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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 year ended December 31, 1998.
[X] 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
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(Exact name of registrant as specified in its charter)
Delaware 13-3607944
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6330 Hedgewood Dr., #150, 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(b) of the Act: None
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 25, 1999, the aggregate market value of
the voting stock held by non affiliates of the Registrant was $5,928,794.
The number of shares outstanding of the Registrant's Common Stock was 19,888,207
at March 25, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1999 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 "SMS") designs,
manufactures and markets advanced wet surface preparation and cleaning equipment
used in the manufacture of microelectronic devices such as semiconductors,
integrated circuits (IC's), and also for the production of raw silicon wafers on
which such devices are manufactured. The automated products utilize a robotic
handling system and complex software to carry out numerous, precisely controlled
cleaning, etching, and stripping operations required throughout the
microelectronic and raw silicon fabrication process. The product line also
includes manual and semi-automated systems. The utilization of these products
has extended beyond the semiconductor sector to include such applications as
circuit boards, parts cleaning, plating systems, and substrate cleaning of
electronic memory devices such as computer disk drives. In recent years, some of
these systems have been used for more sophisticated applications in the research
and development environment, pilot line applications, and lower volume IC
manufacturing.
During 1997, to refocus the Company to its core business, wet wafer
surface preparation, SMS sold substantially all of the net assets of two of its
subsidiaries, Systems Chemistry Incorporation (SCI), manufacturer of chemical
distribution systems, and Imtec Acculine, Inc. (Imtec), a manufacturer of
temperature regulated baths and megasonic systems. Also during 1997, the Company
licensed its PRIMAXX(TM) technology in a specific field of use. In the fourth
quarter of 1998 and consistent with the previously-announced plan to divest of
non-core business units, the Company sold certain net assets of its PRIMAXX(TM)
operations, which manufactured tools for dry single-wafer processing.
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, 16MB and 64MB DRAMs, feature sizes of
the circuits have declined from a size greater than 2.0 microns to 0.2 micron
for a 16MB DRAM. At the same time, the size of the wafers has increased from six
inches (150mm) in diameter to eight inches (200mm) in diameter. Volume
production of 300mm wafers is expected to begin after 2001.
Wafer and Semiconductor Device Fabrication
The basic component in the manufacture of semiconductor devices is a thin,
circular crystalline wafer, typically 150mm to 200mm in diameter, composed of
silicon. Production occurs in a controlled environment known as a "clean room"
which is a manufacturing facility separated from the outside environment and
employing specialized filters to reduce the number of particulates in the air
within the facility. 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. 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 number of process steps involved in the manufacture of DRAMs has
increased from approximately 60 for the 64KB (64 thousand bits) circuit to over
300 for the 64MB (64 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.
Following are brief descriptions of the major operations in the
manufacture of ICs.
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
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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 remove contaminants and particulates.
Cleaning is generally performed by exposing the wafer to a sequence of
liquid chemical baths or gas vapors. As many as 60 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.
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 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.
The above operations are repeated numerous times during the fabrication
process with the number of repetitions depending 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.
SMS Products
The following are brief descriptions of the Company's wet surface
preparation and cleaning products:
Automated Wet Stations. An automatic 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 to strip
photoresist from the wafer. Wafers are processed in the wet station primarily by
immersing the wafers in a chemical bath or by placing the wafers into a vapor
chamber. Other modules in a system are used to rinse and dry the wafers. A
robotic arm transports the wafers from module to module. 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.
SMS's 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.
GAMA-98(TM). This product is an advanced product platform involving fully
automated acid/solvent wet stations used in cleaning, etching and stripping of
both bare silicon and patterned wafers. It targets the high-end integrated
circuit and raw silicon final clean market segments and offers a high level of
process flexibility.
Rear-Mount. The rear-mount product is a more mature product that provides
automated cleaning, etching and stripping capabilities providing a less
expensive alternative to the GAMA product line.
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Semi-Automatic and Manual. The semi-automatic and manual wet systems also
are used for the cleaning, etching and stripping of semiconductor wafers and
other electronic substrates. These systems focus on a low volume segment of the
market that values lower price, smaller footprint and simplicity of operation.
SMS's wet surface preparation systems incorporate the following components
and features, many of which are sold separately as additions to, or replacements
for, existing systems. The current silicon wafer and semiconductor markets
continue to search for unique product solutions as provided by the Company's
technologies, such as DIO3(TM) and the In-Situ Chemical Efficiency System
(ICE-1(TM)), which are described below.
DIO3. This technology eliminates the use of liquid sulfuric acid from the
photoresist and organic wet surface cleaning steps, replacing the sulfuric acid
with more "environmentally friendly" dionized water and ozone. The Company
believes DIO3 technology outperforms technology currently available in the
industry. This technology also enables systems to occupy less space, results in
less water consumption and reduces hazardous waste disposal costs.
The In-Situ Chemical Efficiency System (ICE-1.) This patented process is used in
the regulation of chemical concentration within a bath. The proper chemical
mixture within the bath is critical in order to maintain consistent processing.
The mixture is adjusted by the addition of a specific amount of solution to
bring the bath back into compliance within the required tolerances. The use of
this technology reduces overall chemical consumption by enhancing the life of
the bath thereby reducing the need for full bath chemical replacement.
Megasonic Cleaning System (Phaser). SMS'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 1.0 Mhz to 1.1 Mhz and emitting
over 800 watts. There are patent applications pending for portions of the
megasonic cleaning system. In 1999, the Phaser design is expected to be enhanced
to increase energy transmission and reduce material costs. This new design is
called the Direct Coupled (DC) Megasonic.
Research and Development
The market for semiconductor manufacturing equipment is characterized by
technological change and product innovation. SMS believes that continued and
timely technological advances in products and enhancements to existing products
are necessary to enhance its competitive position within the industry as well as
its financial performance. Accordingly, SMS is committed to active research and
development programs and regularly consults with customers, industry groups and
academic institutions to determine the changing needs of the industry. However,
spending in this area has been negatively impacted by the Company's financial
condition.
The Company'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. SMS believes that
evolving technological challenges in the manufacturing process of advanced
semiconductor devices present significant opportunities and challenges.
SMS implemented a program, beginning in 1997, called Product And
Cycle-time Excellence (PACE), which is aimed at achieving:
- Reduced cycle-time from concept initiation through stability of new
products in the field
- Improved quality and reliability for new and existing products
- Improved manufacturability and serviceability of products
- Improved mix of features and functions, thereby better meeting
customer needs
PACE is a clearly defined process framework based on the industry's best
practices. The PACE implementation consists of the following:
- Cross-function decision making and portfolio ownership by a senior
management team (known as the Product Approval Committee).
- Development projects driven by cross-functional teams to ensure
rapid execution as well as ownership and accountability for product
success.
- Phase Reviews to ensure that decisions on new product development
are made in a fact-based and
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consistent manner, and that the resources of the Company are aligned
with the best opportunities.
- A structured development process to maximize best practices and
commonality across development projects, and to ensure the correct
level of project management discipline.
SMS 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 two GAMA-1 systems and an
advanced platform Alpha tool. The Applications Lab also contains equipment for
analysis of 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.
Marketing, Sales and Service
SMS markets and sells its products through a combination of a direct sales force
and manufacturer's representatives for markets in both new fabrication lines and
as replacement systems or components for existing fabrication lines. Potential
customers for SMS's products include advanced semiconductor manufacturers in
primarily three principal markets: the United States, Europe and Asia. In 1998,
75%, 15% and 10% of the Company's net sales were to major semiconductor chip
manufacturers in the United States, Europe and Asia, respectively.
The Company has experienced and expects to continue experiencing
variations in its customer mix. The timing of an order for SMS's products is
primarily dependent upon a 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.
Due to the substantial operational and financial commitments customers
make when they purchase a system, the Company believes that its ability to
provide prompt and effective field support is critical to its marketing efforts.
SMS employs technical staff to assist and train its customers in performing
preventative maintenance and to service the Company's equipment. For the
majority of its orders, the Company provides full-time technical support, parts,
and maintenance for the first year. After the first year, SMS offers maintenance
contracts whereby one or more employees of the Company will work full-time at
the customer's facility and provide service, maintenance and training for the
customer's personnel on a fee basis.
Manufacturing and Assembly
SMS conducts a performance and 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 SMS's specifications. Accordingly, the
Company's manufacturing activities consist primarily of assembling and testing
components and subassemblies, and integrating them into a finished system. SMS
believes that this method allows it to achieve relatively flexible manufacturing
capacity, while lowering overhead expenses.
SMS assembles its fully 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. 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.
The Company 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 the Company to the risk that a
component part or supply will be unavailable. SMS 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. The Company has experienced some delay in the manufacture of its
products caused by the inability to obtain component parts or supplies stemming
from the Company's financial condition.
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 SMS's particular product markets will
not intensify or that the Company's technological advantages may not be reduced
or lost as a result of technological or other advantages by competitors or
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changes in semiconductor processing technology. Many of the Company's
competitors have greater financial and other resources than SMS.
The primary competition to SMS's automated wet station equipment is from
the following companies: DaiNippon Screen Manufacturing Co., Ltd., S.E.S. Ltd.
and Tokyo Electron, Ltd., all based in Japan; Steag Microtech, a Germany based
company, and SCP Global Technologies and CFM Technologies, Inc., U.S. companies.
In addition, SMS faces competition from a number of domestic companies which
supply manual wet stations at prices significantly lower than the prices of the
Company's automated systems.
Protection of Technology
The Company holds eleven United States patents, has three 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. SMS currently has six patents and seven patent applications pending
outside of the United States. SMS believes that the protection of its
proprietary technologies and products is important and it protects its
proprietary information through non-disclosure agreements with its customers,
suppliers and key employees.
ITEM 2. PROPERTIES
SMS's principal design and manufacturing facilities occupy approximately
39,000 square feet of a building in Allentown, Pennsylvania and 26,340 square
feet of a building in Santa Clara, California. The current monthly rentals,
including expenses are approximately $32,000 and $20,000, respectively. The
lease for the Allentown facility expires in 2000. The lease for the California
facility expires in November 2005.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to lawsuits arising, from time to time, in the
ordinary course of business. In the opinion of management, the ultimate
resolutions of such matters will not have a material impact on the Company's
financial position, liquidity or results of operations.
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 J. Ferran 42 Chairman of the Board, President
and Chief Executive Officer
Robert P. Tetu 47 Vice President and Chief Operating Officer
John W. Kizer 57 Vice President Finance and Chief Financial Officer
James S. Molinaro 36 Vice President Marketing and European Sales
Richard E. Novak 53 Sr. Vice President Advanced Technology and
Chief Technical Officer
Mr. Ferran became President, Chief Executive Officer and a director of the
Company in May 1997. Prior thereto, Mr. Ferran served as President and Chief
Executive Officer of Tylan General Corporation and its predecessor from 1984 as
well as being Chairman of the Board of Directors from February 1994 until
February 1997, when Tylan General was acquired by Millipore Corp. Mr. Ferran has
a B.S. in Business Administration from the University of New Hampshire.
Mr. Tetu has been Chief Operating Officer since February 1999. From July
1998 to January 1999, he served as Vice President of Operations of the Company.
From August 1997 to June 1998, he served as Vice President of Engineering of the
Company. From 1996 to July 1997, he served as Vice President of Product
Operations of Rodel, Inc., a supplier of consumables to the semiconductor
industry located in Newark, Delaware. Prior to that, he served as a Business
Unit Manager for Avery Dennison, an office supply manufacturer located in
Cincinnati, Ohio. Mr. Tetu holds a BSChE degree from the University of New
Hampshire.
Mr. Kizer has been Vice President Finance and Chief Financial Officer of
the Company since July 1997, and served as a consultant to the Company from May
1997 until assuming such position. From June 1996 to May 1997 he was a Vice
President and Corporate Controller of Tylan General Corporation. Prior to
joining Tylan General, Mr. Kizer served as Vice President, Finance and Chief
Financial Officer for Robertshaw Controls Company and also held financial
management positions at Trustcorp Bank Ohio and Champion Spark Plug Company. He
has over 25 years' experience in senior financial management positions. Mr.
Kizer holds a B.B.A. degree from the University of Toledo and is a Certified
Public Accountant.
Mr. Molinaro has over 14 years of experience in senior engineering
positions. He has a B.S. degree in Mechanical Engineering/Robotics from
Pennsylvania State University. He has also completed the "Executive Development
Program" at the Wharton School of Business at the University of Pennsylvania.
Mr. Molinaro served on the SMS Board of Directors from 1989 to 1997 and held
various positions in the Company, including President and COO. Mr. Molinaro is
an original founder of the Company and currently holds the position of Vice
President, Technical Planning and Data Analysis.
Dr. Novak has been with the Company since 1991 and has helped expand SMS's
product line. Dr. Novak earned his Ph.D. in ceramic engineering from the
University of Illinois. Previous work experience includes Honeywell, RCA, FSI
International and he was instrumental in basic research concerning the use of
Gallium-Arsenide in the manufacturing of integrated circuits.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until April 17, 1998, the Company's Common Stock was traded on the Nasdaq
National Market under the symbol "SUBM." After that date, the Common Stock has
traded and is currently traded on the Over-the-Counter Bulletin Board under the
same symbol "SUBM." The following table sets forth for the periods indicated the
closing price range of the Common stock.
<TABLE>
<CAPTION>
Common Stock
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
March 31, 1997 $5-1/4 $3-1/16
June 30, 1997 3-1/2 2-5/16
September 30, 1997 4-5/8 2-11/16
December 31, 1997 4-1/16 2-1/16
March 31, 1998 2-9/16 1-3/8
June 30, 1998 1-13/16 3/4
September 30, 1998 1-1/8 5/16
December 31, 1998 57/64 1/8
</TABLE>
In December 1998, the Company issued $4.5 million of Series B 12% Senior
Subordinated Notes due February 1, 2002 ("Series B Senior Subordinated Notes")
with associated warrants to purchase 22,500,000 shares of the Company's Common
Stock at prices ranging from $.36 - $.52 per share, subject to customary
adjustment for changes in capitalization and below market issuances. The
Company used the net proceeds to fund operations.
Interest due on Series B Senior Subordinated Notes through September 30,
1999 will be converted into interest units, each unit consisting of a Series B
Senior Subordinated Note in a principal amount equal to the amount of interest
otherwise payable in cash on such interest payment date and warrants to
purchase 720 shares of Common Stock for each $1,000 principal amount of Series
B Senior Subordinated Notes then issued (pro rated when not in multiples of
$1,000). Beginning October 1, 1999, interest is payable in cash. The exercise
price for such warrants will be 110% of the price of the Common Stock on the
respective dates of issuance. Interest on the Company's 12% Senior Subordinated
Notes through October 1, 1999 which was required to be paid in cash may, at the
Company's option, be paid in interest units. Additionally, certain holders of
the Company's 8% Convertible Subordinated Notes will receive interest units in
lieu of cash interest through September 30, 1999.
The issuance of the Series B Senior Subordinated Notes was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
At March 25, 1999, there were 10,521 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 and long term debt agreements restrict the
Company's ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998(1) 1997(2) 1996 1995(3) 1994(3)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 42,205 $ 97,895 $ 171,484 $ 123,068 $ 86,119
Cost of sales 38,697 90,551 142,748 84,352 57,882
--------- --------- --------- --------- ---------
Gross profit 3,508 7,344 28,736 38,716 28,237
Selling, general and
administrative 15,092 32,230 41,337 29,109 21,465
Research and development 7,849 9,225 9,373 5,678 3,357
Restructuring charges 5,086 5,639 -- -- --
--------- --------- --------- --------- ---------
Operating (loss) income (24,519) (39,750) (21,974) 3,929 3,415
Other (expense) income, net (4,612) (1,154) (4,701) 1,258 72
--------- --------- --------- --------- ---------
(Loss) income before income
taxes and extraordinary charge (29,131) (40,904) (26,675) 5,187 3,487
Income tax expense (benefit) -- 5,480 (6,566) 1,498 1,454
--------- --------- --------- --------- ---------
(Loss) income before
extraordinary charge (29,131) (46,384) (20,109) 3,689 2,033
Extraordinary charge -- (1,169) -- -- --
--------- --------- --------- --------- ---------
Net (loss) income $ (29,131) $ (47,553) $ (20,109) $ 3,689 $ 2,033
========= ========= ========= ========= =========
Basic (loss) income per
Common share $ (1.51) $ (2.77) $ (1.20) $ 0.23 $ 0.13
========= ========= ========= ========= =========
Diluted (loss) income per
Common share $ (1.51) $ (2.77) $ (1.20) $ 0.19 $ 0.12
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $ 30,737 $ 59,708 $124,754 $119,948 $ 59,992
Long-term debt $ 35,187 $ 31,023 $ 24,015 $ 18,909 $ 2,390
Working capital (deficit) $ (4,238) $ 9,025 $ 25,618 $ 47,100 $ 24,178
Stockholders' (deficit) equity $(29,112) $ (2,590) $ 28,676 $ 46,023 $ 31,808
</TABLE>
(1) In October 1998, the Company sold substantially all of the net assets of
PRIMAXX(TM) Corporation. As such, results of operations for the year ended 1998
reflect the operations of PRIMAXX(TM) through October 14, 1998.
(2) In August and December 1997, the Company sold substantially all of the net
assets of its Systems Chemistry and its Imtec Acculine subsidiaries,
respectively. As such, results of operations for the year ended 1997 reflect the
results of operations of Systems Chemistry through August 8, 1997 and results of
operations of Imtec through December 31, 1997.
(3) 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Systems sales consist of new systems and product enhancements and are
recognized at the time of shipment. Other sales consists of spare parts, service
contracts and construction services. Sales of spare parts and service contracts
are recognized when the parts are shipped or when the service has been
performed. Construction services sales, which were performed solely by
Systems Chemistry, were recognized when the services were completed using a
method similar to percentage-of-completion. With the sale of the operations of
Systems Chemistry in 1997, there were no construction service revenues in 1998.
Cost of systems sales consists of materials, labor and related expenses
associated with the production process. Cost of other sales consists primarily
of spare parts material costs and labor, and related expenses associated with
service contracts. In 1997 and 1996, cost of other sales also included
construction costs.
In March 1996, the Company acquired all of the outstanding stock of Imtec
in exchange for 575,000 shares of Common Stock. The transaction was accounted
for as a pooling of interests, and, accordingly, the 1996 financial data was
restated. To concentrate on its core business, wet wafer surface preparation,
the Company sold substantially all of the net assets of its PRIMAXX(TM)
operations, Systems Chemistry and Imtec Acculine subsidiaries in October 1998
and August and December 1997, respectively. As such, results of operations for
1998 reflect the operations of PRIMAXX(TM) through October 14, 1998, results for
the year ended 1997 reflect the results of operations of Systems Chemistry
through August 8, 1997 and results of operations of Imtec for the entire year.
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,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Total net sales 100.0% 100.0% 100.0%
Total cost of sales 91.7 92.5 83.2
------ ------ ------
Gross Profit 8.3 7.5 16.8
Operating Expenses:
Selling, general and administrative expenses 35.8 32.9 24.1
Research and development expenses 18.6 9.4 5.5
Restructuring charges 12.0 5.8 --
------ ------ ------
Total operating expenses 66.4 48.1 29.6
------ ------ ------
Operating loss (58.1) (40.6) (12.8)
Interest expense (16.1) (5.0) (3.1)
Other income (expense), net 5.2 3.8 .4
------ ------ ------
Loss before income taxes
and extraordinary charge (69.0) (41.8) (15.5)
Income tax expense (benefit) -- 5.6 (3.8)
------ ------ ------
Loss before extraordinary charge (69.0) (47.4) (11.7)
Extraordinary charge -- (1.2) --
------ ------ ------
Net loss (69.0)% (48.6)% (11.7)%
====== ====== ======
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS
Year ended December 31, 1998 compared to the year ended December 31, 1997
Net sales for 1998 were $42.2 million, a decrease of $55.7 million, or 57%, from
$97.9 million of net sales for 1997. System sales in 1998 were $35.7 million as
compared to $71.8 million for 1997, a decrease of 50.3%. Other sales were $6.5
million for 1998, a decrease of $19.6 million, or 75.1%, as compared to $26.1
million for 1997. The decrease in sales is primarily attributable to three
factors. First, sales for 1997 include sales of Systems Chemistry through August
7, 1997 and Imtec through December 31, 1997. Second, the slowdown in the
semiconductor equipment industry has decreased orders throughout 1998. Third,
the Company has experienced performance problems with several of its systems in
the field which has delayed repeat orders from several of its key accounts.
These performance problems, through a concerted effort, were substantially
corrected in 1998.
In 1998, 75%, 15% and 10% of the Company's net sales were to major chip
manufacturers in the United States, Asia and Europe, respectively. In 1997, 57%,
32% and 11% of the Company's net sales were to major chip manufacturers in the
United States, Asia and Europe, respectively. The economic crisis in Asia
negatively impacted the Company's sales in 1998.
Cost of sales for 1998 was $38.7 million, or 91.7% of sales, versus $90.6
million, or 92.5% of sales, for 1997. Included in 1998 cost of sales were $4.2
million of charges associated with increases in reserves for inventory, and
included in 1997 cost of sales were $11.2 million of charges associated with
increases in reserves for inventory and warranty. Excluding the 1998 and 1997
charges of $4.2 million and $11.2 million, cost of sales, as a percentage of
sales, for 1998 and 1997 would have been 81.7% and 81.5%, respectively.
Selling, general and administrative expenses were $15.1 million, or 35.8% of
sales for 1998, compared to $32.2 million, or 32.9% of sales for 1997. The
reduction of expenses was primarily due to seven months less Systems Chemistry
activity, twelve months less of Imtec activity, cost reduction programs and
decreased commissions due to lower net sales.
Research and development expenses were $7.8 million, or 18.6% of sales, for
1998, versus $9.2 million, or 9.4% of sales, for the comparable prior year
period. These expenses consist of costs associated with process support for
systems in the field, cost of enhancing existing products and the cost of new
product development.
Results for 1998 and 1997 include restructuring charges of $5.1 million and $5.6
million, respectively, related to the reorganization of the Company, consisting
primarily of severance, lease termination, and asset disposal costs.
Interest expense in 1998 was $6.8 million as compared to $4.9 million in 1997.
The increase in interest expense is a result of the increased average
outstanding borrowings during the year.
Other income, net including interest income was $2.2 million in 1998 as compared
to $3.7 million in 1997. Other income, net for 1998 consists primarily of the
gain of approximately $1.5 million recognized on the sale of certain net assets
of PRIMAXX(TM) operations and a post-closing negotiated adjustment of the
purchase price of $500,000 from the 1997 sale of certain net assets of Systems
Chemistry and interest income on the Company's short term investments. Other
income, net for 1997 consists primarily of the gains recognized on the sale of
the net assets of Systems Chemistry and the PRIMAXX(TM) license.
In 1998, the tax benefit related to the Company's net operating loss
carryforward was offset by the recording of a full valuation allowance. Income
tax expense of $5.5 million was recognized in 1997. The 1997 expense related to
a non-cash charge to increase the Company's valuation allowance for net deferred
tax assets. Such allowance will be available to offset future income tax expense
when it becomes more likely than not that such deferred assets will be realized.
Results for 1997 include an extraordinary loss for debt extinguishment of $1.2
million primarily related to the write-off of the original issue discount and
unamortized debt issuance costs related to the Company's 9% convertible
subordinated notes that were issued to the holders of the Company's 8%
convertible subordinated notes and series A convertible non-redeemable preferred
stock.
10
<PAGE> 11
Year ended December 31, 1997 compared to the year ended December 31, 1996
Net sales for 1997 were $97.9 million, a decrease of $73.6 million, or 43%, from
$171.5 million of net sales for 1996. System sales in 1997 were $71.8 million as
compared to $140.8 million for 1996, a decrease of 49.0%. Other sales were $26.1
million for 1997, a decrease of $4.6 million, or 14.9%, as compared to $30.7
million for 1996. The decrease in sales is primarily attributable to three
factors. First, sales for the entire year 1997 include sales of Systems
Chemistry through August 7, 1997 while 1996 sales include sales of Systems
Chemistry for the entire year. Second, the Company had experienced performance
problems with several of its systems in the field which has delayed repeat
orders from several of its key accounts. Third, the slowdown in the
semiconductor equipment industry decreased orders during the second half of
1997.
In 1997, 57%, 32% and 11% of the Company's net sales were to major chip
manufacturers in the United States, Asia and Europe, respectively. In 1996, 70%,
17% and 13% of the Company's net sales were to major chip manufacturers in the
United States, Asia and Europe, respectively. The economic crisis in Asia did
not materially impact the Company's sales in 1997.
Cost of sales for 1997 was $90.6 million, or 92.5% of sales, versus $142.7
million, or 83.2% of sales, for 1996. Included in 1997 cost of sales were $11.2
million of charges associated with increases in reserves for inventory and
warranty. The increase in cost of sales as a percentage of sales is primarily
attributable to decreased sales volumes, increases in reserves as previously
mentioned and the under-absorption of labor due to the slowdown in equipment
shipments. Included in 1996 cost of sales were charges of approximately $11.0
million to write-off certain inventory and increase the Company's inventory and
warranty reserves. Excluding these 1997 charges of $11.2 million and 1996
charges of $11.0 million, cost of sales, as a percentage of sales, for 1997 and
1996 would have been 81.5% and 76.8%, respectively.
Selling, general and administrative expenses were $32.2 million, or 32.9% of
sales for 1997, compared to $41.3 million, or 24.1% of sales for 1996. The
reduction of expenses was primarily due to five months less Systems Chemistry
activity, cost reduction programs and decreased commissions due to lower net
sales.
Research and development expenses were $9.2 million, or 9.4% of sales, for 1997,
versus $9.4 million, or 5.5% of sales, for the comparable prior year period.
These expenses consist of costs associated with process support for systems in
the field, cost of enhancing existing products and the cost of new product
development. Research and development spending remained at 1996 levels despite
the Company's significant decrease in sales.
Results for 1997 include restructuring charges of $5.6 million related to the
reorganization of the Company, consisting primarily of severance costs and lease
termination costs.
Interest expense in 1997 was $4.9 million as compared to $5.2 million in 1996.
The decrease in interest expense is attributable to the conversion to equity of
certain interest bearing notes in March 1997.
Other income, net including interest income was $3.7 million in 1997 as compared
to $543,000 in 1996. Other income, net for 1997 consists primarily of the gains
on the sale of the net assets of Systems Chemistry and the PRIMAXX(TM) license
and interest income on the Company's short term investments. Other expense in
1996 consisted primarily of interest on the Company's borrowings and capital
lease obligations.
Income tax expense was $5.5 million for 1997 related to a non-cash charge to
increase the Company's valuation allowance for net deferred tax assets. Such
allowance will be available to offset future income tax expense when it becomes
more likely than not that such deferred assets will be realized.
Results for 1997 include an extraordinary loss for debt extinguishment of $1.2
million primarily related to the write-off of the original issue discount and
unamortized debt issuance costs related to the Company's 9% convertible
subordinated notes that were exchanged for 8% convertible subordinated notes and
series A convertible non-redeemable preferred stock.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
In 1998 cash and cash equivalents decreased $6.2 million to $2.0 million
at December 31, 1998 from $8.2 million at December 31, 1997. For the years ended
December 31, 1998, 1997 and 1996, SMS's operations used cash of $13.6 million,
$7.0 million and $21.3 million, respectively. Cash used in operating activities
during 1998 was primarily the result of the $29.1 million loss incurred during
1998 offset by decreases in accounts receivable and inventory totaling $11.7
million. Cash used in operating activities during 1997 was primarily the result
of the $47.6 million loss incurred during 1997 offset by a decrease in accounts
receivable and inventory totaling $23.7 million. Operating activities in 1996
used cash of $21.3 million primarily to fund the Company's $20.1 million loss.
Investing activities in 1998 and 1997 generated cash of approximately $2.0
million and $14.0 million primarily related to proceeds received from the sale
of substantially all of the net assets of its PRIMAXX(TM) operation and Systems
Chemistry respectively. Investing activities utilized cash of $6.9 million in
1996, primarily due to the purchase of equipment to increase production
capacity.
Financing activities provided cash of $5.3 million in 1998, utilized $4.3
million of cash in 1997 and provided cash of $17.6 million in 1996. Financing
activities in 1998 include proceeds of $4.5 million from a private placement of
securities and an increase in the borrowings under the Company's credit
facility. At December 31, 1998, no additional availability existed under the
credit facility. Financing activities in 1997 include proceeds of $20.0 million
from a private placement of securities and a $5 million note relating to the
sale of Systems Chemistry's net assets. In 1997, the Company repaid $28.1
million of borrowings on its line of credit and established a new credit
facility with availability, depending upon levels of eligible accounts
receivable and inventory, of up to $15 million. Financing activities in 1996
provided $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.
Working capital decreased $13.2 million to a working capital deficit of
$4.2 million as of December 31, 1998, from working capital of $9.0 million as of
December 31, 1997. The decrease is due to the lower volume of business coupled
with the slowdown in the semiconductor industry.
In December 1998, the Company issued $4.5 million principal amount of
Series B 12% Senior Subordinated Notes due February 1, 2002 (Series B Senior
Subordinated Notes) with associated warrants to purchase 22,500,000 shares of
the Company's Common stock at prices ranging from $.36 to $.52 per share,
subject to customary adjustment for changes in the capitalization and below
market issuances.
In October 1998, the Company sold substantially all of the net assets of
its PRIMAXX(TM) operation for $2.1 million. The Company retained the rights to
future royalty payments based on the number of units sold.
As of August 1, 1998, the Company began issuing Series B Senior
Subordinated Notes in lieu of the specified cash interest payments on certain of
its outstanding 12% and 8% notes. All such notes issued have attached 720
warrants for each $1,000 principal amount of notes. Series B Senior Subordinated
Notes in the principal amount of approximately $911,000 with warrants to
purchase 655,574 shares of Common Stock at prices ranging from $.36 to $.52 per
share, were issued in 1998. Beginning October 1, 1999, interest becomes payable
only in cash.
Subsequent to year end and through March 31, 1999, the Company issued
$1,250,000 of Series 1999 12% Senior Subordinated Convertible Notes due February
1, 2002. These notes are convertible at the holder's option into approximately
2.4 million shares of Common Stock at a conversion rate equal to 110% of the
Company's Common Stock closing market value on the date of issuance of the note,
subject to customary adjustment for changes in the capitalization and below
market issuances.
In December 1997, the Company sold substantially all of the assets of its
Imtec Acculine subsidiary in exchange for a note of $1.5 million payable through
December 2004. Interest is payable semiannually on June 30 and December 31 at
the lesser of 10% or the rate then paid by the Company to its principal secured
lender (10.0% at December 31, 1998).
In November 1997, the Company completed a private placement of securities
consisting of $20 million principal amount of 12% Senior Subordinated Notes due
February 1, 2002 (Senior Subordinated Notes), with associated warrants to
purchase 6,616,367 shares of the Company's Common Stock at $2.25 per share,
subject to customary adjustment for changes in the capitalization and below
market issuances. The Company used the net proceeds to repay its bank debt,
fund operations and fund its restructuring activities. The Company was not in
compliance with certain covenants under the Senior Subordinated Notes at
December 31, 1998, due to no longer meeting the requirement for listing by
NASDAQ and not meeting certain minimum financial requirements. Additionally,
the Company, based on its current projections, anticipates that it will not be
in
12
<PAGE> 13
compliance with certain financial requirements under the Senior Subordinated
Notes during 1999. The Company, however, has obtained waivers from the
noteholders for the existing and expected covenant violations through
January 1, 2000. In 1998, the Company exercised its option with the noteholders
to issue additional Senior Subordinated Notes in lieu of cash interest payments
for 50% of the interest due in 1998. As such, additional notes in the principal
amount of $1,241,000, bearing interest at the stated 12% were issued in 1998.
Beginning October 1, 1999, interest becomes payable only in cash.
In November 1998, the Company renewed its credit facility with Greyrock
Capital, a division of Nations Credit Commercial Corporation (Greyrock).
As part of the renewal, the facility was extended through January 1, 2000 and
reduced from $15 million to $10 million. Borrowings under this facility bear
interest at "LIBOR" plus 5.375% (11.0038% at December 31, 1998) and are secured
by the Company's assets. The facility contains a borrowing base related to the
Company's eligible receivables and inventory. Periodically, such borrowing base
has been insufficient to fund the Company's cash needs, principally due to the
long lead time required to manufacture many of the Company's products and
relatively small additional funding availability created by work in process
inventory. Borrowings under the credit facility were $4.8 million at December
31, 1998, including $2.0 million of additional borrowings above the available
borrowing base. These additional borrowings of $2.0 million are due September
30, 1999. The facility matures on January 1, 2000, and is renewable upon
agreement of both parties. The terms of the facility limit certain actions of
the Company, including the payment of dividends, and permit Greyrock, in the
event of a material adverse change in the Company's business or financial
condition in Greyrock's good faith judgment, to exercise its rights under a
default, including ceasing making additional funds available under the
facility, declaring all or part of the outstanding balance immediately payable,
and taking possession of the pledged collateral.
The Company schedules production of its systems based upon order backlog.
SMS 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, 1998 and 1997, the Company's continuing business backlog was
$11.9 million and $22.4 million, respectively. Because of possible changes in
delivery schedules and cancellations of orders, SMS's backlog at any particular
date is not necessarily representative of actual sales for any succeeding
period.
The Company incurred operating losses during 1998, 1997 and 1996, and as
of December 31, 1998, had a stockholders' deficit of $29.1 million.
Consequently, the Company has been substantially dependent upon borrowings to
finance its operations in recent years. In response to the significant losses
from operations, the Company hired a new management team in 1997 and implemented
a worldwide restructuring plan. The restructuring plan was developed based on an
evaluation of the Company's current products, its available technology, its
relationships with its customers and its financial position. A summary of
management's actions completed thus far, as well as certain actions initiated
that are expected to continue into 1999 to address the financial conditions
described above, include the following:
- - Divested three subsidiaries with products inconsistent with the Company's
core business, using certain of the proceeds to significantly reduce its
outstanding and maximized line of credit;
- - Refinanced its remaining line of credit balance with term debt and an
additional credit facility;
- - Renegotiated $2 million of additional borrowings above the borrowing base
of qualified accounts receivable and inventory as defined by the credit
facility through September 30, 1999, as well as an extension of the
remainder of the facility through January 1, 2000;
- - Established in 1999 an arrangement whereby certain of the Company's
noteholders will provide, at their sole discretion, cash infusions when
requested by the Company in return for the issuance of convertible debt;
- - Reduced the Company's cash usage through significant workforce reductions,
facilities consolidation from three buildings to one, and reductions in
other spending;
- - Initiated improvements in the cost structure and manufacturability by
engineering the Company's core product lines to use less materials while
maintaining process integrity and reducing costly product refinements and
rework during production thereby improving gross margins;
- - Initiated procedures to shorten installation time through improving the
quality controls on the product before it leaves the manufacturing
facility and through better coordination with the customer regarding the
timing and prerequisites of the installation which will reduce
installation delays, reduce costs to the Company, increase customer
satisfaction, and accelerate payments of receivables;
- - Improved the sales quoting process to involve all functional areas so as
to more accurately estimate costs thereby improving gross margins.
13
<PAGE> 14
- - Initiated and completed a program to fix system operating problems in the
field using a more focused approach toward customer requirements thereby
accelerating the collection of past due receivables and improving customer
satisfaction;
- - Initiated a Product and Cycle Time Excellence program to refocus the
Company's new product development efforts and reduce the number of
development projects to those with strong market and margin potential;
- - Initiated improvements in cash flow through negotiating customer deposits
and extended payment terms with vendors;
- - Developed comprehensive and timely measures for ongoing monitoring of cash
flow to more effectively manage the Company's upcoming annual cash
requirements; and
- - Established a detailed budget to manage the upcoming year's operating
activity with defined timely reporting periods and ongoing monitoring of
strict adherence to budgeted amounts.
Management believes many of the actions taken have contributed to the improved
gross margins on shipments in the last two quarters of 1998; however, management
also believes that future results of operations will be influenced by a number
of factors, including general economic conditions, the volume, mix and timing of
orders received, timely new product introductions and testing, and numerous
other factors. Additionally, the semiconductor industry and related capital
equipment suppliers, such as the Company, have experienced a reduction in demand
which has led and could continue to lead to reduced sales and increased pricing
pressures.
Since a significant portion of the Company's sales represent custom equipment
orders for which pricing can range from $300,000 to over $3,000,000, the volume
and timing of orders can have a significant effect on the Company's operating
results and cash flows. Based on semiconductor capital equipment industry
information available to the Company, management is optimistic that the
industry's downcycle may improve during the second half of 1999 and continue the
favorable trend in 2000; however, no assurance can be given that such
improvement in the industry will occur.
Management believes the cash requirements in 1999 will be provided by operations
and supplemented by borrowings on the Company's credit facility, cash infusions
from certain of the Company's noteholders in return for convertible debt,
deferral of substantially all cash interest on long-term debt through September
30, 1999, and customer deposits on certain orders. Without such supplemental
sources of cash, the Company is susceptible to severe cash shortages which may
impact its ability to operate. While management believes that its plans and
implemented programs, along with the supplemental sources of cash, will result
in adequately funding its 1999 working capital and cash requirements, certain of
these plans, programs, and supplemental cash sources are contingent upon future
events that are not within the Company's control; therefore, there can be no
assurances that management's actions will be successful or certain of the
supplemental cash sources will be available.
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 LIBOR rate. No assurance
can be given that the LIBOR rate of interest will not fluctuate significantly,
which could have an adverse effect on operations.
The substantial losses the Company incurred have burdened the Company with
a level of debt that has severely limited the Company's access to working
capital. The Company has retained an investment-banking firm to advise on the
Company's strategic alternatives, including possible ways to restructure the
balance sheet.
14
<PAGE> 15
YEAR 2000
The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the result
of computer programs and equipment that were written and manufactured using two
digits rather than four to define the applicable year. Date-sensitive computer
programs and equipment may recognize a date using only the last two digits. This
could result in the Year 2000 being recognized as the year 1900. System failures
or miscalculations can occur, which would cause disruptions in operations and/or
the inability to process normal business transactions.
In November 1997, the Company initiated a company-wide Year 2000 Project to
address this issue. Utilizing both internal and external resources, the Company
has been defining, assessing, converting, or replacing, various programs,
hardware and equipment instrumentation systems to make them Year 2000
compatible. The Company has incurred costs of approximately $50,000 through
December 31, 1998 to address the Year 2000 issue and it expects to incur
additional costs of approximately $100,000.
Information Technology ("IT") systems have been evaluated and assessed for Year
2000 readiness. All network IT systems are in the process of being upgraded as
part of a corporate upgrade program that will also address identified Year 2000
related issues and concerns. Non-IT systems typically include embedded
technology such as microcontrollers. These types of systems are more difficult
to assess and repair than IT systems. In fact, the Company will have to replace
non-IT systems since they cannot be repaired. All upgrades and replacement
programs are expected to be completed in 1999.
Manufactured equipment that the Company supplies to its customers have been
identified and assessed for Year 2000 readiness. A report system outlines known
issues of concerns regarding sub-systems and sub components integrated into the
Company's equipment. A corrective action plan has been developed and deployment
of the plan is in effect. The Company is alerting all of its customers to the
concerns regarding Year 2000, though it is inevitably the responsibility of the
end-users to deploy all recommended corrective action plans.
Third parties who supply the Company with real time goods and services have been
identified and are being assessed. Approximately 90% of these third parties have
stated their readiness and capabilities to successfully supply their goods and
services through the Year 2000 and beyond without interruption in deliveries of
goods and services.
The potential risk to the Company due to the Year 2000 related issues are as
follows. Disruptions in computer hardware, software or delivery of supplier
goods and services could result in the inability to engineer, schedule and
deliver manufactured equipment and services to customers as well as the failure
to fulfill contractual agreements. Customers may experience Year 2000 related
problems that could interrupt their abilities to perform business and financial
transactions thus interrupting collections or bank processes. Disruptions in
supplier services may interfere with the Company's ability to communicate to its
customers and adversely effect delivery of products. The amount of total
potential liability and lost revenue cannot be reasonably estimated at this
time.
The Company is preparing to handle the most reasonably likely worst case
scenarios. Secondary critical suppliers are available in many cases.
Communication capabilities are vast through many different medias. All computers
and software will be standardized with secondary systems available to perform
any critical tasks in the event of a system failure. The Company believes it
will be adequately prepared for any significant Year 2000-related issues that
may occur. The Company believes it has sufficient hardware and resources to
address such issues on a timely basis.
15
<PAGE> 16
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 the
Company's financing arrangements and liquidity and capital resources. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements and Supplemental Schedule Page
----
<S> <C>
Report of Independent Auditors 17
Consolidated Balance Sheets as of December 31, 1998 and 1997 18
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 19
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 21
Notes to Consolidated Financial Statements 22
Supplemental Schedule 43
</TABLE>
16
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
SUBMICRON SYSTEMS CORPORATION
We have audited the accompanying consolidated balance sheets of SubMicron
Systems Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits 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 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 consolidated financial position of SubMicron Systems
Corporation as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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.
The accompanying consolidated financial statements have been prepared assuming
that SubMicron Systems Corporation will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring net losses and has
working capital and stockholders' equity deficits at December 31, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The 1998 financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1999
17
<PAGE> 18
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,982 $ 8,228
Accounts receivable, net of allowance for
doubtful accounts of $1,752 and $945 8,676 16,632
Inventories 7,787 13,152
Prepaid expenses and other 1,979 2,288
-------- --------
Total current assets 20,424 40,300
-------- --------
Property and equipment, net 5,926 13,815
Goodwill, net 1,232 1,457
Intangibles and other assets, net 3,155 4,136
-------- --------
$ 30,737 $ 59,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 4,824 $ 3,024
Current portion of long-term debt 2,530 1,849
Accounts payable 3,635 6,830
Accrued expenses and other 9,928 15,617
Deferred revenues 3,745 3,955
-------- --------
Total current liabilities 24,662 31,275
-------- --------
Long-term debt 35,187 31,023
-------- --------
Commitments and contingencies (Note 12)
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value,
5,000 shares authorized -- --
Series A Convertible Preferred Stock, stated value,
89 and 685 shares issued and outstanding 58 4,900
Common Stock, $.0001 par value, 100,000,000
shares authorized, 19,669,825 and 18,338,949
shares issued and outstanding 2 2
Additional paid-in capital 60,518 53,067
Accumulated deficit (89,690) (60,559)
-------- --------
Total stockholders' equity (deficit) (29,112) (2,590)
-------- --------
$ 30,737 $ 59,708
======== ========
</TABLE>
See accompanying notes.
18
<PAGE> 19
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Systems sales .............................. $ 35,706 $ 71,809 $ 140,823
Other sales ................................ 6,499 26,086 30,661
--------- --------- ---------
Total net sales ................... 42,205 97,895 171,484
Cost of systems sales ...................... 35,161 66,370 118,800
Cost of other sales ........................ 3,536 24,181 23,948
--------- --------- ---------
Total cost of sales ............... 38,697 90,551 142,748
--------- --------- ---------
Gross profit ............. 3,508 7,344 28,736
Selling, general and administrative expenses 15,092 32,230 41,337
Research and development expenses .......... 7,849 9,225 9,373
Restructuring charges ...................... 5,086 5,639 --
--------- --------- ---------
Total operating expenses .......... 28,027 47,094 50,710
--------- --------- ---------
Operating loss ........... (24,519) (39,750) (21,974)
Interest expense and other income, net:
Interest income ....................... 274 190 383
Interest expense ...................... (6,805) (4,885) (5,244)
Other income, net ..................... 1,919 3,541 160
--------- --------- ---------
Total other expense, net .......... (4,612) (1,154) (4,701)
--------- --------- ---------
Loss before income taxes and
extraordinary charge ..................... (29,131) (40,904) (26,675)
Income tax expense (benefit) ............... -- 5,480 (6,566)
--------- --------- ---------
Loss before extraordinary charge ........... (29,131) (46,384) (20,109)
Extraordinary charge ....................... -- (1,169) --
--------- --------- ---------
Net loss ................................... $ (29,131) $ (47,553) $ (20,109)
========= ========= =========
Loss per Common share ...................... $ (1.51) $ (2.77) $ (1.20)
========= ========= =========
Loss per Common share -
assuming dilution ..................... $ (1.51) $ (2.77) $ (1.20)
========= ========= =========
</TABLE>
See accompanying notes.
19
<PAGE> 20
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Earnings
Additional (Accum-
Preferred Stock Common Stock Paid-in ulated Deferred Notes
Shares Amount Shares Amount Capital Deficit) Compensation Receivable Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 -- $ -- 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
Exercise of stock options -- -- 23 -- 78 -- -- -- 78
Issuance of Preferred Stock 1 9,181 -- -- -- -- -- -- 9,181
Conversion of Preferred
Stock to Common
Stock -- (4,281) 1,235 -- 4,281 -- -- -- --
Issuance of Common stock
under the employee
stock purchase plan -- -- 191 -- 412 -- -- -- 412
Value ascribed to warrants
issued with senior
subordinated notes -- -- -- -- 6,616 -- -- -- 6,616
Net loss -- -- -- -- -- (47,553) -- -- (47,553)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 1 4,900 18,339 2 53,067 (60,559) -- -- (2,590)
Conversion of Preferred
Stock to Common
Stock (1) (4,842) 1,193 -- 4,842 -- -- -- --
Issuance of Common Stock
under the employee
stock purchase plan -- -- 138 -- 109 -- -- -- 109
Value ascribed to warrants
issued with senior
subordinated notes -- -- -- -- 2,500 -- -- -- 2,500
Net loss -- -- -- -- -- (29,131) -- -- (29,131)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 -- $ 58 19,670 $ 2 $ 60,518 $(89,690) $ -- $ -- $(29,112)
==================================================================================================================================
</TABLE>
See accompanying notes.
20
<PAGE> 21
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss .......................................... $(29,131) $(47,553) $(20,109)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..................... 5,811 6,902 5,124
Extraordinary loss on debt extinguishment ......... -- 1,169 --
Gain on sale of PRIMAXX(TM) ....................... (1,465) -- --
Gain on sales of Systems Chemistry and
PRIMAXX(TM) license .......................... (500) (3,805) --
Write-off of property and equipment ............... 3,286 -- --
Provision for valuation allowances ................ 5,342 7,746 2,831
Amortization of deferred compensation ............. -- -- 224
Deferred tax provision (benefit) .................. -- 5,480 (4,222)
Accretion of note discount ........................ 1,764 532 1,179
Non-cash interest expense ......................... 2,195 -- --
Non-cash compensation for services ................ -- -- 851
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ........ 6,599 17,125 (1,779)
Decrease (increase) in inventories ................ 831 6,588 (6,537)
Decrease (increase) in prepaid expenses and other . 309 4,266 (1,514)
Decrease (increase) in other assets ............... 163 590 (1,294)
Decrease in accounts payable ...................... (3,195) (10,882) (4,348)
(Decrease) increase in accrued expenses ........... (5,639) 2,024 7,889
Increase in deferred revenues ..................... 48 2,837 384
-------- -------- --------
Net cash used in operating activities ................ (13,582) (6,981) (21,321)
-------- -------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures .............................. (520) (1,475) (6,724)
Net proceeds from sale of PRIMAXX(TM) ............. 2,142 -- --
Net proceeds from sale of Systems Chemistry
assets, net of cash sold ....................... 500 14,805 --
Net proceeds from sale of license ................. -- 1,062 --
Purchase of intangible assets ..................... (83) (352) (182)
-------- -------- --------
Net cash provided by (used in) investing activities .. 2,039 14,040 (6,906)
-------- -------- --------
Cash flows provided by (used in) financing activities
Net borrowings (payments) on line of credit ....... 1,800 (25,076) 11,861
Proceeds from sales-leaseback ..................... -- -- 5,287
Proceeds from issuance of convertible debt ........ -- 13,384 --
Value ascribed to warrants issued with
convertible debt ................................ 2,400 6,616 --
Deferred debt issuance costs ...................... -- (1,877) --
Proceeds from long-term debt ...................... 2,118 5,000 --
Collection on notes receivable .................... -- -- 81
Proceeds from exercise of stock options and
warrants and Employee Stock Purchase Plan ....... 109 490 1,606
Principal payments on long-term debt and
capital lease obligations ....................... (1,130) (2,794) (1,192)
-------- -------- --------
Net cash provided by (used in) financing activities .. 5,297 (4,257) 17,643
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents ....................................... (6,246) 2,802 (10,584)
Cash and cash equivalents, beginning of year ......... 8,228 5,426 16,010
-------- -------- --------
Cash and cash equivalents, end of year ............... $ 1,982 $ 8,228 $ 5,426
======== ======== ========
</TABLE>
See accompanying notes.
21
<PAGE> 22
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Background
SubMicron Systems Corporation (the "Company" or "SMS") designs,
manufactures and markets advanced wet surface preparation and cleaning equipment
used in the manufacture of microelectronic devices such as semiconductors,
integrated circuits (IC's), and for the production of raw silicon wafers on
which such devices are manufactured.
The Company was founded in November 1988, and became a public company in
August 1993. The Company acquired the assets of DiPiero, Inc. (d/b/a Universal
Plastics) in May 1994 by assuming its net liabilities of $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 were accounted for as poolings of interests.
As described in Note 3, substantially all of the net assets of PRIMAXX(TM)
Corporation's operations ("PRIMAXX(TM)") were sold in October 1998. In addition,
substantially all the net assets of Systems Chemistry and Imtec were sold in
August and December 1997, respectively.
Going Concern
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 1998, 1997,
and 1996, the Company's operating activities have required a net use of cash
totaling $13.6 million, $7.0 million, and $21.3 million, respectively. During
these years, debt and other credit arrangements, additional private placements
of debt and equity securities, and sales of assets relating to products
inconsistent with the Company's core business primarily funded the net cash
needs from operations. The Company incurred net losses of $29.1 million, $47.6
million, and $20.1 million in 1998, 1997, and 1996, respectively. At December
31, 1998, the Company had a stockholders' deficit of $29.1 million and current
liabilities exceeded current assets by $4.2 million. Further, the Company
operates in the semiconductor capital equipment industry which has been in a
severe downcycle, primarily due to excess chip factory capacity and inventory
oversupply, as well as worsened economic conditions in Asia.
The Company was not in compliance with certain covenants under its
$21.2 million 12% Senior Subordinated Notes as of December 31, 1998, due to no
longer meeting the requirement for continued listing by NASDAQ and not meeting
certain minimum financial requirements. Additionally, the Company, based on its
current projections, anticipates that it will not be in compliance with certain
financial covenants under these notes during 1999. However, the Company has
obtained waivers from these noteholders for the existing and expected covenant
violations through January 1, 2000.
The Company's current credit facility, which matures on January 1, 2000
and is annually renewable upon agreement of both parties, permits the lender,
in the event of a material adverse change in the Company's business or
financial condition in the lender's good faith judgment, to exercise its rights
under a covenant violation, including ceasing making additional funds available
under the facility, declaring all or part of the outstanding balance
immediately payable, and taking possession of the pledged collateral.
Additionally, the terms of the credit facility contain a borrowing base related
to the Company's eligible receivables and inventory; periodically, such
borrowing base has been insufficient to fund the Company's cash needs,
principally due to the long lead time required to manufacture many of the
Company's products and relatively small additional funding availability created
by work-in-process inventory.
The substantial losses the Company incurred have burdened the Company
with a level of debt that has severely limited the Company's access to working
capital. The Company has retained an investment banking firm to advise on the
Company's strategic alternatives, including possible ways to restructure the
balance sheet.
22
<PAGE> 23
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The conditions describe above raise substantial doubt about the
Company's ability to continue as a going concern. The 1998 consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
In 1997, the Company hired a new management team and implemented a
worldwide restructuring plan. The restructuring plan was developed based on an
evaluation of the Company's current products, its available technology, its
relationships with its customers, and its financial position. A summary of
management's actions completed thus far, as well as certain actions initiated
that are expected to continue into 1999 to address the financial conditions
described above, include the following:
- - Divested three subsidiaries with products inconsistent with the Company's
core business, using certain of the proceeds to significantly reduce its
outstanding and maximized line of credit;
- - Refinanced its remaining line of credit balance with term debt and an
additional credit facility;
- - Renegotiated $2 million of additional borrowings above the borrowing base
of qualified accounts receivable and inventory as defined by the credit
facility through September 30, 1999, as well as an extension of the
remainder of the facility through January 1, 2000;
- - Established in 1999 an arrangement whereby certain of the Company's
noteholders will provide, at their sole discretion, cash infusions when
requested by the Company in return for the issuance of convertible debt;
- - Reduced the Company's cash usage through workforce reductions of over 30%,
facilities consolidation from three buildings to one, and reductions in
other spending;
- - Initiated improvements in the cost structure and manufacturability by
engineering the Company's core product lines to use less materials while
maintaining process integrity and reducing costly product refinements and
rework during production thereby improving gross margins;
- - Initiated procedures to shorten installation time through improving the
quality controls on the product before it leaves the manufacturing
facility and through better coordination with the customer regarding the
timing and prerequisites of the installation which will reduce
installation delays, reduce costs to the Company, increase customer
satisfaction, and accelerate payments of receivables;
- - Improved the sales quoting process to involve all functional areas so as
to more accurately estimate costs thereby improving gross margins.
- - Initiated and completed a program to fix system operating problems in the
field using a more focused approach toward customer requirements thereby
accelerating the collection of past due receivables and improving customer
satisfaction;
- - Initiated a Product and Cycle Time Excellence program to refocus the
Company's new product development efforts and reduce the number of
development projects to those with strong market and margin potential;
- - Initiated improvements in cash flow through negotiating customer deposits
and extended payment terms with vendors;
- - Developed comprehensive and timely measures for ongoing monitoring of cash
flow to more effectively manage the Company's upcoming annual cash
requirements; and
- - Established a detailed budget to manage the upcoming year's operating
activity with defined timely reporting periods and ongoing monitoring of
strict adherence to budgeted amounts.
23
<PAGE> 24
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management believes many of the actions taken have contributed to the
improved gross margins on shipments in the last two quarters of 1998; however,
management also believes that future results of operations will be influenced
by a number of factors, including general economic conditions, the volume, mix
and timing of orders received, timely new product introductions and testing,
and numerous other factors. Additionally, the semiconductor industry and
related capital equipment suppliers, such as the Company, have experienced a
reduction in demand which has led and could continue to lead to reduced sales
and increased pricing pressures.
Since a significant portion of the Company's sales represent custom
equipment orders for which pricing can range from $300,000 to over $3,000,000,
the volume and timing of orders can have a significant effect on the Company's
operating results and cash flows. Based on semiconductor capital equipment
industry information available to the Company, management is optimistic that
the industry's downcycle may improve during the second half of 1999 and
continue the favorable trend in 2000; however, no assurance can be given that
such improvement in the industry will occur.
Management believes the cash requirements in 1999 will be provided by
operations and supplemented by borrowings on the Company's credit facility,
cash infusions from certain of the Company's noteholders in return for
convertible debt, deferral of substantially all cash interest on long-term debt
through September 30, 1999, and customer deposits on certain orders. Without
such supplemental sources of cash, the Company is susceptible to severe cash
shortages which may impact its ability to operate. While management believes
that its plans and implemented programs, along with the supplemental sources of
cash, will result in adequately funding its 1999 working capital and cash
requirements, certain of these plans, programs, and supplemental cash sources
are contingent upon future events that are not within the Company's control;
therefore, there can be no assurances that management's actions will be
successful or certain of the supplemental cash sources will be available.
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., Systems Chemistry,
SubMicron Wet Process Stations, Inc. (Universal Plastics), Imtec, SubMicron
Systems Investment Corporation, SMICRON(S) PTE., LTD. (a Singapore Corporation),
SubMicron Systems International Ltd., and PRIMAXX(TM) 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, purchased components,
parts 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 is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
ranging principally from three to five 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.
24
<PAGE> 25
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill and Other Intangible Assets
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 $1,039,000 and $814,000 at December
31, 1998 and 1997, 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.
Accounting for Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which requires 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 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.
In 1998, as part of the Company's restructuring plan, the Company
wrote-off certain assets approximating $3.3 million, including assets held for
sale which were written down to their fair value less costs to sell. Included in
the restructuring charge is the write-off of $1.0 million of leasehold
improvements associated with the consolidation of facilities and $2.3 million of
equipment associated with the discontinuance of expected programs due to
insufficient resources.
Revenue Recognition
Systems sales consists of new systems and product enhancements. Sales are
recognized at the time of shipment. Other sales consist of spare parts and
service sales. Service and spare parts sales are recognized when the service has
been performed or when the parts are shipped. Revenue in 1997 and 1996 from
construction services which were performed solely by Systems Chemistry, is
recognized when the service has been completed using a method similar to
percentage-of-completion and is included in other sales.
Warranty and Installation
The Company generally provides its customers with a warranty on systems
for a 12-month period commencing upon final customer acceptance. A provision for
the estimated cost of warranty and installation is recorded when the related
revenue is recognized. The Company revised its warranty and installation
provision estimate, increasing its net loss by approximately $2.4 million
($0.14 per Common share) and $2.7 million ($0.16 per Common share) in 1997 and
1996, respectively.
Research and Development
Research and development costs are charged to expense as incurred.
25
<PAGE> 26
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounting for Stock-Based Compensation
In October 1995, the FASB 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 Accounting Principles
Board ("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.
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.
Loss per Share
Under the requirements for calculating basic loss per share, the
dilutive effect of stock options and convertible securities has been excluded.
Diluted loss per share has not assumed the conversion of all potentially
dilutive securities since to do so would be antidilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentations.
26
<PAGE> 27
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SALE OF CERTAIN ASSETS
On October 14, 1998, the Company completed the sale of substantially all
of the net assets of PRIMAXX(TM) for $2.1 million. The Company recorded a gain
on the sale of $1.5 million in the fourth quarter of 1998. Results for the year
ended December 1998 reflect the results of operation of PRIMAXX(TM) through
October 14, 1998. The Company retained the rights to future royalty payments
discussed below.
On December 31, 1997, the Company completed the sale of certain net assets
of Imtec in exchange for a note of approximately $1.5 million payable to the
Company through December 2004. Interest is payable semiannually on June 30 and
December 31 at the lesser of 10% or the rate then paid to the Company's
principal secured lender (10% at December 31, 1998). The sales proceeds
approximated the net book value of the net assets sold.
On September 8, 1997, the Company signed a licensing agreement with AG
Associates (Israel) for its PRIMAXX(TM) dry cleaning technology in a specific
field of use. The agreement resulted in a gain of approximately $1.1 million
with additional royalties of up to $2.5 million, based on the number of units
sold, over a multiyear period. The Company recorded the $1.1 million gain on the
licensing agreement in its statement of operations for the year ended December
31, 1997.
On August 7, 1997, the Company sold substantially all of the net assets of
Systems Chemistry for $20.8 million, which amount includes a non-interest
bearing loan of $5 million due in three years. The Company applied the proceeds
of $18.5 million, after transaction costs and bank fees, to reduce the amount
borrowed under its credit facility. The Company recorded a gain on the sale of
$2.7 million in 1997 and, due to a post-closing negotiated adjustment, $0.5
million in 1998. Results for the year ended December 31, 1997 reflect the
results of operations of Systems Chemistry through August 7, 1997.
27
<PAGE> 28
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma results presented below reflect the results of operations of the
Company as if the sales of Systems Chemistry and Imtec had occurred on January
1, 1997. The pro forma financial information presented is not necessarily
indicative of the results of operations that the Company would have obtained had
such events occurred at the beginning of the period. Pro forma information is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------
<S> <C>
Net sales ........................................................ $ 65,293
========
Loss before extraordinary charge ................................. ($47,280)
========
Basic and diluted loss before extraordinary charge per
Common share..................................................... $ (2.76)
========
</TABLE>
4. INVENTORIES:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Raw materials, purchased components and parts $ 9,376 $ 11,856
Work in progress and finished goods ......... 2,674 4,810
-------- --------
12,050 16,666
Excess and obsolescence reserve ............. (4,263) (3,514)
-------- --------
$ 7,787 $ 13,152
======== ========
</TABLE>
In 1998, 1997 and 1996, the Company wrote off certain inventory and
increased reserve provisions, increasing its net loss by approximately
$4.2 million ($0.22 per Common share), $7.7 million ($0.45 per Common
share) and $2.0 million ($0.07 per Common share), respectively.
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
Production equipment ................... $ 7,558 $ 8,014
Office furniture equipment and leasehold
improvements ....................... 6,931 8,136
Equipment under capital lease .......... 5,335 10,101
-------- -------
19,824 26,251
Less - Accumulated depreciation and
amortization ....................... (14,328) (12,436)
-------- -------
5,496 13,815
Assets held for sale ................... 430 --
-------- -------
$ 5,926 $13,815
======== =======
</TABLE>
Accumulated amortization on equipment under capital leases was
approximately $2.9 million and $2.0 million at December 31, 1998 and 1997,
respectively.
28
<PAGE> 29
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. INTANGIBLES AND OTHER ASSETS:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Patent filing costs and trademarks ... $ 944 $ 1,072
Deferred financing costs ............. 1,489 2,024
Security deposits .................... 231 237
Note receivable from sale of Imtec ... 1,122 1,154
Other ................................ 4 130
------- -------
3,790 4,617
Less - Accumulated amortization ...... (635) (481)
------- -------
$ 3,155 $ 4,136
======= =======
</TABLE>
7. CREDIT FACILITY:
In November 1998, the Company renewed its credit facility with Greyrock
Capital, a division of Nations Credit Commercial Corporation ("Greyrock"). As
part of the renewal, the facility was extended through January 1, 2000 and
reduced from $15 million to $10 million. Borrowings under this facility bear
interest at "LIBOR" plus 5.375% (11.0038% at December 31, 1998) and are secured
by the Company's assets. The facility contains a borrowing base related to the
Company's eligible receivables and inventory. Borrowings under the credit
facility were $4.8 million at December 31, 1998, including $2 million of
additional borrowings above the available borrowing base as of December 31,
1998. These additional borrowings of $2.0 million are due September 30, 1999.
The facility matures on January 1, 2000, and is renewable upon agreement of
both parties. The terms of the facility limit certain actions of the Company,
including the payment of dividends, and permit Greyrock, in the event of a
material adverse change in the Company's business or financial condition in
Greyrock's good faith judgment, to exercise its rights under a default,
including ceasing making additional funds available under the facility,
declaring all or part of the outstanding balance immediately payable, and
taking possession of the pledged collateral. Consequently, the credit facility
is classified as a current liability at December 31, 1998.
8. ACCRUED EXPENSES AND OTHER:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Warranty and installation costs ...... $ 3,259 $ 5,691
Commissions .......................... 1,267 1,294
Restructuring charges ................ 1,758 2,675
Purchase commitments and other ....... 416 1,239
Professional fees .................... 386 1,588
Other ................................ 2,842 3,130
------- -------
$ 9,928 $15,617
======= =======
</TABLE>
29
<PAGE> 30
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
12% Senior Subordinated Notes, due February 2002, principal amount of
$21,241,000 (net of unamortized discount) ....................... $ 16,098 $ 13,494
8% convertible subordinated notes, principal amount of $8,692,000, due
March 2002 ..................................................... 8,692 8,692
$5,000,000 principal amount non-interest bearing note, due August 2000
(net of unamortized discount) ................................... 4,261 3,860
Series B 12% Senior Subordinated Notes, due February 2002, principal
amount of $5,410,519 (net of unamortized discount) .............. 2,953 --
Various capital lease obligations with interest from 5% to 14%,
payable monthly with varying maturities through October 2001 .... 5,081 6,153
Other ............................................................... 632 673
-------- --------
37,717 32,872
Less current portion ................................................ (2,530) (1,849)
-------- --------
$ 35,187 $ 31,023
======== ========
</TABLE>
The following is a schedule of aggregate long-term debt maturities (principal
amount) and future minimum capital lease payments at December 31, 1998:
<TABLE>
<CAPTION>
Long-Term Capital
Debt Leases
---- ------
(in thousands)
<S> <C> <C>
1999 $ 632 $1,898
2000 5,000 1,878
2001 -- 1,305
2002 32,886 --
------- ------
$38,518 $5,081
======= ======
</TABLE>
30
<PAGE> 31
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's long term debt arrangements below require the maintenance of
certain financial covenants and limits certain actions of the Company, including
the level of research and development and capital expenditures, issuance of
additional capital stock, and payment of dividends.
In December 1998, the Company issued $4.5 million of Series B 12% Senior
Subordinated Notes due February 1, 2002 ("Series B Senior Subordinated
Notes") with associated warrants to purchase 22,500,000 shares of the Company's
Common Stock at prices ranging from $.36 - $.52 per share, subject to customary
adjustment for changes in capitalization and below market issuances. Interest
is payable quarterly. The Company used the net proceeds to fund operations. The
carrying amount of the debt is net of unamortized discount of $2,358,000 at
December 31, 1998.
As of August 1, 1998, the Company began issuing Series B Senior
Subordinated Notes in lieu of the specified cash interest payments on certain of
its outstanding 12% and 8% notes. Such notes were issued with 720 detachable
warrants for each $1,000 of principal amount of notes. The Series B Senior
Subordinated Notes in the principal amount of $910,519 with warrants to purchase
655,574 shares of Common Stock at prices ranging from $.36 to $.52 per share,
subject to customary adjustment for changes in the capitalization and below
market issuances, are carried net of unamortized discount of $100,000 at
December 31, 1998. Interest is payable quarterly, and, beginning October 1,
1999, only in cash.
In November 1997, the Company completed a $20 million private placement of
securities consisting of $20 million principal amount of 12% Senior Subordinated
Notes due February 1, 2002 ("Senior Subordinated Notes"), with associated
warrants to purchase 6,616,367 shares of the Company's Common Stock at $2.25 per
share, subject to customary adjustment for changes in capitalization and
below market issuances. The Company used the net proceeds to repay its bank
debt, fund operations and fund its restructuring activities. In 1998, the
Company exercised its option with these noteholders to issue additional Senior
Subordinated Notes in the principal amount of $1,241,000 in lieu of cash
interest payments for 50% of the interest due in 1998. Interest is payable
monthly, and, beginning October 1, 1999, only in cash. The carrying amount of
the Senior Subordinated Notes is net of unamortized discount of $5,143,000 and
$6,506,000 at December 31, 1998 and 1997, respectively. At December 31, 1998,
the Company was not in compliance with certain covenants under the Senior
Subordinated Notes. In addition, the Company, based on its current projections,
anticipates that it will not be in compliance with certain financial
requirements under the Senior Subordinated Notes during 1999. However, the
Company has obtained waivers from the note holders for the existing and expected
covenant violations through January 1, 2000.
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 ("Convertible Preferred Stock") and approximately $8.7 million
principal amount of its 8% convertible subordinated notes due March 26, 2002
("New Notes") to previous holders of its 9% convertible subordinated notes due
December 1997 and associated Warrants. The New Notes are convertible into shares
of Common Stock at $3.70 per share, subject to customary adjustments for changes
in capitalization, among others. Interest is payable quarterly. Results for the
year ended December 31, 1997 include an extraordinary charge for debt
extinguishment of $1.2 million, or $0.07 per Common share, in connection with
the Company's issuance of the New Notes and Convertible Preferred Stock.
The $5 million non-interest bearing note due in August 2000, received in
connection with the sale of substantially all the net assets of Systems
Chemistry, carries a discount based on imputed interest at 10% of $739,000 and
$1,140,000 at December 31, 1998 and 1997, respectively. This note is
collateralized by foreign accounts receivable of SubMicron Systems Corporation.
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, resulting in no gain or loss.
The fair value of the Company's long-term debt, using estimated current
borrowing rates, approximates its carrying value.
Subsequent to year end and through March 31, 1999, the Company issued
$1,250,000 of Series 1999 12% Senior Subordinated Convertible Notes due February
1, 2002. These notes are convertible at the holders' option into approximately
2.4 million shares of Common Stock at a conversion rate equal to 110% of the
Company's Common Stock closing market value on the date of issuance of the note,
subject to customary adjustment for changes in capitalization and below
market issuances.
31
<PAGE> 32
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RESTRUCTURING CHARGES
Results for 1998 include restructuring charges of approximately $5.1
million ($.26 per Common share) including severance costs of $1.2 million,
write-off of leasehold improvements and certain fixed assets (see Note 2), and
lease termination costs associated with the further consolidation of facilities.
Results for 1997 include restructuring charges of approximately $5.6 million
($0.33 per Common share) including severance costs of $2.3 million and lease
termination costs associated with the vacancy of the Company's corporate
office. These restructuring charges were incurred as a result of a plan to
restructure the corporate organization and to refocus the Company on its core
technology. In the fourth quarter of 1998, the Company reversed $587,000 of its
estimated restructuring charges stemming from a favorable lease termination
settlement and lower than anticipated severance costs. Amounts paid in 1998 and
1997 of $2.4 million and $2.9 million, respectively, include severance costs of
$1.9 million in 1998 in $1.0 million in 1997. As of December 31, 1998,
the remaining accrued restructuring charge totaled $1,758,000.
11. LOSS PER SHARE
The following table set forth the reconciliation of weighted shares outstanding
for purposes of computing basic and diluted loss per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Numerator (in thousands):
Net loss $ (29,131) $ (47,553) $ (20,109)
Numerator for basic earnings per share -
income available to Common stockholders (29,131) (47,553) (20,109)
------------ ------------ ------------
Effect of dilutive securities
convertible debentures -- -- --
------------ ------------ ------------
Numerator for diluted earnings per share -
income available to Common stockholders
after assumed conversion $ (29,131) $ (47,553) $ (20,109)
============ ============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 19,311,137 17,152,839 16,712,610
Effect of dilutive securities:
Employee stock options -- -- --
Warrants -- -- --
Convertible debentures -- -- --
------------ ------------ ------------
-- -- --
Dilutive potential Common shares
adjusted weighted average shares
and assumed conversions diluted 19,311,137 17,152,839 16,712,610
============ ============ ============
Basic earnings per share $ (1.51) $ (2.77) $ (1.20)
============ ============ ============
Diluted earnings per share $ (1.51) $ (2.77) $ (1.20)
============ ============ ============
</TABLE>
Approximately 34.1 million potentially dilutive securities are outstanding as of
December 31, 1998, including convertible debt and preferred stock, stock
options, and warrants to purchase common stock.
32
<PAGE> 33
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. COMMITMENTS AND CONTINGENCIES:
The Company leases its office and production facilities and several
vehicles under long-term non-cancelable operating leases which expire at various
dates through 2005. Rent expense was approximately $1.2 million, $1.3 million
and $1.4 million in 1998, 1997 and 1996, respectively. Minimum annual operating
lease payments for each of the next five years and in the aggregate are as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999 $1,183
2000 657
2001 284
2002 242
2003 241
Thereafter 461
------
$3,068
======
</TABLE>
Included in the operating lease commitments above are approximately
$575,000 of payments which are included in the Company's restructuring reserve
as the Company has consolidated its operations and is currently attempting to
negotiate the termination of two existing leases.
At December 31, 1998 and 1997, the Company had inventory purchase
commitments which exceed the inventory's net realizable value. Amounts related
to such commitments of approximately $416,000 and $1.1 million have been accrued
as of December 31, 1998 and 1997, respectively.
On July 14, 1992, an action was commenced against the Company for patent
infringement. The complaint alleged that SMS infringed on three of the
plaintiff's patents embodying its 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 prepaid licensing fee of $2.0
million. During 1997, the Company expensed the remaining licensing fee of
$680,000 as management determined it had no future economic benefit. A charge of
approximately $142,000 was recorded in the 1996 statement of operations based
on the units shipped in 1996.
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.
Certain of the Company's officers and other key employees have existing
employment agreements that require the payment of severance benefits upon
termination without cause, resignation for good reason, or a change in control.
13. 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.
Foreign sales (Europe and Asia) represented 25%, 43%, and 30% of net sales in
1998, 1997 and 1996, 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 12%
Customer B 13%
Customer C 30%
Customer D 12%
--- --- ---
42% 12% 13%
==== === ===
</TABLE>
33
<PAGE> 34
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998, approximately 66% of the Company's accounts
receivable were due from three customers.
14. OTHER INCOME:
Other income in 1998 consists primarily of gains recognized on the sale of
substantially all of the net assets of PRIMAXX(TM) of $1.5 million and a
$500,000 working capital settlement from the 1997 sale of substantially all of
the net assets of Systems Chemistry.
Other income in 1997 consists primarily of gains recognized on the sale of
substantially all of the net assets of Systems Chemistry and the PRIMAXX(TM)
license.
15. INCOME TAXES:
The Company's income tax expense (benefit) for 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Federal
Current ...... $ -- $ -- $(2,344)
Deferred ..... -- 4,270 (3,012)
------ ------- -------
Total .... -- 4,270 (5,356)
------ ------- -------
State
Current ...... -- -- --
Deferred ..... -- 1,210 (1,210)
------ ------- -------
Total .... -- 1,210 (1,210)
------ ------- -------
$ -- $ 5,480 $(6,566)
====== ======= =======
</TABLE>
The following is a reconciliation of the statutory federal income tax
expense (benefit) to the effective tax expense (benefit) for 1998, 1997 and 1996
(dollars in thousands):
<TABLE>
<CAPTION>
% of % of % of
Pretax Pretax Pretax
1998 Loss 1997 Loss 1996 Income
-------- ---- -------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Statutory income tax ........ $(10,196) (35.0)% $(14,726) (35.0)% $(9,336) (35.0)%
State income taxes, net of
federal benefit ........... (1,763) (6.1) (2,299) (5.5) (577) (2.2)
Other nondeductible costs ... 58 .2 205 .5 222 0.8
Valuation allowance ......... 12,000 41.2 22,300 53.0 2,600 9.7
Other ....................... (99) (.3) -- -- 525 2.1
-------- ---- -------- ---- ------- -----
$ -- - % $ 5,480 13.0% $(6,566) (24.6)%
======== ==== ======== ==== ======= ====
</TABLE>
34
<PAGE> 35
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets
Warranty and installation reserve ........... $ 1,331 $ 2,325
Allowance for doubtful accounts ............. 716 357
Allowance for excess and obsolete inventories 1,741 2,048
Accrued licensing fees ...................... 102 102
Deferred compensation ....................... 410 410
Uniform inventory capitalization ............ 104 166
Salary and benefit accruals ................. 227 59
Net operating loss carryforwards ............ 30,573 17,374
Federal credit carryforward ................. 320 320
Amortization ................................ 200 189
Commissions ................................. 518 529
Restructuring expenses ...................... 718 1,093
Other ....................................... 1,085 1,360
-------- --------
Total deferred tax assets ............... 38,045 26,332
Valuation allowance for deferred tax assets . (36,900) (24,900)
-------- --------
1,145 1,432
-------- --------
Deferred tax liabilities
Depreciation ................................ (33) (320)
Gain on litigation settlement ............... (1,097) (1,097)
Other ....................................... (15) (15)
-------- --------
Total deferred tax liabilities ............ (1,145) (1,432)
-------- --------
Net deferred tax assets ........................ $ -- $ --
======== ========
</TABLE>
At December 31, 1998, the Company had approximately $79 million of federal
and $37 million of state net operating loss carryforwards available. These
carryforwards expire in various years through 2018.
The Company's valuation allowance for deferred tax assets will be
available to offset future income tax expense when it becomes more likely than
not that such deferred tax assets will be realized. The valuation allowance was
increased $22.3 million and $2.6 million in 1997 and 1996, respectively.
16. STOCK OPTIONS AND WARRANTS:
The Company has stock options outstanding to participants under four stock
option plans which are the 1995 Stock Option Plan for Non-Employee Directors,
the 1997 Stock Option Plan for Non-Employee Directors, the Amended and Restated
1991 Stock Option Plan and the 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 from the date of grant.
In 1995, the Company adopted a Stock Option Plan for Non-Employee
Directors. At December 31, 1998, 21,000 options are outstanding and exercisable
under the 1995 Stock Option Plan for Non-Employee Directors. Exercise prices
range from $3.38 to $10.13. In connection with the adoption of the 1997 Stock
Option Plan for Non-Employee Directors, the Board of Directors has discontinued
use of the 1995 Plan.
In 1997, the Company adopted the 1997 Stock Option Plan for Non-Employee
Directors. Under the plan, non-employee directors of the Company are each
granted options to purchase 75,000 shares of the Common stock upon appointment
to the Board of Directors. The aggregate number of options that may be issued
under the plan is 600,000,
35
<PAGE> 36
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subject to adjustment for stock dividends, stock splits, recapitalization or
certain other adjustments. At December 31, 1998, 315,000 options have been
granted and are outstanding (at $1.69- $3.13 per share) under the 1997 Stock
Option Plan for Non-Employee Directors.
The Company's Amended and Restated 1991 Stock Option Plan (1991 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 5,000,000 shares of Common Stock, subject to
adjustments for stock dividends, stock splits, recapitalization or certain other
adjustments. 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. At December 31, 1998, 1,312,847 options are available for grant under the
1991 Plan.
The Company also has an Executive Stock Option Plan (Executive Plan) that
provides for the issuance of up to 588,495 shares of Common Stock. All available
options under this plan have been granted.
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, 1996 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
Granted 2,856,766 2.63-4.38 -- --
Exercised (22,934) (3.02-4.44) -- --
Canceled (1,341,772) (2.39-11.13) -- --
---------- ------------- -------- -------------
Balance, December 31, 1997 3,087,217 2.39-11.00 536,250 6.00
Granted 3,863,859 (.38-2.81) 268,125 1.69
Exercised -- -- -- --
Canceled (3,486,960) (.77-11.00) (536,250) (1.69-6.00)
---------- ------------- -------- -------------
Balance, December 31, 1998 3,464,116 $ .38-11.00 268,125 $ 6.00
========== ============= ======== =============
</TABLE>
On May 19, 1998, the Company's Board of Directors authorized the repricing
of incentive stock options then outstanding and previously granted under the
1991 Plan. Only current employees were eligible to receive repriced options.
Approximately 2.7 million options were canceled (exercise prices of the options
canceled ranged from $1.75 to $11.00) and new options were granted with an
exercise price of $1.69, which approximated market. The terms of each newly
repriced option assumed the remaining life and vesting provisions of the
terminated options. No options were repriced for directors or non-employees.
At December 31, 1998, there were 1,190,781 exercisable options under the Amended
and Restated 1991 Stock Option Plan, 268,125 exercisable options under the
Executive Stock Option Plan, 21,000 exercisable options under the 1995
36
<PAGE> 37
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plan for Non-Employee Directors, and 60,000 exercisable options
under the 1997 Stock Option Plan for Non-Employee Directors.
In 1993, the Company issued warrants to purchase 150,000 shares 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 40,000
shares at $5 per share were exercised prior to 1996, and the remaining warrants
expired in August 1998.
The Company applies the measurement principles of 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. 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 SFAS Statement 123, the Company's pro forma
net loss for basic and diluted loss per share purposes for 1998, 1997 and 1996
would have been increased by $500,000, or $.03 per Common share, $3.8 million,
or $0.23 per Common share and $2.9 million, or $0.17 per Common share,
respectively.
In November 1997, 6,616,367 warrants, exercisable at $2.25 per share, were
issued in connection with the Company's $20 million private placement of Senior
Subordinated Notes. In December 1998, 22,500,000 warrants, exercisable at prices
ranging from $.36-$.52 per share, were issued in connection with an additional
$4.5 million private placement of Series B Senior Subordinated Notes. Also in
1998, 655,574 warrants, exercisable at $.36-$.52 per share, were issued in
connection with the Company's Series B Senior Subordinated Notes. All of these
warrants expire in November 2007.
Activity in the 1991 Plan and Executive Plan is summarized as follows:
<TABLE>
<CAPTION>
Shares Under Weighted Average
Options Exercise Price
------- --------------
<S> <C> <C>
Balance, January 1, 1996 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
Options granted 2,856,766 3.24
Options exercised (22,934) 3.40
Options canceled (1,341,772) 6.14
---------- -----
Balance, December 31, 1997 3,623,467 4.29
Options granted 4,131,984 1.54
Options exercised -- --
Options canceled (4,023,210) 3.09
---------- -----
Balance, December 31, 1998 3,732,241 $1.28
========== =====
</TABLE>
Stock options outstanding at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Average
Prices Outstanding Contractual Life Exercise Price Fair Value
------ ----------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
$ .38 - 1.69 2,902,331 8.7 years $ 1.46 $ .81
1.70-11.00 829,910 4.8 years 6.60 2.91
--------------- ------- --------- --------- ---------
$ .38-11.00 3,732,241 7.8 years $ 2.59 $ 1.28
=============== ========= ========== ========= =========
</TABLE>
37
<PAGE> 38
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted during 1998, 1997 and 1996
were $1.10 , $1.35, and $3.40, respectively. Fair value is estimated based on
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1998, 1997 and 1996: dividend yield of 0%; expected
volatility of 75% in 1998 and 45% in 1997 and 1996; risk-free interest rates of
4.5% in 1998, 5.3% in 1997, and 6.5% in 1996; 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 1,303 shares of Series A
Convertible Preferred Stock (the "Series A Stock") convertible into
approximately 2.7 million shares of Common Stock (see Note 9). Holders of
Series A Stock receive a liquidation preference of $3.70 per Common share.
During 1998 and 1997, 596.4 and 617.7 shares of Series A Stock were
converted into 1,192,800 and 1,235,400 Common Shares, respectively. Each
remaining share of Series A Stock is convertible into 2,000 shares of the
Company's Common stock.
18. RELATED PARTY TRANSACTIONS
Included on the Company's Board of Directors, in accordance with the terms
of the Senior Subordinated Notes, are representatives of KB Mezzanine Fund II
L.P. and Celerity Partners L.L.C. In 1998 and 1997, the Company incurred
interest and other charges, excluding original issue discounts, of approximately
$2.8 million and $241,000 payable to the KB Mezzanine Fund II L.P. and Celerity
Partners L.L.C. As of December 31, 1998, approximately 27.1 million warrants to
purchase Common Stock of the Company are held by related parties.
19. EMPLOYEE BENEFIT PLANS:
The Company maintains a defined contribution savings and investment
retirement plan under section 401(k) of the Internal Revenue Code in which all
employees are eligible to participate after completing three 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.
The Company maintains an employee stock purchase plan whereby up to
800,000 shares of Common Stock can be purchased by employees. Purchases are made
each June 30 and December 31 at a price equal to 85% of the fair market value of
the stock on the lower of the first or 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 1998 and
1997, a total of 138,076 and 191,601 shares, respectively, were purchased under
the plan. 358,913 shares remain available for purchase under this plan.
Approximately 218,000 shares were issued subsequent to year end to satisfy the
Plan's obligation as of December 31, 1998.
20. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid was $2.7 million , $4.1 million and $5.2 million in 1998,
1997 and 1996, respectively. Income tax paid was $364,000 in 1996.
During 1997 and 1996, capital lease obligations of $601,000 and $6.5
million, respectively, were incurred when the Company entered into a financing
lease for equipment purchases.
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information with respect to the Company's Directors will be contained
in the Company's definitive proxy statement with respect to the Company's 1999
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 1999 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 1999 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 1999 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 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,
1998 and 1997
Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
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.
40
<PAGE> 41
(3) Exhibits included herein:
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 (2)
4.1 Form of Warrant to Purchase Common stock (3)
4.2 Indenture dated January 29, 1998, between SubMicron Systems
Corporation, a Delaware corporation, and United States Trust
Company of New York, a New York corporation (4)
4.3 Purchase Agreement dated November 26, 1997, regarding 12%
Senior Subordinated Notes due February 2002 and Warrants,
including Form of Note (5)
4.4 Warrant Agreement dated November 26, 1997, including Form of
Warrant (5)
4.5 Form of Series B 12% Senior Subordinated Note due February 1,
2002.
4.6 Form of Warrant accompanying Series B 12% Senior Subordinated
Note due February 1, 2002.
4.7 Form of Series 1999 12% Senior Subordinated Convertible Note
due February 1, 2002.
10.1 Amended and Restated 1991 Stock Option Plan (6)(7)
10.2 Executive Stock Option Plan (1)(6)
10.3 1994 Employee Stock Purchase Plan (6)(7)
10.4 1995 Stock Option Plan for Non-Employee Directors (3) (6)
10.5 1997 Stock Option Plan for Non-Employee Directors (6)(7).
10.6 Stockholder Agreement dated November 26, 1997 (5)
10.7 Employment Agreement between the Company and James S. Molinaro
(1)(6)
10.8 Employment Agreement between the Company and David J. Ferran
(6)(8).
10.9 Employment Agreement between the Company and John W. Kizer
(6)(8).
10.10 Severance/Consulting Agreement between the Company and David
F. Levy (6)(8).
10.11 Lease Agreement, as amended, dated as of January 16, 1992,
between Rouse and Associates ("Rouse) and SSC, as amended by
Letter Agreement dated February 13, 1992, between Realprop
Management, Inc., (an affiliate of Rouse) and SubMicron (1)
10.12 Loan and Security Agreement among Greyrock Business Credit, a
division of NationsCredit Commercial Corporation, SubMicron
Systems, Inc. and SubMicron Wet Process Stations, Inc. dated
November 25, 1997 (8).
10.12(a) Amendment to Credit Facility with Greyrock
10.13 Tax Indemnification Agreement dated May 22, 1992, among
SubMicron, David F. Levy and James S. Molinaro (1)
10.14 Indemnity Agreement, dated April 1992, by and among SubMicron,
David Levy and James Molinaro (1)
41
<PAGE> 42
10.15 Form of Subordinated Note and Preferred Stock Purchase
Agreement (8)
10.16 Asset Purchase Agreement among SubMicron Systems Corporation,
Systems Chemistry Incorporated and The BOC Group, Inc.(8)
21 List of Subsidiaries
23 Consent of Ernst & Young LLP
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
Annual Report on Form 10-K for the year ended December 31, 1996.
(3) 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.
(4) Incorporated by reference to an exhibit filed as part of the Company's
Registration Statement on Form S-4, File No. 333-38741.
(5) Incorporated by reference to an exhibit filed as part of the Company's
Current Report on Form 8-K dated November 26, 1997.
(6) Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this Form.
(7) Incorporated by reference to an exhibit filed as part of the Company's
Registration Statement on Form S-8, File No. 333-69695.
(8) 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, 1997.
(b) Reports on Form 8-K:
8-K filed December 24, 1998
42
<PAGE> 43
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
Beginning Charged to Costs Other Balance at
of Period and Expenses Accounts Deductions End of Period
--------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1998:
Allowances for doubtful
accounts receivable $ 945,000 $ 1,080,000 $ -- $ (273,000) $1,752,000
========== =========== =========== =========== ==========
For the year ended
December 31, 1997:
Allowances for doubtful
accounts receivable $1,297,000 $ 813,000 $ (90,000) $(1,075,000) $ 945,000
========== =========== =========== =========== ==========
For the year ended December 31, 1996:
Allowances for doubtful
accounts receivable $ 473,000 $ 824,000 $ -- $ -- $1,297,000
========== =========== =========== =========== ==========
</TABLE>
43
<PAGE> 44
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 J. Ferran
_________________________________
David J. Ferran, President
Date: March 31, 1999
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 J. Ferran President and Director March 31, 1999
________________________________________ (Principal Executive Officer)
David J. Ferran
/s/ John W. Kizer Chief Financial Officer March 31, 1999
________________________________________ (Principal Financial and
John W. Kizer Accounting Officer)
/s/ Mark R. Benham Director March 31, 1999
________________________________________
Mark R. Benham
/s/ Ronald B. Booth Director March 31, 1999
________________________________________
Ronald B. Booth
/s/ Robert J. Wickey Director March 31, 1999
________________________________________
Robert J. Wickey
/s/ Bonaparte H. Liu Director March 31, 1999
________________________________________
Bonaparte H. Liu
/s/ Kevin M. Lynch Director March 31, 1999
________________________________________
Kevin M. Lynch
/s/ James E. Newton Director March 31, 1999
________________________________________
James E. Newton
/s/ Donald Zito Director March 31, 1999
________________________________________
Donald Zito
</TABLE>
44
<PAGE> 1
EXHIBIT 4.5
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
THIS NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT. PURSUANT PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL ISSUE DISCOUNT AND TREASURY
REGULATIONS THEREUNDER, THE ISSUER OF THIS NOTE WILL, BEGINNING NO LATER THAN
TEN DAYS AFTER THE ISSUE DATE HEREOF, PROMPTLY MAKE AVAILABLE TO ANY HOLDER UPON
REQUEST TO SUBMICRON SYSTEMS CORPORATION, 6330 HEDGEWOOD DRIVE, #150, ALLENTOWN,
PENNSYLVANIA 18106, ATTENTION: CHIEF FINANCIAL OFFICER, THE AMOUNT OF ORIGINAL
ISSUE DISCOUNT, THE ISSUE PRICE OF THIS NOTE, THE ISSUE DATE OF THIS NOTE, AND
THE YIELD TO MATURITY OF THIS NOTE.
SUBMICRON SYSTEMS CORPORATION
Date
SERIES B 12% SENIOR SUBORDINATED NOTE
DUE FEBRUARY 1, 2002
No: U.S. $
SUBMICRON SYSTEMS CORPORATION, a Delaware corporation (the
"Company"), for value received, promises to pay to ______________ or its
registered assigns (the "Holder"), on February 1, 2002, the principal amount of
$ _____ (or such lesser principal amount as is then unpaid) and to pay interest
(computed on the basis of a 360-day year of twelve 30-day months) on the unpaid
principal amount hereof at the rate of 12% per annum. The Company shall pay
interest on the unpaid principal amount of this Series B Note (as hereinafter
defined) quarterly in arrears. Interest due and payable (i) up to and including
September 30, 1999, will be payable in the form of Interest Units and (ii)
thereafter will be payable in cash. Certain capitalized terms shall have the
meanings specified in Section 10 hereof.
Interest accruing from the date of issuance through the
immediately following March 31, June 30, September 30 or December 31, as
applicable, shall be payable on such date. Thereafter, interest shall be payable
quarterly in arrears as described above, until the principal amount hereof shall
have been paid in full. Notwithstanding the foregoing, if there has occurred and
is continuing any Event of Default under Sections 10(a)(i) or 10(a)(ii) of this
Series B Note, then interest on all unpaid amounts outstanding hereunder
(including overdue installments of principal or interest) shall be payable at
the Default Rate, compounded monthly (to the extent permitted by applicable
law).The Company may treat the Person in whose name this Series B Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes. The principal and interest on this Series B Note payable in cash
is payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts. The
Company may pay principal and interest by federal funds bank wire transfer, or
by check payable in such legal tender.
<PAGE> 2
1. The Series B Notes.
This note (a "Series B Note") is one of a series of promissory
notes of the Company, designated as "Series B 12% Senior Subordinated Notes due
February 1, 2002" and which are issued or may be issued in connection with (a)
the Company's offering of New Units pursuant to a Confidential Private Offering
Memorandum dated December 2, 1998 (the "Offering Memorandum"), (b) incentives
which may be granted to certain of the Company's management, (c) the issuance of
notes to certain holders of the Company's 8% Convertible Subordinated Notes due
March 26, 2002 and the Company's 12% Senior Subordinated Notes due February 1,
2002 (the "Series 1997 Notes") in lieu of certain cash interest payments, (d)
additional issuances of notes by the Company which are designated as Series B
12% Senior Subordinated Notes due February 1, 2002 and (e) the payment of
interest under any of the foregoing which is scheduled to be paid on or before
October 1, 1999 (such notes as may be issued from time to time under (a) through
(e) above are collectively referred to as the "Series B Notes"). This Series B
Note ranks pari passu with the Series 1997 Notes and all other Series B Notes.
2. Redemption.
(a) The Company may redeem this Series B Note at any time in
whole or from time to time in part, at a redemption price equal to 100% of the
principal amount of this Series B Note, plus accrued interest to the redemption
date, plus a redemption premium equal to 2% of the principal amount redeemed. If
fewer than all of the Series B Notes are to be redeemed, the Company shall
select the Series B Notes to be redeemed on a substantially pro rata basis among
all holders of Series B Notes.
(b) If at any time on or prior to February 1, 2002, there is a
Redemption Event, Holders of a majority in principal amount of the outstanding
Series B Notes may, by written notice to the Company, require that the Company
redeem all, but not less than all, of the outstanding Series B Notes at a
redemption price equal to 100% of the principal amount of the Series B Notes so
being redeemed, plus accrued interest to the redemption date, plus a redemption
premium equal to 2% of the principal amount redeemed; provided, however, that in
the event of closing of any public offering of any equity or debt securities of
the Company, the amount redeemed shall not exceed the amount of net proceeds
received by the Company in connection with such public offering.
(c) If at any time on or prior to February 1, 2002, there is a
Refinancing Event, each Holder may, by written notice to the Company, require
that the Company redeem up to one-half of the principal amount of the Series B
Notes held by such Holder at a redemption price equal to 100% of the principal
amount of the Series B Notes so being redeemed, plus accrued interest to the
redemption date, plus a redemption premium equal to 2% of the principal amount
redeemed; provided, however, that the amount redeemed shall not exceed the net
proceeds received by the Company in connection with such Refinancing Event.
3. Redemption Procedure.
(a) At least 10 days but not more than 30 days before a
redemption date, the Company shall mail a notice of redemption to each Holder
whose Series B Note is to be redeemed. The notice shall: (i) identify the Series
B Notes to be redeemed and shall state the redemption date; (ii) state the
redemption price (principal amount plus accrued interest through such date);
(iii) indicate, if any Series B Note is being redeemed in part, the portion of
the principal amount of such Series B Note to be redeemed and that, after the
redemption date, upon surrender of such Series B Note, a new Series B Note or
Series B Notes in principal amount equal to the unredeemed portion will be
issued; (iv) state that Series B Notes called for redemption must be surrendered
to the Company to collect the redemption price; and (v) state that interest on
the Series B Notes called for redemption ceases to accrue on and after the
redemption date, unless the Company has defaulted on the payment of the
redemption price.
(b) Once notice of redemption is mailed, Series B Notes called
for redemption
-2-
<PAGE> 3
become due and payable on the redemption date at the redemption price.
(c) Upon surrender of a Series B Note that is redeemed in
part, the Company shall issue a new Series B Note equal in principal amount to
the unredeemed portion of the Series B Note surrendered.
4. Covenants of the Company. So long as any of the Series B Notes remain unpaid
and outstanding, the Company covenants to the Holders of outstanding Series B
Notes as follows:
(a) Obligations under Other Documents. Subject to performance
by the holder of its obligations thereunder, the Company shall satisfy all of
its obligations under the Warrants and the Security Documents (as defined
herein).
(b) SEC Reports. The Company shall deliver to the Holders
within 15 days after it files them with the Securities and Exchange Commission
copies of any reports, proxy statements and other information which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
(c) Stay, Extension and Usury Laws. The Company covenants and
agrees (to the extent that it may lawfully do so) that it will not at any time
insist upon, plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law wherever enacted, now or at any
time hereafter enforce, which may affect the covenants or the performance of its
obligations under this Series B Note; and the Company (to the extent it may
lawfully do so) each hereby expressly waives all benefit or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impede the execution of any power herein granted to the Holders, but
will suffer and permit the execution of every such power as though no such law
has been enacted.
(d) Limitation on Dividends and Redemption. The Company shall
not, directly or indirectly:
(i) declare or pay any dividend on, or make any
distribution to the holders (as such) in respect of, any shares of its
capital stock, other than in shares of it common stock, par value
$.0001 per share;
(ii) purchase, redeem or otherwise acquire or retire
for value any equity interests (including warrants, options or other
rights to acquire such equity interests) of the Company or any
subsidiary (other than any such equity interest of a directly or
indirectly wholly-owned subsidiary of the Company) or other Affiliate
(as defined under Rule 501 under the Securities Act of 1933, as
amended) of the Company;
(iii) permit any subsidiary to declare or pay any
dividend on, or make any distribution to the holders (as such) in
respect of, any shares of its capital stock except to the Company or
another directly or indirectly wholly owned subsidiary of the Company;
or
(iv) permit any subsidiary to purchase, redeem or
otherwise retire for value any equity interests (including warrants,
options or other rights to acquire such equity interests) of it, the
Company or any Affiliate of either of them (other than any such Equity
Interests owned by the Company or any other directly or indirectly
wholly owned subsidiary of the Company).
5. Covenants of the Holder. By Holder's acceptance of this Series B Note, Holder
acknowledges and warrants to any Senior Lender that the Subordinated
Indebtedness (as defined in Section 10 hereof) is and shall continue to be (a)
unsecured, except for a second-priority security interest created by the
Security Agreement dated November 26, 1997, as amended (the "Security
Agreement"), and the Patent Security
-3-
<PAGE> 4
Agreement dated November 26, 1997, as amended (the "Patent Security Agreement"),
(or any subsequent security agreements approved by the Senior Lender) and (b)
not subject to any guaranties by any direct or indirect subsidiaries of the
Company other than the Continuing Guaranty dated November 26, 1997, as amended
(the "Guaranty"), or any subsequent guarantees approved by the Senior Lender.
6. Subordination.
(a) Series B Notes Subordinated to Senior Indebtedness. By
Holder's acceptance of this Series B Note, Holder covenants and agrees that this
Series B Note, the Guaranty and the other Security Documents shall be
subordinated in right of payment in accordance with the provisions of this
Section 6 to the prior indefeasible payment in full of all amounts payable under
or in respect of Senior Indebtedness (as such term is defined in Section 10).
(b) Priority and Payment Over of Proceeds in Certain Events.
(i) Subordination on Dissolution, Liquidation
or Reorganization of the Obligor. Upon any payment or distribution of assets or
securities of Obligor, of any kind or character, whether in cash, property or
securities, upon any dissolution or winding up or total or partial liquidation
or reorganization of Obligor, whether voluntary or involuntary or in bankruptcy,
insolvency, receivership or other proceedings, all amounts payable under or in
respect of Senior Indebtedness shall first be indefeasibly paid in full, or
payment provided for, before the Holder shall be entitled to receive any payment
or distribution of any cash, property or securities under or in respect of
Subordinated Indebtedness. Before any payment may be made by Obligor or in
respect of Subordinated Indebtedness upon any such dissolution or winding up or
liquidation or reorganization, any payment or distribution of cash, property or
securities of Obligor of any kind or character to which the Holder would be
entitled, except for the provisions of this Section 6, shall be made by Obligor
or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution directly to the Senior Lender (as
defined in Section 10) or its representatives to the extent necessary to pay all
the Senior Indebtedness in full after giving effect to any concurrent payment or
distribution to the Senior Lender.
(ii) Subordination on Default in Senior
Indebtedness.
(A) No direct or indirect payment by
or on behalf of Obligor under or in respect of the Subordinated Indebtedness,
whether pursuant to the terms of the Subordinated Indebtedness or upon
acceleration, offer to purchase or otherwise, shall be made if, at the time of
such payment, there exists a default in the payment (including, without
limitation, any payment default resulting from any acceleration of the Senior
Indebtedness) under or in respect of the Senior Indebtedness and (A) the
collateral agent under the Security Agreement (the "Agent") has received written
notice thereof, if any, as provided in Section 6(i) and (B) such default shall
not have been cured or waived in writing or the benefits of this sentence waived
in writing by the Senior Lender.
(B) During the continuance of any other
default with respect to the Senior Indebtedness, upon the receipt by the Agent
of written notice from the Senior Lender specifying all events of default with
respect to the Senior Indebtedness, which the person executing such notice on
behalf of the Senior Lender reasonably believes to exist as of the date of such
notice after due inquiry, no payment may be made by Obligor under or in respect
of Subordinated Indebtedness for a period ("Payment Blockage Period") commencing
on the date of receipt of any such notice and ending at the earlier of (X) the
date when all events of default which were specified by the Senior Lender in the
notice which triggered such Payment Blockage Period have been cured or waived,
and (Y) 90 days after the date of receipt of such notice (unless such Payment
Blockage Period shall be terminated earlier by written notice to the Agent from
the Senior Lender).
(C) During any Payment Blockage Period, the
Company will promptly provide Holder with a copy of any written notice delivered
to the Company by the Senior Lender stating that all events of default which
were specified by the Senior Lender in the notice which
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<PAGE> 5
triggered such Payment Blockage Period have been cured or waived.
Notwithstanding anything herein to the contrary (1) in no event will a Payment
Blockage Period extend more than 90 days from the date such notice is effective,
and (2) payments due but not made with respect to the Subordinated Indebtedness
during the Payment Blockage Period may be made at any time after the expiration
of the Payment Blockage Period (unless another Payment Blockage Period is in
effect or payment is otherwise prohibited pursuant to this Section 6, including,
without limitation, in connection with a payment default). No more than two
Payment Blockage Periods may be commenced for any reason during any period of
360 consecutive days. For all purposes of this Section 6(b)(ii), no event of
default under the Senior Indebtedness which the person executing such notice on
behalf of the Senior Lender reasonably believed (after due inquiry) to exist and
be continuing on the date of the commencement of any Payment Blockage Period
(whether or not such event of default was included in the notice required to be
given under this Section 6(b)(ii)) shall be, or be made, the basis for the
commencement of any subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days.
(iii) Rights and Obligations of the Holder of the
Series B Note. In the event that, notwithstanding the foregoing provision
prohibiting such payment or distribution, any holder of the Subordinated
Indebtedness shall have received any payment under or in respect of the
Subordinated Indebtedness at a time when such payment was prohibited by this
Section 6, then and in such event (subject to the provisions of Section 6(g))
such payment or distribution shall be received and held in trust for the Senior
Lender and shall be paid over or delivered to the Senior Lender promptly, in
accordance with Section 6(b)(i) without notice or demand therefor, to the extent
necessary to pay in full all amounts due under or in respect of the Senior
Indebtedness in accordance with its terms after giving effect to any concurrent
payment or distribution to the Senior Lender.
(iv) Acceleration of the Subordinated
Indebtedness and Exercise of Remedies With Respect Thereto. The holders of the
Subordinated Indebtedness shall give the Senior Lender 30 days prior written
notice of any acceleration of the maturity of the Subordinated Indebtedness with
respect to an Event of Default under Section 9(a)(i), (ii), (iii) or (iv)
hereof. All Senior Indebtedness then or thereafter due or declared to be due
shall first be indefeasibly paid in full before the holders of the Subordinated
Indebtedness are entitled to receive any payment from Obligor under or in
respect of Subordinated Indebtedness.
(v) Right to Rely Upon Orders and Decrees
With Respect to Payments and Distributions. Upon any payment or distribution of
cash, assets or securities referred to in this Section 6, the holders of the
Subordinated Indebtedness shall be entitled to rely upon any order or decree of
a court of competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending, and upon a certificate of
the receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making any such payment or distribution, delivered for the purpose of
ascertaining the persons entitled to participate in such distribution, and the
holders of other indebtedness of Obligor, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Section 6.
(c) Payments May be Paid Prior to Dissolution. Nothing in this
Section 6 shall prevent Obligor, except under the conditions described in
Sections 6(b), 6(d) or 6(g) (including, without limitation, if a payment default
has occurred and is continuing with respect to the Senior Indebtedness), from
making payments at any time under or in respect of Subordinated Indebtedness to
the holders thereof entitled thereto unless at least two Business Days prior to
the date upon which such payment would otherwise (except for the prohibitions
contained in Section 6(b)) become due and payable, the Holder or the Agent shall
have received the written notice provided for in Section 6(g). An Obligor shall
give prompt written notice to the Agent and the Holder of any dissolution,
winding up, liquidation or reorganization of such Obligor.
(d) Rights of Senior Lender Not to be Impaired. No right of
the Senior Lender to
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<PAGE> 6
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act in good faith by the Senior
Lender or by any noncompliance by Obligor with the terms and provisions and
covenants in this Section 6, regardless of any knowledge thereof the Senior
Lender may have or otherwise be charged with. The provisions of this Section 6
are intended to be for the benefit of, and shall be enforceable directly by, the
Senior Lender. The Holder agrees not to amend the Series B Notes, including
without limitation, for all purposes of this Section 6(d), to increase the
interest rate payable by Obligor, increase the fees payable to the Holder or add
new fees payable to the Holder, in each case other than fees payable by the
issuance of additional notes or an equity interest, or provide for amortization
of the principal amount of the Series B Notes prior to the dates provided for in
the Series B Notes. Notwithstanding any other provision contained in the Series
B Notes or otherwise, prior to the earlier of repayment in full of all
obligations owed by Obligor to Senior Lender and January 1, 2000, Obligor shall
not make any payment on, or in connection with, the Series B Notes, except for
(i) payments made by the issuance of Interest Units or an equity interest to the
Holder or (ii) interest as currently provided herein.
(e) Subrogation. Upon the indefeasible payment in full of all
amounts payable under or in respect of the Senior Indebtedness, the holders of
the Subordinated Indebtedness shall be subrogated to the rights of the Senior
Lender to receive payments or distributions to the Senior Lender of any cash,
property or securities to which holders of the Subordinated Indebtedness would
be entitled except for the provisions of this Section 6, and no payment pursuant
to the provisions of this Section 6 to the Senior Lender by the holders of the
Subordinated Indebtedness, shall, as between Obligor, its creditors other than
the Senior Lender and the holders of the Subordinated Indebtedness, be deemed to
be a payment by Obligor to or on account of such Subordinated Indebtedness, it
being understood that the provisions of this Section 6 are solely for the
purpose of defining the relative rights of the Senior Lender, on the one hand,
and the holders of the Subordinated Indebtedness, on the other hand. If any
payment or distribution to which the holders of the Subordinated Indebtedness
would otherwise have been entitled but for the provisions of this Section 6
shall have been applied, pursuant to the provisions of this Section 6, to the
payment of all amounts payable under the Senior Indebtedness, then and in such
case, the holders of the Subordinated Indebtedness, together with any holders of
indebtedness ranking pari passu with the Subordinated Indebtedness, shall be
entitled to receive from the Senior Lender any payments or distributions
received by the Senior Lender in excess of the amount sufficient to pay in full
all amounts payable under or in respect of the Senior Indebtedness.
(f) Obligations of the Obligor Unconditional. Nothing
contained in this Section 6, or any of the Series B Notes is intended to or
shall impair, as between Obligor and the holders of the Subordinated
Indebtedness, the obligations of Obligor, which are absolute and unconditional,
to pay to the holders of the Subordinated Indebtedness all amounts which may be
payable thereunder or in respect thereof (including, without limitation, the
principal of and interest on the Subordinated Indebtedness) as and when the same
shall become due and payable in accordance with the terms thereof, or is
intended to or shall affect the relative rights of the holders of the
Subordinated Indebtedness and creditors of Obligor other than the Senior Lender,
nor shall anything herein or therein prevent any holder of the Subordinated
Indebtedness from exercising all rights and remedies otherwise permitted by
applicable law upon default under the Subordinated Indebtedness, subject to
Section 6(b) and to the rights, if any, under this Section 6 of the Senior
Lender in respect of cash, property or securities of Obligor received upon the
exercise of any such right or remedy. The failure of Obligor to make payment on
account of principal or interest on the Subordinated Indebtedness and all other
amounts may be payable in respect thereof by reason of any provision of this
Section 6 shall not be construed as preventing the occurrence of an event of
default under the Subordinated Indebtedness.
(g) Holder Entitled to Assume Payments not Prohibited in
Absence of Notice. The Holder shall not at any time be charged with the
knowledge of the existence of any facts other than any acceleration of the
Subordinated Indebtedness which would prohibit the receipt of any payment to the
Holder, unless and until the Agent or the Holder shall have received written
notice thereof from or on behalf of Obligor, the Senior Lender or from any
trustee, representative or agent therefor which notice shall specify the
applicable provision of this Section 6 which prohibits or restricts receipt of
payment by
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<PAGE> 7
the Holder; and, prior to the receipt of any such written notice by the Agent or
the Holder, the Holder shall be entitled to assume conclusively that no such
facts exist. Unless at least two Business Days prior to the date on which by the
terms of the Subordinated Indebtedness any monies are to be paid by Obligor to
the Holder for any purpose (including, without limitation, the payment of the
principal or interest on the Subordinated Indebtedness), the Agent or the Holder
shall have received the notice provided for in the preceding sentence, the
Holder shall have full power and authority to receive such monies and shall be
entitled to keep and retain the same, and shall not be affected by any notice to
the contrary which may be received by it on or after such date; provided,
however, that the foregoing shall not apply with reference to a payment of
Subordinated Indebtedness pursuant to an acceleration thereof unless the Senior
Lender has received written notice of such acceleration pursuant to Section
6(b)(iv) (if required) which notice shall have been received by the Senior
Lender not less than thirty days in advance of the date of such payment.
Notwithstanding the foregoing, if any payment is made by Obligor after the
occurrence and during the continuance of a payment default with respect to the
Senior Indebtedness, the Holder shall promptly pay over and deliver to the
Senior Lender such payment if (i) the Senior Lender notifies the Agent of such
payment default not more than two Business Days after such payment is made to
the Holder, or (ii) the payment is made after the acceleration of the
Subordinated Indebtedness. It is understood that for purposes of this Section 6,
"payment default" with respect to the Senior Indebtedness means any late payment
under the Senior Indebtedness regardless of whether any applicable grace period
has expired. Each of the Agent and the Holder shall be entitled to rely on the
delivery to it of a written notice by a person representing himself, herself or
itself to be an authorized signatory for the Senior Lender (or a trustee,
representative or agent on behalf of, or other representative of, the Senior
Lender) to establish that such notice has been given by or on behalf of the
Senior Lender.
(h) Reliance by Senior Lender. The Holder by acceptance hereof
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to the Senior Lender, whether
the Senior Indebtedness was created or acquired before or after the issuance of
this Note, to acquire or continue to hold the Senior Indebtedness and the Senior
Lender shall be deemed conclusively to have relied on such subordination
provisions in acquiring or continuing to hold any Senior Indebtedness.
(i) Notice by Senior Lender. The Company agrees to use
reasonable efforts to have the Senior Lender agree to notify the Agent and to
have the Company or the Agent notify the Holder upon the happening of any of the
following:
(a) the transmittal by the Senior Lender of a notice
of default to Obligor; or
(b) the acceleration of the Senior Indebtedness; or
(c) the transfer by assignment and novation of any
Senior Indebtedness, specifying the name and address of the transferee;
provided, however, that the failure by the Senior Lender to give any notice to
the Agent or the Holder required by this Section 6(i)(c) shall not result in any
liability on the part of the Senior Lender or have any other effect except as
expressly set forth in Sections 6(b), 6(c) and 6(g).
Notwithstanding anything in this Note to the
contrary, any notice required to be given herein by the Senior Lender to the
Agent or the Holder, or which the Senior Lender desires to give to the Holder,
under or in connection with this Note (including without limitation all notices
under this Section 6), may be give to the Agent at United States Trust Company
of New York, 114 West 47th Street, 25th Floor, New York, NY 10036, Attn:
Corporate Trust, or at such other address as the Agent may designate by written
notice to the Senior Lender, and receipt by the Agent of any such written notice
shall, for all purposes of this Note, be deemed to be receipt thereof by the
Holder.
(j) Notice By the Holder . The Holder agrees to notify the
Senior Lender upon the
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<PAGE> 8
happening of any of the following:
(a) the transmittal by the Holder of a notice of
default to Obligor; or
(b) acceleration of the Subordinated Indebtedness; or
(c) the transfer of any Subordinated Indebtedness,
specifying the name and address of the transferee; provided, however, that the
failure by the Holder to give any notice to the Senior Lender required by this
Section shall not result in any liability on the part of the Holder or have any
other effect except as expressly set forth in Section 6(b).
7. Security Documents.
In order to secure the Company's obligation to pay the
principal of this Series B Note, the Company has granted the Holder, pursuant to
the terms of the Security Agreement and pro rata based on the relationship that
the dollar amount of this Series B Note bears to the aggregate dollar amount of
all Series B Notes and Series 1997 Notes outstanding from time to time, a lien
and security interest on substantially all of the assets of the Company. The
Company's obligations under this Series B Note have also been guarantied by
SubMicron Systems, Inc. and SubMicron Wet Process Stations, Inc. (the
"Subsidiary Guarantors") pursuant to the Guaranty. The Subsidiary Guarantors'
obligations under such guaranties have been secured by a security interest in
certain of their assets pursuant to the terms of the Security Agreement, and,
with respect to SubMicron Systems, Inc., the Patent Security Agreement (and
together with the Security Agreement and the Guaranty, the "Security
Documents"). The Holder acknowledges and agrees that such lien and guaranties
are second priority liens and guaranties, junior to the liens and guarantees
granted (or may in the future be granted) to holders of Senior indebtedness.
8. Acceptance of Series B Note.
The Holder, by acceptance of this Series B Note, (i) agrees to be bound
by the terms of (a) the Security Documents, including without limitation, the
indemnification provisions contained therein, and (b) the Intercreditor
Agreement dated November 24, 1998 (the "Intercreditor Agreement") and (ii)
agrees with, ratifies and confirms the appointment of (x) the Collateral Agent
under each of the Security Documents (as such term is defined in each such
Security Document), as such Holder's attorney-in-fact under the Security
Documents and authorizes the Collateral Agent to take such action as may be
necessary to effectuate the purposes of the Security Documents and (y) the
Collateral Agent under the Security Agreement as the Agent hereunder. Copies of
the Security Documents and the Intercreditor Agreement, together with any
amendments or replacements shall be maintained at the principal executive
offices of the Company and shall be available for inspection by Holder on
reasonable notice.
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<PAGE> 9
9. Modification of Notes.
The Series B Notes may be modified without prior notice to any
Holder but with the written consent of the Holders of a majority in principal
amount of the Series B Notes then outstanding. The Holders of a majority in
principal amount of the Series B Notes then outstanding may waive compliance by
the Company with any provision of the Series B Notes without prior notice to any
Holder. However, without the consent of each Holder affected and subject to
Section 6(d), an amendment, supplement or waiver may not (a) alter the amount of
Series B Notes whose Holders must consent to an amendment, supplement or waiver,
(b) alter the rate or the time for payment of interest on any Series B Note, (c)
alter the principal or the maturity of any Series B Note or alter the redemption
or prepayment provisions with respect thereto or (d) make any Series B Note
payable in money or property other than as stated in the Series B Notes.
Notwithstanding the foregoing, by acceptance of this Series B Note as described
in Section 8 above, the Holder, pursuant to the terms of the Intercreditor
Agreement, has agreed to vote or consent to the certain actions as forth in the
Intercreditor Agreement.
10. Defaults and Remedies.
(a) Events of Default. An "Event of Default" hereunder occurs
if:
(i) the Company defaults in the payment
of the principal of any Series B Note when the same becomes due and payable at
maturity, upon redemption or otherwise;
(ii) the Company defaults in the
payment of interest on any Series B Note when the same becomes due and payable
and the default continues for a period of three days;
(iii) the Company fails to comply in any
material respect with any of the covenants hereunder and the Default (as
hereinafter defined) continues for the period and after the notice specified
below;
(iv) there occurs any Event of Default
with respect to the Series 1997 Notes (as an Event of Default is defined in the
Series 1997 Notes from time to time and subject to any applicable grace periods
or waivers thereof);
(v) the Company or any of its material
subsidiaries pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an
order for relief against it in an involuntary case,
(C) consents to the appointment of a
Custodian of it or for all or substantially all of its property,
(D) makes a general assignment for the
benefit of its creditors, or
(E) generally is unable to pay its debts as
the same become due; or
(vi) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that:
(A) is for relief against the Company
or any of its material subsidiaries in an involuntary case,
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<PAGE> 10
(B) appoints a Custodian of the
Company or any of its material subsidiaries or for all or substantially all of
its property, or
(C) orders the liquidation of the
Company or any of its material subsidiaries,
and the order or decree remains unstayed and in effect for 60 days.
The term "Bankruptcy Law" means title 11, U.S. Code or any
similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
For the purposes of this Section 9(a), "Default" means any
event which is, or after notice or passage of time would be, an Event of
Default. A Default under Section 9(a)(iii) is not an Event of Default until the
Holders of at least 25% in aggregate principal amount of the then outstanding
Series B Notes notify the Company of the Default and the Company does not cure
the Default within 30 days. The notice must specify the Default, demand that it
be remedied and state that the notice is a "Notice of Default."
(b) Acceleration of Notes. If an Event of Default (other than
an Event of Default specified in clauses (v) and (vi) of Section 9(a)) occurs
and is continuing, the holders of at least 25% in aggregate principal amount of
the then outstanding Series B Notes, by notice to the Company, may declare the
unpaid principal of and any accrued interest on all the Notes to be due and
payable. Immediately upon such declaration, the principal and interest shall be
due and payable. If an Event of Default specified in clause (v) or (vi) of
Section 9(a) occurs, such an amount shall ipso facto become and be immediately
due and payable without any declaration or other act on the part of any Holder.
The holders of a majority in principal amount of the then outstanding Series B
Notes by notice to the Company may rescind an acceleration and its consequences
if the rescission would not conflict with any judgment or decree and if all
existing Events of Default have been cured or waived except nonpayment of
principal or interest that has become due solely because of the acceleration.
(c) Other Remedies. If an Event of Default occurs and is
continuing, holders of the Series B Notes may pursue any available remedy to
collect the payment of principal or interest on the Series B Notes or to enforce
the performance of any provision of the Series B Notes; provided, however, that
acceleration of the Series B Notes shall be governed by Section 9(b) hereof.
A delay or omission by any holder of any Series B Notes in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. All remedies are cumulative to the extent permitted by law.
(d) Waiver of Past Defaults. The holders of a majority in
principal amount of the then outstanding Series B Notes by notice to the Company
may waive an existing default of Event of Default and its consequences except a
continuing default or Event of Default in the payment of the principal of or
interest on any Series B Notes.
(e) Rights of Holders to Receive Payment. Except as otherwise
provided in Section 6 hereof, the right of any holder of a Series B Note to
receive payment of principal and interest on the Series B Note, on or after the
respective due dates expressed in the Series B Note, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such holder.
(f) Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Series B Note, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs,
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<PAGE> 11
including reasonable attorneys' fees, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant.
11. Definitions.
The terms defined in this Section 11 shall, for all purposes
of this Series B Note, have the meanings herein specified, unless the context
otherwise requires.
"Change of Control" shall occur or be deemed to have occurred
if (i) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under
the Exchange Act) shall beneficially own (other than the purchaser or any
transferees of the purchasers) at least 30% of the Company's voting stock and
the purchasers shall beneficially own, directly or indirectly, less voting stock
than such other Person or "group" or (ii) a majority of the members of the Board
of Directors of the Company are not Continuing Directors.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the date of the first issuance of Series B Notes or (ii)
was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
"Company" means SubMicron Systems Corporation, a Delaware
corporation.
"Default Rate" means 15% per annum.
"Holder" means the Person in whose name a Series B Note is
registered on the Company's books.
"Interest Unit" means units consisting of Series B Notes in a
principal amount equal to the amount of interest otherwise payable in cash on an
interest payment date with respect to a Series B Note and Warrants to purchase
720 shares of Common Stock for each $1,000 principal amount of Series B Notes
issued with respect to such interest payment (pro rated for Series B Notes not
in multiples of $1,000).
"New Units" means units, each unit consisting of $1,000
principal amount of Series B Notes and Warrants to purchase 5,000 shares of the
Company's Common Stock.
"Obligor" means any one of the Company, SubMicron Systems,
Inc., a Pennsylvania corporation, and SubMicron Wet Process Stations, Inc., a
California corporation.
"Person" means any individual, partnership, corporation,
trust, unincorporated organization or government or agency or political
subdivision thereof.
"Redemption Event" shall occur or be deemed to have occurred
if any of the following events occur: (i) the merger or consolidation of the
Company with or into any other entity; (ii) the consummation of a sale or
disposition by the Company of all or substantially all of its assets or the
stock or assets of a material business division or Subsidiary of the Company;
(iii) a Change of Control of the Company; (iv) the closing of any public
offering of any equity or debt securities of the Company; or (v) approval by the
Board of Directors of a plan of complete liquidation or dissolution of the
Company.
"Refinancing Event" shall occur or be deemed to have occurred
if the Company consummates, or is able to consummate using its reasonable best
efforts, a financing in which the
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<PAGE> 12
Company or its Subsidiaries incur Senior Indebtedness that refinances or
increases the principal amount of any Senior Indebtedness previously outstanding
or available to the Company, and that bears an initial interest rate of less
than 12% per annum, and that permits redemption of the Series B Notes as
provided herein.
"Senior Indebtedness" means (a) all monetary obligations,
whether now existing or hereafter arising, under the Loan Agreement between the
Company, the Subsidiary Guarantors and the Senior Lender, in effect from time to
time, including, without limitation, (A) obligations in respect of payments of
principal or interest on all Loans or mandatory prepayments thereof, and (B)
commitment or other fees, yield protection and indemnity amounts, enforcement
expenses or other amounts on or with respect thereto, and (b) any amendments,
modifications, deferrals, renewals, extensions, substitutions, future advances
or increases of any monetary obligations described in clause (a) above, or
debentures, notes or evidences of indebtedness heretofore or hereafter issued in
evidence of or in exchange for such indebtedness or payment obligations;
provided, however, that the aggregate amount of Senior Indebtedness shall be
limited to $20,000,000 principal amount of Senior Indebtedness, plus accrued
interest thereon, plus reasonable attorneys fees incurred in connection with the
Senior Indebtedness. Nothing herein shall prohibit Senior Lender from lending
additional amounts in excess of the limits of Senior Indebtedness as set forth
in the previous sentence. Any such lending of amounts in excess of the limit of
Senior Indebtedness set forth above shall not cause any amounts otherwise
qualifying as Senior Indebtedness up to the limit set forth above not to be
classified as Senior Indebtedness.
"Senior Lender" means Greyrock Business Credit, a Division of
NationsCredit Commercial Corporation and any subsequent holder of Senior
Indebtedness.
"Subordinated Indebtedness" means (a) all monetary
obligations, whether now existing or hereafter arising, under (i) the Series B
Notes and (ii) any guaranties issued by any Obligor in favor of the holders of
any Series B Notes, as the foregoing may from time to time be in effect,
including, without limitation, (A) obligations in respect of payments of
principal or interest thereon or mandatory prepayments thereof and including any
principal and interest payable with respect to any offer to purchase any Series
B Notes, and (B) commitment or other fees, yield protection and indemnity
amounts, enforcement expenses or other amounts on or with respect thereto, and
(b) any amendments, modifications, deferrals, renewals, extensions,
substitutions, future advances or increases of any monetary obligations
described in clause (a) above, or debentures, notes or evidences of indebtedness
heretofore or hereafter issued in evidence of or in exchange for such
indebtedness or payment obligations.
"Warrant" means a warrant to purchase shares of the Company's
Common Stock, substantially in the form of Exhibit B to the Offering Memorandum.
12. Non-Waiver.
No course of dealing between the Company and the Holder of
this Note or any delay or failure on the part of the Holder hereof in exercising
any rights hereunder shall operate as a waiver of any rights of any holder
hereof, except to the extent expressly waived in writing by the Holder hereof.
13. Governing Law.
This Note shall be construed in accordance with and governed
by the internal laws of the State of New York.
14. Successors and Assigns.
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<PAGE> 13
All of the covenants, promises and agreements in this Note
shall bind the Company's successors and assigns, whether so expressed or not.
15. Headings.
The headings of the sections and paragraphs of this Note are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
IN WITNESS WHEREOF, the Company has caused this Note to be
signed in its name by a duly authorized officer and to be dated as of the day
and year first above written.
SUBMICRON SYSTEMS CORPORATION
Dated: By:
Name:
Title:
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<PAGE> 14
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
_________________________________agent to transfer this Note on the books of the
Company. The agent may substitute another to act for him.
Date: _____________ Your Signature:______________________________________
_____________________________________________________
(Sign exactly as your name appears on the front of this Note)
Signature Guarantee:
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<PAGE> 1
EXHIBIT 4.6
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
No. Warrants
Warrant Certificate
SubMicron Systems Corporation
This Warrant Certificate certifies that _____________or registered
assigns, is the registered holder (the "Holder" ) of the number of Warrants (the
"Warrants") set forth above to purchase common stock, $0.0001 par value (the
"Common Stock"), of SubMicron Systems Corporation, a Delaware corporation (the
"Company"). Each Warrant entitles the holder upon exercise to receive from the
Company one fully paid and nonassessable share of Common Stock of the Company at
the initial exercise price (the "Exercise Price") of $_____ [110% of fair market
value (currently average of the closing bid and asked price) of a share of
Common Stock on the respective issue date of each Warrant] payable in lawful
money of the United States of America, upon surrender of this Warrant
Certificate and payment of the Exercise Price at the office of the Company.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants (the "Series B Warrants") which are issued
in units in conjunction with the Company's Series B Notes, as defined in the
Company's Private Offering Memorandum dated November 23, 1998 regarding the
offering of units of the Company's Series B 12% Senior Subordinated Notes due
February 1, 2002 and Warrants. The shares of Common Stock issuable on exercise
of the Series B Warrants are referred to herein as the "Warrant Shares."
1. Exercise of Warrants.
(a) Subject to the terms hereof, the Holder shall have the right, which
may be exercised at any time or from time to time commencing on the date hereof
until 5:00 p.m., New York City time, on November 26, 2007 (the "Exercise
Period") to receive from the Company the number of fully paid and nonassessable
Warrant Shares (and such other consideration) which the Holder may at the time
be entitled to receive on exercise of the Warrants and payment of the Exercise
Price then in effect for such Warrant Shares. In lieu of payment of the Exercise
Price, the Holder may exercise the right, during the Exercise Period, to receive
Warrant Shares on a net basis, such that, without the exchange of any funds, the
Holder receives that number of Warrant Shares (and such other consideration)
otherwise issuable (or payable) upon exercise of its Warrants less that number
of Warrant Shares having an aggregate Current Market Value (as defined in
Section 2(f)) at the time of exercise equal to the aggregate Exercise Price that
would otherwise have been paid by the Holder for the Warrant Shares. Each
Warrant not exercised during the Exercise Period shall become void and all
rights thereunder and all rights in respect thereof under this Warrant
Certificate shall cease as of such time.
(b) A Warrant may be exercised upon surrender to the Company at its
office of the Warrant Certificate to be exercised with the form of election to
purchase attached thereto duly filled in and signed, and upon payment to the
Company of the Exercise Price for the number of Warrant Shares in respect of
which such Warrants are then exercised. Payment of the aggregate Exercise Price
shall be made in cash or by certified or official bank check payable to the
order of the Company or, at the election of the Holder, through the surrender to
the Company of Series B Notes, the aggregate principal amount of which, together
with any unpaid accrued interest thereon, equals the aggregate Exercise Price,
or in the manner provided in Section 1(a) above.
(c) Subject to the provisions of Section 7 hereof, upon such surrender
of Warrants and payment of the Exercise Price the Company shall issue and cause
to be delivered with all reasonable
<PAGE> 2
dispatch to or upon the written order of the Holder and in such name or names as
such Holder may designate a certificate or certificates for the number of full
Warrant Shares issuable upon the exercise of such Warrants (and such other
consideration as may be deliverable upon exercise of such Warrants) together
with cash for fractional Warrant Shares as provided in Section 5. Such
certificate or certificates shall be deemed to have been issued and the person
so named therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of such Warrants and payment of
the Exercise Price, irrespective of the date of delivery of such certificate or
certificates for Warrant Shares.
(d) Each Warrant shall be exercisable during the Exercise Period, at
the election of the Holder thereof, either in full or from time to time in part
and, in the event that the Warrant Certificate is exercised in respect of fewer
than all of the Warrant Shares issuable on such exercise at any time prior to
the date of expiration of the Warrants, a new certificate evidencing the
remaining Warrant or Warrants will be issued and delivered pursuant to the
provisions of this Section 1.
2. Adjustment of Exercise Price and Number of Warrant Shares Issuable.
The number of shares of Common Stock issuable upon the exercise of each Warrant
(the "Warrant Number") is initially one. The Exercise Price and Warrant Number
are subject to adjustment from time to time upon the occurrence of the events
enumerated in, or as otherwise provided in, this Section 2.
(a) Adjustment for Change in Capital Stock(a) Adjustment for
Change in Capital Stock
If the Company:
(1) pays a dividend or makes a distribution on
its Common Stock in shares of its Common Stock;
(2) subdivides or reclassifies its outstanding shares
of Common Stock into a greater number of shares;
(3) combines or reclassifies its outstanding
shares of Common Stock into a smaller number of shares;
(4) makes a distribution on its Common Stock in
shares of its capital stock other than Common Stock; or
(5) issues by reclassification of its Common
Stock any shares of its capital stock;
then the Warrant Number in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he or it would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event
listed above shall occur. If the occurrence of any event listed above results in
an adjustment under subsections (b) or (c) below, no adjustment shall be made
under this subsection (a).
(b) Adjustment for Rights Issue(b)
Adjustment for Rights Issue
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<PAGE> 3
If the Company distributes any rights, options or warrants
(whether or not immediately exercisable) to holders of its Common Stock
entitling them to purchase shares of Common Stock at a price per share less than
the Specified Value (as defined in subsection (f) below) per share on the record
date relating to such distribution, the Warrant Number shall be adjusted in
accordance with the formula:
W' = W x O + N
----------
O + N x P
-----
M
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to the record
date for any such distribution.
O = the number of Fully Diluted Shares (as defined in
subsection (p) below) outstanding on the record date
for any such distribution.
N = the number of additional shares of Common Stock
issuable upon exercise of such rights, options or
warrants.
P = the exercise price per share of such rights,
options or warrants.
M = the Specified Value per share of Common Stock on
the record date for any such distribution.
The adjustment shall be made successively whenever any such
rights, options or warrants are issued and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
the rights, options or warrants. If at the end of the period during which all or
a portion of such rights, options or warrants are exercisable, not all rights,
options or warrants shall have been exercised, the Warrant shall be immediately
readjusted to what it would have been if "N" in the above formula had been the
number of shares actually issued with respect to such portion that is no longer
exercisable.
(c) Adjustment for Other Distributions(c)
Adjustment for Other Distributions
If the Company distributes to holders of its Common Stock (i)
any evidences of indebtedness of the Company or any of its subsidiaries, (ii)
any assets of the Company or any of its subsidiaries (other than cash dividends
which are paid out of retained earnings of the Company), or (iii) any rights,
options or warrants to acquire any of the foregoing or to acquire any other
securities of the Company, the Warrant Number shall be adjusted in accordance
with the formula:
W' = W x M
-----
M - F
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<PAGE> 4
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to the record date
mentioned below.
M = the Specified Value per share of Common Stock on
the record date mentioned below.
F = the fair market value on the record date mentioned
below of the indebtedness, assets, rights, options or
warrants distributable to the holder of one share of
Common Stock.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
If an adjustment is made pursuant to this subsection (c) as a result of the
issuance of rights, options or warrants and at the end of the period during
which all or a portion of any such rights, options or warrants are exercisable,
not all such rights, options or warrants (or portion thereof) shall have been
exercised, the Warrant shall be immediately readjusted as if "F" in the above
formula was the fair market value on the record date of the indebtedness or
assets actually distributed upon exercise of such rights, options or warrants,
with respect to such portion that is no longer exercisable, divided by the
number of shares of Common Stock outstanding on the record date.
This subsection does not apply to rights, options or warrants
referred to in subsection (b) of this Section 2.
(d) Adjustment for Common Stock Issue(d) Adjustment for Common
Stock Issue
If the Company issues shares of Common Stock for a
consideration per share less than the Specified Value per share on the date the
Company fixes the offering price of such additional shares, the Warrant Number
shall be adjusted in accordance with the formula:
W' = W x A
-----
O + P
-
M
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to any such
issuance.
O = the number of Fully Diluted Shares outstanding
immediately prior to the issuance of such
additional shares of Common Stock.
P = the aggregate consideration received for the
issuance of such additional shares of Common Stock.
M = the Specified Value per share of Common Stock on
the date of issuance of such additional shares.
A = the number of Fully Diluted Shares outstanding
immediately after the issuance of such additional
shares of Common Stock.
The adjustment shall be made successively whenever any such
issuance is made, and shall become effective immediately after such issuance.
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<PAGE> 5
This subsection (d) does not apply to:
(1) any of the transactions described in subsection
(a) of this Section 2; or
(2) the issuance of Common Stock in connection with
(i) the exercise of Warrants, or (ii) the conversion, exchange or
exercise of any options, warrants, or other securities convertible into
or exchangeable or exercisable for Common Stock.
(e) Adjustment for Convertible Securities Issue(e) Adjustment
for Convertible Securities Issue
If the Company issues any options, warrants or other
securities convertible into or exchangeable or exercisable for Common Stock
(other than securities issued in transactions described in subsection (b) or (c)
of this Section 2) for a consideration per share of Common Stock initially
deliverable upon conversion, exchange or exercise of such securities less than
the Specified Value per share on the date of issuance of such securities, the
Warrant Number shall be adjusted in accordance with this formula:
W' = W x O + D
------
O + P
-
M
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to any such
issuance.
O = the number of Fully Diluted Shares outstanding
immediately prior to the issuance of such securities.
P = the aggregate consideration received for the
issuance of such securities.
M = the Specified Value per share of Common Stock on
the date of issuance of such securities.
D = the maximum number of shares of Common Stock
deliverable upon conversion or in exchange for or
upon exercise of such securities at the initial
conversion, exchange or exercise rate.
The adjustment shall be made successively whenever any such
issuance is made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion,
exchange or exercise of such securities has not been issued when such securities
are no longer outstanding, then the Warrant Number shall promptly be readjusted
to the Warrant Number which would then be in effect had the adjustment upon the
issuance of such securities been made on the basis of the actual number of
shares of Common Stock issued upon conversion, exchange or exercise of such
securities.
This subsection (e) does not apply to the issuance of the
Warrants or the grant to employees or directors of options having an exercise
price of not less than the Market Price (as defined below) of the Common Stock
as of the date of the grant.
(f) Specified Value(f) Specified Value
"Specified Value" per share of Common Stock shall be the
greater of the Current Market Value or the Exercise Price.
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<PAGE> 6
"Current Market Value" per share of Common Stock at any date
shall be the average of the daily Market Prices of the Common Stock for each
business day during the period commencing 30 business days before such date and
ending on the date one day prior to such date or, if the Security has been
registered under the Securities Exchange Act of 1934 (the "Exchange Act") for
less than 30 consecutive business days before such date, then the average of the
daily Market Prices for all of the business days before such date for which
daily Market Prices are available. If the Market Price is not determinable for
at least 15 business days in such period, the Current Market Value of the
Security shall be determined based on the good faith determination of the Board
of Directors of the Company.
Market Price for security (a "Security") on each business day
means: (i) if the Security is listed or admitted to trading on any securities
exchange, the closing price, regular way, on such day on the principal exchange
on which such Security is traded, or if no sale takes place on such day, the
average of the closing bid and asked prices on such day, (ii) if such Security
is not then listed or admitted to trading on any securities exchange, the last
reported sale price on such day, or if there is no such last reported sale price
on such day, the average of the closing bid and the asked prices on such day, as
reported by a reputable quotation source designated by the Company, or (iii) if
neither clause (i) nor (ii) is applicable, the average of the reported high bid
and low asked prices on such day, as reported by the "Over-The-Counter" Bulletin
Board or other reputable quotation service, or a newspaper of general
circulation in the Borough of Manhattan, City of New York, customarily published
on each business day, designated by the Company or (iv) if clause (iii) is not
applicable, the Market Price of the Security shall be determined based on the
good faith determination of the Board of Directors of the Company.
(g) Consideration Received(g) Consideration Received
For purposes of any computation respecting consideration
received pursuant to subsections (d) and (e) of this Section 2, the following
shall apply:
(1) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any
commissions, discounts or other expenses incurred by the Company for
any underwriting of the issue or otherwise in connection therewith;
(2) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market
value thereof (irrespective of the accounting treatment thereof) as
determined in good faith by the Board of Directors; and
(3) in the case of the issuance of options, warrants
or other securities convertible into or exchangeable or exercisable for
shares of Common Stock, the aggregate consideration received therefor
shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration,
if any, to be received by the Company upon the conversion, exchange or
exercise thereof (the consideration in each case to be determined in
the same manner as provided in clauses (1) and (2) of this subsection).
(h) When De Minimis Adjustment May Be Deferred
No adjustment in the Warrant Number need be made unless the
adjustment would require an increase or decrease of at least 0.5% in the Warrant
Number. Any adjustments that are not made shall be carried forward and taken
into account in any subsequent adjustment, provided that no such adjustment
shall be deferred beyond the date on which a Warrant is exercised.
All calculations under this Section 2 shall be made to the
nearest 1/1000th of a share.
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<PAGE> 7
(i) When No Adjustment Required
If an adjustment is made upon the establishment of a record
date for a distribution subject to subsections (a), (b) or (c) of this Section 2
and such distribution is subsequently cancelled, the Warrant Number then in
effect shall be readjusted, effective as of the date when the Board of Directors
determines to cancel such distribution, to that which would have been in effect
if such record date had not been fixed.
To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the amount of cash into which such
Warrants are exercisable. Interest will not accrue on the cash.
(j) Notice of Adjustment (j) Notice of Adjustment
Whenever the Warrant Number or Exercise Price is adjusted, the
Company shall provide the notices required by Section 9 hereof.
(k) Voluntary Reduction (k) Voluntary Reduction
The Company from time to time may reduce the Exercise Price by
any amount for any period of time (including, without limitation, permanently)
if the period is at least 20 days and if the reduction is irrevocable during the
period.
Whenever the Exercise Price is reduced, the Company shall mail
to Warrant Holders a notice of the reduction. The Company shall mail the notice
at least 15 days before the date the reduced Exercise Price takes effect. The
notice shall state the reduced Exercise Price and the period it will be in
effect.
A reduction of the Exercise Price under this Subsection (k)
(other than a permanent reduction) does not change or adjust the Exercise Price
otherwise in effect for purposes of subsections (a), (b), (c), (d) or (e) of
this Section 2.
(l) When Issuance or Payment May Be Deferred
In any case in which this Section 2 shall require that an
adjustment in the Warrant Number be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event (i) issuing to the Holder of any Warrant exercised after such record date
the Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise over and above the Warrant Shares and other capital stock of the
Company, if any, issuable upon such exercise on the basis of the Warrant Number
prior to such adjustment, and (ii) paying to such Holder any amount in cash in
lieu of a fractional share pursuant to Section 5; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional Warrant Shares, other
capital stock and cash upon the occurrence of the event requiring such
adjustment.
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<PAGE> 8
(m) Reorganizations
(i) In case of any capital reorganization, other than in the
cases referred to in Sections 2(a), (b), (c), (d) or (e) hereof, or the
consolidation or merger of the Company with or into another corporation (other
than a merger or consolidation in which the Company is the continuing
corporation and which does not result in any reclassification of the outstanding
shares of Common Stock into shares of other stock or other securities or
property), or the sale of the property of the Company as an entirety or
substantially as an entirety (collectively such actions being hereinafter
referred to as "Reorganizations"), there shall thereafter be deliverable upon
exercise of any Warrant (in lieu of the number of shares of Common Stock
theretofore deliverable) the number of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock that would
otherwise have been deliverable upon the exercise of such Warrant would have
been entitled upon such Reorganization if such Warrant had been exercised in
full immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a duly adopted resolution
certified by the Company's Secretary or Assistant Secretary, shall be made in
the application of the provisions herein set forth with respect to the rights
and interests of Holders so that the provisions set forth herein shall
thereafter be applicable, as nearly as possible, in relation to any shares or
other property thereafter deliverable upon exercise of Warrants.
(ii) The Company shall not effect any such Reorganization
unless prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from such Reorganization or
the corporation purchasing or leasing such assets or other appropriate
corporation or entity shall expressly assume, by a written acknowledgement
executed and delivered to the Holder(s), the obligation to deliver to each such
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to purchase, and all other
obligations and liabilities under this Warrant Certificate.
(n) Adjustment in Exercise Price
Upon each adjustment of the Warrant Number pursuant to this
Section 2, the Exercise Price in effect prior to the making of the adjustment in
the Warrant Number shall thereafter be adjusted as follows:
E' = E x W
---
W'
where:
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
W' = the adjusted Warrant Number.
W = the Warrant Number prior to adjustment.
(o) Form of Warrants(o) Form of Warrants
Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Warrant Certificate.
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<PAGE> 9
(p) Miscellaneous
For purpose of this Section 2, the term "shares of Common
Stock" shall mean (a) shares of any class of stock designated as Common Stock of
the Company at the date of this Warrant Certificate, and (b) shares of any other
class of stock resulting from successive changes or reclassification of such
shares consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. For purposes of this Section 2, the
term "Fully Diluted Shares" shall mean (a) shares of Common Stock outstanding as
of a specified date, and (b) shares of Common Stock into or for which rights,
options, warrants or other securities outstanding as of such date are
exercisable or convertible (other than the Warrants), provided that either: (i)
such rights, options, warrants or other securities are issued and outstanding as
of the date of this Warrant Certificate, or (ii) the conversion or exercise
price of such rights, options, warrants or other securities is not greater than
120% of the fair market value, as of their issue date, of the Common Stock
issuable upon conversion or exercise thereof. In the event that at any time, as
a result of an adjustment made pursuant to this Section 2, the holders of
Warrants shall become entitled to purchase any securities of the Company other
than, or in addition to, shares of Common Stock, thereafter the number or amount
of such other securities so purchasable upon exercise of each Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in subsections (a) through (o) of this Section 2, inclusive, and the
provisions of Sections 1, 4, 5 and 7 with respect to the Warrant Shares or the
Common Stock shall apply on like terms to any such other securities.
(q) No Adjustment for Series B Notes or Series B Warrants
Notwithstanding anything in this Warrant Certificate to the
contrary, there shall be no adjustments made under this Section 2 with respect
to the offer or issuance of any Series B Notes or Series B Warrants.
3. Restrictions on Transfer; Registration of Transfers and
Exchanges.
(a) The Warrants (and any Warrant Shares issued upon the
exercise of the Warrants) may not be transferred except in compliance with
applicable securities laws, except that such holder may transfer any or all of
the Warrants or the Warrant Shares to any of its general partners, limited
partners, shareholders or affiliates, or any combination of the foregoing, if
such transfer is effected in accordance with such securities laws and this
Warrant Certificate.
(b) Prior to any proposed transfer of the Warrants or the
Warrant Shares, unless such transfer is made pursuant to Rule 144 or an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), the transferring Holder will deliver to the Company an
opinion of counsel, reasonably satisfactory in form and substance to the
Company, to the effect that the Warrants or Warrant Shares, as applicable, may
be sold or otherwise transferred without registration under the Securities Act.
The Company will reimburse the transferring Holder for the reasonable fees and
expenses incurred in obtaining any such opinion of counsel. Upon original
issuance thereof, and until such time as the same shall have been registered
under the Act or sold pursuant to Rule 144 promulgated thereunder (or any
similar rule or regulation), each Warrant Certificate or certificate for Warrant
Shares shall bear any legend required pursuant to the Act.
(c) The Company shall from time to time register the transfer
of any outstanding Warrant Certificates in a Warrant register to be maintained
by the Company upon surrender thereof accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company, duly executed by
the registered Holder or Holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant Certificate shall be issued to the
transferee(s) and the surrendered Warrant Certificate shall be canceled and
disposed of by the Company.
(d) Warrant Certificates may be exchanged at the option of the
Holder(s) thereof, when surrendered to the Company at its office for another
Warrant Certificate or other Warrant Certificates of like tenor and representing
in the aggregate a like number of Warrants. Warrant
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<PAGE> 10
Certificates surrendered for exchange shall be canceled and disposed of by the
Company.
4. Reservation of Warrant Shares; Valid Issuance;
Exchange Listing.
(a) The Company shall at all times reserve and keep available,
free from preemptive rights, of the aggregate of its authorized but unissued
Common Stock or its authorized and issued Common Stock held in its treasury, for
the purpose of enabling it to satisfy any obligation to issue Warrant Shares
upon exercise of Warrants, the maximum number of shares of Common Stock which
may then be deliverable upon the exercise of all outstanding Warrants.
(b) The Company covenants that all Warrant Shares and other
capital stock issued upon exercise of Warrants will, upon payment of the
Exercise Price therefor and issue, be validly authorized and issued, fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests with respect to the issue thereof, except as otherwise
provided in Section 7 hereof.
(c) The Company shall from time to time take all action which
may be necessary or appropriate so that the Warrant Shares, immediately upon
their issuance following an exercise of Warrants, will be listed on the
principal securities exchanges and markets within the United States of America,
if any, on which other shares of Common Stock are then listed.
5. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 5, be issuable on
the exercise of any Warrants (or specified portion thereof), the Company shall
pay an amount in cash equal to the fair market value of the Warrant Share so
issuable (as determined in good faith by the Board of Directors), multiplied by
such fraction.
6. Registration Rights
(a) Demand Registration
(i) Request for Registration by Certain Holders
of Registrable Securities. At any time the Company receives from the holder(s)
of 50% of the outstanding Registrable Securities (as defined in Section 6(i)) a
written request that the Company effect a registration or qualification of at
least 25% of the Registrable Securities then outstanding (a "Demand
Registration"), the Company will:
(A) promptly give written notice of
the proposed registration or qualification to all other holders of
Registrable Securities known to the Company, which holders may request
in writing within 10 days after receipt of such notice that Registrable
Securities held by them be included in such Demand Registration, and
the number of Registrable Securities requested to be so included shall
be deemed a part of such Demand Registration; and
(B) as soon as practicable, use
its best efforts to effect such registration or qualification
(including, without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under the
applicable blue sky or other state securities laws and appropriate
compliance with exemptive regulations issued under the Securities Act
and any other governmental requirements or regulations) as may be so
requested and as is reasonably necessary to permit or facilitate the
sale and distribution of all or such portion of such holder's or
holders' Registrable Securities as is specified in such request;
provided that the Company will not be obligated to effect more than two
Demand Registrations pursuant to a request under this Section 6.
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<PAGE> 11
Subject to the foregoing provisions, the Company will file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, but in any event within 90 days, after
receipt of the request or requests of the initiating holders.
(ii) Effective Registration and Expenses. A
registration of Registrable Securities will not count as a Demand Registration
until it has become effective and has remained effective for 180 days or until
all Registrable Securities included therein have been sold, if earlier. The
Company will pay all Registration Expenses (as hereinafter defined) in
connection with any registration initiated as a Demand Registration, whether or
not it becomes effective.
(iii) Priority on Demand Registrations. If the
holder or holders of a majority in number of the Registrable Securities to be
registered in a Demand Registration under this Section 6 so elect, the offering
of such Registered Securities pursuant to such Demand Registration shall be in
the form of an underwritten offering. In such event, if the managing underwriter
or underwriters of such offering advise the Company and the holders in writing
that in their opinion the number of Registrable Securities requested to be
included in such offering is sufficiently large so as to adversely affect the
success of the offering, then the Company will include in such registration the
maximum amount of Registrable Securities which in the opinion of such managing
underwriter or underwriters can be sold without any such adverse effect. Subject
to the advice of the managing underwriter or underwriters concerning the size
and composition of the offering, the Company will include Registrable Securities
or other Common Stock in such registration in accordance with the following
priorities: (i) first, pro rata among all holders of Registrable Securities who
have requested to be included in such registration pursuant to Section 6(a)
hereof, in proportion to the number of shares each such holder requested to be
included in the offering; and (ii) second, pro rata among the other holders of
Common Stock of the Company who have requested to be included in such
registration pursuant to piggy-back registration provisions of other
registration rights agreements, in proportion to the number of shares each such
holder requested be included in the offering pursuant to their piggy-back
rights; and (iii) third, any Common Stock proposed to be issued or sold for the
account of the Company.
(iv) Selection of Underwriters. If any Demand
Registration is to be in the form of an underwritten offering, the investment
banker or bankers and manager or managers that will administer the offering will
be selected by the holders of a majority in number of the Registrable Securities
to be included in such offering; provided that such investment bankers and
managers must be reasonably satisfactory to the Company.
(b) Piggy-Back Registration. If at any time the Company shall
determine to file a registration statement under the Securities Act relating to
a proposed sale to the public of any of its securities, except for
nonconvertible debt securities (other than a registration statement on Form S-8
or Form S-4 or any successor to such Forms) either for its own account or the
account of a security holder or holders, the Company shall:
(i) promptly give to each holder of a
Registrable Security known to the Company written notice thereof (which notice
will include a list of the jurisdictions in which the Company intends to attempt
to qualify such securities under the applicable blue sky or other state
securities laws, the proposed offering price, and the plan of distribution);
(ii) include in such registration (and any
related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 20 days after such written notice from
the Company, by any holder or holders of Registrable Securities;
-11-
<PAGE> 12
(iii) use its best efforts to cause the managing
underwriter or underwriters of such proposed underwritten offering, if any, to
permit the Registrable Securities requested to be included in the registration
statement for such offering to be included on the same terms and conditions as
any similar securities of the Company included therein. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering advise
the Company in writing that, in their opinion, marketing considerations require
a limitation on the number of shares of Common Stock or other Registrable
Securities offered pursuant to any registration statement subject to this
Section, then subject to the advice of said managing underwriter or underwriters
as to the size and composition of the offering, the Company will include Common
Stock and other Registrable Securities in such registration in accordance with
the following priorities: (i) first, Common Stock to be sold for the account of
the Company or, if such registration statement is filed at the demand of a
selling shareholder or shareholders, in accordance with the provisions of such
requirement; and (ii) second, pro rata with respect to all holders of
Registrable Securities or other Common Stock of the Company who have requested
to be included in the registration pursuant to this Section 6(b) or pursuant to
other, analogous piggy-back registration provisions of other agreements, in
proportion to the number of shares each such holder requested to be included in
the offering pursuant to their piggy-back rights. The Company will bear all
Registration Expenses in connection with a piggy-back registration.
Holders of Registrable Securities may exercise piggy-back
registration rights under this Section 6(b) at any time or from time to time, so
long as such holders continue to hold Registrable Securities.
(c) Hold-Back Agreements
(i) Restrictions on Public Sale by Holders of
Registrable Securities. Each holder of Registrable Securities whose Registrable
Securities are covered by a Registration Statement filed pursuant to Sections
6(a) or 6(b) hereof agrees, if requested in writing by the managing underwriters
in an underwritten offering, not to effect any public sale or distribution of
securities of the Company of the same class as the securities included in such
Registration Statement, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such underwritten registration), during the
7-day period prior to, and during the 180-day period following, the effective
date of the Registration Statement for each underwritten offering made pursuant
to such Registration Statement, to the extent timely requested in writing by the
Company or the managing underwriters.
(ii) Restrictions on Public Sale by the Company
and Others. The Company agrees:
(A) not to effect any public or private
sale or distribution of its debt or equity securities, including a sale
pursuant to Regulation D under the Securities Act, during the 7-day
period prior to, and during the 90-day period following, the effective
date of the Registration Statement for each underwritten offering made
pursuant to a Registration Statement filed under Section 6 hereof, to
the extent timely requested in writing by the managing underwriters
(except as part of such underwritten registration or pursuant to
registrations on Forms S-4 or S-8 or any successor form to such Forms);
and
(B) to cause each holder of its
privately placed debt or equity securities issued by the Company at any
time on or after the date of this Warrant Certificate to agree not to
effect any public sale or distribution, including a sale pursuant to
Rule 144 under the Securities Act, of any such securities during the
period set forth in clause (1) above with respect to a Registration
Statement filed under Section 6(a) hereof, to the extent timely
requested in writing by the managing underwriters (except as part of
such underwritten registration, if permitted).
-12-
<PAGE> 13
(d) Registration Procedures
In connection with the Company's registration obligations
pursuant to Sections 6(a) and 6(b) hereof, the Company will use its best efforts
to effect such registration to permit the sale of such Registrable Securities in
accordance with the intended method or methods of disposition thereof (provided,
however, the Company shall have no obligation to proceed with or maintain the
effectiveness of any Registration Statement under Section 6(b) hereof), and
pursuant thereto the Company will as expeditiously as possible:
(i) with respect to Registration Statement
under Section 6(a) hereof, before filing a Registration Statement or Prospectus
or any amendments or supplements thereto, furnish to the holders of the
Registrable Securities covered by such Registration Statement and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be made available for prior review by such holders and
underwriters, and the Company will not file any Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to which the
holders of a majority in number of the Registrable Securities covered by such
Registration Statement or the underwriters, if any, shall reasonably object;
(ii) with respect to Registration Statement
under Section 6(a) hereof, prepare and file with the Securities and Exchange
Commission (the "SEC") such amendments and post-effective amendments to any
Registration Statement, and such supplements to the Prospectus, as may be
reasonably requested by any holder of Registrable Securities or any underwriter
of Registrable Securities or as may be required by the rules, regulations or
instructions applicable to the registration form utilized by the Company or by
the Securities Act or otherwise necessary to keep such Registration Statement
effective for the applicable period and cause the Prospectus as so supplemented
to be filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended methods of disposition by the sellers thereof
set forth in such Registration Statement or supplement to the Prospectus;
(iii) notify the selling holders of
Registrable Securities and the managing underwriters, if any, promptly, and (if
requested by any such person) confirm such advice in writing,
(A) when the Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and,
with respect to the Registration Statement or any post-effective
amendment, when the same has become effective,
(B) of any request by the SEC for
amendments or supplements to the Registration Statement or the
Prospectus or for additional information,
(C) of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose,
(D) if at any time the
representations and warranties of the Company contemplated by paragraph
(xiv) below cease to be true and correct,
(E) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose, and
(F) of the existence of any fact
which results in the Registration Statement, the Prospectus or any
document incorporated therein by reference containing an untrue
statement of material fact or omitting to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading;
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<PAGE> 14
(iv) with respect to a Registration Statement
under Section 6(a) hereof, make every reasonable effort to obtain the withdrawal
of any order suspending the effectiveness of the Registration Statement at the
earliest possible moment;
(v) with respect to a Registration Statement
under Section 6(a) hereof, if reasonably requested by the managing underwriter
or underwriters or a holder of Registrable Securities being sold in connection
with an underwritten offering, immediately incorporate in a Prospectus
supplement or post-effective amendment such necessary information as the
managing underwriters or the holders of a majority in number of the Registrable
Securities being sold reasonably request to have included therein relating to
the plan of distribution with respect to such Registrable Securities, including,
without limitation, information with respect to the amount of Registrable
Securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(vi) at the request of any selling holder of
Registrable Securities, furnish to such selling holder of Registrable Securities
and each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(vii) deliver to each selling holder of
Registrable Securities and the underwriters, if any, without charge, as many
copies of the Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such persons may reasonably request; the
Company consents to the use of the Prospectus or any amendment or supplement
thereto by each of the selling holders of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by the Prospectus or any amendment or supplement
thereto;
(viii) with respect to a Registration Statement under
Section 6(a) hereof, prior to any public offering of Registrable Securities,
register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification of such Registrable Securities for offer
and sale under the securities or blue sky laws of such jurisdictions as any
seller or underwriter reasonably requests in writing and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement; provided that the Company will not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action which would subject it to general service of process or taxation in
any such jurisdiction where it is not then so subject;
(ix) cooperate with the selling holders of
Registrable Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and enable such
Registrable Securities to be in such denominations and registered in such names
as the managing underwriters may request at least two business days prior to any
sale of Registrable Securities to the underwriters;
(x) use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof and the underwriters, if any,
to consummate the disposition of such Registrable Securities;
(xi) with respect to a Registration Statement under
Section 6(a) hereof, if any fact contemplated by Section 6(d)(iii)(F) shall
exist, prepare a supplement or post-effective amendment to the Registration
Statement or the related Prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter delivered
to the purchasers of the Registrable Securities, the Prospectus will not contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading;
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<PAGE> 15
(xii) cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed, if requested by the holders of
a majority in number of such Registrable Securities or by the managing
underwriters, if any;
(xiii) not later than the effective date of the
applicable Registration Statement, provide a CUSIP number for all Registrable
Securities and provide the applicable trustee(s) or transfer agent(s) with
printed certificates for the Registrable Securities which are in a form eligible
for deposit with Depositary Trust Company;
(xiv) with respect to a Registration Statement under
Section 6(a) hereof, enter into agreements (including underwriting agreements)
and take all other appropriate actions in order to expedite or facilitate the
disposition of such Registrable Securities and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration:
(A) make such representations and warranties
and give indemnities to the holders of such Registrable Securities and
the underwriters, if any, in form, scope and substance as are
customarily made by issuers to underwriters in primary underwritten
offerings;
(B) obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions shall be
reasonably satisfactory in form, scope and substance to the managing
underwriters, if any, and the holders of a majority in number of the
Registrable Securities being sold) addressed to each selling holder and
the underwriters, if any, covering the matters customarily covered in
opinions requested in underwritten offerings and such other matters as
may be reasonably requested by such holders and underwriters;
(C) if an underwritten offering, obtain
"cold comfort" letters and updates thereof from the Company's
independent certified public accountants addressed to the underwriters,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters to underwriters in
connection with primary underwritten offerings;
(D) if an underwriting agreement is entered
into, cause the same to set forth in full the indemnification
provisions and procedures of Section 6(f) hereof (or such other
substantially similar provisions and procedures as the underwriters
shall reasonably request) with respect to all parties to be indemnified
pursuant to said Section; and
(E) deliver such documents and certificates
as may be reasonably requested by the holders of a majority of the
Registrable Securities being sold and the managing underwriters, if
any, to evidence compliance with paragraph (xi) above and with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
The above shall be done at the effectiveness of such Registration Statement,
each closing under any underwriting or similar agreement as and to the extent
required thereunder and from time to time as may reasonably be requested by any
selling holder in connection with the disposition of Registrable Securities
pursuant to such Registration Statement, all in a manner consistent with
customary industry practice;
(xv) with respect to a Registration Statement under
Section 6(a) hereof, make available to a representative of the holders of a
majority in number of the Registrable Securities, any underwriter participating
in any disposition pursuant to such Registration Statement, and any attorney or
accountant retained by the sellers or underwriter all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with the registration, with respect to each at such
time or times as the Company
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<PAGE> 16
shall reasonably determine; provided that any records, information or documents
that are designated by the Company in writing as confidential shall be kept
confidential by such persons unless disclosure of such records, information or
documents is required by court or administrative order;
(xvi) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make generally available to its
security holders earnings statements satisfying the provisions of Section 11(a)
of the Securities Act, no later than 15 months after the effective date of a
Registration Statement;
(xvii) with respect to a Registration Statement under Section
6(a) hereof, cooperate and assist in any filings required to be made with the
National Association of Securities Dealers, Inc. (the "NASD") and in the
performance of any due diligence investigation by any underwriter (including any
"qualified independent underwriter" that is required to be retained in
accordance with the rules and regulations of the NASD); and
(xviii) with respect to a Registration Statement under Section
6 hereof, promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) provide copies of such
document to counsel to the selling holders of Registrable Securities and to the
managing underwriters, if any, make the Company's representatives available for
discussion of such document.
The Company may require each seller of Registrable Securities
as to which any registration is being effected to furnish to the Company such
information regarding such seller and the distribution of such securities as the
Company may from time to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 6(d)(xi), such
holder will forthwith discontinue disposition of Registrable Securities until
such holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(d)(xi), or until it is advised in writing by the
Company that the use of the Prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference in
the Prospectus, and, if so directed by the Company, such holder will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in such holder's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time periods mentioned in
Section 6(a) hereof shall be extended by the number of days during the period
from and including the date of the giving of such notice to and including the
date when each seller of Registrable Securities covered by such Registration
Statement either receives the copies of the supplemented or amended prospectus
contemplated by Section 6(d)(xi) hereof or is advised in writing by the Company
that the use of the Prospectus may be resumed.
Notwithstanding any other provisions of this Warrant
Certificate, upon receipt by the Purchaser of a written notice signed by the
President, the Chief Executive Officer, the Chief Financial Officer or any Vice
President of the Company, to the effect set forth below, the Company shall not
be obligated during a reasonable period of time thereafter to effect any
registrations pursuant to this Warrant Certificate, and the holders of
Registrable Securities agree to immediately suspend sales of any securities
under any effective Registration Statement for a reasonable period of time, in
either case not to exceed 90 days, at any time during which, in the Company's
reasonable judgment, (i) there is a development involving the Company or any of
its affiliates which is material but which has not yet been publicly disclosed
or (ii) sales pursuant to the Registration Statement would materially and
adversely affect an underwritten public offering for the account of the Company
or any other material financing project or a proposed or pending material merger
or other material acquisition or material business combination or material
disposition of the Company's assets, to which the Company or any of its
affiliates is, or is expected to be, a party. In the event sales pursuant to an
effective Registration Statement are suspended in accordance with this
paragraph, there shall be added to the period during which the Company is
obligated to keep a registration effective the number of days for which sales
were suspended. The Company may not provide more than one such notice during any
360-day period. In addition, the Company has entered into a Registration Rights
Agreement dated as of November 26, 1997 with The KB Mezzanine Fund II, L.P. and
Celerity Silicon, L.L.C. (the "Registration Rights Agreement"). Pursuant to such
Agreement,
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<PAGE> 17
the Company has agreed not to effect, and to cause each holder of its
privately placed debt or equity securities not to effect, any public sale of
equity securities during the 7-day period prior to and the 90-day period
following the effective date of an underwritten demand registration pursuant to
such Agreement, to the extent timely requested in writing by the managing
underwriters of such offering. The holders of Registrable Securities acknowledge
such restriction and agree that each holder of Registrable Securities and the
Company shall comply with such provision of the Registration Rights Agreement.
(e) Registration Expenses
(i) All expenses incident to the Company's
performance of or compliance with this Warrant Certificate will be paid by the
Company, regardless whether the Registration Statement becomes effective,
including, without limitation:
(A) all registration and filing fees
(including, without limitation, with respect to filings required to be
made with the NASD);
(B) fees and expenses of compliance with
securities or blue sky laws (including, without limitation, fees and
disbursements of counsel for the underwriters or selling holders in
connection with blue sky qualifications of the Registrable Securities
and determination of their eligibility for investment under the laws of
such jurisdictions as the managing underwriters or holders of
Registrable Securities being sold may designate);
(C) printing (including, without limitation,
expenses of printing or engraving certificates for the Registrable
Securities in a form eligible for deposit with Depositary Trust Company
and of printing prospectuses), messenger, telephone and delivery
expenses;
(D) fees and disbursements of counsel for
the Company, for the underwriters and for the selling holders of the
Registrable Securities (subject to the provisions of Section 6(e)(ii)
hereof);
(E) fees and disbursements of all
independent certified public accountants of the Company (including,
without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance);
(F) fees and disbursements of underwriters
(excluding discounts, commissions or fees of underwriters, selling
brokers, dealer managers or similar securities industry professionals
relating to the distribution of the Registrable Securities or legal
expenses of any person other than the Company, the underwriters and the
selling holders);
(G) fees and expenses of other persons
retained by the Company; and
(H) fees and expenses associated with any
NASD filing required to be made in connection with the Registration
Statement, including, if applicable, the fees and expenses of any
"qualified independent underwriter" (and its counsel) that is required
to be retained in accordance with the rules and regulations of the NASD
(all such expenses being herein called "Registration Expenses").
The Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed, rating agency fees and the
fees and expenses of any person, including special experts, retained by the
Company.
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<PAGE> 18
(ii) In connection with each Registration Statement
required hereunder, the Company will reimburse the holders of Registrable
Securities being registered pursuant to such Registration Statement for the
reasonable fees and disbursements of not more than one counsel (or more than one
counsel if a legal opinion is required from more than one counsel by the terms
of any underwriting agreement relating to the registered offering) chosen by the
holders of a majority of such Registrable Securities.
(f) Indemnification
(i) Indemnification by the Company. The Company
agrees to indemnify and hold harmless each holder of Registrable Securities, its
officers, directors, employees and agents and each person who controls such
holder within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act (each such person being sometimes hereinafter referred to
as an "Indemnified Holder") from and against all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation and legal
expenses) arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or allegation thereof based upon information furnished in
writing to the Company by any holder expressly for use therein; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus if (i) such holder failed to
send or deliver a copy of the Prospectus with or prior to the delivery of
written confirmation of the sale of Registrable Securities and (ii) the
Prospectus would have completely corrected such untrue statement or omission;
and provided further, that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability or expense arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission in the Prospectus, if such untrue statement or alleged untrue
statement, omission or alleged omission is completely corrected in an amendment
or supplement to the Prospectus and if, having previously been furnished by or
on behalf of the Company with copies of the Prospectus as so amended or
supplemented, such holder thereafter fails to deliver such Prospectus as so
amended or supplemented prior to or concurrently with the sale of a Registrable
Security to the person asserting such loss, claim, damage, liability or expense
who purchased such Registrable Security which is the subject thereof from such
holder. This indemnity will be in addition to any liability which the Company
may otherwise have.
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against an Indemnified
Holder in respect of which indemnity may be sought from the Company, such
Indemnified Holder shall promptly notify the Company in writing, and the Company
shall assume the defense thereof, including the employment of counsel
satisfactory to such Indemnified Holder and the payment of all expenses;
provided, however, the failure to so notify the Company shall not affect any
obligation the Company may have to indemnify the Indemnified Holder except to
the extent the Company is materially adversely affected by such failure. Such
Indemnified Holder shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be the expense of such Indemnified Holder unless (a) the
Company has agreed to pay such fees and expenses or (b) the Company shall have
failed to assume the defense of such action or proceeding or shall have failed
to employ counsel satisfactory to such Indemnified Holder in any such action or
proceeding or (c) the named parties to any such action or proceeding (including
any impleaded parties) include both such Indemnified Holder and the Company, and
such Indemnified Holder shall have been advised by counsel that representation
of both parties by the same counsel would be inappropriate due to actual or
potential material differing interests between them (in which case, if such
Indemnified Holder notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have the
right to assume the defense of such action or proceeding on behalf of such
Indemnified Holder, it being understood, however, that the Company shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings arising out of the same general
allegations or circumstances, be liable for the
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<PAGE> 19
reasonable fees and expenses of more than one separate firm of attorneys at any
time for such Indemnified Holder and any other Indemnified Holders, which firm
shall be designated in writing by such Indemnified Holders). The Company shall
not be liable for any settlement of any such action or proceeding effected
without its written consent, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Company agrees to indemnify and hold harmless such Indemnified Holders from
and against any loss or liability by reason of such settlement or judgment.
(ii) Indemnification by Holder of Registrable
Securities. Each holder of Registrable Securities severally agrees to indemnify
and hold harmless the Company, its directors and officers and each person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such holder, but only with respect to
information relating to such holder furnished in writing by such holder
expressly for use in any Registration Statement or Prospectus, or any amendment
or supplement thereto, or any preliminary prospectus. In case any action or
proceeding shall be brought against the Company or its directors or officers or
any such controlling person, in respect of which indemnity may be sought against
a holder of Registrable Securities, such holder shall have the rights and duties
given the Company and the Company or its directors or officers or such
controlling person shall have the rights and duties given to each holder by the
preceding paragraph. In no event shall the liability of any selling holder of
Registrable Securities hereunder be greater in amount than the dollar amount of
the proceeds received by such holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such persons
specifically for inclusion in any Prospectus or Registration Statement or any
amendment or supplement thereto, or any preliminary prospectus.
(iii) Contribution. If the indemnification provided
for in this Section 6(f) is unavailable to an indemnified party under Section
6(f)(i) or Section 6(f)(ii) hereof (other than by reason of exceptions provided
in those Sections) in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each applicable indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and of the indemnified or
indemnifying Holder, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the Company, on the one hand, and of the indemnified or indemnifying
Holder, on the other hand, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the indemnified or indemnifying Holder and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in the second paragraph of Section 6(f)(i) hereof, any legal or other fees
or expenses reasonably incurred by such party in connection with investigating
or defending any action or claim.
The Company and each holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this Section
6(f)(iii) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. Notwithstanding the provisions of
this Section 6(f)(iii), an indemnified or indemnifying Holder shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Securities sold by such indemnified or indemnifying Holder or
its affiliated indemnified or indemnifying Holders and distributed to the public
were offered to the public exceeds the amount of any damages which such
indemnified or indemnifying Holder, or its affiliated indemnified or
indemnifying Holders, has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent
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<PAGE> 20
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(g) Rule 144
The Company covenants that it will file the reports required
to be filed by it under the Securities Act and the Exchange Act and the rules
and regulations adopted by the SEC thereunder and will take such further action
as any holder of Registrable Securities may reasonably request, all to the
extent required from time to time to enable such holder to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (i) Rule 144 under the Securities Act, as such
Rule may be amended from time to time, or (ii) any similar rule or regulation
hereafter adopted by the SEC. Upon the request of any holder of Registrable
Securities, the Company will deliver to such holder a written statement as to
whether it has complied with such information and requirements.
(h) Participation in Underwritten Registrations
No holder (or its successors or assigns) may participate in
any underwritten registration hereunder unless such person (i) agrees to sell
such person's securities on the basis provided in any underwriting arrangements
approved by the underwriters and other persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
(i) Definitions
(i) Registrable Securities: The Warrant Shares (and
any other securities issued or issuable with respect to the Warrant Shares by
way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization) issued
or issuable upon exercise of the Series B Warrants; provided that a security
ceases to be a Registrable Security when it is no longer a Transfer Restricted
Security.
(ii) Transfer Restricted Security: Securities
acquired by the holder thereof other than pursuant to an effective registration
under Section 5 of the Securities Act or pursuant to Rule 144; provided that a
Security that has ceased to be a Transfer Restricted Security cannot thereafter
become a Transfer Restricted Security.
7. Payment of Taxes. The Company will pay all documentary stamp taxes
and other governmental charges (excluding all foreign, federal or state income,
franchise, property, estate, inheritance, gift or similar taxes) in connection
with the issuance or delivery of the Warrants hereunder, as well as all such
taxes attributable to the initial issuance or delivery of Warrant Shares upon
the exercise of Warrants and payment of the Exercise Price. The Company shall
not, however, be required to pay any tax that may be payable in respect of any
subsequent transfer of the Warrants or any transfer involved in the issuance and
delivery of Warrant Shares in a name other than that in which the Warrants to
which such issuance relates were registered, and, if any such tax would
otherwise be payable by the Company, no such issuance or delivery shall be made
unless and until the person requesting such issuance has paid to the Company the
amount of any such tax, or it is established to the reasonable satisfaction of
the Company that any such tax has been paid.
8. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate or certificate evidencing Warrant Shares shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and substitution
therefor and upon cancellation of the mutilated Warrant Certificate or other
certificate, or in lieu of and substitution for the Warrant Certificate or other
certificate lost, stolen or destroyed, a new Warrant Certificate or other
certificate of like tenor and representing an equivalent number of Warrants or
Warrant Shares.
9. Notices to Warrant Holders. Upon any adjustment pursuant to Section
2 hereof, the Company shall promptly thereafter (i) cause to be filed with the
Company a certificate of an officer of the Company setting forth the Warrant
Number and Exercise Price after such adjustment and setting forth in
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<PAGE> 21
reasonable detail the method of calculation and the facts upon which such
calculations are based, and (ii) cause to be given to each of the registered
holders of the Warrant Certificates at his or its address appearing on the
Warrant register written notice of such adjustments by first class mail, postage
prepaid. Where appropriate, such notice may be given in advance and included as
a part of the notice required to be mailed under the other provisions of this
Section 9.
In case:
(a) the Company shall authorize the issuance to all
holders of shares of Common Stock of rights, options or warrants to
subscribe for or purchase shares of Common Stock or of any other
subscription rights or warrants; or
(b) the Company shall authorize the distribution to
all holders of shares of Common Stock of assets, including cash,
evidences of its indebtedness, or other securities; or
(c) of any consolidation or merger to which the
Company is a party and for which approval of any shareholders of the
Company is required, or of the conveyance or transfer of the properties
and assets of the Company substantially as an entirety, or of any
reclassification or change of Common Stock issuable upon exercise of
the Warrants (other than a 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 a tender offer or exchange offer for
shares of Common Stock; or
(d) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(e) the Company proposes to take any action that
would require an adjustment to the Warrant Number or the Exercise Price
pursuant to Section 2 hereof; or
then the Company shall cause to be given to each of the registered holders of
the Warrant Certificates at his or its address appearing on the Warrant
register, at least 30 days prior to the applicable record date hereinafter
specified, or the date of the event in the case of events for which there is no
record date, by first-class mail, postage prepaid, a written notice stating (i)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such rights, options, warrants or distribution are to be
determined, or (ii) the initial expiration date set forth in any tender offer or
exchange offer for shares of Common Stock, or (iii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective or consummated, and the date as of which it
is expected that holders of record of shares of Common Stock shall be entitled
to exchange such shares for securities or other property, if any, deliverable
upon such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up. The failure to give the notice required
by this Section 9 or any defect therein shall not affect the legality or
validity of any action taken requiring such notice.
Nothing contained in this Warrant Certificate shall be
construed as conferring upon the Holders of Warrants (prior to the exercise of
such Warrants) the right to vote or to consent or to receive notice as
shareholder in respect of the meetings of shareholders or the election of
Directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company; provided that nothing in the foregoing provision is
intended to detract from any rights explicitly granted to any Holder hereunder.
10. Notices to the Company and Warrant Holders.
(a) All notices and other communications provided for or
permitted hereunder shall be made by hand-delivery, first-class mail, telex,
telecopier, or overnight air courier guaranteeing next day delivery.
(b) All such notices and communications shall be deemed to
have been duly given:
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<PAGE> 22
at the time delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; when answered back if
telexed; when receipt acknowledged, if telecopied; and the next business day
after timely delivery to the courier, if sent by overnight air courier
guaranteeing next day delivery. The parties may change the addresses to which
notices are to be given by giving five days' prior notice of such change in
accordance herewith.
11. Governing Law. This Warrant Certificate shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance with the internal laws of said State.
12. Severability. In the event that one or more of the provisions of
this Warrant Certificate shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Warrant Certificate, but this
Warrant Certificate shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
13. Captions. The captions used in this Warrant Certificate are for
convenience only; they form no part of this Warrant Certificate and shall not
affect its interpretation.
SUBMICRON SYSTEMS CORPORATION
By:________________________________
Title:
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<PAGE> 23
FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise Of Warrant)
The undersigned holder hereby represents that he or it is the
registered holder of this Warrant Certificate, and hereby irrevocably elects to
exercise the right, represented by this Warrant Certificate, to receive ______
shares of Common Stock, $.0001 par value, of SubMicron Systems Corporation and
herewith tenders payment for such shares to the order of SubMicron Systems
Corporation the amount of $______ in accordance with the terms hereof (unless
the holder is exercising Warrants pursuant to the net exercise provisions of
Section 1 of this Warrant Certificate). The undersigned requests that a
certificate for such shares be registered in the name of the undersigned or
nominee hereinafter set forth, and further that such certificate be delivered to
the undersigned at the address hereinafter set forth or to such other person or
entity as is hereinafter set forth. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder, the undersigned requests that
a new Warrant Certificate representing the remaining balance of such shares be
registered in the name of the undersigned or nominee hereinafter set forth, and
further that such certificate be delivered to the undersigned at the address
hereinafter set forth or to such other person or entity as is hereinafter set
forth.
Certificate to be registered as follows:
Name:__________________________________________
Address:_______________________________________
_______________________________________
_______________________________________
Social Security or
Taxpayer Identification No.:______________________________
Certificate to be delivered as follows:
Name:__________________________________________
Address:_______________________________________
_______________________________________
_______________________________________
Signature:______________________________
Date:________________
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<PAGE> 24
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
(I) or (we) assign and transfer this Warrant to
___________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________ agent to transfer this
Warrant on the books of the Company. The agent may substitute another to act for
him.
Date: Your Signature:______________________________
(Sign exactly as your name appears on the other side of this Warrant)
Signature Guarantee:
-24-
<PAGE> 1
EXHIBIT 4.7
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
SUBMICRON SYSTEMS CORPORATION
____________, 1999
SERIES 1999 12% SENIOR SUBORDINATED CONVERTIBLE NOTE
DUE FEBRUARY 1, 2002
No:____________ U.S. $___________
SUBMICRON SYSTEMS CORPORATION, a Delaware corporation (the "Company"),
for value received, promises to pay to _____________________________ or its
registered assigns (the "Holder"), on February 1, 2002 (the "Maturity Date"),
the principal amount of $_________ (or such lesser principal amount as is then
unpaid) and to pay interest (computed on the basis of a 360-day year of twelve
30-day months) on the unpaid principal amount hereof at the rate of 12% per
annum. The Company shall pay interest on the unpaid principal amount of this
Series 1999 Note (as hereinafter defined) monthly in arrears. Interest due and
payable (i) up to and including September 30, 1999, will be payable in the form
of Series 1999 Notes (which shall accrue monthly as set forth above but be
payable on a quarterly basis) and (ii) thereafter will be payable in cash;
provided, that on any interest payment date after September 30, 1999 through and
including January 1, 2000, the Company may, at its option, issue additional
Series 1999 Notes in lieu of payment of up to one-half of the accrued interest
due on such interest payment date. For each interest payment which the Company
issues additional Series 1999 Notes in lieu of all or a portion of the interest
then due as provided herein, the Company shall, pursuant to this paragraph,
deliver additional Series 1999 Notes, dated such interest payment date, in a
principal amount equal to the amount of interest not paid in cash in respect of
this Series 1999 Note on such interest payment date. Each issuance of additional
Series 1999 Notes in lieu of cash payments of interest on the Series 1999 Notes
shall be made pro rata with respect to the outstanding Series 1999 Notes. Any
such additional Series 1999 Notes shall be subject to the same terms (including
the Maturity Date and the rate of interest from time to time payable
<PAGE> 2
thereon) as this Series 1999 Note (except, as the case may be, with respect to
the issuance date and aggregate principal amount). The Holder may, at its
option, receive additional Series 1999 Notes in lieu of the cash interest
otherwise due with respect to any Series 1999 Notes through the Maturity Date.
Certain capitalized terms shall have the meanings specified in Section 12
hereof.
Interest shall be payable monthly in arrears as described
above, until the principal amount hereof shall have been paid in full.
Notwithstanding the foregoing, if there has occurred and is continuing any Event
of Default under Sections 11(a)(i) or 11(a)(ii) of this Series 1999 Note, then
interest on all unpaid amounts outstanding hereunder (including overdue
installments of principal or interest) shall be payable at the Default Rate,
compounded monthly (to the extent permitted by applicable law) during the
continuance of such Event of Default. The Company may treat the Person in whose
name this Series 1999 Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes. The principal and interest on this
Series 1999 Note payable in cash is payable in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts. The Company may pay principal and interest by
federal funds bank wire transfer, or by check payable in such legal tender.
1. Series 1999 Notes.
This note (a "Series 1999 Note") is one of a series of
promissory notes of the Company, designated as "Series 1999 12% Senior
Subordinated Convertible Notes due February 1, 2002," including, without
limitation, additional Series 1999 Notes issued in lieu of cash interest
payments as provided in the Series 1999 Notes (all Series 1999 Notes as may be
issued from time to time are collectively referred to as the "Series 1999
Notes"). This Series 1999 Note ranks pari passu with all other Series 1999
Notes.
2. Conversion.
(a) Subject to and upon compliance with the delivery provisions set
forth in Section 2(b), the Holder shall have the right, at the Holder's option,
at any time and from time to time until the earlier of the Maturity Date or the
Redemption Date (as hereinafter defined), by delivering a notice of conversion
to the Company within the time period set forth in Section 2(b), to convert all
or any portion of this Series 1999 Note into that number of shares of the
Company's common stock, par value $.0001 per share (the "Common Stock"), equal
to the principal amount (or portion thereof) of the Series 1999 Note being
converted plus any accrued but unpaid cash interest thereon divided by $._______
(the "Conversion Price"). The person or persons entitled to receive the shares
of Common Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Conversion
Date (as hereinafter defined). From and after the Conversion Date, interest on
this Series 1999 Note (to the extent converted) will cease to accrue and the
sole right of the Holder of this Series 1999 Note (with respect to the portion
converted) shall be to receive the Common Stock issuable upon such conversion.
(b) In order to effectuate the conversion of this Series 1999 Note
pursuant to Section 2(a), the Holder shall give written notice to the Company,
which notice shall be delivered at least five (5) days before the date of
conversion (the "Conversion Date") specified in the Conversion
-2-
<PAGE> 3
Notice. On or prior to the Conversion Date, the Holder shall deliver this Series
1999 Note, duly endorsed (but effective only on the Conversion Date), or notify
the Company that this Series 1999 Note has been lost, stolen or destroyed and
promptly execute an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss which may be incurred by it in connection
with the Series 1999 Note. Upon conversion of only a portion of this Series 1999
Note, the Company shall either make appropriate notation on this Series 1999
Note of the principal amount so converted and return this Series 1999 Note to
the Holder or issue a new Series 1999 Note in the principal amount not so
converted. The Common Stock issuable upon conversion shall be computed on the
basis of the aggregate unpaid principal amount of the Series 1999 Note (or
portion thereof) so converted plus accrued but unpaid interest thereon. The
Company shall use its best efforts to, or cause the transfer agent to, issue and
deliver as promptly as practicable and in no event later than five (5) business
days after the Conversion Date, or after receipt of such agreement and
indemnification, to such Holder or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the Holder shall
be entitled. The Company shall not be required to issue any fractional shares of
Common Stock; the Company shall pay cash in lieu of any fractional shares based
on the then applicable Conversion Price.
(c) In the event that the Company (i) declares a dividend of Common
Stock on its Common Stock, (ii) subdivides its outstanding Common Stock into a
larger number of shares of Common Stock by reclassification, stock split or
otherwise, or (iii) combines its outstanding Common Stock into a smaller number
of shares of Common Stock, the Conversion Price shall be adjusted proportionally
so that thereafter (as to the Conversion Price) the Holder of this Series 1999
Note shall be entitled to receive upon conversion of this Series 1999 Note the
number of shares of Common Stock which such Holder would have owned after the
happening of any of the events described above had this Series 1999 Note been
converted immediately prior to the happening of such event; provided, that in no
event shall the Conversion Price be reduced to less than the par value of the
shares of Common Stock issuable upon conversion. An adjustment made pursuant to
this Section 2(c) shall become effective immediately after the record date in
the case of a dividend, or the payment date if no record date is fixed to
determine the stockholders entitled to receive such dividend (and adjusted 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. This Section 2(c) shall apply to
successive reclassifications of Common Stock.
(d) In case of any capital reorganization, other than that referred to
in Section 2(c) above, or the consolidation or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or the sale of the property of the
Company as an entirety or substantially as an entirety (any such action being
hereinafter referred to as a "Reorganization"), there shall thereafter be
deliverable upon conversion of this Series 1999 Note (in lieu of the number of
shares of Common Stock theretofore deliverable) the number of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock that would otherwise have been deliverable upon the conversion of this
Series 1999 Note would have been entitled upon such Reorganization if such
Series 1999 Note had been converted in full immediately prior to such
Reorganization. In case of any Reorganization, appropriate
-3-
<PAGE> 4
adjustment, as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a duly adopted resolution
certified by the Company's Secretary or Assistant Secretary, shall be made in
the application of the provisions herein set forth with respect to the rights
and interests of Holders so that the provisions set forth herein shall
thereafter be applicable, as nearly as possible, in relation to any shares or
other property thereafter deliverable upon conversion of this Series 1999 Note.
3. Redemption.
(a) Subject to Section 2 above and provided that the Fair Market Value
of the Common Stock is equal to or exceeds two times the Conversion Price for a
period of thirty consecutive business days ending within five days of the
mailing of the notice of redemption pursuant to Section 4(a) hereof, the Company
may redeem this Series 1999 Note at any time in whole or from time to time in
part, at a redemption price equal to 100% of the principal amount of this Series
1999 Note, plus accrued interest to the Redemption Date (as hereinafter
defined), plus a redemption premium equal to 2% of the principal amount
redeemed. If fewer than all of the Series 1999 Notes are to be redeemed, the
Company shall select the Series 1999 Notes to be redeemed on a substantially pro
rata basis among all holders of Series 1999 Notes.
(b) If at any time on or prior to February 1, 2002, there is a
Redemption Event, Holders of a majority in principal amount of the outstanding
Series 1999 Notes may, by written notice to the Company, require that the
Company redeem all, but not less than all, of the outstanding Series 1999 Notes
at a redemption price equal to 100% of the principal amount of the Series 1999
Notes so being redeemed, plus accrued interest to the redemption date, plus a
redemption premium equal to 2% of the principal amount redeemed; provided,
however, that in the event of closing of any public offering of any equity or
debt securities of the Company, the amount redeemed shall not exceed the amount
of net proceeds received by the Company in connection with such public offering.
(c) If at any time on or prior to February 1, 2002, there is a
Refinancing Event, each Holder may, by written notice to the Company, require
that the Company redeem up to one-half of the principal amount of the Series
1999 Notes held by such Holder at a redemption price equal to 100% of the Series
1999 Notes so being redeemed, plus accrued interest to the redemption date, plus
a redemption premium equal to 2% of the principal amount redeemed; provided,
however, that the amount redeemed shall not exceed the net proceeds received by
the Company in connection with such Refinancing Event.
4. Redemption Procedure.
(a) At least 10 days but not more than 30 days before a Redemption
Date, the Company shall mail a notice of redemption to each Holder whose Series
1999 Note is to be redeemed. The notice shall: (i) identify the Series 1999
Notes to be redeemed and shall state the redemption date (the "Redemption
Date"); (ii) state the redemption price (principal amount plus accrued interest
through such date) for the Series 1999 Note or portion thereof being redeemed;
(iii) indicate, if any Series 1999 Note is being redeemed in part, the portion
of the principal amount of such Series 1999 Note to be redeemed and that, after
the redemption date, upon surrender of such Series 1999 Note, a new Series 1999
Note or Series 1999 Notes in principal amount equal to the
-4-
<PAGE> 5
unredeemed portion will be issued; (iv) state that Series 1999 Notes called for
redemption must be surrendered to the Company to collect the redemption price;
and (v) state that interest on the Series 1999 Notes or portion thereof called
for redemption ceases to accrue on and after the Redemption Date, unless the
Company has defaulted on the payment of the redemption price.
(b) Once notice of redemption is mailed, Series 1999 Notes, or portion
thereof, called for redemption become due and payable on the Redemption Date at
the redemption price (unless converted by the Holder prior to the Redemption
Date pursuant to Section 2 hereof).
(c) Upon surrender of a Series 1999 Note that is redeemed in part, the
Company shall issue a new Series 1999 Note equal in principal amount to the
unredeemed portion of the Series 1999 Note surrendered.
5. Covenants of the Company. So long as any of the Series 1999 Notes remain
unpaid and outstanding, the Company covenants to the Holders of outstanding
Series 1999 Notes as follows:
(a) Payment of Series 1999 Notes; Satisfaction of Obligations.
The Company shall pay the principal of and interest on the Series 1999
Notes on the dates and in the manner provided herein.
If there has occurred and is continuing any Event of Default under
Sections 11(a)(i) or 11(a)(ii) hereof, then to the extent lawful, the Company
shall pay interest (including interest accruing after the commencement of any
proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the
Series 1999 Notes (including overdue installments of principal or interest) at
the Default Rate, compounded monthly.
Subject to performance by the Holder of its obligations thereunder, the
Company shall satisfy all of its obligations under the Security Documents (as
defined herein).
(b) SEC Reports. The Company shall deliver to the Holder within 15 days
after it files them with the Securities and Exchange Commission copies of any
reports, proxy statements and other information which the Company is required to
file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
(c) Compliance Certificate.
(i) The Company shall deliver to the Holders, within 45 days
after the end of each fiscal quarter and within 90 days after the end of each
fiscal year of the Company an Officers' Certificate stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal
quarter or fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Series 1999 Note, and further
stating, as to each such Officer signing such certificate, that to his knowledge
the Company has kept, observed, performed and fulfilled each and every covenant
contained in this Series 1999 Note (or, if a Default or Event of Default shall
have occurred, describing all such Defaults or Events of Default of which he may
have knowledge) and that to his knowledge no event has occurred and remains in
existence by reason of which payments on account of the principal of or
interest, if any, on the
-5-
<PAGE> 6
Securities are prohibited or if such event has occurred, a description of the
event. The Officers' Certificate shall set forth all financial calculations for
such fiscal quarter or fiscal year necessary to demonstrate the Company's
compliance with the covenants contained in this Section 5.
(ii) The Company will deliver to the Holders, forthwith upon
becoming aware of any Default or Event of Default, an Officers' Certificate
specifying in reasonable detail such Default, Event of Default or default and
the nature of any remedial or corrective action the Company proposes to take
with respect thereto.
(d) Stay, Extension and Usury Laws. The Company covenants and agrees
(to the extent that it may lawfully do so) that it will not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law wherever enacted, now or at any time
hereafter enforce, which may affect the covenants or the performance of its
obligations under this Series 1999 Note; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to the Holders, but will suffer
and permit the execution of every such power as though no such law has been
enacted.
(e) Limitation on Dividends and Redemption. The Company shall not,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution
to the holders (as such) in respect of, any shares of its capital stock, other
than in shares of Common Stock;
(ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any Subsidiary (other than any such
Equity Interests of a directly or indirectly wholly-owned Subsidiary of the
Company) or other Affiliate of the Company;
(iii) permit any Subsidiary to declare or pay any dividend on,
or make any distribution to the holders (as such) in respect of, any shares of
its Capital Stock except to the Company or another directly or indirectly wholly
owned Subsidiary of the Company; or
(iv) permit any Subsidiary to purchase, redeem or otherwise
retire for value any Equity Interests of it, the Company or any Affiliate of
either of them (other than any such Equity Interests owned by the Company or any
other directly or indirectly wholly owned Subsidiary of the Company).
(f) Corporate Existence. The Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence and the corporate existence of each of its Subsidiaries in accordance
with the respective organizational documents of each of them and the corporate
rights (charter and statutory), licenses and franchises of the Company and its
Subsidiaries; provided, however, that the Company shall not be required to
preserve any such right, license or franchise, or corporate existence, if the
Board of Directors of the Company shall determine that the preservation thereof
is no longer desirable in the conduct of the business of the Company and its
Subsidiaries taken as a whole and that the loss thereof is not adverse in any
material respect to any Holder.
-6-
<PAGE> 7
(g) Same Business. The Company and its Subsidiaries will not engage in
businesses which are not of the same general type as conducted by the Company
and its Subsidiaries on the date hereof or businesses which do not have a
substantial connection thereto.
(h) Taxes. The Company shall, and shall cause its Subsidiaries to, pay
prior to delinquency all material taxes, assessments and governmental levies
except as contested in good faith and by appropriate proceedings.
(i) Investment Company Act; United States Real Property Holding
Corporation. Neither the Company nor any of its Subsidiaries shall become an
investment company subject to registration under the Investment Company Act of
1940, as amended. Neither the Company nor any of its Subsidiaries shall become a
United States real property holding corporation as defined in Section 897(c)(2)
of the Code.
(j) No Merger, etc. Neither the Company nor any of its Subsidiaries
shall consolidate or merge with or into, or sell, lease, convey or otherwise
dispose of all or substantially all of their respective assets to, any Person;
provided, however, that any Subsidiary of the Company may consolidate or merge
with or into the Company or any of its other wholly-owned Subsidiaries if such
consolidation or merger is otherwise permissible under Section 5(f).
(k) Limitation on Additional Indebtedness. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become or remain directly or
indirectly liable with respect to (collectively, "Incur") any Indebtedness other
than (A) the Indebtedness represented by the Series 1999 Notes, (B) up to
$10,000,000 aggregate principal amount of new Senior Indebtedness, (C)
Indebtedness between or among the Company and its Subsidiaries and/or between or
among the Company's Subsidiaries, (D) Indebtedness outstanding on March 5, 1999,
and (E) up to $29,000,000 aggregate principal amount of other Indebtedness at
any time outstanding.
(l) Limitation on Transactions With Affiliates.
(i) Neither the Company nor any of its Subsidiaries shall
sell, lease, transfer or otherwise dispose of any of its properties or assets to
or purchase any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, an
Affiliate (an "Affiliate Transaction"), except on terms that are no less
favorable to the Company or the relevant Subsidiary than those that could have
been obtained in a comparable transaction by the Company or such Subsidiary from
an unrelated person; provided, however, that the Company and its wholly-owned
Subsidiaries may engage in any sale, lease, transfer, or other disposition of
property among themselves and may enter into any contract, agreement,
understanding, loan, advance or guarantee among themselves.
(ii) Neither the Company nor any Subsidiary may enter into an
Affiliate Transaction or series of related Affiliate Transactions involving or
having a potential value of more than $50,000 unless such transaction has been
approved by the Holders of a majority in principal amount of the Series 1999
Notes; provided, however, that the Company and its wholly-owned Subsidiaries may
engage in any sale, lease, transfer, or other disposition of property
-7-
<PAGE> 8
among themselves and may enter into any contract, agreement, understanding,
loan, advance or guarantee among themselves.
(iii) The limitations set forth in this Section 5(l) will not
apply to any compensatory transaction approved in good faith by the Board of
Directors, with an officer, director or employee entered into the ordinary
course of business, including, without limitation, compensation, indemnity and
employee benefit arrangements.
(m) Restrictions on Liens. The Company will not itself, and will not
permit any Subsidiary, to create or suffer to exist any Liens upon any assets of
the Company or any Subsidiary or any shares of capital stock of any Subsidiary,
in either case now owned or hereafter acquired, provided, however, that this
Section 5(m) shall not prohibit the creation or continuing existence of any
Permitted Liens. If the Company at any time pledges shares of capital stock to
the Senior Lender, the Company shall execute and deliver to and for the benefit
of the Holders, a pledge agreement in substantially the same form as executed in
favor of the Senior Lender, except that any pledges in favor of the Holders
shall be second in priority to that of the Senior Lender pursuant to
subordination agreements containing substantially similar terms and conditions
as are contained in Section 7 hereof.
(n) Sale of Assets.
(i) Except with respect to Permitted Asset Sales, neither the
Company nor any of its Subsidiaries shall sell, lease, convey or otherwise
dispose of (whether in one transaction or a series of transactions) any assets
(including capital stock of any Subsidiaries), other than sales of inventory in
the ordinary course of business (an "Asset Sale"), if the aggregate Net Proceeds
of all Asset Sales during any fiscal year exceed $250,000.
(ii) Neither the Company nor any of its Subsidiaries shall,
without the consent of the Holders of a majority in principal amount of the
Series 1999 Notes, enter into any Asset Sale if the consideration paid is less
than an amount equal to the greater of (x) the fair market value of such asset
and (y) the book value of such asset; provided, however, that assets with a fair
market value of not greater than $100,000 in the aggregate may be sold during
any fiscal year without regard to the foregoing requirement if the amount of
consideration received for such assets is promptly applied to the purchase of
comparable assets.
(iii) Except with respect to Permitted Asset Sales, at least
90% of the consideration for each such Asset Sale received by the Company or
such Subsidiary shall be in the form of cash; provided, however, that the amount
of (i) any liabilities (as shown on the Company's or such Subsidiary's most
recent balance sheet or in the notes thereto) of the Company or any Subsidiary
that are assumed by the transferee of any such assets or stock sold, leased,
conveyed or disposed of and (ii) any notes or other obligations received by the
Company or any Subsidiary from such transferee that are immediately converted by
the Company or such Subsidiary into cash, shall be deemed to be cash for
purposes of this Section 5(n).
(o) Ownership of Subsidiaries. Except with respect to Permitted Asset
Sales or as permitted by Section 5(f) or 5(n) above, the Company shall maintain
(along with one or more Subsidiaries in
-8-
<PAGE> 9
the case of an indirect Subsidiary) good and valid title to those Equity
Interests of each of its Subsidiaries owned by it, free and clear of any Lien
other than Permitted Liens.
Except with respect to Permitted Asset Sales and notwithstanding
the provisions of Section 5(n) above, neither the Company nor any Subsidiary
shall dispose of the Capital Stock of any Subsidiary, if, after giving effect to
such disposition, the Company would own less than a majority of the outstanding
economic and voting interests in such Subsidiary or former Subsidiary.
(p) Insurance. The Company shall maintain liability, casualty and other
insurance with a reputable insurer or insurers in such amounts and against such
risks as is carried by responsible companies engaged in similar businesses and
owning similar assets. In addition to the foregoing, the Company shall maintain
in full force and effect, with a reputable insurer or insurers, to the extent
obtainable at a commercially reasonable price, a key-man life insurance policy
or policies on Mr. David Ferran in an aggregate insured amount at least equal to
the lesser of (i) $10,000,000 or (ii) the aggregate amount of the Company's
outstanding obligations under the Series 1999 Notes and all Senior Indebtedness,
naming the Company as beneficiary and any holder of Senior Indebtedness and the
Holder of Series 1999 Notes as loss payees.
(q) Minimum Interest Coverage Ratio.
The Company shall furnish to the Holder an Officers' Certificate
within 45 days after the end of each fiscal quarter of the Company (but 90 days
after the end of its fiscal year), commencing with the quarterly period ending
June 30, 1999, setting forth the Company's Interest Coverage Ratio for its four
immediately preceding full fiscal quarter. The Company's Interest Coverage Ratio
for the four-quarter period ending on each such quarterly date shall not be less
than the amount set forth below alongside the date shown:
<TABLE>
<CAPTION>
Interest
Date Coverage Ratio
---- --------------
<S> <C>
June 30, 1999 (0.31):1
September 30, 1999 2.53:1
December 31, 1999 and each fiscal 2.40:1
year-end thereafter
</TABLE>
(r) Minimum EBITDA.
The Company shall furnish to the Holder an Officers' Certificate
within 45 days after the end of each fiscal quarter of the Company (but 90 days
after the end of its fiscal year), commencing with the quarterly period ending
June 30, 1999, setting forth the Company's EBITDA for its four immediately
preceding full fiscal quarters. The Company's EBITDA for the four-quarter period
ending on each such quarterly date shall not be less than the amount set forth
below next to the date shown:
-9-
<PAGE> 10
<TABLE>
<CAPTION>
Date EBITDA
---- ------
<S> <C>
June 30, 1999 $(897,000)
September 30, 1999 $7,081,000
December 31, 1999 $7,743,000
March 31, 2000 $14,000,000
</TABLE>
(s) Issuances of Capital Stock. Neither the Company nor any of its
Subsidiaries shall issue for cash consideration any shares of Capital Stock, or
rights, warrants, options or other securities exercisable or exchangeable for or
convertible into Capital Stock, at any time after the date hereof; provided,
however, that the Company may issue shares of Capital Stock, or such rights,
warrants, options or other securities (a) to finance the acquisition of related
businesses, including the real or personal property used in such businesses or,
(b) if the net proceeds of any such issuance are applied to the payment of
Senior Indebtedness or the Series 1999 Notes in accordance with the optional
redemption provisions thereof or (c) to employees of the Company or its
Subsidiaries pursuant to stock incentive plans of the Company, but only to the
extent that the aggregate number of shares of Common Stock issuable under such
plans does not exceed the number of shares subject to outstanding options as of
March 5, 1999 plus 1,000,000 (as adjusted for any stock split or
reclassification).
(t) Compensation; Management Fees.
The salary, bonus and other benefits (or any increases therein)
paid or accrued for each employee of the Company or any Subsidiary who receives
total compensation in excess of $100,000 per year shall be approved by a
Compensation Committee of the Board of Directors of the Company, a majority of
which Committee shall be comprised of directors who are neither officers nor
employees of the Company or any Subsidiary.
Neither the Company nor any of its Subsidiaries shall pay, agree
to pay, or cause to be paid to any holder of Capital Stock of the Company, or
any Affiliate of any such holder, any management fees without the prior written
consent of the Holders of the Series 1999 Notes.
(u) Employee Plans.
The Company shall not, directly or indirectly, (i) terminate any
employee pension benefit plan subject to Title IV of ERISA so as to result in
any material liability to the Company or its Subsidiaries, (ii) make a complete
or partial withdrawal (within the meaning of Section 4201 of ERISA) from any
multi-employer plan so as to result in any material liability to the Company or
its Subsidiaries, or (iii) adopt, establish, maintain or enter into any
obligation to contribute to any new employee benefit plan or multi-employer
plan, modify any existing employee benefit plan so as to materially increase its
obligations thereunder, or increase a contribution obligation to any
multi-employer plan, without the written consent of the Holders of a majority in
principal amount of the then outstanding Series 1999 Notes. This Section shall
not be deemed to prohibit the Company from modifying its medical, dental or
other employee Welfare Plans in the ordinary course of business.
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<PAGE> 11
As used in this Section 5, the terms "employee pension benefit
plan," "multi-employer plan," and "employee benefit plan" shall have the
meanings assigned to such terms in ERISA.
(v) ERISA Notices.
Promptly, but in any event within 15 days, the Company shall
deliver to the Holder, if and when the Company or any of its Subsidiaries (i)
gives or is required to give notice to the Pension Benefit Guaranty Corporation
(the "PBGC") of any "reportable event" (as defined in Section 4043 of ERISA)
with respect to any employee pension benefit plan which might constitute grounds
for a termination of such plan under Title IV of ERISA or the imposition of a
tax under Section 4971 of the Code, or knows that the plan administrator of any
such plan has given or is required to give notice of any such reportable event,
a copy of the notice of such reportable event given or required to be given to
the PBGC, (ii) receives notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any multi-employer plan is in reorganization or
has been terminated, a copy of such notice, (iii) receives notice from the PBGC
under Title IV of ERISA of an intent to terminate or appoint a trustee to
administer any employee pension benefit plan, a copy of such notice, (iv)
applies for a waiver of the minimum funding standard under Section 412 of the
Code, a copy of such application, (v) gives notice of intent to terminate any
employee pension benefit plan under Title IV of ERISA, a copy of such notice and
other information filed with the PBGC or (vi) fails to make any payment or
contribution to any employee pension benefit plan (or multi-employer plan or in
respect of any benefit arrangement) or makes any amendment to any employee
benefit plan or benefit arrangement which could result in the imposition of a
lien or the posting of a bond or other security, a certificate of the Chief
Financial Officer of the Company setting forth details as to such occurrence and
action, if any, which the Company is required or proposes to take.
(w) Maintenance of Net Worth.
The Company shall furnish to the Holder an Officers' Certificate
within 90 days after the end of each fiscal year of the Company, commencing with
the fiscal year ending December 31, 1999, setting forth the Company's Net Worth
as of such year-end. The Company's Net Worth as of each such year-end shall not
be less than the amount set forth below under the date shown:
<TABLE>
<CAPTION>
1999 2000 2001
---- ---- ----
<S> <C> <C> <C>
December 31, $(22,200,000) $12,000,000 $16,000,000
</TABLE>
(x) Limitation on Capital Expenditures.
The Company shall furnish to the Holder an Officers' Certificate
within 90 days after the end of its fiscal year, commencing with the fiscal year
ending December 31, 1999, setting forth the Company's total Capital
Expenditures, on a consolidated basis, for its immediately preceding fiscal
year. The Company's total Capital Expenditures, on a consolidated basis, for the
fiscal year ending on December 31, 1999 and each fiscal year end thereafter
shall not be greater than $500,000 .
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<PAGE> 12
(y) Maximum Lease Payments.
The Company shall furnish to the Holder an Officers' Certificate
within 45 days after the end of each fiscal quarter of the Company (but 90 days
after the end of its fiscal year), commencing with the quarterly period ending
June 30, 1999, setting forth the Company's total Rental Obligations, on a
consolidated basis, for the immediately preceding fiscal quarter. The Company's
total Rental Obligations, on a consolidated basis, for any such quarter shall
not exceed $500,000.
(z) Inconsistent Agreements. The Company shall not, and shall not
permit its Subsidiaries to, (i) enter into any agreement or arrangement which is
inconsistent with, or would be reasonably likely to impair the ability of the
Company to fulfill, its obligations under this Series 1999 Note, (ii) prepay,
redeem or defease any Indebtedness of the Company or any Subsidiary that is
subordinated to the Series 1999 Notes in right of payment, or supplement, amend
or otherwise modify the terms of any agreement or instrument evidencing,
governing or affecting the terms of any such Indebtedness if the effect thereof
would materially shorten the maturity or increase the amortization thereof, or
otherwise be materially adverse to the Holders or (iii) supplement, amend or
otherwise modify the terms of its Articles or Certificate of Incorporation or
Bylaws, if the effect thereof would be materially adverse to the Holders,
including without limitation to increase the liquidation preference of, or the
rate of dividends payable on, any series of preferred stock.
(aa) Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries.
The Company will not, and will not permit any Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Subsidiary of the Company to (a) pay dividends or make any other distributions
on its Capital Stock or any other interest or participation in, or measured by,
its profits owned by, or pay any Indebtedness owed to, the Company or a
Subsidiary of the Company, (b) make loans or advances to the Company or a
Subsidiary of the Company or (c) transfer any of its properties or assets to the
Company or to any Subsidiary of the Company, except for such encumbrances or
restrictions with respect to a Subsidiary of the Company that is not a
Subsidiary of the Company on the date hereof, in existence at the time such
Person becomes a Subsidiary of the Company. Nothing contained in this Section
5(o) shall prevent the Company or any of its Subsidiaries from entering into any
agreement (i) permitting or providing for the incurrence of Liens otherwise
permitted by Section 5(m) or (ii) restricting the sale or other disposition of
property securing Indebtedness.
(bb) Limitation on Acquisitions.
Except with respect to Capital Expenditures permitted under
Section 5(x), the Company shall not, directly or indirectly, and shall not
permit any Subsidiary to, acquire, in one transaction or a series of
transactions, any stock or assets of any Person (an "Acquisition") involving or
having an aggregate value in excess of $200,000, unless such Acquisition has
been approved in writing by the Holders of a majority in principal amount of the
then outstanding Series 1999 Notes).
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<PAGE> 13
(cc) Limitation on Research and Development Expenditures.
The Company's total research and development expenditures for any
fiscal year, commencing with the fiscal year ending December 31, 1999, shall not
exceed 12% of the Company's total revenues for the fiscal year ending December
31, 1999 and 10% of the Company's total revenues for the fiscal year ending
December 31, 2000 and each fiscal year-end thereafter, as reflected in the
Company's audited annual financial statements.
(dd) Compliance with Laws. The Company will, and will cause its
Subsidiaries to, comply with all statutes, ordinances, governmental rules and
regulations, judgments, orders and decrees (including all Environmental Laws) to
which any of them is subject, and obtain and keep in effect all licenses,
permits, franchises and other governmental authorizations necessary to the
ownership or operation of their respective properties or the conduct of their
respective businesses, except to the extent that the failure to so comply or
obtain and keep in effect would not have a Material Adverse Effect.
(ee) Payment of BOC Note. The Company agrees to use its best efforts to
refinance or amend its $5,000,000 Subordinated Promissory Note due 2000 payable
to The BOC Group, Inc. (the "BOC Note") so that such note (or refinancing
thereof) will have a maturity date not earlier than February 15, 2002. The
Company agrees that it will not repay any principal amount of the BOC Note while
the Series 1999 Notes are outstanding without obtaining the written consent of
the Holders of a majority in principal amount of the outstanding Series 1999
Notes, which consent will not be unreasonably withheld so long as (i) the
Company has a source of funds with which to make such repayment without
materially adversely affecting the Company's ability to meet its current
obligations as they become due and (ii) no Default or Event of Default has
occurred and is continuing or is reasonably likely to occur as a result of such
repayment.
(ff) Reservation of Shares of Common Stock. The Company shall reserve
and keep available at all times, free of preemptive rights, shares of Common
Stock for the purpose of enabling the Company to satisfy any obligation to issue
shares of Common Stock upon conversion of the Series 1999 Notes. The number of
shares so reserved may be reduced by the number of shares actually delivered
pursuant to conversion of Series 1999 Notes.
6. Covenants of the Holder.
By Holder's acceptance of this Series 1999 Note, Holder acknowledges
and warrants to any Senior Lender that the Subordinated Indebtedness is and
shall continue to be (a) unsecured, except for a second-priority security
interest created by the Security Agreement dated March 5, 1999 (the "Security
Agreement") and the Patent and Trademark Security Agreement dated March 5, 1999
(the "Patent Security Agreement") (or any subsequent security agreements
approved by the Senior Lender) and (b) not subject to any guaranties by any
direct or indirect subsidiaries of the Company other than the Continuing
Guaranty dated March 5, 1999 (the "Guaranty"), or any subsequent guarantees
approved by the Senior Lender. The Security Agreement, the Patent Security
Agreement and the Guaranty are sometimes collectively referred to as the
"Security Documents."
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<PAGE> 14
7. Subordination.
(a) Series 1999 Notes Subordinated to Senior Indebtedness. By Holder's
acceptance of this Series 1999 Note, Holder covenants and agrees that this
Series 1999 Note, the Guaranty and the other Security Documents shall be
subordinated in right of payment in accordance with the provisions of this
Section 7 to the prior indefeasible payment in full of all amounts payable under
or in respect of Senior Indebtedness (as such term is defined in Section 12).
(b) Priority and Payment Over of Proceeds in Certain Events.
(i) Subordination on Dissolution, Liquidation or
Reorganization of the Obligor. Upon any payment or distribution of assets or
securities of Obligor, of any kind or character, whether in cash, property or
securities, upon any dissolution or winding up or total or partial liquidation
or reorganization of Obligor, whether voluntary or involuntary or in bankruptcy,
insolvency, receivership or other proceedings, all amounts payable under or in
respect of Senior Indebtedness shall first be indefeasibly paid in full, or
payment provided for, before the Holder shall be entitled to receive any payment
or distribution of any cash, property or securities under or in respect of
Subordinated Indebtedness. Before any payment may be made by Obligor or in
respect of Subordinated Indebtedness upon any such dissolution or winding up or
liquidation or reorganization, any payment or distribution of cash, property or
securities of Obligor of any kind or character to which the Holder would be
entitled, except for the provisions of this Section 7, shall be made by Obligor
or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution directly to the Senior Lender or its
representatives to the extent necessary to pay all the Senior Indebtedness in
full after giving effect to any concurrent payment or distribution to the Senior
Lender.
(ii) Subordination on Default in Senior Indebtedness.
(A) No direct or indirect payment by or on behalf of
Obligor under or in respect of the Subordinated Indebtedness, whether pursuant
to the terms of the Subordinated Indebtedness or upon acceleration, offer to
purchase or otherwise, shall be made if, at the time of such payment, there
exists a default in the payment (including, without limitation, any payment
default resulting from any acceleration of the Senior Indebtedness) under or in
respect of the Senior Indebtedness and (I) the collateral agent under the
Security Agreement (the "Agent") has received written notice thereof, if any, as
provided in Section 7(i) and (II) such default shall not have been cured or
waived in writing or the benefits of this sentence waived in writing by the
Senior Lender.
(B) During the continuance of any other default with
respect to the Senior Indebtedness, upon the receipt by the Agent of written
notice from the Senior Lender specifying all events of default with respect to
the Senior Indebtedness, which the person executing such notice on behalf of the
Senior Lender reasonably believes to exist as of the date of such notice after
due inquiry, no payment may be made by Obligor under or in respect of
Subordinated Indebtedness for a period ("Payment Blockage Period") commencing on
the date of receipt of any such notice and ending at the earlier of (I) the date
when all events of default which were specified by the Senior Lender in the
notice which triggered such Payment Blockage Period have been cured or waived,
and (II) 90 days after the date of receipt of such notice (unless
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<PAGE> 15
such Payment Blockage Period shall be terminated earlier by written notice to
the Agent from the Senior Lender).
(C) During any Payment Blockage Period, the Company
will promptly provide Holder with a copy of any written notice delivered to the
Company by the Senior Lender stating that all events of default which were
specified by the Senior Lender in the notice which triggered such Payment
Blockage Period have been cured or waived. Notwithstanding anything herein to
the contrary (I) in no event will a Payment Blockage Period extend more than 90
days from the date such notice is effective, and (II) payments due but not made
with respect to the Subordinated Indebtedness during the Payment Blockage Period
may be made at any time after the expiration of the Payment Blockage Period
(unless another Payment Blockage Period is in effect or payment is otherwise
prohibited pursuant to this Section 7, including, without limitation, in
connection with a payment default). No more than two Payment Blockage Periods
may be commenced for any reason during any period of 360 consecutive days. For
all purposes of this Section 7(b)(ii), no event of default under the Senior
Indebtedness which the person executing such notice on behalf of the Senior
Lender reasonably believed (after due inquiry) to exist and be continuing on the
date of the commencement of any Payment Blockage Period (whether or not such
event of default was included in the notice required to be given under this
Section 7(b)(ii)) shall be, or be made, the basis for the commencement of any
subsequent Payment Blockage Period whether or not within a period of 360
consecutive days.
(iii) Rights and Obligations of the Holder of the Series 1999
Note. In the event that, notwithstanding the foregoing provision prohibiting
such payment or distribution, any holder of the Subordinated Indebtedness shall
have received any payment under or in respect of the Subordinated Indebtedness
at a time when such payment was prohibited by this Section 7, then and in such
event (subject to the provisions of Section 7(g)) such payment or distribution
shall be received and held in trust for the Senior Lender and shall be paid over
or delivered to the Senior Lender promptly, in accordance with Section 7(b)(i)
without notice or demand therefor, to the extent necessary to pay in full all
amounts due under or in respect of the Senior Indebtedness in accordance with
its terms after giving effect to any concurrent payment or distribution to the
Senior Lender.
(iv) Acceleration of the Subordinated Indebtedness and
Exercise of Remedies With Respect Thereto. The holders of the Subordinated
Indebtedness shall give the Senior Lender 30 days prior written notice of any
acceleration of the maturity of the Subordinated Indebtedness with respect to an
Event of Default under Section 11(a)(i), (ii), (iii) or (iv) hereof. All Senior
Indebtedness then or thereafter due or declared to be due shall first be
indefeasibly paid in full before the holders of the Subordinated Indebtedness
are entitled to receive any payment from Obligor under or in respect of
Subordinated Indebtedness.
(v) Right to Rely Upon Orders and Decrees With Respect to
Payments and Distributions. Upon any payment or distribution of cash, assets or
securities referred to in this Section 7, the holders of the Subordinated
Indebtedness shall be entitled to rely upon any order or decree of a court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending, and upon a certificate of the receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making any
such payment or distribution,
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<PAGE> 16
delivered for the purpose of ascertaining the persons entitled to participate in
such distribution, and the holders of other indebtedness of Obligor, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Section 7.
(c) Payments May be Paid Prior to Dissolution. Nothing in this Section
7 shall prevent Obligor, except under the conditions described in Sections 7(b),
7(d) or 7(g) (including, without limitation, if a payment default has occurred
and is continuing with respect to the Senior Indebtedness), from making payments
at any time under or in respect of Subordinated Indebtedness to the holders
thereof entitled thereto unless at least two Business Days prior to the date
upon which such payment would otherwise (except for the prohibitions contained
in Section 7(b)) become due and payable, the Holder or the Agent shall have
received the written notice provided for in Section 7(g). An Obligor shall give
prompt written notice to the Agent and the Holder of any dissolution, winding
up, liquidation or reorganization of such Obligor.
(d) Rights of Senior Lender Not to be Impaired. No right of the Senior
Lender to enforce subordination as herein provided shall at any time in any way
be prejudiced or impaired by any act or failure to act in good faith by the
Senior Lender or by any noncompliance by Obligor with the terms and provisions
and covenants in this Section 7, regardless of any knowledge thereof the Senior
Lender may have or otherwise be charged with. The provisions of this Section 7
are intended to be for the benefit of, and shall be enforceable directly by, the
Senior Lender. The Holder agrees not to amend the Series 1999 Notes, including
without limitation, for all purposes of this Section 7(d), to increase the
interest rate payable by Obligor, increase the fees payable to the Holder or add
new fees payable to the Holder, in each case other than fees payable by the
issuance of additional Series 1999 Notes or an equity interest, or provide for
amortization of the principal amount of the Series 1999 Notes prior to the dates
provided for in the Series 1999 Notes. Notwithstanding any other provision
contained in the Series 1999 Notes or otherwise, prior to the earlier of
repayment in full of all obligations owed by Obligor to Senior Lender and
January 1, 2000, Obligor shall not make any payment on, or in connection with,
the Series 1999 Notes, except for (i) payments made by the issuance of
additional Series 1999 Notes or an equity interest to the Holder or (ii)
interest as currently provided herein.
(e) Subrogation. Upon the indefeasible payment in full of all amounts
payable under or in respect of the Senior Indebtedness, the holders of the
Subordinated Indebtedness shall be subrogated to the rights of the Senior Lender
to receive payments or distributions to the Senior Lender of any cash, property
or securities to which holders of the Subordinated Indebtedness would be
entitled except for the provisions of this Section 7, and no payment pursuant to
the provisions of this Section 7 to the Senior Lender by the holders of the
Subordinated Indebtedness, shall, as between Obligor, its creditors other than
the Senior Lender and the holders of the Subordinated Indebtedness, be deemed to
be a payment by Obligor to or on account of such Subordinated Indebtedness, it
being understood that the provisions of this Section 7 are solely for the
purpose of defining the relative rights of the Senior Lender, on the one hand,
and the holders of the Subordinated Indebtedness, on the other hand. If any
payment or distribution to which the holders of the Subordinated Indebtedness
would otherwise have been entitled but for the provisions of this Section 7
shall have been applied, pursuant to the provisions of this Section 7, to the
payment of all amounts payable under the Senior Indebtedness, then and in such
case, the holders of the Subordinated Indebtedness, together with
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<PAGE> 17
any holders of indebtedness ranking pari passu with the Subordinated
Indebtedness, shall be entitled to receive from the Senior Lender any payments
or distributions received by the Senior Lender in excess of the amount
sufficient to pay in full all amounts payable under or in respect of the Senior
Indebtedness.
(f) Obligations of the Obligor Unconditional. Nothing contained in this
Section 7 is intended to or shall impair, as between Obligor and the holders of
the Subordinated Indebtedness, the obligations of Obligor, which are absolute
and unconditional, to pay to the holders of the Subordinated Indebtedness all
amounts which may be payable thereunder or in respect thereof (including,
without limitation, the principal of and interest on the Subordinated
Indebtedness) as and when the same shall become due and payable in accordance
with the terms thereof, or is intended to or shall affect the relative rights of
the holders of the Subordinated Indebtedness and creditors of Obligor other than
the Senior Lender, nor shall anything herein prevent any holder of the
Subordinated Indebtedness from exercising all rights and remedies otherwise
permitted by applicable law upon default under the Subordinated Indebtedness,
subject to Section 7(b) and to the rights, if any, under this Section 7 of the
Senior Lender in respect of cash, property or securities of Obligor received
upon the exercise of any such right or remedy. The failure of Obligor to make
payment on account of principal or interest on the Subordinated Indebtedness and
all other amounts may be payable in respect thereof by reason of any provision
of this Section 7 shall not be construed as preventing the occurrence of an
event of default under the Subordinated Indebtedness.
(g) Holder Entitled to Assume Payments not Prohibited in Absence of
Notice. The Holder shall not at any time be charged with the knowledge of the
existence of any facts other than any acceleration of the Subordinated
Indebtedness which would prohibit the receipt of any payment to the Holder,
unless and until the Agent or the Holder shall have received written notice
thereof from or on behalf of Obligor, the Senior Lender or from any trustee,
representative or agent therefor which notice shall specify the applicable
provision of this Section 7 which prohibits or restricts receipt of payment by
the Holder; and, prior to the receipt of any such written notice by the Agent or
the Holder, the Holder shall be entitled to assume conclusively that no such
facts exist. Unless at least two Business Days prior to the date on which by the
terms of the Subordinated Indebtedness any monies are to be paid by Obligor to
the Holder for any purpose (including, without limitation, the payment of the
principal or interest on the Subordinated Indebtedness), the Agent or the Holder
shall have received the notice provided for in the preceding sentence, the
Holder shall have full power and authority to receive such monies and shall be
entitled to keep and retain the same, and shall not be affected by any notice to
the contrary which may be received by it on or after such date; provided,
however, that the foregoing shall not apply with reference to a payment of
Subordinated Indebtedness pursuant to an acceleration thereof unless the Senior
Lender has received written notice of such acceleration pursuant to Section
7(b)(iv) (if required) which notice shall have been received by the Senior
Lender not less than thirty days in advance of the date of such payment.
Notwithstanding the foregoing, if any payment is made by Obligor after the
occurrence and during the continuance of a payment default with respect to the
Senior Indebtedness, the Holder shall promptly pay over and deliver to the
Senior Lender such payment if (i) the Senior Lender notifies the Agent of such
payment default not more than two Business Days after such payment is made to
the Holder, or (ii) the payment is made after the acceleration of the
Subordinated Indebtedness. It is understood that for purposes of this Section 7,
"payment default" with respect to the Senior Indebtedness
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<PAGE> 18
means any late payment under the Senior Indebtedness regardless of whether any
applicable grace period has expired. Each of the Agent and the Holder shall be
entitled to rely on the delivery to it of a written notice by a person
representing himself, herself or itself to be an authorized signatory for the
Senior Lender (or a trustee, representative or agent on behalf of, or other
representative of, the Senior Lender) to establish that such notice has been
given by or on behalf of the Senior Lender.
(h) Reliance by Senior Lender. The Holder by acceptance hereof
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to the Senior Lender, whether
the Senior Indebtedness was created or acquired before or after the issuance of
this Note, to acquire or continue to hold the Senior Indebtedness and the Senior
Lender shall be deemed conclusively to have relied on such subordination
provisions in acquiring or continuing to hold any Senior Indebtedness.
(i) Notice by Senior Lender. The Company agrees to use reasonable
efforts to have the Senior Lender agree to notify the Agent and to have the
Company or the Agent notify the Holder upon the happening of any of the
following:
(i) the transmittal by the Senior Lender of a notice of
default to Obligor; or
(ii) the acceleration of the Senior Indebtedness; or
(iii) the transfer by assignment and novation of any Senior
Indebtedness, specifying the name and address of the transferee; provided,
however, that the failure by the Senior Lender to give any notice to the Agent
or the Holder required by this Section 7(i)(iii) shall not result in any
liability on the part of the Senior Lender or have any other effect except as
expressly set forth in Sections 7(b), 7(c) and 7(g).
Notwithstanding anything in this Series 1999 Note to the
contrary, any notice required to be given herein by the Senior Lender to the
Agent or the Holder, or which the Senior Lender desires to give to the Holder,
under or in connection with this Note (including without limitation all notices
under this Section 7), may be give to the Agent at Equinox Investment Partners,
L.L.C., Attention: Robert J. Wickey, 405 Lexington Avenue, 21st Floor, New York,
New York, 10174, or at such other address as the Agent may designate by written
notice to the Senior Lender, and receipt by the Agent of any such written notice
shall, for all purposes of this Note, be deemed to be receipt thereof by the
Holder.
(j) Notice By the Holder . The Holder agrees to notify the Senior
Lender upon the happening of any of the following:
(i) the transmittal by the Holder of a notice of default to
Obligor; or
(ii) acceleration of the Subordinated Indebtedness; or
(iii) the transfer of any Subordinated Indebtedness,
specifying the name and address of the transferee; provided, however, that the
failure by the Holder to give any notice to the Senior Lender required by this
Section shall not result in any liability on the part of the Holder or have any
other effect except as expressly set forth in Section 7(b).
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<PAGE> 19
8. Security Documents.
In order to secure the Company's obligation to pay the principal of
this Series 1999 Note, the Company has granted the Holder, pursuant to the terms
of the Security Agreement and pro rata based on the relationship that the dollar
amount of this Series 1999 Note bears to the aggregate dollar amount of all
Series 1999 Notes outstanding from time to time, a lien and security interest on
substantially all of the assets of the Company. The Company's obligations under
this Series 1999 Note have also been guarantied by SubMicron Systems, Inc. and
SubMicron Wet Process Stations, Inc. (the "Subsidiary Guarantors") pursuant to
the Guaranty. The Subsidiary Guarantors' obligations under such guaranties have
been secured by a security interest in certain of their assets pursuant to the
terms of the Security Agreement, and, with respect to SubMicron Systems, Inc.,
the Patent and Trademark Security Agreement. The Holder acknowledges and agrees
that such lien and guaranties are second priority liens and guaranties, junior
to the liens and guarantees granted (or may in the future be granted) to holders
of Senior indebtedness.
9. Acceptance of Series 1999 Note.
The Holder, by acceptance of this Series 1999 Note, (i) agrees to be
bound by the terms of the Security Documents, including without limitation, the
indemnification provisions contained therein, and (ii) agrees with, ratifies and
confirms the appointment of (x) the Collateral Agent under each of the Security
Documents (as such term is defined in each such Security Document), as such
Holder's attorney-in-fact under the Security Documents and authorizes the
Collateral Agent to take such action as may be necessary to effectuate the
purposes of the Security Documents and (y) the Collateral Agent under the
Security Agreement as the Agent hereunder. Copies of the Security Documents,
together with any amendments or replacements shall be maintained at the
principal executive offices of the Company and shall be available for inspection
by Holder on reasonable notice.
10. Modification of Series 1999 Notes.
The Series 1999 Notes may be modified without prior notice to any
Holder but with the written consent of the Holders of a majority in principal
amount of the Series 1999 Notes then outstanding. The Holders of a majority in
principal amount of the Series 1999 Notes then outstanding may waive compliance
by the Company with any provision of the Series 1999 Notes without prior notice
to any Holder. However, without the consent of each Holder affected and subject
to Section 7(d), an amendment, supplement or waiver may not (a) alter the amount
of Series 1999 Notes whose Holders must consent to an amendment, supplement or
waiver, (b) alter the rate or the time for payment of interest on any Series
1999 Note, (c) alter the principal or the maturity of any Series 1999 Note or
alter the redemption or prepayment provisions with respect thereto or (d) make
any Series 1999 Note payable in money or property other than as stated in the
Series 1999 Notes.
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<PAGE> 20
11. Defaults and Remedies.
(a) Events of Default. An "Event of Default" hereunder occurs if:
(i) the Company defaults in the payment of the principal of
any Series 1999 Note when the same becomes due and payable at maturity, upon
redemption or otherwise;
(ii) the Company defaults in the payment of interest on any
Series 1999 Note when the same becomes due and payable and the default continues
for a period of three days;
(iii) the Company fails to comply in any material respect with
any of the covenants hereunder and the Default (as hereinafter defined)
continues for the period and after the notice specified below;
(iv) there occurs any Event of Default with respect to the
Series 1997 Notes and/or the Series B Notes (as an Event of Default is defined
in the Series B Notes or the Series 1997 Notes, as applicable, from time to time
and subject to any applicable grace periods or waivers thereof);
(v) the Company or any of its material subsidiaries pursuant
to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief
against it in an involuntary case,
(C) consents to the appointment of a Custodian of it
or for all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or
(E) generally is unable to pay its debts as the same
become due; or
(vi) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any of its
material subsidiaries in an involuntary case,
(B) appoints a Custodian of the Company or any of its
material subsidiaries or for all or substantially all of its property, or
(C) orders the liquidation of the Company or any of
its material subsidiaries,
and the order or decree remains unstayed and in effect for 60 days.
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<PAGE> 21
The term "Bankruptcy Law" means title 11, U.S. Code or any
similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
For the purposes of this Section 11(a), "Default" means any
event which is, or after notice or passage of time would be, an Event of
Default. A Default under Section 11(a)(iii) is not an Event of Default until the
Holders of at least 25% in aggregate principal amount of the then outstanding
Series 1999 Notes notify the Company of the Default and the Company does not
cure the Default within 30 days of such notice. The notice must specify the
Default, demand that it be remedied and state that the notice is a "Notice of
Default."
(b) Acceleration of Series 1999 Notes. If an Event of Default (other
than an Event of Default specified in clauses (v) and (vi) of Section 11(a))
occurs and is continuing, the holders of at least 25% in aggregate principal
amount of the then outstanding Series 1999 Notes, by notice to the Company, may
declare the unpaid principal of and any accrued interest on all the Series 1999
Notes to be due and payable. Immediately upon such declaration, the principal
and interest shall be due and payable. If an Event of Default specified in
clause (v) or (vi) of Section 11(a) occurs, such an amount shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of any Holder. The holders of a majority in principal amount of the
then outstanding Series 1999 Notes by notice to the Company may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due solely
because of the acceleration.
(c) Other Remedies. If an Event of Default occurs and is continuing,
holders of the Series 1999 Notes may pursue any available remedy to collect the
payment of principal or interest on the Series 1999 Notes or to enforce the
performance of any provision of the Series 1999 Notes; provided, however, that
acceleration of the Series 1999 Notes shall be governed by Section 10(b) hereof.
A delay or omission by any holder of any Series 1999 Notes in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. All remedies are cumulative to the extent permitted by law.
(d) Waiver of Past Defaults. The holders of a majority in principal
amount of the then outstanding Series 1999 Notes by notice to the Company may
waive an existing default of Event of Default and its consequences except a
continuing default or Event of Default in the payment of the principal of or
interest on any Series 1999 Notes.
(e) Rights of Holders to Receive Payment. Except as otherwise provided
in Section 7 hereof, the right of any holder of a Series 1999 Note to receive
payment of principal and interest on the Series 1999 Note, on or after the
respective due dates expressed in the Series 1999 Note, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such holder.
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<PAGE> 22
(f) Undertaking for Costs. In any suit for the enforcement of any right
or remedy under this Series 1999 Note, a court in its discretion may require the
filing by any party litigant in the suit of an undertaking to pay the costs of
the suit, and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant.
12. Definitions.
The terms defined in this Section 12 shall, for all purposes
of this Series 1999 Note, have the meanings herein specified, unless the context
otherwise requires.
"Affiliate" means with respect to any specified Person, any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether in the capacity of officer or director of such Person, through the
ownership of voting securities, by agreement or otherwise.
"Capital Expenditures" means for any fiscal period, the
aggregate expenditures (whether paid in cash or accrued as a liability,
including without limitation payments under Capital Leases) for capital assets
which would be included in property, plant and equipment on a balance sheet
prepared in accordance with GAAP. Amounts expended by the Company or its
Subsidiaries for Acquisitions in compliance with the provisions of Section 5(p)
shall not constitute Capital Expenditures for purposes of Section 5(m) hereof.
"Capital Lease" means any lease of any property which would in
accordance with GAAP be required to be classified and accounted for on the
balance sheet of the lessee as a capital lease.
"Capitalized Lease Obligation" means with respect to any
Person for any period, any obligation of such Person to pay rent or other
amounts under a Capital Lease; the amount of such obligation shall be the
capitalized amount thereof determined in accordance with such principles.
"Capital Stock" means any and all shares, interests,
participation or other equivalents (however designated) of corporate stock or
other equity interests, including without limitation all common stock and
preferred stock.
"Change of Control" shall occur or be deemed to have occurred
if (i) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under
the Exchange Act) shall beneficially own (other than KB Mezzanine Fund II, L.P.,
Celerity Silicon, L.L.C. or any of their respective Affiliates) at least 30% of
the Company's voting stock and KB Mezzanine Fund II, L.P., Celerity Silicon,
L.L.C. and any of their respective Affiliates, in the aggregate, shall
beneficially own, directly or indirectly, less voting stock than such other
Person or "group" or (ii) a majority of the members of the Board of Directors of
the Company are not Continuing Directors.
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<PAGE> 23
"Consolidated Net Income" means for any period, the aggregate
of the Net Income of the Company and its consolidated Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP, provided
that (i) the Net Income of any Person which is not a Subsidiary of the Company
or is accounted for by the Company by the equity method of accounting shall be
included in Consolidated Net Income only to the extent of the amount of
dividends or distributions actually paid by such Person to the Company or a
Subsidiary of the Company, (ii) the Net Income of any Person acquired by the
Company in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded from Consolidated Net Income and (iii) the
Net Income of any Subsidiary of the Company that is subject to restrictions,
direct or indirect, on the payment of dividends or the making of distributions
to the Company shall be excluded from Consolidated Net Income to the extent of
such restrictions. "Net Income" of any Person shall mean the net income (loss)
of such Person, determined in accordance with GAAP, excluding, however, any gain
(but not loss) realized upon the sale or other disposition (including, without
limitation, dispositions pursuant to sale and leaseback transactions) of any
real property or equipment of such Person which is not sold or otherwise
disposed of in the ordinary course of business and any gain (but not loss)
realized upon the sale or other disposition of any capital stock of such Person
or a subsidiary of such Person.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on March 5, 1999 or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Company" means SubMicron Systems Corporation, a Delaware
corporation.
"Default Rate" means 15% per annum.
"EBITDA" means for any period, the sum of the Company's (i)
Consolidated Net Income, plus (ii) consolidated interest expense (including
without limitation amortization of original issue discount), plus (iii)
provisions for income taxes plus (iv) depreciation and amortization (in each
case, with respect to clauses (ii), (iii) and (iv), as determined in accordance
with GAAP and to the extent included in the computation of Consolidated Net
Income).
"Environmental Laws" means any and all federal, state or local
laws, statutes, ordinances, rules, regulations, judgments, orders, decrees,
permits, licenses, or other governmental restrictions or requirements and the
common law relating to pollution or protection of public or employee health or
the environment, including without limitation the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended and Resource
Conservation and Recovery Act of 1976, as amended.
"Equity Interest" means Capital Stock or warrants, options or
other rights to acquire Capital Stock (but excluding any debt security which is
convertible into, or exchangeable for, Capital Stock).
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<PAGE> 24
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute or law thereto.
"Fair Market Value" for each day means (i) if the Company's
Common Stock is listed or admitted to trading on any securities exchange, the
closing price, regular way, on such day on the principal exchange on which the
Common Stock is traded, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, (ii) if the Common Stock is not
then listed or admitted to trading on any securities exchange, the last reported
sale price on such day, or if there is no such last reported sale price on such
day, the average of the closing bid and the asked prices on such day, as
reported by a reputable quotation source designated by the Company, or (iii) if
neither clause (i) nor (ii) is applicable, the average of the reported high bid
and low asked prices on such day, as reported by the "Over-The-Counter" Bulletin
Board or other reputable quotation service, or a newspaper of general
circulation in the Borough of Manhattan, City of New York, customarily published
on each business day, designated by the Company or (iv) if clauses (i), (ii),
(iii) and (iv) are not applicable, the Fair Market Value of the Common Stock
shall be determined based on the good faith determination of the Board of
Directors of the Company.
"GAAP" means those generally accepted accounting principles
and practices which are recognized as such by the American Institute of
Certified Public Accountants acting through its Accounting Principles Board or
by the Financial Accounting Standards Board or through other appropriate boards
or committees thereof and which are consistently applied for all periods after
the date hereto so as to properly reflect the financial conditions, and the
results of operations and cash flows, of the Company and its consolidated
Subsidiaries, except that any accounting principle or practice required to be
changed by the Accounting Principles Board or Financial Accounting Standards
Board (or other appropriate board or committee of such boards) in order to
continue as a generally accepted accounting principle or practice may so be
changed. In the event of a change in GAAP, this Series 1999 Note, to the extent
GAAP applies, shall continue to be construed in accordance with GAAP as in
existence on the date hereof; provided, however, the Holder and the Company will
thereafter negotiate in good faith to revise any affected covenants to make such
covenants consistent with GAAP as then in effect, and, after any such revision,
the Series 1999 Note will be construed in accordance with GAAP as then in
effect.
"Holder" means the Person in whose name a Series 1999 Note is
registered on the Company's books.
"Indebtedness" means with respect to any Person, the aggregate
amount of, without duplication, the following:
(a) all obligations for borrowed money;
(b) all obligations evidenced by bonds, debentures,
notes or other similar instruments;
(c) all obligations to pay the deferred purchase
price of property or services, except Trade Payables, accrued commissions and
other similar accrued current
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<PAGE> 25
liabilities in respect of such obligations, if such liabilities are not overdue
and arise in the ordinary course of business;
(d) all Capitalized Lease Obligations;
(e) all obligations or liabilities of others secured
by a Lien on any asset owned by such Person or Persons whether or not such
obligation or liability is assumed;
(f) all obligations of such Person or Persons,
contingent or otherwise, in respect of any letters of credit or bankers'
acceptances; and
(g) all guaranties.
"Interest Coverage Ratio" means for any period, the ratio of
(i) the Company's EBITDA for such period to (ii) the consolidated interest
expense (including the interest component of Capital Leases, but excluding
non-cash interest and the amortization of debt issuance costs and original issue
discount) for such period with respect to all Indebtedness of the Company and
its Subsidiaries outstanding on the date of determination.
"Junior Indebtedness" means the Company's (i) 12% Senior
Subordinated Notes due February 1, 2002, (ii) Series B 12% Senior Subordinated
Notes due February 1, 2002, (iii) 8% Convertible Subordinated Notes due 2002 and
(iv) $5,000,000 Subordinated Promissory Note due 2000.
"Lien" means any material mortgage, pledge, lien, encumbrance,
charge or adverse claim affecting title or resulting in a charge against real or
personal property, or security interest of any kind (including, without
limitation, any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell and any filing of
or agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statutes) of any jurisdiction).
"Material Adverse Effect" means (i) any material adverse
effect whatsoever upon the validity, perfection or enforceability of the Series
1999 Notes or Security Documents, (ii) any material adverse effect on the
results of operations, financial condition, properties, assets, business or
prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any
material adverse effect on the ability of the Company or the Subsidiary
Guarantors to fulfill their obligations under the Series 1999 Notes or Security
Documents and any instrument governing Indebtedness of the Company or a
Subsidiary incurred as of March 5, 1999, or any document contemplated hereby or
thereby.
"Net Worth" means at any date, the sum of (i) the total
shareholders' equity reflected on the balance sheet of the Company as of such
date, determined in accordance with GAAP, excluding (to the extent included in
the calculation of shareholders' equity) the cumulative effect of any net
operating loss carry forward benefit reported in the notes to the Company's
financial statements from time to time for any period commencing after March 5,
1999 plus (ii) the aggregate liquidation preference of the outstanding Preferred
Stock of the Company plus (iii) the outstanding principal amount of any Junior
Indebtedness.
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<PAGE> 26
"Obligor" means any one of the Company, SubMicron Systems,
Inc., a Pennsylvania corporation, and SubMicron Wet Process Stations, Inc., a
California corporation.
"Officers' Certificate" means a certificate signed by any two
officers, one of whom must be the Chairman of the Board, the President, the
Chief Executive Officer or Chief Financial Officer, the Treasurer or a Vice
President of the Company.
"Operating Lease" means any lease other than a Capital Lease.
"Permitted Asset Sales" means sales of excess or obsolete
inventory.
"Permitted Liens" means, with respect to any Person: (i)
pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States Government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or import duties or for the
payment of rent; (ii) Liens imposed by law, such as carriers, warehousemen's and
mechanics' Liens or Liens arising out of judgments or awards against such Person
with respect to which such Person shall then be prosecuting appeal or other
proceedings for review; (iii) Liens securing the payment of taxes, assessments
and governmental charges or levies which are not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (iv) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; (v) minor survey exceptions, minor
encumbrances, easements or reservations of, or rights of others for, rights of
way, sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning of other restrictions as to the use of real properties or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not incurred in connection with
Indebtedness or other extensions of credit and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (vi) Liens in
existence on March 5, 1999; (vii) Liens on assets owned by the Company or its
Subsidiaries in favor of any holder of Senior Indebtedness securing Senior
Indebtedness permitted hereunder; (viii) purchase money Liens upon or in any
real or personal property (including fixture and other equipment) acquired or
held by the Company or any Subsidiary in the ordinary course of business to
secure the purchase price of such property or to secure Indebtedness incurred
solely for the purpose of financing the acquisition or improvement of such
property, or Liens existing on such property at the time of its acquisition
(other than any such Lien created in contemplation of such acquisition) provided
that (X) no such Lien shall extend to or cover any property other than the
property being acquired or improved and (Y) any such Indebtedness would be
permitted to be incurred pursuant to Section 5(k) hereof; and (ix) Liens
securing Capital Leases or Operating Leases.
"Person" means any individual, partnership, corporation,
trust, unincorporated organization or government or agency or political
subdivision thereof.
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<PAGE> 27
"Redemption Event" shall occur or be deemed to have occurred
if any of the following events occur: (i) the merger or consolidation of the
Company with or into any other entity; (ii) the consummation of a sale or
disposition by the Company of all or substantially all of its assets or the
stock or assets of a material business division or Subsidiary of the Company;
(iii) a Change of Control of the Company; (iv) the closing of any public
offering of any equity or debt securities of the Company; or (v) approval by the
Board of Directors of a plan of complete liquidation or dissolution of the
Company.
"Refinancing Event" shall occur or be deemed to have occurred
if the Company consummates, or is able to consummate using its reasonable best
efforts, a financing in which the Company or its Subsidiaries incur Senior
Indebtedness that refinances or increases the principal amount of any Senior
Indebtedness previously outstanding or available to the Company, and that bears
an initial interest rate of less than 12% per annum, and that permits redemption
of the Series 1999 Notes as provided herein.
"Rental Obligations" means the maximum aggregate fixed rentals
paid or payable by a lessee under any Operating Lease during a specified period
(excluding amounts paid or payable on account of maintenance, ordinary repairs,
insurance, taxes, assessments and other similar charges, whether or not
designated as rental or additional rental), regardless of any amounts received
by such lessee as sublessor under any Operating Lease.
"Senior Indebtedness" means (a) all monetary obligations,
whether now existing or hereafter arising, under the Loan Agreement between the
Company, the Subsidiary Guarantors and the Senior Lender, in effect from time to
time, including, without limitation, (i) obligations in respect of payments of
principal or interest on all loans or mandatory prepayments thereof, and (ii)
commitment or other fees, yield protection and indemnity amounts, enforcement
expenses or other amounts on or with respect thereto, and (b) any amendments,
modifications, deferrals, renewals, extensions, substitutions, future advances
or increases of any monetary obligations described in clause (a) above, or
debentures, notes or evidences of indebtedness heretofore or hereafter issued in
evidence of or in exchange for such indebtedness or payment obligations;
provided, however, that the aggregate amount of Senior Indebtedness shall be
limited to $20,000,000 principal amount of Senior Indebtedness, plus accrued
interest thereon, plus reasonable attorneys fees incurred in connection with the
Senior Indebtedness. Nothing herein shall prohibit Senior Lender from lending
additional amounts in excess of the limits of Senior Indebtedness as set forth
in the previous sentence. Any such lending of amounts in excess of the limit of
Senior Indebtedness set forth above shall not cause any amounts otherwise
qualifying as Senior Indebtedness up to the limit set forth above not to be
classified as Senior Indebtedness.
"Senior Lender" means Greyrock Capital, a Division of
NationsCredit Commercial Corporation and any subsequent holder of Senior
Indebtedness.
"Subordinated Indebtedness" means (a) all monetary
obligations, whether now existing or hereafter arising, under (i) the Series
1999 Notes and (ii) any guaranties issued by any Obligor in favor of the holders
of any Series 1999 Notes, as the foregoing may from time to time be in effect,
including, without limitation, (A) obligations in respect of payments of
principal or interest thereon or mandatory prepayments thereof and including any
principal and interest payable with respect to any offer to purchase any Series
1999 Notes, and (B) commitment or
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<PAGE> 28
other fees, yield protection and indemnity amounts, enforcement expenses or
other amounts on or with respect thereto, and (b) any amendments, modifications,
deferrals, renewals, extensions, substitutions, future advances or increases of
any monetary obligations described in clause (a) above, or debentures, notes or
evidences of indebtedness heretofore or hereafter issued in evidence of or in
exchange for such indebtedness or payment obligations.
"Subsidiary" means with respect to any Person (the "Parent"),
any corporation, association or other business entity of which securities or
other ownership interests representing more than 50% of the ordinary voting
power are, at the time as of which any determination is being made, owned or
controlled by the Parent or one or more subsidiaries of the Parent or by the
parent and one or more subsidiaries of the Parent.
"Subsidiary Guarantors" means SubMicron Systems, Inc. and
SubMicron Wet Process Stations, Inc.
"Trade Payables" means with respect to any Person, accounts
payable and other similar accrued current liabilities in respect of obligations
or indebtedness to trade creditors created, assumed or guaranteed by such Person
or any of its Subsidiaries in the ordinary course of business in connection with
the obtaining of property or services.
13. Board Representation.
In the event that the Representative (as defined below) is not
otherwise entitled to designate two individuals as nominees for election to the
Company's Board of Directors or does not otherwise have two designees on the
Board of Directors, then so long as The KB Mezzanine Fund II, L.P. ("KB") and
Celerity Silicon, L.L.C. ("Celerity") together own at least $3,500,000 in
aggregate principal amount of the Series 1999 Notes, the Board of Directors will
elect as directors of the Company of such class as the Company may determine two
individuals (the "Nominees") designated by the Representative for a minimum term
of one year, consistent with the staggered board requirements of the Company's
Certificate of Incorporation. Upon the expiration of the term of either such
Nominee, if KB and Celerity continue to own at least $3,500,000 in aggregate
principal amount of the Series 1999 Notes, the Company will, at the request of
the Representative, nominate such Nominee or another nominee designated by the
Representative, for reelection as a director of the Company. The foregoing
obligations of the Company are subject to the Nominees agreeing, prior to
service on the Board, that each such Nominee will resign as a director effective
on the date that at least $3,500,000 in aggregate principal amount of the Series
1999 Notes is not owned by KB and Celerity. For purposes of this Section 13, the
term "Representative" shall mean a person designated by KB and Celerity.
14. No Voting Rights.
Nothing contained in this Series 1999 Note shall be construed
as conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a stockholder of the Company, unless
and to the extent converted in accordance with the terms of Section 2 hereof.
15. Non-Waiver.
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<PAGE> 29
No course of dealing between the Company and the Holder of
this Note or any delay or failure on the part of the Holder hereof in exercising
any rights hereunder shall operate as a waiver of any rights of any holder
hereof, except to the extent expressly waived in writing by the Holder hereof.
16. Governing Law.
This Note shall be construed in accordance with and governed
by the internal laws of the State of New York.
17. Successors and Assigns.
All of the covenants, promises and agreements in this Note
shall bind the Company's successors and assigns, whether so expressed or not.
18. Headings.
The headings of the sections and paragraphs of this Note are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
IN WITNESS WHEREOF, the Company has caused this Note to be
signed in its name by a duly authorized officer and to be dated as of the day
and year first above written.
SUBMICRON SYSTEMS CORPORATION
Dated:___________________ By:________________________________________
Title:_____________________________________
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<PAGE> 30
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent
may substitute another to act for him.
Date: _____________ Your Signature:__________
(Sign exactly as your name appears on the front of this Note)
Signature Guarantee:
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<PAGE> 1
EXHIBIT 10.12A
AMENDMENT TO LOAN DOCUMENTS
BORROWER: SUBMICRON SYSTEMS, INC.
ADDRESS: 6330 HEDGEWOOD DRIVE
ALLENTOWN, PENNSYLVANIA 18106
BORROWER: SUBMICRON WET PROCESS STATIONS, INC.
ADDRESS: 3381 EDWARDS AVENUE
SANTA CLARA, CALIFORNIA 95054
DATE: DECEMBER 2, 1998
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK
CAPITAL, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION (formerly Greyrock
Business Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 950,
Los Angeles, CA 90024 and the borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between
them, dated November 25, 1997 (the "Loan Agreement"), as follows. (This
Amendment, the Loan Agreement, any prior written amendments to said agreements
signed by Greyrock and the Borrower, and all other written documents and
agreements between Greyrock and the Borrower are referred to herein collectively
as the "Loan Documents". Capitalized terms used but not defined in this
Amendment, shall have the meanings set forth in the Loan Agreement.)
1. CREDIT LIMIT. Section 1(1) of the Schedule to the Loan Agreement,
which presently reads as follows:
"1. Credit Limit (Section 1.1). An amount not to exceed the
lesser of (1) or (2) below:
"(1) $15,000,000 at any one time outstanding; or
"(2) an amount equal to
"(i) 80% of the amount of Borrower's
Eligible Receivables (as defined in Section
8 above), plus
"(ii) the lesser of 10% of the Value of
Borrower's Eligible Inventory (as defined in
Section 8 above) or $2,000,000. "Value", as
used herein, means the lower of cost or
wholesale market value.
"Loans will be made separately to each Borrower based on the
Collateral of each Borrower."
is amended to read as follows:
"1. Credit Limit (Section 1.1). An amount not to exceed the
lesser of (1) or (2) below:
"(1) $10,000,000 at any one time outstanding; or
"(2) an amount equal to
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<PAGE> 2
GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS
"(i) 80% of the amount of Borrower's
Eligible Receivables (as defined in Section
8 above) (the `Receivable Loans'), plus
"(ii) the lesser of the following (the
`Inventory Loans'), 10% of the Value of
Borrower's Eligible Inventory (as defined in
Section 8 above) or $2,000,000, plus
"(iii) $2,000,000 (the `Overadvance Loans').
"Receivable Loans and Inventory Loans will be made separately
to each Borrower based on the Collateral of each Borrower.
`Value', as used above, means the lower of cost or wholesale
market value. On September 30, 1999 all Overadvance Loans
shall be due and payable, and thereafter no further
Overadvance Loans will be made. The making of Overadvance
Loans shall be a matter of Greyrock's sole and absolute
discretion."
2. EXTENSION. Section 4 of the Schedule is amended in its entirety to
read as follows:
"4. Maturity Date (Section 6.1): January 1, 2000, subject to
automatic renewal as provided in Section 6.1 above, and early
termination as provided in Section 6.2 above.
3. CONDITIONS. Notwithstanding any execution and delivery of this
Agreement by Greyrock and Borrower, it shall not be deemed effective unless and
until the following conditions have been satisfied on or before December 9,
1998, and Borrower shall provide Greyrock with evidence satisfactory to Greyrock
confirming the same by said date:
(a) The Borrower shall receive cash in an amount not less than
$4,000,000 in consideration for the issuance by Borrower of its equity and/or
subordinated debt securities on or after the date hereof.
(b) The Borrower shall enter into written agreements with The
KB Mezzanine Fund II, L.P. ("KB") and Celerity Silicon, L.L.C. ("Celerity")
providing for KB and Celerity to agree to accept equity and/or subordinated debt
securities in lieu of cash interest payments which are due and payable with
respect to the Parent's 12% Senior Subordinated Notes due 2002 (the "12% Notes")
from July 2, 1998 through September 30, 1999.
(c) The Borrower shall enter into written agreements with
holders of Parent's 8% Convertible Subordinated Notes due 2002 (the 8% Notes"),
which shall agreements shall provide that (i) at least 80% of the aggregate
interest due with respect to the 8% Notes from October 1, 1998 through September
30, 1999 shall be payable in the form of subordinated debt securities and
warrants in lieu of cash interest payments, and (ii) at least 80% of each
quarterly interest payment due with respect to the 8% Notes from February 1,
1999 through September 30, 1999 shall be payable in the form of subordinated
debt securities and warrants in lieu of cash interest payments.
4. FEE. In consideration for Greyrock entering into this Amendment, the
Borrower shall concurrently pay Greyrock a fee in the amount of $100,000,
payable in 12 consecutive equal monthly installments commencing January 1, 1999.
Said fee shall be non-refundable and in addition to all interest and other fees
payable to Greyrock under the Loan Documents. Greyrock is authorized to charge
said fee to Borrower's loan account.
5. REPRESENTATIONS TRUE. Borrower represents and warrants to Greyrock
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
-2-
<PAGE> 3
GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS
6. CONSENT TO ISSUANCE OF SUBORDINATED DEBT. Greyrock hereby consents
to (a) the issuance by Parent of its Series B 12% Senior Subordinated Notes due
February 1, 2002 (the "Series B Notes"), including without limitation the
issuances contemplated by Section 3 hereof, and pursuant to the Security
Agreement dated November 26, 1997, as amended, the Patent Security Agreement
dated November 26, 1997, as amended, and the Continuing Guaranty dated November
26, 1997, as amended, each relating to the 12% Notes and, as amended, to the 12%
Notes and the Series B Notes, in the forms previously provided to Greyrock.
7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the
other Loan Documents set forth in full all of the representations and agreements
of the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
Borrower: GBC:
Submicron Systems, Inc. Greyrock Business Credit,
a Division of NationsCredit
Commercial Corporation
By_______________________________ By_______________________________
President or Vice President
Title____________________________
Borrower:
SUBMICRON WET PROCESS STATIONS, INC.
By_______________________________
President or Vice President
-3-
<PAGE> 4
GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the Continuing Guarantees of the
undersigned, all of which are hereby ratified and affirmed. This Consent may be
executed in counterparts. The signatures of the undersigned shall be fully
effective even if other persons named below fail to sign this Consent.
Submicron Systems Corporation
By_______________________________
Title_____________________________
-4-
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
SubMicron Systems, Inc., a Pennsylvania Corporation
SubMicron Wet Process Stations, Inc., a California Corporation d/b/a Universal
Plastics
45
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-71900, 33-91986, 333-4514, and 333-69695 and Form S-3 Nos.
33-64500 and 333-4516) of SubMicron Systems Corporation of our report dated
March 31, 1999, with respect to the consolidated financial statements and
schedule of SubMicron Systems Corporation included in this Annual Report (Form
10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1999
46
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<PP&E> 20,254
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<BONDS> 37,717
0
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<OTHER-SE> (29,172)
<TOTAL-LIABILITY-AND-EQUITY> 30,737
<SALES> 42,205
<TOTAL-REVENUES> 42,205
<CGS> 38,697
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<INCOME-PRETAX> (29,131)
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