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<p align="center"><font size="3"><strong>UNITED STATES</br>
SECURITIES AND EXCHANGE COMMISSION</br>
Washington, D.C. 20549</strong></font></p>
<HR align=center SIZE=2 width="25%">
<br>
<p align="center"><font size="5"><strong>FORM 10-Q</strong></center></font></p>
<HR align=center SIZE=2 width="25%">
<p> <i>(Mark One)</i>
<p align="center"><font size="3"><strong>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="4" color="FF0000"><strong>
For the Quarter Ended January 31, 2000
</strong></font></p>
<p align="center"><font size="3"><strong> OR </strong></font></p>
<p align="center"><font size="3"><strong>
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="3"><strong>
For the transition period from ________to _________
</strong></font></p>
<p align="center"><font size="3"><strong>
<u>Commission file number 0-26968</u>
</strong></font></p>
<p align="center"><font size="6" color="#0000FF"><strong>
<u>ETEC SYSTEMS, INC.</u>
</strong></font></br>
<font size="2">
(Exact name of Registrant as specified in its Charter)
</font></p>
<P>
<TABLE COLS=2 WIDTH="100%" >
<TR>
<TD>
<font size="3"><strong>
<CENTER><u>Nevada</u></CENTER>
</font></strong>
</TD>
<TD>
<font size="3"><strong>
<CENTER><u> 94-3094580 </u></CENTER>
</font></strong>
</TD>
</TR>
<TR>
<TD>
<font size="2">
<CENTER> (State or Other Jurisdiction of Incorporation or Organization) </CENTER>
</font>
</TD>
<TD>
<font size="2">
<CENTER>(I.R.S. Employer Identification Number)</CENTER>
</font>
</TD>
</TR>
<BR>
<p align="center"><font size="3"><strong>
<u>26460 Corporate Avenue, Hayward, California 94545
</strong></font></u><br>
<font size="2">
(Address of Principal Executive Offices including Zip Code)
</font></p>
<p align="center"><font size="3"><strong><u>
(510)783-9210
</strong></font></u><br>
<font size="2">
(Registrant's Telephone Number, Including Area Code)
</font></p>
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<p>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ] </p>
<p> 22,271,632 shares of Common Stock were outstanding as of February 23, 2000.
<DIV align=left>
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</strong></p>
<p align="center"><strong>
ETEC SYSTEMS, INC.<br>
FORM 10-Q<br>
TABLE OF CONTENTS
</strong></p>
<p align="center"><strong>
PART I. FINANCIAL INFORMATION
</strong></p>
<p>Item 1. Financial Statements:
<BLOCKQUOTE>
<OL TYPE=a>
<p><A HREF="#bs">
<LI>Consolidated Balance Sheets --
July 31, 1999 and January 31, 2000</A>
<p><A HREF="#ops">
<LI>Consolidated Statements of Income -- Three
Months and Six Months ended January 31, 1999 and 2000</A>
<p><A HREF="#flows">
<LI>Consolidated Statements of Cash Flows --
Six Months ended January 31, 1999 and 2000</A>
<p><A HREF="#notes">
<LI>Notes to Consolidated Financial Statements</A>
</OL TYPE=a>
</BLOCKQUOTE>
<p>Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
<BLOCKQUOTE>
<p><A HREF="#results">
Results of Operations</A>
<p><A HREF="#liquid">
Liquidity and Capital Resources</A>
<p><A HREF="#factors">
Certain Factors that May Affect Future Results</A>
</BLOCKQUOTE>
<A HREF="#risks">
<p>Item 3. Quantitative and Qualitative Disclosure about Market Risks</A>
<p align="center"><strong>
PART II. OTHER INFORMATION
</strong></p>
<p>Item 1: Legal Proceedings
<p>Item 2: Changes in Securities and Use of Proceeds
<BLOCKQUOTE>
<p> Not Applicable
</BLOCKQUOTE>
<p>Item 3: Defaults Upon Senior Securities
<BLOCKQUOTE>
<p> Not Applicable
</BLOCKQUOTE>
<p>Item 4: Submission of Matters to a Vote of Security Holders
<p>Item 5: Other Information
<BLOCKQUOTE>
<p> Not Applicable
</BLOCKQUOTE>
<p>Item 6: Exhibits and Reports on Form 8-K
<p align="left"><strong>
<A HREF="#sign">
SIGNATURES</A>
</strong></p>
</strong></p>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<p align="center"><strong>
Part 1. Financial Information
</strong></p>
<p><strong>Item 1. Consolidated Financial Statements</strong></p>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="bs"></A>
<p align="center"><strong>
ETEC SYSTEMS, INC.
</strong><br>
<strong>
Consolidated Balance Sheets<br>
(in thousands, except share and per share amounts)<br>
(Unaudited)
</strong>
<pre>
July 31, January 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $44,849 $45,293
Marketable securities.............................. 14,075 10,192
Accounts receivable, less allowance for
doubtful accounts of $2,279 and $1,079............ 70,077 69,557
Inventory.......................................... 94,390 99,911
Deferred tax assets................................ 17,644 17,644
Other current assets............................... 9,224 12,313
------------ ------------
Total current assets.............................. 250,259 254,910
Property, plant and equipment, net................. 50,532 51,993
Other assets....................................... 7,215 5,607
------------ ------------
$308,006 $312,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $19,736 $19,331
Accrued and other liabilities...................... 34,176 34,462
Taxes payable...................................... 8,192 3,787
------------ ------------
Total current liabilities......................... 62,104 57,580
Deferred gain on sale of asset..................... 2,472 2,384
Other liabilities.................................. 4,774 3,955
------------ ------------
Total liabilities................................. 69,350 63,919
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; none outstanding.... -- --
Common Stock, par value $0.01 per share;
60,000,000 shares authorized; 21,488,267 and
21,877,263 issued and outstanding................. 215 219
Warrants........................................... 600 600
Additional paid-in capital......................... 189,501 201,366
Accumulated other comprehensive income............. 1,592 1,732
Retained earnings ................................. 46,748 44,674
------------ ------------
Total stockholders' equity........................ 238,656 248,591
------------ ------------
$308,006 $312,510
============ ============
</pre>
<p align="center"><strong> See the accompanying notes to these
consolidated financial statements.</strong></p>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="ops"></A>
<p align="center"><strong>
ETEC SYSTEMS, INC.
</strong><br>
<strong>
Consolidated Statements of Income<br>
(in thousands, except per share amounts)<br>
(Unaudited)
</strong>
<pre>
Three Months Ended Six Months Ended
January 31, January 31,
------------------- -------------------
1999 2000 1999 2000
--------- --------- --------- ---------
Revenue:
Products........................... $42,352 $41,288 $111,181 $84,593
Services........................... 10,684 13,945 20,753 27,367
--------- --------- --------- ---------
53,036 55,233 131,934 111,960
--------- --------- --------- ---------
Cost of revenue:
Products........................... 18,652 21,842 49,846 44,154
Services........................... 9,336 11,483 17,343 23,301
--------- --------- --------- ---------
27,988 33,325 67,189 67,455
--------- --------- --------- ---------
Gross profit......................... 25,048 21,908 64,745 44,505
--------- --------- --------- ---------
Operating expenses:
Research, development and
engineering....................... 13,712 14,859 30,844 29,955
Selling, general and
administrative.................... 9,050 9,413 18,040 18,317
--------- --------- --------- ---------
22,762 24,272 48,884 48,272
--------- --------- --------- ---------
Income/(loss) from operations........ 2,286 (2,364) 15,861 (3,767)
Interest expense..................... (159) (111) (312) (191)
Interest income and other, net....... 408 436 1,302 862
--------- --------- --------- ---------
Income/(loss) before income tax
provision (benefit)............... 2,535 (2,039) 16,851 (3,096)
Income tax provision/(benefit)....... 862 (673) 5,729 (1,022)
--------- --------- --------- ---------
Net income/(loss).................... $1,673 ($1,366) $11,122 ($2,074)
========= ========= ========= =========
Net income/(loss) per share - basic.. $0.08 ($0.06) $0.52 ($0.10)
========= ========= ========= =========
Shares used in per-share
calculation - basic................ 21,209 21,658 21,454 21,591
========= ========= ========= =========
Net income/(loss)
per share - diluted................. $0.08 ($0.06) $0.51 ($0.10)
========= ========= ========= =========
Shares used in per-share
calculation - diluted.............. 21,868 21,658 22,021 21,591
========= ========= ========= =========
</pre>
<p align="center"><strong> See the accompanying notes to these
consolidated financial statements.</strong></p>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="flows"></A>
<p align="center"><strong>
ETEC SYSTEMS, INC.
</strong><br>
<strong>
Consolidated Statements of Cash Flows<br>
(in thousands)<br>
(Unaudited)
</strong>
<pre>
Six Months Ended
January 31,
---------------------
1999 2000
---------- ----------
Cash flows from operating activities:
Net income/(loss)........................................ $11,122 ($2,074)
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 6,929 6,614
Changes in assets and liabilities:
Accounts receivable.................................... (88) (5,464)
Factoring of accounts receivable....................... 8,440 6,072
Inventory.............................................. (10,539) (5,521)
Other assets........................................... (8,032) (1,481)
Accounts payable....................................... 6,085 (405)
Accrued and other liabilities.......................... (9,559) (339)
---------- ----------
Net cash provided by (used in) operating activities.. 4,358 (2,598)
---------- ----------
Cash flows from investing activities:
Purchases of marketable securitiest.................... (16,317) (4,134)
Sales of marketable securities......................... 28,695 8,017
Capital expenditures for property and equipment, net... (7,067) (8,075)
---------- ----------
Net cash provided by (used in) investing activities.. 5,311 (4,192)
---------- ----------
Cash flows from financing activities:
Repayment of debt and capital leases................... (82) --
Repayment to intermediary.............................. (15,523) (4,687)
Repurchase of Common Stock ............................ (19,822) --
Proceeds from issuance of Common Stock................. 4,770 11,869
---------- ----------
Net cash (used in) provided by financing activities. (30,657) 7,182
---------- ----------
Effect of exchange rate changes on cash.................. 397 52
---------- ----------
Net change in cash and cash equivalents.................. (20,591) 444
Cash and cash equivalents at the beginning
of the period.......................................... 63,600 44,849
---------- ----------
Cash and cash equivalents at the end of the period....... $43,009 $45,293
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................. $468 $170
========== ==========
Cash paid during the period for income taxes............. $10,170 $1,006
========== ==========
Tax benefits from stock option activities................ $1,009 $2,249
========== ==========
</pre>
<p align="center"><strong> See the accompanying notes to these
consolidated financial statements.</strong></p>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="notes"></A>
<B><P>NOTE 1 - BASIS OF PRESENTATION</P>
</B>
<P>In the opinion of Etec's management, the accompanying unaudited balance
sheets and related unaudited interim statements of operations and cash flows
include all adjustments (consisting only of normal recurring items) necessary
for their fair presentation in conformity with generally accepted accounting
principles. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Examples include provisions for inventory
and bad debts. Actual results may differ materially from these estimates.
Interim results are not necessarily indicative of results for the full year.
The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Etec Systems, Inc. Form 10-K for the fiscal year ended July 31,
1999. </P>
<P>We operate on a 52-week calendar. For clarity, fiscal periods are reported
on a calendar month end. </P>
<I><P>Net Income Per Share</P>
</I>
<P>Basic net income/(loss) per share is computed on the basis of the weighted
average number of common shares outstanding during the period. Diluted net
income/(loss) per share is computed on the basis of the weighted average number
of common shares and equivalents (representing the dilutive effect of stock
options) outstanding during the period. Net income/(loss) has not been adjusted
for any period presented for purposes of computing basic and diluted net
income/(loss) per share. Due to the net loss for the three months ended January
31, 2000, common stock equivalents outstanding of 974,479 are considered anti-
dilutive and excluded from the calculation of net loss per share-diluted.</P>
<P>For purposes of computing diluted net income/(loss) per share, weighted
average potential common shares do not include stock options with an exercise
price that exceeds the average fair market value of our common stock for the
period. The number of shares excluded from the computation for the quarter
ended January 31, 1999 was 1,029,330 at an average exercise price of $46.39 and
for the quarter ended January 31, 2000 was 187,035 shares at an average exercise
price of $58.57. </P>
<I>
<P>Recent Accounting Pronouncements</P>
</I>
<P>In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes a new
model for accounting for derivatives and hedging activities. It supersedes and
amends a number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB Statement No. 133," is effective for all fiscal quarters and years
beginning after June 15, 2000. We are in the process of determining the effect
of adopting SFAS 133, which will be effective for our fiscal year 2001.</P>
<B>
<P>NOTE 2 - CASH EQUIVALENTS AND MARKETABLE SECURITIES</P>
</B><P>We consider all highly liquid debt instruments having a maturity of three
months or less to be cash equivalents.</P>
<P>All investments are considered available for sale. Investments classified as
available for sale are recorded at fair value and any temporary difference
between an investment's cost and fair value is recorded as a separate component
of stockholders' equity. At January 31, 2000, these available for sale
securities totaling approximately $29.9 million were included in cash and cash
equivalents or marketable securities. The investment portfolio at January 31,
2000 is comprised of money market funds, corporate debentures and municipal
obligations. Temporary differences between cost and fair value at July 31, 1999
and January 31, 2000 were not material.</P>
<B><P>NOTE 3 - INVENTORY</P>
</B><P>Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis. The components of inventories
are as follows (in thousands):</P>
<br>
<pre>
July 31, January 31,
1999 2000
----------- -----------
Purchased parts.................... $21,208 $17,267
Work-in-process.................... 44,641 54,203
Spares............................. 28,541 28,441
----------- -----------
$94,390 $99,911
=========== ===========
</pre>
<B>
<P>NOTE 4 - INCOME TAXES </P>
</B><P>We recorded a provision of $0.9 million and a benefit of $0.7 million for
income taxes for the three months ended January 31, 1999 and 2000, respectively.
Our benefit for income taxes for the three months ended January 31, 2000
reflects the tax benefit expected to be realized during the year or recognized
as a deferred tax asset at the end of the year. Management will continue to
evaluate the recoverability of the deferred tax assets in future periods.</P>
<B>
<P> </P>
<P>NOTE 5 - COMPREHENSIVE INCOME</P>
</B><P>As of the first quarter of fiscal 1999, we adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires that unrealized
gains or losses on investments and foreign currency translation adjustments be
included in other comprehensive income. The components of comprehensive income
are as follows (in thousands):</P>
<br>
<pre>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
Net income/(loss)......... $1,673 ($1,366) $11,122 ($2,074)
Change in cumulative
translation adjustments.. 1,349 965 2,566 140
----------- ----------- ----------- -----------
Total comprehensive
income/(loss)............. $3,022 ($401) $13,688 ($1,934)
=========== =========== =========== ===========
</pre>
<B><P ALIGN="CENTER"></P>
<P>NOTE 6 - CONTINGENT LIABILITIES</P>
</B>
<P>Semiconductor-related industries have experienced substantial litigation
regarding patent and other intellectual property rights. As is typical in the
industry, we have from time to time received, and may in the future receive,
communications from third parties alleging infringements of patents and other
intellectual property rights. In the future, protracted litigation may be
necessary to defend us against alleged infringement of others' rights. Any such
litigation, even if we are ultimately successful in our defense, could result in
substantial cost and diversion of time and effort by management. This in and of
itself could have a material adverse effect on our business, financial condition
and results of operations. Further, adverse determinations in such litigation
could result in our loss of proprietary rights, subject Etec to significant
liabilities (including treble damages under certain circumstances), require us
to seek licenses from third parties, or prevent us from manufacturing or selling
our systems.</P>
<P>The Lemelson Foundation has filed a suit against numerous semiconductor
manufacturers, claiming patent infringement of a number of basic U.S. patents
granted to Jerome Lemelson over many years. Some of these semiconductor
companies, and the attorneys for the Lemelson Foundation, have also contacted
semiconductor equipment companies and commercial maskmaking companies, claiming
potential liability for infringement of these same patents. We, in turn, have
been contacted by two of our customers, notifying us of the fact that they have
received claims and claiming that we may have responsibility for indemnifying
them under the terms of our sales contracts. We have reached a settlement with
one customer, and we believe that we will be able to settle with the other
customer on reasonable terms, without any material adverse effect. However,
there is no assurance that we will be able to do so, and the costs of a lengthy
litigation, or a judgment in which we are found liable, could have a material
adverse effect. In addition, we may receive similar claims for indemnity from
other U.S. customers who are pursued by the Lemelson Foundation.</P>
<B><P>NOTE 7 - OPERATING SEGMENT</P>
</B><P>We have adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in fiscal year 1999. SFAS No. 131
establishes standards for reporting information about operating segments and
related disclosures about products, geographic information and major customers.
</P>
<P>Etec designs, develops, manufactures, and markets patterning solutions that
enable the production of semiconductor chips and printed circuit boards
worldwide. Its products include electron-beam and laser-beam systems that
produce high-precision masks, which are used to print circuit patterns onto
semiconductor wafers, and laser direct imaging systems, which directly image
patterns on printed circuit boards. We are organized into three product line
operating segments: the Semiconductor Products Group ("SPG"), the
Interconnect Products Group ("IPG"), and the Display Products Group
("DPG"). </P>
<P>SPG's products include MEBES; electron beam systems, and ALTA;
and CORE; laser beam systems. Sales of SPG products represented a
majority of our revenue and gross margin. IPG makes and sells
DigiRite<SUP>TM</SUP> 2000 laser direct imaging systems. DPG is a development
stage business and there can be no assurance that we will be able to introduce
its products successfully into the market.</P>
<P>Segment operating expenses and assets include those items that can be
specifically identified with or reasonably allocated to a particular segment.
Operating segments do not sell products to each other, and accordingly, there
are no intersegment revenues to be reported. </P>
<P>Information on reportable segments for the three and six months ended January
31, 1999 and 2000 are as follows (in thousands): </P>
<br>
<pre>
SPG IPG DPG Total
----------- ----------- ----------- -----------
Three months ended January 31, 1999
Revenue.................... $53,036 -- -- $53,036
Operating income/(loss).... $6,168 ($2,747) ($1,135) $2,286
Assets..................... $323,676 $8,727 $3,410 $335,813
Three months ended January 31, 2000
Revenue.................... $54,258 $975 -- $55,233
Operating income/(loss).... $4,545 ($6,121) ($788) ($2,364)
Assets..................... $300,905 $9,474 $2,131 $312,510
Six months ended January 31, 1999
Revenue.................... $131,934 -- -- $131,934
Operating income/(loss).... $23,589 ($5,812) ($1,916) $15,861
Assets..................... $323,676 $8,727 $3,410 $335,813
Six months ended January 31, 2000
Revenue.................... $110,347 $1,613 -- $111,960
Operating income/(loss).... $7,235 ($9,409) ($1,593) ($3,767)
Assets..................... $300,905 $9,474 $2,131 $312,510
</pre>
<P ALIGN="CENTER"></P>
<P> </P>
<B><P>NOTE 8 - RESTRUCTURING </P>
</B><P>We recorded restructuring charges totaling $2.5 million in the quarter
ended April 30, 1999. The restructuring charges comprise mainly severance costs
related to the involuntary termination of 91 employees, of which 73 were based
in Hayward, 12 in Oregon and 6 in France. These charges also include facility
costs arising from the consolidation of the Company's European and Oregon
operations.</P>
<P>The following table shows the components of the restructuring charge recorded
in the fiscal year ended July 31, 1999 and the six months ended January 31, 2000
(in thousands):</P>
<br>
<pre>
Provision Incurred Incurred
Fiscal Year Fiscal Year Balance Six Months Balance
Ended Ended at Ended at
July 31, July 31, July 31, January 31, January 31,
1999 1999 1999 2000 2000
----------- ----------- ----------- ----------- ----------
Severance and benefits.... $1,593 $1,189 $404 $226 $178
Facilities closure costs
and other................ 922 460 462 300 162
----------- ----------- ----------- ----------- ----------
Total..................... $2,515 $1,649 $866 $526 $340
=========== =========== =========== =========== ==========
</pre>
<br>
<br>
<P>Cash outlays were primarily made for severance and benefit costs. The
balance due for severance and benefits at January 31, 2000 primarily relates to
amounts due to French employees.</P>
<B><P>NOTE 9 - PENDING MERGER </P>
</B><P>On January 12, 2000, we announced that a definitive agreement had been
reached with Applied Materials, Inc. to merge Etec with a subsidiary of Applied
Materials, Inc. in a reverse triangular stock-for-stock merger. The merger is
subject to regulatory review and certain other conditions, and will be accounted
for as a pooling-of-interest business combination. </P>
<p align="center"><strong>
ETEC SYSTEMS, INC.<br>
</strong>
<p><strong>Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations</strong></p>
<A NAME="results"></A>
<p><strong>A. Results of Operations</strong></p>
<B>
<P> </P>
</B><P>Statements in this report that are prefaced with words such as
"expects," "anticipates," "believes" and similar
words and other statements of similar sense, are forward-looking statements.
These statements are based on our current expectations and estimates as to
prospective events and circumstances that may or may not be within our control
and as to which there can be no firm assurances. These forward-looking
statements, like any other forward-looking statements, involve risks and
uncertainties that could cause actual results to differ materially from those
projected or anticipated.</P>
<B><P>Quarters Ended January 31, 1999 and January 31, 2000</P>
</B>
<I><P>Revenue.</I> Revenues comprise primarily sales of our MEBES, CORE, and
ALTA mask pattern generation systems, accessories and upgrades, and the
provision of technical support, maintenance and other services on such products.
Product revenue, as a percentage of total revenue, decreased from 80% in the
quarter ended January 31, 1999 to 75% in the quarter ended January 31, 2000,
while service revenues increased from 20% to 25% of total revenue over the same
period. We recognized revenue on three SPG systems and one IPG system in the
quarter ended January 31, 2000, compared to three SPG systems and one major
upgrade in the quarter ended January 31, 1999. We derive most of our revenues
from the sale of a small number of systems and upgrades. As such, any delay in
the recognition of revenue for a single system or upgrade can have a material
adverse effect on our consolidated results of operations in a particular period.
</P>
<P>Product revenue decreased 3% to $41.3 million from $42.4 million for the
quarters ended January 31, 2000 and 1999, respectively. The slight decrease is
due primarily to lower sales of accessories. One system scheduled for shipment
in the second quarter of fiscal 2000 was not accepted by a customer prior to the
end of the quarter. After the close of the quarter, the customer accepted the
system. We will recognize the associated revenue during the quarter ending
April 30, 2000. </P>
<P>Service revenue increased 30% to $13.9 million from $10.7 million for the
quarters ended January 31, 2000 and 1999, respectively, due to an increase in
the number of systems under service contracts. </P>
<I><P>Gross Profit.</I> Our gross profit on product revenue decreased 18% to
$19.4 million from $23.7 million for the quarters ended January 31, 2000 and
1999, respectively. The decrease is due to an increase in excess and obsolete
inventory reserves of approximately $1 million, increased fixed costs associated
with our two new facilities and lower revenues. Because of these factors,
product gross margins decreased to 47% from 56% for the three months ended
January 31, 2000 and 1999, respectively. Going forward, margins could be
adversely affected by lower than expected SPG product sales, product mix skewing
toward older less expensive mask pattern generation equipment, or lower than
anticipated margins in IPG where we do not have significant prior experience or
sales volumes. A substantial portion of our international sales are denominated
in U.S. dollars. As a result, changes in the values of foreign currencies
relative to the value of the U.S. dollar can render our products comparatively
more expensive. Although we have not been negatively impacted in the past by
foreign currency fluctuations, such conditions could affect our international
sales in future periods. A combination of some or all of these factors may have
a material adverse effect on margins in the remainder of fiscal 2000.</P>
<P>Our gross profit on service revenue increased 92% to $2.5 million from $1.3
million for the quarters ended January 31, 2000 and 1999, respectively. Gross
margin percentage on service revenue was 18% and 13% for the quarters ended
January 31, 2000 and 1999, respectively. The increase in service margins
reflects an increase in the number of systems under installation. Service costs
related to installation are charged to product costs. As the number of systems
under installation increases, service costs are proportionately lower. </P>
<I>
<P>Research, Development and Engineering.</I> Our research, development and
engineering expenses, net of third-party funding under cooperative development
agreements, increased 8% to $14.9 million from $13.7 million for the quarters
ended January 31, 2000 and 1999, respectively. This increase reflects the
establishment of the "Advanced Reticle Solutions Center", increased
activity in next generation development costs associated with our MEBES products
and increased fixed costs associated with our new clean room facilities.
Funding received under cooperative development contracts was $2.3 million and
$2.0 million for the quarters ended January 31, 2000 and 1999, respectively.
Research and development expense in the remainder of fiscal 2000 could be higher
than expected if we are unable to meet milestones necessary to secure funding
under cooperative development contracts.</P>
<I><P>Selling, General and Administrative.</I> Selling, general and
administrative expenses increased 4% to $9.4 million from $9.0 million for the
quarters ended January 31, 2000 and 1999, respectively. This increase is due to
increased overhead associated with our new facilities. </P>
<I><P>Income Tax Provision.</I> We recorded an income tax benefit of $0.7
million for the quarter ended January 31, 2000 and a provision for income taxes
of $0.9 million for the quarter ended January 31, 1999. Our effective tax rate
decreased from 34% in the quarter ended January 31, 1999 to 33% in the quarter
ended January 31, 2000, primarily due to tax credits. </P>
<B><P>Six Months Ended January 31, 1999 and January 31, 2000</P>
</B><I><P>Revenue. </I>Product revenue decreased 24% to $84.6 million from
$111.2 million for the six months ended January 31, 2000 and 1999, respectively.
This large decrease reflects the sale of fewer systems in the first half of
fiscal 2000. We sold seven SPG and two IPG systems for the six months ended
January 31, 2000, as compared to ten SPG systems and one factory upgrade for the
six months ended January 31, 1999.</P>
<P>Service revenue increased 32% to $27.4 million from $20.8 million for the six
months ended January 31, 2000 and 1999, respectively, due to an increase in the
number of systems under service contracts, increases in average service contract
prices and incremental billable services associated with relocating certain
customers' systems. </P>
<I><P>Gross Profit.</I> Gross profit on product revenue decreased 34% to $40.4
million from $61.3 million for the six months ended January 31, 2000 and 1999,
respectively. The decrease is due primarily to lower revenues and increased
fixed costs associated with our two new manufacturing facilities. As a result
of these factors, product gross margins decreased to 48% from 55% for the six
months ended January 31, 2000 and 1999, respectively. </P>
<P>Gross profit on service revenue increased 19% to $4.1 million from $3.4
million for the six months ended January 31, 2000 and 1999, respectively. Gross
margin percentage on service revenue was 15% and 16% for the six months ended
January 31, 2000 and 1999, respectively. The decline in gross profit percentage
reflects higher costs due to a moderate increase in service personnel offset by
an increase in the number of systems under installation and warranty. </P>
<I>
<P>Research, Development and Engineering.</I> Our research, development and
engineering expenses, net of third-party funding under cooperative development
agreements, decreased 3% to $30.0 million from $30.8 million for the six months
ended January 31, 2000 and 1999, respectively. Funding received under
cooperative development contracts was $3.7 million and $4.1 million for the six
months ended January 31, 2000 and 1999, respectively.</P>
<I><P>Selling, General and Administrative.</I> Selling, general and
administrative expenses increased to $18.3 million from $18.0 million,
representing 16% and 14% of revenue, for the six months ended January 31, 2000
and 1999, respectively. During the six months ended January 31, 2000, we
benefited from a reduction in our bad debt reserves as a significant past due
receivable was collected. This reduction was offset by increased overhead
associated with the two new manufacturing facilities and costs associated with
renegotiating bank credit lines. </P>
<I><P>Interest Income and Other, net. </I>Interest and other income was $0.9
million and $1.3 million for the six months ended January 31, 2000 and 1999,
respectively. The decrease is mainly due to lower average cash balances
available for investment. </P>
<I><P>Income Tax Provision.</I> We recorded an income tax benefit of $1.0
million for the six months ended January 31, 2000 and a provision for income
taxes of $5.7 million for the six months ended January 31, 1999. Our effective
tax rate decreased from 34% in the six months ended January 31, 1999 to 33% in
the six months ended January 31, 2000, primarily due to tax credits. </P>
<A NAME="liquid"></A>
<B><P>B. Liquidity and Capital Resources </P>
</B><P>As of January 31, 2000, we had cash, cash equivalents and marketable
securities of $55.5 million, as compared to $58.9 million at July 31, 1999. We
believe that existing cash balances (including cash equivalents and marketable
securities), together with other sources of liquidity, including cash flows from
operating activities and amounts available under the existing $50.0 million
revolving line of credit (all of which was available at January 31, 2000), will
provide adequate cash to fund our operations for at least the next 12 months.
To the extent that such cash resources are insufficient to fund our activities,
we would need to raise additional funds. There can be no assurance that we
could obtain additional financing on reasonable terms or at all. If additional
capital is raised through the sale of equity or debt securities, dilution of
earnings per share could occur.</P>
<P>The major source of cash during the six months ended January 31, 2000 was
$11.9 million proceeds from issuance of Common Stock due to increased employee
stock option exercises. Fluctuations in accounts receivable, inventory and
current liabilities for the six months ended January 31, 2000 were caused
primarily by the timing of system orders, the timing of revenue recognition,
variations in unit shipments, factoring of accounts receivable and the timing of
payments to vendors. We also sold marketable securities of $8.0 million during
the period. </P>
<P>The major uses of cash during the period were $8.1 million of net capital
expenditures for leasehold improvements and testing and process equipment, net
repayments of $4.7 million to a third-party financing intermediary, and
purchases of marketable securities totaling $4.1 million. </P>
<A NAME="factors"></A>
<B><P>C. Certain Factors that May Affect Future Results</P>
</B><P>In addition to other risks and uncertainties that may be described
elsewhere in this document, certain risks and uncertainties that could affect
our financial results include, but are not limited to, the following: risks
associated with the timely development and market acceptance of new products in
an environment of rapid technological change, reduced or postponed orders as a
result of changes in customers' planned capital spending, timely availability of
key components, delays in factory testing and acceptance, increased costs and
manufacturing capacity associated with the addition of new facilities, ability
of certain customers to finance new system purchases, the possibility of new
products or technologies introduced by competitors, the cyclicality of the
maskmaking and semiconductor industries, inventory exposure associated with the
manufacturing of a system without a firm order due to our relatively low current
backlog, changes in mask or semiconductor manufacturing processes that could
eliminate the need for newer generation of maskmaking systems , unexpected
reductions in third-party R&D funding, failure of sole source suppliers to
provide components, loss of a customer from Etec's relatively small base of
customers and material variations in financial results due to a delay in
delivery of even one system. In addition, the pending merger with Applied
Materials could have a material adverse effect in customers' purchasing
decisions. (See additional discussion contained in "Risk Factors - Trends
and Uncertainties Relating to Etec" set forth in the Registration Statement
on Form S-4 of Applied Materials, Inc. (File No. 333-96427), which is
incorporated herein by reference).</P>
<P>Year 2000 Readiness Disclosure</P>
<P>Computer programs and systems that make use of dates represented by only two
digits (98 rather than 1998) may not operate properly in and after the year
2000. Two digit fields can cause problems with sorting, mathematical
calculations and comparisons when working with years outside the range of 1900
through 1999. The problem also potentially extends to any systems or devices
that include embedded technology such as microchips. The risks to us, and our
mitigation efforts and contingency plans, have been disclosed in our most recent
annual and quarterly reports on Forms 10-K and 10-Q. Those disclosures are
still correct. The following information updates those disclosures.</P>
<P>We have completed all major Year 2000 projects. With the passage of most
critical dates, including the commencement of our 2000 fiscal year, January 1,
2000 and February 29, 2000, we and our significant suppliers and customers
experienced no significant disruptions due to the Year 2000 issue. Based on
this experience, we currently expect no significant disruptions in the future as
a result of the Year 2000 issue or the fact that 2000 is a leap year.
Accordingly, the Year 2000 issue has not had, and is not currently expected to
have, any material adverse effect on our financial condition, results of
operations or liquidity. </P>
<P>This information is subject to the same risks and uncertainties outlined in
prior disclosures. The above section, even if incorporated by reference into
other documents or disclosures, is a Year 2000 Readiness Disclosure as defined
under the Year 2000 Information and Readiness Disclosure Act of 1998. </P>
<A NAME="risks"></A>
<B><P>Item 3. Quantitative and Qualitative Disclosures About Market Risk	</P>
</B>
<P>Our market risk exposures, as set forth in Item 7A of our Annual Report on
Form 10-K for the year ended July 31, 1999, have not changed significantly.</P>
<B><P>Part II - Other Information</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY">Item 1. Legal Proceedings</P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company is not currently involved in any material legal
proceedings.</P>
<B><P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY">Item 4. Submission of Matters to a Vote of Security
Holders</P>
</B><P ALIGN="CENTER"></P>
The Company held its Annual Meeting of Stockholders on December 1
Matters voted upon at the meeting included:
1) Election of directors (listed below)
The following directors were elected to hold office until the
Annual Meeting of Stockholders of the Company:
<pre>
Directors Affirmative Withheld
------------------------- ----------- ---------
Stephen E. Cooper 19,466,872 302,074
Takeshi (John) Suzuki 19,475,264 293,682
Edward L. Gelbach 19,465,453 303,493
John M. McBennett 19,473,189 295,757
William J. Ryan 19,466,301 302,645
William T. Siegle 18,967,468 801,478
Thomas M. Trent 19,474,874 294,072
Robert M. Wehrli 19,471,099 297,847
2) Approval of increase in number of shares of Common Stock ava
for issuance under the 1995 Omnibus Incentive Plan by 800,000
shares:
Votes in the affirmative: 12,756,783
Votes in the negative: 6,925,448
Votes adstained: 86,715
3) Approval of increase in number of shares of Common Stock ava
for issuance under the 1995 Directors' Stock Option Plan by 5
shares:
Votes in the affirmative: 15,313,565
Votes in the negative: 4,220,887
Votes adstained: 87,425
Broker non-votes: 147,069
4) Approval of increase in number of shares of Common Stock ava
for issuance under the 1995 Employee Stock Purchase Plan by 2
shares:
Votes in the affirmative: 19,335,987
Votes in the negative: 201,135
Votes adstained: 84,755
Broker non-votes: 147,069
5) Ratification of the appointment of PricewaterhouseCoopers LL
independent public accountants for the Company for the fiscal
ending July 31, 2000
Votes in the affirmative: 19,689,667
Votes in the negative: 8,502
Votes adstained: 70,777
</pre>
<br>
<br>
<B><P ALIGN="JUSTIFY">Item 6. Exhibits and Reports on Form 8-K</P>
</B><P>(a)	The following exhibits are filed herewith:</P>
</FONT>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=577>
<TR><TD WIDTH="17%" VALIGN="TOP">
<U><FONT FACE="Courier" SIZE=2><P>Exhibit No.</U></FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<U><FONT FACE="Courier" SIZE=2><P>Description</U></FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">2.1</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Incorporated by reference to exhibit filed with
Current Report on Form 8-K dated January 12, 2000. Agreement and Plan of
Reorganization dated January 12, 2000 by and among Etec Systems, Inc., Applied
Materials, Inc. and Boston Acquisition Sub, Inc. </FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP"> </TD>
<TD WIDTH="83%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">10.29</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Mutual Reciprocal Easement Agreement between
Greenstone Development, LLC. and Etec Systems, Inc.</FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP"> </TD>
<TD WIDTH="83%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">27</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Financial Data Schedule.</FONT></TD>
</TR>
<FONT FACE="Courier" SIZE=2>
<P ALIGN="JUSTIFY"> </P>
<OL START=2 TYPE="a">
<P ALIGN="JUSTIFY"><LI>Reports on Form 8-K: </LI></P></OL>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">A Current Report on Form 8-K, dated February 16, 2000, was
filed reporting earnings for the second quarter fiscal 2000. This item was
reported under Item 5 - "Other Events" of Form 8-K. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">A Current Report on Form 8-K, dated January 31, 2000, was
filed reporting that we will report lower than expected revenues for our second
quarter fiscal 2000. This item was reported under Item 5 - "Other
Events" of Form 8-K. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">A Current Report on Form 8-K, dated January 12, 2000, was
filed reporting that we have entered into a definitive agreement with Applied
Materials, Inc. to merge the two companies in a stock-for-stock merger. This
item was reported under Item 1 - "Changes in Control of Registrant" of
Form 8-K.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY"> </P>
<br>
<br>
<br>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<br>
<A NAME="sign"></A>
<p align="center"><strong>
ETEC SYSTEMS, INC.
<br>
<br>
SIGNATURES
</strong></p>
<p>Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 9, 2000.
<P>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
ETEC SYSTEMS, INC.
</TD></TR>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
<I>(Registrant)</I>
</TD></TR>
<P>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="2%"></TD>
<TD width="60%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD>By: </TD>
<TD align=left>
/s/ William D. Snyder
</TD></TR>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
<HR align=left SIZE=1>
</TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
William D. Snyder
</TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left><I>
Vice President and Chief Financial Officer
</I></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left><I>
(Principal Financial Officer and Principal
Accounting Officer)
</I></TD></TR></P>
<br>
<br>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<p align="center"><strong>
ETEC SYSTEMS, INC.
<br>
<br>
INDEX OF EXHIBITS
</strong></p>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=577>
<TR><TD WIDTH="17%" VALIGN="TOP">
<U><FONT FACE="Courier" SIZE=2><P>Exhibit No.</U></FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<U><FONT FACE="Courier" SIZE=2><P>Description</U></FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">2.1</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Incorporated by reference to exhibit filed with
Current Report on Form 8-K dated January 12, 2000. Agreement and Plan of
Reorganization dated January 12, 2000 by and among Etec Systems, Inc., Applied
Materials, Inc. and Boston Acquisition Sub, Inc. </FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP"> </TD>
<TD WIDTH="83%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">10.29</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Mutual Reciprocal Easement Agreement between
Greenstone Development, LLC. and Etec Systems, Inc.</FONT></TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP"> </TD>
<TD WIDTH="83%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="17%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P ALIGN="CENTER">27</FONT></TD>
<TD WIDTH="83%" VALIGN="TOP">
<FONT FACE="Courier" SIZE=2><P>Financial Data Schedule.</FONT></TD>
</TR>
<br>
<br>
<br>