AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INSYNC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA 1647773 77-0227489
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1463 CENTRE POINTE DRIVE
MILPITAS, CA 95035
(408) 946-3100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
STANLEY L. LEOPARD, CHIEF EXECUTIVE OFFICER
TERENCE J. GRIFFIN, CHIEF FINANCIAL OFFICER
INSYNC SYSTEMS, INC.
1463 CENTRE POINTE DRIVE
MILPITAS, CA 95035
(408) 946-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
FRANK S. CURRIE, ESQ. CARLA S. NEWELL, ESQ.
JOHN T. SHERIDAN, ESQ. BENNETT L. YEE, ESQ.
ANTON COMMISSARIS, ESQ. NANCY M. CHEN, ESQ.
CHRISTOPHER G. NICHOLSON, ESQ. FRANK GRANT, ESQ.
WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH VILLENEUVE
PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD 155 CONSTITUTION DRIVE
PALO ALTO, CA 94304 MENLO PARK, CA 94025
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following effectiveness of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
=============================================================================================
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE
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Common Stock................... shares $ $39,000,000 $11,819
=============================================================================================
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating
the registration fee.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 1, 1997
PROSPECTUS
Shares
[LOGO OF INSYNC SYSTEMS APPEARS HERE]
Common Stock
--------
Of the shares of Common Stock offered hereby, shares are being
sold by Insync Systems, Inc., a California corporation ("Insync" or the
"Company"), and shares are being sold by certain shareholders (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholders. See "Principal and Selling
Shareholders." Prior to this offering (the "Offering"), there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $ and $ per share.
See "Underwriting" for the factors considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "INSY."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------
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.
=============================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ---------------------------------------------------------------------------------------------
Per Share.............. $ $ $ $
- ---------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
=============================================================================================
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting offering expenses estimated at $ payable by the
Company.
(3) The Company and certain of the Selling Shareholders have granted the
Underwriters a 30-day option to purchase in the aggregate up to
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1997.
BT ALEX. BROWN
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997
GAS DELIVERY SYSTEM
[Photograph of a Gas Delivery System
with a person standing adjacent]
[INSYNC LOGO APPEARS HERE]
IGS
[Photograph of the Company's
Integrated Gas System with person
adjacent]
GAS DELIVERY SYSTEMS
Gas delivery systems and
subassemblies are critical to the
operation of deposition, etch and
other semiconductor manufacturing
equipment. The Company manufactures
gas delivery systems and
subassemblies in clean room
production facilities using
specialized manufacturing
techniques.
INTEGRATED GAS SYSTEM
The Company's Integrated Gas System
(IGS) is a modular platform for gas
delivery that is designed to
simplify the specification and
manufacturing process for gas
delivery systems in order to reduce
component inventory requirements,
configuration complexity, cycle time
and overall semiconductor process
equipment costs.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
"Insync" and the Insync logo appearing on the cover page of this Prospectus
are trademarks of the Company. This Prospectus also includes trademarks of
other companies.
2
[INSYNC LOGO GAS DELIVERY SYSTEMS IN THE FAB
APPEARS HERE]
Gas delivery systems and subassemblies are pervasive throughout the
semiconductor device manufacturing process. The Company's gas delivery systems
and subassemblies are primarily incorporated into deposition, etch and, to a
lesser extent, other semiconductor process equipment. The Company's customers
include four major North American semiconductor equipment manufacturers:
Applied Materials, Lam Research, Novellus Systems and Watkins-Johnson.
[Diagram of a typical Fab floor depicting various manufacturing areas,
highlighting semiconductor process equipment that use gas delivery systems and
subassemblies.]
The Company's gas delivery systems and subassemblies are designed to reduce
contamination in the process chamber and shorten cycle times for equipment
manufacturers, thereby contributing to lower wafer manufacturing costs for
device manufacturers.
Process Equipment Requiring GAS DELIVERY SYSTEMS
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements and
notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties, including
statements regarding strategies, intentions or expectations. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
Insync is a leading provider of outsourcing services to semiconductor
equipment manufacturers for the design and manufacture of gas delivery systems
and subassemblies. Gas delivery is a critical component of deposition, etch and
other semiconductor process equipment. The Company believes its outsourcing
services reduce its customers' total costs by shortening product delivery cycle
times, reducing inventory and materials procurement costs, eliminating
redundant work, enhancing information exchange and coordinating increasingly
complex manufacturing and design processes. The Company's principal customers
are Applied Materials, Inc., Lam Research Corporation, Watkins-Johnson Company
and most recently, Novellus Systems, Inc., four major North American
semiconductor equipment manufacturers. The Company offers a full range of gas
delivery solutions, including subassemblies for integration into its customers'
internally manufactured gas delivery systems and complete systems for
incorporation into its customers' products at final assembly. Insync has
recently introduced the Integrated Gas System (the "IGS"), a modular platform
for gas delivery that is designed to simplify the specification, configuration,
manufacturing and serviceability for gas delivery systems.
The manufacture of semiconductors has required increasingly complex and
sophisticated process technologies. More than 40% of all semiconductor
manufacturing equipment, which in turn performs more than 70% of the
manufacturing process steps, requires the introduction, management and
evacuation of process gases. These steps include the deposition of insulating
or conducting materials onto a wafer ("deposition") and the etching of the
wafer to selectively remove deposited material ("etch"). Deposition and etch
processes require highly controlled process environments and chemistry and, as
a result, the equipment used for deposition and etch is complex and
incorporates sophisticated systems to control various process gases and the
conditions in which they are used. Device manufacturers continuously demand
innovations in the core process technologies underlying deposition and etch. In
order to meet such demands, equipment manufacturers have been required to
repeatedly improve their process equipment in many respects, including the
inclusion of increasingly complex and sophisticated gas delivery systems.
Insync has expertise in gas delivery requirements and specialized production
capabilities focused on the design and manufacture of complex, customized gas
delivery systems and subassemblies within the time constraints demanded by
equipment manufacturers. The Company has invested significant resources in
developing additional manufacturing capabilities and capacity in order to offer
its customers advanced production capabilities that, in many cases, exceed the
customer's own internal capabilities. The Company believes its customers
benefit by outsourcing resource-intensive design and manufacturing activities
for gas delivery systems and subassemblies, and from the expertise and
efficiencies that the Company derives from providing outsourced gas delivery
solutions to multiple leading equipment manufacturers.
The Company's objective is to be the primary provider of outsourcing design
and manufacturing services for gas delivery to leading semiconductor equipment
manufacturers. The Company's strategy is to extend its leadership in gas
delivery, expand its gas delivery systems business, strengthen its
relationships with customers and suppliers, leverage its manufacturing
capabilities and promote modular approaches to gas delivery systems. In January
1996, Insync acquired substantially all of the non-cash assets and liabilities
of Pullbrite, Inc. ("Pullbrite"), another independent provider of gas delivery
systems to semiconductor equipment manufacturers. Insync was founded in 1989.
Insync's address is 1463 Centre Pointe Drive, Milpitas, California 95035 and
its telephone number is (408) 946-3100.
3
THE OFFERING
Common Stock offered by the Company.. shares
Common Stock offered by the Selling
Shareholders........................ shares
Common Stock outstanding after the
Offering ........................... shares (1)
Use of proceeds...................... Repayment of debt and for working capital
and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol.............................. INSY
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- --------- -------- -------- -------- -------
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 2,771 $ 7,199 $ 20,617 $49,969 $86,099 $59,448 $34,679
Income (loss) from
operations............. 178 (72) 1,477 5,518 (8,260)(2) 9,411 2,174
Interest expense and
other, net............. 75 114 230 434 2,562 1,358 1,675
Net income (loss)....... 101 (188) 734 2,996 (6,508) 4,818 310
Pro forma net income
(loss) per share(3).... $ (0.87) $ 0.03
Pro forma shares used in
per share
computations(3)........ 7,617 8,214
QUARTER ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
Net sales............... $33,125 $26,323 $ 16,015 $10,636 $15,102 $19,577
Income (loss) from
operations............. 5,768 3,643 (18,117)(2) 446 344 1,830
Interest expense and
other, net............. 713 645 608 596 913 762
Net income (loss)....... $ 3,019 $ 1,799 $(11,239) $ (87) $ (336) $ 646
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED (4)
------- ------------
BALANCE SHEET DATA:
Working capital........................................... $ 7,951 $
Total assets.............................................. 39,241
Long-term obligations..................................... 17,108
Redeemable Preferred Stock and put warrants............... 23,845
Shareholders' equity (deficiency)......................... (17,030)
- --------
(1) Excludes as of June 30, 1997 (i) 1,257,901 shares of Common Stock issuable
upon the exercise of outstanding options at a weighted average exercise
price of $3.90 per share and (ii) 317,996 shares of Common Stock issuable
upon the exercise of outstanding warrants at a weighted average exercise
price of $3.81 per share. See "Management--Stock Plans" and Notes 8 and 12
of Notes to Financial Statements of Insync.
(2) Includes charges of $16.6 million and $858,000 for the write down of
intangible assets and restructuring charges, respectively. See Notes 2 and
3 of Notes to Financial Statements of Insync.
(3) See Note 1 of Notes to Financial Statements of Insync for an explanation of
the number of shares used in computing pro forma net income (loss) per
share.
(4) Adjusted to reflect (i) conversion of each of the outstanding shares of
redeemable Series A Preferred Stock upon the closing of the Offering and
(ii) the sale of the shares of Common Stock offered by the
Company at an assumed initial public offering price of $ per share
(after deduction of the underwriting discounts and commissions and
estimated offering expenses) and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
Unless the context otherwise specifies, the information in this Prospectus
assumes (i) no exercise of the Underwriters' over-allotment option, (ii) the
conversion of all outstanding shares of redeemable Series A Preferred Stock of
the Company (the "Redeemable Preferred Stock") into an aggregate of 2,352,940
shares of Common Stock upon the closing of the Offering, and (iii) the
completion of a 2-for-3 reverse stock split of the Company's outstanding Common
Stock to be effected prior to the effectiveness of the Offering. See "Certain
Transactions" and "Underwriting."
4
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements that involve risks and uncertainties, including statements
regarding strategies, intentions or expectations. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. The Company's actual results may differ
materially from the results discussed in such forward-looking statements as a
result of certain factors including those set forth in the following risk
factors and elsewhere in this Prospectus.
Fluctuations in Operating Results. The Company's operating results have
fluctuated in the past and continue to be subject to annual and quarterly
fluctuations due to a variety of factors over which the Company may have
limited or no control and which may be difficult or impossible for the Company
to predict. For example, the Company's net sales for the quarters ended March
31, 1996, December 31, 1996, and June 30, 1997, were $33.1 million, $10.6
million and $19.6 million, respectively. Factors that may cause the Company's
operating results to fluctuate include: the timing and product mix of
significant orders and shipping schedules of its customers; industry-wide
changes in the demand for semiconductors or for semiconductor manufacturing
equipment; the ability of the Company to design, manufacture, test and deliver
defect-free gas delivery systems and subassemblies in a timely and cost
effective manner; the gain or loss of any significant customer; competitive
pressures; the timing of product announcements by the Company's competitors,
its customers or their competitors; seasonal changes in purchases of
semiconductor manufacturing equipment; the availability and cost of components
from the Company's suppliers; and the availability of production capacity. In
addition to fluctuations in net sales, gross margins can vary from period to
period as a result of a number of factors including the management of
production capacity and changes in product mix. For example, historically, gas
delivery systems have had lower gross margins than subassemblies and gross
margins for different types of subassemblies have varied. There can be no
assurances that the Company will anticipate or respond in a timely manner to
those factors listed above or that, irrespective of the Company's response,
such factors will not materially and adversely affect the Company's business,
operating results and financial condition in one or more quarterly or annual
periods.
A significant portion of the Company's operating and manufacturing expenses
are relatively fixed in nature and planned expenditures are based in part on
anticipated orders. In the event of a decline in net sales, the Company would
likely not be able to adjust spending quickly enough to compensate for such
decline which would magnify the adverse impact of the net sales shortfall on
the Company's business, operating results and financial condition. For
example, the Company has expended resources in recent periods to expand its
capabilities and capacity in anticipation of semiconductor manufacturing
industry growth. If such industry growth does not occur when anticipated or at
all, the Company's business, operating results and financial condition would
be materially adversely affected. In particular, the Company's manufacturing
capacity and operating expenses currently exceed levels required to support
present net sales and there can be no assurance that the Company's net sales
will increase in the future. For these and other reasons, results of
operations in any period should not be considered indicative of the results to
be expected for future periods and there can be no assurance that the Company
will be profitable in any future period. Due to the foregoing factors, it is
likely that in one or more future quarters, the Company's operating results
will fall below the expectations of public market analysts or investors. In
each such event, the price of the Company's Common Stock could decline
significantly. See "--Customer Concentration," "--Industry Concentration;
Cyclicality of Semiconductor Industry," "--Management of Business
Fluctuations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Customer Concentration. Historically, substantially all of the Company's net
sales in any particular period have been attributable to a limited number of
semiconductor equipment manufacturers. Net sales
5
to four of the Company's customers, Applied Materials, Lam Research, Watkins-
Johnson and Novellus Systems, accounted for approximately 86% of the Company's
net sales during 1996 and approximately 90% of its net sales for the six
months ended June 30, 1997. The Company expects that sales to a small number
of key customers will continue to account for substantially all of its net
sales for the foreseeable future. None of the Company's customers has entered
into a long-term agreement requiring them to purchase the Company's systems or
subassemblies or use its services. The Company's sales contracts generally
allow customers to cancel orders at any time with liability only for custom
material purchased and manufacturing steps completed as of the time of
cancellation. The demand for the Company's products and services from its
customers is dependent in part on orders received by them from their
semiconductor device manufacturer customers who are increasing capacity in
existing wafer fabrication facilities or building new facilities. As purchases
related to a particular new or expanded wafer fabrication facility are
completed, sales related to that semiconductor device manufacturer are likely
to decrease sharply. If completed contracts are not replaced on a timely basis
by new orders from the Company's customers relating to the same or other
device manufacturers, the Company's business, operating results and financial
condition could be materially adversely affected. Further, the appearance of a
close working relationship with a particular customer may materially adversely
affect the Company's ability to establish or maintain a relationship with, or
sell products to, competitors of that customer.
The Company's net sales could be materially adversely affected by a number
of factors, including: the loss of a significant customer or any reduction in
orders from any significant customer or the cancellation or delay of a
significant order from a customer; the Company's failure to be selected as a
provider of gas delivery systems or subassemblies for a new product or product
line of a significant customer; a customer's use of internal or multiple
external sources for its gas delivery requirements; customer deviations from
recent buying patterns; or financial difficulties of a customer or a
significant semiconductor device manufacturer. The Company has experienced
significant reductions in net sales in prior periods due to such factors. For
example, net sales attributable to a key customer declined from $13.2 million
for the first calendar quarter of 1996 to $2.0 million for the fourth calendar
quarter of 1996, which the Company believes was due primarily to reduced
production levels by such customer in response to a general slowdown of the
semiconductor equipment market which began in the second calendar quarter of
1996, the decision by such customer to work off inventories built up during
prior quarters and the selection by such customer of another gas delivery
provider for systems related to a new product. In addition, there can be no
assurance that one or more of the Company's key customers will not temporarily
or permanently elect to produce a higher proportion of their gas delivery
requirements internally. Any such reductions in outsourcing, which may be more
likely during periods of slowdown, would magnify the adverse effects of any
slowdowns in the Company's business and could limit the success of the
Company's strategy to supply an increasing portion of its customers' total gas
delivery requirements. The occurrence or recurrence of any of such factors,
many of which are outside the Company's control, could materially adversely
affect the Company's business, operating results and financial condition.
There can be no assurance that any of the Company's customers will not
reduce or cease ordering the Company's products or services due to the above
factors or other reasons. Any such reduction or cessation would likely have a
material adverse effect on the Company's business, operating results and
financial condition. Furthermore, attempts to mitigate the adverse effects of
such reduction or cessation through the prompt addition of a new customer or
customers would likely be difficult since prospective customers typically
require lengthy qualification periods prior to placing volume orders with a
new provider of gas delivery systems and subassemblies.
Although the Company maintains a backlog, the Company's customers may defer
or cancel orders without significant penalties. Anticipated orders from the
Company's customers have in the past failed to materialize and delivery
schedules have been deferred or canceled as a result of changes in customer
requirements. Order deferrals and cancellations have in the past and may in
the future have a material
6
adverse effect on the Company's business, operating results and financial
condition. See "--Dependence on Outsourcing; Evolving Gas Delivery Industry,"
"--Industry Concentration; Cyclicality of Semiconductor Industry," "Business--
Customers" and Note 10 to Notes to Financial Statements of Insync.
Dependence on Selection as Provider for New Products. The Company's ability
to generate net sales in the future is primarily dependent on its being
selected by semiconductor equipment manufacturers as a provider of gas delivery
systems and/or subassemblies for their new products. In any given period, the
Company's gas delivery systems and subassemblies are included in only a limited
number of different models of semiconductor device manufacturing equipment,
each having a limited life cycle. In the past, equipment manufacturers have
selected gas delivery providers for new product models during the design and
testing phases of their product development cycles. The Company believes that
it would be difficult for it to begin providing gas delivery systems and/or
subassemblies for use in a particular model of wafer processing equipment if
the Company had not been selected and qualified as a provider during the
development of such product. Therefore, a failure to be selected as a provider
during the early stages of a product's life cycle could preclude the Company
from being an outsourced provider of gas delivery systems and/or subassemblies
for such product model throughout its life cycle. For example, the Company's
net sales were negatively affected during the second half of 1996 when a
competitor became the primary provider of the gas delivery system for a new
product generation developed by one of the Company's major customers. In
addition, such failure to be selected could reduce the Company's ability to be
selected as a provider for future product models if, for example, such failure
adversely affects the working relationship between the Company and the
manufacturer of such product model. There can be no assurance that the Company
will be selected as a provider of gas delivery systems and/or subassemblies for
new product models introduced by existing customers or other equipment
manufacturers. Unless the Company is selected as a provider of gas delivery
systems and/or subassemblies for new models as existing models are phased out,
the Company's business, operating results and financial condition will be
materially and adversely affected.
Industry Concentration; Cyclicality of Semiconductor Industry. Substantially
all of the Company's net sales are derived from the sale of gas delivery
systems and subassemblies to semiconductor equipment manufacturers. The gas
delivery requirements of semiconductor equipment manufacturers are, in turn,
dependent upon capital expenditures by semiconductor device manufacturers,
particularly those opening new wafer fabrication facilities or expanding or
upgrading existing facilities. The construction and expansion of fabrication
facilities is influenced in large part by the current and anticipated market
demand for semiconductors and products utilizing such devices. There can be no
assurance as to when or whether semiconductor device manufacturers will
construct and expand wafer fabrication facilities. The semiconductor industry
has historically been highly cyclical and has experienced periods of
oversupply. Such periods have resulted in significantly reduced demand for
semiconductor manufacturing equipment, including equipment requiring the gas
delivery systems and subassemblies provided by the Company. Furthermore, the
Company believes that its net sales may decline disproportionately as compared
to the semiconductor equipment market in periods of slowdown or downturn if its
customers respond to such slowdowns or downturns by reducing their inventory
levels or by reducing outsourcing. For example, the Company's net sales
declined from $33.1 million for the first quarter of 1996 to $10.6 million for
the fourth quarter of 1996 which the Company believes was primarily due to a
downturn in the semiconductor equipment market. In addition, the Company
believes its ability to reduce expenses in a future downturn will be
constrained by the need to sustain investments in marketing, research,
development and engineering, and the need to maintain extensive customer
service and support capabilities. The Company expects that the semiconductor
device and equipment markets will continue to be cyclical and will decline in
some future periods. The Company's business, operating results and financial
condition could be materially adversely affected by such downturns or slowdowns
in the semiconductor device and equipment markets.
7
Failure to Meet Customer Performance Criteria; Risk of Delays or
Defects. The Company's gas delivery systems and subassemblies are intended to
be integrated into semiconductor process equipment manufactured by the
Company's customers for sale to semiconductor device manufacturers. The
Company's customers have demanding requirements for on-time delivery of
defect-free systems and subassemblies. Any delay by the Company in delivering
fully functional systems and subassemblies to any customer may lead to lost or
delayed sales. A failure to meet on-time delivery or performance criteria
could, in addition to resulting in the loss of revenue from, and loss of
future business with, such customer, cause long-term damage to the Company's
reputation, delay market acceptance of the Company's systems, subassemblies
and technologies (including the IGS), and increase warranty and service costs,
any of which could have a material adverse effect upon the Company's business,
operating results and financial condition. In the past, the Company has
experienced difficulty in meeting its customers' delivery schedules and
quality standards, particularly during periods in which the Company was
attempting to rapidly increase or decrease production capacity in response to
significant fluctuations in demand. For example, during the first six months
of 1997, the rates of late deliveries to customers and items rejected by
customers for defects or deviations from specifications were substantially
higher than the Company has historically experienced. The Company believes
that these increases were primarily attributable to difficulties associated
with training newly hired employees and increasing the Company's production
capacity following employee layoffs and decreases in production experienced in
the second half of 1996 and from changes to manufacturing processes
implemented during the first half of 1997. Although the Company's on-time
delivery and performance standards have recently returned to historic levels,
there can be no assurance that the Company will continue to meet on-time
delivery and product performance specifications in the future. A failure to
meet on-time delivery and specifications of customers could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Dependence on Outsourcing; Evolving Gas Delivery Industry. The Company is
dependent on the outsourcing of gas delivery systems and subassembly
requirements by semiconductor equipment manufacturers. The Company believes
that the market created by such outsourcing is evolving rapidly. Historically,
semiconductor equipment manufacturers designed and manufactured the majority
of gas delivery systems and subassemblies internally due to their highly
specialized design, need for last-minute configurability, and importance to
overall equipment performance. Companies providing outsourcing services have
historically addressed only part of equipment manufacturers' total gas
delivery needs, often building selected subassemblies to the equipment
manufacturers' specifications. The Company believes that equipment
manufacturers will not substantially increase the degree to which they
outsource their gas delivery requirements until independent providers can
demonstrate their ability to consistently provide comprehensive gas delivery
systems on a cost competitive basis, in a timely and efficient manner and in
quantities sufficient to support volume production. The Company's objectives
of adding new customers and increasing sales to existing customers are
dependent on the Company developing such capabilities and capacity and on
equipment manufacturers selecting the Company as a provider of such
outsourcing services. Although the Company has invested substantial financial
and other resources in efforts to develop such capabilities and capacity and
to build relationships with equipment manufacturers, there can be no assurance
that the Company will have the capabilities and capacity to provide the full
breadth of these requirements on a cost competitive basis. In addition, there
can be no assurance that the Company will successfully develop the
capabilities to address, on a consistent basis, the complete array of gas
delivery requirements demanded by semiconductor equipment manufacturers.
Regardless of whether the Company is successful in meeting the gas delivery
requirements of semiconductor equipment manufacturers, there can be no
assurance that the market for independent gas delivery suppliers will not
decrease in the future. Such market is dependent on the degree to which
semiconductor equipment manufacturers outsource their gas delivery needs.
There can be no assurance that equipment manufacturers will continue to
outsource their gas delivery requirements or, if such outsourcing continues,
that such customers will increase their outsourcing or that the Company will
be selected as a provider of outsourcing services. In particular, in the event
of a slowdown or an overall
8
decline in the semiconductor equipment industry (such as the slowdown which
began in the second quarter of 1996) there can be no assurance that
semiconductor equipment manufacturers will not produce a greater proportion of
their gas delivery system requirements internally. A decrease or slowdown in
the market for independent gas delivery providers could have a material
adverse effect on the business, operating results and financial condition of
the Company.
Competition. The Company believes that competition in the gas delivery
market is intense and likely to increase substantially. Traditionally, gas
delivery systems and subassemblies have been primarily manufactured internally
by semiconductor equipment manufacturers. While these equipment manufacturers
are significant customers or potential customers of the Company, companies
including Applied Materials and Lam Research continue to produce significant
quantities of gas delivery systems internally. For a variety of reasons,
including any downturn or slowdown in the semiconductor equipment industry,
there can be no assurance that semiconductor equipment manufacturers will not
elect to utilize their internal manufacturing capacity to manufacture a
greater percentage of their gas delivery requirements. The Company's
competitors also include numerous privately and publicly held independent gas
delivery providers, mass flow controller companies and others. Other companies
not currently offering such systems, including gas suppliers, may attempt to
enter and develop products for this market or to develop alternative
technologies which could 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 and manufacturing
capacity necessary to meet the requirements of large equipment manufacturers,
to fund customer service and support, and to invest in both product and
process research and development. Current and potential competitors may have
substantially greater financial resources, name recognition and more extensive
engineering, manufacturing, marketing and customer service and support
capabilities than the Company. In addition, most of the Company's key
customers have established relationships with one or more of the Company's
competitors as additional or alternative providers, which the Company believes
tends to further intensify competition and may limit the Company's ability to
capture a greater percentage of a customer's outsourced gas delivery
requirements. 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 performance
characteristics and/or lower prices. New product introductions or product
announcements by the Company's competitors could cause a decline in sales or a
loss of market acceptance of the Company's gas delivery systems and
subassemblies. Moreover, such increased competitive pressure could lead to
intensified price competition, which could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company will be able to compete successfully in the
future. See "Business--Competition."
Management of Business Fluctuations. The Company has, in the past, undergone
periods of rapid growth and periods of rapid declines in net sales. See "--
Fluctuations in Operating Results." In response to the downturn in the
semiconductor equipment industry that began in the second quarter of 1996, the
Company significantly reduced its workforce and production capacity and
deferred expenditures for operational and financial infrastructure. As a
result of significant increases in orders in the first and second quarters of
1997, compared to the fourth quarter of 1996, the Company hired and trained a
significant number of new employees in the first half of 1997. The Company
believes that problems associated with rapid growth in the Company's capacity
caused the Company to fail to meet customers' on-time delivery and product
specifications requirements in the first half of 1997, which in turn adversely
affected the net sales of the Company during such period.
The significant quarter to quarter net sales increases and decreases
historically experienced from time to time by the Company and by the
semiconductor equipment industry require the Company to balance its short term
operational needs with long range planning needs. If the Company believes a
downturn is of relatively short duration, management may choose to retain
capacity and capabilities that
9
exceed present needs to avoid disruptions. Any decision to retain such
capacity and capabilities would have at least a short-term adverse effect on
the Company's business, operating results and financial condition. Conversely,
if management determines to reduce its capacity and capabilities, the Company
may be unable to take advantage of future industry growth, or may lose market
share to competitors with greater manufacturing capacity during subsequent
periods of expansion, thus reducing the Company's net sales in future
quarters.
The Company is making significant expenditures in the second half of 1997 to
prepare for potential growth in the semiconductor industry based, in part,
upon management's belief that customers' selection of the Company's systems
and services may depend on the Company having the demonstrable capacity to
accommodate such customers' volume and other requirements. Company initiatives
include expansion of production capacity, hiring and training employees and
implementation and installation of a variety of new and upgraded operating and
financial systems, procedures and controls, including the enhancement of its
accounting and other internal management systems and the linking of its
systems and processes with those of its key customers. There can be no
assurance, however, that the Company will successfully implement such
installation or achieve such enhancement or that such enhancement, if
achieved, will result in lower costs or on-time performance. In addition, in
the event that anticipated growth in the semiconductor industry and the
Company's customers do not materialize in the near term, the expenditures
incurred by the Company in implementing such expansion measures would have a
material adverse effect on the Company's business, operating results and
financial condition.
In periods of growth, the Company must identify, recruit, train and
integrate new employees quickly to keep pace with such growth. The
availability of qualified personnel is limited and competition for such
personnel is intense. Any such growth could also significantly strain the
Company's management, manufacturing, financial and other resources. Any
failure to address these growth issues in an effective manner could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the additions and upgrades
to the Company's operating systems, procedures and controls being implemented
in the second half of 1997 will be implemented successfully or without
unexpected costs, delays or difficulties, or will enhance the Company's
ability to manage any future growth or closely integrate the Company's systems
with those of its customers. Moreover, there can be no assurance that the
Company will grow in future periods, or if such growth occurs, that the
Company's systems, procedures and controls will be adequate to support the
Company's expanded operations. Finally, the expansion of its facilities or any
move to new facilities could be disruptive and could have a material adverse
effect on the Company's business, operating results and financial condition.
In particular, there can be no assurance of the Company's ability to fully
utilize any expanded capacity on a timely basis.
Rapid Technological Change. The semiconductor equipment industry is
characterized by, among other things, rapid technological change, evolving
industry standards, frequent new product introductions and significant
competition. The success of the Company in developing, introducing, selling
and supporting gas delivery systems and subassemblies depends upon effectively
managing total costs to customers and a variety of other factors including:
the ability of the Company to identify and address emerging customer
requirements; the timely and efficient completion of gas delivery system
design, development, manufacture and assembly; software development; and
product field-testing. To the extent gas delivery systems, subassemblies and
capabilities developed by the Company are based upon anticipated changes in
semiconductor production technologies, sales for such offerings may be
materially adversely affected if such technologies do not gain acceptance in
the industry. There can be no assurance that the Company will be successful in
developing, manufacturing, marketing or enhancing existing or new gas delivery
systems or subassemblies for new or emerging process technologies.
Furthermore, there can be no assurance that it will be able to do so quickly
enough to keep pace with rapid technological advances in the industry. In
addition, the introduction of new or enhanced gas delivery systems,
10
subassemblies and capabilities by the Company's competitors, suppliers or
customers could cause a decline in net sales or loss of market acceptance of
the Company's existing and/or future offerings.
The Company's future operating results could also be adversely affected if
it fails to support newly introduced and accepted modular gas delivery system
platforms. The Company believes that equipment manufacturers may begin to
supplant traditional, fully-customized design techniques with more modular
approaches in an effort to simplify the design, specification, manufacture and
installation of gas delivery systems. To the extent equipment manufacturers
demand gas delivery systems based on modular platforms, the Company's
business, operating results and financial condition would be materially
adversely affected if the IGS, the Company's modular platform, fails to gain
wide market acceptance.
Furthermore, fundamental changes in gas delivery system requirements for
semiconductor process technologies could materially reduce or eliminate the
semiconductor equipment industry's demand for and dependence on the
capabilities that the Company has developed with respect to current gas
delivery system methodologies. The failure of the Company to respond quickly
to such changes and to offer competitive solutions would likely significantly
impact the Company's market share and materially adversely affect the
Company's business, operating results and financial condition. See "Business--
Systems and Services."
Sole or Limited Sources of Supply. The Company relies to a substantial
extent on outside vendors to manufacture many of the components used in its
gas delivery systems and subassemblies. From time to time, certain of these
components are only attainable from a sole or limited group of suppliers. The
Company's reliance on outside vendors generally, and on a sole or limited
group of suppliers in particular, involves several risks, including a
potential inability to obtain an adequate supply of required components,
reduced control over pricing and timely delivery of components, and limited
ability to pass on price increases to its customers. Because the procurement
of certain of these components may require long lead times, there can be no
assurance that delays or shortages caused by suppliers will not occur. The
Company's ability to fill customer orders may depend on the availability of
thousands of different components from its suppliers and, particularly in
periods of high demand, the Company has in the past experienced difficulties
in obtaining certain components on a timely basis which has delayed deliveries
to the Company's customers. Any such inability to obtain adequate deliveries
or any other circumstance that would require the Company to seek alternative
sources of supply, or to manufacture such components internally, could delay
the Company's ability to ship its products and could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, the Company's customers, at times, require the Company to secure
certain components from a specific component manufacturer. If the Company is
unable to secure these specified components due to supplier shortages or for
any other reason, it could adversely affect the Company's ability to retain
the customer's order or to deliver products on a timely basis, which in turn
could adversely affect its relationship with the customer. If significant
customer relationships were adversely affected in this manner, it could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Manufacturing."
Limited Intellectual Property Protection. The Company relies on a
combination of patent, copyright, trademark and trade secret laws,
nondisclosure agreements and other intellectual property protection methods to
protect its proprietary technology. Although the Company currently holds two
patents and has three pending patent applications in the United States, the
Company believes that patents are of less significance in its industry than
such factors as customer service, innovation, technical expertise and know-how
of its personnel. There can be no assurance that the Company's competitors
will not be able to legally ascertain the nonpatented proprietary information
embedded in the Company's gas delivery systems or other products, in which
case the Company may be unable to prevent use of such information. To the
extent the Company elects to assert its patent rights, there can be no
assurance that any claims of the Company's patents will be sufficiently broad
to protect the Company's technology. In addition, there can be no assurance
that any patents issued to the Company will not be challenged,
11
invalidated or circumvented, that any rights granted thereunder will provide
adequate protection to the Company, or that the Company will have sufficient
resources to prosecute its rights.
Although the Company has not received any notices from third parties
alleging infringement claims, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future, or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, operating results and financial condition. If any such
claims are asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on reasonable terms or at all.
Alternatively, the Company could decide to resort to litigation to challenge
such claims. Such challenges could be extremely expensive and time consuming.
Adverse determinations in any litigation could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and prevent the Company from manufacturing and selling its
products. Any of these developments could have a material adverse effect on
the Company's business, operating results and financial condition.
Dependence on Key Personnel. The Company's financial performance will depend
in significant part upon the continued contributions of Stanley L. Leopard,
its Chairman of the Board and Chief Executive Officer, Jorge L. Titinger, its
President and Chief Operating Officer, Brent D. Elliot, its Executive Vice
President, Technology and Marketing, and other officers and key personnel,
many of whom would be difficult to replace. None of such persons has an
employment or non-competition agreement with the Company. In addition, the
Company maintains only limited key man life insurance on these three officers.
The loss of Mr. Leopard, Mr. Titinger, Mr. Elliot or any other key person
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's future operating
results depend, in part, upon its ability to attract and retain other
qualified management, engineering, financial, technical, marketing and sales
and support personnel for its operations. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company's business, operating
results and financial condition. See "Business--Employees" and "Management--
Directors and Executive Officers."
Potential Future Acquisitions. In the future, the Company may pursue
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash,
potentially dilutive issuances of equity securities, incurrence of debt and
amortization expenses related to goodwill and other intangible assets, each of
which could materially adversely affect the Company's business, operating
results and financial condition. For example, in the third fiscal quarter of
1996, the Company recorded an expense of $16.6 million related to the
reduction in carrying value of certain intangible assets acquired from
Pullbrite, Inc. in January 1996. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired company, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time,
the Company has engaged in preliminary discussions with third parties
concerning potential acquisitions of product lines, technologies and
businesses; however, there are currently no negotiations, commitments or
agreements with respect to any acquisition. In the event that such an
acquisition does occur, however, there can be no assurance as to the effect
thereof on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 2 of Notes to Financial Statements of Insync.
Limited Insurance Coverage; Environmental Regulation. The operations of the
Company involve the use of industrial machine tools and exposure to hazardous
chemicals, with attendant risks of liability for personal injury and property
damage. There can be no assurance that accidents will not occur or that the
Company will not incur substantial liability in connection with the operation
of its business. The
12
Company maintains workers' compensation insurance and general liability
insurance, with policy limits of $1.0 million per accident or occurrence. The
Company also maintains an umbrella policy with limits of $5.0 million in the
aggregate. Such insurance excludes coverage for losses or liabilities relating
to environmental damage or pollution. The Company's business, operating results
and financial condition could be materially adversely affected by a claim that
was not covered or only partially covered by its insurance. In addition, the
Company is subject to a variety of governmental regulations relating to the
use, storage, handling and disposal of toxic or other hazardous substances used
in connection with its electropolishing activities. Any failure by the Company
to control the use, storage, handling or disposal or adequately restrict the
discharge of hazardous or toxic substances could subject the Company to
significant liabilities or could cause the Company's manufacturing operations
to be curtailed or suspended.
Control by Directors and Executive Officers. The Company's directors,
executive officers and their affiliates will beneficially own approximately %
of the Company's outstanding Common Stock upon completion of the Offering. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. Additionally, as a result of their securities
ownership and their positions with the Company, these shareholders will have
significant influence over major corporate transactions as well as the election
of directors of the Company and matters on which the Board of Directors may
act. See "Principal and Selling Shareholders."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price will be determined by negotiations among the Company, the Selling
Shareholders and the representatives of the Underwriters based upon several
factors and may not be indicative of future market prices. The market price of
the Company's Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company, its competitors or its customers,
trends in the semiconductor manufacturing industry and other events or factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many
companies in the semiconductor sector. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has been initiated against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect on the Company's business, operating results and
financial condition. Any settlement or adverse determination in such litigation
could also subject the Company to significant liability, which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Underwriting."
Anti-Takeover Effects of Unissued Preferred Stock. Upon the completion of the
Offering, the Company's Board of Directors will have the authority to issue up
to 4,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the shareholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deterring or
preventing a change in control of the Company. The Company has no present plans
to issue shares of Preferred Stock after completion of the Offering. See
"Description of Capital Stock."
Need for Additional Capital. The Company believes that in order to remain
competitive it may require additional financial resources over the next several
years for working capital, research,.
13
development and engineering, expansion of sales and marketing efforts, capital
expenditures and potential acquisitions. Although the Company believes that it
will be able to fund planned expenditures for at least the next 12 months from
a combination of the proceeds of the Offering, cash flow from operations,
existing cash balances and the Company's bank line of credit, there can be no
assurance that the Company will be able to obtain any additional financing
which may be required in the future on acceptable terms or at all. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Shares Eligible for Future Sale. Sales of substantial amounts of shares in
the public market or the prospect of such sales could adversely affect the
market price of the Company's Common Stock. Upon completion of the Offering,
the Company will have outstanding shares of Common Stock. Of these shares,
(i) all of the shares offered hereby and an additional shares held by
existing shareholders will be freely saleable upon the effectiveness of the
Offering, (ii) shares will be eligible for sale 90 days following the
effectiveness of the Offering under Rules 144 and 701 promulgated under to the
Securities Act of 1933, as amended (the "Securities Act") and (iii) an
additional shares of Common Stock held by current shareholders are subject
to lock-up agreements under which the holders of such shares have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this Prospectus without the prior written consent of BT
Alex. Brown Incorporated. After the 180-day period, approximately shares
will be eligible for sale under Rules 144 and 701. The remaining approximately
shares held by existing shareholders will become eligible for sale from
time to time in the future under Rule 144. In addition, the Company intends to
file a registration statement under the Securities Act shortly after the
effectiveness of the Offering, covering the sale of shares of Common Stock
reserved for issuance under the Company's Amended and Restated 1993 Stock
Option Plan (the "1993 Plan"), 1997 Stock Plan (the "1997 Plan") and 1997
Employee Stock Purchase Plan (the "1997 Purchase Plan"). As of August 1, 1997,
there were options outstanding to purchase a total of approximately shares
of the Company's Common Stock, all of which are subject to 180-day lock-up
agreements, and approximately additional shares reserved for future option
grants. Approximately shares issuable upon exercise of such options will
be eligible for purchase and resale into the public market 180 days after the
date of this Prospectus in reliance upon Rule 701. Certain existing
shareholders, holding an aggregate of approximately shares of Common Stock
and the holders of warrants to purchase shares of Common Stock also will
be entitled to registration rights with respect to their shares of Common
Stock after the Offering. See "Management--Stock Plans," "Description of
Capital Stock--Registration Rights of Certain Holders," "Shares Eligible for
Future Sale," and "Underwriting."
Dilution. Purchasers in the Offering will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price. Additional dilution will occur
upon the exercise of outstanding stock options and warrants. See "Dilution"
and "Management--Stock Plans."
14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby, based on an assumed initial public
offering price of $ per share, and after deducting underwriting discounts
and commissions and estimated offering expenses, are estimated to be $
million ($ million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any proceeds from the sale of shares of
Common Stock to be sold by the Selling Shareholders in the Offering.
The Company will use approximately $12.0 million of the net proceeds of the
Offering to repay a portion of the outstanding balance owed on a term loan and
will repay the outstanding balance on the Company's bank line of credit ($1.5
million outstanding at June 30, 1997). The remaining net proceeds will be used
for working capital and general corporate purposes. A portion of the net
proceeds may also be used for investments in or acquisitions of complimentary
businesses, products or technologies, although no such transactions are
currently under negotiation. Pending such uses, the Company will invest the net
proceeds from the Offering in short-term, investment grade, interest bearing
securities, including government obligations and other money market
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and Note 5 of Notes
to Financial Statements of Insync.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any earnings for use in its business
and does not anticipate declaring or paying any cash dividends in the
foreseeable future. In addition, the Company's bank credit facility prohibits
the declaration or payment of dividends without the bank's prior approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
15
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company, (ii) the unaudited pro forma capitalization of
the Company reflecting the conversion of all outstanding shares of Redeemable
Preferred Stock into Common Stock and (iii) the unaudited pro forma
capitalization of the Company to reflect the net sale of shares of Common
Stock pursuant to the Offering at an assumed initial public offering price of
$ per share and the application of the net proceeds therefrom as set forth
under "Use of Proceeds." The capitalization information set forth in the table
below is qualified by the more detailed Financial Statements and Notes thereto
appearing elsewhere in this Prospectus and should be read in conjunction with
such Financial Statements and Notes.
JUNE 30, 1997
--------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
Long-term bank notes payable and other(1)........... $ 17,108 $17,108 $
Redeemable Preferred Stock, $.01 par value;
3,000,000 shares authorized; 3,000,000 shares
outstanding, actual; none outstanding pro forma and
as adjusted........................................ 23,485 --
Common stock put warrants........................... 360 360
Shareholders' equity (deficiency):
Preferred stock, $.01 par value, none authorized,
actual; 4,000,000 shares authorized, pro forma
and as adjusted; none outstanding................ -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 5,116,279 shares outstanding, actual;
7,469,219 shares outstanding, pro forma;
shares outstanding, as adjusted(2)............... 951 24,436
Deferred stock compensation....................... (316) (316)
Retained earnings (deficit)....................... (17,665) (17,665)
-------- -------- ----
Total shareholders' equity (deficiency)........... (17,030) 6,455
-------- -------- ----
Total capitalization............................ $ 23,923 $ 23,923 $
======== ======== ====
- --------
(1) See Note 5 of Notes to Financial Statements of Insync.
(2) Excludes as of June 30, 1997 (i) 1,257,901 shares of Common Stock issuable
upon the exercise of outstanding options at a weighted average exercise
price of $3.90 per share and (ii) 317,996 shares of Common Stock issuable
upon the exercise of outstanding warrants at a weighted average exercise
price of $3.81 per share. See "Management--Stock Plans" and Notes 8 and 12
of Notes to Financial Statements of Insync.
16
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value of the Common
Stock from the assumed initial public offering price. The pro forma net
tangible book value of the Company's Common Stock at June 30, 1997 was $3.0
million or $0.40 per share. Pro forma net tangible book value per share is
determined by dividing the amount of total tangible assets of the Company less
total liabilities by the number of shares of Common Stock outstanding as of
such date assuming the conversion of all outstanding shares of Redeemable
Preferred Stock. After giving effect to the sale of shares of Common
Stock offered by Insync hereby (at an assumed initial public offering price of
$ per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company), the pro forma net
tangible book value of Insync at June 30, 1997 would have been $ or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing shareholders and an immediate dilution of
$ per share to new investors purchasing shares at the assumed initial public
offering price. The following table illustrates the per share dilution:
Assumed initial public offering price............................... $
Pro forma net tangible book value at June 30, 1997................ $0.40
Increase in pro forma net tangible book value attributable to new
investors........................................................
-----
Pro forma net tangible book value after the Offering................
----
Pro forma net tangible book value dilution to new investors......... $
====
The following table sets forth on a pro forma basis as of June 30, 1997 the
number of shares of Common Stock purchased from Insync, the total consideration
paid to Insync, and the average price per share paid by existing shareholders
and by new investors purchasing shares in the Offering (based upon an assumed
initial public offering price of $ per share and before deduction of
estimated underwriting discounts and commissions and offering expenses payable
by Insync):
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------------------- ------- -------------
Existing shareholders.. 7,469,219 % $27,685,000 % $3.71
New investors..........
----------- ------- ----------- -----
Total................ 100.0% $ 100.0%
=========== ======= =========== =====
- --------
(1) Sales by the Selling Shareholders in the Offering will reduce the number
of shares of Common Stock held by existing shareholders to or
approximately % ( shares, or approximately % if the
Underwriters' over-allotment option is exercised in full) and will
increase the number of shares held by new investors to or
approximately % ( shares, or approximately %, if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after this Offering. See
"Principal and Selling Shareholders."
The computations in the tables above exclude as of June 30, 1997 (i)
1,257,901 shares of Common Stock issuable upon exercise of outstanding options
at a weighted average exercise price of $3.90 per share, (ii) 317,996 shares of
Common Stock issuable upon the exercise of outstanding warrants at a weighted
average exercise price of $3.81 per share and (iii) an aggregate of 676,403
additional shares of Common Stock, subject to shareholder approval, reserved
for future issuance under the Company's 1993 Plan, 1997 Plan and 1997 Purchase
Plan. To the extent that these options or warrants are exercised, there will be
substantial further dilution to new investors. See "Capitalization,"
"Management--Stock Plans" and Notes 8 and 12 of Notes to Financial Statements
of Insync.
17
SELECTED FINANCIAL DATA
The following selected financial data of Insync as of December 31, 1995 and
1996 and June 30, 1997, and for each of the three years in the period ended
December 31, 1996 and for the six months ended June 30, 1997 are derived from
the Company's financial statements audited by Deloitte & Touche LLP,
independent auditors, included elsewhere in the Prospectus. The selected
financial data as of December 31, 1994 has been derived from audited financial
statements not included herein. The selected financial data as of and for the
years ended December 31, 1992 and 1993 and for the six months ended June 30,
1996 have been derived from unaudited financial statements that have been
prepared on the same basis as the audited financial statements and which, in
the opinion of management, included all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. All of the data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $2,771 $7,199 $20,617 $49,969 $86,099 $ 59,448 $ 34,679
Cost of sales........... 1,879 5,487 15,668 36,529 62,261 41,464 26,327
------ ------ ------- ------- ------- -------- --------
Gross profit............ 892 1,712 4,949 13,440 23,838 17,984 8,352
Operating expenses:
Selling, general and
administrative......... 714 1,471 2,803 5,686 11,070 6,286 4,289
Research, development
and engineering........ -- 313 669 2,236 3,560 2,287 1,889
Write down of
intangible assets...... -- -- -- -- 16,610 -- --
Restructuring charges.. -- -- -- -- 858 -- --
------ ------ ------- ------- ------- -------- --------
Total operating
expenses.............. 714 1,784 3,472 7,922 32,098 8,573 6,178
------ ------ ------- ------- ------- -------- --------
Income (loss) from
operations.............. 178 (72) 1,477 5,518 (8,260) 9,411 2,174
Interest expense and
other, net.............. 75 114 230 434 2,562 1,358 1,675
------ ------ ------- ------- ------- -------- --------
Income (loss) before
income taxes............ 103 (186) 1,247 5,084 (10,822) 8,053 499
Provision for income
taxes................... 2 2 513 2,088 (4,314) 3,235 189
------ ------ ------- ------- ------- -------- --------
Net income (loss)....... $ 101 $ (188) $ 734 $ 2,996 $(6,508) $ 4,818 $ 310
====== ====== ======= ======= ======= ======== ========
Pro forma net income
(loss) per share(1)..... $ (0.87) $ 0.03
======= ========
Pro forma shares used in
per share
computations(1)......... 7,617 8,214
DECEMBER 31, JUNE 30,
------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ -------- ------ --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 85 $ 2 $ 39 $ 182 $ 2,829 $5,549 $ 929
Working capital
(deficit)............... (157) 149 1,296 4,409 10,363 10,128 7,951
Intangible assets....... -- -- -- -- 3,895 20,909 3,485
Total assets............ 1,097 3,395 10,258 18,242 36,860 55,891 39,241
Long-term obligations .. 182 1,315 907 413 20,636 21,343 17,108
Redeemable Preferred
Stock and put warrants.. -- -- -- -- 23,411 23,414 23,845
Shareholders' equity
(deficiency)............ 122 152 2,009 7,791 (17,344) (6,268) (17,030)
- -------
(1) See Note 1 of Notes to Financial Statements of Insync for an explanation
of the number of shares used in computing pro forma net income (loss) per
share.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties, including statements
regarding strategies, intentions or expectations. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors,"
"Business" and elsewhere in this Prospectus.
GENERAL
Insync is a leading provider of outsourcing services to semiconductor
equipment manufacturers for the design and manufacture of gas delivery systems
and subassemblies. The Company's gas delivery systems and subassemblies are
used principally in deposition, etch and other semiconductor wafer processing
equipment and are designed to, among other things, maintain purity in the
process chamber and shorten cycle times for equipment manufacturers, thereby
contributing to lower wafer manufacturing costs for device manufacturers. The
Company offers a full range of gas delivery solutions, including subassemblies
for integration into its customers' internally manufactured gas delivery
systems and complete systems for incorporation into its customers' products at
final assembly. In order to simplify the processes and shorten the time
required to specify, design, manufacture, install and service a gas delivery
system, the Company has recently introduced the IGS, a modular platform for
the design and manufacture of gas delivery systems. In addition, the Company
is developing proprietary design tools to allow its customers to strengthen
their gas delivery system design and specification activities.
In general, customer orders for subassemblies have shorter lead times than
orders for gas delivery systems, and subassemblies typically range in price
from $50 to $2,000 while gas delivery systems prices range from $35,000 to
$75,000 (excluding mass flow controllers) and have been as high as $200,000.
Gas delivery systems can require more intensive design services and closer
coordination between the Company and the semiconductor manufacturer that will
be the end user of the finished equipment. Sales of gas delivery systems were
$13.3 million in 1996 and $10.2 million in the six months ended June 30, 1997.
Sales of subassemblies were $72.8 million in 1996 and $24.5 million in the six
months ended June 30, 1997. See "Risk Factors--Dependence on Outsourcing;
Evolving Gas Delivery Industry."
The semiconductor equipment industry has historically experienced cyclical
periods of significant market expansion and contraction. The Company's
business grew rapidly from 1992 through 1995 during a period of market
expansion. In the first quarter of 1996, the Company completed an acquisition
which further expanded its business. The Company believes that declining
production levels and a general slowdown in the semiconductor equipment
industry began during the second quarter of 1996 and adversely affected the
business of its customers. Primarily as a result of the declining production
levels and associated changes in inventory management practices of its
customers, the Company experienced a decline in net sales from $33.1 million
in the quarter ended March 31, 1996 to $10.6 million in the quarter ended
December 31, 1996. The Company's net sales of $10.6 million during the quarter
ended December 31, 1996 represented the lowest quarterly level of net sales
during the current downturn. Net sales grew sequentially to $15.1 million and
$19.6 million in the quarters ended March 31, 1997 and June 30, 1997,
respectively. In response to the substantial decline in net sales and a
related decrease in Insync's factory utilization, the Company reduced its
workforce from 579 employees in March 1996 to 254 employees by the end of
December 1996. The Company's workforce was 372 employees at June 30, 1997, and
net sales increased from $26.7 million to $34.7 million for the six months
ended December 31, 1996 and June 30, 1997, respectively. The Company expects
that the semiconductor
19
device and equipment markets will continue to be cyclical and that the
semiconductor device and equipment markets will decline in some future periods.
See "Risk Factors--Fluctuations in Operating Results" and "--Industry
Concentration; Cyclicality of Semiconductor Industry."
The Company's principal customers are Applied Materials, Lam Research,
Watkins-Johnson, and, most recently, Novellus Systems. These customers
accounted for approximately 86% of the Company's net sales during 1996 and
approximately 90% of the Company's net sales for the six months ended June 30,
1997. The Company expects that sales to a small number of key customers will
continue to account for substantially all of its net sales for the foreseeable
future. However, there can be no assurance that any of the Company's key
customers will not reduce or cease ordering the Company's systems,
subassemblies or services. See "Risk Factors--Customer Concentration."
Gross margins for the Company can fluctuate depending on product mix and
factory utilization. Generally, subassemblies generate gross margins that are
slightly higher than gas delivery systems, and gross margins for different
types of subassemblies vary. Gross margins on gas delivery systems tend to be
slightly lower than for subassemblies because a higher proportion of purchased
components and fixtures are used in finished gas delivery systems with
correspondingly higher materials handling requirements. Margins for
subassemblies are dependent to a significant degree on the cost and number of
particular components and materials, and the degree of factory utilization. In
addition, the Company is generally expected to have available production
capacity in place prior to the receipt of large customer orders. As a result,
the Company began to expand production capacity in the first six months of 1997
in anticipation of increasing customer order levels. In the event that
anticipated increases in order levels were not to materialize in the near term
or at all, the expenditures incurred by the Company in expanding its capacity
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Fluctuations in Operating
Results" and "--Management of Business Fluctuations."
The Company has recently increased its operating expenses in anticipation of
increasing customer orders for gas delivery systems. In general, gas delivery
systems require more engineering infrastructure than subassemblies. The Company
believes its current operating expense levels will support significantly higher
levels of revenues from gas delivery systems. However, there can be no
assurance that such anticipated growth will occur on a timely basis or at all.
On January 2, 1996, Insync acquired substantially all of the non-cash assets
and liabilities of Pullbrite, another independent provider of gas delivery
systems and subassemblies to semiconductor equipment manufacturers, for $30.0
million. As a result of declining sales to Pullbrite's major customer in 1996
and other factors, the Company recorded a $16.6 million charge for the write
off of goodwill and the reduction of the carrying value associated with the
major customer relationship. See Note 2 of Notes to Financial Statements of
Insync.
20
RESULTS OF OPERATIONS
The following table sets forth as a percentage of net sales the Company's
results of operations for the periods shown:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 76.0 73.1 72.3 69.7 75.9
------- ------- ------- -------- --------
Gross profit................. 24.0 26.9 27.7 30.3 24.1
Operating expenses:
Selling, general and
administrative.............. 13.6 11.4 12.6 10.6 12.7
Research, development and
engineering................. 3.2 4.5 4.4 3.8 5.1
Write down of intangible
assets...................... -- -- 19.3 -- --
Restructuring charges........ -- -- 1.0 -- --
------- ------- ------- -------- --------
Total operating expenses... 16.8 15.9 37.3 14.4 17.8
------- ------- ------- -------- --------
Income (loss) from operations.. 7.2 11.0 (9.6) 15.9 6.3
Interest expense and other,
net........................... 1.2 0.8 3.0 2.4 4.9
------- ------- ------- -------- --------
Income (loss) before income
taxes......................... 6.0 10.2 (12.6) 13.5 1.4
Provision for income taxes..... 2.4 4.2 (5.0) 5.4 0.5
------- ------- ------- -------- --------
Net income (loss).............. 3.6% 6.0% (7.6)% 8.1% 0.9%
======= ======= ======= ======== ========
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Net Sales
Net sales decreased by 41.7% to $34.7 million for the six months ended June
30, 1997 as compared to $59.4 million for the six months ended June 30, 1996.
During this period, net sales from gas delivery systems increased by $3.1
million or 43.7% from $7.1 million to $10.2 million while net sales from
subassemblies declined by $27.8 million or 53.2% from $52.3 million to $24.5
million. The increase in the gas delivery systems revenue resulted from the
Company's increased success in providing complete gas delivery systems. The
decrease in subassembly revenues was primarily attributable to a downturn in
the semiconductor equipment industry and a corresponding decrease in sales by
the Company to certain of its major customers. Sales to Lam Research, Applied
Materials and Watkins-Johnson declined by an aggregate of $24.1 million from
$51.5 million for the six months ended June 30, 1996 to $27.4 million for the
six months ended June 30, 1997. This decrease was partially offset by the
addition of Novellus Systems, a significant new customer.
Gross Profit
Gross profit decreased to $8.4 million or 24.1% of net sales for the six
months ended June 30, 1997 as compared to $18.0 million or 30.3% of net sales
for the six months ended June 30, 1996. The decline in gross profit was
primarily due to the Company's increase in production capacity in the first
half of 1997 following a significant reduction in its capacity as the
semiconductor equipment market declined during the second half of 1996. In
response to the Company's significant sales decline and to minimize the impact
of the industry downturn on the Company's gross profit, the Company implemented
a number of measures to reduce its production capacity, including the
consolidation of a significant amount of its Silicon Valley operations into one
location at its Milpitas facility and the reduction of its workforce from 579
employees in March 1996 to 254 employees at December 31, 1996. As the Company's
customers began to expand their production levels in the first six months of
1997, the
21
Company expanded its production capacity and increased its headcount to 372 at
June 30, 1997. The Company's factory utilization levels remain below those
levels experienced in 1995 and the first six months of 1996. See "Risk
Factors--Management of Business Fluctuations."
Selling, General and Administrative
Selling, general and administrative expenses decreased 31.8% to $4.3 million
for the six months ended June 30, 1997 as compared to $6.3 million for the six
months ended June 30, 1996. The decrease was primarily due to the
implementation of several expense reduction measures, including headcount and
discretionary spending reductions, which the Company made in response to the
semiconductor equipment industry downturn. The Company believes that its
selling, general and administrative expenses will increase in absolute dollars
in the future as the Company expands its staffing and experiences higher costs
associated with being a public company.
Research, Development and Engineering
Research, development and engineering expenses decreased 17.4% to $1.9
million for the six months ended June 30, 1997 as compared to $2.3 million for
the six months ended June 30, 1996. The lower expenditures in the 1997 period
related to the Company's efforts to reduce costs and to higher expenses
incurred by the Company during the six months ended June 30, 1996 related to
the development of the IGS platform. The Company expects that research,
development and engineering expenses will increase in absolute dollars as it
continues to invest in its engineering capabilities and capacity in order to
support potential growth in the gas delivery systems business.
Interest Expense and Other, Net
Interest expense and other, net increased by 23.3% to $1.7 million for the
six months ended June 30, 1997 as compared to $1.4 million for the six months
ended June 30, 1996. The increase was primarily due to an increase in the
effective interest rate and other costs relating to the Company's bank credit
facility.
Provision for Income Taxes
Insync's effective tax rates were 37.9% and 40.2% for the six months ended
June 30, 1997 and 1996 respectively, approximating federal and statutory rates.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Net Sales
Net sales increased by 72.3% to $86.1 million in 1996 as compared to $50.0
million in 1995. The increase resulted primarily from the acquisition of
Pullbrite and, to a lesser extent, the addition of a major customer, Novellus
Systems. Net sales from Pullbrite accounted for $34.2 million of the Company's
net sales in 1996. Excluding the effect of the Pullbrite acquisition, the
Company's net sales increased from $50.0 million in 1995 to $51.9 million in
1996, an increase of 3.8%. Net sales from gas delivery systems increased in
1996 by $4.1 million or 44.6% from $9.2 million to $13.3 million while net
sales from subassemblies increased by $31.9 million or 78.4% from $40.8 million
to $72.8 million. The increase in net sales of gas delivery systems resulted
from the Company's increased success in providing complete gas delivery
systems. The increase in net sales of subassemblies was primarily due to the
acquisition of Pullbrite.
Gross Profit
Gross profit increased to $23.8 million or 27.7% of net sales in 1996 as
compared to $13.4 million or 26.9% of net sales in 1995. The increase in gross
profit reflected increased utilization of the Company's facilities during the
first half of 1996 as well as the effect of fixed costs remaining constant
against higher revenues. The increase was partially offset by a decline in the
gross profit during the latter part of the year when the Company was carrying
excess production capacity as the semiconductor equipment market declined.
22
Selling, General and Administrative
Selling, general and administrative expenses increased by 94.7% to $11.1
million in 1996 as compared to $5.7 million in 1995. The increase was primarily
due to the Company's acquisition of Pullbrite and the expansion of the
Company's sales and information systems infrastructure.
Research, Development and Engineering
Research, development and engineering expenses increased by 59.2% to $3.6
million in 1996 as compared to $2.2 million in 1995 principally due to
increased expenditures for the IGS platform. The Company also increased its
engineering capacity and capabilities in order to enable it to provide
specialized services such as mechanical and system design as well as analytical
certification services in an effort to address all the gas control requirements
of its customers.
Write Down of Intangible Assets
In 1996, the Company recorded a $16.6 million write down of intangible assets
related to the write off of goodwill pertaining to the Pullbrite acquisition
and the reduction in the carrying value of a major Pullbrite customer. See Note
2 of Notes to Financial Statements of Insync.
Restructuring Charges
In 1996, the Company recorded an $858,000 restructuring charge related to
several actions including the reduction of its work force, the disposition of
unproductive assets, and facility consolidations. The restructuring was
completed in October 1996. See Note 3 of Notes to Financial Statements of
Insync.
Interest Expense and Other, Net
Interest expense and other, net were $2.6 million and $434,000 in 1996 and
1995, respectively. The increase was primarily due to the impact of interest
cost incurred on debt relating to the financing of the Pullbrite acquisition.
Provision for Income Taxes
Insync's effective tax rates were 39.9% and 41.1% for 1996 and 1995,
approximating federal and state statutory rates.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994.
Net Sales
Net sales increased by 142.4% to $50.0 million in 1995 as compared to $20.6
million in 1994. The increase was due to an overall expansion in the
semiconductor equipment industry and increased sales to the Company's major
customers. Net sales from gas delivery systems increased to $9.2 million in
1995 as compared to $2.6 million in 1994 while net sales of subassemblies
increased to $40.8 million in 1995 as compared to $18.0 million in 1994.
Gross Profit
Gross profit increased to $13.4 million or 26.9% of net sales in 1995 as
compared to $4.9 million or 24.0% of net sales in 1994. The increase in gross
profit reflected increased utilization of the Company's facilities as well as
the effect of fixed costs remaining constant against higher revenues. Much of
the improved utilization resulted from the Company's Austin, Texas facility,
which became fully operational in the first quarter of 1995. The increase in
gross profit was partially offset by greater gas control systems sales which
have historically had lower gross profit margins than subassembly sales.
23
Selling, General and Administrative
Selling, general and administrative expenses increased by 102.9% to $5.7
million in 1995 as compared to $2.8 million in 1994. The increase was primarily
related to increased staffing and associated expenses necessary to support
Insync's increased scale of operations, including the addition of the Austin,
Texas facility.
Research, Development and Engineering
Research, development and engineering expenses increased to $2.2 million in
1995 as compared to $669,000 in 1994 due to increased expenditures for the
development of the IGS and to support the increased gas delivery systems
business.
Interest Expense and Other, Net
Interest expense and other, net were $434,000 and $230,000 in 1995 and 1994,
respectively. The increase was primarily attributable to a higher level of
outstanding notes payable.
Provision for Income Taxes
Insync's effective tax rates were 41.1% and 41.1% for years 1995 and 1994,
approximately federal and state statutory rates.
24
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the ten
quarters ended June 30, 1997, both in dollar amounts and as a percentage of net
sales. This information has been derived from the Company's unaudited financial
statements. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained elsewhere in this
Prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information. Such information should be read in
conjunction with the Company's audited Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Company's quarterly results are
subject to fluctuations and operating results for any quarter are not
necessarily indicative of results for any future period.
QUARTER ENDED
------------------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
Net sales............... $10,374 $12,107 $12,581 $14,907 $33,125 $26,323 $ 16,015 $10,636 $15,102 $19,577
Cost of sales........... 7,906 8,981 9,081 10,561 22,734 18,730 12,465 8,332 11,839 14,488
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Gross profit........... 2,468 3,126 3,500 4,346 10,391 7,593 3,550 2,304 3,263 5,089
Operating expenses:
Selling, general and
administrative........ 1,165 1,324 1,526 1,671 3,374 2,912 3,058 1,726 2,068 2,221
Research, development
and engineering....... 414 486 611 725 1,249 1,038 676 597 851 1,038
Write down of
intangible assets..... -- -- -- -- -- -- 16,610 -- -- --
Restructuring charges.. -- -- -- -- -- -- 1,323 (465) -- --
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Total operating
expenses.............. 1,579 1,810 2,137 2,396 4,623 3,950 21,667 1,858 2,919 3,259
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) from
operations............. 889 1,316 1,363 1,950 5,768 3,643 (18,117) 446 344 1,830
Interest expense and
other, net............. 130 113 105 86 713 645 608 596 913 762
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes........... 759 1,203 1,258 1,864 5,055 2,998 (18,725) (150) (569) 1,068
Provision for income
taxes.................. 310 501 534 743 2,036 1,199 (7,486) (63) (233) 422
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)....... $ 449 $ 702 $ 724 $ 1,121 $ 3,019 $ 1,799 $(11,239) $ (87) $ (336) $ 646
======= ======= ======= ======= ======= ======= ======== ======= ======= =======
QUARTER ENDED
------------------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
AS A PERCENTAGE OF NET SALES
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0%
Cost of sales........... 76.2 74.2 72.2 70.8 68.6 71.2 77.8 78.3 78.4 74.0
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Gross profit........... 23.8 25.8 27.8 29.2 31.4 28.8 22.2 21.7 21.6 26.0
Operating expenses:
Selling, general and
administrative........ 11.2 10.9 12.1 11.2 10.2 11.1 19.1 16.2 13.7 11.3
Research, development
and engineering....... 4.0 4.1 4.9 4.9 3.8 3.9 4.2 5.7 5.6 5.3
Write down of
intangible assets..... -- -- -- -- -- -- 103.7 -- -- --
Restructuring charges.. -- -- -- -- -- -- 8.3 (4.4) -- --
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Total operating
expenses.............. 15.2 15.0 17.0 16.1 14.0 15.0 135.3 17.5 19.3 16.6
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) from
operations............. 8.6 10.8 10.8 13.1 17.4 13.8 (113.1) 4.2 2.3 9.4
Interest expense and
other, net............. 1.3 0.9 0.8 0.6 2.2 2.4 3.8 5.6 6.1 3.9
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes........... 7.3 9.9 10.0 12.5 15.2 11.4 (116.9) (1.4) (3.8) 5.5
Provision for income
taxes.................. 3.0 4.1 4.2 5.0 6.1 4.6 (46.7) (0.6) (1.6) 2.2
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)....... 4.3% 5.8% 5.8% 7.5% 9.1% 6.8% (70.2)% (0.8)% (2.2)% 3.3%
======= ======= ======= ======= ======= ======= ======== ======= ======= =======
25
Quarterly net sales increased in each quarter of 1995 reflecting increased
demand from the Company's semiconductor equipment customers, and increased by
$18.2 million or 122.1% in the first quarter of 1996 as compared to $14.9
million in the fourth quarter of 1995 primarily due to the acquisition of
Pullbrite. Excluding net sales attributable to the Pullbrite acquisition,
Insync's net sales for the fourth quarter of 1995 and the first quarter of 1996
grew 8.9%, or from $14.9 million to $16.2 million, respectively. The Company
experienced a significant decline in net sales beginning in the first quarter
of 1996 to its major customers. This decline was primarily related to a
downturn in the semiconductor equipment industry and the ensuing reduction of
inventory levels by the Company's customers. The Company experienced increases
in net sales for the first two quarters of 1997 reflecting increased demand
from the Company's customers. Gross profit began declining during the second
half of 1996 primarily due to the Company's excess production capacity as the
semiconductor equipment market declined. Gross profit was additionally impacted
during the third quarter of 1996, when the Company recorded a $331,000 sales
return reserve in connection with a decision to permit a major customer to
return product. In the fourth quarter of 1996, the Company's negotiations with
this major customer resulted in no product being returned and the previously
provided sales return reserve was reversed. Gross profit was also favorably
impacted in the fourth quarter of 1996, when the Company reversed a $150,000
warranty accrual established in 1995 for a specific product warranty exposure
which no longer existed. Excluding these items, the gross profit for the fourth
quarter of 1996 was $1.8 million or 17.1% of net sales.
In response to the declining sales in 1996, the Company reduced its workforce
and recorded a related charge to operating expenses of $330,000 during the
second quarter of 1996. During the third quarter of 1996, the Company reversed
a $365,000 bonus accrual which had been recorded during the first quarter of
1996, pursuant to its management bonus program and was no longer payable due to
the Company's losses. Excluding the write down of intangibles and restructuring
charges in the third quarter of 1996, operating expenses declined significantly
in the fourth quarter of 1996 as compared to the third quarter of 1996 due to
the implementation of several additional expense reduction measures, including
headcount and discretionary spending reductions in response to the
semiconductor industry equipment downturn and the partial reversal of the
restructuring reserve due to the favorable outcome of a lease amendment. The
significant increase in interest expense in 1996 as compared to 1995 was
primarily due to the impact of interest incurred as a result of increased debt
related to the financing of the Pullbrite acquisition. The increase in interest
expense in 1997 was primarily due to an increase in the effective interest rate
and other costs relating to the Company's bank credit facility.
The Company's quarterly operating results have in the past and may in the
future fluctuate significantly depending on a number of factors, including but
not limited to: the timing and product mix of significant orders and shipping
schedules of its customers; industry-wide changes in the demand for
semiconductors or for semiconductor manufacturing equipment; the ability of the
Company to design, manufacture, test and deliver defect-free gas delivery
systems and subassemblies in a timely and cost effective manner; the gain or
loss of any significant customer; competitive pressures; the timing of product
announcements by the Company's competitors, its customers or their competitors;
seasonal changes in purchases of semiconductor manufacturing equipment; the
availability and cost of components from the Company's suppliers; and the
availability of production capacity. For these and other reasons, results of
operations in any period should not be considered indicative of the results to
be expected for future periods and there can be no assurance that the Company
will be profitable in any future period. See "Risk Factors--Fluctuations in
Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Insync has primarily financed its operations and capital expenditures through
cash flows from operations, the private sale of equity securities, bank credit
facilities and long-term and short-term notes. Insync's principal sources of
liquidity as of June 30, 1997 consisted of $929,000 of cash and cash
26
equivalents and $3.5 million available under a $5 million line of credit. The
Company's bank credit facility includes this line of credit and an outstanding
term loan of $24.0 million at June 30, 1997 which is due in quarterly
installments through the year 2000. Borrowings bear interest at the bank's
prime rate (8.5% at June 30, 1997) plus 2% and are secured by substantially all
of the Company's assets. The bank credit facility subjects the Company to
certain financial covenants. See "Use of Proceeds," and Notes 5, 7 and 13 of
Notes to Financial Statements of Insync.
Cash provided (used) by operations was $(1.1) million, $7.5 million, $2.3
million and $(1.8) million for the six months ended June 30, 1997 and for the
years 1996, 1995, and 1994, respectively. For the six months ended June 30,
1997, the primary source of cash was an increase in accounts payable of $2.7
million while the significant uses of cash included increases in accounts
receivable of $3.6 million and inventory of $2.3 million. In 1996, the primary
sources of cash included decreases in accounts receivable and inventory of $7.5
million and $1.4 million, respectively. The decreases were partially offset by
decreases in accounts payable of $5.9 million and accrued liabilities of $1.8
million. For the years 1995 and 1994, increases in accounts receivable and
inventory of $4.8 million and $6.4 million, respectively, were the primary uses
of cash due to the significant increase in net sales during such periods. The
primary sources of cash for 1995 and 1994 were increases in accounts payable
and other accrued liabilities of $3.2 million and $3.4 million, respectively.
Cash provided by (used) for investing activities was $136,000, $(19.2)
million, $(3.1) million and $(722,000) for the six months ended June 30, 1997
and for the years 1996, 1995 and 1994, respectively. The significant use for
investing activities in 1996 was primarily related to the purchase of Pullbrite
while the uses for the six months ended June 30, 1997, and for 1995 and 1994
were primarily due to capital expenditures at both the Company's Milpitas,
California and Austin, Texas facilities.
Financing activities provided (used) cash of $(938,000), $14.3 million,
$912,000 and $2.5 million for the six months ended June 30, 1997 and for the
years 1996, 1995 and 1994, respectively. Repayment of debt of $3.0 million was
the major use of cash for the six months ended June 30, 1997 while borrowings
under the Company's line of credit of $1.5 million was the major source of
cash. In 1996, notes payable borrowings provided cash of $39.3 million. This
was partially offset by repayments of notes payable in the amount of $14.6
million. Additionally, repayment of subordinated notes payable used cash of
$15.0 million. A private placement of Redeemable Preferred Stock in the amount
of $23.5 million (net of issuance costs) provided cash from financing
activities. This amount was partially offset by a repurchase of Common Stock of
$19.3 million. In 1995, cash was provided by a private placement of Common
Stock in the amount of $1.9 million which was offset by repayments of
borrowings under the line of credit in the amount of $1.1 million. In 1994,
cash was provided by net borrowings under the line of credit in the amount of
$2.2 million.
The Company believes that the net proceeds and the sale of the Common Stock
offered hereby, together with its current cash balances, cash available under
its bank credit facility and cash from operations will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
12 months. However, the Company may require additional funds to support its
working capital requirements or for other purposes, particularly to the extent
that the Company experiences growth in the future. There can be no assurances
that any necessary additional financing will be available to the Company on
commercially reasonable terms, if at all. In addition, although there are no
present understandings, commitments or agreements with respect to any
acquisition of businesses, products or technologies, the Company, from time to
time, evaluates potential acquisitions of other businesses, products and
technologies that are complimentary to those of the Company, and may in the
future require additional equity or debt financings to consummate such
acquisitions. See "Risk Factors--Need for Additional Capital."
27
BUSINESS
This Business section and other parts of this Prospectus contain forward-
looking statements that involve risks and uncertainties, including statements
regarding strategies, intentions or expectations. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus.
INTRODUCTION
Insync is a leading provider of outsourcing services to semiconductor
equipment manufacturers for the design and manufacture of gas delivery systems
and subassemblies. The Company's gas delivery systems and subassemblies are
used principally in deposition, etch and other semiconductor wafer processing
equipment and are designed to, among other things, maintain purity in the
process chamber and shorten cycle times for equipment manufacturers, thereby
contributing to lower wafer manufacturing costs for device manufacturers. The
Company's principal customers are Applied Materials, Lam Research, Watkins-
Johnson and, most recently Novellus Systems, four major North American
semiconductor equipment manufacturers. The Company offers a full range of gas
delivery capabilities, including subassemblies for integration into its
customers' internally manufactured gas delivery systems and complete systems
for incorporation into its customers' products at final assembly. In order to
simplify the processes and shorten the time required to specify, design,
manufacture, install and service a gas delivery system, the Company has
recently introduced the IGS, a modular platform for the design and manufacture
of gas delivery systems. In addition, the Company is developing proprietary
design tools to allow its customers to strengthen their gas delivery system
design and specification activities. The Company's objective is to be the
primary provider of outsourcing design and manufacturing services for gas
delivery to leading semiconductor equipment manufacturers.
- ------- ------------- -------------
INSYNC Systems SEMICONDUCTOR Deposition, Etch SEMICONDUCTOR
SYSTEMS Subassemblies EQUIPMENT and other Process DEVICE
- ------- IGS MANUFACTUERS Equipment MANUFACTURERS
------------- -------------
INDUSTRY BACKGROUND
Advances in design and manufacturing process technologies have enabled the
semiconductor industry to continue to produce devices with increased speed and
performance and reduced geometries. The process technologies necessary to
manufacture these advanced devices have required increasingly complex and
sophisticated process equipment that have significantly increased the costs of
wafer fabrication facilities ("fabs") and have increased the manufacturing
challenges for semiconductor device manufacturers. Today's advanced technology
fabs typically cost in excess of $1 billion, with a significant portion
directed to critical "front-end" manufacturing process equipment which build
the layers on semiconductor wafers which make up a single semiconductor
device. More than 40% of all semiconductor equipment, which in turn perform
more than 70% of the process steps, requires the introduction, management and
evacuation of process gases. These steps include the deposition of insulating
or conducting materials onto a wafer; the etching of the wafer to selectively
remove deposited material; and other process steps. According to VLSI
Research, in 1996, the market for deposition and etch equipment was $10.4
billion. Deposition and etch processes require highly controlled process
environments and chemistry and, as a result, the equipment used for deposition
and etch is complex and
28
incorporates sophisticated systems to control various process gases and the
conditions in which they are used. In an attempt to continue the historical
trends of increasing device density and performance while maintaining or
improving manufacturing yield, device manufacturers continuously demand
innovations in the core process technologies underlying deposition and etching,
among others. In order to meet such demands, equipment manufacturers have been
required to repeatedly improve their process equipment in many respects,
including the inclusion of increasingly complex and sophisticated gas delivery
systems.
Gas delivery systems and subassemblies are critical to the equipment's
ability to perform the deposition, etching and other process steps required in
semiconductor device production. These process steps frequently include the
precise introduction of various high-purity process gases, the exact management
of process chamber conditions and the evacuation of process gases from the
chamber before each new step. Gas delivery systems also play a critical role in
controlling contamination in the semiconductor manufacturing process.
Maintenance of gas purity and the reduction of particle contaminants are
increasingly important as geometric reductions in feature sizes and greater
densities magnify the effect of impurities on manufacturing yields. In order to
achieve higher yields, greater throughput and higher levels of equipment
utilization, semiconductor device manufacturers require equipment that
incorporates increasingly complex and specialized gas delivery systems that,
among other things, minimize chemical particle contamination.
[DIAGRAM 29-A TO BE INSERTED HERE]
[A diagram depicting typical multi-chamber semiconductor process equipment,
highlighting and labeling gas delivery systems and subassemblies.]
The size of gas delivery systems and the number of components used in such
systems and subassemblies have increased steadily. Gas delivery systems are
typically comprised of subassemblies of numerous discrete components such as
filters, purifiers, regulators, transducers (monitors), manifolds, valves and
mass flow controllers whose role in the aggregate is to maintain gas purity,
deliver required gas to the process equipment, measure gas flow rates,
precisely time the introduction and mixture of
29
process gases to the process chamber and evacuate residual gases from the
chamber in preparation for the next process step. Today, an advanced gas
delivery system for etch can be as large as 16 cubic feet and incorporate more
than 200 components, many of which are available from multiple vendors.
Further, equipment manufacturers have customarily offered their device
manufacturer customers the opportunity to specify discrete gas delivery
component parts from particular vendors, even though such component parts
perform the same functions as parts which could be obtained from another
vendor. Thus, the procurement of various discrete gas delivery components has
become increasingly costly and time consuming. As a result of such broad
component availability, device manufacturers have tended to specify highly
customized gas delivery systems which often require ongoing modifications up
until the final stages of assembly. These customization requirements, when
coupled with the specification by customers of multiple discrete component
parts from particular vendors, have required equipment manufacturers to develop
capabilities in specialized and small lot manufacturing, to maintain large gas
delivery component inventories and to repeatedly design iterations for gas
delivery systems and subassemblies. At the same time, the period for delivering
and installing semiconductor equipment in a fab has become increasingly
compressed because significant delays in constructing, in equipping, or in
achieving full operating utilization of a fab result in higher start up costs,
lost revenue and market share, lower operating margins and ultimately, lower
profits for semiconductor device manufacturers. The effective and timely
manufacture of the gas delivery system is crucial to an equipment
manufacturer's ability to install its equipment on time in a fab. As a result,
equipment manufacturers must be able to respond quickly and effectively to the
last-minute reconfiguration requests and quick turn around demands of device
manufacturers.
The growing complexity of gas delivery systems and rising demands by device
manufacturers for their last minute customization and rapid turnaround have
placed increasing demands on semiconductor equipment manufacturers for
resources dedicated to the design and manufacture of gas delivery systems and
to the procurement and stocking of components. In contrast to core process
technologies, the Company does not believe that gas delivery systems have been
a competitive differentiator among equipment manufacturers. The Company
believes that equipment manufacturers are increasingly required to develop
innovations to their core deposition, etch and other process technologies, as
semiconductor wafer sizes increase from 8 to 12 inches, line widths decrease to
0.25 microns and below, and semiconductor densities increase. The Company
believes that the desire of equipment manufacturers to concentrate on their
core competencies, and to ensure that gas delivery requirements can be met in a
timely and cost effective manner has led to outsourcing gas delivery systems to
third parties, and to attempts to create gas delivery systems which are more
capable of standardized volume manufacture rather than the present specialized,
small lot manufacturing approach. Many equipment manufacturers outsource the
manufacture of gas delivery subassemblies, but then provide final gas delivery
system integration in house. In some cases, equipment manufacturers outsource
the design and manufacture of the entire gas delivery system. In general, the
design and manufacture of entire systems requires greater infrastructure and
expertise than subassembly manufacturing in order to meet turnaround and
performance requirements, and equipment manufacturers' requirements for
independent suppliers of gas delivery systems are more comprehensive than for
providers of gas delivery subassemblies.
The Company believes that equipment manufacturers are seeking more
standardized volume manufacturing and as a result are encouraging device
manufacturers to eliminate the specification of large numbers of discrete
component parts from particular vendors, and instead to accept a more limited
number of "modular" choices for their gas delivery needs. The Company believes
that the drive toward a modular approach will become increasingly important as
new fabs are constructed to manufacture 12 inch wafers. The Company believes
that this simplified "modular" approach has the potential to reduce the number
of vendors and specific parts required to be ordered for a given gas delivery
system, and thus reduce cycle time and inventory management, while enabling the
cost savings associated with volume manufacturing.
30
The Company believes that semiconductor equipment manufacturers are
increasingly seeking independent providers that are focused exclusively on the
development and production of gas delivery systems and subassemblies. As
evolving process technologies have become more complex, the Company believes
that equipment manufacturers will seek independent providers that can provide
precisely fabricated gas delivery subassemblies and, increasingly, complete
traditional or modular gas delivery systems, more quickly and cost effectively
than their internal capabilities and resources allow. These independent
providers may benefit from the efficiencies associated with servicing multiple
equipment manufacturers and may provide the expertise and rapid turnaround
capabilities necessary to meet the requirements of the ultimate device
manufacturer customers. The Company believes that as the semiconductor
industry evolves toward 12 inch wafers, the ability of independent providers
to provide a more standardized modular gas delivery platform will become
increasingly important.
INSYNC SOLUTION
The Company is a leading provider of outsourcing services to semiconductor
equipment manufacturers for the design and manufacture of gas delivery systems
and subassemblies. The Company believes its outsourcing services reduce its
customers' total costs by shortening product delivery cycle times, reducing
inventory and materials procurement costs, eliminating redundant work,
enhancing information exchange, and coordinating increasingly complex
manufacturing and design processes. With extensive expertise in gas delivery
requirements and the ability to design and manufacture complex customized
systems and subassemblies within the short time constraints demanded by
equipment manufacturers, the Company enables its customers to focus resources
on core process technologies. The Company has also recently introduced the
IGS, a modular platform for gas delivery that is designed to simplify the
specification, configuration, manufacturing and serviceability, and reduce
cycle time and overall semiconductor process equipment cost. The Company
believes that its customers benefit from the expertise and efficiencies that
the Company derives from providing outsourced gas delivery solutions to
multiple leading equipment manufacturers.
STRATEGY
The Company's objective is to be the primary provider of outsourcing design
and manufacturing services for gas delivery to leading semiconductor equipment
manufacturers. To accomplish this objective, Insync seeks to develop and
provide solutions which allow equipment manufacturers to fully outsource their
gas delivery requirements and consistently satisfy their customers' demands
for on-time delivery of reliable process equipment. To fulfill its objective,
the Company intends to:
Extend Leadership in Gas Delivery. The Company has developed significant
expertise in key gas delivery disciplines such as gas chemistry, physics,
thermodynamics and ultra-clean manufacturing. The Company's key customers
currently include three of the five largest North American process equipment
manufacturers. The Company is seeking to extend its leadership position by
strengthening its close working relationships both with its equipment
manufacturing customers and their customers (semiconductor device
manufacturers) in order to increase its knowledge and understanding of gas
delivery in the actual fab operating environment. The Company believes these
relationships provide it with an early insight into advances in semiconductor
manufacturing technologies and an opportunity to develop innovations and
technologies in response to the current and emerging gas delivery needs of
device manufactures. For example, the IGS, the Company's modular platform for
designing and manufacturing gas delivery systems, was developed to address a
perceived need for simplification, modularity and rapid configurability which
the Company believes will become increasingly important factors as the
industry transitions to 12 inch wafer processing equipment. In addition, the
Company is developing proprietary design tools to allow its customers to
simplify their gas delivery system design and specification activities.
31
Expand Gas Delivery Systems Business. The Company is seeking to expand the
gas delivery systems sector of its business which it believes represents a
significant future market opportunity. The Company believes that, to the
extent the complexity and resource demands of gas delivery systems continue to
distract equipment manufacturers' from their core competencies, they will
increasingly outsource their gas delivery requirements, including the
outsourcing of complete gas delivery systems. The Company believes that
existing and potential customers will view a significant gas delivery system
capability as an important factor in selecting an outsource gas delivery
provider. In order to expand its gas delivery system capacity and
capabilities, the Company has tailored its manufacturing operations to include
a dedicated gas delivery system manufacturing capability.
Strengthen Relationships with Customers and Suppliers. The Company intends
to continue to integrate its business processes with those of its key
customers and suppliers in order to: reduce total costs for its customers, its
suppliers and the Company; eliminate redundant work; enhance information
exchange; coordinate increasingly complex manufacturing and design processes;
and to enable its customers to shorten their product delivery cycle times. For
example, by providing substantially all of the gas delivery needs of Watkins-
Johnson, Insync has reduced this customer's costs by reducing the customer's
design engineering expenses, redesigning critical components and significantly
curtailing redundant overhead expenses. The Company believes that the
establishment of such close relationships improves its potential to supply a
greater proportion of its existing customers' gas delivery needs and may
attract new customers and suppliers.
Leverage Manufacturing Capabilities. The Company is developing world-class
manufacturing capabilities that equal or exceed those of its key customers and
competitors with respect to gas delivery systems and subassemblies. The
Company believes that manufacturing capabilities, as well as capacity, are a
critical determinant in an equipment manufacturer's decision to outsource its
gas delivery system and subassembly needs. The Company believes its
manufacturing process capabilities and capacity enable it to provide multiple
and varied customers with complex, customized gas delivery systems and
subassemblies within the short time demands of equipment manufacturers. This
assists its customers in maintaining or reducing their cycle times and
maintaining high quality standards on a cost-competitive basis. The Company
has invested significant resources in recent years in new manufacturing
facilities and in the redesign of its manufacturing processes, including the
establishment of new protocols for tooling and automation and specific
manufacturing cells for gas delivery systems, for subassemblies and for
"quick-turn" projects to accommodate last-minute changes and rush orders.
Particularly in the area of gas delivery system manufacturing, the Company has
extended its capabilities and expanded its capacity to levels that it believes
exceed current demand to demonstrate its ability to meet the needs of
customers and potential customers.
Promote Modular Platform Approach. The Company believes that a shift to
"modular" approaches to gas system design and manufacture from the present
practice of specifying a large number of discrete component parts of specified
manufacturers, is an essential step in the ability to reduce cycle time,
reduce inventory management and achieve the cost savings associated with
volume manufacturing of standard products. Although the Company does not
anticipate that modular gas delivery systems will be deployed in high volumes
in equipment designed for traditional gas systems, the Company believes that
the transition to 12 inch wafer processing equipment will present an
opportunity for widespread adoption of modular gas systems. In anticipation of
this opportunity, the Company developed the IGS, a modular platform for gas
delivery systems in order to, among other things, significantly reduce the
required number of discrete components and reduce cycle times for designing
and manufacturing gas delivery systems.
32
SYSTEMS AND SERVICES
The Company is a leading provider of outsourcing services to semiconductor
equipment manufacturers for the design and manufacture of gas delivery systems
and subassemblies. Gas delivery systems and subassemblies are used principally
in deposition, etch and other processing equipment. The Company's systems and
services are designed to, among other things, maintain purity in the process
chamber and shorten cycle times for equipment manufacturers, thereby
contributing to lower wafer manufacturing costs for device manufacturers.
The manufacture of gas delivery systems and subassemblies is a highly
specialized process. The various components and materials used in each product
must be inspected and certified for purity and usability. The infrastructure
must be precisely sized and assembled to fit the individual semiconductor
equipment manufacturers' specifications and to ensure that each connection is
free of oxidation and corrosion. Inspection and testing procedures must be
rigorous and exact to insure that high purity standards have been maintained.
Gas Delivery Systems. The Company's gas delivery systems regulate the exact
flow, pressure, purity and mixing of the gases to the process chamber,
functions that are critical to successful semiconductor manufacturing.
Production of these complex systems involves conceptual system design,
mechanical design, materials procurement and management, quality assurance,
fabrication and assembly of various components and product testing and
analytical certification. The Company's systems are most frequently used on
etch and deposition process equipment such as Lam Research's Rainbow series,
Watkins-Johnson's APCVD-1000 and Novellus System's Speed series. Prices of the
Company's gas delivery systems vary according to size, complexity and number
of components in the system, and generally range between $35,000 and $75,000
(excluding mass flow controllers) and have been as high as $200,000.
Insync is committed to being the market leader in gas delivery for
semiconductor equipment manufacturers by simplifying the processes and
shortening the time required to specify, design, manufacture and install a gas
delivery system. The Company believes that providing these benefits to
semiconductor equipment manufacturers will encourage them to adopt the Company
as their primary outsourced gas delivery system provider. Accordingly, the
Company has devoted a significant amount of its research, development and
engineering efforts in the past three years towards the development of the
IGS, the Company's modular platform for systems.
The Company introduced the IGS in June 1997. Although net sales attributable
to the IGS have not been material to date, the Company believes the IGS will
reduce total gas delivery system costs and permit users to: reduce cycle time
for manufacturing gas delivery systems; reduce gas delivery system design
expenses; reduce equipment footprint to better utilize expensive fab clean
room space; reduce the required number of discrete components; increase gas
delivery system performance and overall equipment utilization in certain
processes; reduce contamination through moisture reduction and shortened flow
paths for gases; and reduce time for field modifications and maintenance
through its modular design. There can be no assurance that the IGS platform
will achieve wide market acceptance. See "Risk Factors--Evolving Gas Delivery
Industry; Dependence on Outsourcing" and "--Rapid Technological Change."
Subassemblies. Subassemblies are customized configurations of components
such as regulators, valves, filters and fittings. The Company manufactures
subassemblies separately for its customers and also combines them to form the
core of its gas delivery systems. Subassemblies also serve as interconnections
between the gas delivery systems, the process chambers and the vacuum pumps
located in the fab. Semiconductor equipment manufacturers require numerous
subassemblies, often in multiple configurations, to support the gas delivery
requirements of their customers. The Company's
33
subassemblies range in price from approximately $50 to over $2,000. The Company
believes that subassemblies will continue to be a significant source of its net
sales.
The various processes and procedures required to produce gas delivery
products generally must be accomplished rapidly due to the "last minute" design
nature of gas delivery configurations. The Company believes the ability to
produce subassemblies rapidly is an important competitive factor. Insync's
manufacturing process generally enables the Company to provide rapid
fabrication of complex subassemblies in between two and 72 hours. See "Risk
Factors--Failure to Meet Customer Performance Criteria; Risk of Relays or
Defects."
Services. The Company provides specialized services in an ongoing effort to
address all the gas delivery requirements of its semiconductor equipment
manufacturer customers. Specifically, the Company provides assistance in
mechanical and system design as well as analytical certification services. For
example, the Company has redesigned a gas delivery system for a key customer,
which substantially improved overall equipment performance and reliability and
reduced field service costs by approximately one million dollars during the 12
month period following deployment of the redesigned system. Mechanical design
services include the design of new gas delivery systems and the redesign of
existing gas delivery systems. The design process includes concept evaluation,
cost analysis, design and documentation. Analytical certification services
generally include the moisture and particulate evaluation of components,
subassemblies and gas delivery systems.
CUSTOMERS
The Company is a leading independent provider of gas delivery systems and
subassemblies to four major North American semiconductor equipment
manufacturers: Applied Materials, Lam Research, Watkins-Johnson and Novellus
Systems. In addition, the Company has sold gas delivery systems and
subassemblies to numerous other semiconductor equipment manufacturers. Applied
Materials, Lam Research and Watkins-Johnson each represented in excess of 10%
of the Company's net sales during both 1996 and the six months ended June 30,
1997. These three, together with Novellus Systems, represented approximately
86% of the Company's net sales during 1996 and approximately 90% of its net
sales for the six months ended June 30, 1997. The Company believes that its
ongoing relationships with these major companies will enhance its ability to
stay abreast of the latest developments in gas delivery system requirements and
technologies.
The Company expects that a significant portion of its net sales will continue
to be derived from sales to a limited number of customers for the foreseeable
future. The Company's operating results could be materially adversely affected
by any loss of business from, the cancellation of orders by, or decreases in
prices of products sold to, any of these customers. See "Risk Factors--Customer
Concentration," "--Dependence on Selection as Provider for New Products" and
"--Dependence on Outsourcing; Evolving Gas Delivery Industry."
MARKETING, SALES AND SUPPORT
The Company's ability to increase its net sales is largely dependent upon
maintaining its role as a primary supplier of gas delivery products to its
existing customers, its ability to continue to increase its capacity in support
of its customers' growth and its success in adding new customers. Each of the
Company's four key customers is serviced by a customer specific team. The teams
are comprised of sales managers, sales support personnel, engineers and
manufacturing managers who implement and integrate the multiple specialized
services required to complete a customized order. In addition, the teams assist
in the design and implementation of various cooperative projects with
customers, including those that eliminate unnecessary processes and costs and
those which provide support before, during and after orders are received. The
Company believes that it has close working relationships with its key customers
and that these relationships help it to continually forecast requirements for
inventory and manufacturing
34
capacity, which allow it to plan resources so that customer demands can be
satisfied in a timely manner. As a principal element of its marketing and
support strategy, Insync concentrates on pursuing the integration of its
business processes and information systems with those of its customers to
provide both significant improvements in cycle time and the reduction of total
costs for key customers and the Company. The Company also maintains an
engineering group which works directly with its customers' technical personnel
on-site to produce innovative technology and to increase the Company's
understanding of its customers' gas delivery system needs.
RESEARCH, DEVELOPMENT AND ENGINEERING
The market for semiconductor manufacturing equipment is characterized by,
among other things, rapid technological change. As more process steps are
required and device geometries are reduced in the production of semiconductors,
the risks of contamination also increase. The increasing complexity of the
wafer fabrication process has led to the requirement for increasingly complex
and precise gas delivery systems and subassemblies. The Company believes that
the continued and timely development of new solutions and manufacturing methods
are essential for it to maintain its competitive position. The Company works
directly with semiconductor equipment and semiconductor device manufacturers to
develop gas delivery technologies that exceed the device manufacturers'
requirements for purity and that improve the throughput of fabs and decrease
the time to full manufacturing utilization.
As of June 30, 1997, the Company had 44 full time employees in research,
development and engineering. The Company incurred research, development and
engineering expenses of $699,000, $2.2 million, $3.6 million and $1.9 million
during 1994, 1995 and 1996 and the six months ended June 30, 1997,
respectively, and expects to continue to increase such expenditures in the
future. The Company also intends to continue to leverage its research and
development efforts by engaging in projects with its customers and other third
parties. See "Risk Factors--Rapid Technological Change."
MANUFACTURING
The Company believes that advanced manufacturing process capabilities and the
ability to increase manufacturing capacity concurrent with the expanding
requirements of semiconductor equipment manufacturers are critical competitive
factors in the gas delivery marketplace. The Company currently offers its
customers proprietary manufacturing methods, including automated stainless
steel tube cutting, manufacturing and tooling protocols and specialized tubing
which produce less corrosion and correspondingly less contamination in the
production environment. Other manufacturing techniques in which the Company has
significant expertise include patented moisture reduction methods, and
electropolishing techniques for reduction of contamination.
The Company's manufacturing activities consist of a multi-step process which
can include assembly and testing of subassemblies and their integration into
finished gas delivery systems. Stringent cleanliness controls are present
throughout the manufacturing process and testing areas of production to reduce
particle contamination. Much of the assembly and testing of the Company's
systems are conducted in clean room environments. Prior to shipping a completed
product, the customers' engineers may perform acceptance tests at the Company's
facilities. After passing the acceptance tests, the gas delivery system or
subassembly is packaged in a clean room environment and prepared for shipment.
The Company is in the process of installing a new management information
system which it anticipates will enable it to maintain high manufacturing
standards at significantly increased production levels and to interface
directly with the information systems of its customers. The Company intends to
continue to strive for improvements in processes, training, tool development
and internal organization which the Company believes will contribute to lower
costs and improve on-time performance. There can be no assurance, however, that
the Company will successfully implement such installation or achieve such
improvements or that such improvements, if achieved, will result in lower costs
or on-time performance.
35
The Company procures certain components and raw materials included in its
products from single source suppliers or a limited group of suppliers. Most
single source supply requirements result from specification of particular
components by semiconductor device manufacturers. To date, the Company has
generally been able to obtain adequate supplies of such components and raw
materials in a timely manner. However, disruption or termination of certain of
these sources without adequate or timely replacement sources could have a
material adverse effect on the Company's operations. The Company believes that
alternative sources could be obtained and qualified to supply these products,
if necessary. See "Risk Factors--Management of Business Fluctuations" and "--
Sole or Limited Sources of Supply."
COMPETITION
The Company believes that competition in the gas delivery market is intense
and likely to increase substantially. Traditionally, gas delivery systems and
subassemblies have been primarily manufactured internally by semiconductor
equipment manufacturers. While these equipment manufacturers are significant
customers or potential customers of the Company, companies including Applied
Materials and Lam Research continue to produce significant quantities of gas
delivery systems internally. For a variety of reasons, including any downturn
or slowdown in the semiconductor equipment industry, there can be no assurance
that semiconductor equipment manufacturers will not elect to utilize their
internal manufacturing capacity to manufacture a greater percentage or all of
their gas delivery requirements. The Company's competitors also include
numerous privately and publicly held independent gas delivery providers, mass
flow controller companies and others. The Company competes with these
independent gas delivery providers, mass flow controller companies and other
companies on the basis of an ability to: provide advanced system design and
engineering services; offer adequate manufacturing capacity to meet customers'
cycle time requirements; price competitively; provide outstanding equipment
performance, reliability and quality; maintain sufficient financial resources;
deliver superior customer service; and, support and maintain good relationships
with customers and parts suppliers. The Company believes it presently competes
favorably with respect to these factors.
Other companies not currently offering such systems, including gas suppliers,
may attempt to enter and develop products for this market or to develop
alternative technologies which could 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 and
manufacturing capacity necessary to meet the requirements of large equipment
manufacturers, to fund customer service and support, and to invest in both
product and process research and development. Current and potential competitors
may have substantially greater financial resources, name recognition and more
extensive engineering, manufacturing, marketing and customer service and
support capabilities than the Company. In addition, most of the Company's key
customers have established relationships with one or more of the Company's
competitors as additional or alternative providers, which the Company believes
tends to further intensify competition and may limit the Company's ability to
capture a greater percentage of a customer's outsourced gas delivery systems
requirements. 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 performance
characteristics and/or lower prices. 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, such
increased competitive pressure could lead to intensified price competition,
which could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the Company
will be able to compete successfully in the future.
BACKLOG
As of June 30, 1997, the Company's backlog was approximately $9.9 million.
The Company includes in its backlog only those customer orders for systems and
subassemblies for which it has accepted
36
purchase orders and assigned shipment dates within the following 12 months.
Industry practice allows the customer to cancel or reschedule orders prior to
shipment with liability only for purchased materials and manufacturing steps
completed as of the date of cancellation. Accordingly, the Company's backlog at
a particular date may not necessarily be representative of actual sales for any
succeeding period.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, nondisclosure agreements and other intellectual property
protection methods to protect its proprietary technology. Although the Company
currently holds two patents and has three pending patent applications in the
United States, the Company believes that patents are of less significance in
this industry than such factors as innovative skills, technical expertise and
know-how of its personnel. There can be no assurance that the Company's
competitors will not be able to legally ascertain the nonpatented proprietary
information embedded in the Company's gas delivery systems, in which case the
Company may be precluded from preventing the use of such information. To the
extent the Company elects to assert its patent rights, there can be no
assurance that any claims of the Company's patents will be sufficiently broad
to protect the Company's technology. In addition, there can be no assurance
that any patents issued to the Company will not be challenged, invalidated or
circumvented, that any rights granted thereunder will provide adequate
protection to the Company, or that the Company will have sufficient resources
to prosecute its rights.
Although the Company has not received any notices from third parties alleging
infringement claims, there can be no assurance that infringement claims by
third parties or claims for indemnification resulting from infringement claims
will not be asserted in the future or that such assertions, if proven to be
true, will not materially adversely affect the Company's financial condition,
business and results of operations. If any such claims are asserted against the
Company, the Company may seek to obtain a license under the third party's
intellectual property rights. There can be no assurance that a license will be
available on reasonable terms or at all. The Company could decide, in the
alternative, to resort to litigation to challenge such claims. Such challenges
could be extremely expensive and time consuming. Adverse determinations in any
litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties and prevent
the Company from manufacturing and selling its products. Any of these
developments could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, Insync had a workforce consisting of 324 full time
employees and 48 persons employed on a temporary basis. No employee of the
Company is currently represented by a labor union. Management considers its
employee relations to be good. The Company believes that its future success is
dependent to a significant degree on its being able to continue to attract and
retain skilled personnel.
FACILITIES
The Company maintains its headquarters in Milpitas, California in a leased
71,000 square foot facility. In addition to housing its corporate offices, the
facility is the center for one of the Company's three manufacturing groups. The
lease on 48,000 square feet of the facility expires on August 1, 2000 with two
five-year renewal periods available. The lease on the remaining 23,000 square
feet of the Milpitas facility expires on March 31, 1998. The Company also
leases a manufacturing facility in Austin, Texas. This facility comprises
70,000 square feet and the lease thereon expires September 2001, with three
three-year renewal periods available. The Company's manufacturing facility in
Fremont, California encompasses 21,000 square feet and the lease thereon
expires on December 31, 2001 with one five-year renewal period available. The
Company's locations are convenient to the corporate and product design offices
and manufacturing facilities of its key customers.
37
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, handling, manufacture and disposal of toxic or other
hazardous substances used to manufacture the Company's products. The Company
uses lubricants, adhesives, solvents and cleaners in connection with its
manufacturing and assembly operations. The Company believes that its storage,
use and disposal of such materials complies in all material respects with
applicable governmental regulations, and that it has obtained all necessary
environmental permits to conduct its business. Any failure by the Company to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous or toxic substances could subject the Company to significant
liabilities, resulting in a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Limited
Insurance Coverage; Environmental Regulation."
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers as of June 30, 1997:
NAME AGE POSITION
---- --- --------
Stanley L. Leopard(1)............ 50 Chairman of the Board and Chief
Executive Officer
Jorge L. Titinger................ 36 President and Chief Operating Officer
Brent D. Elliot.................. 34 Executive Vice President, Technology
and Marketing and Director
Frank R. Balma................... 48 Vice Chairman of the Board
Terence J. Griffin............... 35 Senior Vice President, Chief Financial
Officer and Secretary
Michael C. Child(2).............. 42 Director
Don M. Lyle(2)(3)................ 58 Director
Russell G. Redenbaugh(1)......... 52 Director
W. Lee Shevel(1)(3).............. 65 Director
- --------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Stanley L. Leopard became Chairman of the Board of the Company in January
1993 after serving in an advisory capacity for two years. He was named Chief
Executive Officer in August 1994. Mr. Leopard also served as the Company's
Chief Financial Officer from January 1993 to July 1994. Prior to joining the
Company, Mr. Leopard was a principal of Leopard & Associates, a management
consulting firm that he formed in 1983.
Jorge L. Titinger has served as the Company's President and Chief Operating
Officer since November 1996. From November 1995 to November 1996, Mr. Titinger
served as the Company's Vice President of Operations. From February 1993 to
October 1995, Mr. Titinger was Vice President of Operations and Customer
Service as well as one of the founders of NeTpower, Inc., a network computing
company. Prior to founding NeTpower, Inc. Mr. Titinger worked in various
management capacities for MIPS/Silicon Graphics from October 1989 to January
1993.
Brent D. Elliot, a founder of the Company, has served as Executive Vice
President, Technology and Marketing since April 1997, after having served as
Senior Vice President, Technology and Marketing since November 1996. Prior to
that, Mr. Elliot served in the Company's Office of the President from August
1995 to November 1996. Mr. Elliot previously held a number of other positions
at the Company, including Chief Technical Officer from April 1994 to November
1996, Chief Financial Officer from September 1989 to January 1993, Secretary
from September 1989 to July 1994 and Executive Vice President from September
1989 to April 1994. In addition, Mr. Elliot has been a director of the Company
since its inception in 1989. From 1981 through 1989, Mr. Elliot served as
Director of Operations of Innovative Engineering, Inc., a manufacturer of
hazardous gas abatement equipment for the semiconductor industry.
Frank R. Balma, a founder of the Company, has served as Vice Chairman of the
Board since November 1996. From August 1995 until November 1996, he served in
the Company's Office of the President and was its Chief Operating Officer from
August 1994 to November 1996. From September 1989 to August 1995, Mr. Balma
served as the Company's President. He also served as the Company's Chief
Executive Officer from September 1989 to August 1994. In addition, Mr. Balma
has been a director of the Company since its inception in 1989. From 1986 to
1989, Mr. Balma was Director of Sales at
39
Innovative Engineering, Inc., a manufacturer of hazardous gas abatement
equipment for the semiconductor industry.
Terence J. Griffin joined the Company in August 1993 as Corporate Controller
and has been the Company's Chief Financial Officer, Vice President and
Secretary since July 1994. In April 1997, Mr. Griffin was appointed as a
Senior Vice President of the Company. From 1986 to 1993, Mr. Griffin held
various financial positions at Diasonics, Inc., a manufacturer of medical
imaging equipment, ultimately serving as Finance Manager for Diasonics'
Ultrasound Division.
Michael C. Child has been a director of the Company since January 1996. Mr.
Child is currently a Managing Director of TA Associates, a private equity
firm. Mr. Child joined TA Associates in 1982 and served as a General Partner
from 1986 to 1994. Mr. Child also serves as a director of Sonic Solutions, a
digital audio workstation company.
Don M. Lyle has been a director of the Company since April 1995 after
serving in an advisory capacity from November 1993 to March 1995. He has been
a principal of Technology Management Co., a management consulting firm, since
1983. He also served as Vice President of Tandem Computers, a computer
manufacturing company, from June 1988 to December 1994. From 1968 to 1983, Mr.
Lyle served in various capacities at Burroughs Corporation, a mainframe and
computer manufacturing company, including Vice President, Systems Management
and Vice President, Advanced Technology. He is currently a director of DH
Technology, Inc., a communications networking firm, a director of Emulex
Network Systems, a specialty printer company and a director of NRI
Corporation, a company.
Russell G. Redenbaugh has been a director of the Company since April 1995
after serving in an advisory capacity from May 1994 to March 1995. He has been
a partner and director of Cooke & Bieler, Inc., a Philadelphia-based
investment management firm, since 1969. Since 1985 Mr. Redenbaugh has been
president of Kairos, Inc., a management consulting firm. In addition, he is a
member of the U.S. Civil Rights Commission.
W. Lee Shevel has been a director of the Company since April 1995 after
serving in an advisory capacity from November 1993 to March 1995. He has been
an owner and Managing Director of EIM, a management consulting firm, since
June 1994. Dr. Shevel served in several positions with Unisys Corporation, an
information systems and services company, from June 1992 to June 1994. In
addition, Dr. Shevel was President of Paramax Canada, a Unisys company, from
1988 to 1992 and Vice President, Systems and Technology from 1984 to 1988.
Directors are elected by the shareholders of the Company for one-year terms
and hold office until the next annual meeting of shareholders or until their
successors are elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee consists of Stanley L. Leopard, Russel G. Redenbaugh
and W. Lee Shevel. The Executive Committee has all the authority and powers of
the Board of Directors to act on behalf of the Company subject to certain
limitations set forth in the Company's Bylaws. These limitations include a
prohibition on taking any action requiring shareholder approval; the filling
of vacancies or appointments to the Board of Directors or any other committee
of the Company and the fixing of compensation with respect to such positions;
and distributions to shareholders except at a rate and range and during a
period previously determined by the Board of Directors. Following the taking
of any action by the Executive Committee, the Committee is required to prepare
a report to the Board of Directors of the Company.
The Compensation Committee consists of Michael C. Child and Don M. Lyle. The
Compensation Committee reviews and evaluates the compensation and benefits of
employees of the Company, reviews
40
general policy matters relating to the compensation and benefits of employees
of the Company and makes recommendations concerning these matters to the Board
of Directors. The Compensation Committee also administers the Company's 1993
Plan and will administer the 1997 Plan and the 1997 Purchase Plan when such
plans become effective.
The Audit Committee consists of Don M. Lyle and W. Lee Shevel. The Audit
Committee reviews the scope and timing of the Company's independent auditors'
audit services and other services they are asked to perform, including the
auditors' report on the Company's financial statements following completion of
their audit and the Company's policies and procedures with respect to internal
accounting and financial controls. In addition, the Audit Committee makes
annual recommendations to the Board of Directors for the appointment of the
Company's independent auditors for the ensuing year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the Compensation Committee members has been at any time an officer or
employee of the Company. No interlocking relationship exists between any member
of the Company's Compensation Committee and any member of any other Company's
board of director's compensation committee.
DIRECTOR COMPENSATION
The Company does not have a formal director compensation plan, but currently
pays directors a $2,500 stipend for each fiscal quarter of service. In
addition, the Company has, from time to time, granted its directors stock
options and warrants to purchase Common Stock. See "Certain Transactions."
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not currently have any employment contract in effect with
its Chief Executive Officer or any other Named Executive Officer (as defined
below).
41
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth all compensation for
services rendered during the year ended December 31, 1996 earned by the
Company's Chief Executive Officer and each of the four other most highly
compensated officers of the Company whose aggregate compensation exceeded
$100,000 (the "Named Executive Officers") for services rendered in all
capacities.
LONG-TERM
COMPENSATION
------------
ANNUAL
COMPENSATION AWARDS
-------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITIONS SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION(1)(2)
------------------ ---------- --------- ------------ ------------------
Stanley L. Leopard(3)..... $223,558 $61,555 -- $ 7,625
Chairman of the Board,
Chief Executive Officer
Frank R. Balma............ 165,773 43,542 -- 5,770
Vice Chairman of the
Board
Jorge L. Titinger......... 153,192 11,000 99,999(4) 4,925
President and Chief
Operating Officer
Brent D. Elliot .......... 203,337 17,979 -- 5,350
Executive Vice President,
Technology and Marketing
Terence J. Griffin........ 98,615 10,834 -- 4,004
Senior Vice President,
Chief Financial Officer
and Secretary
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other annual compensation in the form of perquisites and other personal
benefits has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for such year.
(2) Consists of life insurance premiums paid by the Company and certain
contributions to benefit plans.
(3) Excludes value of the country club membership described in "Certain
Transactions."
(4) Includes (i) 50,000 options issued on July 23, 1996 in replacement for
50,000 options issued on November 3, 1995 and canceled on July 23, 1996;
(ii) 16,666 options issued on July 23, 1996 in replacement for 16,666
options issued on April 19, 1996, and (iii) 33,333 options issued on
October 23, 1996. Excludes 16,666 options issued on April 19, 1996 and
subsequently cancelled on July 23, 1996.
42
Option Grants in Last Fiscal Year. The following table sets forth certain
information with respect to the grant of stock options during 1996 to the
Named Executive Officers.
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTIONS TERM(4)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(1) YEAR(2) PER SHARE(3) DATE 5% 10%
---- ---------- ---------- ------------ ---------- -- -----------
Stanley L. Leopard...... -- -- -- -- -- --
Frank R. Balma.......... -- -- -- -- -- --
Jorge L. Titinger....... 16,666(5) 3.3% $9.00 canceled -- --
16,666(5) 3.3 6.00 4/19/06 $ 60,877 $153,151
33,333 6.7 6.00 10/23/06 125,866 319,019
50,000(6) 10.0 6.00 11/3/05 171,977 427,048
Brent D. Elliot......... -- -- -- -- -- --
Terence J. Griffin...... -- -- -- -- -- --
- --------
(1) Mr. Titinger's options were granted pursuant to the Company's 1993 Plan
and become exercisable on an annual basis at the rate of 20% per year.
Options exercisable for 16,666 shares of Common Stock have a vesting
commencement date of July 1, 1996; Options exercisable for 33,333 shares
have a vesting commencement date of January 1, 1997; and options
exercisable for 50,000 shares have a vesting commencement date of January
1, 1996.
(2) Includes options to purchase 210,000 shares of Common Stock granted to
employees in July 1996 with an exercise price of $6.00. These stock
options were issued to replace outstanding stock options which had been
previously granted at a price greater than $6.00, and canceled in July
1996.
(3) The per share exercise prices represent 100% of the fair market value of
the underlying Common Stock, as determined by the Company's Board of
Directors, as of the date of grant.
(4) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compound rates of appreciation of
the Company's Common Stock over the term of these options. These numbers
are calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercises and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the individuals. This table does
not take into account any appreciation in the price of the Common Stock
from the date of grant to the current date. The values shown are net of
the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise.
(5) Options exercisable for 16,666 shares of Common Stock were originally
issued on April 19, 1996 with an exercise price of $9.00 per share, were
canceled on July 23, 1996, and replaced by 16,666 options with an exercise
price of $6.00 per share. Both grants are shown in the table.
(6) Options for 50,000 shares of Common Stock were originally issued on
November 3, 1995, with an exercise price of $9.00 per share, were canceled
on July 23, 1996, and were replaced by options exercisable for 50,000
shares with an exercise price of $6.00 per share. The options exercisable
for 50 ,000 shares granted on July 23, 1996 are shown in the table.
43
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. None of the Named Executive Officers exercised any options to purchase
stock of the Company during the year ended December 31, 1996. The following
table sets forth information for the Named Executive Officers with respect to
options to purchase Common Stock of the Company held at December 31, 1996.
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Stanley L. Leopard......... 33,333 133,333 $117,499 $469,999
Frank R. Balma............. -- -- -- --
Jorge L. Titinger.......... -- 99,999 -- --
Brent D. Elliot............ -- -- -- --
Terence J. Griffin......... 40,000 26,666 210,000 139,997
- --------
(1) There was no public trading market for the Company's Common Stock as of
December 31, 1996. Accordingly, these values have been calculated on the
basis of the fair market value of $6.00 per share, as had most recently
been determined by the Board of Directors as of such date.
STOCK PLANS
Amended and Restated 1993 Stock Option Plan The Company's Amended and
Restated 1993 Stock Option Plan (the "1993 Plan") was adopted by the Board of
Directors on August 9, 1993 and approved by the shareholders on August 16,
1993. The 1993 Plan was most recently amended on September 15, 1997. The 1993
Plan provides, subject to shareholder approval, for the issuance of a maximum
of 1,933,333 shares. As of August 1, 1997, 1,359,751 shares were subject to
outstanding options, and 32,692 shares had been issued upon exercise of
options granted under the 1993 Plan. Following the Offering, no additional
options to purchase Common Stock will be issued under the 1993 Plan.
The 1993 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code 1986, as amended, (the
"Code") to employees (including officers and employee directors) and for the
grant of nonstatutory stock options to employees, directors and consultants.
Options granted under the 1993 Plan are not transferable by the optionee, and
each option is exercisable during the lifetime of the optionee only by such
optionee. Options granted under the 1993 Plan must generally be exercised
within three months after the end of the optionee's status as an employee,
director or consultant of the Company, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term.
The 1993 Plan provides that in the event of (i) a merger of the Company with
or into another corporation, (ii) a sale of substantially all of the Company's
assets or (iii) a reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are transferred
to holders different from those who held such securities immediately prior to
such merger, each option shall be assumed or an equivalent option substituted
for by the successor corporation. If the successor corporation assumes or
substitutes for options and subsequently involuntarily terminates any employee
within 12 months of the merger or sale of assets, then the employee shall have
the right to exercise the option as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the outstanding
options are not assumed or substituted for by the successor corporation, the
Board of Directors shall provide for the optionee to have the right to
exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable.
44
1997 Stock Plan The Company's 1997 Stock Plan (the "1997 Plan") was adopted
by the Board of Directors on September 15, 1997 and is subject to shareholder
approval. The 1997 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Code, to employees (including
officers and employee directors) and for the grant of nonstatutory stock
options and stock purchase rights ("SPRs") to employees, directors and
consultants. The number of shares of Common Stock currently reserved for
issuance pursuant to the 1997 Plan, is equal to (a) 133,333 shares plus (b)
the number of shares reserved under the 1993 Plan but not issued or underlying
granted options and any shares returned to the 1993 Plan as a result of
termination of options under the 1993 Plan, plus (c) annual share increases
equal to the lesser of (i) 333,333 shares, (ii) 2.5% of the Company's
outstanding shares of capital stock on January 1 of each year or (iii) any
amount determined by the Board of Directors. Unless terminated sooner, the
1997 Plan will terminate automatically on September 15, 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration
payable upon such exercise. In addition, the Administrator has the authority
to amend, suspend or terminate the 1997 Plan, provided that no such action may
affect any share of Common Stock previously issued and sold or any option
previously granted under the 1997 Plan.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of the optionee's
status as an employee, director or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreements relating to SPRs shall grant the Company
a repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's employment with the Company for any reason (including death
or disability). The purchase price for shares repurchased pursuant to such
restricted stock purchase agreements shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must be at least equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date
and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the 1997 Plan may not exceed ten
years.
The 1997 Plan provides that each non-employee director shall automatically
be granted an option to purchase shares of Common Stock on the date that
such person first becomes a non-employee director, unless immediately prior to
becoming a non-employee director, such person was an employee director of the
Company. In addition, each non-employee director shall automatically be
granted an option to purchase shares on the date of the Company's annual
meeting of shareholders, if on such date he or she shall have served on the
Board for at least the preceding six months. Each option granted to a non-
employee director shall have a term of 10 years, shall vest as to
45
25% of optioned stock one year from the date of grant, and 1/48 of the optioned
stock shall vest each month thereafter, provided that the person continues to
serve as a Director on such dates, and the exercise price of each such option
shall be 100% of the fair market value per share of the Common Stock on the
date of grant.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option or SPR
substituted for by the successor corporation. If the successor corporation
assumes or substitutes options and SPRs and subsequently involuntarily
terminates any employee other than for cause within 12 months of the merger or
sale of assets, then the employee shall have the right to exercise the option
or SPR as to all of the optioned stock, including shares as to which it would
not otherwise be exercisable. If the outstanding options and SPRs are not
assumed or substituted for by the successor corporation, the Administrator
shall provide for the optionee to have the right to exercise the option or SPR
as to all of the optioned stock, including shares as to which it would not
otherwise be exercisable. If the Administrator makes an option or SPR
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option or SPR shall be fully
exercisable for a period of 15 days from the date of such notice, and the
option or SPR will terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase
Plan (the "1997 Purchase Plan") was adopted by the Board of Directors on
September 15, 1997 and is subject to shareholder approval. A total of 166,666
shares of Common Stock has been reserved for issuance under the 1997 Purchase
Plan, plus annual increases equal to the lesser of (i) 133,333 shares, (ii) 1%
of the outstanding shares on January 1 of each year or (iii) any amount
determined by the Board of Directors.
The 1997 Purchase Plan, which is intended to qualify under Section 423 of the
Code, contains consecutive, overlapping, 12 month offering periods. Each
offering period incudes two six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of the Offering and ends on
the last trading day on or before October 31, 1998.
Employees are eligible to participate if they are employed by the Company or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, any employee who (i) immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all capital stock of the Company or (ii) whose rights to purchase
stock under all employee stock purchase plans of the Company accrues at a rate
which exceeds $25,000 worth of stock for each calendar year may not be granted
an option to purchase stock under the 1997 Purchase Plan. The 1997 Purchase
Plan permits participants to purchase Common Stock through payroll deductions
of up to 15% of the participant's "compensation." Compensation is defined as
the participant's base straight time gross earnings only, excluding payments
for overtime, commissions, shift premiums, incentive compensation, bonuses and
other compensation. The maximum number of shares a participant may purchase
during a single purchase period is 3,333 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning of the offering period or at the end
of the purchase period. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the
46
new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be reimbursed their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set. The 1997 Purchase Plan will terminate on
September 15, 2007. The Board of Directors has the authority to amend or
terminate the 1997 Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 1997 Purchase Plan.
PROFIT SHARING/401(K) PLAN
The Company maintains the Insync Systems, Inc. Profit Sharing/401(k) Plan
(the "401(k) Plan"). All eligible employees of the Company who have attained
age 18 may participate in the 401(k) Plan after completing six months of
service by enrolling on the first day of any calendar quarter. The 401(k) Plan
provides that each participant may contribute from 1% to 15% of his or her pre-
tax compensation (up to a statutorily prescribed annual limit of $9,500 in
1997) to the 401(k) Plan. The Company currently matches salary deferral
contributions at a rate of 50% up to a limit of 3% of the employee's pre-tax
compensation. At the discretion of the Board of Directors, the Company may make
a profit sharing contribution to the 401(k) Plan. To date, the Company has not
made any profit sharing contribution. The 401(k) Plan includes a stock bonus
provision for non-highly compensated participants. The Board of Directors
elected to contribute, as of January 1, 1996, an aggregate amount of Common
Stock equal to 100 shares per eligible participant up to a maximum of 13,500
shares of Common Stock. Any shares directed to be contributed pursuant to the
stock bonus provision by the Board of Directors are allocated equally among the
eligible participants. Generally, participants must be employed on the last day
of the plan year and have 1,000 hours of service in that plan year to be
eligible to receive matching, profit sharing or stock bonus contributions.
Matching contributions are always fully vested; stock bonus and profit sharing
contributions are subject to a vesting schedule. Participants are permitted to
borrow from their account and may also request hardship withdrawals.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Amended and Restated Articles of
Incorporation that limits the liability of its directors for monetary damages
as directors to the fullest extent permitted by the California Corporations
Code. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company will indemnify its directors and officers and
may indemnify its employees and other agents to the fullest extent permitted by
California law. In addition, as permitted by its Bylaws, the Company has also
entered into indemnification agreements with its directors and executive
officers in addition to the indemnification provided for in the Company's
Bylaws. The indemnification agreements may require the Company, among other
things, to indemnify its directors and officers against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified and to obtain directors' and officers'
insurance if available on reasonable terms. The Company believes that these
provisions and agreements are necessary to attract and retain qualified
directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
47
CERTAIN TRANSACTIONS
On January 30, 1996 and March 6, 1996, the Company sold an aggregate of
3,000,000 shares of its Redeemable Preferred Stock for an aggregate
consideration of $24 million pursuant to a Series A Preferred Stock and Warrant
Purchase Agreement (the "Series A Purchase Agreement"). On January 30, 1996, in
connection with the sale of its Redeemable Preferred Stock, the Company also
sold, for an aggregate consideration of $1,000, warrants to acquire up to
66,666 shares of its Common Stock at an exercise price of $12.00 per share.
Entities affiliated with TA Associates, Inc. purchased an aggregate of
2,500,000 shares of Redeemable Preferred Stock and all of such warrants.
Michael C. Child, a director of the Company, is a Managing Director of TA
Associates, Inc. The Company's Articles of Incorporation in effect prior to the
completion of the Offering provide for the conversion of each share of
Redeemable Preferred Stock into between one share and approximately 1.176471
shares of the Company's Common Stock, on a pre-split basis, upon the first
public offering of the Company's Common Stock which meets certain criteria,
with the exact conversion rate dependent on the public offering price per share
applicable to such offering. In connection with the Offering, such conversion
rate would be approximately 1.176471, resulting in the 2,500,000 shares of
Redeemable Preferred Stock held by entities affiliated with TA Associates, Inc.
being converted into 2,941,176 shares of Common Stock of the Company on a pre-
split basis, or 1,960,784 shares of Common Stock giving effect to the 2-for-3
reverse stock split to be effected in connection with the Offering. The
purchasers of Redeemable Preferred Stock, including entities affiliated with TA
Associates, Inc., were also granted certain rights to cause the Company to
register the Common Stock issuable upon the conversion of the Redeemable
Preferred Stock under the Securities Act.
Between January 31, 1996 and March 6, 1996, in connection with the sale of
its Redeemable Preferred Stock, the Company repurchased an aggregate of
1,607,213 shares of its Common Stock from existing shareholders at a price of
$12.00 per share. The opportunity to participate in such repurchase program was
extended to all holders of Common Stock on a pro rata basis, with unexercised
rights being reallocated to shareholders who desired to sell more than their
pro rata allocation. The following table summarizes the sales of Common Stock
made by the officers and directors of the Company in such repurchase program:
SHARES OF AGGREGATE
COMMON STOCK CONSIDERATION
SOLD TO THE PAID BY
COMPANY THE COMPANY
------------ -------------
Stanley L. Leopard................................... 146,918 $ 1,763,016
Frank R. Balma....................................... 375,248 4,502,984
Brent D. Elliot...................................... 366,666 4,400,000
Don M. Lyle.......................................... 13,333 160,000
Lee W. Shevel........................................ 13,333 160,000
------- -----------
Total.............................................. 915,498 $10,986,000
======= ===========
On May 1, 1994, for consulting services rendered to the Company in his
individual capacity, Russell Redenbaugh, a director of the Company, was issued
a fully-vested warrant expiring in 2004 to purchase 33,333 shares of the
Company's Common Stock at an exercise price of $0.75 per share. On March 8,
1995, Mr. Redenbaugh was granted an option under the 1993 Plan to purchase
50,000 shares of Common Stock at an exercise price of $4.50 per share which
will become exercisable in equal quarterly installments over five years of
continued service commencing January 1, 1995. On April 5, 1995, for his
services as a director, Mr. Redenbaugh was granted an option under the 1993
Plan to purchase 16,666 shares of Common Stock at an exercise price of $4.50
per share, which will become exercisable in five equal annual installments upon
completion of each year of service subsequent to April 5, 1995. On August 23,
1995, Mr. Redenbaugh was issued a fully-vested warrant expiring in 2005 to
purchase 23,333 shares of Common Stock at an exercise price of $5.25 per share,
for services in his capacity as a consultant to the Company. On January 23,
1996, Mr. Redenbaugh purchased 20,000 shares of the Company's Common Stock from
each of Stanley L. Leopard, Frank R. Balma and Brent D. Elliot, at a per share
price of $5.25 pursuant to options granted to Mr. Redenbaugh by each of the
named individuals.
48
Mr. Redenbaugh, a director of the Company, is the Chief Executive Officer and
majority shareholder of Kairos, Inc. ("Kairos"), a management consulting firm.
Beginning in 1994, the Company engaged the services of Kairos to advise the
Company on certain management and business matters for which the Company paid
Kairos $110,000. During 1997, 1996 and 1995, the Company paid Kairos $100,000,
$112,000 and $186,000 respectively for consulting services. In addition, during
1995, the Company issued to certain Kairos employees and consultants options
and warrants to purchase an aggregate of 99,997 shares of Common Stock at a
weighted average exercise price of $2.75, of which 43,333 fully-vested warrants
expiring in 2005 with an exercise price of $1.50 per share were granted to Mr.
Redenbaugh and 5,000 fully-vested warrants were granted to Frederick T. Hecht,
a consultant of the Company as described below.
The Company also paid approximately $157,000, $241,000, $144,000 and $64,000
in 1997, 1996, 1995 and 1994, respectively, to Hecht and Associates, Inc. for
sales and management training classes for certain of the Company's employees.
Frederick T. Hecht owns a majority interest in Hecht and Associates, Inc. and
has also been paid $6,000 and $3,000 in 1995 and 1994, respectively, for
services rendered in his individual capacity as an advisor to the Company's
Board of Directors. Stanley L. Leopard, the Company's Chairman and Chief
Executive Officer, formerly held a minority interest in Hecht and Associates,
Inc.
In return for his consulting services in 1994, on May 1, 1994 Mr. Hecht was
issued a fully-vested warrant from the Company expiring in 2004 for 33,333
shares of Common Stock at an exercise price per share of $0.75. On May 10,
1995, Mr. Hecht received another fully-vested warrant expiring in 2005 for
5,000 shares of Common Stock at an exercise price per share of $1.50 for his
consulting services to the Company rendered on behalf of Kairos. Mr. Hecht also
received a gift of 6,666 shares of Common Stock from Frank R. Balma in 1995. On
March 8, 1995, the Company granted Mr. Hecht an option under the 1993 Plan to
purchase 50,000 shares of Common Stock at an exercise price per share of $4.50
in return for consulting services, which will become exercisable in equal
quarterly installments over five years of continued service commencing January
1, 1995.
On April 5, 1995, for his services as a director of the Company, Don M. Lyle
was granted an option under the 1993 Plan to purchase 16,666 shares of Common
Stock at an exercise price per share of $4.50 which will become exercisable in
five equal annual installments subject to his continued service. On August 23,
1995, Mr. Lyle was granted an additional option under the 1993 Plan to purchase
16,666 shares of Common Stock at an exercise price per share of $5.25, which
will become exercisable over a five-year period subject to his continued
service.
On April 5, 1995, for his services as a director of the Company, W. Lee
Shevel was granted an option under the 1993 Plan to purchase 16,666 shares of
Common Stock at an exercise price per share of $4.50, which will become
exercisable in five equal annual installments upon his completion of each year
of service subsequent to April 5, 1995. On March 8, 1995, Dr. Shevel was
granted an additional option under the 1993 Plan to purchase 50,000 shares of
Common Stock at an exercise price per share of $4.50 exercisable in equal
quarterly installments over five years of continued service.
On May 27, 1996, the Company and Stanley L. Leopard entered into a co-
investment agreement with respect to the purchase of one full-use country club
membership. Pursuant to such agreement, the Company and Mr. Leopard each paid
50 percent of the $100,000 membership purchase price and will each acquire a 50
percent equity interest in the membership. Mr. Leopard will have the use of the
membership and will be responsible for the payment of all periodic fees, dues,
and/or costs relating to the membership. In the event that Mr. Leopard's
employment with the Company terminates for any reason, Mr. Leopard will have
the option to purchase, within 90 days of such termination, the Company's
interest in the membership at the greater of (i) the Company's cost and (ii)
the then-current fair market value.
49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of August 1, 1997 as
adjusted to reflect the sale of shares of Common Stock by the Company
and based on information obtained from the persons named below with respect to
the beneficial ownership of shares of Common Stock by (i) each person (or group
of affiliated persons) known by the Company to be the owner of more than 5% of
the outstanding shares of Common Stock, (ii) each of the Company's directors;
(iii) each of the Named Executive Officers; and (iv) all officers and directors
as a group. Unless otherwise indicated, the address of each shareholder in the
table below is c/o Insync Systems, Inc., 1463 Centre Pointe Drive, Milpitas, CA
95035.
SHARES SHARES SHARES
BENEFICIALLY OWNED TO BE BENEFICIALLY OWNED
5% SHAREHOLDERS, BEFORE OFFERING(2)(3) SOLD IN AFTER OFFERING(2)(3)
DIRECTORS AND EXECUTIVE ------------------------- THE -----------------------
OFFICERS(1) NUMBER PERCENT OFFERING NUMBER PERCENT
- ----------------------- ------------- ----------- -------- ---------- ----------
Entities affiliated
with TA Associates,
Inc.(4)............... 2,027,450 27.1%
High Street Tower,
Suite 2500
125 High Street
Boston, Massachusettes
02110-2720
Michael C. Child(4).... 2,027,450 27.1
Frank R. Balma......... 991,579 13.9
Brent D. Elliot(5)..... 593,754 8.3
Stanley L. Leopard(6).. 450,599 6.3
Elizabeth Reilly(7).... 438,058 6.2
7572 Lockford Ct.
Cupertino, CA 95014
Entities affiliated
with Summit
Partners(8)........... 392,156 5.5
499 Hamilton Avenue,
Suite 200
Palo Alto, CA 94301
Russell G.
Redenbaugh(9)......... 220,500 3.0
W. Lee Shevel(10)...... 135,166 1.9
Don M. Lyle(11)........ 89,999 1.3
Terence J. Griffin(12). 53,333 *
Jorge L. Titinger(13).. 13,333 *
All Officers and
Directors as a Group
(9 persons)(14)....... 4,575,712 58.4%
Other Selling
Shareholders
- --------
* Less than one percent.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each shareholder named in the table
has sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.
(2) Applicable percentage of ownership is based on 7,116,278 shares of Common
Stock and as-if-converted Redeemable Preferred Stock outstanding on August
1, 1997 and shares of Common Stock outstanding after the
completion of the Offering assuming no exercise of the Underwriters' over-
allotment option. If the Underwriters' over-allotment option is exercised
in full the Company and certain shareholders will sell an aggregate of
additional shares of Common Stock.
50
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of
August 1, 1997 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of any other person. Except as indicated in the footnotes to the above
table and pursuant to applicable community property laws, each shareholder
named in the table has sole voting and investment power with respect to
the shares set forth opposite such shareholder's name.
(4) Includes 1,960,784 shares of Common Stock issuable upon conversion of
Redeemable Preferred Stock in connection with the Offering. Also includes
66,666 shares of Common Stock issuable pursuant to warrants held and
exercisable within 60 days after August 1, 1997. The shares and warrants
are held of record by Advent VII L.P., Advent New York L.P., Advent
Atlantic and Pacific II L.P., Advent Industrial II, L.P., Chestnut Capital
International III Limited Partnership and TA Venture Investors Limited.
Such entities are part of an affiliated group of investment partnerships
associated with TA Associates, Inc. Michael C. Child, a director of the
Company, is a Managing Director of TA Associates, Inc., which in turn,
directly or indirectly possesses investment and voting power with respect
to the shares and warrants held of record by the aforementioned entities.
Therefore, Mr. Child directly or indirectly holds shared investment and
voting power with respect to such shares and warrants, but disclaims
beneficial ownership of such shares and warrants, except to the extent of
his pecuniary interest therein. See "Certain Transactions."
(5) Excludes 438,058 shares held in the name of Elizabeth Reilly, the former
spouse of Mr. Elliot, and as to which Mr. Elliot holds neither voting nor
dispositive rights.
(6) Includes 367,266 shares of Common Stock outstanding as of August 1, 1997
and 66,666 shares of Common Stock issuable pursuant to options held by Mr.
Leopard which may be exercised within 60 days of August 1, 1997. Also
includes 16,666 shares of Common Stock in the name of the Balma Education
Trust of which Mr. Leopard is a trustee. Excludes 105,000 shares of Common
Stock held in the name of the Stanley L. Leopard 1994 Irrevocable Trust
for the benefit of Mr. Leopard's children of which Mr. Leopard is not a
trustee. Excludes 233,333 shares of Common Stock in the Melody Rae Leopard
Trust of which Mr. Leopard is neither a beneficiary nor trustee.
(7) Excludes 593,754 shares held in the name of Brent D. Elliot, the former
spouse of Elizabeth Reilly, as to which Ms. Reilly holds neither voting
nor dispositive rights.
(8) Includes 392,156 shares of Common Stock issuable upon conversion of
Redeemable Preferred Stock in connection with the Offering. The shares are
held of record by Summit Ventures IV, L.P. and Summit Investors III, L.P.
See "Certain Transactions."
(9) Includes 68,000 shares of Common Stock outstanding as of August 1, 1997
and 152,500 shares of Common Stock issuable pursuant to options and
warrants held by Mr. Redenbaugh which may be exercised within 60 days
after August 1, 1997.
(10) Includes 82,666 shares of Common Stock outstanding as of August 1, 1997
and 52,500 shares issuable pursuant to options held by Mr. Shevel which
may be exercised within 60 days after August 1, 1997.
(11) Includes 76,666 shares of Common Stock outstanding as of August 1, 1997
and 13,333 shares of Common Stock issuable pursuant to options held by Mr.
Lyle which may be exercised within 60 days after August 1, 1997.
(12) Includes 53,333 shares of Common Stock issuable pursuant to options held
by Mr. Griffin which may be exercised within 60 days after August 1, 1997.
(13) Includes 13,333 shares of Common Stock issuable pursuant to options held
by Mr. Titinger which may be exercised within 60 days after August 1,
1997.
(14) Includes 418,331 shares of Common Stock issuable pursuant to options and
warrants which may be exercised within 60 days after August 1, 1997.
51
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering the Company's authorized capital stock will
consist of 50,000,000 shares of Common Stock, $0.01 par value per share, and
4,000,000 shares of Preferred Stock, $0.01 par value per share.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Amended and Restated Articles of
Incorporation, which is included as an exhibit to the Registration Statement of
which this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of August 1, 1997, there were 5,116,279 shares of Common Stock outstanding
and held of record by 263 shareholders. Immediately after completion of the
Offering and assuming no exercise of the Underwriters' over-allotment option,
there will be an aggregate of shares of Common Stock outstanding as
well as options to purchase an aggregate of approximately shares of
Common Stock. Matters submitted for shareholder approval generally require a
majority vote. Holders of Common Stock are entitled to one vote per share on
all matters to be voted on by shareholders.
Subject to any preferences that may be applicable to outstanding shares of
Preferred Stock, if any, holders of Common Stock are entitled to receive
ratably such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
will be entitled to share ratably in the Company's assets remaining after the
payment of liabilities and the satisfaction of any liquidation preferences
granted the holders of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive or other subscription rights. The shares of
Common Stock are not convertible into any other security. The outstanding
shares of Common Stock are, and the shares being offered hereby will be, upon
issuance and sale, fully paid and nonassessable. See "Dividend Policy."
PREFERRED STOCK
Upon completion of the Offering, the Board of Directors will be authorized to
issue 4,000,000 shares of undesignated 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 undesignated Preferred Stock and to
fix the number of shares constituting any series in the designations of such
series, without further vote or action by the shareholders. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue Preferred Stock following the Offering.
WARRANTS
As of August 1, 1997 the Company had outstanding warrants to purchase 317,996
shares of Common Stock at a weighted average exercise price of $3.81 per share.
Following the Offering, the holders of warrants to purchase up to 40,000 shares
of the Company's Common Stock will have the right to cause the Company to
purchase all or part of such warrants or the Common Stock issued upon exercise
thereof at a price of $9.00 per share.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon completion of the Offering, the holders of approximately shares of
Common Stock will be entitled upon expiration of lock-up agreements with the
Underwriters to certain rights with
52
respect to the registration of such shares under the Securities Act. Under the
terms of the agreements between the Company and the holders of such registrable
securities, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other
securities holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. Holders of registration rights may also require the Company to
file a registration statement under the Securities Act at the Company's expense
with respect to their shares of Common Stock, and the Company is required to
use its best efforts to effect such registration. Further, holders may require
the Company to file registration statements on Form S-3 at the Company's
expense when such form becomes available for use by the Company. All such
registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares to be included in such registration. In the event of such limitation,
the number of the shares to be included in such an offering will be allocated
among the persons exercising registration rights pursuant to a formula which
favors inclusion of shares with a higher original issuance price. As a result,
the holders of the Common Stock issuable upon the conversion of the Redeemable
Preferred Stock, including entities affiliated with Michael C. Child, a
director of the Company, will generally be allowed to include a greater
percentage of their shares in such offering in the event of such limitations.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF AMENDED AND RESTATED ARTICLES OF
INCORPORATION, AMENDED AND RESTATED BYLAWS
The Company's Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws, among other things, (i) limit the rights of shareholders to
take action by written consent without a meeting and (ii) provide that the
Board of Directors, without action by the shareholders, may issue and fix the
rights and preferences of shares of Preferred Stock. These provisions may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by the shareholders, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock, may
adversely affect the market price of, and the voting and other rights of, the
holders of the Common Stock and could have the effect of discouraging certain
attempts to acquire the Company or remove incumbent management, including
incumbent members of the Company's Board of Directors, even if some or a
majority of the Company's shareholders deemed such an attempt to be in their
best interests. See "Risk Factors--Control by Directors and Executive Officers"
and "--Anti-Takeover Effects of Unissued Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company. Its telephone number is (718) 921-8247.
LISTING
The Company has filed an application to list its Common Stock on the Nasdaq
National Market under the trading symbol "INSY."
53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for securities of the
Company. No prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the lapse of the
restrictions described below could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future at a time
and in a manner which it deems appropriate.
Upon completion of the Offering, the Company will have shares of Common
Stock outstanding, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants after August 1, 1997.
Of these shares, (i) all of the shares offered hereby and an additional
shares will be freely saleable upon the effectiveness of the Offering;
(ii) shares will be eligible for sale 90 days following the
effectiveness of the Offering under Rules 144 and 701 of the Securities Act;
and (iii) an additional shares of Common Stock held by current
shareholders are subject to lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this Prospectus without the prior
written consent of BT Alex. Brown Incorporated. Pursuant to the Underwriting
Agreement, the Company has agreed not to consent to release any shareholders
from such lock-up agreements. After the 180-day period, approximately
shares will be eligible for sale under Rules 144 and 701. The remaining
approximately shares held by existing shareholders will become eligible
for sale from time to time in the future under Rule 144.
DAYS AFTER DATE OF THIS PROSPECTUS SHARES ELIGIBLE FOR SALE COMMENT
---------------------------------- ------------------------ ------------------------
Upon Effectiveness........ Freely tradeable shares
sold in the Offering and
shares saleable under
Rule 144(k) that are not
subject to 180-day
lockup.
90 days................... an additional Shares saleable under
Rules 144 and 701 that
are not subject to 180-
day lockup.
180 days.................. an additional Lockup released; shares
saleable under Rules 144
and 701.
Thereafter................ an additional Restricted securities
held for one year or
less.
In general, under Rule 144, a person (or persons whose shares are
aggregated), who has beneficially owned shares for at least one year is
entitled to sell within any three-month period commencing 90 days after the
date of this Prospectus a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (approximately
shares immediately after the Offering) or (ii) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the approximately shares of Common Stock
issuable upon the exercise of options or reserved
54
for issuance under the 1997 Plan and 1993 Plan and the 166,666 shares of Common
Stock reserved for issuance under the 1997 Purchase Plan within 180 days after
the date of this Prospectus, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities
Act.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701, which permits nonaffiliates to sell their
Rule 701 shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this Prospectus. As of August 1, 1997, the holders of options exercisable
for approximately shares of Common Stock will be eligible to sell their
shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the
expiration of the 180-day Lockup Period.
In addition, after the Offering, the holders of approximately shares of
Common Stock and the holders of warrants to purchase shares of Common
Stock will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights of Certain Holders."
55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
BT Alex. Brown Incorporated, PaineWebber Incorporated, and Prudential
Securities Incorporated (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Shareholders the following respective
numbers of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions to be set forth on the cover page of
this Prospectus:
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
BT Alex. Brown Incorporated........................................
PaineWebber Incorporated...........................................
Prudential Securities Incorporated.................................
----
Total............................................................
====
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any such shares are
purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial 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 Offering, the offering price and other selling terms
may be changed by the Representatives.
The Company and certain of the Selling Shareholders of the Company have
granted to the Underwriters an option, exercisable not later than 30 days after
the date of this Prospectus, to purchase in the aggregate up to additional
shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to and the Company and the Selling
56
Shareholders will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company has agreed that it will not sell or offer any shares of Common
Stock or other securities convertible into or exchangeable into Common Stock or
release any shareholder from any lock-up agreement for a period of 180 days
after the date of this Prospectus without the prior written consent of BT Alex.
Brown Incorporated. Shareholders of the Company, holding in the aggregate
shares of Common Stock including outstanding options and warrants to
purchase shares of Common Stock, have agreed not to offer, sell or
otherwise dispose of any of such shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior consent of BT Alex.
Brown Incorporated. See "Shares Eligible for Future Sale".
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the Offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise.
Finally, the Underwriters may bid for, and purchase, shares of Common Stock in
market making transactions. These activities may stabilize or maintain the
market price of Common Stock above market levels that may otherwise prevail.
The Underwriters are not required to engage in these activities and may end any
of these activities at any time.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, the result of operations of the Company in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company and the Selling Shareholders by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
57
EXPERTS
The financial statements of Insync Systems, Inc. as of June 30, 1997 and
December 31, 1996 and 1995, and for the six months ended June 30, 1997 and for
each of the three years in the period ended December 31, 1996 and the financial
statements of Pullbrite, Inc., as of and for the years ended September 30, 1995
and 1994 included in this Prospectus and the related financial statement
schedule included elsewhere in the Registration Statement, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement and are included
in reliance upon the reports of such firm given upon their authority as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act and the rules and
regulations promulgated thereunder with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, and each such statement is
qualified in all respects by such reference. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. 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 Commission's Web site is http://www.sec.gov.
The Company is not currently subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the offering of the Company's Common Stock, the Company will become
subject to the informational requirements of the Exchange Act. The Company
intends to furnish its shareholders with annual reports containing financial
statements audited by its independent accountants and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
statements.
58
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INSYNC SYSTEMS, INC.
Independent Auditors' Report............................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Shareholders' Equity (Deficiency).......................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
PULLBRITE, INC.
Independent Auditors' Report............................................. F-19
Balance Sheets........................................................... F-20
Statements of Income..................................................... F-21
Statements of Stockholders' Equity....................................... F-22
Statements of Cash Flows................................................. F-23
Notes to Financial Statements............................................ F-24
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Insync Systems, Inc.:
We have audited the accompanying balance sheets of Insync Systems, Inc. as of
December 31, 1995 and 1996 and June 30, 1997 and the related statements of
operations, shareholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 1996 and for the six months ended
June 30, 1997. 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, such financial statements present fairly, in all material
respects, the financial position of Insync Systems, Inc. as of December 31,
1995 and 1996 and June 30, 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 and for
the six months ended June 30, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
San Jose, California
September 16, 1997
(September 29, 1997 as to Note 13)
F-2
INSYNC SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, PRO FORMA
---------------- JUNE 30, JUNE 30,
1995 1996 1997 1997
------- -------- -------- ---------
ASSETS
Current Assets:
Cash and equivalents................... $ 182 $ 2,829 $ 929 $ 929
Short-term investments................. -- 1,500 -- --
Receivables............................ 7,387 5,765 9,347 9,347
Inventories............................ 5,664 7,832 10,147 10,147
Prepaid expenses....................... 304 564 544 544
Deferred income taxes.................. 812 2,030 2,302 2,302
------- -------- -------- --------
Total current assets................. 14,349 20,520 23,269 23,269
Property and equipment, net.............. 3,404 5,644 5,848 5,848
Intangible assets, net................... -- 3,895 3,485 3,485
Deferred income taxes.................... -- 6,037 5,596 5,596
Other assets............................. 489 764 1,043 1,043
------- -------- -------- --------
TOTAL.................................... $18,242 $ 36,860 $ 39,241 $ 39,241
======= ======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term
obligations........................... $ 188 $ 6,552 $ 7,055 $ 7,055
Line of credit......................... 1,150 -- 1,500 1,500
Bank overdraft......................... -- -- 555 555
Accounts payable....................... 6,314 2,557 5,297 5,297
Accrued liabilities.................... 1,591 1,048 911 911
Income taxes payable................... 697 -- -- --
------- -------- -------- --------
Total current liabilities............ 9,940 10,157 15,318 15,318
Long-term obligations.................... 413 20,636 17,108 17,108
Deferred income taxes.................... 98 -- -- --
------- -------- -------- --------
Total liabilities.................... 10,451 30,793 32,426 32,426
------- -------- -------- --------
Commitments and contingencies (note 6) -- -- -- --
Redeemable preferred stock
$0.01 par value; 3,000,000 shares
authorized; shares outstanding: 1995,
none; 1996 and 1997, 3,000,000, pro
forma, none (redemption amount of
$24,000).............................. -- 23,411 23,485 --
Common stock put warrants................ -- -- 360 360
Shareholders' equity (deficiency):
Common stock, $0.01 par value;
50,000,000 shares authorized; shares
outstanding: 1995, 6,656,052; 1996,
5,102,848; 1997, 5,116,279; pro forma,
7,469,219............................. 4,227 896 951 24,436
Deferred stock compensation............ -- (339) (316) (316)
Retained earnings (deficit)............ 3,564 (17,901) (17,665) (17,665)
------- -------- -------- --------
Total shareholders' equity
(deficiency)........................ 7,791 (17,344) (17,030) 6,455
------- -------- -------- --------
TOTAL.................................... $18,242 $ 36,860 $ 39,241 $ 39,241
======= ======== ======== ========
See notes to financial statements.
F-3
INSYNC SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -------------------
1994 1995 1996 1996 1997
------- ------- -------- ----------- -------
(UNAUDITED)
Net sales....................... $20,617 $49,969 $ 86,099 $59,448 $34,679
Cost of sales................... 15,668 36,529 62,261 41,464 26,327
------- ------- -------- ------- -------
Gross profit................ 4,949 13,440 23,838 17,984 8,352
Operating expenses:
Selling, general and
administrative............... 2,803 5,686 11,070 6,286 4,289
Research, development and
engineering.................. 669 2,236 3,560 2,287 1,889
Write down of intangible
assets (Note 2).............. -- -- 16,610 -- --
Restructuring charge.......... -- -- 858 -- --
------- ------- -------- ------- -------
Total operating expenses.... 3,472 7,922 32,098 8,573 6,178
------- ------- -------- ------- -------
Income (loss) from operations... 1,477 5,518 (8,260) 9,411 2,174
Interest expense and other...... 230 434 2,562 1,358 1,675
------- ------- -------- ------- -------
Income (loss) before income tax. 1,247 5,084 (10,822) 8,053 499
Provision for (benefit from)
income taxes................... 513 2,088 (4,314) 3,235 189
------- ------- -------- ------- -------
Net income (loss)............... $ 734 $ 2,996 (6,508) 4,818 310
======= =======
Accretion of redeemable
preferred stock................ (147) (74) (74)
-------- ------- -------
Net income (loss) applicable to
common shareholders............ $ (6,655) $ 4,744 $ 236
======== ======= =======
Pro forma net income (loss) per
share.......................... $ (0.87) $ 0.03
======== =======
Pro forma shares used in
computation.................... 7,617 8,214
See notes to financial statements.
F-4
INSYNC SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK DEFERRED RETAINED
------------------ ------------------- STOCK EARNINGS
SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) TOTAL
---------- ------ ---------- ------- ------------ --------- --------
BALANCES, JANUARY 1,
1994................... 2,000,000 $ 20 4,516,912 $ 297 $ -- $ (166) $ 151
Conversion of Series A
preferred stock to
common stock........... (2,000,000) (20) 666,666 20 -- -- --
Issuance of Series B
preferred stock........ 588,000 588 -- -- -- -- 588
Issuance of common
stock.................. 36,000 27 27
Conversion of notes
payable to common
stock.................. -- -- 222,222 500 -- -- 500
Common stock issued for
services............... -- -- 6,000 9 -- -- 9
Net income.............. -- -- -- -- -- 734 734
---------- ----- ---------- ------- ----- -------- --------
BALANCES, DECEMBER 31,
1994................... 588,000 588 5,447,800 853 -- 568 2,009
Conversion of Series B
preferred stock to
common stock........... (588,000) (588) 391,990 588 -- -- --
Issuance of common
stock.................. -- -- 439,953 1,939 -- -- 1,939
Exercise of stock
options................ -- -- 1,866 1 -- -- 1
Exercise of warrant..... -- -- 13,333 1 -- -- 1
Conversion of
subordinated notes
payable................ -- -- 341,110 565 -- -- 565
Common stock and
warrants issued for
services............... -- -- 20,000 280 -- -- 280
Net income.............. -- -- -- -- -- 2,996 2,996
---------- ----- ---------- ------- ----- -------- --------
BALANCES, DECEMBER 31,
1995................... -- -- 6,656,052 4,227 -- 3,564 7,791
Issuance of common
stock.................. -- -- 36,614 403 -- -- 403
Exercise of stock
options................ -- -- 17,395 21 -- -- 21
Repurchase and
retirement of common
stock.................. -- -- (1,607,213) (4,477) -- (14,810) (19,287)
Sale of warrants in
connection with sale of
redeemable preferred
stock.................. -- -- -- 223 -- -- 223
Accretion of redeemable
preferred stock........ -- -- -- -- -- (147) (147)
Deferred stock
compensation........... -- -- -- 499 (499) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 160 -- 160
Net loss................ -- -- -- -- -- (6,508) (6,508)
---------- ----- ---------- ------- ----- -------- --------
BALANCES, DECEMBER 31,
1996................... -- -- 5,102,848 896 (339) (17,901) (17,344)
Exercise of stock
options................ -- -- 13,431 32 -- -- 32
Accretion of redeemable
preferred stock........ -- -- -- -- -- (74) (74)
Amortization of deferred
stock compensation..... -- -- -- -- 23 -- 23
Common stock options
issued for services.... -- -- -- 23 -- -- 23
Net income.............. -- -- -- -- -- 310 310
---------- ----- ---------- ------- ----- -------- --------
BALANCES, JUNE 30, 1997. -- $ -- 5,116,279 $ 951 $(316) $(17,665) $(17,030)
========== ===== ========== ======= ===== ======== ========
See notes to financial statements.
F-5
INSYNC SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- ---------- ------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............... $ 734 $ 2,996 $ (6,508) $ 4,818 $ 310
Adjustments to reconcile net
income (loss) to net cash
provided by (used for)
operating activities:
Issuance of common stock and
warrants for services......... 9 280 77 -- 383
Amortization of deferred stock
compensation.................. -- -- 160 14 23
Depreciation and amortization.. 387 707 3,579 1,805 1,254
Loss on disposal of equipment.. -- 106 775 45 37
Deferred income taxes.......... (213) (485) (7,353) (333) 169
Write down of intangible
assets........................ -- -- 16,610 -- --
Changes in assets and
liabilities (net of
acquisition):
Receivables.................... (2,425) (3,881) 7,473 3,318 (3,582)
Inventories.................... (3,928) (958) 1,360 (1,530) (2,315)
Prepaid expenses............... 12 (245) (260) 94 20
Accounts payable............... 3,039 2,090 (5,930) (3,490) 2,740
Accrued liabilities............ 375 1,121 (1,757) 1,360 (137)
Income taxes payable........... 240 553 (697) (523) --
------- ------- -------- -------- ------
Net cash provided by (used
for) operating activities.... (1,770) 2,284 7,529 5,578 (1,098)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Cash paid for acquisition of
Pullbrite...................... -- -- (15,000) (15,000) --
Purchases of property and
equipment...................... (734) (2,616) (3,032) (1,892) (997)
Purchase of short-term
investments.................... -- -- (1,500) -- --
Maturities of short-term
investments.................... -- -- -- -- 1,500
Other assets.................... 12 (437) 368 284 (367)
------- ------- -------- -------- ------
Net cash provided by (used
for) investing activities.... (722) (3,053) (19,164) (16,608) 136
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments) under
line of credit................. 2,150 (1,075) (1,150) (1,150) 1,500
Bank overdraft.................. -- -- -- -- 555
Notes payable borrowings........ 15 350 39,298 39,298 --
Repayments of notes payable and
capital leases................. (251) (304) (13,413) (11,287) (3,025)
Repayment of subordinated notes
payable........................ -- -- (15,000) (15,000) --
Proceeds from issuance of common
stock.......................... 27 1,941 347 336 32
Proceeds from issuance of
preferred stock................ 588 -- 23,487 23,487 --
Repurchase and retirement of
common stock................... -- -- (19,287) (19,287) --
------- ------- -------- -------- ------
Net cash provided by (used
for) financing activities.... 2,529 912 14,282 16,397 (938)
Net increase (decrease) in cash. 37 143 2,647 5,367 (1,900)
Cash and equivalents, beginning. 2 39 182 182 2,829
------- ------- -------- -------- ------
Cash and equivalents, ending.... $ 39 $ 182 $ 2,829 $ 5,549 $ 929
======= ======= ======== ======== ======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid................... $ 134 $ 411 $ 1,640 $ 474 $1,316
======= ======= ======== ======== ======
Income taxes paid............... $ 486 $ 2,050 $ 3,947 $ 3,646 $ 52
======= ======= ======== ======== ======
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of notes payable to
common stock................... $ 500
=======
Conversion of subordinated notes
payable to common stock........ $ 565
=======
Conversion of preferred stock to
common stock................... $ 20 $ 588
======= =======
Acquisition of Pullbrite:
Fair value of assets acquired.. $ 33,387 $ 33,387
Cash paid...................... (15,000) (15,000)
Convertible note payable issued
to seller..................... (15,000) (15,000)
-------- --------
Liabilities assumed............ $ 3,387 $ 3,387
======== ========
See notes to financial statements.
F-6
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business--Insync Systems, Inc. (the "Company")
was incorporated in August 1989. The Company is primarily engaged in the
business of developing, manufacturing, and marketing gas delivery systems and
subassemblies for the semiconductor equipment industry. The Company's products
are sold primarily to customers in the United States and its business is
dependent on the worldwide demand for semiconductor equipment and
semiconductors.
Certain Significant Risks and Uncertainties--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 the amounts disclosed as contingencies
at the date of the financial statements and the reported amounts of revenue
and expense for the periods presented. Actual results could differ from those
estimates. Such estimates include allowances for potentially uncollectible
accounts receivable, valuation reserves for inventories, accrued warranty
costs, and a valuation allowance for net deferred tax assets.
In addition, the Company operates in a dynamic industry and believes that
adverse changes in any of the following could have a negative impact on the
Company's future financial position, cash flows and results of operations: the
timing and product mix of significant orders and shipping schedules of its
customers; industry-wide changes in the demand for semiconductors or for
semiconductor manufacturing equipment; the ability of the Company to design,
manufacture, test and deliver defect-free gas delivery systems and
subassemblies in a timely and cost effective manner; the gain or loss of any
significant customer; competitive pressures; the timing of product
announcements by the Company's competitors, its customers or their
competitors; seasonal changes in purchases of semiconductor manufacturing
equipment; the availability and cost of components from the Company's
suppliers; and the availability of production capacity.
Concentration of Credit Risk--The Company extends credit to its customers,
most of whom are large, established companies in the semiconductor equipment
or semiconductor industries primarily located in California and Texas. Credit
risk is mitigated by the Company's credit evaluation process. The Company
generally does not require collateral or other security to support accounts
receivable. Reserves are maintained for estimated potential credit losses.
Cash and Equivalents--All highly liquid financial instruments purchased with
maturities of three months or less are included as cash and cash equivalents.
Short Term Investments--Short term investments consist primarily of
certificates of deposit with an original maturity date of greater than 90
days. At December 31, 1996, the fair value of short term investments
approximated cost.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over estimated useful
lives of five years. Leasehold improvements are amortized over the shorter of
the lease term or the useful lives of the improvements.
Intangible Assets--Intangible assets consist primarily of a major customer
relationship arising from the acquisition of Pullbrite, Inc. (see Note 2)
which is being amortized using the straight-line method over five years. The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable.
F-7
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments--Financial instruments consist of cash,
cash equivalents and long-term debt. The Company believes that the fair value
of financial instruments as reported in the balance sheets as of December 31,
1995 and 1996 and June 30, 1997 approximates cost. The carrying amount of cash
equivalents approximates fair value because of the short maturity of those
instruments. The fair value of long-term debt approximates the carrying amount
as the borrowings are at adjustable interest rates which reprice based on
fluctuations in market conditions and the level of operating cash flow of the
Company.
Revenue Recognition--Revenue from product sales is recognized at the time of
shipment or upon receipt by the customer if the terms are FOB destination
point. Product warranty costs are accrued in the period that sales are
recognized.
Stock-based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board No. 25 "Accounting for Stock Issued to Employees".
Income Taxes--The Company accounts for income taxes using an asset and
liability approach. Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce deferred tax assets to amounts that are more
likely than not to be realized.
Pro Forma Net Income (Loss) Per Share is based on the reported net income
(loss) adjusted for accretion of redeemable preferred stock, to arrive at net
income (loss) applicable to common stock. Pro forma net income (loss) per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding in 1996 and 1997. Common equivalent
shares include redeemable preferred stock and common stock options and
warrants (using the treasury stock method). Common stock equivalents are
excluded from the computation if there is a net loss as their effect is anti-
dilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, common and common equivalent
shares issued during the period commencing twelve months prior to the initial
filing of a proposed public offering at prices below the assumed public
offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method at an
assumed offering price per share for stock options and the if-converted method
for redeemable preferred stock). Historical net income per share for 1994 and
1995 has not been presented as such computations are not meaningful because of
the significant change in the Company's capital structure from the conversion
of its redeemable preferred stock that is anticipated to occur in connection
with its proposed initial public offering.
Unaudited Pro Forma Information--The unaudited pro forma information gives
effect to the conversion of all outstanding shares of redeemable preferred
stock into an aggregate of 2,352,940 shares of common stock upon the closing
of the initial public offering contemplated by this Prospectus.
Recently Issued Accounting Standards--In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS') No. 128, "Earnings Per Share" which establishes and
simplifies the standards for computing and presenting earnings per share data.
SFAS No. 128 will become effective for the Company beginning with the fiscal
year ended December 31, 1997 and requires that all previously reported
earnings per share data included in any future presentations be restated.
Early adoption of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary
and fully diluted earnings per share with basic and diluted earnings per
share. Pro forma basic and diluted earnings (loss) per share under SFAS No.
128 for the year ended December 31, 1996 and the six months ended June 30,
1997 would not have been materially different from the pro forma amounts
reported.
F-8
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for the reporting and
presentation of comprehensive income and its components. Comprehensive income
is defined as the change in equity of a business enterprise during a period
arising from transactions, events or circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by or distributions to owners. SFAS No. 130 will become effective
for the Company beginning with the year ended December 31, 1998 and will
require the presentation of total comprehensive income and its major
components for the period. Also in June 1997, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" which
establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. It will become effective for the
Company beginning with the year ended December 31, 1998. Adoption of these
statements will have no impact on the Company's financial position, results of
operations or cash flows.
Interim Financial Data--In the opinion of the Company's management, the
interim data includes all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the results of operations for
such periods. The audited results for the six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year or
for any other interim period. Information relating to the six months ended
June 30, 1996 is unaudited.
2. ACQUISITION OF PULLBRITE
On January 2, 1996, the Company acquired certain assets and assumed certain
liabilities of Pullbrite, Inc. for $30 million. Pullbrite, Inc. was an
independent provider of gas delivery systems and subassemblies to
semiconductor equipment manufacturers. The purchase price of $30 million was
paid in cash of $15 million (financed through a bank line of credit and note
payable--see Note 5) and the issuance of a $15 million subordinated
convertible note payable to the former owners of Pullbrite, Inc. The
acquisition has been accounted for by the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the net tangible
assets acquired was allocated $14.4 million to a major customer relationship
and $7.3 million to goodwill. During the second and third quarters of 1996,
the Company experienced a significant reduction in business from the major
customer and a competitor was selected to supply gas delivery systems for one
of the customer's new products. As a result, management evaluated the
recoverability of the carrying value of the major customer relationship and
related goodwill. As a result of this evaluation, management wrote off the
goodwill and reduced the carrying value of the major customer relationship to
its fair value, determined based on the expected discounted cash flows from
this relationship. Additionally, management reduced the amortization period
for the remaining related intangible from 15 years to five years.
Had the acquisition of Pullbrite, Inc. occurred at January 1, 1995,
unaudited pro forma net sales, gross profit and net income would have been
$98.2 million, $29.3 million and $8.6 million, respectively; however, these
pro forma amounts are not necessarily indicative of the actual results of
operations had the acquisition occurred on that date.
3. RESTRUCTURING CHARGES
In September 1996, the Company restructured its operations and recognized a
$1.3 million charge in response to declining revenues resulting from a
downturn in the semiconductor equipment industry. The restructuring included
the reduction of the work force, disposition of unproductive assets and
facility consolidations and was completed during the fourth quarter of 1996.
The initial estimate of
F-9
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$1.3 million was reduced by $465,000 in the fourth quarter due to the favorable
outcome of a lease amendment. The total cost of the Company's restructuring
actions reduced 1996 pretax income by $858,000 which consisted of $573,000 in
write downs for the disposition of unproductive assets and $285,000 relating to
severance and other facility expenses. As of December 31, 1996, all of the
restructuring costs had been incurred and there were no related liabilities
remaining.
4. BALANCE SHEET DETAILS
DECEMBER 31,
-------------- JUNE 30,
1995 1996 1997
------ ------ --------
(IN THOUSANDS)
Accounts receivables:
Receivables.................................... $7,462 $5,872 $ 9,476
Less allowance................................. (75) (107) (129)
------ ------ -------
$7,387 $5,765 $ 9,347
====== ====== =======
Inventories:
Raw materials.................................. $3,534 $5,175 $ 4,663
Work in process................................ 1,685 1,242 2,280
Finished goods................................. 445 1,415 3,204
------ ------ -------
$5,664 $7,832 $10,147
====== ====== =======
Property and equipment:
Machinery and equipment........................ $2,894 $6,422 $ 7,069
Furniture and fixtures......................... 967 1,242 1,426
Leasehold improvements......................... 679 577 823
------ ------ -------
4,540 8,241 9,318
Less accumulated depreciation and amortization... (1,136) (2,597) (3,470)
------ ------ -------
$3,404 $5,644 $ 5,848
====== ====== =======
Intangibles...................................... $ -- $5,020 $ 5,020
Less accumulated amortization.................. -- (1,125) (1,535)
------ ------ -------
$ -- $3,895 $ 3,485
====== ====== =======
Accrued liabilities:
Compensation and benefits...................... $ 707 $ 356 $ 532
Other.......................................... 884 692 379
------ ------ -------
$1,591 $1,048 $ 911
====== ====== =======
5. CREDIT FACILITIES
At June 30, 1997, the Company had a bank credit facility commitment
consisting of a term note maturing June 28, 2000 ($24 million outstanding at
June 30, 1997) and $1.5 million outstanding under a $5 million revolving credit
facility maturing June 28, 1998. Borrowings bear interest at the bank's prime
rate (8.5% at June 30, 1997) plus a margin (2% at June 30, 1997) ranging from
0% to 2% which adjusts based on the Company's leverage ratio. The notes are
secured by all tangible and intangible assets, real and personal property.
Principal is due in 16 consecutive increasing quarterly installments and
interest is payable monthly. Advances under the revolving note are limited to
80% of eligible accounts
F-10
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
receivables and a commitment fee (0.50% at June 30, 1997), ranging from 0.25%
to 0.50% which adjusts under the same terms as the margin, is payable quarterly
in arrears on any unborrowed portion. As of June 30, 1997, the Company had
outstanding guarantees of $635,000 granted in the form of a standby letter of
credit under its revolving credit facility.
Terms of the credit facility impose certain restrictions on the payment of
dividends and require the Company to maintain minimum quarterly financial
covenants including leverage and current ratios, operating cash flow coverage
and sustained profitability (see Note 13).
Secured promissory notes are due in monthly installments through 2000 with
interest at 11% and are secured by the underlying machinery and equipment
purchased.
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
-------------- JUNE 30,
1995 1996 1997
----- ------- --------
Bank notes payable............................... $ 348 $27,000 $24,000
Secured promissory note.......................... 253 188 163
----- ------- -------
Total.......................................... 601 27,188 24,163
Current portion.................................. (188) (6,552) (7,055)
----- ------- -------
Long-term obligations............................ $ 413 $20,636 $17,108
===== ======= =======
Maturities of long-term obligations as of June 30, 1997 are as follows (in
thousands):
Period Ending December 31,
1997 (six months).................. $ 3,527
1998............................... 7,553
1999............................... 8,548
2000............................... 4,535
-------
$24,163
=======
F-11
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASE COMMITMENTS
The Company leases its primary facilities and certain equipment under
operating leases expiring from July 1997 through September 2001. The Company
has a five year lease for its Austin, Texas facility expiring in September
2001. This lease has two five-year renewal options. Additionally, the Company
has two five-year renewal options to extend its Milpitas, California facility
lease which expires in August 2000. The Company also leases its Fremont
facilities from the former owners of Pullbrite, Inc. through December 31,
2001. This lease has two additional five-year renewal options. Minimum lease
payments to the former owners of Pullbrite, Inc. are $12,600 per month.
Future minimum payments due under non-cancelable operating lease
arrangements as of June 30, 1997 are as follows (in thousands):
Period Ending December 31,
1997 (six months)................... $1,251
1998................................ 2,507
1999................................ 2,284
2000................................ 1,948
2001................................ 916
------
Total minimum lease payments.......... $8,906
======
Rent expense was $262,000, $403,000 and $1,369,000 for the years ended
December 31, 1994, 1995 and 1996, respectively; and $606,000 and $848,000 for
the six months ended June 30, 1996 and 1997, respectively.
7. REDEEMABLE PREFERRED STOCK AND COMMON STOCK PUT WARRANTS
Redeemable Preferred Stock--In January and March of 1996, the Company issued
3,000,000 shares of redeemable preferred stock for total gross proceeds of $24
million. Approximately $5 million was used for operational purposes and the
remainder was used to repurchase common stock from existing shareholders. The
redeemable preferred stock is redeemable for $24 million in two equal annual
installments beginning with the fifth anniversary of its issuance. Redeemable
preferred stock offering costs of $513,000 were netted against the proceeds.
The carrying value of the redeemable preferred stock is being accreted ratably
over the five year redemption period. The redeemable preferred stock
automatically converts into a maximum of 2,352,940 shares of common stock upon
an initial public offering meeting certain criteria (see Note 13).
The holders of the redeemable preferred stock have voting rights similar to
common shareholders and may vote on all matters except the election of board
members (they may elect their representative board member). Preferred
shareholders are also entitled to certain preferences on liquidation or
dissolution of the Company and to noncumulative annual cash dividends of $0.48
per share prior and in preference to any declaration or payment of dividends
on the Company's common stock. The redeemable preferred stock has a
liquidation preference of $16 per share.
In connection with the redeemable preferred stock issuance, the Company
granted to the holders of the redeemable preferred stock warrants to acquire
66,666 shares of the Company's common stock at an exercise price of $12.00 per
share. These warrants are exercisable through January 1998 (see Note 13). The
estimated fair value of the warrants of $223,000 was allocated to common
stock.
F-12
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock Put Warrants--In connection with the modification of certain
financial covenants related to the Company's revolving credit facility
commitment in April 1997, the Company issued warrants to acquire 40,000 shares
of the Company's common stock at a price of $0.015 per share to its senior
lenders. The warrants are exercisable through April 29, 2002 and the Company,
at the option of the holder, may be obligated to purchase the common stock
underlying these warrants at a price of $9.00 per share. The estimated fair
value of the put warrants of $360,000 was recognized as additional interest
expense during the six months ended June 30, 1997.
8. SHAREHOLDERS' EQUITY (DEFICIENCY)
Stock Option Plan
The Company's stock option plans (the "plans") permits the grant of incentive
and nonqualified stock options to key employees, officers, directors and
consultants. Under the plans, incentive stock options are issued at no less
than 100% of the fair market value of the Company's common stock as determined
at the date of grant or no less than 85% of fair market value for nonqualified
stock options. Generally, options granted under the plans have a term of ten
years from the date of grant and vest ratably over four or five years as
determined by the Board of Directors.
As discussed in Note 1, the Company applies APB No. 25 and related
interpretations in accounting for its plans. The Company recognizes deferred
compensation for the difference between the exercise price and the fair market
value of the Company's common stock on the date of grant for options granted to
employees. Deferred stock compensation is being amortized on a straight-line
basis over the five-year vesting period of the underlying options. The related
expense was $0, $0, $160,000, and $23,000 for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997, respectively.
F-13
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In July 1996, the Company repriced all outstanding stock options which had
been previously granted at a price greater than $6.00. The Company canceled the
existing stock options to purchase 240,000 shares of common stock and granted
new options with an exercise price of $6.00. These options are included in 1996
option activity. A summary of stock option activity under the plans is as
follows:
OUTSTANDING OPTIONS
------------------------
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
January 1, 1994....................................... --
Granted............................................. 713,921 $1.23
Canceled............................................ (136,624) 0.75
---------
December 31, 1994..................................... 577,297 1.35
Granted............................................. 438,710 5.87
Exercised........................................... (1,866) 0.75
Canceled............................................ (36,125) 1.10
---------
December 31, 1995 (154,746 options exercisable at a
weighted average price of $1.66 per share)........... 978,016 3.39
Granted............................................. 558,043 6.68
Exercised........................................... (17,395) 1.21
Canceled............................................ (372,777) 7.61
---------
December 31, 1996 (330,636 options exercisable at a
weighted average price of $2.38 per share)........... 1,145,887 3.65
Granted............................................. 166,488 6.00
Exercised........................................... (13,431) 2.31
Canceled............................................ (41,043) 5.99
---------
June 30, 1997......................................... 1,257,901 3.90
=========
Had compensation cost, for awards under the plans, been determined based on
the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based
Compensation", the estimated weighted average fair value per option as of the
grant date for the awards made during 1995 and 1996 and the six months ended
June 30, 1997 would have been $1.61, $1.91 and $1.65, respectively. At June 30,
1997, 509,407 shares were available for future grant.
The following table summarizes information as of June 30, 1997 concerning
currently outstanding and exercisable options:
WEIGHTED
AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- ----------------
(YEARS)
$ 0.75 292,483 6.8 $0.75 169,090 $0.75
2.25--2.475 204,995 7.4 2.43 81,997 2.43
4.50--6.00 760,423 8.6 5.50 199,050 4.91
--------- -------
0.75--6.00 1,257,901 8.0 3.90 450,137 2.90
========= =======
F-14
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of the
year ended December 31, 1996. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differs from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affects the calculated values.
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, 5.5
years; no stock volatility; risk free interest rate of 6%; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair value of granted awards had been amortized to expense over the
vesting period of the awards, pro forma net income (loss) applicable to common
shareholders would have been $2,982,000, $(6,884,000) ($0.90 net loss per
share) and $73,000 ($0.01 net income per share) for the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997, respectively.
However, the impact of outstanding non-vested stock options granted prior to
January 1, 1995 has been excluded from the pro forma calculation; accordingly,
the pro forma adjustments for the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997 are not necessarily indicative of future
period pro forma adjustments, when the calculation will apply to all applicable
stock options.
Common Stock Grants
The Company issued 6,000 and 20,000 shares of common stock to consultants in
consideration of services performed during 1994 and 1995, respectively, and
recognized the estimated fair value of the common stock as expense on the dates
issued of $9,000 and $80,000, respectively.
Employee Stock Purchase Plan
During 1997, the Company established an employee stock purchase plan and
reserved 166,666 shares of common stock subject to shareholder's approval.
Common Stock Reserved for Issuance
At June 30, 1997, the Company has reserved or otherwise committed to issue
shares of common stock as follows:
Preferred stock.................................................. 2,352,940
Exercise of options.............................................. 1,667,309
Exercise of warrants............................................. 317,996
Employee stock purchase plan..................................... 166,666
---------
4,504,911
=========
Subsequent to June 30, 1997, the Board of Directors approved an increase of
266,666 shares in the number of shares available for grant under the Company's
stock option plans.
F-15
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The components of the provision for income taxes are summarized as follows
(in thousands):
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- ----------------
1994 1995 1996 1996 1997
----- ------ ------- ----------- ----
(UNAUDITED)
Currently payable:
Federal.............................. $ 574 $2,023 $ 2,383 $2,967 $ 12
State................................ 152 550 656 601 8
----- ------ ------- ------ ----
726 2,573 3,039 3,568 20
Deferred:
Federal.............................. (168) (383) (5,810) (200) 135
State................................ (45) (102) (1,543) (133) 34
----- ------ ------- ------ ----
(213) (485) (7,353) (333) 169
----- ------ ------- ------ ----
Total.............................. $ 513 $2,088 $(4,314) $3,235 $189
===== ====== ======= ====== ====
A reconciliation between the Company's effective tax rate to the statutory
rate is as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ----------- ----
(UNAUDITED)
Tax at federal statutory rate................... 35% 35% 35% 35% 35%
State income taxes, net of federal benefit...... 6 6 6 6 6
Research and Development credits................ (2) (2) -- -- --
Other........................................... 2 2 (2) (1) --
--- --- --- --- ---
Total......................................... 41% 41% 39% 40% 41%
=== === === === ===
The components of the net deferred tax asset consist of the following (in
thousands):
DECEMBER 31,
-------------- JUNE 30,
1995 1996 1997
------ ------- --------
Deferred tax assets--accruals and reserves recognized
in different periods................................. $ 812 $ 1,694 $1,691
Deferred tax assets--intangible assets recognized in
different periods.................................... -- 6,504 6,380
Deferred tax liabilities--depreciation and
amortization......................................... (98) (131) (173)
----- ------- ------
Net deferred tax asset................................ $ 714 $ 8,067 $7,898
===== ======= ======
F-16
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. MAJOR CUSTOMERS
Sales to major customers in relation to net sales are as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ------------------------------
CUSTOMER 1994 1995 1996 1996 1997
-------- ------- ------- ------- ---------------- ------------
(UNAUDITED)
A 67% 65% 33% 34% 30%
B 29 32 16 16 20
C * * 32 36 29
D * * * * 11
Accounts receivable with major customers as a percentage of total receivables
were as follows:
DECEMBER 31,
------------------------------------- JUNE 30,
CUSTOMER 1995 1996 1997
-------- ------ ------ --------
A 47% 22% 23%
B 52 * *
C * 35 47
D * 12 15
E * 14 *
*Less than 10% of total.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which participants
may contribute up to 20% of their compensation, subject to certain Internal
Revenue Service limitations. Additionally, the Company makes matching
contributions on behalf of each plan participant equal to $0.50 per dollar of
the contributions made by the participant, not to exceed an amount equal to 3%
of their annual compensation. The Company's contributions were none, $60,000,
$225,000 and $114,000 for the years ended December 31, 1994, 1995 and 1996 and
for the six months ended June 30, 1997, respectively. In addition, the Company
committed in fiscal 1995 to issue 8,600 shares of common stock to the plan and
recognized expense of $77,000 representing the estimated fair value of the
shares at the date contributed.
12. RELATED PARTY TRANSACTIONS
Related party transactions not otherwise disclosed herein are as follows:
A consulting firm in which the Company's chairman had a minority interest
provides sales and management development training services to the Company.
During the six months ended June 30, 1997 and the years ended December 31,
1996, 1995 and 1994, the Company paid $157,000, $241,000, $144,000 and $64,000,
respectively, for these services. Additionally, the Company issued in 1995 to
the president of this firm options to acquire 50,000 shares of common stock at
an exercise price of $4.50 per share.
Also during the six months ended June 30, 1997 and the years ended December
31, 1996, 1995 and 1994, the Company paid $100,000, $112,000, $186,000 and
$110,000 respectively, for services performed by consultants of a firm whose
president is a director of the Company. During 1995, the Company issued options
and warrants to acquire 99,997 shares of the Company's common stock at a
weighted average exercise price of $2.75 per share to consultants of this firm
for services performed.
F-17
INSYNC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1995, the Company recognized $200,000 as expense for the estimated fair
value of the equity instruments granted during that year.
13. SUBSEQUENT EVENTS
On September 26, 1997, the Board of Directors, acting pursuant to prior
shareholder authorization, approved a two-for-three reverse split of its common
stock. All share and per share information has been adjusted to retroactively
give effect to the reverse split for all periods presented.
On September 26, 1997, the holders of the redeemable preferred stock elected
to convert their shares pursuant to their conversion rights into an aggregate
of 2,352,940 shares of common stock upon the closing of the initial public
offering contemplated by this Prospectus. In connection with this, the Company
agreed to extend the expiration date of certain warrants previously granted to
the shareholders by one year.
Also on September 26, 1997, the Company obtained an amendment to its bank
credit facility revising its financial covenants through December 31, 1997. As
of June 30, 1997, the Company was in compliance with the financial covenants as
amended. In connection with the amendment, the Company issued to its senior
lenders common stock put warrants to acquire 10,000 shares of the Company's
common stock at a price of $0.015 per share. The Company, at the option of the
holder, may be obligated to purchase the common stock underlying these warrants
at a price of $9.00 per share.
F-18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Pullbrite, Inc.:
We have audited the accompanying balance sheets of Pullbrite, Inc. as of
September 30, 1994 and 1995, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pullbrite, Inc. as of September 30, 1994
and 1995, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
October 20, 1995
(January 2, 1996 as to Note 9)
F-19
PULLBRITE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
---------------
1994 1995
------ -------
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 850 $ 2,854
Short-term investments....................................... 155 189
Receivables, less allowances of $202 in 1994 and $40 in 1995. 3,074 4,900
Inventories.................................................. 1,319 2,586
Prepaid expenses............................................. 2 34
------ -------
Total current assets....................................... 5,400 10,563
PROPERTY AND EQUIPMENT, net.................................... 1,297 1,395
OTHER ASSETS................................................... 494 786
------ -------
TOTAL.......................................................... $7,191 $12,744
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 693 $ 965
Accrued liabilities.......................................... 621 1,020
Income taxes payable......................................... 71 --
------ -------
Total current liabilities.................................. 1,385 1,985
DEFERRED RENT AND OTHER........................................ 42 30
------ -------
Total liabilities.......................................... 1,427 2,015
------ -------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 500,000 shares authorized; shares
outstanding: 20,000......................................... 19 19
Unrealized gain (loss) on available-for-sale securities...... (7) 17
Retained earnings............................................ 5,752 10,693
------ -------
Total stockholders' equity................................. 5,764 10,729
------ -------
TOTAL.......................................................... $7,191 $12,744
====== =======
See notes to financial statements.
F-20
PULLBRITE, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED
SEPTEMBER 30,
----------------
1994 1995
------- -------
NET SALES..................................................... $28,966 $42,484
COST OF SALES................................................. 20,173 28,482
------- -------
GROSS PROFIT.................................................. 8,793 14,002
------- -------
OPERATING EXPENSES-
Selling, general and administrative......................... 1,505 2,412
------- -------
INCOME FROM OPERATIONS........................................ 7,288 11,590
------- -------
OTHER INCOME (EXPENSE):
Interest income and other................................... 27 75
Interest expense............................................ (15) (5)
------- -------
Total other expense, net.................................. 12 70
------- -------
INCOME BEFORE INCOME TAXES.................................... 7,300 11,660
PROVISION FOR INCOME TAXES.................................... 213 216
------- -------
NET INCOME.................................................... $ 7,087 $11,444
======= =======
See notes to financial statements.
F-21
PULLBRITE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNREALIZED
COMMON STOCK GAIN
------------- (LOSS) ON RETAINED
SHARES AMOUNT SECURITIES EARNINGS TOTAL
------ ------ ---------- -------- -------
BALANCES, October 1, 1993........... 20,000 $19 $-- $ 3,725 $ 3,744
Unrealized loss on available-for-
sale securities.................... (7) (7)
Distributions....................... (5,060) (5,060)
Net income.......................... 7,087 7,087
------ --- --- ------- -------
BALANCES, September 30, 1994........ 20,000 19 (7) 5,752 5,764
Unrealized gain on available-for-
sale securities.................... 24 24
Distributions....................... (6,503) (6,503)
Net income.......................... 11,444 11,444
------ --- --- ------- -------
BALANCES, September 30, 1995........ 20,000 $19 $17 $10,693 $10,729
====== === === ======= =======
See notes to financial statements.
F-22
PULLBRITE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
SEPTEMBER 30,
----------------
1994 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 7,087 $11,444
Reconciliation to net cash provided by operating activities:
Depreciation and amortization............................... 163 259
Loss on disposal of equipment............................... 14 --
Loss on sale of securities.................................. 14 --
Deferred rent............................................... 13 (12)
Changes in assets and liabilities:
Receivables................................................ (1,021) (1,826)
Inventories................................................ (422) (1,267)
Prepaid expenses........................................... 6 (32)
Accounts payable........................................... (183) 272
Accrued expenses........................................... 232 399
Income taxes payable....................................... (13) (71)
------- -------
Net cash provided by operating activities................. 5,890 9,166
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (842) (391)
Proceeds from sale of equipment.............................. -- 34
Other assets................................................. (374) (292)
Purchase of investments...................................... (3,160) (10)
Proceeds from sale of investments............................ 2,984 --
------- -------
Net cash used for investing activities.................... (1,392) (659)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit.............................. 350 --
Repayment of line of credit.................................. (350) --
Repayments of notes payable.................................. (144) --
Distributions to shareholders................................ (5,060) (6,503)
------- -------
Net cash used for financing activities.................... (5,204) (6,503)
------- -------
NET INCREASE (DECREASE) IN CASH............................... (706) 2,004
CASH, Beginning of period..................................... 1,556 850
------- -------
CASH, End of period........................................... $ 850 $ 2,854
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................ $ 36 $ 5
======= =======
Income taxes paid............................................ $ 121 $ 287
======= =======
See notes to financial statements.
F-23
PULLBRITE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS--Pullbrite, Inc. (the Company) was
incorporated in August 1980. The Company is primarily in the business of
manufacturing and selling gas control and vacuum systems and subassemblies
and electro-polishing of stainless steel parts for the semiconductor
manufacturing industry.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially
subject the Company to concentration of credit risk consist of short-term
investments and accounts receivable. Short-term investments consist
primarily of mutual fund accounts that are regularly monitored by
management. For the years ended September 30, 1994 and 1995, one customer,
a major manufacturer of semiconductor equipment, represented 81%, and 79%
of net sales, respectively. At September 30, 1994 and 1995, 78% and 80% of
receivables were due from that customer, respectively. The Company also
extends credit to its other customers, most of whom are located in
California and operate in the semiconductor equipment industry. Credit risk
with respect to the trade receivables is mitigated by the Company's credit
evaluation process. The Company generally does not require collateral or
other security to support accounts receivable.
INVESTMENTS--Investments consist primarily of mutual fund accounts. Short-
term investments are classified as available for sale securities and are
stated at market value. The unrealized gain (loss) of $(7,000) and $17,000
at September 30, 1994 and 1995, respectively, has been recognized as a
separate component of stockholders' equity.
INVENTORIES--Inventories are stated at the lower of cost (first-in, first-
out) or market.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are amortized
over their estimated useful lives of thirty years, although these lives are
longer than the terms of the related leases. These leases are with related
parties, and management has the ability and intends to extend these leases.
REVENUE RECOGNITION--Revenues from product sales are recognized at the time
of shipment. Product warranty costs are accrued in the period that sales
are recognized.
INCOME TAXES--The Company has elected to be taxed as an S Corporation for
federal and state income tax purposes. In lieu of corporate income taxes,
the shareholders of an S Corporation are taxed on their proportionate share
of the Company's taxable income. Therefore, no provision for federal income
taxes has been included in these financial statements. Although the S
Corporation election is recognized for California income tax purposes, this
state requires S Corporations to pay a tax of 1.5% (2.5% before 1995) of
taxable income.
2. INVENTORIES
Inventories consist of:
SEPTEMBER 30,
-------------
1994 1995
------ ------
Finished goods.............................................. $ 147 $ 581
Work in process............................................. 169 408
Raw materials............................................... 1,003 1,597
------ ------
Total....................................................... $1,319 $2,586
====== ======
F-24
PULLBRITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1994 AND 1995
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
SEPTEMBER 30,
--------------
1994 1995
------ ------
Machinery and equipment................................... $1,556 $1,851
Furniture and fixtures.................................... 55 73
Leasehold improvements.................................... 396 406
------ ------
2,007 2,330
Accumulated depreciation and amortization................. (710) (935)
------ ------
$1,297 $1,395
====== ======
4. ACCRUED LIABILITIES
Accrued liabilities consist of:
SEPTEMBER
30,
-----------
1994 1995
---- ------
Compensation and benefits.................................... $337 $ 702
Other........................................................ 284 318
---- ------
Total........................................................ $621 $1,020
==== ======
5. LINE OF CREDIT
At September 30, 1995, the Company had a $1,000,000 bank line of credit.
Borrowings bear interest at the bank's prime rate (8.75% at September 30,
1995) plus .5% and are collateralized by accounts receivable, inventory,
and equipment. The line of credit is guaranteed by the stockholders. The
line of credit contains restrictive covenants, including maintaining a
minimum current ratio of 2.0:1, and maximum debt to tangible net worth of
1.0:1. In addition, the Company must remain profitable on an annual basis.
There were no borrowings outstanding on this line of credit at September
30, 1994 and 1995.
6. LEASE COMMITMENTS
The Company conducts its operations in facilities that are leased from a
partnership which is owned by the stockholders of the Company. Rent expense
is recognized on a straight-line basis over the term of the lease due to
scheduled rent increases. Future minimum annual commitments as of September
30, 1995 are as follows (in thousands):
FISCAL YEAR
-----------
1996.............................................................. $ 211
1997.............................................................. 211
1998.............................................................. 211
1999.............................................................. 236
2000.............................................................. 245
Thereafter........................................................ 797
------
Total............................................................. $1,911
======
Rent expense to related parties for the years ended September 30, 1994 and
1995 was $204,000 and $211,000, respectively.
F-25
PULLBRITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED SEPTEMBER 30, 1994 AND 1995
7. INCOME TAXES
The provision for income taxes for the years ended September 30, 1994 and
1995 consisted of currently payable income taxes of $213,000 and $216,000.
8. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan whereby the Company may contribute up
to 15% of the compensation of eligible employees. Employees who have
attained the age of twenty-one become eligible after one year of service.
Contributions to the profit sharing plan were $100,000 and $150,000 in each
of the years ended September 30, 1994 and 1995. The amount to be
contributed is discretionary and is determined each year by the Board of
Directors.
The Company also has a 401(k) tax-deferred savings plan under which
participants may contribute up to 25% of their compensation, subject to
Internal Revenue Service limitations. Contributions to the plan by the
Company equal 25% of the salary reduction elected by each employee up to a
maximum reduction of 4% of annual salary. The Company, at its option, may
contribute additional amounts to the plan. Company contributions to the
plan were $25,000 and $35,000 for the years ended September 30, 1994 and
1995, respectively.
9. SUBSEQUENT EVENTS
On January 2, 1996, the Company and its stockholders entered into a
definitive agreement with Insync Systems, Inc. (Insync), for Insync's
acquisition of certain assets and liabilities of the Company for
$30 million. On January 2, 1996, the acquisition was consummated and was
accounted for as a purchase.
F-26
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER OR ANY
SELLING SHAREHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 28
Management................................................................ 39
Certain Transactions...................................................... 48
Principal and Selling Shareholders........................................ 50
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[Insync Logo]
Common Stock
-----------
PROSPECTUS
-----------
BT Alex. Brown
PaineWebber Incorporated
Prudential Securities Incorporated
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses, other than
underwriting discounts and commissions, to be paid by the Company in connection
with this offering.
AMOUNT
TO BE
PAID
--------
Securities and Exchange Commission registration fee................ $ 11,819
NASD filing fee.................................................... 4,400
Nasdaq National Market listing fee................................. *
Accounting fees and expenses....................................... *
Legal fees and expenses............................................ 250,000
Printing........................................................... 300,000
Printing and engraving stock certificates.......................... *
Blue Sky fees and expenses......................................... 5,000
Transfer Agent and Registrar fees and expenses..................... *
Road show expenses................................................. *
Insurance premiums................................................. *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
- --------
* To be completed by amendment.
Pursuant to certain registration rights agreements between the Company and
the Selling Shareholders, no portion of the above expenses will be borne by
such Selling Shareholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. The Company's
Amended and Restated Articles of Incorporation and the Company's Bylaws provide
for indemnification of the Company's directors and officers to the maximum
extent permitted by the California Corporations Code. In addition, the Company
has entered into indemnification agreements with its officers and directors.
Reference is also made to Section 8 of the Underwriting Agreement indemnifying
officers and directors of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 1, 1994, the Company issued and sold the following unregistered
securities pursuant to the exemption from the registration requirements of the
Securities Act of 1933, as amended, provided by Section 4(2) of the Act or Rule
701 of the Act:
(1) In December 1994, the Company issued 222,222 shares of Common Stock
to a supplier for cancellation of indebtedness in the amount of $500,000.
(2) From December 1994 through August 1995, the Company issued 26,000
shares of Common Stock for services provided in lieu of cash of $89,000.
(3) From May 1995 through July 1995, the Company issued and sold 439,953
shares of Common Stock to a group of private investors for aggregate cash
consideration of $1,939,000, net of issuance costs.
II-1
(4) In September 1995, the Company issued 13,333 shares of Common Stock
to a supplier upon the exercise of a warrant for an aggregate cash
consideration of $1,000.
(5) On January 30, 1996 and March 6, 1996, the Company issued and sold an
aggregate of 3,000,000 shares of Series A Preferred Stock and warrants to
purchase 66,666 shares of Common Stock to a group of private investors for
an aggregate cash consideration of $24,001,000.
(6) On January 2, 1996, the Company issued a $15 million convertible
promissory note to Pullbrite, Inc. in connection with the Company's
acquisition of Pullbrite, Inc.
(7) Between July 1, 1994 and August 1, 1997, the Company granted options
to directors and consultants pursuant to its 1993 Stock Option Plan, at
exercise prices of between $0.75 and $10.50. At August 1, 1997 options to
purchase 1,359,751 shares of Common Stock were outstanding.
(8) Between December 1993 and September 1997, the Company granted
warrants to directors, consultants and a lender of the Company to purchase
317,996 shares of Common Stock, at exercise prices ranging from $0.015 to
$12.00 per share.
(9) From August 1, 1995 through August 1, 1997, the Company issued and
sold 32,692 shares of Common Stock upon the exercise of stock options for
an aggregate consideration of $53,475.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
1.01 Form of Underwriting Agreement.
2.01 Purchase Agreement by and between Pullbrite, Inc., Byron L. Bertsch,
James E. Wyant and Insync Systems, Inc.*
3.01 Articles of Incorporation, as amended.
3.02 Form of Amended and Restated Articles of Incorporation of Registrant
to be in effect following completion of the Offering.*
3.03 Bylaws, as amended.
3.04 Form of bylaws, to be in effect following completion of the Offering.*
4.01 Specimen of Common Stock Certificate.
4.02 Insync Systems, Inc. Amended and Restated Registration Rights
Agreement dated January 19, 1996.
4.03 Insync Systems, Inc. Amended and Restated 1993 Stock Option Plan.
4.04 1997 Stock Plan and Stock Option Agreement.
4.05 Insync Systems, Inc. 1997 Employee Stock Purchase Plan with
Subscription Agreement.
4.06 Insync Systems, Inc. Profit Sharing/401(k) Plan.*
4.07 Insync Systems, Inc. Profit Sharing/401(k) Plan Adoption Agreement and
Summary Plan Description.*
4.08 Series A Preferred Stock and Warrant Purchase Agreement dated as of
January 30, 1996 and March 6, 1996.*
4.09 Forms of Warrant to Purchase Common Stock.*
II-2
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
4.10 Form of Employee and Affiliate Stock Purchase Agreement.
4.11 Officer and Director Lockup Agreement.*
5.01 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality
of securities being registered.*
10.01 Lease of 1463 Centre Pointe Drive, Milpitas, CA.*
10.02 Commercial Lease Agreement of 200 C. Parker Drive, Suite 600, Austin,
TX. 78728.*
10.03 Lease of 45437 Warm Springs Boulevard, Fremont, CA 94539.*
10.04 Lease of 1507 Centre Point Drive, Milpitas, CA.*
10.05 Consulting Services Agreement with Kairos.
10.06 Master Purchase Order and Sales Agreement with Applied Materials.*
10.07 Equity Agreement between Stanley L. Leopard and the Company.
10.08 Blank Purchase Agreement of Lam Research; Agreement #840-0001*
11.01 Statement regarding computation of per share earnings.
12.01 Statement regarding computation of ratios.*
23.01 Independent Auditors' Consent and Report on Schedules.
23.02 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.01).*
24.01 Power of attorney (See page II-5).
27.01 Financial Data Schedule.*
- --------
* To be filed by amendment.
** Pursuant to Item 601(b)(2), certain schedules and other attachments have
been omitted from the indicated exhibits and which omitted items shall be
furnished supplementally to the Commission upon request.
*** Attached to the Registration Statement.
(b) The following financial statement schedule is filed herewith:
Schedule II Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information required
to be set forth therein is inapplicable or is shown either in the financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director,
II-3
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milpitas, State of
California, on October 1, 1997.
Insync Systems, Inc.
/s/ Stanley L. Leopard
By: _________________________________
Stanley L. Leopard, Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stanley L. Leopard and Terence J. Griffin,
jointly and severally, his true and lawful attorneys-in-fact, each with the
power of substitution, for him, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stanley L. Leopard Chief Executive Officer and October 1, 1997
____________________________________ Director
Stanley L. Leopard
/s/ Terence J. Griffin Chief Financial Officer October 1, 1997
____________________________________
Terence J. Griffin
/s/ Frank R. Balma Director October 1, 1997
____________________________________
Frank R. Balma
/s/ Brent D. Elliot Director October 1, 1997
____________________________________
Brent D. Elliot
/s/ Michael C. Child Director October 1, 1997
____________________________________
Michael C. Child
/s/ Don M. Lyle Director October 1, 1997
____________________________________
Don M. Lyle
/s/ Russell G. Redenbaugh Director October 1, 1997
____________________________________
Russell G. Redenbaugh
/s/ W. Lee Shevel Director October 1, 1997
____________________________________
W. Lee Shevel
II-5
SCHEDULE II
INSYNC SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE OF CHARGED TO BALANCE AT
BEGINNING OF COST AND DEDUCTIONS/ END OF
PERIOD EXPENSES WRITE-OFF PERIOD
------------ ---------- ----------- ----------
Year ended December 31, 1994
Accounts receivable allow-
ance........................ $ 4 $ 7 $ -- $ 11
Year ended December 31, 1995
Accounts receivable allow-
ance........................ $ 11 $247 $183 $ 75
Year ended December 31, 1996
Accounts receivable allow-
ance........................ $ 75 $390 $358 $107
Six month period ended June 30,
1997
Accounts receivable allow-
ance........................ $107 $ 22 $ -- $129
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
1.01 Form of Underwriting Agreement.
2.01 Purchase Agreement by and between Pullbrite, Inc., Byron L. Bertsch,
James E. Wyant and Insync Systems, Inc.*
3.01 Articles of Incorporation, as amended.
3.02 Form of Amended and Restated Articles of Incorporation of Registrant
to be in effect following completion of the Offering.*
3.03 Bylaws, as amended.
3.04 Form of bylaws, to be in effect following completion of the Offering.*
4.01 Specimen of Common Stock Certificate.
4.02 Insync Systems, Inc. Amended and Restated Registration Rights
Agreement dated January 19, 1996.
4.03 Insync Systems, Inc. Amended and Restated 1993 Stock Option Plan.
4.04 1997 Stock Plan and Stock Option Agreement.
4.05 Insync Systems, Inc. 1997 Employee Stock Purchase Plan with
Subscription Agreement.
4.06 Insync Systems, Inc. Profit Sharing/401(k) Plan.*
4.07 Insync Systems, Inc. Profit Sharing/401(k) Plan Adoption Agreement and
Summary Plan Description.*
4.08 Series A Preferred Stock and Warrant Purchase Agreement dated as of
January 30, 1996 and March 6, 1996.*
4.09 Forms of Warrant to Purchase Common Stock.*
4.10 Form of Employee and Affiliate Stock Purchase Agreement.
4.11 Officer and Director Lockup Agreement.*
5.01 Opinion of Wilson, Sonsini, Goodrich & Rosati, PC regarding legality
of securities being registered.*
10.01 Lease of 1463 Centre Pointe Drive, Milpitas, CA.*
10.02 Commercial Lease Agreement of 200 C. Parker Drive, Suite 600, Austin,
TX 78728.*
10.03 Lease of 45437 Warm Springs Boulevard, Fremont, CA 94539.*
10.04 Lease of 1507 Centre Point Drive, Milpitas, CA.*
10.05 Consulting Services Agreement with Kairos.
10.06 Master Purchase Order and Sales Agreement with Applied Materials.*
10.07 Equity Agreement between Stanley L. Leopard and the Company.
10.08 Blank Purchase Agreement of Lam Research; Agreement #840-0001.*
11.01 Statement regarding computation of per share earnings.
12.01 Statement regarding computation of ratios.*
23.01 Independent Auditors' Consent and Report on Schedules.
23.02 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.01).*
24.01 Power of attorney (See page II-5).
27.01 Financial Data Schedule.*
- --------
* To be filed by amendment.
** Pursuant to Item 601(b)(2), certain schedules and other attachments have
been omitted from the indicated exhibit and which omitted items shall be
furnished supplementally to the Commission upon request.
*** Attached to the Registration Statement.