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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MAY 1, 1998 COMMISSION FILE NUMBER: 0-26968
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ETEC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 94-3094580
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
26460 CORPORATE AVENUE, HAYWARD, CALIFORNIA 94545
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510)783-9210
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
22,062,960 shares of Common Stock were outstanding as of May 29, 1998.
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
ETEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
April 30, July 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $40,874 $55,975
Marketable securities.............................. 56,317 34,262
Accounts receivable, less allowance for
doubtful accounts of $1,189 and $1,136............ 86,940 54,879
Inventory.......................................... 84,410 67,202
Deferred tax assets................................ 22,822 22,822
Other current assets............................... 6,384 3,322
------------ ------------
Total current assets.............................. 297,747 238,462
Property, plant and equipment, net................. 45,252 42,013
Other assets....................................... 4,222 4,068
------------ ------------
$347,221 $284,543
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $21,417 $20,830
Accrued and other liabilities...................... 75,299 53,028
Taxes payable...................................... 14,438 8,301
------------ ------------
Total current liabilities......................... 111,154 82,159
Deferred gain on sale of asset..................... 2,670 2,871
Other liabilities.................................. 1,587 1,872
------------ ------------
Total liabilities................................. 115,411 86,902
------------ ------------
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
and 40,000,000 shares authorized; 22,057,598 and
21,679,636 issued and outstanding................. 221 217
Warrants........................................... 600 631
Additional paid-in capital......................... 204,990 198,557
Cumulative translation adjustments................. (1,518) (719)
Net unrealized gain on investments................. 9 --
Retained earnings (accumulated deficit)............ 27,508 (1,045)
------------ ------------
Total stockholders' equity........................ 231,810 197,641
------------ ------------
$347,221 $284,543
============ ============
See accompanying notes to consolidated financial statements.
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue:
Products........................... $60,969 $61,717 $173,101 $143,428
Services........................... 9,059 7,984 27,460 24,840
--------- --------- --------- ---------
70,028 69,701 200,561 168,268
--------- --------- --------- ---------
Cost of revenue:
Products........................... 27,145 28,827 76,750 68,102
Services........................... 7,133 6,149 20,850 19,343
--------- --------- --------- ---------
34,278 34,976 97,600 87,445
--------- --------- --------- ---------
Gross profit......................... 35,750 34,725 102,961 80,823
--------- --------- --------- ---------
Operating expenses:
Research, development and
engineering....................... 13,056 9,470 37,388 24,066
Selling, general and
administrative.................... 7,362 8,287 24,735 20,472
Write-off of in-process
technology acquired............... -- 3,874 -- 3,874
--------- --------- --------- ---------
20,418 21,631 62,123 48,412
--------- --------- --------- ---------
Income from operations............... 15,332 13,094 40,838 32,411
Interest expense..................... (257) (287) (617) (797)
Other income, net.................... 1,222 981 3,371 2,802
--------- --------- --------- ---------
Income before income tax provision... 16,297 13,788 43,592 34,416
Income tax provision................. 5,623 6,182 15,039 12,240
--------- --------- --------- ---------
Net income........................... $10,674 $7,606 $28,553 $22,176
========= ========= ========= =========
Basic earnings per share............. $0.49 $0.36 $1.30 $1.08
========= ========= ========= =========
Weighted-average common shares....... 22,004 21,334 21,881 20,538
========= ========= ========= =========
Diluted earnings per share........... $0.47 $0.34 $1.25 $1.02
========= ========= ========= =========
Dilutive potential common shares..... 22,916 22,498 22,827 21,807
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
April 30,
---------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income............................................... $28,553 $22,176
Adjustments to reconcile net income to net cash
used in operating activities:
Write-off of in-process technology acquired............ -- 3,874
Depreciation and amortization.......................... 5,459 2,996
Deferred taxes......................................... -- (1,162)
Changes in assets and liabilities:
Accounts receivable.................................... (38,319) (12,021)
Factoring of accounts receivable....................... 6,200 --
Inventory.............................................. (18,021) (21,986)
Other current assets................................. (14,115) --
Other assets........................................... (456) (207)
Accounts payable....................................... 646 2,683
Accrued and other liabilities.......................... 19,722 18,628
---------- ----------
Net cash provided by (used in) operating activities.. (10,331) 14,981
---------- ----------
Cash flows from investing activities:
Purchases of marketable securities, net................ (22,055) (21,946)
Capital expenditures for property and equipment, net... (8,781) (18,219)
Payment for purchase of Ebetech, net of cash acquired.. -- (4,682)
New building construction costs........................ -- (4,500)
Proceeds from sale of facilities....................... 11,000 5,000
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Net cash used in investing activities................ (19,836) (44,347)
---------- ----------
Cash flows from financing activities:
Repayment of debt and capital leases................... (93) (2,742)
Financing from (repayment to) intermediary............. 12,115 (13,842)
Repurchase of warrants................................. -- (2,633)
Collection of (issuance of) notes receivable
from (to) stockholders............................... 201 (201)
Proceeds from issuance of Common Stock................. 4,128 40,522
---------- ----------
Net cash provided by financing activities............ 16,351 21,104
---------- ----------
Effect of exchange rate changes on cash.................. (1,285) (1,509)
---------- ----------
Net change in cash and cash equivalents.................. (15,101) (9,771)
Cash and cash equivalents at the beginning
of the period.......................................... 55,975 44,472
---------- ----------
Cash and cash equivalents at the end of the period....... $40,874 $34,701
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................. $531 $727
========== ==========
Cash paid during the period for income taxes............. $6,734 $7,831
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Tax benefits from stock option transactions.............. $2,077 $2,830
========== ==========
See accompanying notes to consolidated financial statements.
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the management of Etec Systems, Inc. ("Etec" or
the "Company"), the unaudited consolidated interim financial statements
included herein have been prepared on the same basis as the July 31,
1997 audited consolidated financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the interim period results.
The results of operations for current interim periods are not
necessarily indicative of results to be expected for the current year or
for any other period.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended July 31, 1997 included in the
Company's Annual Report on Form 10-K (File No. 0-26968). The July 31,
1997 balance sheet included herein was derived from audited consolidated
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
For purposes of presentation, the Company has indicated its
interim fiscal periods as ending April 30, 1998 and April 30, 1997. As
the Company's fiscal period is accounted for on a 52-53 week year, the
interim period consolidated financial statements included herein
represent results for each of the three- and nine-month periods ended
May 1, 1998 and May 2, 1997.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and requires the Company
to report additional information on comprehensive income to supplement
the reporting of income. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Comparative financial statements
must be provided for all periods presented and require reclassification
adjustments. The Company will adopt SFAS 130 in fiscal 1999 and does not
expect its provisions to have a material effect on the Company's
presentation of its consolidated financial statements.
SFAS 131 establishes standards for reporting information about
operating segments in annual and interim financial statements and also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective
for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS 131 in fiscal 1999 and is currently studying its provisions.
NOTE 2 - CASH EQUIVALENTS AND MARKETABLE SECURITIES
At April 30, 1998, the Company's investments were classified as
available-for-sale. The difference between the cost and fair value of
those investments is shown as a separate component of stockholders'
equity. At April 30, 1998, these available-for-sale securities totaling
approximately $29.7 million were included in cash and cash equivalents
or marketable securities on the balance sheet. The investment portfolio
at April 30, 1998 is comprised of money market funds, corporate
debentures, asset-backed obligations, U.S. Government agency securities,
certificates of deposit, commercial paper, auction-rate preferreds, and
municipal obligations.
NOTE 3 - INVENTORY
April 30, July 31,
1998 1997
----------- -----------
(in thousands)
Purchased parts....................... $29,079 $20,325
Work-in-process....................... 39,435 35,972
Spares................................ 15,896 10,905
----------- -----------
$84,410 $67,202
=========== ===========
NOTE 4 - INCOME TAXES
The Company recorded provisions for income taxes for the nine
months ended April 30, 1998 and 1997 of $15.0 million and $12.2 million,
respectively. The Company's provision for income taxes for the nine
months ended April 30, 1998 reflects the utilization of research and
development tax credits and tax benefits from the use of a foreign sales
corporation, partially offset by foreign earnings taxed at higher rates.
During the second quarter of fiscal 1998, the Company reduced its fiscal
1998 effective tax rate from the 35.5% used in the first quarter to
34.5% in order to reflect revised estimates of certain tax credits. The
provision for the nine months ended April 30, 1997 includes a $1.2
million benefit which reflects the fiscal 1997 first quarter release of
valuation allowances previously recorded against the Company's deferred
tax assets. Management's evaluation of the recoverability of the
Company's deferred tax assets is based in part upon the current product
backlog and the Company's presumed ability to increase manufacturing
capacity. Management will continue to evaluate the recoverability of
the deferred tax assets in future periods.
NOTE 5 - LEASES
In November 1997, the Company completed the purchase of
approximately 15.2 acres of land in Hillsboro, Oregon at a cost of
approximately $2.4 million. The Company is having a new facility
constructed on this site to meet development and manufacturing
requirements for its laser mask pattern generation products and to back
up its electron-beam manufacturing capabilities in Hayward, California.
In December 1997, the Company entered into an agreement to lease
the facility to be constructed on the land described above. The lessor
of the buildings has committed to spend up to $60.0 million for the
construction and the Company will act as construction agent for the
lessor. The lease term begins upon completion of construction (which is
expected in the middle of calendar year 1999) and ends in November,
2004. With the approval of the lessor, the Company may extend the lease
term for up to three one-year periods. The Company has the option to
purchase the facility at any time during the lease term at the lessor's
capitalized cost. If the Company does not elect to purchase the
property at the end of the lease term, the Company is required to
guarantee the minimum residual value which shall not exceed $49.8
million.
In February 1998, the Company entered into an agreement to amend
the existing lease on its Hayward facilities to accommodate a $50.0
million planned expansion of production and research and development
facilities and renovation of existing production facilities via
construction lease allowances. The lease amendment also included the
leaseback of $11.0 million of building improvements on existing
facilities sold to the lessor via the lease amendment. The initial term
of the lease expires in May, 2014, and, if not cancelled by the Company,
will be automatically extended for three five-year renewal periods and
one additional eight-month renewal period.
NOTE 6-REVOLVING LINE OF CREDIT
In April 1998, the Company extended the term of its existing $50.0
million revolving line of credit from May 1999 to November 1999. As of
May 1, 1998, no amounts have been drawn under this line of credit.
During the quarter, the covenants were revised to be substantially the
same as those under the Hillsboro, Oregon lease agreement. In addition,
the Company amended the interest rate from the London Interbank Offered
Rate plus 1.25% to the London Interbank Offered Rate plus 0.95%.
NOTE 7 - NET INCOME PER SHARE
The Company calculates earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share
(SFAS 128). Basic EPS is computed by dividing net income available to
common stockholders (numerator) by the weighted-average common shares
(denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including
stock options and warrants, using the treasury stock method. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the
exercise of stock options and warrants.
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations under SFAS 128:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ --------------------
1998 1997 1998 1997
----------- ----------- --------- ---------
(In thousands, except per share amounts)
BASIC EPS COMPUTATION
Net income................................. $10,674 $7,606 $28,553 $22,176
=========== =========== ========= =========
Weighted-average common shares............. 22,004 21,334 21,881 20,538
=========== =========== ========= =========
Basic earnings per share................... $0.49 $0.36 $1.30 $1.08
=========== =========== ========= =========
DILUTED EPS COMPUTATION
Net income................................. $10,674 $7,606 $28,553 $22,176
=========== =========== ========= =========
Weighted-average common shares............. 22,004 21,334 21,881 20,538
Plus shares from assumed conversion:
Effect of dilutive options and warrants.. 912 1,164 946 1,269
----------- ----------- --------- ---------
Dilutive potential common shares........... 22,916 22,498 22,827 21,807
=========== =========== ========= =========
Diluted earnings per share................. $0.47 $0.34 $1.25 $1.02
=========== =========== ========= =========
ANTIDILUTIVE SECURITIES*
Options outstanding at end of period....... 184 209 187 245
=========== =========== ========= =========
Weighted-average exercise price............ $59.22 $36.87 $59.20 $36.46
=========== =========== ========= =========
- ------------
*Antidilutive securities consist of options excluded from the computation
of diluted earnings per share because the exercise price of each of these
options was greater than the average market price of the Company's Common
Stock during the period.
ETEC SYSTEMS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
A. Results of Operations
Quarters Ended April 30, 1998 and April 30, 1997
Revenue. Revenues are primarily comprised of sales of ALTA, MEBES,
and CORE systems, accessories and upgrades, and the provision of
technical support, maintenance and other services. The Company derives
most of its 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 the Company's
consolidated results of operations in a particular period.
Product revenue of $61.0 million for the quarter ended April 30,
1998 was 1% less than the $61.7 million for the corresponding quarter of
1997. Eight systems were sold in the quarter ended April 30, 1998
compared to nine systems in the quarter ended April 30, 1997. One
system scheduled for shipment during the quarter ended April 30, 1998
was not accepted by the customer because it failed to meet a "stripe
butting" specification. After the close of the quarter the
specification was revised, the customer accepted the system, and the
Company will recognize the associated revenue during the quarter ending
July 31, 1998. Sales of accessories and upgrades in the quarter ended
April 30, 1998 were double those for the quarter ended April 30, 1997.
Service revenue increased 13% to $9.1 million from $8.0 million
for the quarters ended April 30, 1998 and 1997, respectively, due
primarily to generally higher service activity caused by an increase in
the number of systems under service contracts.
Gross Profit. The Company's gross profit on product revenue
increased 3% to $33.8 million from $32.9 million for the quarters ended
April 30, 1998 and 1997, respectively. The increase is primarily
attributable to changes in product mix to newer generation products with
higher average selling prices and corresponding margins. Gross profit
as a percentage of revenue decreased on a sequential basis to 55.5% for
the quarter ended April 30, 1998 from 58.9% for the prior quarter,
principally because of an unusually rich mix of new products in the
earlier quarter, but was higher than the 53.3% margin achieved in the
quarter ended April 30, 1997. There can be no assurance that the
Company will be able to maintain or increase gross margin on product
revenue in future periods.
The Company's gross profit on service revenue increased 5% to $1.9
million from $1.8 million for the quarters ended April 30, 1998 and
1997, respectively. Gross margin on service revenue was 21% and 23% for
the quarters ended April 30, 1998 and 1997, respectively, reflecting
increased headcount on flat revenue. There can be no assurance that the
Company will be able to maintain or increase gross margins on service
revenue in future periods.
Research, Development and Engineering. The Company's research,
development and engineering expenses continue to reflect its commitment
to increased levels of product development. These expenses, net of
third-party funding under cooperative development agreements, increased
to $13.1 million, representing 19% of revenue, from $9.5 million,
representing 14% of revenue, for the quarters ended April 30, 1998 and
1997, respectively. The increase is primarily due to expenses incurred
for development of MEBES products, together with costs associated with
preparing the initial "beta" versions of the Company's new DigiRite 2000
laser direct imaging system for shipment from the Company's Tucson
facility. These additional costs were partially offset by $1.5 million
of reimbursements under cooperative development agreements received
during the quarter ended April 30, 1998. No such amounts were received
during the quarter ended April 30, 1997.
Selling, General and Administrative. Selling, general and
administrative expenses decreased 11% to $7.4 million, representing 11%
of revenue, from $8.3 million, representing 12% of revenue, for the
quarters ended April 30, 1998 and 1997, respectively. The decrease
results principally from lower commission costs due to completion in the
second quarter of 1998 of the Company's market development fee
obligations in Asia, offset by an increase in headcount.
Income Tax Provision. The Company recorded provisions for income
taxes for the quarters ended April 30, 1998 and 1997 of $5.6 million and
$6.2 million, respectively. The Company's provision for income taxes for
the quarter ended April 30, 1998 reflects the utilization of research
and development tax credits and tax benefits from the use of a foreign
sales corporation, partially offset by foreign earnings taxed at higher
rates. Beginning with the second quarter of 1998, the Company reduced
its fiscal 1998 effective tax rate from the 35.5% used in the first
quarter to 34.5% in order to reflect revised estimates of certain tax
credits. Management's evaluation of the recoverability of the Company's
deferred tax assets is based in part upon the current product backlog
and the Company's presumed ability to increase manufacturing capacity.
Management will continue to evaluate the recoverability of the deferred
tax assets in future periods.
Nine Months Ended April 30, 1998 and April 30, 1997
Revenue. Product revenue increased 21% to $173.1 million from
$143.4 million for the nine months ended April 30, 1998 and 1997,
respectively. The increase in fiscal 1998 is primarily due to the sale
of three more systems and higher average selling prices than for the
corresponding 1997 period, offset in part by a reduction of sales of
accessories and upgrades in 1998.
Service revenue increased 11% to $27.5 million from $24.8 million
for the nine months ended April 30, 1998 and 1997, respectively, due
primarily to generally higher service activity caused by an increase in
the number of systems under service contracts.
Gross Profit. The Company's gross profit on product revenue
increased 28% to $96.4 million from $75.3 million for the nine months
ended April 30, 1998 and 1997, respectively. The increase results from
an increase in product revenue and the higher gross margin on product
revenue, which increased to 56% for the nine months ended April 30, 1998
from 53% for the nine months ended April 30, 1997. The increase in
product gross margin is primarily attributable to changes in product mix
and generally higher average selling prices for the Company's newer
products. There can be no assurance that the Company will be able to
maintain or increase the present level of gross margin on product
revenue in future periods.
The Company's gross profit on service revenue increased 20% to
$6.6 million from $5.5 million for the nine months ended April 30, 1998
and 1997, respectively. Gross margin on service revenue was 24% and 22%
for the nine months ended April 30, 1998 and 1997, respectively. The
increases in gross profit and gross margin reflect increased revenues
from an increase in the number of systems under service contracts and
increased productivity. There can be no assurance that the Company will
be able to maintain or increase the present level of gross margin on
service revenue in future periods.
Research, Development and Engineering. The Company's research,
development and engineering expenses continue to reflect its commitment
to increased levels of product development. These expenses, net of
third-party funding under cooperative development agreements, increased
to $37.4 million, representing 19% of revenue, from $24.1 million,
representing 14% of revenue, for the nine months ended April 30, 1998
and 1997, respectively. The Company expects future increases in net
spending due to its commitment to product development. Funding
received under cooperative development contracts was $ 5.1 million and
$0.5 million, respectively, during the first nine months of fiscal 1998
and fiscal 1997. The increase is attributable to the achievement of
milestones under a multimillion dollar cost reimbursement and
development agreement with a private consortium.
Selling, General and Administrative. Selling, general and
administrative expenses increased 21% to $24.7 million, representing 12%
of revenue, from $20.5 million, representing 12% of revenue, for the
nine months ended April 30, 1998 and 1997, respectively. Selling,
general and administrative expenses increased primarily due to increased
headcount, market development fees and sales commissions associated with
increased product sales.
Income Tax Provision. The Company recorded provisions for income
taxes for the nine months ended April 30, 1998 and 1997 of $15.0 million
and $12.2 million, respectively. The Company's provision for income
taxes for the nine months ended April 30, 1998 reflects the utilization
of research and development tax credits and tax benefits from the use of
a foreign sales corporation, partially offset by foreign earnings taxed
at higher rates. Beginning with the second quarter of 1998, the Company
reduced its fiscal 1998 effective tax rate from 35.5% used in the first
quarter to 34.5% in order to reflect estimates of certain tax credits.
The Company's provision for income taxes for the nine months ended April
30, 1997 includes a $1.2 million benefit which reflects the first
quarter release of valuation allowances previously recorded against the
Company's deferred tax assets. Management's evaluation of the
recoverability of the Company's deferred tax assets is based in part
upon the current product backlog and the Company's presumed ability to
increase manufacturing capacity. Management will continue to evaluate
the recoverability of the deferred tax assets in future periods.
B. Liquidity and Capital Resources
In addition to its operational cash flows, in fiscal 1997 and
fiscal 1996, the Company raised approximately $108.0 million from its
initial public offering, two additional public offerings, and a private
placement. In fiscal 1997, the Company received $5.0 million from the
sale and leaseback of its headquarters campus. In fiscal 1998, the
Company received commitments of up to $121.0 million for the
construction of additional manufacturing facilities during fiscal 1998
and fiscal 1999 under operating lease arrangements. The Company
believes that approximately $53.0 million of the $121.0 million total
will be used in fiscal 1998 and approximately $68.0 million will be used
in fiscal 1999 under these commitments.
The Company's capital budget for fiscal 1998 of $80.0 million
included the $53.0 million in facility construction which was
subsequently converted to a construction allowance under an operating
lease. The remaining $27.0 million is planned for other capital
expenditures. The Company spent approximately $8.8 million for net
capital expenditures in the first nine months of fiscal 1998 primarily
to purchase testing and process equipment.
In October 1997, the Company purchased approximately 4.2 acres of
land in Hayward, California for $0.9 million. This site provides the
Company flexibility for future expansion of its Hayward-based
operations. In addition, in November 1997, the Company completed the
purchase of approximately 15.2 acres of land in Hillsboro, Oregon for
approximately $2.4 million. The Company is having a new facility
constructed on this site to meet development and manufacturing
requirements for its laser mask pattern generation products and to back
up its electron-beam manufacturing capabilities in Hayward, California.
The new facilities in Hayward and Hillsboro are expected to be completed
in the middle of calendar year 1999.
As of April 30, 1998, the Company had cash and cash equivalents
and marketable securities of $97.2 million. The Company believes that
existing cash balances (including cash equivalents and marketable
securities), together with existing sources of liquidity, including
cash flows from operating activities and amounts available under the
existing $50.0 million revolving line of credit, will provide adequate
cash to fund its operations for at least the next twelve months. The
Company also believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of
opportunities as they arise. As such, the Company may effect additional
equity or debt financings in the future to fund such activities.
Operating Activities
Net cash used in operating activities for the nine months ended
April 30, 1998 was $10.3 million. Net cash provided by operating
activities for the nine months ended April 30, 1997 was $15.0 million.
Cash flows from operating activities for the nine months ended
April 30, 1998 primarily reflected net income of $28.6 million;
increases in depreciation and amortization of $5.5 million; increases in
accounts receivable of $38.3 million; factoring of accounts receivable
of $6.2 million; increases in inventory of $18.0 million; increases in
other current assets of $14.1 million (including $11.0 million in
respect of the sale and leaseback of building improvements); and
increases in accrued and other liabilities of $19.7 million (primarily
due to increases in advances from customers of approximately $11.5
million).
Cash flows from operating activities for the nine months ended
April 30, 1997 primarily reflected net income of $22.2 million;
increases in noncash items of $5.7 million (which include depreciation
and amortization of $3.0 million, partly offset by $1.2 million of
deferred taxes); and increases in accounts receivable of $12.0 million,
inventory of $22.0 million, accounts payable of $2.7 million, and
accrued and other liabilities of $18.6 million.
Fluctuations in accounts receivable, inventory, and current
liabilities for the above periods were caused primarily by the timing of
system orders, the timing of revenue recognition, the increase in unit
shipments, the factoring of accounts receivable and the timing of
payments to vendors. The increase in accounts receivable is due to a
higher sales volume in comparison to the prior period, a higher ratio of
sales in Asia, which usually take longer to settle than domestic sales,
and shipments of newer technology machines which often extend customer
acceptance. The increase in inventory is due to the purchase of raw
materials in anticipation of a higher order level than was actually
achieved and to an increased level of service parts. Prior to the
shipment of a system, the Company receives payment for a portion of the
system sales price. Such payments are generally received when the
Company accepts an order and at various points when the system is being
installed and thereafter. Therefore, the amount of customer advances at
each reporting period fluctuates based on the number of systems that are
on order, the timing of when orders are accepted, and each system's
status within the manufacturing cycle. Advances from customers
increased to $23.0 million at April 30, 1998 from $11.5 million at July
31, 1997.
Investing Activities
Net cash used in investing activities for the nine months ended
April 30, 1998 was $19.8 million compared to $44.3 million for the nine
months ended April 30, 1997. Cash flows from investing activities for
the nine months ended April 30, 1998 reflected net purchases of
marketable securities of $22.0 million and net capital expenditures of
$8.8 million, less the sale of $11.0 million of building improvements
which were leased back. Cash flows from investing activities for the
nine months ended April 30, 1997 primarily reflected net purchases of
marketable securities of $21.9 million and net capital expenditures of
$18.2 million.
Financing Activities
Net cash provided by financing activities for the nine months
ended April 30, 1998 was $16.4 million compared to the nine months ended
April 30, 1997 of $21.1 million. Cash flows from financing activities
for the nine months ended April 30, 1998 primarily reflected receipts of
$12.1 million from a third-party financing intermediary. Cash flows
from financing activities for the nine months ended April 30, 1997
primarily reflected proceeds from issuance of Common Stock of $40.5
million. The decrease in net cash provided by financing activities is
primarily attributable to the fact that there was no public offering of
the Company's Common Stock during the first nine months of fiscal 1998
as there was during the first nine months of fiscal 1997.
C. Certain Factors that May Affect Future Results
Statements in this report which are prefaced with words such as
"expects," "anticipates," "believes" and similar words and other
statements of similar sense, are forward-looking statements. These
statements are based on the Company's current expectations and estimates
as to prospective events and circumstances which may or may not be
within the Company's control and as to which there can be no firm
assurances given. These forward-looking statements, like any other
forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or
anticipated.
In addition to other risks and uncertainties that may be described
elsewhere in this document, certain risks and uncertainties that could
affect the Company's financial results include, but are not limited to,
the following: reduced orders or backlog due to changes in capital
spending decisions of customers or potential customers; the timely
development, market acceptance and successful production of new products
and enhancements in an environment of rapid technological change;
limitations on the Company's ability to carry out a rapid expansion of
its manufacturing capabilities; significant variations in quarterly or
annual results due to factors affecting even a small number of systems,
such as a delay in completion of manufacturing or testing of a single
system to a future fiscal period; and risks associated with foreign
operations, such as foreign exchange risk, general market conditions,
import-export controls, and political risks.
Year 2000 Issue
The Company has formed a project team to review its existing
products, services, processes, systems, facilities and key business
partners to ensure they are able to adequately address the issues
expected to arise in connection with the upcoming change in the century.
The Company's project to achieve this is based on the Government
Accounting Office model. Using this model, the Company is developing an
action plan to implement the system and programming changes necessary to
address, on an enterprise-wide basis, year 2000 issues, and is in the
process of assessing the schedule for and cost of implementing this
plan.
The Company believes that its Year 2000 project will be completed
on a timely basis; however, there can be no assurance that unexpected
delays or increased costs associated with implementation will not have
an adverse effect on the Company's operations.
In addition, the Company has not yet fully determined the extent
to which its business may be impacted by third parties whose products
and services may not be ready for the year 2000. There can be no
assurance that the systems of other companies which the Company deals
with, or on which the Company's systems rely, will be able to adequately
address the year 2000 issue, or that the failure to do so will not have
an adverse effect on the Company's operations.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit
No. Description
- ------- ---------------------------------------------------------
10.1 Second Amended and Restated Lease Agreement by and between ET LLC,
a Delaware limited liability company d/b/a ET QRS LLC as Landlord
and Etec Systems, Inc., a Nevada corporation, as Tenant of the
Hayward, California premises dated February 2, 1998
10.2 1995 Omnibus Incentive Plan of Etec Systems, Inc. (As Amended and
Restated Effective December 2, 1997)
10.3 First Amendment to Second Amended and Restated Lease Agreement by
and between ET LLC, a Delaware limited liability company d/b/a ET
QRS LLC as Landlord and Etec Systems, Inc., a Nevada corporation,
as Tenant of the Hayward, California premises dated March 31, 1998
10.4 Second Amendment to Second Amended and Restated Lease Agreement by
and between ET LLC, a Delaware limited liability company d/b/a ET
QRS LLC as Landlord and Etec Systems, Inc., a Nevada corporation,
as Tenant of the Hayward, California premises dated May 8, 1998
10.5 Second Amendment to Credit Agreement between Etec Systems, Inc.,
each of the financial institutions currently a party to the Credit
Agreement, and ABN Amro Bank N.V.
27 Financial Data Schedule.
See Exhibit Index on page 18.
(b) Reports on Form 8-K.
None.
ETEC SYSTEMS, INC.
SIGNATURE
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 June 12, 1998.
ETEC SYSTEMS, INC.
(Registrant)
By /s/ William D. Snyder
William D. Snyder
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
ETEC SYSTEMS, INC.
INDEX OF EXHIBITS
Exhibit
No. Description
- ------- ---------------------------------------------------------
10.1 Second Amended and Restated Lease Agreement by and between ET LLC,
a Delaware limited liability company d/b/a ET QRS LLC as Landlord
and Etec Systems, Inc., a Nevada corporation, as Tenant of the
Hayward, California premises dated February 2, 1998
10.2 1995 Omnibus Incentive Plan of Etec Systems, Inc. (As Amended and
Restated Effective December 2, 1997)
10.3 First Amendment to Second Amended and Restated Lease Agreement by
and between ET LLC, a Delaware limited liability company d/b/a ET
QRS LLC as Landlord and Etec Systems, Inc., a Nevada corporation,
as Tenant of the Hayward, California premises dated March 31, 1998
10.4 Second Amendment to Second Amended and Restated Lease Agreement by
and between ET LLC, a Delaware limited liability company d/b/a ET
QRS LLC as Landlord and Etec Systems, Inc., a Nevada corporation,
as Tenant of the Hayward, California premises dated May 8, 1998
10.5 Second Amendment to Credit Agreement between Etec Systems, Inc.,
each of the financial institutions currently a party to the Credit
Agreement, and ABN Amro Bank N.V.
27 Financial Data Schedule.