<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed Pursuant to Rule 424(a)
Registration No. 333-22821
SUBJECT TO COMPLETION, DATED MARCH 5, 1997
PROSPECTUS
- ----------
3,000,000 SHARES
[LOGO OF IPEC]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company. The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol IPEC. On March 4, 1997, the last reported sale price for the
Common Stock was $25.63 per share. See "Price Range of Common Stock."
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $ $ $
- -------------------------------------------------------------------------------
Total (3)............. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $450,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
, 1997
<PAGE>
CMP REDUCES WAFER DEFECTS AND IMPROVES YIELDS
[Microphotograph of a Pentium chip produced without CMP]
SEMICONDUCTOR DEVICES PRODUCED WITHOUT CMP
HAVE TOPOGRAPHIC VARIATIONS THAT CAN LEAD TO WAFER DEFECTS
THESE MICROPHOTOGRAPHS DEMONSTRATE THE DIFFERENCE BETWEEN
A PENTIUM(TM) CHIP MANUFACTURED WITHOUT THE USE OF
CHEMICAL MECHANICAL PLANARIZATION (CMP) (TOP) AND WITH THE
USE OF CMP (BOTTOM). IN THE TOP PHOTOGRAPH, DEPOSITION AND
ETCHING PROCESSES HAVE CREATED AN UNEVEN TOPOGRAPHY ON THE
WAFER SURFACE. AS THE BOTTOM PHOTOGRAPH SHOWS, THE
COMPANY'S CMP EQUIPMENT FLATTENS OXIDE AND METAL LAYERS
DURING THE PRODUCTION OF ADVANCED SEMICONDUCTORS.
SUBSEQUENT PHOTOLITHOGRAPHY STEPS ARE ENHANCED
SUBSTANTIALLY, THEREBY REDUCING DEFECTS AND IMPROVING
YIELDS PER WAFER.
THE USE OF CMP ENABLES MORE PRECISE IMPRINTING OF MULTIPLE
LAYER CIRCUIT DIAGRAMS AND REDUCES DEFECTS
[Microphotograph of a Pentium chip produced with CMP]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock of
the Company is quoted on the Nasdaq National Market and reports, proxy
statements and other information concerning the Company may also be inspected
at the offices of the National Association of Securities Dealers, 1735 K
Street, N.W., Washington, D.C. 20006.
Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits
thereto filed with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). For further information pertaining to the Company and
the shares, reference is made to the Registration Statement and the exhibits
thereto, which may be inspected without charge at, and copies thereof may be
obtained at prescribed rates from, the office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company with
the Commission (File No. 0-20470) are incorporated herein by reference: (1)
Annual Report on Form 10-K/A-1 for the year ended June 30, 1996, including
information from the Company's Proxy Statement incorporated therein; (2)
Quarterly Report on Form 10-Q/A-1 for the quarter ended September 30, 1996
(3) Quarterly Report on Form 10-Q for the quarter ended December 31, 1996 and
(4) Current Report on Form 8-K filed on December 30, 1996.
All documents filed by the Company pursuant to Section 13 (a), 13 (c), 14,
or 15 (d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Common Stock hereunder shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of filing of such reports or documents. The Company will provide
without charge to each person to whom a copy of this Prospectus is delivered,
a copy of any and all of such documents (exclusive of exhibits unless such
exhibits are specifically incorporated by reference herein upon written or
oral request to Investor Relations at the Company's offices at 4717 East
Hilton Avenue, Phoenix, Arizona 85034 (telephone number (602) 517-7200).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
----------------
IPEC, IPEC Westech, Avanti, AvantGaard and Athens are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. This Prospectus contains forward-
looking statements that involve risks and uncertainties. The Company's actual
future results could differ materially from those projected in the forward-
looking statements. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
IPEC is the leading supplier of chemical mechanical planarization ("CMP")
systems used in the manufacture of semiconductors. CMP combines an abrasive
slurry and mechanical pressure to flatten the surface of a silicon wafer after
each layer of conducting metal or insulating oxide is deposited on the wafer.
CMP creates a flatter surface, which increases the precision with which
photolithography can imprint multiple layers of circuit diagrams and reduces
wafer defects in the production of advanced semiconductors. The Company
believes that CMP is increasingly necessary for semiconductor manufacturers to
achieve adequate yields and to increase revenue per wafer as advanced
semiconductors are designed with three or more metal layers and line widths at
or below 0.5 micron. IPEC's CMP systems are used to manufacture advanced
microprocessors such as Intel's Pentium, Pentium Pro and related MMX
microprocessors and Motorola's Power PC, as well as advanced memory products
such as DRAMs produced by IBM, Micron and Siemens.
The growth of the CMP market is driven by the demand for continually more
complex, higher performance integrated circuits ("ICs") at reduced cost per
function. The average of estimates by Dataquest and VLSI Research indicate that
the CMP market was approximately $260 million in calendar 1996 and grew 35%
from calendar 1995 to calendar 1996, despite an industry-wide slowdown in the
second half of calendar 1996. According to VLSI Research, the CMP market is
projected to generate over $1 billion of revenue in calendar 2001, representing
a compound annual growth rate of approximately 30% per year.
The Company currently manufactures three wafer planarization systems: the
AvantGaard 676, the Avanti 472 and the Avanti 372M. The Company's CMP systems
are configured to match varying customer requirements and offer different
throughput levels and ease of use. The AvantGaard 676, introduced to the open
market in April 1996, is a four head, one wafer at a time, metal and oxide
planarization system that uses an orbital polishing motion. This high-
throughput system is capable of processing approximately 40 wafers per hour and
offers one of the industry's smallest footprints.
IPEC's strategy is to build on its existing leadership position in the CMP
market, to reduce the cost of ownership for its CMP equipment and to enhance
customer satisfaction. Through December 31, 1996, the Company had sold
approximately 670 CMP systems to more than 65 semiconductor manufacturers. The
Company believes that 11 of these manufacturers use IPEC CMP systems for volume
production of advanced ICs. In fiscal 1996 and 1995, sales of the Company's CMP
stand-alone polishing systems accounted for approximately 84% and 82%,
respectively, of the Company's total revenue. IPEC has shipped CMP systems to
the following customers: AMD, Cypress Semiconductor, Fujitsu, Hitachi, Hyundai,
IBM, Intel, LSI Logic, Micron, Motorola, NEC, Samsung, SGS-Thomson, Siemens,
Texas Instruments and TSMC.
During the second quarter of fiscal 1997, the Company announced its strategic
decision to focus its resources on manufacturing of CMP and CMP-related
equipment. As a result, the Company adopted a plan for the disposition of its
subsidiary, IPEC Clean (formerly Athens Corp, acquired in November 1994), by
the end of calendar 1997. IPEC Clean provides chemical reprocessing and
distribution systems and stand-alone post-CMP wafer cleaning systems. Financial
data from the time of acquisition through the second quarter of fiscal 1997
have been restated to reflect the discontinuation of IPEC Clean.
The Company is a Delaware corporation with its headquarters at 911 Bern
Court, San Jose, California 95112, and its telephone number at that location is
(408) 436-2170. Unless the context otherwise requires, the "Company" and "IPEC"
refer to Integrated Process Equipment Corp. and its predecessors and
subsidiaries.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered......................... 3,000,000 shares
Common Stock to be outstanding after the of- 19,247,661 shares (1)
fering......................................
Use of proceeds.............................. For working capital and other
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol................ IPEC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------------------------- ------------------
1992 1993 1994(2) 1995 1996(3) 1995 1996
------- ------- ------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA(4):
Revenue................ $ 259 $ 1,438 $31,158 $75,220 $148,690 $ 66,974 $ 65,069
Gross margin........... 259 495 8,420 33,621 63,629 29,690 25,546
Purchased research and
development........... -- -- 1,107 -- 36,961 36,961 --
Program discontinuance
charge................ -- -- -- -- -- -- 17,601
Operating income
(loss)................ (994) (2,332) (4,543) 11,153 (15,862) (24,806) (17,122)
Income (loss) from
continuing operations
before income taxes... (1,001) (2,599) (9,730) 10,670 (15,762) (23,715) (17,833)
Net income (loss) from
continuing operations. (1,001) (2,599) (8,900) 9,956 (9,363) (14,267) (11,684)
Net loss from discon-
tinued operations..... -- -- -- (9,357) (1,294) (1,167) (28,564)
Net income (loss)...... (1,001) (2,599) (8,900) 599 (10,657) (15,434) (40,248)
Net income (loss) from
continuing operations
per share of Common
Stock................. $ (1.96) $ (2.12) $ (3.26) $ .97 $ (0.69) $ (1.02) $ (0.80)
Net loss from
discontinued
operations per share
of Common Stock....... -- -- -- $ (0.95) $ (0.09) $ (0.08) $ (1.92)
Net income (loss) per
share of Common Stock. $ (1.96) $ (2.12) $ (3.26) $ 0.02 $ (0.78) $ (1.10) $ (2.72)
Weighted average shares
of Common Stock
outstanding(5)........ 530 1,243 2,763 9,865 14,434 14,310 14,851
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(4):
Cash and cash equivalents............................. $ 36,953 $ 95,164
Working capital....................................... 76,031 134,242
Total assets.......................................... 176,474 234,685
Current portion of long-term debt..................... 2,219 2,219
Long-term debt, less current portion.................. 17,860 3,860
Total stockholders' equity............................ 114,109 186,320
</TABLE>
- -------------------
(1) Based on shares outstanding on December 31, 1996. Includes 1,283,961 shares
of Common Stock issued upon the conversion of all outstanding Series C
Preferred Stock on February 25, 1997. Excludes 752,358 shares of Common
Stock issuable upon the conversion of Series B Preferred Stock. Excludes
3,827,278 shares of Common Stock issuable upon exercise of outstanding
options and warrants as of December 31, 1996 at a weighted average exercise
price of $14.37 per share. As of February 28, 1997, options or warrants to
purchase an additional 30,000 shares of Common Stock were outstanding. See
"Capitalization."
(2) Includes results of operations of IPEC Planar Phoenix after its acquisition
by the Company in September 1993.
(3) Includes results of operations of IPEC Planar Portland and IPEC Precision
after their acquisition by the Company in October 1995 and December 1995,
respectively.
(4) Financial data for fiscal 1995 and 1996 and the six months ended December
31, 1995 and 1996 have been restated to reflect the discontinuation of IPEC
Clean during the second quarter of fiscal 1997.
(5) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(6) As adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $25.63 per share and the
receipt of the estimated net proceeds therefrom, as well as the repayment
of long-term debt of $12.0 million in January 1997. See "Use of Proceeds"
and "Capitalization."
---------------
Except as otherwise noted, all information in this Prospectus (i) with
respect to financial data for fiscal 1995 and 1996 and the six months ended
December 31, 1995 and 1996 have been restated to reflect the discontinuation of
IPEC Clean during the second quarter of fiscal 1997, (ii) with respect to
Common Stock includes Class A Common Stock unless otherwise indicated or the
context otherwise requires and (iii) assumes no exercise of the Underwriters'
over-allotment option.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information contained
in this Prospectus before purchasing the shares of Common Stock offered
hereby.
The Company's Limited Operating History Has Involved Annual and Quarterly
Losses. Prior to the Company's acquisition of IPEC Planar Phoenix in fiscal
1994, the Company did not have significant revenue. The Company had a net loss
in fiscal 1994 and fiscal 1996 of $8.9 million and $10.7 million,
respectively. The Company had a net loss of $3.4 million in the first quarter
of fiscal 1997. The Company had a net loss of approximately $36.9 million in
the second quarter of fiscal 1997, due in part to one-time charges of
approximately $42.6 million in the quarter due to discontinuation of the
business of IPEC Clean and of a research and development program. As a result,
the Company will have a net loss for fiscal 1997. Operating results for future
periods are subject to numerous uncertainties, and there can be no assurance
that the Company will be profitable in future periods.
Operating Results Are Subject to Quarterly Fluctuations for Varied
Reasons. The Company's operating results are subject to quarterly fluctuations
due to a variety of factors, including industry-wide changes in the demand for
semiconductors or for semiconductor production equipment; the timing of
significant shipments accelerations, delays, cancellations or postponement of
orders; acceptance of the Company's products; the gain or loss of significant
customers; competitive pressures; availability and costs of components from
the Company's suppliers; the timing of product announcements and introductions
by the Company, its customers or its competitors; the timing and structure of
acquisitions and dispositions or spin-offs; changes in the mix of products
sold; the level of international sales, which historically have had lower
margins than domestic sales; delayed or canceled construction of wafer
fabrication facilities by customers; research and development expenses
associated with new product introductions; market acceptance of new or
enhanced versions of the Company's and its customers' products; reductions in
personnel and the sufficiency of capital resources to support operations at
current levels. The Company cannot assure that it will be able to anticipate
or respond timely to changes in any of the factors listed above.
The Company has experienced adverse effects from some of these factors in
the past and may experience them in the future. For example, the Company's
results in fiscal 1994 were adversely impacted by an engineering redesign of
its 372M CMP product. In the second quarters of fiscal 1995 and 1996, the
Company had losses due to nonrecurring charges associated with the IPEC Clean,
IPEC Planar Portland and IPEC Precision acquisitions. The Company had a loss
in the first quarter of fiscal 1997, primarily because IPEC Clean and IPEC
Precision manufactured products and incurred operating expenses based on sales
plans which were not achieved, and to a lesser degree due to increased cost of
goods sold resulting from the issuance of warrants to a major customer as
described below. The Company incurred a net loss in the second quarter of
fiscal 1997, primarily due to a $25.0 million charge for estimated losses on
disposal of IPEC Clean and a $17.6 million charge for asset write-downs due to
discontinuation of the Company's Avanti 672 product development effort. The
semiconductor equipment market experienced an industry-wide slowdown of
semiconductor capital equipment shipments in the second half of calendar 1996,
which adversely affected sales of the Company's CMP polishing equipment. The
Company's revenue from sales of CMP equipment in each of the first and second
quarters of fiscal 1997 was lower than such revenue achieved in the fourth
quarter of fiscal 1996. In addition, 19% of the Company's revenue in the first
half of fiscal 1997 resulted from acceleration by a major customer of orders
in exchange for which the Company committed to issue warrants to purchase the
Company's Common Stock to the customer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A")--Overview."
The Company expects that fiscal 1997 revenue will be below fiscal 1996
revenue. The Company cannot assure that it will be profitable in future
quarters.
6
<PAGE>
Results of operations in any period should not be considered indicative of
the results to be expected for future periods. Fluctuations in operating
results may also result in fluctuations in the price of the Company's Common
Stock.
The Timing of Significant Shipments and Orders Can Impact Quarterly
Results. The Company derives most of its revenue from the sale of products in
a price range from $250,000 to $1.4 million per unit and the sale of a
clustered system can be priced much higher. As a result, the timing of
individual shipments can have a significant impact on the Company's results of
operations for a particular period. The Company has previously experienced
order and delivery delays and cancellations which caused the Company to miss
its quarterly revenue and profit projections, including during the first
quarter of fiscal 1997, and there can be no assurance that the Company can
avoid such order and delivery delays in the future. During the first quarter
of fiscal 1997, a significant customer agreed to accelerate certain orders
into the first three quarters of fiscal 1997. While the customer has
acknowledged receipt of these machines, they have not all been delivered to
the customer's facilities and placed into service, which could adversely
affect the Company's ability to obtain orders from this customer in the fourth
quarter of fiscal 1997 and in fiscal 1998 to replace accelerated orders. A
significant portion of the Company's operating expenses are relatively fixed
in nature and planned expenditures are based in part on anticipated orders.
Ongoing expenditures for product development and engineering make it difficult
to reduce expenses in a particular quarter if the Company's sales goals for
the quarter are not met. Any inability to reduce spending quickly enough to
mitigate any revenue shortfall would magnify the adverse impact of the revenue
shortfall on the Company's results of operations.
The Company Depends on a Small Number of Major Customers. A small number of
customers account for a significant percentage of the Company's sales volume
and revenue. In fiscal 1995, Intel, IBM and Motorola represented 16%, 24% and
16%, respectively, of the Company's revenue. In fiscal 1996, Intel and IBM
represented 35% and 11% of the Company's revenue, respectively. In the first
six months of fiscal 1997, Intel represented 45% of the Company's revenue. The
Company anticipates that its revenue will continue to depend on a limited
number of major customers, although the companies considered to be major
customers and the percentage of the Company's revenue represented by each
major customer may vary from quarter to quarter. Several of the Company's
major customers, including Intel, must determine shortly whether to adopt the
Company's new AvantGaard 676 or to adopt comparable high-throughput products
from the Company's competitors. Any such determination by a major customer,
particularly Intel, would have a material adverse effect on the Company's
business, financial condition and results of operations. The loss of a major
customer, any material reduction in orders by such customers, including
reductions due to market or competitive conditions or the determination of any
such customer not to adopt the Company's next generation products, would have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success depends in part upon its
ability to obtain orders from new customers, as well as the financial
condition of its customers and the general economy.
The Company Must Develop New Products Due to Technological Change. The
Company derives virtually all of its revenue from sales of CMP equipment and
related products by IPEC Planar. Semiconductor manufacturing equipment and
processes are subject to rapid technological changes and product obsolescence.
Sales of certain of the Company's products generally depend on new facility
construction projects and facility upgrades. The Company's strategy depends in
part on developing and introducing products which lower the semiconductor
manufacturer's cost of ownership, which involves a number of factors,
including product acquisition and operating expenses, throughput, reliability,
footprint and wafer yields. The Company believes that its future success will
depend in part upon its ability to develop and enhance its existing products
and develop new products to meet such anticipated technological changes.
The Company Depends on Broader Industry Acceptance of CMP and the AvantGaard
676. The CMP process has not yet been broadly adopted by semiconductor
manufacturers for volume production. Most semiconductor manufacturers who have
CMP equipment use it only for pilot line production, and few semiconductor
manufacturers produce commercial quantities of integrated circuits using CMP
machines. The
7
<PAGE>
Company believes that only 11 of the Company's more than 65 customers
presently use the Company's CMP systems for volume production of semiconductor
devices. To date, the Company's products have been used primarily to
manufacture advanced semiconductor logic and memory devices. While industry
analysts have projected significant future growth for the CMP polisher market,
these projections depend on the analyst's assumptions, and variations in
industry demand can occur during the several years included in the
projections. The Company cannot assure that projected industry growth will
occur. No assurance can be given as to the willingness of semiconductor
manufacturers to adopt CMP processes and the determination of such
manufacturers not to do so would have a material adverse effect on the
Company's business, financial condition and results of operation.
The Company's future results depend on sales of the AvantGaard 676 and
Avanti 472 CMP wafer polishing systems. The Avanti 372M CMP wafer polishing
system is based on older technology and is sold primarily to one customer,
with shipments expected only through calendar 1999. Because shipments of the
Avanti 372M are limited and the Avanti 472 does not offer the same throughput
or footprint as the AvantGaard 676 or other high-throughput CMP systems, the
Company expects its reliance on sales of the AvantGaard 676 to increase in the
future. As of December 31, 1996, the AvantGaard 676 had been sold to nine
customers. The AvantGaard 676 was initially designed solely to planarize metal
layers and has not been widely used for this purpose in volume production. The
Company's oxide process for the AvantGaard 676 was recently developed. The
Company believes that the oxide process is being used by a very limited number
of customers. If commercial use does not confirm the utility of the AvantGaard
676 for both oxide and metal processes, or if customers do not broadly adopt
the AvantGaard 676, the Company's business, financial condition and results of
operations would be materially and adversely affected.
The Company's future results also depend on sales of IPEC Precision's
products, which are currently oriented towards semiconductor wafer
manufacturers and have not been adopted by these or other semiconductor
industry customers. There can be no assurance that customers will accept these
products, or that these products can be sold profitably or in volume.
Product Development Difficulties Could Adversely Affect the Company's
Results of Operations. The Company's current product development efforts
include the AvantGaard 776, which is being designed to integrate CMP,
metrology and wafer cleaning, and the development of systems for slurry
reprocessing, plasma-assisted chemical etch and thin film thickness
measurement. Semiconductor equipment companies often experience delays in
completing advanced products. In the past, the Company has experienced delays
in developing new CMP tools and processes and the plasma-assisted chemical
etch system. The Company cannot assure that any product in development will be
completed as scheduled or that completed products will be commercially
adopted. IPEC Precision may require a large amount of capital in order to
commercialize its current products and products under development. If any of
the Company's products currently under development are not commercialized in a
timely manner, the Company could be required to write off inventory and other
assets related to the development project, and the Company could lose
customers and revenue. For example, the Company incurred a $17.6 million asset
write-off in the second quarter of fiscal 1997 for discontinuance of the
Avanti 672 product development program. If the AvantGaard 776 is not
commercialized in a timely manner, such delay would have a material adverse
effect on the Company's business, financial condition and results of
operations. To the extent products developed by the Company are based upon
anticipated changes in semiconductor production technologies, sales for such
products may be adversely affected if other technology becomes accepted in the
industry.
The Company May be Adversely Affected by the Intensely Competitive Market in
Which it Participates. The semiconductor equipment industry is an intensely
competitive market. The Company believes that direct domestic and
international competition in CMP polisher systems and clustered CMP polisher
and cleaning systems is likely to increase substantially. The Company is aware
of a number of companies currently marketing CMP systems that directly compete
with the Company's systems, including Applied Materials, Inc. ("Applied
Materials"), Ebara Corporation, SpeedFam International, Inc. ("SpeedFam") and
Strasbaugh. Competition is increasing significantly in the market for high-
throughput
8
<PAGE>
planarization systems. The Company is aware that other capital equipment
manufacturers not currently involved in the development of CMP systems may
also attempt to enter and develop products for this market or to develop
alternative technologies which may reduce the need for the Company's products.
The trend towards consolidation in the semiconductor equipment industry has
made it increasingly important to have the financial resources necessary to
compete effectively across a broad range of product offerings, to fund
customer service and support on a world-wide basis and to invest in both
product and process research and development. Certain current and potential
competitors, including Applied Materials, have substantially greater financial
resources, name recognition and more extensive engineering, manufacturing,
marketing and customer service and support capabilities than the Company. In
addition, current and potential competitors, including Applied Materials, that
supply a broader range of semiconductor capital equipment may have better
relationships with semiconductor manufacturers, including the Company's
customers. The Company expects its current competitors to continue to improve
the design and performance of their existing products and processes, and to
introduce new products and processes with improved price and performance
characteristics. New product introductions or product announcements by the
Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products and could adversely affect the
acceptance of new products. Moreover, increased competitive pressure could
lead to intensified price based competition, which could have a materially
adverse effect on the Company's business, financial condition and results of
operations.
The Company is Subject to Risks Associated with International
Sales. International sales accounted for approximately 28% and 21% of the
Company's revenue in fiscal 1996 and 1995, respectively. International sales
were approximately 36% of revenue in the first six months of fiscal 1997. The
Company's international sales historically have had lower gross margins than
domestic sales since these sales were made through distributors, which
purchase products from the Company at a discount to list price. The Company
expects that international sales will continue to account for a significant
portion of its revenue in future periods. Margins on international sales may
vary in the future depending on the level of sales made through distributors.
International sales are subject to certain inherent risks, including tariffs,
embargoes and other trade barriers, staffing and operating foreign sales and
service operations, managing distributors and collecting accounts receivable.
The Company is also subject to risks associated with regulations relating to
the import and export of high technology products. The export of the Company's
products to certain countries is limited by law. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products in the future will be
implemented by the United States or any other country.
Fluctuations in currency exchange rates could cause the Company's products
to become relatively more expensive to customers in a particular country,
leading to a reduction in sales or profitability in that country. While the
Company's sales are currently denominated only in U.S. dollars, future
international activity may result in foreign currency denominated sales. Gains
and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's results of operations.
The Company's Strategy Relies on Increased Penetration of the Asian
Market. The Company believes that its future success will depend in part upon
continued acceptance of its products by Asian semiconductor manufacturers.
This market segment is large, represents a substantial percentage of the
worldwide semiconductor manufacturing capacity, and is difficult for foreign
companies to penetrate. Asian manufacturers may develop alternatives to CMP,
or may enhance existing manufacturing techniques such as spin-on glass and
deposited glass, to achieve acceptable yields for DRAMs and other integrated
circuits involving three or more metal layers and line widths at or below 0.5
micron. The Company currently sells its products in Asian countries through
sales representatives and distributors. If the Company determines to develop a
direct presence in these markets, particularly Japan, such decision would
require the allocation of substantial management and financial resources, may
adversely affect the Company's relationship with its current distributors, and
would increase a number of risks related to international sales as described
above.
9
<PAGE>
The Semiconductor Industry Is Cyclical, Causing Fluctuations in the
Company's Operating Results. The Company's business depends upon capital
expenditures by manufacturers of semiconductor devices, primarily for the
opening of new or expansion of existing fabrication facilities which, in turn,
depends upon the current and anticipated market demand for semiconductor
devices and products utilizing such devices. The semiconductor industry is
highly cyclical and has experienced significant overall growth in recent
years, which has resulted in growth in the semiconductor capital equipment
industry. However, the semiconductor industry is currently experiencing a
downturn, which could have a severe adverse effect on the industry's demand
for semiconductor processing equipment. In certain instances, industry
downturns have lasted for extended periods of time. There can be no assurance
that past growth in the semiconductor and semiconductor capital equipment
industries, or the resulting growth in the Company's business, can be
sustained in the future or that the recent downturn in the market will not
continue.
The Company's planned operations assume that a significant portion of new
orders will result from demand from semiconductor manufacturers building or
expanding fabrication facilities for advanced multi-level semiconductor
devices with design requirements of 0.5 micron and below, and there can be no
assurance that such demand will exist.
Past Acquisitions Have Adversely Affected Operating Results. The Company's
growth in annual revenues from fiscal 1994 through fiscal 1996 has resulted
not only from expansion of its core CMP business, but also from acquisitions
in fiscal 1994, 1995 and 1996. The Company's expansion through acquisitions
has resulted in significantly higher operating expenses, particularly because
the Company's strategy initially has been to operate each acquired business
independently, resulting in separate marketing, customer support and
administrative functions. The companies acquired had not operated profitably
before their acquisition by IPEC. IPEC Clean, acquired in fiscal 1995, did not
operate profitably and was discontinued by the Company in the second quarter
of fiscal 1997, resulting in a $25 million charge in that quarter. IPEC
Precision has not yet achieved significant revenue from shipments of
production equipment. There can be no assurance that the Company will be able
to integrate or operate profitably any acquired entity.
Future Acquisitions, Dispositions or Joint Development Efforts May Require
Significant Resources and Adversely Affect Results. The Company's strategy is
to obtain additional wafer fabrication technologies and may involve, in part,
acquisitions of products, technologies or businesses from third parties. In
addition, the Company may make acquisitions to obtain additional distribution
capacity in specified geographic markets. An acquisition could absorb
substantial cash resources, require the Company to incur or assume debt
obligations, or involve the issuance of additional Common Stock, which could
dilute the Company's outstanding Common Stock. An acquisition which is
accounted for as a purchase, like the Company's past acquisitions, could
involve significant one-time charges, or could involve the amortization of
goodwill over a number of years, which would adversely affect earnings in
those years. An acquired entity may have unknown liabilities, and its business
may not achieve the results anticipated at the time of the acquisition. An
acquisition or disposition would absorb significant management time and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company may dispose of or spin-off portions of its business which the
Company determines are not complementary to its strategy. The Company plans to
dispose of IPEC Clean by selling or closing down its operations by the end of
calendar 1997. Discussions with potential acquirors are at an early stage, and
there can be no assurance of the terms, if any, of a sale. In the event a sale
cannot be achieved by the end of calendar 1997, the Company plans to shut down
IPEC Clean's operations. The IPEC Clean disposition effort could absorb
significant management time and adversely affect the Company's business,
financial condition and results of operations.
The Company is considering the possibility of entering into joint venture or
research and product development relationships with other companies with
respect to its advanced plasma-assisted etching equipment and metrology
equipment used in the manufacturing of silicon wafers and semiconductor
devices. Such a relationship could include the contribution of the assets of
IPEC Precision to a joint venture with
10
<PAGE>
another company. The Company has not entered into any definitive agreement at
this time. Since no specific structure for a joint venture or other
arrangement has been determined, the Company cannot predict its obligations
under or the financial consequences of such an arrangement. There can be no
assurance that the Company will be able to enter into such an agreement, would
retain a significant interest in the business of IPEC Precision in the event
of such an agreement or would reduce expenses relating to IPEC Precision's
business, or that any such joint venture would be successful.
Acceleration of Product Shipments Due to Issuance of Warrants Has Increased
Revenue and Cost of Goods Sold and May Affect Future Shipments. The Company's
fiscal 1997 operating results will be affected by the Company's exercise of
its right to cause a significant customer to accelerate planned orders and the
issuance to the customer of warrants to purchase IPEC Common Stock. During the
first quarter of fiscal 1997, the customer agreed to accelerate certain orders
into the first three quarters of fiscal 1997. In consideration for the
acceleration, the Company committed to issue, during the first three quarters
of fiscal 1997, warrants to purchase an aggregate minimum of 155,000 shares
and an aggregate maximum of 250,000 shares of Common Stock. Costs associated
with the issuance of warrants to purchase a minimum of 155,000 shares were
incurred in the first quarter of fiscal 1997, resulting in a $657,000 increase
in cost of goods sold. The Company accelerated orders in the second quarter of
fiscal 1997, issuing an additional warrant to purchase 90,000 shares and
recognizing costs associated with 45,000 of these shares, resulting in a
$191,000 increase in cost of goods sold. The Company expects that it will
accelerate additional orders into the third quarter of fiscal 1997, will issue
a warrant to purchase 100,000 shares and will recognize costs associated with
50,000 of these shares, resulting in a $211,000 increase in cost of goods
sold. To the extent orders have been accelerated during the first three
quarters of fiscal 1997, this may reduce shipments anticipated for the fourth
quarter of fiscal 1997 and for fiscal 1998. There can be no assurance that the
Company can obtain replacement orders for shipment in these future periods.
While the customer has acknowledged receipt of these machines, they have not
all been delivered to the customer's facilities and placed into service, which
could adversely affect the Company's ability to obtain replacement orders from
this customer. See "--The Company Depends on a Small Number of Major
Customers."
The Company's Efforts to Market Product Bays Are at an Early Stage. During
fiscal 1996, the Company commenced an effort to market product bays consisting
of the CMP process, CMP tools, metrology, chemical and slurry distribution,
slurry reprocessing, deionized water filtration and additional support
systems. The Company has shipped only two product bays to one customer. The
Company may need access to certain products manufactured by IPEC Clean for
product bays, such as the Exxflow CMP Water Recovery System, chemical
distribution systems and wet chemical reprocessors. Due to the early stage of
efforts to dispose of IPEC Clean, the Company cannot predict whether it will
continue to have access to these products and the inability to do so could
hinder the Company's ability to sell product bays.
The Company Would be Adversely Affected if Suppliers Could Not Deliver Goods
and Services. The Company relies on a limited number of independent
manufacturers to provide certain components in assemblies made to the
Company's specifications and use in the Company's products. In the event that
the Company's subcontractors were to experience financial, operational,
production or quality assurance difficulties that resulted in the reduction or
interruption of supply to the Company, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the Company purchases certain key components from qualified vendors
for which alternative qualified sources are not currently available. Any
prolonged inability to obtain adequate amounts of qualified components would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company Depends on Proprietary Technology, and Protection is Uncertain.
The Company's success depends in significant part on the proprietary nature of
its technology. Patents issued to the Company may not provide the Company with
meaningful advantages and may be challenged. The two initial patents relating
to the Company's single wafer planarization system products are scheduled to
expire in 1997. In 1993, the technology covered by these patents currently
forming the basis of the CMP process and used in the
11
<PAGE>
Company's primary products was licensed on a royalty-free basis to a
competitor. This license was granted pursuant to a settlement arrangement in
which the Company also incurred settlement obligations aggregating $1.4
million, of which $125,000 remained outstanding at December 31, 1996. To the
extent that a competitor of the Company is able to reproduce or otherwise
capitalize on the Company's technology prior to the issuance of a patent, it
may be difficult or impossible for the Company to obtain necessary
intellectual property protection in the United States or other countries where
such competitor conducts its operations. Moreover, the laws of foreign
countries may not protect the Company's intellectual property to the same
extent as do the laws of the United States.
The Company also relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees and other parties. These
agreements may be breached, and the Company may not have adequate remedies for
any such breach. The Company's trade secrets may also become known to or
independently developed by others.
The Company Has Placed Its Technology in Escrow Under a Significant License
Agreement. The Company manufactures the AvantGaard 676 under a license from a
volume manufacturer of advanced microprocessors. The Company has escrowed
technical data sufficient to permit such manufacturer to manufacture the
Company's AvantGaard 676, which may be released from escrow if the Company
does not meet certain criteria regarding product or spare part delivery
schedules to the manufacturer. If the data is released from escrow, the
semiconductor manufacturer could manufacture the AvantGaard 676 or have the
AvantGaard 676 manufactured by others for its use, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. The escrow terminates in October 1998.
The Company is Subject to Infringement Claims. In the future the Company may
receive notice of claims of infringement of other parties' proprietary rights.
If any Company equipment is found to infringe a patent, a court may grant an
injunction to prevent making, selling or using the equipment in the applicable
country. The Company may seek to obtain a license of such third party's
intellectual property rights, which may not be available under reasonable
terms or at all. The Company's application to register the trademark "IPEC"
has been opposed in the U.S. Patent and Trademark Office by Dow Corning
Corporation, which owns the registered trademark "HIPEC." The Company has
filed an answer but cannot predict the outcome due to the early stage of the
proceedings. Expensive and time-consuming litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of
the rights of others and to determine the scope and validity of proprietary
rights of others.
The Company is Exposed to Product Liability and Environmental Regulations.
The nature of the Company's business exposes it to product liability claims,
as well as the risk that harmful substances will escape into the workplace and
the environment and cause damage or injuries. For example, in June 1995 and in
July 1996, acid reprocessors sold by IPEC Clean malfunctioned and allowed
sulfuric acid to escape from the quartz cylinder containers. In these
instances, no acid escaped from the compartment containing the quartz cylinder
and no damage to the manufacturing facility resulted. The Company's products
could malfunction in the future and damage a customer's facilities and harm
its employees. The Company and its customers are subject to stringent federal,
state and local regulations governing the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in their
manufacturing operations. Current or future regulations could require the
Company or its customers to make substantial expenditures for preventive or
remedial action, reduction of chemical exposure or waste treatment or
disposal.
The Company Depends on its Key Personnel. The Company's future success is
dependent upon its ability to attract and retain qualified management,
technical, sales and support personnel and the competition for such personnel
is intense. The loss of certain key people or the Company's inability to
attract and retain new key employees could have a material adverse effect on
the Company's business, financial condition and results of operations. In
particular, the Company believes that its future success is highly dependent
on Sanjeev R. Chitre, its Chief Executive Officer, and Thomas C. McKee, its
President and Chief Operating Officer. During
12
<PAGE>
July and October 1996, the Company effected reductions in its work force to
reduce its expenses and may do so in the future. Repeated layoffs could
adversely affect the retention of employees, and could adversely affect the
Company's ability to hire new personnel in the future. Personnel terminations
at IPEC Precision included technical personnel, who could be difficult to
replace if IPEC Precision successfully markets its products and requires
additional engineering staff to support customers. The Company's announcement
that it intends to discontinue IPEC Clean's operations could adversely affect
retention of IPEC Clean personnel. If key employees depart IPEC Clean, this
could adversely affect IPEC Clean's operations, which in turn could adversely
affect the Company's ability to sell IPEC Clean.
The Company May Need to Raise Capital on Unfavorable Terms. The Company
believes that the net proceeds from the sale of Common Stock offered hereby,
together with its cash and cash equivalents, will be sufficient to support its
operations for at least the next 12 months. Additional new debt or equity
financing may be required in the future to fund the Company's operations.
There can be no assurance that such additional financing will be available
when needed or, if available, will be on satisfactory terms. In order to raise
capital, the Company may issue debt or equity securities senior to the
outstanding Common Stock, and may incur substantial dilution. The failure to
obtain additional financing when needed on satisfactory terms would also
hinder the Company's ability to make continued capital investments.
The Company's Stock Price is Volatile. The Company's Common Stock has
experienced substantial price volatility and such volatility may occur in the
future, particularly as a result of quarter to quarter variations in the
actual or anticipated financial results of the Company or of other companies
in the semiconductor industry, or in the markets served by the Company, or
announcements by the Company or its competitors regarding new product
introductions. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many technology
companies' stocks in particular and that have often been unrelated or
disproportionate to the operating performance of these companies. These
factors may adversely affect the market price of the Common Stock.
Certain Anti-Takeover Provisions May Discourage Change in Control. The
Company's Certificate of Incorporation authorizes the Company's Board of
Directors to issue preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series, without further
vote or action by its stockholders. The voting power held by the Company's
officers and directors may give those individuals substantial influence over
any corporate action submitted to the Company's shareholders. Pursuant to
Delaware corporate law, the approval of the outstanding Preferred Stock may be
required for certain corporate actions. Any series of Preferred Stock which
the Company may issue in the future would participate in these class voting
rights and may have additional independent rights to approve certain actions.
The existence of the Class A Common Stock may make the Company a less
attractive target for a hostile takeover bid or render more difficult or
discourage a merger proposal, an unfriendly tender offer, a proxy contest or
the removal of incumbent management, even if such transactions were favored by
the stockholders of the Company other than the Class A Common stockholders.
The Company is subject to Section 203 of the Delaware General Corporate Law.
The voting power held by officers and directors, outstanding rights to elect
members of the Company's Board of Directors, the voting rights of outstanding
Preferred Stock and Preferred Stock which may be issued in the future, the
Company's stockholder rights plan, the existence of Class A Common Stock and
the application of Delaware General Corporate Law Section 203 could discourage
certain types of transactions involving an actual or potential change in
control of the Company, including transactions in which the holders of Common
stock who are not officers and directors might otherwise receive a premium for
their shares over then current prices, and may limit the ability of such
stockholders to cause or approve transactions which they may deem to be in
their best interests. See "Description of Capital Stock--Anti-Takeover
Effects."
Shares Eligible for Future Sale Could Adversely Affect the Market for the
Company's Common Stock. Other than the shares subject to a lock-up expiring 90
days after effectiveness of the offering made hereby and certain shares of
affiliates subject to volume limitations on resale, substantially all of the
shares of
13
<PAGE>
the Company's Common Stock outstanding or issuable upon exercise of
outstanding options and warrants following this offering will be freely
tradeable. Sales of substantial amounts of Common Stock in the public market
after the offering or the perception that such sales could occur may adversely
affect prevailing market prices of the Common Stock. Upon conversion of all
outstanding Series B-1, B-2 and B-3 Preferred Stock, the Company would have
approximately an additional 752,000 shares of Common Stock outstanding,
approximately 557,000 of which would be "'restricted securities" as defined in
Rule 144 of the Securities Act and approximately 195,000 of which would be
freely tradeable. In connection with this offering, directors, executive
officers and certain stockholders of the Company holding an aggregate of
approximately 1,979,000 shares of Common Stock, including options to purchase
Common Stock and securities convertible into Common Stock within 60 days of
December 31, 1996, have agreed that for 90 days following the date of this
Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any such shares without the prior written consent of Hambrecht & Quist LLC,
on behalf of the Underwriters. In addition, the Company has agreed that it
will not issue securities without the consent of Hambrecht & Quist LLC,
subject to certain exceptions. These lock-up agreements may be waived by
Hambrecht & Quist LLC, on behalf of the Underwriters, at any time as to one or
more such persons, with or without prior notice to the public. See
"Description of Capital Stock--Registration Rights."
DESCRIPTION OF FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
are subject to the "safe harbor" created by those sections. These forward-
looking statements include, but are not limited to, statements concerning the
necessity of CMP; size of the CMP market; size of the wafer fabrication
equipment market; disposition of IPEC Clean; income and revenue; delivery of
products; acceleration of orders; issuance of warrants; dependence on major
customers; industry and customer acceptance of products; product introduction
and development; competition; international sales; strategy; demand from
semiconductor manufacturers; future acquisitions, dispositions or joint
development efforts; marketing of product bays; litigation; gross margin and
expense; and debt or equity financing. These forward-looking statements may be
found in "Prospectus Summary," "Risk Factors," "MD&A" and "Business." Forward-
looking statements not specifically set forth above may also be found in these
and other sections of this Prospectus. The Company's actual future results
could differ materially from those discussed in the forward-looking statements
as a result of certain factors, including those discussed in "Risk Factors"
and elsewhere in this Prospectus.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $72.2 million
($83.1 million if the Underwriters' over-allotment option is exercised in
full), after deducting estimated underwriting discount and commissions and
estimated expenses payable by the Company in connection with this offering.
The Company intends to use approximately $2.0 million of the net proceeds of
this offering to repay existing bank debt. A portion of the net proceeds of
this offering may be used to expand the Company's sales and service operations
in Korea and other Asian countries. The Company intends to use the balance of
the net proceeds from this offering for general corporate purposes, including
working capital and research and development. Pending such uses, the Company
intends to invest the net proceeds in interest-bearing, investment grade
securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol IPEC. The following table sets forth for the periods indicated the high
and low sale price for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995
1st Quarter............................................. $15.000 $ 8.125
2nd Quarter............................................. 18.875 13.250
3rd Quarter............................................. 22.500 13.625
4th Quarter............................................. 38.250 20.000
FISCAL YEAR ENDED JUNE 30, 1996
1st Quarter............................................. $56.500 $31.500
2nd Quarter............................................. 40.250 23.000
3rd Quarter............................................. 27.750 16.750
4th Quarter............................................. 35.000 17.500
FISCAL YEAR ENDING JUNE 30, 1997
1st Quarter............................................. $21.750 $ 9.500
2nd Quarter............................................. 20.750 10.125
3rd Quarter (through March 4, 1997)..................... 28.000 17.250
</TABLE>
On March 4, 1997, the last reported sale price for the Common Stock as
reported on the Nasdaq National Market was $25.63 per share. As of December
31, 1996, there were approximately 233 holders of record of Common Stock. See
"Risk Factors--The Company's Stock Price is Volatile."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. The terms of the Series B Preferred Stock prevent the
Company from paying dividends on the Common Stock unless the Company has paid
all dividends due to the holders of the Series B Preferred Stock. In fiscal
1994 the Company paid cash dividends on its Series A Preferred Stock in the
amount of $41,000. In fiscal 1995, the Company recorded dividends on its
Series B Preferred Stock in the amount of $377,000 and paid dividends on its
Series B Preferred Stock in the amount of $79,000. In fiscal 1996, the Company
recorded dividends on its Series B Preferred Stock in the amount of $579,000
and paid dividends on its Series B Preferred Stock in the amount of $439,000.
The Company's bank line prohibits the payment of dividends on any shares of
any class of the Company's stock, except for payments to holders of Preferred
Stock in an amount not exceeding $600,000 in any fiscal year, without the
consent of the bank. See "Description of Capital Stock--Preferred Stock."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1996 (i) on an actual basis and (ii) as adjusted to give effect to the
sale of 3,000,000 shares of Common Stock offered hereby at an assumed offering
price of $25.63 per share and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion.................. $ 17,860 $ 3,860 (1)
--------- --------
Stockholders' equity:
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 14,442,050 shares issued and
outstanding(2)..................................... 144 174
Class A Common Stock, $0.01 par value, 3,500,000
shares authorized, 521,650 shares issued and
outstanding........................................ 5 5
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized(3)
Series B-1 Preferred Stock, 21,478 shares
authorized, 15,572 shares issued and outstanding. -- --
Series B-2 Preferred Stock, 21,478 shares
authorized, 20,941 shares issued and outstanding. -- --
Series B-3 Preferred Stock, 21,478 shares
authorized, 21,210 shares issued and outstanding. -- --
Series C Preferred Stock, 100,000 shares
authorized, issued and outstanding(4)............ 1 1
Additional paid-in capital.......................... 178,118 250,299
Accumulated deficit................................. (64,190) (64,190)
Foreign currency translation adjustment............. 31 31
--------- --------
Total stockholders' equity...................... 114,109 186,320
--------- --------
Total capitalization.......................... $ 131,969 $190,180
========= ========
</TABLE>
- ---------------------
(1) Reflects the repayment of $12.0 million in January 1997 and $2.0 million
from the proceeds of this offering.
(2) Excludes 1,283,961 shares of Common Stock issued upon conversion of all
outstanding shares of Series C Preferred Stock on February 25, 1997.
Excludes 752,358 shares of Common Stock issuable upon the conversion of
Series B Preferred Stock. Excludes 3,827,278 shares of Common Stock
issuable upon exercise of outstanding options and warrants as of
December 31, 1996 at a weighted average exercise price of $14.37 per
share. As of February 28, 1997, options or warrants to purchase an
additional 30,000 shares of Common Stock were outstanding.
(3) Excludes 50,000 shares of Series D Preferred Stock authorized after
December 31, 1996. See "Description of Capital Stock."
(4) All shares of Series C Preferred Stock converted into Common Stock on
February 25, 1997.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of June 30, 1996 and for the
year then ended are derived from the consolidated financial statements of the
Company that have been audited by KPMG Peat Marwick LLP, independent auditors,
which are included elsewhere in this Prospectus. The selected consolidated
financial data as of June 30, 1995 and for each of the two years in the period
ended June 30, 1995, are derived from the consolidated financial statements of
the Company that have been audited by Richard A. Eisner & Company LLP,
independent auditors, which are included elsewhere in this Prospectus. The
selected consolidated financial data as of June 30, 1992, 1993 and 1994 and
for each of the two years in the period ended June 30, 1993 are derived from
the Company's consolidated financial statements which were also audited by
Richard A. Eisner & Company LLP and which are not included herein. The
selected consolidated financial data for the six months ended December 31,
1995 and 1996 are derived from unaudited financial statements which, in the
opinion of management of the Company, reflect all adjustments (consisting of
adjustments for purchased research and development, a discontinued research
and development program, a write-down of assets of discontinued operations and
normal recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The information presented below should be read in conjunction with
"Risk Factors", "MD&A," the Company's consolidated financial statements and
notes thereto included elsewhere in this Prospectus, as well as the reports
and documents for fiscal 1995 and 1996 and the six months ended December 31,
1995 and 1996 filed by the Company with the Commission. Financial data for
fiscal 1995 and 1996 and the six months ended December 31, 1995 and 1996 have
been restated to reflect the discontinuation of IPEC Clean during the second
quarter of fiscal 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------------ ------------------
1992 1993 1994(1) 1995 1996(2) 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA(3):
Revenue............... $ 259 $ 1,438 $ 31,158 $ 75,220 $148,690 $ 66,974 $ 65,069
Cost of goods sold.... -- 943 22,738 41,599 85,061 37,284 39,523
-------- -------- -------- -------- -------- -------- --------
Gross margin.......... 259 495 8,420 33,621 63,629 29,690 25,546
Operating expenses:
Research and
development........ 527 1,446 2,453 5,407 15,877 6,326 11,950
Purchased research
and development.... -- -- 1,107 -- 36,961 36,961 --
Selling, general and
administrative..... 726 1,381 9,403 17,061 26,653 11,209 13,117
Program
discontinuance
charge............. -- -- -- -- -- -- 17,601
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses......... 1,253 2,827 12,963 22,468 79,491 54,496 42,668
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)............... (994) (2,332) (4,543) 11,153 (15,862) (24,806) (17,122)
Interest income....... 10 57 22 380 1,680 1,155 203
Interest expense...... (17) (324) (5,197) (879) (2,031) (245) (1,173)
Other income
(expense), net....... -- -- (12) 16 451 181 259
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes.. (1,001) (2,599) (9,730) 10,670 (15,762) (23,715) (17,833)
Income tax expense
(benefit)............ -- -- (830) 714 (6,399) (9,448) (6,149)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) from
continuing
operations........... (1,001) (2,599) (8,900) 9,956 (9,363) (14,267) (11,684)
Net loss from
discontinued
operations........... -- -- -- (9,357) (1,294) (1,167) (28,564)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... (1,001) (2,599) (8,900) 599 (10,657) (15,434) (40,248)
Cumulative dividend on
Preferred Stock...... (38) (38) (118) (377) (579) (399) (162)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)
attributable to
Common Stockholders.. $ (1,039) $ (2,637) $ (9,018) $ 222 $(11,236) $(15,833) $(40,410)
======== ======== ======== ======== ======== ======== ========
Net income (loss) from
continuing operations
per share of Common
Stock................ $ (1.96) $ (2.12) $ (3.26) $ 0.97 $ (0.69) $ (1.02) $ (0.80)
Net loss from
discontinued
operations per share
of Common Stock...... -- -- -- $ (0.95) $ (0.09) $ (0.08) $ (1.92)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per
share of Common
Stock................ $ (1.96) $ (2.12) $ (3.26) $ 0.02 $ (0.78) $ (1.10) $ (2.72)
======== ======== ======== ======== ======== ======== ========
Weighted average
shares of Common
Stock outstanding(4). 530 1,243 2,763 9,865 14,434 14,310 14,851
CONSOLIDATED BALANCE
SHEET DATA(3):
Cash and cash
equivalents.......... $ 587 $ 1,108 $ 979 $ 65,790 $ 11,325 $ 31,050 $ 36,953
Working capital....... (816) 1,406 15,707 98,555 53,700 50,448 76,031
Total assets.......... 1,678 1,981 41,466 150,624 184,701 182,272 176,474
Current portion of
long-term debt....... -- -- 979 4,362 1,886 1,565 2,219
Long-term debt, less
current portion...... -- -- 9,249 1,285 22,753 13,541 17,860
Total stockholders'
equity (deficit)..... (608) 1,616 19,575 130,120 128,337 118,897 114,109
</TABLE>
- ------------------
(1) Includes results of operations of IPEC Planar Phoenix after its
acquisition by the Company in September 1993.
(2) Includes results of operations of IPEC Planar Portland and IPEC Precision
after their acquisition by the Company in October 1995 and December 1995,
respectively.
(3) Financial data for fiscal 1995 and 1996 and the six months ended December
31, 1995 and 1996 have been restated to reflect the discontinuation of
IPEC Clean during the second quarter of fiscal 1997.
(4) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual future results could differ materially
from those discussed in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
IPEC is a Delaware corporation organized in December 1991 and is the
successor by merger to a California corporation of the same name that was
incorporated in October 1989. The Company is primarily engaged in designing,
manufacturing, marketing and servicing equipment for the semiconductor
manufacturing industry.
The Company is organized into two divisions. IPEC Planar manufactures CMP
equipment and CMP-related products. IPEC Precision manufactures advanced
plasma-assisted chemical etching equipment and metrology equipment for use
primarily in manufacturing of silicon wafers and semiconductor devices.
IPEC incurred a net loss of $10.7 million in fiscal 1996 compared to net
income of $0.6 million in fiscal 1995 and a net loss of $8.9 million in fiscal
1994. The results for fiscal 1996 and 1994 were negatively impacted by non-
recurring charges related to the acquisitions of IPEC Planar Portland and IPEC
Precision in fiscal 1996 and IPEC Planar Phoenix in fiscal 1994. Purchased
research and development charges related to these acquisitions were
approximately $37.0 million and $1.1 million in fiscal 1996 and 1994,
respectively. Additionally, the Company incurred a charge amounting to
approximately $4.3 million in fiscal 1994 for debt discount and deferred
financing fees attributable to warrants issued in connection with a $5.0
million bridge loan which was repaid from the proceeds of a public offering.
In the second quarter of fiscal 1997, the Company incurred a net loss of
$36.9 million primarily due to the discontinuation of its IPEC Clean business
and its Avanti 672 product development effort. Losses and financial
information for fiscal 1995, fiscal 1996 and the six months ended December 31,
1995 and 1996 have been restated to reflect the discontinuation of IPEC Clean.
The Company incurred a $25.0 million charge for estimated losses on disposal
of IPEC Clean and a $1.9 million loss from IPEC Clean operations in the second
quarter of fiscal 1997. In addition, the Company incurred a $17.6 million
charge for asset write-downs due to the discontinuation of the Avanti 672
program development effort. As a result of the above charges, the Company will
incur a net loss in fiscal 1997. The Company also expects that revenue for
fiscal 1997 will be below revenue recorded in fiscal 1996. See "Risk Factors--
Operating Results Are Subject to Quarterly Fluctuations for Varied Reasons."
The Company's revenue is derived from the sale of products, related spare
parts and service. In accordance with generally accepted accounting
principles, the Company recognizes revenue when a product is shipped. Revenue
from spare part sales or service is recognized when shipped or upon completion
of service.
The Company's gross margin may vary due to many factors and is especially
dependent on direct versus indirect sales, product mix and domestic versus
international sales. The Company sells directly in the United States and such
sales historically have had a higher gross margin than indirect international
sales. Gross margins in any period may not be indicative of margins for future
periods. See "Risk Factors--Operating Results Are Subject to Quarterly
Fluctuations for Varied Reasons."
18
<PAGE>
The Company's fiscal 1997 operating results will be affected by the
Company's exercise of its right to cause a significant customer to accelerate
planned orders and the issuance to the customer of warrants to purchase IPEC
Common Stock. During the first quarter of fiscal 1997, the customer agreed to
accelerate certain orders into the first three quarters of fiscal 1997. In
consideration for the acceleration, the Company committed to issue, during the
first three quarters of fiscal 1997, warrants to purchase an aggregate minimum
of 155,000 shares and an aggregate maximum of 250,000 shares of Common Stock.
Costs associated with the issuance of warrants to purchase a minimum of
155,000 shares were incurred in the first quarter of fiscal 1997, resulting in
a $657,000 increase in cost of goods sold. The Company accelerated orders in
the second quarter of fiscal 1997, issuing an additional warrant to purchase
90,000 shares and recognizing costs associated with 45,000 of these shares,
resulting in a $191,000 increase in cost of goods sold. The Company expects
that it will accelerate additional orders into the third quarter of fiscal
1997, will issue a warrant to purchase 100,000 shares and will recognize costs
associated with 50,000 of these shares, resulting in a $211,000 increase in
cost of goods sold. To the extent orders are accelerated during the first
three quarters of fiscal 1997, this may reduce shipments anticipated for the
fourth quarter of fiscal 1997 and for fiscal 1998. There can be no assurance
that the Company can obtain replacement orders for shipment in these future
periods. While the customer has acknowledged receipt of these machines, they
have not all been delivered to the customer's facilities and placed into
service, which could adversely affect the Company's ability to obtain
replacement orders from this customer. See "Risk Factors--The Company Depends
on a Small Number of Major Customers."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items of
the Company's consolidated statements of operations expressed as a percentage
of revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------------
SIX MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................ 73.0 55.3 57.2 55.7 60.7
----- ----- ----- ------ ------
Gross margin...................... 27.0 44.7 42.8 44.3 39.3
Operating expenses:
Research and development......... 7.9 7.2 10.7 9.4 18.4
Purchased research and
development..................... 3.5 -- 24.9 55.2 --
Selling, general and
administrative.................. 30.2 22.7 17.9 16.7 20.2
Program discontinuance charge.... -- -- -- -- 27.0
----- ----- ----- ------ ------
Total operating expenses........ 41.6 29.9 53.5 81.3 65.6
----- ----- ----- ------ ------
Operating income (loss)........... (14.6) 14.8 (10.7) (37.0) (26.3)
Interest income................... -- 0.5 1.1 1.7 0.3
Interest expense.................. (16.6) (1.2) (1.3) (0.4) (1.8)
Other income, net................. -- -- 0.3 0.3 0.4
----- ----- ----- ------ ------
Income (loss) from continuing
operations before income taxes... (31.2) 14.1 (10.6) (35.4) (27.4)
Income tax expense (benefit)...... (2.6) 0.9 (4.3) (14.1) (9.4)
----- ----- ----- ------ ------
Net income (loss) from continuing
operations....................... (28.6) 13.2 (6.3) (21.3) (18.0)
Net loss from discontinued
operations....................... -- (12.4) (0.9) (1.7) (43.9)
----- ----- ----- ------ ------
Net income (loss)................. (28.6)% 0.8% (7.2)% (23.0)% (61.9)%
===== ===== ===== ====== ======
</TABLE>
19
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Revenue. Revenue was $65.1 million for the six months ended December 31,
1996 compared to $67.0 million for the six months ended December 31, 1995.
This 3% decrease was primarily attributable to an industry-wide slowdown in
semiconductor capital equipment shipments in the first six months of fiscal
1997, which adversely affected sales of the Company's CMP equipment. Revenue
from foreign sales represented 36% and 23% of total sales in the first six
months of fiscal 1997 and fiscal 1996, respectively. The Company expects that
revenue for the year ending June 30, 1997 will be below revenue reported for
the year ended June 30, 1996.
Cost of goods sold. Cost of goods sold increased as a percentage of revenue
to 60.7% in the first six months of fiscal 1997 from 55.7% in the first six
months of fiscal 1996. Cost of goods sold increased as a percentage of revenue
in the first six months of fiscal 1997 due to the allocation of higher levels
of customer service expenditures across lower revenue, costs associated with
suspending material procurement for the Avanti 672 and a higher percentage of
sales through international distributors. Gross margin during the first six
months of fiscal 1997 was also adversely affected by a $0.8 million increase
in cost of goods sold related to warrants issued to a major customer in
connection with an agreement permitting the Company to accelerate certain
deliveries in the first, second and third quarters of fiscal 1997, as
described above. During the first six months of fiscal 1997 the customer
accelerated orders under this agreement that accounted for approximately 19%
of revenue. The charge in a quarter is based on the market value of the
warrant shares on the date of the agreement and the incremental number of
warrant shares issued in the quarter.
The Company's gross margin is impacted by a number of factors, such as
product mix, material costs and the level of international sales, which may
result in greater sales discounts and lower gross margin. Since IPEC Precision
is commencing operations and its customer base is new, the Company expects
that IPEC Precision's gross margin percentage will continue to be lower than
the gross margin attained for the Company's CMP tools. As new products are
introduced by IPEC Precision in future quarters, the Company's gross margin
may decrease. During the Company's planned transition to direct sales and
field service, distributor discounts will continue to negatively impact gross
margin. Gross margin in future periods may be higher or lower than those in
the first six months of fiscal 1997 depending on such factors. Due to these
factors, there can be no assurance that gross margin will improve over fiscal
1996 levels in the near future. See "Risk Factors--Operating Results Are
Subject to Quarterly Fluctuations for Varied Reasons."
Research and development. Research and development expense increased 89% to
$12.0 million in the first six months of fiscal 1997 from $6.3 million in the
first six months of fiscal 1996, and increased as a percentage of revenue to
18.4% in the first six months of fiscal 1997 from 9.4% in the first six months
of fiscal 1996. This increase was primarily due to development of the
Company's AvantGaard 676 and Avanti 672 high-throughput CMP tools. The Avanti
672 program was discontinued in the second quarter of fiscal 1997. Incremental
costs of $2.0 million in the first six months of 1997 were incurred at IPEC
Precision, which was acquired in December 1995, for the development of
proprietary plasma-assisted chemical etching and metrology technology.
Purchased research and development. The Company incurred a charge of $37.0
million for purchased in-process research and development in the first six
months of fiscal 1996 as a result of the acquisitions of IPEC Planar Portland
and IPEC Precision.
Selling, general and administrative. Selling, general and administrative
expenses increased 17% to $13.1 million in the first six months of fiscal 1997
from $11.2 million in the first six months of fiscal 1996, and increased as a
percentage of revenue to 20.2% in the first six months of fiscal 1997 from
16.7% in the first six months of fiscal 1996. This increase was primarily due
to incremental selling, general and administrative expenses at IPEC Precision
and additional depreciation, amortization and overhead resulting from
acquisitions completed in the first half of fiscal 1996. These expenses were
partially offset by work force reductions in the first and second quarters of
fiscal 1997 which reduced salary expense at IPEC Planar and IPEC Precision by
approximately $0.2 million per quarter. Selling, general and administrative
expenses for the first six months of
20
<PAGE>
fiscal 1997 were offset in part by a $0.9 million benefit resulting from
adjustments for both the fiscal 1994 IPEC Planar Phoenix and fiscal 1996 IPEC
Planar Portland acquisitions.
Program discontinuance charge. The Company has demonstrated that the
AvantGaard 676 tool can be used for both metal and oxide planarization,
resulting in a decision to focus solely on the AvantGaard 676 as the next
generation CMP tool. Accordingly, the Company incurred a $17.6 million program
discontinuance charge in the first six months of fiscal 1997 from write-downs
of inventory and assets relating to the Company's discontinuation of the
Avanti 672 program. See "Risk Factors--Product Development Difficulties Could
Adversely Affect the Company's Results of Operations."
Interest income. Interest income decreased to $0.2 million in the first six
months of fiscal 1997 from $1.2 million in the first six months of fiscal 1996
as a result of lower average cash and cash equivalent balances in fiscal 1997.
Higher balances in the second quarter of fiscal 1996 resulted from the
exercise of warrants in the fourth quarter of fiscal 1995, resulting in
proceeds to the Company of $63.2 million. Cash generated from the convertible
preferred stock financing and the sale/leaseback of the Phoenix manufacturing
and administrative facility, discussed in "Liquidity and Capital Resources"
below, had no significant effect on interest income in the fiscal 1997 six-
month period because these transactions were completed toward the end of that
period in December 1996.
Interest expense. Interest expense increased to $1.2 million in the first
six months of fiscal 1997 from $0.2 million in the first six months of fiscal
1996 as a result of increased borrowings.
Income from continuing operations. As a result of the Company's decision to
focus on CMP and CMP-related products, the Company has decided to divest the
operations of IPEC Clean. The operating results of IPEC Clean have been
segregated from the continuing operations of the Company and reported
separately as discontinued operations for all periods presented. The loss from
operations of IPEC Clean increased to $28.6 million in the first six months of
fiscal 1997 from $1.2 million in the first six months of fiscal 1996. The loss
for the fiscal 1997 period included $25.0 for the estimated loss on disposal
of IPEC Clean primarily as a result of program discontinuance charges, with
the remainder consisting of operating losses. See "Risk Factors--Future
Acquisitions and Dispositions May Require Significant Resources and Adversely
Affect Results."
Income tax expense. The loss from continuing operations before income taxes
amounted to $17.8 million and $23.7 million for the six-month periods of
fiscal 1997 and 1996, respectively. Income tax benefit amounted to $6.1
million and $9.4 million for the six-month periods of fiscal 1997 and 1996, or
effective tax benefit rates of 34% and 40%, respectively. The lower benefit
rate for the fiscal 1997 six-month period resulted primarily from adjustments
of deferred tax balances and state tax accruals.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenue. Revenue was $148.7 million for the year ended June 30, 1996
compared to $75.2 million for the year ended June 30, 1995. This increase was
attributable to increased sales of $68.5 million for IPEC Planar (including
sales of IPEC Planar Portland, which was acquired in the second quarter of
fiscal 1996) and sales of $5.0 million for IPEC Precision (which was acquired
in the second quarter of fiscal 1996). Revenue from foreign sales represented
approximately 28% and 21% of total revenue in fiscal 1996 and 1995,
respectively.
Cost of goods sold. Cost of goods sold increased as a percentage of revenue
to 57.2% in fiscal 1996 from 55.3% in fiscal 1995, due in part to the
increased level of international sales in fiscal 1996, where the Company
typically sells indirectly through distributors. Also, during fiscal 1996,
volume purchase agreement sales from IPEC Planar Portland and IPEC Precision's
initial sales to customers lowered gross margin by approximately 1%.
Research and development. Research and development expense increased 194% to
$15.9 million in fiscal 1996 from $5.4 million in fiscal 1995, and increased
as a percentage of revenue to 10.7% in fiscal 1996 from
21
<PAGE>
7.2% in fiscal 1995. Approximately $8.9 million of the increased research and
development expense resulted primarily from costs incurred to develop the
Company's Avanti 672 and AvantGaard 676 CMP tools. Additional costs amounting
to $1.6 million were also incurred at IPEC Precision, which resulted from the
development of plasma-assisted chemical etching and metrology technologies.
Purchased research and development. The Company incurred one-time purchased
research and development charges amounting to $37.0 million in fiscal 1996 as
a result of the acquisitions of IPEC Planar Portland and IPEC Precision.
Selling, general and administrative. Selling, general and administrative
expenses increased 56% to $26.7 million in fiscal 1996 from $17.1 million in
fiscal 1995, and decreased as a percentage of revenue to 17.9% in fiscal 1996
from 22.7% in fiscal 1995. The absolute dollar increase was primarily due to
the growth of the Company, which resulted in the addition of personnel, sales
commissions and additional depreciation and amortization resulting from recent
acquisitions and the Company's new Planar Phoenix facility. The decrease as a
percentage of revenue was primarily due to greater levels of revenue.
Operating income. The operating loss for fiscal 1996 was $15.9 million
compared to operating income of $11.2 million in fiscal 1995. The loss in
fiscal 1996 was principally attributable to $37.0 million of purchased
research and development charges related to the acquisitions of IPEC Planar
Portland and IPEC Precision and increased research and development
expenditures. Excluding acquisition charges, operating income would have been
$21.1 million in fiscal 1996.
Interest expense. Interest expense increased to $2.0 million in fiscal 1996
from $0.9 million in fiscal 1995 as a result of higher borrowing levels. Debt
financing occurred during fiscal 1996 to acquire IPEC Precision and for the
construction of a new manufacturing facility in Phoenix. A substantial portion
of the Company's financing was consolidated with a $10.0 million term loan and
a $30.0 million revolving loan facility agreement with a bank in the fourth
quarter of fiscal 1996.
Interest income. Interest income increased to $1.7 million in fiscal 1996
from $0.4 million in fiscal 1995 as a result of higher levels of invested
cash, particularly in the first and second quarters of fiscal 1996. Higher
cash balances in fiscal 1996 resulted from the exercise of warrants in late
fiscal 1995 resulting in net proceeds to the Company of $63.2 million.
Income tax expense. As a result of the write-offs in fiscal 1996, the
Company's effective tax benefit rate was 40.6% in fiscal 1996. Due to the
Company's ability to utilize net operating loss carryforwards in fiscal 1995,
the effective tax rate was 6.7%. These net operating loss carryforwards were
fully utilized in fiscal 1995.
Net loss from discontinued operations. Losses from discontinued operations
amounted to $1.3 million in fiscal 1996 compared to $9.4 million in fiscal
1995, primarily as a result of the purchased research and development charge
of $8.5 million related to the acquisition of IPEC Clean in fiscal 1995.
Net income per share. Net loss per share was $0.78 in fiscal 1996 compared
to net income per share of $0.02 in fiscal 1995. The weighted average number
of common shares outstanding increased to 14.4 million shares in fiscal 1996
from 9.9 million shares in fiscal 1995, primarily as a result of warrant calls
during fiscal 1995 and shares issued in connection with the Company's
acquisition of IPEC Clean. Since the Class B warrant call occurred in the
fourth quarter of fiscal 1995, the weighted average number of shares of common
stock outstanding was not fully affected until fiscal 1996.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Revenue. Revenue was $75.2 million for the year ended June 30, 1995 compared
to $31.2 million for the year ended June 30, 1994. This 141% increase was due
primarily to increased sales for IPEC Planar Phoenix (which was acquired in
the first quarter of fiscal 1994). Revenue from foreign sales represented 21%
and 39% of total sales in fiscal 1995 and 1994, respectively.
22
<PAGE>
Cost of goods sold. Cost of goods sold decreased as a percentage of revenue
to 55.3% in fiscal 1995 from 73.0% in fiscal 1994. Cost of goods sold
decreased as a percentage of revenue in fiscal 1995 due in part to
improvements in operating efficiencies in both subassembly manufacturing and
final product assembly, a reduction in labor hours, improved material
procurement practices, increased product reliability and increased economies
of scale. The increase in revenue in fiscal 1995 also had a significant impact
on operating efficiencies. The acquisition of IPEC Planar Phoenix occurred in
fiscal 1994 and resulted in operating inefficiencies inherent in the
transitional phases of merging IPEC and IPEC Planar Phoenix. Additionally,
during fiscal 1994 there was a $1.3 million inventory write-off.
Research and development. Research and development expense increased 120% to
$5.4 million in fiscal 1995 from $2.5 million in fiscal 1994, and decreased as
a percentage of revenue to 7.2% in fiscal 1995 from 7.9% in fiscal 1994. The
increase in absolute dollars was primarily due to the development of new CMP
products and processes.
Selling, general and administrative. Selling, general and administrative
expenses increased 81% to $17.1 million in fiscal 1995 from $9.4 million in
fiscal 1994, and decreased as a percentage of revenue to 22.7% in fiscal 1995
from 30.2% in fiscal 1994. The absolute dollar increase was primarily due to
the growth of the Company resulting in the addition of senior level personnel,
legal, accounting and consulting expenses related to financing activities, and
sales commissions.
Operating income. Operating income was $11.2 million in fiscal 1995 compared
to an operating loss of $4.5 million in fiscal 1994. During fiscal 1994, the
Company experienced substantially higher labor, material and engineering and
manufacturing support costs as part of its start-up and initial production of
the Avanti 472 product line. While cost of goods sold and research and
development expenses were also high in fiscal 1995, these costs decreased as a
percentage of revenue to 61.4% in fiscal 1995 from 80.9% in fiscal 1994.
Interest expense. Debt discount and deferred financing fees of $4.3 million
were included in interest expense in fiscal 1994. Those fees were attributable
to a $5.0 million bridge loan and a $2.0 million credit line, which were
repaid in fiscal 1994.
Income tax expense. After recognizing tax benefits attributable to the
reversal of the valuation allowance for deferred tax assets utilization of
federal and state research and development credits, the Company recognized a
tax provision in fiscal 1995 of $0.7 million compared to a tax benefit of $0.8
million in fiscal 1994. Due to the Company's ability to utilize net operating
losses, its effective tax rate was 6.7% in fiscal 1995.
Net income from discontinued operations. Losses from discontinued operations
of $9.4 million were incurred in fiscal 1995, primarily as a result of a
purchased research and development charge amounting to $8.5 million in
connection with the acquisition in fiscal 1995 of IPEC Clean.
Net income per share. Net income per share was $0.02 in fiscal 1995 compared
to a net loss of $3.26 per share in fiscal 1994. The weighted average number
of shares of common stock outstanding increased to 9.9 million at June 30,
1995 from 2.8 million at June 30, 1994. This increase was the result of
several factors, including option grants, the issuance of shares of Series B
Preferred Stock due to earn-outs based on revenue growth, shares issued as a
result of Class A and Class B warrant calls and shares issued in connection
with the acquisition of IPEC Clean. Because the majority of these factors
occurred in the fourth quarter of fiscal 1995, the weighted average number of
shares of common stock outstanding in fiscal 1995 does not reflect the full
impact of these factors.
23
<PAGE>
Selected Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations data
for the six quarters ended December 31, 1996, as well as such data expressed as
a percentage of the Company's revenue for the periods indicated. This data has
been derived from unaudited financial statements that, in the opinion of
management, include all adjustments (consisting of adjustments for purchased
research and development, a discontinued research and development program, a
write-down of assets of discontinued operations and normal recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Company's annual audited consolidated financial statements
and notes thereto. See "Risk Factors-Operating Results are Subject to Quarterly
Fluctuations for Varied Reasons."
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1996 1996 1996 1996
--------- ----------- -------- -------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................................................... $30,164 $ 36,810 $39,864 $41,852 $29,407 $ 35,662
Cost of goods sold............................................ 16,221 21,063 23,217 24,560 19,043 20,480
--------- ----------- -------- -------- ---------- ----------
Gross margin.................................................. 13,943 15,747 16,647 17,292 10,364 15,182
Operating expenses:
Research and development...................................... 2,844 3,482 4,589 4,962 6,507 5,443
Purchased research and development............................ - 36,961 - - - -
Selling, general and administrative........................... 4,815 6,394 8,193 7,251 6,305 6,812
Program discontinuance charge................................. - - - - - 17,601
--------- ----------- -------- -------- ---------- ----------
Total operating expenses...................................... 7,659 46,837 12,782 12,213 12,812 29,856
--------- ----------- -------- -------- ---------- ----------
Operating income (loss)....................................... 6,284 (31,090) 3,865 5,079 (2,448) (14,674)
Interest income............................................... 826 329 371 154 109 94
Interest expense.............................................. (149) (96) (1,117) (669) (572) (601)
Other income, net............................................. 65 116 182 88 67 192
--------- ----------- -------- -------- ---------- ----------
Income (loss) from continuing operations before income taxes.. 7,026 (30,741) 3,301 4,652 (2,844) (14,989)
Income tax expense (benefit).................................. 2,566 (12,014) 1,181 1,868 (1,185) (4,964)
--------- ----------- -------- -------- ---------- ----------
Net income (loss) from continuing operations.................. 4,460 (18,727) 2,120 2,784 (1,659) (10,025)
Net income (loss) from discontinued operations................ (948) (219) 576 (703) (1,718) (26,846)
--------- ----------- -------- -------- ---------- ----------
Net income (loss)............................................. 3,512 (18,946) 2,696 2,081 (3,377) (36,871)
Cumulative dividend on Preferred Stock........................ (309) (90) (90) (90) (81) (81)
--------- ----------- -------- -------- ---------- ----------
Net income (loss) attributable to Common Stockholders......... $3,203 $(19,036) $2,606 $1,991 $(3,458) $(36,952)
========= =========== ======== ======== ========== ==========
<CAPTION>
Percentage of Revenue
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue....................................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................ 53.8 57.2 58.2 58.7 64.8 57.4
--------- ----------- -------- -------- ---------- ----------
Gross margin.................................................. 46.2 42.8 41.8 41.3 35.2 42.6
Operating expenses:
Research and development...................................... 9.4 9.5 11.5 11.9 22.1 15.2
Purchased research and development............................ - 100.4 - - - -
Selling, general and administrative........................... 16.0 17.4 20.6 17.3 21.4 19.1
Program discontinuance charge................................. - - - - - 49.4
--------- ----------- -------- -------- ---------- ----------
Total operating expenses...................................... 25.4 127.3 32.1 29.2 43.5 83.7
--------- ----------- -------- -------- ---------- ----------
Operating income (loss)....................................... 20.8 (84.5) 9.7 12.1 (8.3) (41.1)
Interest income............................................... 2.8 0.9 0.9 0.4 0.4 0.3
Interest expense.............................................. (0.5) (0.2) (2.8) (1.6) (1.9) (1.7)
Other income, net............................................. 0.2 0.3 0.5 0.2 0.2 0.5
--------- ----------- -------- -------- ---------- ----------
Income (loss) from continuing operations before income taxes.. 23.3 (83.5) 8.3 11.1 (9.6) (42.0)
Income tax expense (benefit).................................. 8.5 (32.6) 3.0 4.4 (4.0) (13.9)
--------- ----------- -------- -------- ---------- ----------
Net income (loss) from continuing operations.................. 14.8 (50.9) 5.3 6.7 (5.6) (28.1)
Net income (loss) from discontinued operations................ (3.2) (0.6) 1.4 (1.7) (5.8) (75.3)
--------- ----------- -------- -------- ---------- ----------
Net income (loss)............................................. 11.6 (51.5) 6.7 5.0 (11.4) (103.4)
Cumulative dividend on Preferred Stock........................ (1.0) (0.2) (0.2) (0.2) (0.3) (0.2)
--------- ----------- -------- -------- ---------- ----------
Net income (loss) attributable to Common Stockholders......... 10.6% (51.7)% 6.5% 4.8% (11.7)% (103.6)%
========= =========== ======== ======== ========== ==========
</TABLE>
24
<PAGE>
Revenue for fiscal 1996 increased each quarter due to increased sales of CMP
systems and incremental revenue from IPEC Precision in the fourth quarter of
fiscal 1996. Revenue decreased in the first and second quarters of fiscal 1997
from the fourth quarter of fiscal 1996 due to an industry-wide slowdown in
semiconductor capital equipment shipments in the first six months of fiscal
1997. Approximately 23% and 16% of the Company's aggregate revenue in the
first and second quarters, respectively, of fiscal 1997 was due to the
acceleration into such quarters of product deliveries to a major customer. In
connection with such product acceleration, the Company issued warrants to such
customer, which resulted in increases in the cost of goods sold for such
quarters. Research and development expense increased for the five consecutive
quarters ended September 30, 1996 due to the Company's development of the
Avanti 672 and AvantGaard 676, and decreased in the quarter ended December 31,
1996 due to the discontinuation of the Avanti 672 program development effort
in that quarter. See "MD&A--Overview" and "Risk Factors--The Company Depends
on a Small Number of Major Customers" and "--Acceleration of Product Shipments
Due to Issuance of Warrants Has Increased Revenue and Cost of Goods Sold and
May Affect Future Shipments."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity include cash and cash
equivalents of $37.0 million at December 31, 1996. An additional $1.2 million
was available under a revolving loan facility for borrowings at December 31,
1996, based on eligible accounts receivable that can be used to collateralize
such borrowings.
During the second quarter of fiscal 1997, the Company issued 100,000 shares
of Series C Preferred Stock (all of which were converted into 1,283,961 shares
of Common Stock on February 25, 1997) and a warrant to purchase up to 456,000
shares of Common Stock in exchange for $25.0 million. During the second
quarter of fiscal 1997, the Company also completed a sale/leaseback of its
150,000 square foot Phoenix manufacturing and administrative facility. The
facility was sold for $18.7 million and leased back to the Company for an
initial 15-year term and two five-year renewal options. Proceeds from these
financings were used to repay a $10.0 million term loan and for working
capital purposes.
The Company entered into a loan agreement with a bank in April 1996. Under
the terms of the agreement, the Company received a $10.0 million term loan and
a $30.0 million revolving loan facility to provide working capital and for
general corporate purposes. Proceeds from the loan agreement were utilized to
pay $16.0 million of debt incurred in connection with the acquisition of IPEC
Precision. Approximately $2.0 million was outstanding under the revolving loan
facility at January 31, 1997. The loan agreement includes various covenants,
including, among other things, maintenance of certain financial ratios and
limitations on the amount of dividends that can be paid to stockholders. See
Note 8 of Notes to Consolidated Financial Statements. The loan agreement
expires in April 1997. The Company intends to enter into another revolving
credit agreement. At this time the terms of the new agreement cannot be
determined. The new agreement may require that amounts outstanding under the
current loan agreement be repaid.
In fiscal 1996, cash and cash equivalents decreased by $54.5 million. The
Company generated $9.6 million of cash from operating activities in fiscal
1996. The Company used $59.3 million of cash for investing activities in
fiscal 1996. Investments for the acquisition of IPEC Planar Portland and IPEC
Precision used $12.0 million and $11.5 million of cash, respectively.
Purchases of property and equipment used $36.6 million of cash, primarily for
the construction of a new manufacturing facility in Phoenix, Arizona.
The Company believes that the net proceeds from the sale of Common Stock
offered hereby, together with its cash and cash equivalents, will be
sufficient to fund its operations for at least the next 12 months. Additional
new debt or equity financing may be required in the future to fund the
Company's operations. There can be no assurance that such additional financing
will be available when needed or, if available, will be on satisfactory terms.
In order to raise capital, the Company may issue debt or equity securities
senior to the outstanding Common Stock and may incur substantial dilution. See
"Risk Factors--The Company May Need to Raise Capital on Unfavorable Terms."
25
<PAGE>
BUSINESS
THE COMPANY
IPEC is the leading supplier of chemical mechanical planarization ("CMP")
systems used in the manufacture of semiconductors. CMP combines an abrasive
slurry and mechanical pressure to flatten the surface of a silicon wafer after
each layer of conducting metal or insulating oxide is deposited on the wafer.
CMP creates a flatter surface, which increases the precision with which
photolithography can imprint multiple layers of circuit diagrams and reduces
wafer defects in the production of advanced semiconductors. The Company
believes that CMP is increasingly necessary for semiconductor manufacturers to
achieve adequate yields and to increase revenue per wafer as advanced
semiconductors are designed with three or more metal layers and line widths at
or below 0.5 micron. IPEC's CMP systems are used to manufacture advanced
microprocessors such as Intel's Pentium, Pentium Pro and related MMX
microprocessors and Motorola's Power PC, as well as advanced memory products
such as DRAMs produced by IBM, Micron and Siemens.
The Company is organized into two divisions. IPEC Planar manufactures CMP
equipment and CMP-related products. IPEC Precision manufactures advanced
plasma-assisted chemical etching equipment and metrology equipment for use
primarily in manufacturing of silicon wafers and semiconductor devices.
During the second quarter of fiscal 1997, the Company announced its
strategic decision to focus its resources on manufacturing of CMP and CMP-
related equipment. As a result, the Company adopted a plan for the disposition
of IPEC Clean by the end of calendar 1997. IPEC Clean provides chemical
reprocessing and distribution systems and stand-alone post-CMP wafer cleaning
systems. Financial data from the time of acquisition through the second
quarter of fiscal 1997 have been restated to reflect the discontinuation of
IPEC Clean.
INDUSTRY BACKGROUND
Demand for semiconductors continues to expand, driven largely by the growth
of existing computer and communications markets and the emergence of new
segments in these markets, such as multimedia, portable computing and wireless
communications. The increase in semiconductor demand is fueled by the
development of more complex, higher performance ICs at reduced cost per
function. The production of these more complex and higher performance ICs
requires more advanced and expensive wafer fabrication equipment. Today's
advanced wafer fabrication facility costs in excess of $1 billion to
construct, with more than two-thirds of this cost allocated to equipment.
According to VLSI Research, as of January 1997 there were approximately 90
wafer fabrication facilities under construction or expansion.
Semiconductor manufacturers have capitalized on advances in semiconductor
equipment technology to produce increasingly complex ICs at lower cost.
Semiconductor manufacturers use circuit designs with more layers of metal and
finer line widths to produce ICs which can provide more functionality, operate
at higher speeds, occupy less space and consume less power. For example, in
1989, the Intel 386 microprocessor was produced with two layers of metal and
0.8 micron line widths, and 4-megabit DRAMs were produced using two metal
layers and line widths of 1.0 micron. Today's Pentium microprocessor is
produced with four metal layers at 0.5 micron line widths or less, and 64-
megabit DRAMs will be produced at 0.35 micron geometries using three metal
layers. In addition, over the past five years, manufacturers of ICs have
migrated from semiconductor wafers of four to six inches in diameter to eight
inch wafers to increase the number of integrated circuits per wafer.
Improvements in IC design and performance, together with increased wafer
sizes, have increased the value of each wafer. This has caused semiconductor
manufacturers to place greater emphasis on wafer processing equipment that
reduces risk of damage to each wafer.
The production of advanced semiconductor wafers typically includes
alternating steps of deposition, etching and cleaning, where multiple layers
of highly complex circuit designs are built on the wafer substrate. These
steps are repeated numerous times in order to layer different materials and
imprint various features on
26
<PAGE>
the wafer. Deposition and etching processes create an uneven topography on the
wafer surface. At line widths at or below 0.5 micron, topographical variations
can prevent precise resolution during photolithography, which leads to wafer
defects and reduced yields. In addition, for complex devices with multiple
layers of metal, the etching process typically leaves metal residues that can
produce short circuits when other metal layers are deposited. Nevertheless,
the Company believes that future production of high performance
microprocessors and memory devices will require three or more layers of metal,
line widths at or below 0.35 micron, and wafer diameters of eight inches or
more.
As complex ICs are produced with multiple layers of metal and at line widths
at or below 0.5 micron, planarization is increasingly necessary after each
deposition or etching step to achieve adequate yields and revenue per wafer.
Traditional planarization techniques deposit additional dielectric material to
fill gaps and etch the dielectric layer to remove bumps, or apply a glass-like
material to fill gaps. However, these methods achieve a relatively smooth
surface for only a small area of the wafer. Consequently, these traditional
techniques have not proven effective for achieving adequate planarity across
an entire wafer to allow consistent imaging of devices with geometries at or
below 0.5 micron. In contrast, chemical mechanical planarization, originally
used to polish optical lenses and bare silicon wafers, results in a uniformly
planar surface by combining abrasive slurry and mechanical pressure to remove
excess insulating (or dielectric) material and metal residues. CMP enables
semiconductor manufacturers to develop advanced semiconductor designs with
more layers of metal and finer geometries. At the same time, CMP reduces the
cost to manufacture these more advanced ICs by increasing yields.
The growth of the CMP market is driven by the demand for continually more
complex, high performance integrated circuits at reduced costs per function.
The average of estimates by Dataquest and VLSI Research indicate that the CMP
market was approximately $260 million in calendar 1996 and grew 35% from
calendar 1995 to calendar 1996. According to VLSI Research, the CMP market is
projected to generate over $1 billion of revenue in calendar 2001,
representing a compound annual growth rate of approximately 30% per year.
Although the CMP polisher market grew from calendar 1995 to calendar 1996, the
market experienced an industry-wide slowdown in the second half of calendar
1996, which caused the Company's CMP revenues to decrease from prior periods.
Dataquest has forecast an 18% drop in calendar 1997 wafer fabrication
equipment sales and a 5% increase in such sales in calendar 1998, but the CMP
market forecast is more robust. Dataquest projects 9% growth in the CMP market
in calendar 1997, followed by a 25% increase in calendar 1998. See "Risk
Factors--The Company Depends on Broader Industry Acceptance of CMP and the
AvantGaard 676."
THE IPEC STRATEGY
IPEC's strategy is to build on its existing leadership position in the CMP
market, to reduce the cost of ownership for its CMP equipment and to enhance
customer satisfaction.
Build on Existing CMP Market Leadership. Through December 31, 1996, the
Company had sold approximately 670 CMP systems to more than 65 semiconductor
manufacturers, including most of the top volume producers of ICs worldwide.
The Company believes that 11 of the 13 companies currently using CMP for
volume production use IPEC's products to produce advanced ICs. These IPEC
customers include IBM, Intel and Motorola. IPEC's strategy is to leverage its
strength in the market for CMP polishers both by assisting a broad range of
manufacturers in their transition from pilot to volume use of CMP and by
encouraging migration to IPEC's next generation of integrated polishing and
cleaning products, which are designed to lower cost of ownership. See "Risk
Factors--The Company Depends on Broader Industry Acceptance of CMP and the
AvantGaard 676."
Reduce Cost of Ownership. IPEC devotes resources to improve its existing CMP
polishers and develop new products designed to increase throughput, occupy
less space than currently available solutions and reduce use of consumables.
With its highly compact polishing systems for both metal and oxide
planarization, which operates at a throughput rate of approximately 40 wafers
per hour, the AvantGaard 676 represents a significant step in this strategy.
IPEC's design strategy emphasizes higher levels of reliability and ease of
use. The
27
<PAGE>
Company believes that these design principles reduce cost of ownership by
minimizing equipment down time, footprint, training requirements and operator
demands. See "Risk Factors--Product Development Difficulties Could Adversely
Affect the Company's Results of Operations."
Enhance Customer Satisfaction Worldwide. The Company's customers operate
semiconductor fabrication facilities in North America, Asia and Europe. These
customers demand equipment solutions tailored to their unique manufacturing
process needs, a high level of customer service and close interaction with
their equipment suppliers. IPEC's operating strategy emphasizes meeting these
expectations through a sales process focused on each customer's requirements
through a worldwide service organization. To ensure high quality customer
service, the Company increased its customer support staff at IPEC Planar 110%
to 143 persons as of June 30, 1996 from 68 persons as of June 30, 1995. As of
December 31, 1996, IPEC Planar employed 155 customer support persons. IPEC
intends to enhance its customer service and support globally by increasing its
local installation and customer service capabilities. The Company also
believes that direct distribution by IPEC in selected markets outside North
America will contribute to customer satisfaction, and IPEC intends to increase
its direct participation in those markets. See "Risk Factors--The Company is
Subject to Risks Associated with International Sales" and "--The Company's
Strategy Relies on Increased Penetration of the Asian Market."
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
IPEC Planar
IPEC developed the use of CMP for wafer processing together with a major
semiconductor manufacturer. The Company's core CMP technologies include
precise mechanical controls for wafer and pad positioning, movement and
pressure; wet chemistry and fluid dynamics related to particle size,
temperature and flow; pad reconditioning; electrical design in a wet chemistry
environment; and control software with a graphical user interface.
The Company's current CMP systems are automated tools for uniformly
planarizing oxide and metal layers on silicon wafers from four to eight inches
in diameter. The systems are designed to perform planarizing applications
requiring process flexibility with repeatable results. IPEC's CMP products
feature automatic cassette loading and unloading, two-step planarizing and
temperature, pressure and surface speed control. Planarization in the
Company's CMP systems is achieved by pressure and three relative wafer
motions; the wafer chuck rotates about its center, the arm supporting the
wafer chuck oscillates and the polishing plate (which has a polishing pad
laminated to its surface) rotates. This combination of pressure and motion
ensures uniform material removal and flatness across the entire wafer surface
and from wafer to wafer.
Wafer carrier and platen rotation speeds are programmable to allow control
of wafer rotation speed during the planarizing operation. The rotation speeds
work in tandem with programmable arm oscillation and chemical slurry supply.
System operation is controlled from a centrally located programmable control
panel. A number of process programs can be stored in memory to allow quick
selection of stored process parameters for different wafer sizes, materials or
processes. While the system normally operates automatically, with the computer
program controlling all operating variables, the system also allows for manual
control.
The Company currently manufactures three wafer planarization systems: the
AvantGaard 676, the Avanti 472 and the Avanti 372M. IPEC is developing the
AvantGaard 776 Automatic Wafer Planarization System. The Company's CMP systems
are configured to match varying customer requirements and offer different
throughput levels and ease of use. IPEC's present CMP systems range in price
from $475,000 to $1.4 million depending on configuration and options. In
fiscal 1996 and 1995, sales of the Company's CMP stand-alone polishing systems
accounted for approximately 84% and 82%, respectively, of the Company's total
revenue.
The AvantGaard 676 Wafer Planarization System was acquired in October 1995
through the acquisition of IPEC Planar Portland, at which time the tool was
being sold to only one customer. IPEC introduced the
28
<PAGE>
AvantGaard 676 for metal process to the open market in April 1996. The Company
recently demonstrated an oxide process for the AvantGaard 676. The AvantGaard
676 is a four head, one wafer at a time, metal and oxide planarization system
that uses an orbital polishing motion. This is a high-throughput system
capable of processing approximately 40 wafers per hour and offers one of the
industry's smallest footprints. As of December 31, 1996, the Company had sold
the AvantGaard 676 to nine customers. The AvantGaard 676 was initially
designed solely to planarize metal layers and has not been widely used for
this purpose in volume production. The Company's oxide process for the
AvantGaard 676 was recently developed. The Company believes that the oxide
process is being used by a very limited number of customers. See "Risk
Factors--The Company Depends on Broader Industry Acceptance of CMP and the
AvantGaard 676" and "--The Company Depends on a Small Number of Major
Customers."
The Avanti 472 Automatic Wafer Planarization System, introduced in March
1994, is a fully automated, single-side, single wafer planarization system for
polishing oxide and metal layers on silicon wafers from four to eight inches
in diameter. In addition to the planarization of oxide layers, the system
polishes layers of metal interconnects, including tungsten, aluminum and
copper. The Avanti 472 offers higher throughput and improved ergonomics over
the previous generation 372M, as well as an improved pad conditioner system.
The Avanti 372M Automatic Wafer Planarization System, introduced in 1992, is
similar to the Avanti 472. The 372M is sold primarily to one customer.
The AvantGaard 776 Automatic Wafer Planarization System, which is presently
under development, is designed to integrate CMP, metrology and wafer cleaning
in a single unit, increase wafer throughput, and occupy less clean room space
than stand-alone CMP equipment and post-CMP cleaners. The AvantGaard 776 is
planned as a four head, single wafer system with both oxide and metal
capability. See "Risk Factors--Product Development Difficulties Could
Adversely Affect the Company's Results of Operations."
IPEC Precision
The SOI-200 Wafer Thinning System, the Company's proprietary wafer thinning
system, obtained in December 1995 through the acquisition of IPEC Precision,
is used to etch thin-bonded silicon-on-insulator ("SOI") wafers to high levels
of precision and uniformity. This system uses plasma-assisted chemical etching
("PACE"), a non-contact, low energy etch technique and incorporates a thin
film mapper to attain SOI dimensions which the Company believes cannot be
achieved economically with conventional etching technologies. In fiscal 1996,
sales of the SOI-200 Wafer Thinning System represented approximately 3% of the
Company's revenue. To date, the system has been sold to two customers.
AcuMap II is a stand-alone thin film thickness metrology instrument based on
the thin film mapper in the SOI-200 system. AcuMap II uses a spectral
reflectrometry system to perform rapid whole wafer dielectric thin film
thickness visualization by measuring up to 30,000 points in 90 seconds. To
date, the AcuMap II has been sold only to a limited number of customers.
AcuThin bonded SOI wafers are processed by IPEC Precision using PACE
technology to achieve very thin and uniform active layers. Over 50 customers
have purchased and utilized AcuThin wafers since late 1992.
The Precision Wafer Shaper employs PACE technology to produce ultra-flat
bulk silicon wafers, improving wafer flatness and reducing manufacturing cost.
The first system, designed to handle six inch and eight inch wafers, was sold
to a leading wafer manufacturer in December. An enhanced version, the PWS-300,
is being marketed to a limited number of leading wafer manufacturers for
processing 12 inch wafers to the device industry's goal of wafers which have
less than .25 micron variation in thickness across the entire wafer.
PRODUCTS FROM DISCONTINUED PROGRAMS
The Company has adopted a plan for the disposition of its subsidiary, IPEC
Clean, which provides chemical reprocessing and distribution systems and
stand-alone post-CMP wafer cleaning systems. Through IPEC Clean, the Company
also offered several stand-alone CMP cleaners which serve a variety of
integrated circuit fabrication needs. The Avanti 672 Automatic Wafer
Planarization System was being designed for CMP applications. The Company has
refocused the development and marketing of the Avanti 672 for 12-inch bare
29
<PAGE>
wafer silicon polishing applications. See "Risk Factors--Future Acquisitions
and Dispositions May Require Significant Resources and Adversely Affect
Results" and "--The Company's Efforts to Market Product Bays Are at an Early
Stage."
CUSTOMERS
The Company sells its products to leading semiconductor manufacturers
located throughout the United States, Asia and Europe. The Company shipped
products during fiscal 1996 to the following customers: AMD, Cypress
Semiconductor, Fujitsu, Hitachi, Hyundai, IBM, Intel, LSI Logic, Micron,
Motorola, NEC, Samsung, SGS-Thomson, Siemens, Texas Instruments and TSMC. IBM
and Intel represented 11% and 35%, respectively, of the Company's fiscal 1996
revenue. Intel, IBM and Motorola represented 16%, 24% and 16%, respectively,
of the Company's fiscal 1995 revenue. IBM and Intel represented 45% and 17%,
respectively, of the Company's fiscal 1994 revenue. The loss of a major
customer or any reduction in orders by such a customer would have a material
adverse effect on the Company. The Company's future success depends in part
upon its ability to obtain orders from new customers and increase orders from
existing customers. See "Risk Factors--The Company Depends on a Small Number
of Major Customers."
MARKETING, SALES AND SUPPORT
IPEC Planar and IPEC Precision market products in the United States through
independent sales forces. At December 31, 1996, IPEC Planar employed 28 and
IPEC Precision employed 7 direct sales and support personnel. Each
subsidiary's direct sales force develops orders, coordinates distribution,
demonstrates equipment and provides applications support.
The Company markets its products internationally through independent
distributors in Europe, Israel and Asia. In Japan, Tokyo Electron Limited
sells and distributes certain CMP products. The Company's primary distributor
in Europe is Teltec. The Company also has several nonexclusive distributors in
Europe. Sales outside the United States during fiscal 1996 and 1995
represented approximately 28% and 21%, respectively, of the Company's revenue.
See "Risk Factors--The Company is Subject to Risks Associated with
International Sales."
MANUFACTURING
IPEC has manufacturing facilities in Phoenix, Arizona; Portland, Oregon and
Bethel, Connecticut. The Company manufactures a majority of the more complex
plastic and metal components of its CMP products using both numerically
controlled and manually operated plastic and metal fabrication equipment. IPEC
purchases other components from third parties and assembles and tests products
configured by customers for particular orders. The Company's manufacturing
strategy emphasizes outsourcing of components and subassemblies. The standard
warranty for the Company's products is one year for parts and labor. At
December 31, 1996, the Company employed 406 persons in direct manufacturing
and manufacturing support activities. See "Risk Factors--The Company Would be
Adversely Affected if Suppliers Could Not Deliver Goods and Services."
The nature of the Company's business exposes it to product liability claims,
as well as the risk that harmful substances will escape into the workplace and
the environment and cause damage or injuries. The Company's products could
malfunction in the future and damage a customer's facilities or harm its
employees. The Company and its customers are subject to stringent Federal,
state and local regulations governing the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in their
manufacturing operations. Current or future regulations could require the
Company or its customers to make substantial expenditures for preventive or
remedial action, reduction of chemical exposure or waste treatment or
disposal. See "Risk Factors--The Company is Exposed to Product Liability and
Environment Regulations."
RESEARCH AND DEVELOPMENT
The semiconductor capital equipment market generally, and in particular the
CMP market in which the Company competes, is characterized by rapid
technological development and product innovation. The Company's ongoing
research and development efforts are currently focused on product and process
30
<PAGE>
development, automation, improved reliability, machine control software,
safety, man-machine interfaces, maintainability and metrology. Current product
development efforts include the AvantGaard 776 CMP system as well as slurry
reprocessing, plasma-assisted chemical etch and thin film thickness
measurement systems. In order to respond to developing technologies in the
semiconductor manufacturing industry, the Company intends to maintain its
internal development efforts and to seek cooperative research and product
development relationships with other technology companies and government
agencies. As of December 31, 1996, the Company had approximately 167 full-time
employees dedicating their efforts to equipment design engineering, process
support and research and development. Research and development expenditures
for fiscal 1996 and 1995 were $15.9 million and $5.4 million, respectively.
See "Risk Factors--The Company Must Develop New Products Due to Technological
Change," "--Product Development Difficulties Could Adversely Affect the
Company's Results of Operations" and "--Future Acquisitions and Dispositions
May Require Significant Resources and Adversely Affect Results."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in significant part on the proprietary nature
of its technology. Patents issued to the Company may not provide the Company
with meaningful advantages and may be challenged. The two initial patents
relating to the Company's single wafer planarization system products are
scheduled to expire in 1997. In 1993, the technology covered by these patents,
currently forming the basis of the CMP process and used in the Company's
primary products, was licensed on a royalty-free basis to a competitor. This
license was granted pursuant to a settlement arrangement in which the Company
also incurred settlement obligations aggregating $1.4 million, of which
$125,000 remained outstanding at December 31, 1996. To the extent that a
competitor of the Company is able to reproduce or otherwise capitalize on the
Company's technology prior to the issuance of a patent, it may be difficult or
impossible for the Company to obtain necessary intellectual property
protection in the United States or other countries where such competitor
conducts its operations. Moreover, the laws of foreign countries may not
protect the Company's intellectual property to the same extent as do the laws
of the United States.
The Company also relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees and other parties. These
agreements may be breached, and the Company may not have adequate remedies for
any such breach. The Company's trade secrets may also become known to or
independently developed by others.
In the future the Company may receive notice of claims of infringement of
other parties' proprietary rights. If any Company equipment is found to
infringe a patent, a court may grant an injunction to prevent making, selling
or using the equipment in the applicable country. The Company may seek to
obtain a license of such third party's intellectual property rights, which may
not be available under reasonable terms or at all. The Company's application
to register the trademark "IPEC" has been opposed in the U.S. Patent and
Trademark Office by Dow Corning Corporation, which owns the registered
trademark "HIPEC." The Company has filed an answer but cannot predict the
outcome due to the early stage of the proceedings. Expensive and time-
consuming litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company, to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of proprietary rights of others.
The Company manufactures the AvantGaard 676 under a license from a volume
manufacturer of advanced microprocessors. The Company has escrowed technical
data sufficient to permit such manufacturer to manufacture the Company's
AvantGaard 676, which may be released from escrow if the Company does not meet
certain criteria regarding product or spare part delivery schedules to the
manufacturer. If the data is released from escrow, the semiconductor
manufacturer could manufacture the AvantGaard 676 or have the AvantGaard 676
manufactured by others for its use, which would have a material adverse effect
on the Company's business, financial condition and results of operations. The
escrow terminates in October 1998.
31
<PAGE>
In July 1990, the Company and MTC Co. Ltd. ("MTC"), a Japanese manufacturer
and seller of semiconductor equipment, agreed to joint development and
commercialization of a single wafer wet processing system for wafer
fabrication. The Company obtained the right to the resulting technology. The
Company has the right to manufacture the system developed with MTC in North
America and Europe in exchange for a 6% royalty on stand-alone wet modules and
on that portion of integrated systems which incorporate wet modules.
COMPETITION
The semiconductor equipment industry is an intensely competitive market. The
Company believes that direct domestic and international competition in CMP
polisher systems and clustered CMP polisher and cleaning systems is likely to
increase substantially. The Company is aware of a number of companies
currently marketing CMP systems that directly compete with the Company's
systems, including Applied Materials, Ebara Corporation, SpeedFam and
Strasbaugh. Competition is increasing significantly in the market for high
throughput planarization systems. The Company is aware that other capital
equipment manufacturers not currently involved in the development of CMP
systems may also attempt to enter and develop products for this market or to
develop alternative technologies which may reduce the need for the Company's
products.
The trend towards consolidation in the semiconductor equipment industry has
made it increasingly important to have the financial resources necessary to
compete effectively across a broad range of product offerings, to fund
customer service and support on a world-wide basis and to invest in both
product and process research and development. Certain current and potential
competitors, including Applied Materials, have substantially greater financial
resources, name recognition and more extensive engineering, manufacturing,
marketing and customer service and support capabilities than the Company. In
addition, current and potential competitors, including Applied Materials, that
supply a broader range of semiconductor capital equipment may have better
relationships with semiconductor manufacturers including the Company's
customers. The Company expects its current competitors to continue to improve
the design and performance of their existing products and processes, and to
introduce new products and processes with improved price and performance
characteristics. New product introductions or product announcements by the
Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased competitive
pressure could lead to intensified price based competition, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that its future success will depend in part upon
continued acceptance of its products by Asian semiconductor manufacturers.
This market segment is large, represents a substantial percentage of the
worldwide semiconductor manufacturing capacity and is difficult for foreign
companies to penetrate. Asian manufacturers may develop alternative
techniques, or may enhance existing techniques such as spin-on glass and
deposited glass, to achieve acceptable yields for DRAMs and other integrated
circuits involving three or more metal layers and line widths at or below 0.5
micron. The Company currently sells its products in Asian countries through
distributors. If the Company determines to develop a direct presence in these
markets, particularly Japan, such decision would require the allocation of
substantial management and financial resources, may adversely affect the
Company's relationship with its current distributors, and would increase a
number of risks related to international sales as described above.
BACKLOG
The Company includes in its backlog only those customer orders for systems
for which it has accepted purchase orders and assigned shipment dates within
the following 12 months. Backlog also includes orders for spare parts and
service contracts. Industry practice allows the customer to cancel or
reschedule orders prior to shipment without penalties. Accordingly, the
Company's backlog at a particular date may not necessarily be representative
of actual sales for any succeeding period due to orders received for product
to be shipped in the same quarter, possible changes in system delivery
schedules, cancellation of orders and potential delays in system shipments. At
December 31, 1996, the Company's order backlog was approximately $49.5
million, compared to approximately $66.1 million at December 31, 1995.
32
<PAGE>
EMPLOYEES
At December 31, 1996, the Company had approximately 848 employees, of whom
85 were in administrative positions, 167 were in engineering and research and
development, 35 in marketing and sales, 155 in field service and support, and
the remaining employees were involved in direct manufacturing and
manufacturing support activities. The Company also utilizes contract employees
to supplement key work centers during peak loads. No employee of the Company
is currently represented by a labor union. Management considers its employee
relations to be good. The Company believes that the future success of the
Company is dependent to a significant degree on its being able to continue to
attract and retain skilled personnel. See "Risk Factors--The Company Depends
on its Key Personnel."
PROPERTIES
The Company leases a 150,000 square foot building in Phoenix, Arizona used
as its primary manufacturing, research and administrative facility.The
building has a state-of-the-art Class 10/Class 100 clean room used mainly for
process development. The production and administrative functions were moved to
this location in the third quarter of fiscal 1996. The Company also leases an
additional 14,000 square feet in Phoenix that it uses primarily for storage.
The Company leases additional facilities in various parts of the country.
These include a 46,000 square foot facility in Tempe, Arizona used for
subassembly manufacturing, a 28,000 square foot facility, including a 1,000
square foot Class 10,000 clean room in Tempe, Arizona used for engineering and
research and development, and a 37,500 square foot facility in Bethel,
Connecticut used for manufacturing and research and development. The Company
also leases facilities in San Jose, California; Burlington, Vermont; Austin
and Garland, Texas; and Oceanside, California.
33
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the Company's
current directors and executive officers as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Sanjeev R. Chitre(1)........... 41 Chairman of the Board of Directors and
Chief Executive Officer
Thomas C. McKee................ 48 President and Chief Operating Officer
John S. Hodgson................ 45 Vice President, Chief Financial
Officer, Treasurer and Secretary
Harold C. Baldauf.............. 65 Director
William J. Freschi(2).......... 56 Director
Kenneth Levy(3)................ 54 Director
Roger D. McDaniel(2)........... 57 Director
</TABLE>
- ---------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option Committee and the Compensation Committee.
Sanjeev R. Chitre founded the Company and has been the Chairman of the Board
of Directors and Chief Executive Officer since its organization in October
1989. Mr. Chitre was a Vice President of marketing and sales of Superware
Technology, Inc., a manufacturer of automated in-line systems for the
semiconductor industry, from 1984 through 1989.
Thomas C. McKee has been IPEC's President and Chief Operating Officer since
October 1995 and was Westech's Chief Operating Officer from April 1994 to
October 1995. From November 1993 to April 1994 he was Executive Vice President
of Westech. Prior to joining IPEC, Mr. McKee served in various management and
consulting positions within the semiconductor capital equipment industry and
was the founder of Semiconductor Systems, Inc., a manufacturer of
photolithography track equipment that was sold to General Signal in 1983.
John S. Hodgson has been Vice President, Chief Financial Officer, Treasurer
and Secretary of the Company since July 1994. From 1985 to 1993, he served in
senior financial capacities for Dover Technologies, the electronics subsidiary
of Dover Corporation ("Dover"). In 1993, Mr. Hodgson was named Vice President
of Finance of Dovatron International, Inc., a contract electronics
manufacturer that was spun out into a separate public company by Dover.
Harold C. Baldauf has been a director of the Company since September 1993.
Mr. Baldauf was a principal stockholder, director and Vice President of
Westech for more than five years prior to its acquisition by IPEC. Mr. Baldauf
is Chairman of the Board of Directors of Saginaw Control and Engineering and
the Chairman of the Board of Directors of Southwest Automation Systems, Inc.
("Southwest Automation"). Mr. Baldauf is also a consultant to the Company and
to Southwest Automation.
William J. Freschi has been a director of the Company since September 1992.
He has been a principal of the investment banking firm of Alex, Brown & Sons
Incorporated since 1984.
Kenneth Levy has been a director of the Company since May 1995. Since 1974,
he has been the Chief Executive Officer of KLA Instruments, a semiconductor
manufacturing instrumentation company. Mr. Levy is a director of Ultratech
Stepper, Inc., Network Peripherals, Inc. and KLA Instruments. Mr. Levy also
serves as a director emeritus of the Semiconductor Equipment and Materials
Institute ("SEMI"), an international industry association of material and
equipment manufacturers which serves the semiconductor industry.
Roger D. McDaniel has been a director of the Company since August 1996. From
April 1989 to August 1996, he was the Chief Executive Officer of MEMC
Electronic Materials, Inc., a silicon wafer producer, and has served as a
director since April 1989. Mr. McDaniel is also a director and past Chairman
of SEMI.
34
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of
the Company as of December 31, 1996 and as adjusted to reflect the sale of the
shares offered by this Prospectus (assuming no exercise of the Underwriter's
over-allotment option), by (i) all persons known to the Company to be the
beneficial owners of more than 5% of the Company's Common Stock, (ii) the
Company's executive officers, (iii) each of the Company's current directors
and (iv) all current directors and executive officers as a group. The
information on beneficial ownership in the table and the footnotes below is
based upon the Company's records, Schedule 13D and 13G filings and information
supplied to the Company by the listed person or entity.
The following table has been prepared in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and discloses all securities beneficially
owned by the named persons as of December 31, 1996, plus all securities which
such persons have a right to acquire through the exercise of options or other
rights within 60 days of December 31, 1996. Certain individuals in the table
below have the right to acquire additional shares after such 60-day period, as
indicated in the footnotes to the table.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS OWNED (#) OFFERING OFFERING
- --------------------------------------- ---------------- ---------- ----------
<S> <C> <C> <C>
Sanjeev R. Chitre (2)............. 888,989 5.7% 4.8%
Thomas C. McKee (3)............... 81,268 * *
John S. Hodgson (4)............... 60,000 * *
Harold C. Baldauf (5)............. 563,854 3.7 3.1
William J. Freschi (6)............ 100,232 * *
Kenneth Levy (7).................. 30,000 * *
Roger D. McDaniel (8)............. -- * *
Fletcher International Limited
(9).............................. 1,283,961 8.6 7.2
The Capital Group Companies, Inc.
(10)............................. 1,914,900 12.8 10.7
All current directors and current
executive officers as a
group (8 persons) (11)........... 1,724,343 10.6 9.0
</TABLE>
- ---------------------
* Less than one percent.
(1) Percentage ownership is calculated based on an aggregate of 14,963,700
shares issued and outstanding as of December 31, 1996 and an aggregate of
17,963,700 shares issued and outstanding upon completion of the offering.
Excludes 1,283,961 shares issued upon the conversion of Series C
Preferred Stock on February 25, 1997 to Fletcher International Limited,
except with respect to such holder.
(2) Includes 256,489 shares of Class A Common Stock held by Mr. Chitre.
Includes 612,500 shares purchasable by Mr. Chitre within 60 days of
December 31, 1996, upon exercise of outstanding stock options. Mr. Chitre
holds additional options for the purchase of 480,000 shares of the
Company's Common Stock, which vest at various times following such 60-day
period. In January and February 1997, Mr. Chitre sold an aggregate of
135,000 shares of Common Stock including 75,000 shares acquired upon
exercise of options and 40,000 shares acquired upon conversion of 40,000
shares of Class A Common Stock into Common Stock. Excludes 254,382 shares
of Class A Common Stock held by the Avantika Sanjeev Chitre Irrevocable
Trust dated July 1, 1991 (the "Trust"). Neither Mr. Chitre nor his wife
has a beneficial interest in the shares held in the name of the Trust.
Bruce W. McRoy, the trustee, holds sole voting and investment power with
respect to such shares. The beneficiary of the Trust is Mr. Chitre's
daughter, Avantika Sanjeev Chitre. In February 1997, the Trust sold
25,000 shares of Common Stock issued upon conversion of the Class A
Common Stock.
(3) Includes 80,625 shares purchasable by Mr. McKee within 60 days of
December 31, 1996, upon exercise of outstanding stock options. Mr. McKee
holds additional options for the purchase of 60,000 shares of
35
<PAGE>
the Company's Common Stock, which vest at various times following such 60-
day period. In February 1997, Mr. McKee sold 80,625 shares of Common Stock
acquired upon the exercise of options.
(4) Includes 60,000 shares purchasable by Mr. Hodgson within 60 days of
December 31, 1996, upon exercise of outstanding stock options. Mr.
Hodgson holds additional options for the purchase of 50,000 shares of the
Company's Common Stock, which vest at various times following such 60-day
period. In February 1997, Mr. Hodgson sold 10,000 shares of Common Stock
acquired upon the exercise of options.
(5) Includes 90,338 shares of Common Stock issuable upon conversion of Series
B-1 Preferred Stock, 111,498 shares of Common Stock issuable upon
conversion of Series B-2 Preferred Stock and 148,470 shares of Common
Stock issuable upon conversion of Series B-3 Preferred Stock. Includes
30,000 shares of Common Stock purchasable by Mr. Baldauf within 60 days
of December 31, 1996, upon exercise of outstanding stock options. In
February 1997, Mr. Baldauf sold 120,000 shares of Common Stock.
(6) Includes 85,000 shares purchasable by Mr. Freschi within 60 days of
December 31, 1996, upon exercise of outstanding options. Mr. Freschi
holds additional options for the purchase of 45,000 shares of the
Company's Common Stock, which vest at various times following such 60-day
period. In January 1997, Mr. Freschi sold 10,000 shares of Common Stock
acquired upon exercise of options.
(7) Includes 30,000 shares purchasable by Mr. Levy within 60 days of December
31, 1996, upon exercise of outstanding options. Mr. Levy holds additional
options for the purchase of 45,000 shares of the Company's Common Stock,
which vest at various time following such 60-day period.
(8) Mr. McDaniel holds options for the purchase of 30,000 shares of the
Company's Common Stock, which vest at various times following such 60-day
period.
(9) Includes 1,283,961 shares of Common Stock issued upon conversion of
Series C Preferred Stock on February 25, 1997. Does not include up to
456,000 shares of Common Stock issuable upon the exercise of warrants
exercisable from and after June 16, 1998 to and including December 16,
2002, which exercisability may accelerate upon certain circumstances.
(10) The Capital Group Companies, Inc. is the parent holding company of a
group of investment management companies that hold investment power, and
in some case, voting powers of the Company's Common Stock. Capital
Guardian Trust Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is the beneficial owner of 1,245,000 shares of the
Company's Common Stock. The remaining shares are beneficially owned by
other subsidiaries of The Capital Group Companies, Inc., none of which by
itself owns 5% or more of the outstanding securities.
(11) Includes 90,338 shares of Common Stock issuable upon conversion of Series
B-1 Preferred Stock, 111,498 shares of Common Stock issuable upon
conversion of Series B-2 Preferred Stock and 148,470 shares of Common
Stock issuable upon conversion of Series B-3 Preferred Stock. Includes
898,125 shares purchasable within 60 days of December 31, 1996, upon
exercise of outstanding stock options. Such persons also hold additional
options for the purchase of an aggregate of 710,000 shares of the
Company's Common Stock, which vest at various times following such 60-day
period. Since December 31, 1996, such persons sold 175,625 shares of
Common Stock acquired upon exercise of options and 762,500 shares of
Common Stock remain purchasable within 60 days of December 31, 1996.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, 3,500,000 shares of Class A Common Stock, and 2,000,000 shares
of Preferred Stock. 21,478, 21,478 and 21,478 shares of Preferred Stock have
been designated Series B-1, B-2 and B-3 Preferred Stock, respectively. 100,000
shares of Preferred Stock have been designated as Series C Preferred Stock.
50,000 shares of Preferred Stock have been designated as Series D Preferred
Stock.
COMMON STOCK AND CLASS A COMMON STOCK
The rights of the holders of the Common Stock and the Class A Common Stock
are essentially identical, except that: (i) the holders of the Common Stock
are entitled to one vote per share, and holders of Class A Common Stock are
entitled to four votes per share with respect to all matters on which holders
of the Company's Common Stock are entitled to vote, (ii) if stock dividends,
splits, distributions, reverse splits, combinations, reclassification of
shares, or other recapitalizations (collectively, "recapitalizations") are
declared or effected, such recapitalizations shall be effected in a like
manner with respect to the Common Stock and the Class A Common Stock except
that payments in shares of capital stock shall be paid in Common Stock with
respect to Common Stock and Class A Common Stock with respect to Class A
Common Stock, and (iii) shares of Class A Common Stock are convertible into
Common Stock at the option of the holder at any time on a share-for-share
basis.
Shares of Class A Common Stock are automatically converted into shares of
Common Stock upon their transfer to any person other than the following
transferees (the "Permitted Transferees"): (a) the spouse, lineal descendants
or adopted children ("Family Members"); (b) a trust for the sole benefit of
Family Members; (c) a partnership or a corporation wholly owned by Class A
Common Stockholders and their Family Members; and (d) any other Class A Common
Stockholders. Class A Common Stock held by a partnership or a corporation may
be transferred to its partners or stockholders existing at the time a
transferor acquired its Class A Common Stock or if such Partner or stockholder
is a Permitted Transferee. There is no trading market for the Class A Common
Stock.
Subject to the preferences of the Preferred Stock, holders of the Common
Stock and Class A Common Stock have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors and are entitled to share ratably, as a single class, in all of the
assets of the Company available for distribution to holders of shares of
Common Stock and Class A Common Stock upon the liquidation, dissolution or
winding up of the affairs of the Company. Holders of Common Stock do not have
preemptive, subscription or conversion rights. There are no redemption or
sinking fund provisions for the benefit of the Common Stock or Class A Common
Stock in the Company's Certificate of Incorporation.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board in the resolutions
authorizing the issuance of that particular series. In designating any series
of Preferred Stock, the Board may, without further action by the holders of
Common Stock, fix the number of shares constituting that series and fix the
dividend rights, dividend rate, conversion rights, voting rights (which may be
greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the
liquidation preferences of the series of Preferred Stock.
The holders of the Series B-1, B-2 and B-3 Preferred Stock have no voting
rights except as required by law or in connection with an amendment of the
Certificate of Incorporation of the Company which may adversely effect their
preferences, rights, powers or privileges. The holders of the Series B-1, B-2
and B-3 Preferred Stock are entitled to an annual cumulative dividend of $5.59
per share, accruing from September 3, 1993, payable on each December 31 and
June 30, beginning on June 30, 1994, June 30, 1995 and June 30,
37
<PAGE>
1996 for the Series B-1, B-2 and B-3 Preferred, respectively. Upon the
dissolution or liquidation of the Company, the holder of each share of Series
B-1, B-2 and B-3 Preferred Stock shall be entitled to payment of $93.12 before
the holders of the Common Stock or Class A Common Stock (or any other series
of Preferred Stock which is junior to the Series B Preferred Stock on
dissolution or liquidation) receive any payment. Each share of Series B-1 and
B-2 Preferred Stock is convertible into 12.54 and 11.41 shares of Common
Stock, respectively. Each share of Series B-3 Preferred Stock is convertible
into 15 shares of Common Stock. The conversion rate on the Series B Preferred
Stock would be adjusted in the event of a stock dividend, stock split,
combination or reclassification of the Common Stock. The Series B Preferred
Stock has certain anti-dilution rights upon certain issuances of rights or
warrants and distributions of indebtedness on the Common Stock. The Series B-
1, B-2 and B-3 Preferred Stock is not subject to redemption.
All shares of Series C Preferred Stock were converted into Common Stock on
February 25, 1997 and no shares remain available for issuance.
Series D Preferred Stock is not redeemable. Each share of Series D Preferred
Stock will be entitled to an aggregate dividend of 1,000 times the dividend
declared per Common Share. In the event of liquidation, the holders of the
Series D Preferred will be entitled to a minimum preferential liquidation
payment equal to $120,000 per share. Each share of Series D Preferred will
have 1,000 votes, voting together with the Common Shares. In the event of any
merger, consolidation or other transaction in which the Common Shares are
changed or exchanged, each share of Series D Preferred will be entitled to
receive 1,000 times the amount received per Common Share. These rights are
protected by customary anti-dilution provisions. Because of the nature of the
dividend, liquidation and voting rights of the shares of Series D Preferred,
the value of the one one-thousandth interest in a share of Series D Preferred
purchasable upon exercise of each Right should approximate the value of one
Common Share.
ANTI-TAKEOVER EFFECTS
The existence of the Class A Common Stock may make the Company a less
attractive target for a hostile takeover bid or render more difficult or
discourage a merger proposal, an unfriendly tender offer, a proxy contest or
the removal of incumbent management, even if such transactions were favored by
the stockholders of the Company other than the Class A Common Stockholders.
Thus, the stockholders may be deprived of an opportunity to sell their shares
at a premium over prevailing market prices in the event of a hostile takeover
bid. Those seeking to acquire the Company through a business combination may
be compelled to consult first with the Class A Common Stockholders in order to
negotiate the terms of such business combination. Any such proposed business
combination will have to be approved by the Board of Directors, which may be
under the control of the Class A Common Stockholders, and if stockholder
approval were required, the approval of the Class A Common Stockholders may be
necessary before any such business combination could be consummated.
The Board of Directors has the authority without stockholder approval to
issue an additional 1.6 million shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series. The issuance
of Preferred Stock could adversely affect the voting power of holders of
Common Stock or the likelihood that such holders will receive a dividend
payment or payments upon liquidation and could have the effect of delaying,
deterring or preventing a change in control of the Company or the removal of
management. The Company has no present plan to issue any shares of Preferred
Stock.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporate Law; an anti-takeover law. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date
that the person became an interested stockholder unless (with certain
exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner.
38
<PAGE>
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interest stockholder" is a person who, together with affiliates
and associates, owns (or within a three year period, did own) 15% or more of a
corporation's outstanding voting stock. This provision may have the effect of
delaying, deterring or preventing a change in control of the Company without
further action by the stockholders.
The Company's Board of Directors declared a dividend of one right ("Right")
to purchase one one-thousandth share of the Company's Series D Preferred Stock
for each outstanding share of Common Stock and Class A Common Stock ("Common
Share") of the Company. The dividend will be payable on May 5, 1997 to
stockholders of record as of the close of business on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series D Preferred at an exercise price of $120.00, subject to
adjustment. The Rights may become exercisable following the tenth day after a
person or group announces acquisition of 15% or more of the Company's Common
Shares or announces commencement of a tender offer or exchange offer, the
consummation of which would result in ownership by the person or group of 15%
or more of the Common Shares. The Company will be entitled to redeem the
Rights at $0.01 per Right at any time on or before the tenth day following
acquisition by a person or group of 15% or more of the Company's Common
Shares.
If prior to redemption of the Rights, a person or group acquires 15% or more
of the Company's Common Shares, each Right not owned by a holder of 15% or
more of the Common Shares will entitle its holder to purchase, at the Right's
then current exercise price, that number of Common Shares of the Company (or,
in certain circumstances as determined by the Board, cash, other property or
other securities) having a market value at that time of twice the Rights's
exercise price. If, after the tenth day following acquisition by a person or
group of 15% or more of the Company's Common Shares, the Company sells more
than 50% of its assets or earning power or is acquired in a merger or other
business combination transaction, the acquiring person must assume the
obligations under the Rights and the Rights will become exercisable to acquire
common stock of the acquiring person at the discounted price. At any time
after an event triggering exercisability of the Rights at a discounted price
and prior to the acquisition by the acquiring person of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than those owned by the acquiring person or its affiliates)
for Common Shares of the Company at an exchange ratio of one Common Share per
Right.
The Rights approved by the Board are designed to protect and maximize the
value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive the Company's Board of Directors and its
stockholders of any real opportunity to determine the destiny of the Company
or to evaluate and protect the long-term value of the Company. The Rights are
not intended to prevent a takeover of the Company. The Rights may be redeemed
by the Company at $0.01 per Right within ten days (or such later date as may
be determined by a majority of Continuing Directors) after the accumulation of
15% or more of the Company's shares by a single acquiror or group.
Accordingly, the Rights should not interfere with any merger or business
combination approved by the Board of Directors. Issuance of the Rights does
not in any way weaken the financial strength of the Company or interfere with
its business plans. The issuance of the Rights themselves has no dilutive
effect, will not affect reported earnings per share, should not be taxable to
the Company or to its stockholders, and will not change the way in which the
Company's shares are presently traded. The Company's Board of Directors
believes that the Rights represent a sound and reasonable means of addressing
the complex issues of corporate policy created by the current takeover
environment. However, the Rights may have the effect of rendering more
difficult or discouraging an acquisition of the Company deemed undesirable by
the Board of Directors. The Rights may cause substantial dilution to a person
or group that attempts to acquire the Company on terms or in a manner not
approved by the Company's Board of Directors, except pursuant to an offer
conditioned upon the negation, purchase or redemption of the Rights.
39
<PAGE>
REGISTRATION RIGHTS
The Company has agreed to issue warrants to purchase 100,000 shares of
Common Stock on March 31, 1997 and has agreed to register the Common Stock
issuable upon exercise of such warrants within 45 days of the closing of such
transaction. Certain other stockholders and securityholders have been granted
certain contractual demand and "piggyback" registration rights with respect to
securities of the Company. The Company has registered all outstanding
securities held by holders of such registration rights. Holders of
approximately 616,240 shares of Common Stock underlying certain securities may
resell such Common Stock under currently effective registration statements.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company, New York, New York.
40
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, Donaldson, Lufkin & Jenrette Securities Corporation and
Prudential Securities Incorporated (the "Underwriters") have severally agreed
to purchase from the Company the following respective number of shares of
Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC..................................
Donaldson, Lufkin & Jenrette Securities Corporation....
Prudential Securities Incorporated.....................
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the public offering of the shares, the offering price and other selling
terms may be changed by the Underwriters.
The Company has granted to the Underwriters an over-allotment option,
exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 450,000 additional shares of Common Stock at the public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares
of Common Stock offered hereby. The Company will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company's officers, directors and certain stockholders, who will own in
the aggregate approximately 1,979,000 shares of Common Stock after the
offering, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire share of Common Stock or
securities exchangeable for or convertible into Shares of Common Stock owned
by them during the 90-day period following the date of this Prospectus. The
Company has agreed that during the 90-day period following the date of this
Prospectus or it will not, without the prior written consent of Hambrecht &
Quist LLC, on behalf of the Underwriters, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock
41
<PAGE>
or any securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, other than (A) the shares to be
sold in this offering, (B) shares of Common Stock issued upon the exercise of
options granted under the Company's 1992 Stock Option Plan (the "Option
Plan"), upon the exercise of options and warrants outstanding as of the date
of this Prospectus, or upon conversion of convertible stock outstanding as of
the date of this Prospectus, (C) options to purchase Common Stock granted
under the Option Plan and (D) shares of Common Stock issued under the
Company's 1994 Employee Stock Purchase Plan.
In connection with the offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 under Regulation M during the business day prior to
the pricing of the offering. Such passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
In connection with this offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the offering
then they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the offering
to cover all or a portion of such short position. The Underwriters may also
over all or a portion of such short position, up to 450,000 shares of Common
Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Hambrecht & Quist LLC, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
offering) for the account of the other Underwriters, the selling concession
with respect to Common Stock that is distributed in the offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in
this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
Hambrecht & Quist LLC has, from time to time, rendered investment banking
advisory services to the Company. Hambrecht & Quist LLC received fees of
$200,000 and a warrant to purchase 10,000 shares of Common Stock at an
exercise price of $29.25 per share in connection with the Company's
acquisition of IPEC Planar Portland; fees of $1.5 million and a warrant to
purchase 20,352 shares of Common Stock at an exercise price of $24.567 per
share in connection with the Company's Series C Preferred Stock Financing; and
fees of $30,000 in connection with the Company's stockholder rights plan.
42
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the
Underwriters by Cooley Godward LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Integrated Process Equipment Corp.
and Subsidiaries as of June 30, 1996 and for the year then ended have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements of Integrated Process Equipment Corp.
and Subsidiaries as of June 30, 1995 and for each of the two years in the two
year period then ended have been included herein in reliance upon the report
of Richard A. Eisner & Company LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
43
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report, KPMG Peat Marwick LLP ...................... F-2
Independent Auditors' Report, Richard A. Eisner & Company, LLP ........... F-3
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31,
1996 (unaudited)......................................................... F-4
Consolidated Statements of Operations for the years ended June 30, 1994,
1995 and 1996 and the six-month periods ended December 31, 1995 and 1996
(unaudited).............................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 1994, 1995 and 1996 and the six-month period ended
December 31, 1996 (unaudited)............................................ F-7
Consolidated Statements of Cash Flows for the years ended June 30, 1994,
1995 and 1996 and the six-month periods ended December 31, 1995 and 1996
(unaudited).............................................................. F-10
Notes to Consolidated Financial Statements................................ F-12
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Process Equipment Corp.:
We have audited the accompanying consolidated balance sheet of Integrated
Process Equipment Corp. and subsidiaries as of June 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Process Equipment Corp. and subsidiaries as of June 30, 1996 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 2, 1996, except as to note 17
which is as of February 25, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Process Equipment Corp.:
We have audited the accompanying consolidated balance sheet of Integrated
Process Equipment Corp. and subsidiaries as of June 30, 1995 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the years in the two-year period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Integrated Process Equipment
Corp. and subsidiaries at June 30, 1995 and the consolidated results of their
operations and cash flows for each of the years in the two-year period then
ended, in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
August 18, 1995, except as to Note 17
which is as of February 25, 1997
F-3
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1995 1996 1996
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 65,790 $ 11,325 $ 36,953
Accounts receivable (note 16)............... 21,330 34,089 35,258
Inventories (notes 3 and 16)................ 18,907 23,437 29,540
Prepaid expenses............................ 982 946 1,219
Net assets of discontinued operations (note
17)........................................ 7,442 12,339 3,920
Deferred income taxes (note 12)............. 2,204 5,175 13,646
-------- -------- --------
Total current assets.................... 116,655 81,311 120,536
-------- -------- --------
Property, plant and equipment, net (note 4)... 10,358 50,225 23,301
Intangible assets, net (note 5)............... 7,549 15,135 13,108
Deferred income taxes (note 12)............... -- 13,175 17,928
Other assets.................................. 839 1,475 1,601
Net assets of discontinued operations (note
17) 15,223 17,380 --
-------- -------- --------
$150,624 $184,701 $176,474
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 7)...................... $ -- $ 2,056 $ 221
Current portion of long-term debt (note 8).. 4,362 1,886 2,219
Accounts payable............................ 6,542 11,961 11,510
Accrued liabilities (note 6)................ 7,196 17,708 30,555
-------- -------- --------
Total current liabilities............... 18,100 33,611 44,505
-------- -------- --------
Long-term debt, less current portion (note 8). 1,285 22,753 17,860
Deferred income taxes (note 12)............... 1,119 -- --
-------- -------- --------
Total liabilities....................... 20,504 56,364 62,365
-------- -------- --------
Stockholders' equity (notes 9 and 17)
Preferred stock, $.01 par value per share,
Nonvoting. Authorized, 2,000,000 shares:
Series B-1 cumulative preferred stock.
Authorized 21,478 shares, issued and
outstanding 20,941 shares at June 30,
1995 and 1996 and 15,572 shares at
December 31, 1996. Liquidation preference
of $1,450 as of December 31, 1996........ -- -- --
Series B-2 cumulative preferred stock.
Authorized 21,478 shares, issued and
outstanding 20,941 shares. Liquidation
preference of $1,950 as of December 31,
1996..................................... -- -- --
Series B-3 cumulative preferred stock.
Authorized 21,478 shares, issued and
outstanding 21,210 shares at June 30 and
December 31, 1996. Liquidation preference
of $1,975 as of December 31, 1996........ -- -- --
Series C convertible preferred stock.
Authorized 100,000 shares, issued and
outstanding 100,000 shares at December
31, 1996. Liquidation preference of
$25,000 as of December 31, 1996.......... -- -- 1
Common stock, $.01 par value per share. One
vote per share; authorized 30,000,000
shares at June 30, 1995, and 50,000,000
shares at June 30 and December 31, 1996,
issued and outstanding 13,501,756 shares at
June 30, 1995, 14,238,406 shares at June
30, 1996, and 14,442,050 shares at December
31, 1996................................... 135 142 144
Class A common stock, $.01 par value per
share. Four votes per share; authorized
3,500,000 shares, issued and outstanding
521,704 shares at June 30, 1995, 521,650
shares at June 30 and December 31, 1996.... 5 5 5
Additional paid-in capital.................. 142,422 151,730 178,118
Accumulated deficit......................... (12,450) (23,546) (64,190)
Foreign currency translation adjustment..... 8 6 31
-------- -------- --------
Total stockholders' equity.............. 130,120 128,337 114,109
Commitments and contingencies (note 13)
-------- -------- --------
$150,624 $184,701 $176,474
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------- ------------------
1994 1995 1996 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................ $31,158 $75,220 $148,690 $ 66,974 $ 65,069
Cost of goods sold............. 22,738 41,599 85,061 37,284 39,523
------- ------- -------- -------- --------
Gross margin............... 8,420 33,621 63,629 29,690 25,546
Operating expenses:
Research and development..... 2,453 5,407 15,877 6,326 11,950
Purchased research and
development................. 1,107 -- 36,961 36,961 --
Selling, general and
administrative.............. 9,403 17,061 26,653 11,209 13,117
Program discontinuance charge
(note 17)................... -- -- -- -- 17,601
------- ------- -------- -------- --------
Total operating expenses... 12,963 22,468 79,491 54,496 42,668
------- ------- -------- -------- --------
Operating income (loss).... (4,543) 11,153 (15,862) (24,806) (17,122)
Other income (expense):
Interest income.............. 22 380 1,680 1,155 203
Interest expense (note 8).... (5,197) (879) (2,031) (245) (1,173)
Other, net................... (12) 16 451 181 259
------- ------- -------- -------- --------
Total other income
(expense)................. (5,187) (483) 100 1,091 (711)
------- ------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes....... (9,730) 10,670 (15,762) (23,715) (17,833)
Income tax expense (benefit)
(note 12)..................... (830) 714 (6,399) (9,448) (6,149)
------- ------- -------- -------- --------
Income (loss) from
continuing operations..... (8,900) 9,956 (9,363) (14,267) (11,684)
Discontinued operations:
Loss from operations of IPEC
Clean, net of taxes (note
17)......................... -- (9,357) (1,294) (1,167) (3,614)
Loss on disposal of IPEC
Clean, net of taxes
(note 17)................... -- -- -- -- (24,950)
------- ------- -------- -------- --------
Net loss from discontinued
operations................ -- (9,357) (1,294) (1,167) (28,564)
------- ------- -------- -------- --------
Net income (loss).......... (8,900) 599 (10,657) (15,434) (40,248)
Cumulative dividend on
preferred stock............... (118) (377) (579) (399) (162)
------- ------- -------- -------- --------
Net income (loss)
attributable to common
stockholders.............. $(9,018) $ 222 $(11,236) $(15,833) $(40,410)
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------ ----------------
1994 1995 1996 1995 1996
------- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share:
From continuing operations........ $ (3.26) $ .97 $ (.69) $ (1.02) $ (.80)
From discontinued operations...... -- (.95) (.09) (.08) (1.92)
------- ------ ------- ------- -------
Net income (loss) per common share. $ (3.26) $ .02 $ (.78) $ (1.10) $ (2.72)
======= ====== ======= ======= =======
Shares used in per share
calculation....................... 2,763 9,865 14,434 14,310 14,851
======= ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES C
PREFERRED STOCK STOCK PREFERRED STOCK COMMON STOCK
---------------- -------------- ----------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------ ------ ------ ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993.................... 305,398 $ 425 -- $-- -- $ -- 1,006,250 $10
Conversion of Series A preferred stock
to common stock............................ (305,398) (425) -- -- -- -- 152,698 2
Acquisition of Westech Systems, Inc......... -- -- 21,478 -- -- -- 429,530 4
Director stock sale......................... -- -- -- -- -- -- 72,928 --
Exercise of stock options................... -- -- -- -- -- -- 10,000 --
Proceeds from public offering, net
of offering costs of $1,538................ -- -- -- -- -- -- 2,561,000 26
Issuance of Class A warrants................ -- -- -- -- -- -- -- --
Issuance of Class D warrants................ -- -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- -- --
Preferred stock dividends paid.............. -- -- -- -- -- -- -- --
Foreign currency translation adjustment..... -- -- -- -- -- -- -- --
-------- ----- ------ --- ------- ------- --------- ---
Balance at June 30, 1994.................... -- -- 21,478 -- -- -- 4,232,406 42
Issuance of Series B-2 preferred stock...... -- -- 21,478 -- -- -- -- --
Conversion of Series B preferred stock
to common stock............................ -- -- (1,074) -- -- -- 12,860 --
Conversion of Class A common
stock to common stock...................... -- -- -- -- -- -- 505,678 6
Exercise of warrants........................ -- -- -- -- -- -- 7,350,410 74
Exercise of unit purchase options........... -- -- -- -- -- -- 64,540 --
Acquisition of Athens Corp.................. -- -- -- -- -- -- 1,095,695 11
Exercise of stock options................... -- -- -- -- -- -- 217,731 2
Employee stock purchase plan................ -- -- -- -- -- -- 22,436 --
Tax benefit attributable to
exercise of stock options.................. -- -- -- -- -- -- -- --
Issuance of Class E warrants................ -- -- -- -- -- -- -- --
Option compensation charges................. -- -- -- -- -- -- -- --
Net income.................................. -- -- -- -- -- -- -- --
Preferred stock dividends paid.............. -- -- -- -- -- -- -- --
-------- ----- ------ --- ------- ------- --------- ---
</TABLE>
<TABLE>
<CAPTION>
CLASS A FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
----------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993.................... 1,100,310 $11 $5,192 $(4,029) $ 7
Conversion of Series A preferred stock
to common stock............................ -- -- 423 -- --
Acquisition of Westech Systems, Inc......... -- -- 5,996 -- --
Director stock sale......................... (72,928) -- -- -- --
Exercise of stock options................... -- -- 77 -- --
Proceeds from public offering, net
of offering costs of $1,538................ -- -- 17,207 -- --
Issuance of Class A warrants................ -- -- 3,516 -- --
Issuance of Class D warrants................ -- -- 73 -- --
Net loss.................................... -- -- -- (8,900) --
Preferred stock dividends paid.............. -- -- -- (41) --
Foreign currency translation adjustment..... -- -- -- -- 1
--------- --- ------ ------- -----
Balance at June 30, 1994.................... 1,027,382 11 32,484 (12,970) 8
Issuance of Series B-2 preferred stock...... -- -- 2,000 -- --
Conversion of Series B preferred stock
to common stock............................ -- -- -- -- --
Conversion of Class A common
stock to common stock...................... (505,678) (6) -- -- --
Exercise of warrants........................ -- -- 83,346 -- --
Exercise of unit purchase options........... -- -- 541 -- --
Acquisition of Athens Corp.................. -- -- 20,998 -- --
Exercise of stock options................... -- -- 1,670 -- --
Employee stock purchase plan................ -- -- 212 -- --
Tax benefit attributable to
exercise of stock options.................. -- -- 988 -- --
Issuance of Class E warrants................ -- -- 144 -- --
Option compensation charges................. -- -- 39 -- --
Net income.................................. -- -- -- 599 --
Preferred stock dividends paid.............. -- -- -- (79) --
--------- --- ------ ------- -----
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------- ------------------ -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995................. -- $ -- 41,882 $ -- -- $--
Issuance of Series B-3 preferred stock... -- -- 21,478 -- -- --
Conversion of Series B preferred stock
to common stock........................ -- -- (268) -- -- --
Reclassification of shares............... -- -- -- -- -- --
Exercise of warrants..................... -- -- -- -- -- --
Acquisition of remaining interests in
Athens Corp............................ -- -- -- -- -- --
Exercise of unit purchase options........ -- -- -- -- -- --
Conversion of convertible debenture...... -- -- -- -- -- --
Exercise of stock options................ -- -- -- -- -- --
Employee stock purchase plan............. -- -- -- -- -- --
Tax benefit attributable to exercise of
stock options.......................... -- -- -- -- -- --
Issuance of warrants..................... -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
Preferred stock dividends paid........... -- -- -- -- -- --
Foreign currency translation adjustment.. -- -- -- -- -- --
------- ------- --------- ------ ------- -------
Balance at June 30, 1996................. -- $ -- 63,092 $ -- -- $--
</TABLE>
<TABLE>
<CAPTION>
CLASS A FOREIGN
COMMON STOCK COMMON STOCK ADDITIONAL CURRENCY
----------------- --------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
---------- ------ ------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995................. 13,501,756 $135 521,704 $ 5 $142,422 $(12,450) $ 8
Issuance of Series B-3 preferred stock... -- -- -- -- 2,000 -- --
Conversion of Series B preferred stock
to common stock........................ 4,020 -- -- -- -- -- --
Reclassification of shares............... 54 -- (54) -- -- -- --
Exercise of warrants..................... 156,250 2 -- -- 1,413 -- --
Acquisition of remaining interests in
Athens Corp............................ 211,670 2 -- -- 204 -- --
Exercise of unit purchase options........ 68,880 1 -- -- 926 -- --
Conversion of convertible debenture...... 50,000 -- -- -- 110 -- --
Exercise of stock options................ 179,868 2 -- -- 1,950 -- --
Employee stock purchase plan............. 65,908 -- -- -- 1,044 -- --
Tax benefit attributable to exercise of
stock options.......................... -- -- -- -- 1,561 -- --
Issuance of warrants..................... -- -- -- -- 100 -- --
Net loss................................. -- -- -- -- -- (10,657) --
Preferred stock dividends paid........... -- -- -- -- -- (439) --
Foreign currency translation adjustment.. -- -- -- -- -- -- (2)
---------- ---- ------- --- -------- -------- ---
Balance at June 30, 1996................. 14,238,406 $142 521,650 $ 5 $151,730 $(23,546) $ 6
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A
PREFERRED SERIES B SERIES C
STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------- ------------------ ----------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ --------- ------- --------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996................... -- $-- 63,092 $-- -- $-- 14,238,406 $142
Retirement of Series B-1 preferred stock... -- -- (5,369) -- -- -- -- --
Issuance of warrants....................... -- -- -- -- -- -- -- --
Exercise of stock options.................. -- -- -- -- -- -- 151,007 2
Employee stock purchase plan............... -- -- -- -- -- -- 52,637 --
Tax benefit attributable to
exercise of stock options................ -- -- -- -- -- -- -- --
Issuance of Series C preferred stock
(less offering costs of $1,570).......... -- -- -- -- 100,000 1 -- --
Net loss................................... -- -- -- -- -- -- -- --
Preferred stock dividends paid............. -- -- -- -- -- -- -- --
Foreign currency translation adjustment.... -- -- -- -- -- -- -- --
--- --- --------- ------ --------- ----- ---------- ----
Balance at December 31, 1996
(unaudited).............................. -- $-- 57,723 $-- 100,000 $ 1 14,442,050 $144
=== === ========= ====== ========= ===== ========== ====
</TABLE>
<TABLE>
<CAPTION>
CLASS A FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
-------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996................... 521,650 $ 5 $151,730 $(23,546) $ 6
Retirement of Series B-1 preferred stock... -- -- (500) -- --
Issuance of warrants....................... -- -- 848 -- --
Exercise of stock options.................. -- -- 1,589 -- --
Employee stock purchase plan............... -- -- 698 -- --
Tax benefit attributable to
exercise of stock options................ -- -- 324 -- --
Issuance of Series C preferred stock
(less offering costs of $1,570).......... -- -- 23,429 -- --
Net loss................................... -- -- -- (40,248) --
Preferred stock dividends paid............. -- -- -- (396) --
Foreign currency translation adjustment.... -- -- -- -- 25
------- --- -------- -------- ---
Balance at December 31, 1996
(unaudited).............................. 521,650 $ 5 $178,118 $(64,190) $31
======= === ======== ======== ===
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- ------------------
1994 1995 1996 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ (8,900) $ 599 $(10,657) $(15,434) $(40,248)
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and
amortization............ 5,829 2,988 6,328 1,640 6,704
(Gain) loss on sale of
property, plant and
equipment............... 12 -- (134) -- --
Loss on disposal of IPEC
Clean, net of taxes..... -- -- -- -- 24,950
Purchased research and
development............. 1,107 -- 36,961 36,961 --
Program discontinuance
charge.................. -- -- -- -- 17,601
Deferred tax benefit..... (830) (1,085) (15,855) (12,097) (13,426)
Acquisition adjustment... -- -- -- -- (865)
Cost of warrants issued.. -- -- -- -- 848
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Accounts receivable.... (4,401) (11,045) (10,432) (6,647) (1,252)
Inventories............ (6,078) (2,059) 521 3,493 (15,104)
Prepaid expenses and
other assets.......... (183) (693) (487) (1,590) (399)
Accounts payable....... -- (918) (7,054) 1,233 (451)
Accrued liabilities.... 43 (933) 3,062 280 8,873
Net assets of
discontinued
operations............ 682 2,843 7,349 (7,927) 849
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities.......... (12,719) (10,303) 9,602 (88) (11,920)
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Purchase of property, plant
and equipment.............. (951) (5,625) (36,571) (19,658) (343)
Acquisition costs........... 134 -- -- -- --
Proceeds from sale of
property, plant and
equipment.................. 3 -- 886 -- 20,417
Proceeds from notes
receivable--officers....... 31 -- -- -- --
Purchase of subsidiaries,
net of cash acquired....... (1,111) (929) (23,641) (23,641) --
-------- -------- -------- -------- --------
Net cash provided by (used
in) investing activities.. (1,894) (6,554) (59,326) (43,299) 20,074
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt....................... -- 338 35,787 10,000 4,407
Repayment of notes payable.. -- (4,000) (24,000) -- (1,259)
Net proceeds from issuance
of common stock and
warrants................... 17,310 85,845 5,544 2,562 2,289
Payment of preferred stock
dividends.................. (41) (79) (439) (351) (396)
Repayment of long-term debt
and capital leases......... (1,604) (868) (21,631) (3,564) (11,022)
Repayment of related party
notes payable.............. (515) (4,768) -- -- --
Net proceeds from issuance
of Series C preferred
stock...................... -- -- -- -- 23,430
Borrowing from related
parties.................... -- 5,200 -- -- --
Deferred financing fees..... (667) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities.. 14,483 81,668 (4,739) 8,647 17,449
-------- -------- -------- -------- --------
Effect of exchange rate
changes on cash............. 1 -- (2) -- 25
-------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents. (129) 64,811 (54,465) (34,740) 25,628
Cash and cash equivalents,
beginning of period......... 1,108 979 65,790 65,790 11,325
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period............... $ 979 $ 65,790 $ 11,325 $ 31,050 $ 36,953
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER
YEARS ENDED JUNE 30, 31,
--------------------------- ----------------
1994 1995 1996 1995 1996
------- -------- -------- -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid for:
Interest..................... $ 905 $ 657 $ 1,902 $ 423 $1,339
======= ======== ======== ======== ======
Income taxes................. $ -- $ 576 $ 3,317 $ 2,906 $ --
======= ======== ======== ======== ======
Supplemental disclosures of
noncash investing activities:
The Company made acquisitions
of $1,111, $929 and $23,593
for cash in the years ended
June 30, 1994, 1995 and 1996,
respectively. The purchase
prices were allocated to the
assets acquired and
liabilities assumed based on
their fair value as indicated
in notes to the consolidated
financial statements. A
summary of cash paid for the
acquisitions follows:
Purchase price............... $11,198 $ 21,747 $ 54,395 $ 54,395 $ --
Less cash acquired........... (87) (18) (1,269) (1,269) --
Common stock issued.......... (4,000) (20,800) (206) (206) --
Notes payable................ -- -- (26,056) (26,056) --
Long-term debt............... -- -- (3,223) (3,223) --
Preferred stock issued....... (6,000) -- -- -- --
------- -------- -------- -------- ------
$ 1,111 $ 929 $ 23,641 $ 23,641 $ --
======= ======== ======== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(1) ORGANIZATION
Integrated Process Equipment Corp. (IPEC) and subsidiaries (the Company)
designs, manufactures, markets and services capital equipment used by the
semiconductor industry.
ACQUISITIONS
IPEC Planar Phoenix
On September 3, 1993, IPEC acquired Westech Systems, Inc. (Westech) for
$4,900. The name of Westech was subsequently changed to IPEC Planar Phoenix,
Inc. The purchase price consisted of cash amounting to $900 and 429,530 shares
of IPEC's common stock valued at $4,000. In addition, IPEC agreed to issue up
to $6,000 of its Series B 6% cumulative convertible preferred stock,
contingent upon achievement of revenue targets in 1993, 1994 and 1995. Since
the revenue targets for each calendar year were met, $6,000 of preferred stock
was issued and included in the purchase price with a corresponding increase in
goodwill.
After giving consideration to the issuance of preferred stock, the adjusted
purchase price was allocated to the assets acquired, including cash of $87 and
liabilities assumed based on their fair values as follows:
<TABLE>
<S> <C>
Purchase price:
Cash.............................................................. $ 900
Common stock...................................................... 4,000
Preferred stock................................................... 6,000
Costs of acquisition.............................................. 298
-------
Total........................................................... $11,198
=======
Assets acquired and liabilities assumed:
Current assets.................................................... $16,317
Property, plant and equipment..................................... 4,557
Other assets...................................................... 49
Patents........................................................... 5,176
Purchased research and development................................ 1,107
Goodwill.......................................................... 6,910
Current liabilities............................................... (20,135)
Noncurrent liabilities............................................ (1,953)
Deferred income taxes............................................. (830)
-------
Total........................................................... $11,198
=======
</TABLE>
The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase and, accordingly,
the accompanying consolidated financial statements include the accounts of
Westech from the date of acquisition.
F-12
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
IPEC Clean
On November 22, 1994, the Company acquired approximately 94% of the
outstanding common stock of Athens Corp (Athens), a privately-owned company
engaged in manufacturing wet process reprocessing systems for the
semiconductor industry. The name of Athens was subsequently changed to IPEC
Clean, Inc. (IPEC Clean). The purchase price consisted of 1,095,695 shares of
the Company's common stock. The Company subsequently acquired the remaining
interests in the common stock of Athens in fiscal 1996 in exchange for 211,670
shares of the Company's common stock.
The purchase price was allocated to the assets acquired, including cash of
$18 and liabilities assumed based on their fair values as follows:
<TABLE>
<S> <C>
Purchase price:
Common stock...................................................... $21,215
Costs of acquisition.............................................. 995
-------
Total........................................................... $22,210
=======
Assets acquired and liabilities assumed:
Current assets.................................................... $ 6,711
Property, plant and equipment..................................... 1,207
Other assets...................................................... 753
Purchased research and development................................ 8,485
Developed technology.............................................. 13,592
Assembled workforce............................................... 881
Goodwill.......................................................... 577
Current liabilities............................................... (9,186)
Noncurrent liabilities............................................ (696)
Deferred income taxes............................................. (114)
-------
Total........................................................... $22,210
=======
</TABLE>
The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase and, accordingly,
the accompanying consolidated financial statements include the accounts of
Athens from the date of acquisition.The operations of IPEC Clean were
classified as discontinued in fiscal 1997. See note 17.
The purchased research and development included eight different potential
products and was valued using a discounted cash flow analysis with no
valuation of any potential product exceeding the estimated replacement cost to
the Company. Of the eight "in-process" products acquired, four were in the
product definition stage and four products had been conceptually outlined but
had not gone through the product definition stage. At the time of the
acquisition, there were no future alternative uses for these products. The
Company believes that the technology had no separate economic value and the
technology was expensed as purchased research and development cost at the time
of acquisition.
F-13
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
IPEC Planar Portland
On October 30, 1995, the Company acquired all of the outstanding common stock
of GAARD Automation, Inc. (GAARD), a privately-owned company that developed
and sold an advanced high throughput chemical mechanical planarization (CMP)
system for metal planarization. The name of GAARD was subsequently changed to
IPEC Planar Portland, Inc. GAARD also designed and manufactured custom
flexible automation systems used outside the semiconductor industry. The
purchase price consisted of cash of $12,000 and notes payable and long-term
debt of $18,923. Notes payable of $15,000 were subsequently repaid in 1996.
The purchase price was allocated to the assets acquired (including cash of
$1,269) and liabilities assumed based on their fair values as follows:
<TABLE>
<S> <C>
Purchase price:
Cash.............................................................. $12,000
Notes payable..................................................... 15,700
Long-term debt.................................................... 3,223
Costs of acquisition.............................................. 620
-------
Total........................................................... $31,543
=======
Assets acquired and liabilities assumed:
Current assets.................................................... $ 7,958
Property, plant and equipment..................................... 128
Deferred income taxes............................................. 1,010
Purchased research and development................................ 28,793
Current liabilities............................................... (6,346)
-------
Total........................................................... $31,543
=======
</TABLE>
The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase, and accordingly,
the accompanying consolidated financial statements include the results of
GAARD from the date of acquisition.
The purchased research and development included one potential product and
was valued using a discounted cash flow analysis. The valuation did not exceed
the estimated replacement cost to the Company. The product, a CMP tool, was in
the product definition stage at the time of the acquisition, and there were no
future alternative uses for this product. The Company believes that the
technology had no separate economic value and the technology was expensed as
purchased research and development cost at the time of acquisition.
F-14
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
IPEC Precision
On December 29, 1995, the Company's subsidiary IPEC Precision, Inc. acquired
substantially all of the assets constituting the Precision Materials Operation
of Hughes Danbury Optical Systems, Inc. (HDOS). IPEC Precision (formerly HDOS)
was engaged in the design, manufacture, and sale of precision equipment, based
on proprietary plasma-assisted chemical etching and metrology technologies,
for use in the production of advanced semiconductor wafers and devices, and
provided wafer processing services that use such proprietary technology and
equipment. The purchase price consisted of cash of $11,517 and notes payable
of $10,356.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values as follows:
<TABLE>
<S> <C>
Purchase price:
Cash.............................................................. $11,517
Notes payable..................................................... 10,356
Costs of acquisition.............................................. 725
-------
Total........................................................... $22,598
=======
Assets acquired and liabilities assumed:
Current assets.................................................... $ 879
Property, plant and equipment..................................... 6,190
Deferred income taxes............................................. 400
Patents........................................................... 6,222
Assembled workforce............................................... 1,622
Purchased research and development................................ 8,168
Current liabilities............................................... (883)
-------
Total........................................................... $22,598
=======
</TABLE>
The purchased research and development was charged to operations upon
acquisition. The acquisition was accounted for as a purchase and, accordingly,
the accompanying consolidated financial statements include the results of IPEC
Precision from the date of acquisition. A $9,000 note payable to HDOS relating
to the acquisition bearing interest at the rate of 11% per annum was repaid on
February 27, 1996. The Company also financed $10,000 of the $11,517 paid to
HDOS through borrowing from a stockholder, which was also repaid in April
1996.
The purchased research and development included four potential products and
was valued using a discounted cash flow analysis. The valuation did not exceed
the estimated replacement cost to the Company. Of the four "in-process"
products acquired, two were in the product definition stage and two products
had been conceptually outlined but had not gone through the product definition
stage. The Company believes that the technology had no separate economic value
and the technology was expensed as purchased research and development cost at
the time of acquisition.
F-15
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
Pro Forma
Pro forma unaudited consolidated operations data from continuing operations
(excluding nonrecurring charges for purchased research and development and
discontinued operations), assuming all acquisitions had taken place on July 1,
1993 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Revenue........................................... $42,961 $93,545 $156,839
Net income (loss)................................. $(7,467) $11,301 $ 13,587
Net income (loss) per share....................... $ (2.70) $ 1.15 $ .94
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of IPEC and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Cash and Cash Equivalents
All highly liquid securities with original maturities of three months or
less at the date of purchase are considered to be cash equivalents.
Concentration of Credit Risk
The Company sells products and services to customers, primarily
semiconductor manufacturers, and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives of the assets which range
from three to forty years. Equipment recorded under capital leases is stated
at the lower of fair market value or the present value of minimum lease
payments at
F-16
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
the inception of the lease. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the related assets.
Intangible Assets
Intangible assets have been allocated among various categories based on
their estimated fair value upon acquisition as determined by management or by
independent appraisal. The Company continually evaluates whether events and
circumstances have occurred that indicate the estimated useful life of
intangible assets may warrant revision or that the remaining balance may not
be recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
net cash flows generated by the asset over the remaining estimated life of the
assets in measuring whether the asset is recoverable. Material factors which
may alter the useful life of the asset or determine that the balance may not
be recoverable include effects of new technologies obsolescence, demand,
competition and other economic factors.
Goodwill represents the excess cost over the fair value of tangible and
intangible assets acquired and is amortized over 10 years using the straight-
line method. Patents are amortized over 5 to 10 years using the straight-line
method. Assembled workforce represents the avoided cost to interview and train
employees and is being amortized over 5 years using the straight-line method.
Warranty Expense
The Company warrants its products for a period of one year or longer upon
sale. Future estimated warranty costs are charged to operations at the time of
sale.
Revenue Recognition
The Company recognizes revenue from sales when a product is shipped. Revenue
from spare part sales or service revenue is recognized when shipped or upon
completion of service.
Research and Development
Expenditures for research and development are charged to operations as
incurred.
Income Taxes
The Company utilizes the method of accounting for income taxes prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Pursuant to SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
F-17
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
Income (Loss) per Share of Common Stock
Net income (loss) per common share is computed by dividing net income (loss)
less dividends on convertible preferred stock by the weighted average number
of common shares outstanding during the period, plus, when their effect is
dilutive, common stock equivalents consisting of certain shares subject to
stock options and warrants.
Foreign Currency Translation
The functional currency for the Company's foreign operations is their local
currency. Assets and liabilities of foreign operations are translated into
U.S. dollars using current exchange rates at the balance sheet date, and
revenue and expenses are translated into U.S. dollars using average exchange
rates for the year. The effects of foreign currency translation adjustments
are included as a separate component of stockholders' equity. Transaction
gains and losses are included in operations and were not significant for the
years ended June 30, 1994, 1995 and 1996 and the six-month periods ended
December 31, 1995 and 1996.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", (SFAS No. 121) 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
Company adopted SFAS No. 121 in the first quarter of the fiscal year ended
June 30, 1997 and this adoption did not have a material impact on the
consolidated financial statements.
Reclassifications
Certain 1995 and 1994 balances have been reclassified to conform to the 1996
presentation.
F-18
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(3) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1995 1996 1996
-------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................ $ 14,607 $14,574 $24,081
Work in process.............................. 5,279 9,391 15,705
Finished goods............................... 6 1,020 1,238
-------- ------- -------
19,892 24,985 41,024
Less: inventory obsolescence reserve......... (985) (1,548) (11,484)
-------- ------- -------
$ 18,907 $23,437 $29,540
======== ======= =======
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1995 1996 1996
-------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $ 251 $ 1,642 $ --
Buildings................................... 1,219 15,414 151
Machinery and equipment..................... 8,420 33,806 31,583
Building and leasehold improvements......... 543 1,325 1,483
Office furniture and fixtures............... 527 1,051 727
Vehicles.................................... 84 106 88
Equipment recorded under capital leases..... 766 2,291 3,197
-------- ------- -------
Total....................................... 11,810 55,635 37,229
Less: accumulated depreciation and
amortization................................ (1,452) (5,410) (13,928)
-------- ------- -------
$ 10,358 $50,225 $23,301
======== ======= =======
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill...................................... $ 4,910 $ 6,910 $ 6,910
Patents....................................... 5,177 11,398 11,398
Assembled workforce........................... -- 1,622 1,622
------- ------- -------
Total......................................... 10,087 19,930 19,930
Less: accumulated amortization................ (2,538) (4,795) (6,822)
------- ------- -------
$ 7,549 $15,135 $13,108
======= ======= =======
</TABLE>
F-19
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(6) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranties............................. $ 1,700 $ 5,215 $ 5,153
Accrued income taxes........................... -- 3,190 5,739
Accrued payroll and benefits................... 825 1,474 1,290
Accrued vacation............................... 461 944 914
Accrued commissions............................ 1,292 768 1,140
Accrued losses on discontinued operations...... -- -- 5,460
Accrued losses on noncancellable purchase
commitments................................... -- -- 4,500
Other accrued liabilities...................... 2,918 6,117 6,359
------- ------- -------
$ 7,196 $17,708 $30,555
======= ======= =======
</TABLE>
(7) NOTES PAYABLE
At June 30, 1996 notes payable amounted to $2,056. Notes payable amounting
to $13,000 and $2,700 were issued in connection with the acquisition of GAARD.
The $13,000 note was paid in April 1996 and $2,000 of the $2,700 note was paid
in January 1996.
A note payable to HDOS amounting to $1,356 was also outstanding at June 30,
1996. The note is due in equal installments on July 1, 1996 and September 30,
1996. The note bears interest at 8.5%. The note was paid in fiscal 1997.
F-20
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(8) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------- DECEMBER 31,
1995 1996 1996
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable, bank (a)......................... $ -- $19,786 $14,193
Notes payable, other, interest ranging from
prime plus 1% to 12%; due in 1997;
collateralized by various assets................ 1,543 198 63
Note payable, interest at prime; matures in
January 1998; collateralized by patents and
guaranteed by a stockholder.................... 275 175 125
Notes payable to stockholder, bearing interest
at prime plus 2% (b)........................... 3,000 -- --
Note payable, GAARD acquisition (c)............. -- 2,620 2,087
Capital lease obligations, interest at rates
ranging from 7.3% to 11.3% (d)................. 272 1,860 3,611
Other........................................... 557 -- --
------ ------- -------
5,647 24,639 20,079
Less: current portion........................... 4,362 1,886 2,219
------ ------- -------
Long-term debt, net............................. $1,285 $22,753 $17,860
====== ======= =======
</TABLE>
- ---------------------
(a) The Company entered into a loan agreement in April 1996 with a bank. Under
the terms of the agreement, the Company received a $10,000 term loan and a
$30,000 revolving loan facility to provide working capital and for general
corporate purposes. The borrowing base for the revolving loan facility
consists of 80% of eligible accounts receivable as defined by the
agreement. At June 30, 1996 and December 31, 1996, the borrowing base was
$22,104 and $15,412, respectively. The unused credit available under this
facility at June 30, 1996 and December 31, 1996 was $12,318 and $1,219,
respectively.
The outstanding balance of the term loan was $10,000 at June 30, 1996. It
bears interest at a rate of 9.52% and matures in October 1997. The
outstanding balance on the revolving loan facility was $9,786 at June 30,
1996. It bears interest at the Company's option at the prime rate or LIBOR
plus 2.75%. The weighted average interest rate at June 30, 1996 on the
outstanding balance was 8.24%. The commitments made under the revolving
credit facility expire in April 1997, but may be extended annually for two
one-year periods with the consent of the bank. If the revolving credit
facility expires, the Company is obligated to repay the outstanding balance
in eight equal quarterly payments of principal plus interest. The term loan
and revolving loan facility are secured by a blanket lien on the assets of
the Company and its subsidiaries. The $10,000 term loan was repaid in the
second quarter of fiscal year 1997.
The terms of the loan agreement include various covenants, which, among
other things include maintenance of certain financial ratios, limit the
amount of dividends that can be paid to common stockholders and
acquisitions of treasury stock. The Company was in compliance with these
covenants as of June 30, 1996 and December 31, 1996.
F-21
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(b) IPEC, Westech Systems, Inc. (now known as IPEC Planar Phoenix, Inc.) and
an individual stockholder entered into a two-year $10,000 revolving credit
facility in September 1994. In December 1995 in connection with the IPEC
Precision acquisition, this facility was converted to a term loan due on
September 30, 1997. The loan bears interest at a floating rate equal to
the prime rate in effect from time to time plus 2% and is secured by a
first lien on the assets of IPEC and Westech and a pledge of the stock of
IPEC's subsidiaries. The loan was repaid in full in April 1996.
As consideration for making the loan available, IPEC and Westech agreed to
pay the stockholder administrative fees of $300 in the aggregate ($100 of
which has been paid and the balance of which is payable by September 8,
1996). IPEC also issued to the stockholder three-year warrants to purchase
50,000 shares of IPEC common stock at a purchase price of $10 per share and
a 10-year debenture in the principal amount of $500 bearing interest at the
prime rate. The debenture was converted into 50,000 shares of IPEC common
stock in the third quarter of fiscal 1996. The warrants were exercised in
the fourth quarter of fiscal 1996.
(c) The Company entered into a $3,223 promissory note with the former owner of
GAARD. The note bears interest at 5.58% per year, principal and interest
are payable in monthly installments. The note matures in September 1998
and is unsecured.
(d) The Company entered into lease financing arrangements for certain
equipment and leasehold improvements. These leases expire at various dates
through June 2001.
In September 1993, the Company obtained a bridge loan in the amount of
$5,000 which was discounted by the value of warrants issued to the lenders.
Upon completion of the public offering in January 1994, the Company repaid the
loan and wrote off the debt discount and expenses of the loan aggregating
$4,256, which is included in interest expense.
Interest expense to related parties was $164, $304 and $561 for the years
ended June 30, 1994, 1995 and 1996, respectively. Interest expense includes
debt discount and deferred financing fees of $213 for the year ended June 30,
1995.
The future maturities of long-term debt as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1997............................................................ $ 1,886
1998............................................................ 16,562
1999............................................................ 5,556
2000............................................................ 395
2001............................................................ 240
-------
Total........................................................... $24,639
=======
</TABLE>
(9) STOCKHOLDERS' EQUITY
Preferred Stock
Approximately 305,000 shares of Series A preferred stock were converted into
approximately 153,000 shares of common stock in fiscal 1994.
F-22
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
The holders of Series B preferred stock are entitled to an annual cumulative
dividend amounting to $5.59 per share, payable semiannually on December 31 and
June 30, commencing June 30, 1994. The Series B preferred stock was issued to
the former stockholders of Westech upon achievement of revenue targets in
calendar 1993, 1994 and 1995. Each share of the Series B-1 preferred stock,
Series B-2 preferred stock and Series B-3 preferred stock is convertible into
12.54, 11.41 and 15.00 shares of common stock, respectively. During fiscal
1995, 1,074 shares of Series B-1 and B-2 preferred stock were converted into
12,860 shares of common stock, and in fiscal 1996, 268 shares of Series B-3
preferred stock were converted into 4,020 shares of common stock.
Class A Common Stock
Each share of Class A common stock is entitled to four votes and can be
converted into one share of the Company's common stock. Each share of common
stock is entitled to one vote. In connection with the Company's initial public
offering, all of the holders of the Company's Class A common stock placed into
escrow on a pro rata basis, an aggregate of 733,550 shares of Class A common
stock. Since the market price of the Company's common stock attained specific
levels in fiscal 1995, the shares of Class A common stock placed in escrow
were released to the respective shareholders.
Options and Warrants
Concurrent with the Company's initial public offering in August 1992, the
Company issued options to the underwriter to purchase 87,500 units at an
exercise price of $44.20 per unit. Each unit consists of one share of common
stock, one Class A warrant and one Class B warrant. The options expire in
1997. At June 30, and December 31, 1996 approximately 23,000 of these options
were outstanding.
Concurrent with the Company's secondary offering in February 1994, the
Company issued options to the underwriter for the purchase of 1,800 units at
an exercise price of $1,650 per unit. Each unit consists of 130 shares of
common stock and 78 Class B warrants which expire in 1999. At June 30 and
December 31, 1996, all of these options were outstanding.
Upon the exercise of each Class A warrant, the holder received one share of
common stock and one Class B warrant. The Class A warrants were called for
redemption in August 1994.
Upon the exercise of each Class B warrant, the holder received one share of
common stock. These warrants were called for redemption in May 1995.
Class D warrants were issued in connection with lines of credit extended by
a stockholder and have been assigned a value of $73. Additional warrants were
issued in connection with services provided during the acquisition of GAARD
and have been assigned a value of $100.
F-23
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(all data as of and for the six months ended
December 31, 1995 and 1996 is unaudited)
Warrants
The following table summarizes warrant activity:
<TABLE>
<CAPTION>
COMMON CLASS A CLASS B CLASS C CLASS D CLASS E COMMON COMMON COMMON
(D) (A) (B) (D) (C) (E) (F) (G) (H) TOTAL
------- ---------- ---------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price... $ 4.00 $ 8.90 $ 13.45 $ 2.52 $ 8.90 $ 10.00 $ 29.95 $ 14.66 $ 24.57 --
Expiration....... 8/13/95 8/13/97 8/13/99 8/28/97 8/13/97 12/31/97 12/26/00 12/31/99 12/16/02 --
Issued with
public
offerings....... -- 1,006,250 2,620,850 -- 100,000 -- -- -- -- 3,727,100
Issued with
bridge
financing....... 25,000 1,250,000 -- -- -- -- -- -- -- 1,275,000
Issued in
connection with
line of credit.. -- -- -- 275,000 -- 50,000 -- -- -- 325,000
Issued in
connection with
exercise of A
warrants........ -- -- 2,291,380 -- -- -- -- -- 2,291,380
Issued in
connection with
acquisition
services........ -- -- -- -- -- -- 10,000 -- -- 10,000
Issued with unit
purchase
options......... -- 64,540 64,540 -- -- -- -- -- -- 129,080
Exercised........ (25,000) (2,291,380) (4,971,660) (137,500) (100,000) (50,000) -- -- -- (7,575,540)
Redeemed......... -- (29,410) (5,110) -- -- -- -- -- -- (34,520)
------- ---------- ---------- -------- -------- -------- -------- -------- -------- ----------
Outstanding at
June 30, 1996... -- -- -- 137,500 -- -- 10,000 -- -- 147,500
------- ---------- ---------- -------- -------- -------- -------- -------- -------- ----------
Issued in
connection with
an agreement
with a major
customer to
accelerate
certain
deliveries in
quarters one and
two of fiscal
1997............ -- -- -- -- -- -- -- 200,000 -- 200,000
Issued in
connection with
issuance of
Series C
preferred stock. -- -- -- -- -- -- -- -- 476,352 476,352
------- ---------- ---------- -------- -------- -------- -------- -------- -------- ----------
Outstanding at
December 31,
1996
(unaudited)..... -- -- -- 137,500 -- -- 10,000 200,000 476,352 823,852
======= ========== ========== ======== ======== ======== ======== ======== ======== ==========
</TABLE>
- -------------------
(a) Upon exercise of each Class A warrant, the holder received one share of
common stock and one Class B warrant. In August 1994, the Class A warrants
were called by the Company for redemption. As a result, warrants for
2,226,840 shares were exercised providing net proceeds of approximately
$19,025 to the Company.
(b) Upon exercise of each Class B warrant, the holder received one share of
common stock. In May 1995, these warrants were called by the Company for
redemption. As a result warrants for 4,902,780 shares were exercised
providing net proceeds of $63,273 to the Company.
(c) These warrants were issued in connection with a line of credit extended by
a stockholder and assigned a value of $73.
(d) Upon exercise, the holder will receive one share of common stock for each
warrant exercised.
(e) These warrants were issued in connection with a line of credit extended by
a stockholder and assigned a value of $144.
(f) These warrants were issued in connection with services provided during the
acquisition of GAARD and were assigned a value of $100.
(g) These warrants were issued in connection with an agreement to accelerate
planned orders from a significant customer.
(h) These warrants were issued in connection with the Series C convertible
preferred stock.
F-24
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(10) EMPLOYEE BENEFITS
Effective August 1993, the Company established a defined contribution plan
under Section 401(k) of the Internal Revenue Code that covers all eligible
employees. Participants may contribute up to 15% of their salary. Participants
vest immediately in their own contributions and over a five-year period in the
Company's matching contributions. The Company made matching contributions of
$189 in fiscal 1996.
The Company acquired defined contribution plans under Section 401(k) of the
Internal Revenue Code in connection with the acquisitions of Athens and GAARD.
The Athens plan was merged into the Company's plan on July 1, 1995. The GAARD
plan was merged into the Company's plan on January 1, 1997. Participants in
the GAARD plan may also contribute up to 15% of their salary.
In connection with the acquisition of IPEC Precision, employees of IPEC
Precision became eligible for participation in the Company's 401(k) plan.
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan to
provide employees with a more convenient means to acquire an equity interest
in the Company. Eligible employees of the Company can purchase common stock
through payroll deductions at 85% of the fair market value of the stock.
Payroll deductions for the purchase of stock may not exceed 10% of an
employee's base compensation or $25. As of June 30, 1996, 88,344 shares have
been purchased under this plan. The maximum number of shares that may be
issued under this plan is 1,000,000.
The Company's 1992 Stock Option Plan provides for the issuance of incentive
stock options, nonqualified stock options and stock appreciation rights to
purchase up to 4,050,000 shares of common stock to employees, directors and
consultants. The grants vest over periods ranging up to five years. Under the
Stock Option Plan, options may be granted to purchase shares of the Company's
common stock at not less than fair market value at the date of grant, and are
exercisable for a period not exceeding ten years from that date.
F-25
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
The following table summarizes the activity under this plan:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PRICE EXERCISABLE
--------- -------------- -----------
<S> <C> <C> <C>
Outstanding, July 1, 1993 -- $ --
Granted.............................. 314,000 7.75 - 10.00
Exercised............................ (10,000) 7.75
---------
Outstanding, June 30, 1994........... 304,000 7.75 - 10.00 164,000
=========
Granted.............................. 2,860,000 9.00 - 28.75
Exercised............................ (196,000) 7.75 - 9.00
Forfeitures.......................... (111,000) 7.75 - 9.00
---------
Outstanding, June 30, 1995........... 2,857,000 7.75 - 28.75 655,000
=========
Granted.............................. 649,000 13.875 - 31.00
Exercised............................ (180,000) 7.75 - 20.75
Forfeitures.......................... (178,000) 9.00 - 31.00
---------
Outstanding, June 30, 1996........... 3,148,000 7.75 - 31.00 1,103,000
=========
Granted.............................. 167,000 10.875 - 16.50
Exercised............................ (151,000) 7.75 - 13.875
Forfeitures.......................... (161,000) 9.00 - 28.75
---------
Outstanding, December 31, 1996
(unaudited).......................... 3,003,000 7.75 - 28.75 1,101,000
========= =========
</TABLE>
On April 3, 1996, the Board of Directors of the Company approved a repricing
of options granted after April 20, 1995. Employees, excluding officers and
directors, who were issued stock options subsequent to April 20, 1995 and who
were active employees on April 3, 1996, could elect to keep their options to
buy common stock at the original grant price or reprice their options to
$17.875 per share, the fair market value of the common stock on April 2, 1996.
If the employee elected to reprice the employee's options to $17.875 per
share, the vesting commencement date was extended by periods ranging from four
months to one year.
On August 16, 1996, the Board of Directors of the Company approved a
repricing of options granted after January 20, 1995, and prior to August 16,
1996, with an exercise price exceeding $13.875 per share. Employees, officers
and directors holding options granted with an exercise price exceeding $13.875
per share, who were active in their respective positions on August 16, 1996,
could elect to keep their options to buy common stock at the original grant
price or reprice the holder's options to $13.875 per share, the fair market
value of the common stock on August 16, 1996. If the option holder elected to
reprice the options to $13.875 per share, the vesting commencement date was
extended by periods ranging from one to thirteen months.
Common stock received through the exercise of non-qualified stock options
results in a tax deduction for the Company equivalent to the taxable income
recognized by the optionee at time of exercise. For financial reporting
purposes, the tax effect of this deduction is accounted for as a credit to
additional paid-in capital rather than as a reduction of income tax expense.
Such optionee exercise of options resulted in a tax benefit to the Company of
$988 and $1,561 for the years ended June 30, 1995 and 1996, respectively.
F-26
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(11) MAJOR CUSTOMERS
One customer accounted for 17%, 16%, 35%, 35% and 45% of revenue for the
fiscal years ended June 30, 1994, 1995 and 1996 and for the six-month periods
ended December 31, 1995 and 1996, respectively. Another customer accounted for
45%, 24%, 11% and 11% of revenue for the fiscal years ended June 30, 1994,
1995 and 1996 and for the six-month period ended December 31, 1995,
respectively. A third customer accounted for 16% and 12% of revenue for the
fiscal year ended June 30, 1995 and for the six month period ended December
31, 1995, respectively.
Total export sales by geographic region are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------- --------------
1994 1995 1996 1995 1996
------ ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Far East............................... $7,195 $9,465 $23,738 $7,131 $10,408
Europe................................. $4,956 $6,390 $17,472 $7,986 $12,945
Other.................................. $ 6 $ 36 $ 81 $ 53 $ 11
</TABLE>
(12) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------ -------------------
1994 1995 1996 1995 1996
------ ------ -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................... $ -- $1,052 $ 7,827 $ 1,957 $ --
State...................... -- 192 1,249 313 200
Foreign.................... -- 31 -- -- --
------ ------ -------- -------- ---------
-- 1,275 9,076 2,270 200
------ ------ -------- -------- ---------
Deferred:
Federal.................... (700) (992) (13,474) (10,280) (11,413)
State...................... (130) (207) (2,381) (1,817) (2,013)
------ ------ -------- -------- ---------
(830) (1,199) (15,855) (12,097) (13,426)
------ ------ -------- -------- ---------
Income tax expense
(benefit)................. $ (830) $ 76 $ (6,779) $ (9,827) $ (13,226)
====== ====== ======== ======== =========
</TABLE>
Income tax expense (benefit) is included in the statements of operations as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------- -------------------
1994 1995 1996 1995 1996
------ ----- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Continuing operations......... $ (830) $ 714 $ (6,399) $ (9,448) $ (6,149)
Discontinued operations....... -- (638) (380) (379) (7,077)
------ ----- -------- -------- ---------
$(830) $ 76 $ (6,779) $ (9,827) $ (13,226)
====== ===== ======== ======== =========
</TABLE>
F-27
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets, liabilities and the valuation allowance
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------- DECEMBER 31,
1995 1996 1996
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Warranty reserve............................. $1,160 $ 2,934 $ 2,334
Inventory reserve............................ 961 1,698 1,298
Vacation accrual............................. 269 463 463
Research and development credits............. 1,090 158 158
Allowance for losses on program
discontinuance............................... -- -- 7,151
Allowance for losses on discontinued
operations................................... -- -- 5,120
Net operating loss and alternative minimum
tax credit carryforwards.................... 7,115 6,763 1,965
Technology asset............................. -- 14,784 14,577
Other........................................ 225 227 191
------ ------- -------
10,820 27,027 33,257
Valuation allowance.......................... (1,951) (1,707) --
------ ------- -------
8,869 25,320 33,257
------ ------- -------
Deferred tax liabilities:
Differences between the tax basis and fair
value of intangibles and fixed assets
acquired.................................... 6,894 5,707 802
Depreciation differences..................... 540 881 881
Other........................................ 350 382 --
------ ------- -------
7,784 6,970 1,683
------ ------- -------
Net deferred tax asset...................... $1,085 $18,350 $31,574
====== ======= =======
</TABLE>
In December 1994, the Company acquired IPEC Clean. IPEC Clean had net
operating loss carryovers (NOLs) of approximately $19,000 at the date of
acquisition which expire between the years 2000 to 2005. These NOLs may only
be used to offset future earnings of IPEC Clean.
The valuation allowance has been reduced by approximately $2,704 and $244
during the years ended June 30, 1995 and 1996, respectively, and $1,707 during
the six-month period ended December 31, 1996. The entire valuation allowance
related to deferred tax assets attributable to the acquisition of IPEC Clean.
Deferred tax assets and liabilities, primarily net operating loss
carryforwards, basis of fixed assets and intangibles acquired and the
valuation allowance, were adjusted in the second quarter of fiscal 1997 as a
result of discontinued operations. Management believes that it is more likely
than not that the results of future operations will generate sufficient
taxable income to realize the net deferred tax assets.
F-28
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
Rate Reconciliation
The effective tax rate on income (loss) from continuing operations before
income taxes is different from the federal statutory tax rate. A
reconciliation of the Federal statutory income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
ENDED
YEAR ENDED JUNE DECEMBER
30, 31,
-------------------- -------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate.. (34.0)% 34.0% (34.0)% (34.0)% (34.0)%
State and local taxes................... -- 3.6 (4.2) (4.0) (6.7)
Research and development tax credits.... -- (9.5) (4.4) (1.5) (2.8)
Nondeductible expenses, including
purchased research and development and
amortization of goodwill................ -- .6 5.7 1.3 8.0
Reversal of valuation allowance for
deferred tax assets..................... 25.5 (22.6) -- -- --
Other................................... -- .6 (3.7) (1.6) 1.0
----- ----- ----- ----- -----
Effective income tax rate.............. (8.5)% 6.7% (40.6)% (39.8)% (34.5)%
===== ===== ===== ===== =====
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits and other claims arising in the ordinary
course of business. In the opinion of management, based on consultation with
legal counsel, the effect of such matters will not have a material adverse
effect on the Company's financial position or results of operations.
The following is a schedule by year of the approximate future minimum lease
payments under noncancelable operating leases with terms in excess of one year
for the succeeding five years as of June 30, 1996:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
--------------------
<S> <C>
1997 $1,087
1998 983
1999 673
2000 541
2001 445
------
$3,729
======
</TABLE>
Total rent expense under all operating leases for the years ended June 30,
1994, 1995 and 1996 was $473, $636 and $1,248, respectively.
F-29
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such
amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale, at
one time, the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
Since the fair value is estimated as of June 30, 1996, the amounts that will
actually be realized or paid at settlement or maturity of the instruments
could be significantly different.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amount is assumed to be the fair value because of the short-term
maturity of these instruments.
Notes Payable and Long-Term Debt
The fair value of the Company's notes payable and long-term debt approximate
the terms in the marketplace at which they could be replaced. Therefore, the
fair value approximates the carrying value of these financial instruments.
(15) RELATED PARTY TRANSACTIONS
The Company had purchases of raw materials and services of approximately
$5,136, $3,455 and $8,814 from companies owned by stockholders of the Company
during the years ended June 30, 1994, 1995 and 1996, respectively. The Company
had payables related to these purchases of $359 and $934 at June 30, 1995 and
1996, respectively.
On December 29, 1995, the Company loaned $900 to the Chairman of the
Company. The loan bears interest at the prime rate and is due on the earliest
to occur of (i) 90 days after the Chairman's ability to sell Company stock
without restriction under Section 16 of the Securities Exchange Act or a
lockup agreement, (ii) immediately on voluntary termination of employment,
(iii) 90 days after involuntary termination of employment for "cause," or (iv)
immediately on the sale of a personal residence. The loan is secured by all of
the executive's options to purchase the Company's common stock and shares of
common stock. Included in other assets is a receivable of $969 related to this
loan at June 30, 1996.
F-30
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
(16) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowance for accounts
receivable and inventory obsolescence for the years ended June 30, 1994, 1995
and 1996 follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF YEAR ADDITIONS DEDUCTIONS YEAR
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1994....... $ -- 50 $ -- $ 50
Year ended June 30, 1995....... $ 50 $ -- $ -- $ 50
Year ended June 30, 1996....... $ 50 $ 50 $ -- $ 100
Allowances for inventory
obsolescence:
Year ended June 30, 1994....... $ -- 1,289 $(551) $ 738
Year ended June 30, 1995....... $ 738 $ 247 $ -- $ 985
Year ended June 30, 1996....... $ 985 $ 718 $(155) $1,548
</TABLE>
(17) SUBSEQUENT EVENTS
Discontinued Operations
In the second quarter of fiscal 1997, the Company announced its decision to
focus its resources on its manufacturing of CMP and CMP related equipment. As
a result of this decision, the Company has adopted a plan for the disposition
by sale of IPEC Clean within the next twelve months.
IPEC Clean has been accounted for as a discontinued operation and,
accordingly, its results of operations and financial position are segregated
for all periods presented in the accompanying consolidated financial
statements. Revenue, related income (losses) and income taxes associated with
the discontinued operations are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
JUNE 30, DECEMBER 31,
---------------- ----------------
1995 1996 1995 1996
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................. $13,165 $35,810 $19,016 $ 4,609
------- ------- ------- -------
Loss from discontinued operations before
taxes................................... $(9,995) $(1,674) $(1,546) $(5,494)
Income tax benefit...................... $ (638) $ (380) $ (379) $(1,880)
------- ------- ------- -------
Loss from discontinued operations, net
of taxes................................ $(9,357) $(1,294) $(1,167) $(3,614)
======= ======= ======= =======
</TABLE>
The effective income tax benefit for discontinued operations differs from
the Company's effective tax rate primarily as a result of nondeductible
amortization of intangible assets.
The Company recorded a pre-tax charge of $27,187 to write down intangible
assets, accounts receivable, inventory, equipment and other assets to
estimated net realizable value and to record additional liabilities in the
second quarter of fiscal 1997. A charge of $2,960 was also recorded to reflect
the estimated phase out costs associated with IPEC Clean. Included in accrued
liabilities at December 31, 1996 in the accompanying consolidated balance
sheet is $5,460 related to these charges. The tax benefit associated with
these charges was $5,197.
F-31
<PAGE>
INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands, except percentages, shares and per share amounts)
(all data as of and for the six month periods ended
December 31, 1995 and 1996 is unaudited)
The net assets of the discontinued operations have been reclassified in the
accompanying consolidated balance sheets as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1995 1996 1996
-------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets............................... $ 13,920 $19,234 $9,179
Property, plant and equipment, net........... 1,343 2,430 372
Intangible assets............................ 13,955 12,911 --
Other assets................................. 799 2,127 581
Current liabilities.......................... (6,478) (6,895) (6,212)
Long-term debt............................... (874) (88) --
-------- ------- ------
$ 22,665 $29,719 $3,920
======== ======= ======
</TABLE>
Program Discontinuance Charge
In the second quarter of fiscal 1997, the Company recorded a pre-tax
nonrecurring charge of $17,601, related to write-downs of inventories of
$9,001, write-downs of property, plant and equipment of $4,100 and the accrual
of related noncancellable purchase orders of $4,500 related to the
discontinuance of the Avanti 672 product development program.
Series C Convertible Preferred Stock
The Company completed a $25,000 equity financing in the second quarter of
fiscal 1997. The Company sold 100,000 shares of newly issued Series C
convertible preferred stock. The Series C convertible preferred stock is
convertible into shares of the Company's common stock on or after January 31,
1997 and will automatically convert into common stock on December 31, 2002. At
the holder's option, each share of Series C convertible preferred stock is
convertible at a premium over an average of the volume weighted average daily
market prices of the common stock. The number of shares of common stock to be
issued upon conversion will vary based on future stock price movements. On
February 25, 1997 all shares of Series C convertible preferred stock converted
into 1,283,961 shares of common stock.
In connection with the issuance of the Series C convertible preferred stock,
warrants were issued to acquire up to 476,352 shares of the Company's common
stock. These warrants may generally be exercised from and after June 16, 1998
until December 16, 2002 at an exercise price of $24.567 per share.
Sale/Leaseback
The Company completed an $18,700 sale/leaseback transaction of its Phoenix
manufacturing and administrative facility in the second quarter of fiscal
1997. The Company leased back the facility for an initial fifteen year term
with two five year renewal options. Proceeds from the transaction were used to
repay a $10,000 term loan with a bank. Annual rental payments will vary but
will range between $2,100 and $2,300 over the next five years.
F-32
<PAGE>
AVANTGAARD 676 WAFER PLANARIZATION SYSTEM
[Photograph of Unit]
SCHEMATIC OF AVANTGAARD 676 WAFER PLANARIZATION SYSTEM
[Diagram showing system components labeled "Rinse Station, Orbital Polishing
Platen (1 of 4), Pad Conditioner, Transfer Robot, Load/Unload Wafer Carriers,
User Interface) and stating "Footprint = 26 sq. ft."]
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Incorporation of Certain Documents By Reference............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 6
Description of Forward Looking Statements.................................. 14
Use of Proceeds............................................................ 15
Price Range of Common Stock................................................ 15
Dividend Policy............................................................ 15
Capitalization............................................................. 16
Selected Consolidated Financial Data....................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 18
Business................................................................... 26
Management................................................................. 34
Principal Stockholders..................................................... 35
Description of Capital Stock............................................... 37
Underwriting............................................................... 41
Legal Matters.............................................................. 43
Experts.................................................................... 43
Index to Consolidated Financial Statements................................. F-1
</TABLE>
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3,000,000 SHARES
[LOGO OF IPEC]
COMMON STOCK
---------------
PROSPECTUS
---------------
Hambrecht & Quist
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
, 1997
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