-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F5TBX8rrO69bG+wxKxLpOUNeIdLtDTODkqNgbNJBzGJOGQaHupK7IYATxyS2Y6h2 EShfb+PeC+qjigI6cBg3eg== 0000893220-99-000407.txt : 19990402 0000893220-99-000407.hdr.sgml : 19990402 ACCESSION NUMBER: 0000893220-99-000407 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUBMICRON SYSTEMS CORP CENTRAL INDEX KEY: 0000877210 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 133607944 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19507 FILM NUMBER: 99583131 BUSINESS ADDRESS: STREET 1: 6330 HEDGEWOOD DRIVE NO 150 CITY: ALLENTOWN STATE: PA ZIP: 18106 BUSINESS PHONE: 2153919200 MAIL ADDRESS: STREET 1: 6330 HEDGEWOOD DRIVE #150 CITY: ALLENTOWN STATE: PA ZIP: 18106 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY CAPITAL ENTERPRISE CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY INVESTMENT CORP /DE DATE OF NAME CHANGE: 19600201 10-K 1 FORM 10-K SUBMICRON SYSTEMS CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998. [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________to__________ . Commission file number 0-19507 SubMicron Systems Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3607944 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6330 Hedgewood Dr., #150, Allentown, PA 18106 18106 - --------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 391-9200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [X] Based on the closing sale price of March 25, 1999, the aggregate market value of the voting stock held by non affiliates of the Registrant was $5,928,794. The number of shares outstanding of the Registrant's Common Stock was 19,888,207 at March 25, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part III - Portions of the Registrant's definitive Proxy Statement with respect to the Registrant's 1999 Annual Meeting of Stockholders, to be filed no later than 120 days after the end of the Registrant's fiscal year. 1 2 PART I ITEM 1. BUSINESS General SubMicron Systems Corporation (the "Company" or "SMS") designs, manufactures and markets advanced wet surface preparation and cleaning equipment used in the manufacture of microelectronic devices such as semiconductors, integrated circuits (IC's), and also for the production of raw silicon wafers on which such devices are manufactured. The automated products utilize a robotic handling system and complex software to carry out numerous, precisely controlled cleaning, etching, and stripping operations required throughout the microelectronic and raw silicon fabrication process. The product line also includes manual and semi-automated systems. The utilization of these products has extended beyond the semiconductor sector to include such applications as circuit boards, parts cleaning, plating systems, and substrate cleaning of electronic memory devices such as computer disk drives. In recent years, some of these systems have been used for more sophisticated applications in the research and development environment, pilot line applications, and lower volume IC manufacturing. During 1997, to refocus the Company to its core business, wet wafer surface preparation, SMS sold substantially all of the net assets of two of its subsidiaries, Systems Chemistry Incorporation (SCI), manufacturer of chemical distribution systems, and Imtec Acculine, Inc. (Imtec), a manufacturer of temperature regulated baths and megasonic systems. Also during 1997, the Company licensed its PRIMAXX(TM) technology in a specific field of use. In the fourth quarter of 1998 and consistent with the previously-announced plan to divest of non-core business units, the Company sold certain net assets of its PRIMAXX(TM) operations, which manufactured tools for dry single-wafer processing. Industry Background The need for new processes and systems capable of manufacturing silicon wafers and high performance electronic devices with increasingly complex circuits has increased the demand for new semiconductor production equipment. Since 1980, the semiconductor industry has met the growing demand for more advanced Dynamic Random Access Memory (DRAM) by providing integrated circuits with smaller circuit designs and increased memory capacity. With the successive development of the 64KB, 256KB, 1MB, 4MB, 16MB and 64MB DRAMs, feature sizes of the circuits have declined from a size greater than 2.0 microns to 0.2 micron for a 16MB DRAM. At the same time, the size of the wafers has increased from six inches (150mm) in diameter to eight inches (200mm) in diameter. Volume production of 300mm wafers is expected to begin after 2001. Wafer and Semiconductor Device Fabrication The basic component in the manufacture of semiconductor devices is a thin, circular crystalline wafer, typically 150mm to 200mm in diameter, composed of silicon. Production occurs in a controlled environment known as a "clean room" which is a manufacturing facility separated from the outside environment and employing specialized filters to reduce the number of particulates in the air within the facility. During the fabrication process, several layers of conductive or dielectric materials are sequentially grown or deposited on the wafer surface through a series of thermal or chemical procedures. Each layer undergoes a series of processes to etch and strip away a portion of the layer, leaving the desired integrated circuit pattern. The wafers are ultimately separated into individual integrated circuits or discrete components and are then packaged, assembled and tested. The number of process steps involved in the manufacture of DRAMs has increased from approximately 60 for the 64KB (64 thousand bits) circuit to over 300 for the 64MB (64 million bits) circuit. A critical part of the fabrication process is the cleaning of the wafers to remove particles, oxides and metal contamination which, if not removed, can render a circuit inoperable, particularly if the size of the contaminant particle is larger than the geometry of the integrated circuitry. As the circuits on DRAMs have become smaller, the tolerance levels for contaminants on the wafer surface have declined in order to maintain commercially acceptable yields. Following are brief descriptions of the major operations in the manufacture of ICs. Cleaning. The wafer surface must be cleaned and prepared in order to begin the IC fabrication. As the integrated circuits' geometry becomes smaller and more complex, the reduction of organic, metal and particle contamination of the wafer becomes a critical factor in wafer processing. Specific contaminants are organic, oxide films and metals. These contaminants can destroy individual circuits and must be removed prior to the growth or deposit of 2 3 subsequent layers on the wafer. Contamination removal is also required prior to high-temperature operations so that the contamination is not diffused into the wafer during such operations. The wafer must also be cleaned at various other stages in the fabrication process to remove contaminants and particulates. Cleaning is generally performed by exposing the wafer to a sequence of liquid chemical baths or gas vapors. As many as 60 of the 300 process steps involved in manufacturing an advanced IC take place in a wet station. In addition to contamination from particles left over from the various steps in the fabrication process, such as etching or stripping, contaminants may also be introduced from the equipment and chemicals utilized in the manufacturing process. Layering. After initial cleaning and wafer surface preparation, a thin film of either conductive or dielectric material is grown or deposited on the wafer surface. Depending upon its particular electrical properties, a layer functions as an insulator, semiconductor or conductor. Photolithography. After the film layer is deposited on the wafer, it is covered with photoresist, a light sensitive material. Integrated circuit patterns are then projected onto the photoresist by exposing it to an energy source. Chemical changes occur in the portion of the photoresist exposed to the energy source. These changes result in a transfer of the image of the desired circuit onto the wafer. Etching. After a circuit pattern has been imprinted, the image on the film is developed, which creates precisely defined areas of protected and unprotected photoresist. The next step in the fabrication process is etching, which involves removal of the unprotected areas of the patterned film, leaving behind the desired circuit pattern. The etching can be accomplished with either a wet chemistry process, using liquid chemicals, or a dry chemistry (typically plasma) process, using chemical gases. The circuit is then electrically charged through the diffusion or implantation of ions. Stripping. After the surface has been electrically charged, the remaining areas of photoresist are stripped off the wafer with either a wet chemistry or a dry chemistry process. The above operations are repeated numerous times during the fabrication process with the number of repetitions depending upon the type and complexity of the semiconductor device. A finished integrated circuit consists of a number of film layers which together form thousands of extremely small electronic components that combine to perform the desired electrical functions. Each step in the fabrication process requires precision and must be rigorously controlled to attain commercially acceptable yields and cost performance. SMS Products The following are brief descriptions of the Company's wet surface preparation and cleaning products: Automated Wet Stations. An automatic wet station consists of an interconnected series of chemical processing modules, each programmed to apply specific chemicals, gases or vapors to the wafer surface in order to remove particles and other contaminants, to etch deposited layers or to strip photoresist from the wafer. Wafers are processed in the wet station primarily by immersing the wafers in a chemical bath or by placing the wafers into a vapor chamber. Other modules in a system are used to rinse and dry the wafers. A robotic arm transports the wafers from module to module. The robot and specific chemical or vapor used with each module, including the chemical or vapor concentration and temperature, are controlled by a computer and customized software included with each system. SMS's systems are designed to minimize the level of contaminants introduced into the fabrication process by reducing both the contamination level of its components and the chemicals used in its systems as well as the degree of operator interaction necessary for operation. Each system is based on a standardized modular design which is intended to permit reconfiguration of the system to meet particular customer needs and specifications. The modular design also provides certain flexibility in reconfiguring or expanding the system as integrated circuits become more complex and processing requirements change. GAMA-98(TM). This product is an advanced product platform involving fully automated acid/solvent wet stations used in cleaning, etching and stripping of both bare silicon and patterned wafers. It targets the high-end integrated circuit and raw silicon final clean market segments and offers a high level of process flexibility. Rear-Mount. The rear-mount product is a more mature product that provides automated cleaning, etching and stripping capabilities providing a less expensive alternative to the GAMA product line. 3 4 Semi-Automatic and Manual. The semi-automatic and manual wet systems also are used for the cleaning, etching and stripping of semiconductor wafers and other electronic substrates. These systems focus on a low volume segment of the market that values lower price, smaller footprint and simplicity of operation. SMS's wet surface preparation systems incorporate the following components and features, many of which are sold separately as additions to, or replacements for, existing systems. The current silicon wafer and semiconductor markets continue to search for unique product solutions as provided by the Company's technologies, such as DIO3(TM) and the In-Situ Chemical Efficiency System (ICE-1(TM)), which are described below. DIO3. This technology eliminates the use of liquid sulfuric acid from the photoresist and organic wet surface cleaning steps, replacing the sulfuric acid with more "environmentally friendly" dionized water and ozone. The Company believes DIO3 technology outperforms technology currently available in the industry. This technology also enables systems to occupy less space, results in less water consumption and reduces hazardous waste disposal costs. The In-Situ Chemical Efficiency System (ICE-1.) This patented process is used in the regulation of chemical concentration within a bath. The proper chemical mixture within the bath is critical in order to maintain consistent processing. The mixture is adjusted by the addition of a specific amount of solution to bring the bath back into compliance within the required tolerances. The use of this technology reduces overall chemical consumption by enhancing the life of the bath thereby reducing the need for full bath chemical replacement. Megasonic Cleaning System (Phaser). SMS's high frequency/high power energy cleaning system (the "TurboPhaser") uses high frequency energy waves to remove particle contamination from a batch of wafers immersed in a chemical bath. This process, also known as megasonic cleaning, is designed to assist in the removal of contaminants from the wafer surface which generally cannot be removed by standard spray wafer processing. The TurboPhaser is operated by an electronic controller and possesses transducer assemblies capable of operating (from a single power supply) at a frequency range of 1.0 Mhz to 1.1 Mhz and emitting over 800 watts. There are patent applications pending for portions of the megasonic cleaning system. In 1999, the Phaser design is expected to be enhanced to increase energy transmission and reduce material costs. This new design is called the Direct Coupled (DC) Megasonic. Research and Development The market for semiconductor manufacturing equipment is characterized by technological change and product innovation. SMS believes that continued and timely technological advances in products and enhancements to existing products are necessary to enhance its competitive position within the industry as well as its financial performance. Accordingly, SMS is committed to active research and development programs and regularly consults with customers, industry groups and academic institutions to determine the changing needs of the industry. However, spending in this area has been negatively impacted by the Company's financial condition. The Company's research and development programs are primarily focused on devising methods for producing cleaner wafer surfaces required for smaller geometry integrated circuits, increasing process control and flexibility through monitoring and software management systems, and further developing robotic automation in the clean room for single wafer processing. SMS believes that evolving technological challenges in the manufacturing process of advanced semiconductor devices present significant opportunities and challenges. SMS implemented a program, beginning in 1997, called Product And Cycle-time Excellence (PACE), which is aimed at achieving: - Reduced cycle-time from concept initiation through stability of new products in the field - Improved quality and reliability for new and existing products - Improved manufacturability and serviceability of products - Improved mix of features and functions, thereby better meeting customer needs PACE is a clearly defined process framework based on the industry's best practices. The PACE implementation consists of the following: - Cross-function decision making and portfolio ownership by a senior management team (known as the Product Approval Committee). - Development projects driven by cross-functional teams to ensure rapid execution as well as ownership and accountability for product success. - Phase Reviews to ensure that decisions on new product development are made in a fact-based and 4 5 consistent manner, and that the resources of the Company are aligned with the best opportunities. - A structured development process to maximize best practices and commonality across development projects, and to ensure the correct level of project management discipline. SMS maintains a 2,600 square-foot Class 1 Applications Laboratory in a portion of its Allentown facility. The Applications Lab provides the Company's customers with the ability to process their wafers on the Company's equipment. The equipment in the Applications Lab includes two GAMA-1 systems and an advanced platform Alpha tool. The Applications Lab also contains equipment for analysis of process performance data on the quality of the Company's equipment. This capability includes defect analysis for particles and ionics as well as oxide uniformity analysis. The Applications Lab also provides a test facility for the Company's future products. Marketing, Sales and Service SMS markets and sells its products through a combination of a direct sales force and manufacturer's representatives for markets in both new fabrication lines and as replacement systems or components for existing fabrication lines. Potential customers for SMS's products include advanced semiconductor manufacturers in primarily three principal markets: the United States, Europe and Asia. In 1998, 75%, 15% and 10% of the Company's net sales were to major semiconductor chip manufacturers in the United States, Europe and Asia, respectively. The Company has experienced and expects to continue experiencing variations in its customer mix. The timing of an order for SMS's products is primarily dependent upon a customer's expansion program, replacement needs or requirements to improve semiconductor device fabrication productivity and yields. Consequently, a customer that places significant orders in one year may not necessarily place significant orders in subsequent years. Due to the substantial operational and financial commitments customers make when they purchase a system, the Company believes that its ability to provide prompt and effective field support is critical to its marketing efforts. SMS employs technical staff to assist and train its customers in performing preventative maintenance and to service the Company's equipment. For the majority of its orders, the Company provides full-time technical support, parts, and maintenance for the first year. After the first year, SMS offers maintenance contracts whereby one or more employees of the Company will work full-time at the customer's facility and provide service, maintenance and training for the customer's personnel on a fee basis. Manufacturing and Assembly SMS conducts a performance and cost analysis of each component of its products and manufactures only those component parts for which it believes there is a functional, quality or major cost advantage. Other components are purchased from third-party vendors. Many of these purchased items are standard products, although certain parts are made to SMS's specifications. Accordingly, the Company's manufacturing activities consist primarily of assembling and testing components and subassemblies, and integrating them into a finished system. SMS believes that this method allows it to achieve relatively flexible manufacturing capacity, while lowering overhead expenses. SMS assembles its fully automated wet systems in a Class 10 clean room environment which is similar to the clean rooms used by many semiconductor manufacturers for wafer fabrication. This procedure is intended to reduce the amount of particulate and other contaminants in its system, thereby improving yield for its customers. Following assembly, the completed system is packaged in a clean room environment to maintain clean room standards prior to shipment. The Company attempts to maintain minimal inventory and to order component part supplies only as needed to manufacture a system for which a purchase order has been received. This approach subjects the Company to the risk that a component part or supply will be unavailable. SMS has attempted to reduce this risk by maintaining multiple approved vendors of component parts and supplies necessary for the manufacture of its systems and attempting to forecast requirements. The Company has experienced some delay in the manufacture of its products caused by the inability to obtain component parts or supplies stemming from the Company's financial condition. Competition The semiconductor equipment manufacturing industry is highly competitive. The principal competitive factors in the industry are the quality, performance, reliability, price and operating cost of the processing equipment. There can be no assurance that levels of competition in SMS's particular product markets will not intensify or that the Company's technological advantages may not be reduced or lost as a result of technological or other advantages by competitors or 5 6 changes in semiconductor processing technology. Many of the Company's competitors have greater financial and other resources than SMS. The primary competition to SMS's automated wet station equipment is from the following companies: DaiNippon Screen Manufacturing Co., Ltd., S.E.S. Ltd. and Tokyo Electron, Ltd., all based in Japan; Steag Microtech, a Germany based company, and SCP Global Technologies and CFM Technologies, Inc., U.S. companies. In addition, SMS faces competition from a number of domestic companies which supply manual wet stations at prices significantly lower than the prices of the Company's automated systems. Protection of Technology The Company holds eleven United States patents, has three allowed United States patent applications and has several patent applications pending in the United States covering various features of its products and products under development. SMS currently has six patents and seven patent applications pending outside of the United States. SMS believes that the protection of its proprietary technologies and products is important and it protects its proprietary information through non-disclosure agreements with its customers, suppliers and key employees. ITEM 2. PROPERTIES SMS's principal design and manufacturing facilities occupy approximately 39,000 square feet of a building in Allentown, Pennsylvania and 26,340 square feet of a building in Santa Clara, California. The current monthly rentals, including expenses are approximately $32,000 and $20,000, respectively. The lease for the Allentown facility expires in 2000. The lease for the California facility expires in November 2005. ITEM 3. LEGAL PROCEEDINGS The Company is subject to lawsuits arising, from time to time, in the ordinary course of business. In the opinion of management, the ultimate resolutions of such matters will not have a material impact on the Company's financial position, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. ITEM A. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Positions with the Company - ---- --- -------------------------- David J. Ferran 42 Chairman of the Board, President and Chief Executive Officer Robert P. Tetu 47 Vice President and Chief Operating Officer John W. Kizer 57 Vice President Finance and Chief Financial Officer James S. Molinaro 36 Vice President Marketing and European Sales Richard E. Novak 53 Sr. Vice President Advanced Technology and Chief Technical Officer Mr. Ferran became President, Chief Executive Officer and a director of the Company in May 1997. Prior thereto, Mr. Ferran served as President and Chief Executive Officer of Tylan General Corporation and its predecessor from 1984 as well as being Chairman of the Board of Directors from February 1994 until February 1997, when Tylan General was acquired by Millipore Corp. Mr. Ferran has a B.S. in Business Administration from the University of New Hampshire. Mr. Tetu has been Chief Operating Officer since February 1999. From July 1998 to January 1999, he served as Vice President of Operations of the Company. From August 1997 to June 1998, he served as Vice President of Engineering of the Company. From 1996 to July 1997, he served as Vice President of Product Operations of Rodel, Inc., a supplier of consumables to the semiconductor industry located in Newark, Delaware. Prior to that, he served as a Business Unit Manager for Avery Dennison, an office supply manufacturer located in Cincinnati, Ohio. Mr. Tetu holds a BSChE degree from the University of New Hampshire. Mr. Kizer has been Vice President Finance and Chief Financial Officer of the Company since July 1997, and served as a consultant to the Company from May 1997 until assuming such position. From June 1996 to May 1997 he was a Vice President and Corporate Controller of Tylan General Corporation. Prior to joining Tylan General, Mr. Kizer served as Vice President, Finance and Chief Financial Officer for Robertshaw Controls Company and also held financial management positions at Trustcorp Bank Ohio and Champion Spark Plug Company. He has over 25 years' experience in senior financial management positions. Mr. Kizer holds a B.B.A. degree from the University of Toledo and is a Certified Public Accountant. Mr. Molinaro has over 14 years of experience in senior engineering positions. He has a B.S. degree in Mechanical Engineering/Robotics from Pennsylvania State University. He has also completed the "Executive Development Program" at the Wharton School of Business at the University of Pennsylvania. Mr. Molinaro served on the SMS Board of Directors from 1989 to 1997 and held various positions in the Company, including President and COO. Mr. Molinaro is an original founder of the Company and currently holds the position of Vice President, Technical Planning and Data Analysis. Dr. Novak has been with the Company since 1991 and has helped expand SMS's product line. Dr. Novak earned his Ph.D. in ceramic engineering from the University of Illinois. Previous work experience includes Honeywell, RCA, FSI International and he was instrumental in basic research concerning the use of Gallium-Arsenide in the manufacturing of integrated circuits. 6 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until April 17, 1998, the Company's Common Stock was traded on the Nasdaq National Market under the symbol "SUBM." After that date, the Common Stock has traded and is currently traded on the Over-the-Counter Bulletin Board under the same symbol "SUBM." The following table sets forth for the periods indicated the closing price range of the Common stock.
Common Stock Quarter Ended High Low - ------------- ---- --- March 31, 1997 $5-1/4 $3-1/16 June 30, 1997 3-1/2 2-5/16 September 30, 1997 4-5/8 2-11/16 December 31, 1997 4-1/16 2-1/16 March 31, 1998 2-9/16 1-3/8 June 30, 1998 1-13/16 3/4 September 30, 1998 1-1/8 5/16 December 31, 1998 57/64 1/8
In December 1998, the Company issued $4.5 million of Series B 12% Senior Subordinated Notes due February 1, 2002 ("Series B Senior Subordinated Notes") with associated warrants to purchase 22,500,000 shares of the Company's Common Stock at prices ranging from $.36 - $.52 per share, subject to customary adjustment for changes in capitalization and below market issuances. The Company used the net proceeds to fund operations. Interest due on Series B Senior Subordinated Notes through September 30, 1999 will be converted into interest units, each unit consisting of a Series B Senior Subordinated Note in a principal amount equal to the amount of interest otherwise payable in cash on such interest payment date and warrants to purchase 720 shares of Common Stock for each $1,000 principal amount of Series B Senior Subordinated Notes then issued (pro rated when not in multiples of $1,000). Beginning October 1, 1999, interest is payable in cash. The exercise price for such warrants will be 110% of the price of the Common Stock on the respective dates of issuance. Interest on the Company's 12% Senior Subordinated Notes through October 1, 1999 which was required to be paid in cash may, at the Company's option, be paid in interest units. Additionally, certain holders of the Company's 8% Convertible Subordinated Notes will receive interest units in lieu of cash interest through September 30, 1999. The issuance of the Series B Senior Subordinated Notes was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. At March 25, 1999, there were 10,521 record holders of the Company's Common Stock. The Company has not paid any dividends on its Common stock. The Company does not anticipate paying dividends on its Common stock in the foreseeable future, and its banking and long term debt agreements restrict the Company's ability to pay dividends. 7 8 ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands, except per share data)
Year Ended December 31, ---------------------------------------------------------------------------- 1998(1) 1997(2) 1996 1995(3) 1994(3) --------- --------- --------- --------- --------- Statement of Operations Data: Net sales $ 42,205 $ 97,895 $ 171,484 $ 123,068 $ 86,119 Cost of sales 38,697 90,551 142,748 84,352 57,882 --------- --------- --------- --------- --------- Gross profit 3,508 7,344 28,736 38,716 28,237 Selling, general and administrative 15,092 32,230 41,337 29,109 21,465 Research and development 7,849 9,225 9,373 5,678 3,357 Restructuring charges 5,086 5,639 -- -- -- --------- --------- --------- --------- --------- Operating (loss) income (24,519) (39,750) (21,974) 3,929 3,415 Other (expense) income, net (4,612) (1,154) (4,701) 1,258 72 --------- --------- --------- --------- --------- (Loss) income before income taxes and extraordinary charge (29,131) (40,904) (26,675) 5,187 3,487 Income tax expense (benefit) -- 5,480 (6,566) 1,498 1,454 --------- --------- --------- --------- --------- (Loss) income before extraordinary charge (29,131) (46,384) (20,109) 3,689 2,033 Extraordinary charge -- (1,169) -- -- -- --------- --------- --------- --------- --------- Net (loss) income $ (29,131) $ (47,553) $ (20,109) $ 3,689 $ 2,033 ========= ========= ========= ========= ========= Basic (loss) income per Common share $ (1.51) $ (2.77) $ (1.20) $ 0.23 $ 0.13 ========= ========= ========= ========= ========= Diluted (loss) income per Common share $ (1.51) $ (2.77) $ (1.20) $ 0.19 $ 0.12 ========= ========= ========= ========= =========
December 31, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- BALANCE SHEET DATA Total assets $ 30,737 $ 59,708 $124,754 $119,948 $ 59,992 Long-term debt $ 35,187 $ 31,023 $ 24,015 $ 18,909 $ 2,390 Working capital (deficit) $ (4,238) $ 9,025 $ 25,618 $ 47,100 $ 24,178 Stockholders' (deficit) equity $(29,112) $ (2,590) $ 28,676 $ 46,023 $ 31,808
(1) In October 1998, the Company sold substantially all of the net assets of PRIMAXX(TM) Corporation. As such, results of operations for the year ended 1998 reflect the operations of PRIMAXX(TM) through October 14, 1998. (2) In August and December 1997, the Company sold substantially all of the net assets of its Systems Chemistry and its Imtec Acculine subsidiaries, respectively. As such, results of operations for the year ended 1997 reflect the results of operations of Systems Chemistry through August 8, 1997 and results of operations of Imtec through December 31, 1997. (3) In February 1995, the Company acquired all of the outstanding stock of Systems Chemistry in exchange for 3,400,000 shares of Common Stock. In March 1996, the Company acquired all of the outstanding common stock of Imtec in exchange for 575,000 shares of Common Stock. Each transaction was accounted for as a pooling of interests and, accordingly, historical financial data has been restated to include Systems Chemistry and Imtec. 8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Systems sales consist of new systems and product enhancements and are recognized at the time of shipment. Other sales consists of spare parts, service contracts and construction services. Sales of spare parts and service contracts are recognized when the parts are shipped or when the service has been performed. Construction services sales, which were performed solely by Systems Chemistry, were recognized when the services were completed using a method similar to percentage-of-completion. With the sale of the operations of Systems Chemistry in 1997, there were no construction service revenues in 1998. Cost of systems sales consists of materials, labor and related expenses associated with the production process. Cost of other sales consists primarily of spare parts material costs and labor, and related expenses associated with service contracts. In 1997 and 1996, cost of other sales also included construction costs. In March 1996, the Company acquired all of the outstanding stock of Imtec in exchange for 575,000 shares of Common Stock. The transaction was accounted for as a pooling of interests, and, accordingly, the 1996 financial data was restated. To concentrate on its core business, wet wafer surface preparation, the Company sold substantially all of the net assets of its PRIMAXX(TM) operations, Systems Chemistry and Imtec Acculine subsidiaries in October 1998 and August and December 1997, respectively. As such, results of operations for 1998 reflect the operations of PRIMAXX(TM) through October 14, 1998, results for the year ended 1997 reflect the results of operations of Systems Chemistry through August 8, 1997 and results of operations of Imtec for the entire year. The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's consolidated statements of operations.
PERCENTAGE OF NET SALES YEAR ENDED DECEMBER 31, 1998 1997 1996 ------ ------ ------ Total net sales 100.0% 100.0% 100.0% Total cost of sales 91.7 92.5 83.2 ------ ------ ------ Gross Profit 8.3 7.5 16.8 Operating Expenses: Selling, general and administrative expenses 35.8 32.9 24.1 Research and development expenses 18.6 9.4 5.5 Restructuring charges 12.0 5.8 -- ------ ------ ------ Total operating expenses 66.4 48.1 29.6 ------ ------ ------ Operating loss (58.1) (40.6) (12.8) Interest expense (16.1) (5.0) (3.1) Other income (expense), net 5.2 3.8 .4 ------ ------ ------ Loss before income taxes and extraordinary charge (69.0) (41.8) (15.5) Income tax expense (benefit) -- 5.6 (3.8) ------ ------ ------ Loss before extraordinary charge (69.0) (47.4) (11.7) Extraordinary charge -- (1.2) -- ------ ------ ------ Net loss (69.0)% (48.6)% (11.7)% ====== ====== ======
9 10 RESULTS OF OPERATIONS Year ended December 31, 1998 compared to the year ended December 31, 1997 Net sales for 1998 were $42.2 million, a decrease of $55.7 million, or 57%, from $97.9 million of net sales for 1997. System sales in 1998 were $35.7 million as compared to $71.8 million for 1997, a decrease of 50.3%. Other sales were $6.5 million for 1998, a decrease of $19.6 million, or 75.1%, as compared to $26.1 million for 1997. The decrease in sales is primarily attributable to three factors. First, sales for 1997 include sales of Systems Chemistry through August 7, 1997 and Imtec through December 31, 1997. Second, the slowdown in the semiconductor equipment industry has decreased orders throughout 1998. Third, the Company has experienced performance problems with several of its systems in the field which has delayed repeat orders from several of its key accounts. These performance problems, through a concerted effort, were substantially corrected in 1998. In 1998, 75%, 15% and 10% of the Company's net sales were to major chip manufacturers in the United States, Asia and Europe, respectively. In 1997, 57%, 32% and 11% of the Company's net sales were to major chip manufacturers in the United States, Asia and Europe, respectively. The economic crisis in Asia negatively impacted the Company's sales in 1998. Cost of sales for 1998 was $38.7 million, or 91.7% of sales, versus $90.6 million, or 92.5% of sales, for 1997. Included in 1998 cost of sales were $4.2 million of charges associated with increases in reserves for inventory, and included in 1997 cost of sales were $11.2 million of charges associated with increases in reserves for inventory and warranty. Excluding the 1998 and 1997 charges of $4.2 million and $11.2 million, cost of sales, as a percentage of sales, for 1998 and 1997 would have been 81.7% and 81.5%, respectively. Selling, general and administrative expenses were $15.1 million, or 35.8% of sales for 1998, compared to $32.2 million, or 32.9% of sales for 1997. The reduction of expenses was primarily due to seven months less Systems Chemistry activity, twelve months less of Imtec activity, cost reduction programs and decreased commissions due to lower net sales. Research and development expenses were $7.8 million, or 18.6% of sales, for 1998, versus $9.2 million, or 9.4% of sales, for the comparable prior year period. These expenses consist of costs associated with process support for systems in the field, cost of enhancing existing products and the cost of new product development. Results for 1998 and 1997 include restructuring charges of $5.1 million and $5.6 million, respectively, related to the reorganization of the Company, consisting primarily of severance, lease termination, and asset disposal costs. Interest expense in 1998 was $6.8 million as compared to $4.9 million in 1997. The increase in interest expense is a result of the increased average outstanding borrowings during the year. Other income, net including interest income was $2.2 million in 1998 as compared to $3.7 million in 1997. Other income, net for 1998 consists primarily of the gain of approximately $1.5 million recognized on the sale of certain net assets of PRIMAXX(TM) operations and a post-closing negotiated adjustment of the purchase price of $500,000 from the 1997 sale of certain net assets of Systems Chemistry and interest income on the Company's short term investments. Other income, net for 1997 consists primarily of the gains recognized on the sale of the net assets of Systems Chemistry and the PRIMAXX(TM) license. In 1998, the tax benefit related to the Company's net operating loss carryforward was offset by the recording of a full valuation allowance. Income tax expense of $5.5 million was recognized in 1997. The 1997 expense related to a non-cash charge to increase the Company's valuation allowance for net deferred tax assets. Such allowance will be available to offset future income tax expense when it becomes more likely than not that such deferred assets will be realized. Results for 1997 include an extraordinary loss for debt extinguishment of $1.2 million primarily related to the write-off of the original issue discount and unamortized debt issuance costs related to the Company's 9% convertible subordinated notes that were issued to the holders of the Company's 8% convertible subordinated notes and series A convertible non-redeemable preferred stock. 10 11 Year ended December 31, 1997 compared to the year ended December 31, 1996 Net sales for 1997 were $97.9 million, a decrease of $73.6 million, or 43%, from $171.5 million of net sales for 1996. System sales in 1997 were $71.8 million as compared to $140.8 million for 1996, a decrease of 49.0%. Other sales were $26.1 million for 1997, a decrease of $4.6 million, or 14.9%, as compared to $30.7 million for 1996. The decrease in sales is primarily attributable to three factors. First, sales for the entire year 1997 include sales of Systems Chemistry through August 7, 1997 while 1996 sales include sales of Systems Chemistry for the entire year. Second, the Company had experienced performance problems with several of its systems in the field which has delayed repeat orders from several of its key accounts. Third, the slowdown in the semiconductor equipment industry decreased orders during the second half of 1997. In 1997, 57%, 32% and 11% of the Company's net sales were to major chip manufacturers in the United States, Asia and Europe, respectively. In 1996, 70%, 17% and 13% of the Company's net sales were to major chip manufacturers in the United States, Asia and Europe, respectively. The economic crisis in Asia did not materially impact the Company's sales in 1997. Cost of sales for 1997 was $90.6 million, or 92.5% of sales, versus $142.7 million, or 83.2% of sales, for 1996. Included in 1997 cost of sales were $11.2 million of charges associated with increases in reserves for inventory and warranty. The increase in cost of sales as a percentage of sales is primarily attributable to decreased sales volumes, increases in reserves as previously mentioned and the under-absorption of labor due to the slowdown in equipment shipments. Included in 1996 cost of sales were charges of approximately $11.0 million to write-off certain inventory and increase the Company's inventory and warranty reserves. Excluding these 1997 charges of $11.2 million and 1996 charges of $11.0 million, cost of sales, as a percentage of sales, for 1997 and 1996 would have been 81.5% and 76.8%, respectively. Selling, general and administrative expenses were $32.2 million, or 32.9% of sales for 1997, compared to $41.3 million, or 24.1% of sales for 1996. The reduction of expenses was primarily due to five months less Systems Chemistry activity, cost reduction programs and decreased commissions due to lower net sales. Research and development expenses were $9.2 million, or 9.4% of sales, for 1997, versus $9.4 million, or 5.5% of sales, for the comparable prior year period. These expenses consist of costs associated with process support for systems in the field, cost of enhancing existing products and the cost of new product development. Research and development spending remained at 1996 levels despite the Company's significant decrease in sales. Results for 1997 include restructuring charges of $5.6 million related to the reorganization of the Company, consisting primarily of severance costs and lease termination costs. Interest expense in 1997 was $4.9 million as compared to $5.2 million in 1996. The decrease in interest expense is attributable to the conversion to equity of certain interest bearing notes in March 1997. Other income, net including interest income was $3.7 million in 1997 as compared to $543,000 in 1996. Other income, net for 1997 consists primarily of the gains on the sale of the net assets of Systems Chemistry and the PRIMAXX(TM) license and interest income on the Company's short term investments. Other expense in 1996 consisted primarily of interest on the Company's borrowings and capital lease obligations. Income tax expense was $5.5 million for 1997 related to a non-cash charge to increase the Company's valuation allowance for net deferred tax assets. Such allowance will be available to offset future income tax expense when it becomes more likely than not that such deferred assets will be realized. Results for 1997 include an extraordinary loss for debt extinguishment of $1.2 million primarily related to the write-off of the original issue discount and unamortized debt issuance costs related to the Company's 9% convertible subordinated notes that were exchanged for 8% convertible subordinated notes and series A convertible non-redeemable preferred stock. 11 12 LIQUIDITY AND CAPITAL RESOURCES In 1998 cash and cash equivalents decreased $6.2 million to $2.0 million at December 31, 1998 from $8.2 million at December 31, 1997. For the years ended December 31, 1998, 1997 and 1996, SMS's operations used cash of $13.6 million, $7.0 million and $21.3 million, respectively. Cash used in operating activities during 1998 was primarily the result of the $29.1 million loss incurred during 1998 offset by decreases in accounts receivable and inventory totaling $11.7 million. Cash used in operating activities during 1997 was primarily the result of the $47.6 million loss incurred during 1997 offset by a decrease in accounts receivable and inventory totaling $23.7 million. Operating activities in 1996 used cash of $21.3 million primarily to fund the Company's $20.1 million loss. Investing activities in 1998 and 1997 generated cash of approximately $2.0 million and $14.0 million primarily related to proceeds received from the sale of substantially all of the net assets of its PRIMAXX(TM) operation and Systems Chemistry respectively. Investing activities utilized cash of $6.9 million in 1996, primarily due to the purchase of equipment to increase production capacity. Financing activities provided cash of $5.3 million in 1998, utilized $4.3 million of cash in 1997 and provided cash of $17.6 million in 1996. Financing activities in 1998 include proceeds of $4.5 million from a private placement of securities and an increase in the borrowings under the Company's credit facility. At December 31, 1998, no additional availability existed under the credit facility. Financing activities in 1997 include proceeds of $20.0 million from a private placement of securities and a $5 million note relating to the sale of Systems Chemistry's net assets. In 1997, the Company repaid $28.1 million of borrowings on its line of credit and established a new credit facility with availability, depending upon levels of eligible accounts receivable and inventory, of up to $15 million. Financing activities in 1996 provided $17.6 million primarily from borrowing on the Company's line of credit, proceeds from a sale-leaseback transaction and exercises of options and warrants. Working capital decreased $13.2 million to a working capital deficit of $4.2 million as of December 31, 1998, from working capital of $9.0 million as of December 31, 1997. The decrease is due to the lower volume of business coupled with the slowdown in the semiconductor industry. In December 1998, the Company issued $4.5 million principal amount of Series B 12% Senior Subordinated Notes due February 1, 2002 (Series B Senior Subordinated Notes) with associated warrants to purchase 22,500,000 shares of the Company's Common stock at prices ranging from $.36 to $.52 per share, subject to customary adjustment for changes in the capitalization and below market issuances. In October 1998, the Company sold substantially all of the net assets of its PRIMAXX(TM) operation for $2.1 million. The Company retained the rights to future royalty payments based on the number of units sold. As of August 1, 1998, the Company began issuing Series B Senior Subordinated Notes in lieu of the specified cash interest payments on certain of its outstanding 12% and 8% notes. All such notes issued have attached 720 warrants for each $1,000 principal amount of notes. Series B Senior Subordinated Notes in the principal amount of approximately $911,000 with warrants to purchase 655,574 shares of Common Stock at prices ranging from $.36 to $.52 per share, were issued in 1998. Beginning October 1, 1999, interest becomes payable only in cash. Subsequent to year end and through March 31, 1999, the Company issued $1,250,000 of Series 1999 12% Senior Subordinated Convertible Notes due February 1, 2002. These notes are convertible at the holder's option into approximately 2.4 million shares of Common Stock at a conversion rate equal to 110% of the Company's Common Stock closing market value on the date of issuance of the note, subject to customary adjustment for changes in the capitalization and below market issuances. In December 1997, the Company sold substantially all of the assets of its Imtec Acculine subsidiary in exchange for a note of $1.5 million payable through December 2004. Interest is payable semiannually on June 30 and December 31 at the lesser of 10% or the rate then paid by the Company to its principal secured lender (10.0% at December 31, 1998). In November 1997, the Company completed a private placement of securities consisting of $20 million principal amount of 12% Senior Subordinated Notes due February 1, 2002 (Senior Subordinated Notes), with associated warrants to purchase 6,616,367 shares of the Company's Common Stock at $2.25 per share, subject to customary adjustment for changes in the capitalization and below market issuances. The Company used the net proceeds to repay its bank debt, fund operations and fund its restructuring activities. The Company was not in compliance with certain covenants under the Senior Subordinated Notes at December 31, 1998, due to no longer meeting the requirement for listing by NASDAQ and not meeting certain minimum financial requirements. Additionally, the Company, based on its current projections, anticipates that it will not be in 12 13 compliance with certain financial requirements under the Senior Subordinated Notes during 1999. The Company, however, has obtained waivers from the noteholders for the existing and expected covenant violations through January 1, 2000. In 1998, the Company exercised its option with the noteholders to issue additional Senior Subordinated Notes in lieu of cash interest payments for 50% of the interest due in 1998. As such, additional notes in the principal amount of $1,241,000, bearing interest at the stated 12% were issued in 1998. Beginning October 1, 1999, interest becomes payable only in cash. In November 1998, the Company renewed its credit facility with Greyrock Capital, a division of Nations Credit Commercial Corporation (Greyrock). As part of the renewal, the facility was extended through January 1, 2000 and reduced from $15 million to $10 million. Borrowings under this facility bear interest at "LIBOR" plus 5.375% (11.0038% at December 31, 1998) and are secured by the Company's assets. The facility contains a borrowing base related to the Company's eligible receivables and inventory. Periodically, such borrowing base has been insufficient to fund the Company's cash needs, principally due to the long lead time required to manufacture many of the Company's products and relatively small additional funding availability created by work in process inventory. Borrowings under the credit facility were $4.8 million at December 31, 1998, including $2.0 million of additional borrowings above the available borrowing base. These additional borrowings of $2.0 million are due September 30, 1999. The facility matures on January 1, 2000, and is renewable upon agreement of both parties. The terms of the facility limit certain actions of the Company, including the payment of dividends, and permit Greyrock, in the event of a material adverse change in the Company's business or financial condition in Greyrock's good faith judgment, to exercise its rights under a default, including ceasing making additional funds available under the facility, declaring all or part of the outstanding balance immediately payable, and taking possession of the pledged collateral. The Company schedules production of its systems based upon order backlog. SMS includes in its backlog only those customer orders for which it has accepted purchase orders and assigned shipment dates within the next twelve-month period. As of December 31, 1998 and 1997, the Company's continuing business backlog was $11.9 million and $22.4 million, respectively. Because of possible changes in delivery schedules and cancellations of orders, SMS's backlog at any particular date is not necessarily representative of actual sales for any succeeding period. The Company incurred operating losses during 1998, 1997 and 1996, and as of December 31, 1998, had a stockholders' deficit of $29.1 million. Consequently, the Company has been substantially dependent upon borrowings to finance its operations in recent years. In response to the significant losses from operations, the Company hired a new management team in 1997 and implemented a worldwide restructuring plan. The restructuring plan was developed based on an evaluation of the Company's current products, its available technology, its relationships with its customers and its financial position. A summary of management's actions completed thus far, as well as certain actions initiated that are expected to continue into 1999 to address the financial conditions described above, include the following: - - Divested three subsidiaries with products inconsistent with the Company's core business, using certain of the proceeds to significantly reduce its outstanding and maximized line of credit; - - Refinanced its remaining line of credit balance with term debt and an additional credit facility; - - Renegotiated $2 million of additional borrowings above the borrowing base of qualified accounts receivable and inventory as defined by the credit facility through September 30, 1999, as well as an extension of the remainder of the facility through January 1, 2000; - - Established in 1999 an arrangement whereby certain of the Company's noteholders will provide, at their sole discretion, cash infusions when requested by the Company in return for the issuance of convertible debt; - - Reduced the Company's cash usage through significant workforce reductions, facilities consolidation from three buildings to one, and reductions in other spending; - - Initiated improvements in the cost structure and manufacturability by engineering the Company's core product lines to use less materials while maintaining process integrity and reducing costly product refinements and rework during production thereby improving gross margins; - - Initiated procedures to shorten installation time through improving the quality controls on the product before it leaves the manufacturing facility and through better coordination with the customer regarding the timing and prerequisites of the installation which will reduce installation delays, reduce costs to the Company, increase customer satisfaction, and accelerate payments of receivables; - - Improved the sales quoting process to involve all functional areas so as to more accurately estimate costs thereby improving gross margins. 13 14 - - Initiated and completed a program to fix system operating problems in the field using a more focused approach toward customer requirements thereby accelerating the collection of past due receivables and improving customer satisfaction; - - Initiated a Product and Cycle Time Excellence program to refocus the Company's new product development efforts and reduce the number of development projects to those with strong market and margin potential; - - Initiated improvements in cash flow through negotiating customer deposits and extended payment terms with vendors; - - Developed comprehensive and timely measures for ongoing monitoring of cash flow to more effectively manage the Company's upcoming annual cash requirements; and - - Established a detailed budget to manage the upcoming year's operating activity with defined timely reporting periods and ongoing monitoring of strict adherence to budgeted amounts. Management believes many of the actions taken have contributed to the improved gross margins on shipments in the last two quarters of 1998; however, management also believes that future results of operations will be influenced by a number of factors, including general economic conditions, the volume, mix and timing of orders received, timely new product introductions and testing, and numerous other factors. Additionally, the semiconductor industry and related capital equipment suppliers, such as the Company, have experienced a reduction in demand which has led and could continue to lead to reduced sales and increased pricing pressures. Since a significant portion of the Company's sales represent custom equipment orders for which pricing can range from $300,000 to over $3,000,000, the volume and timing of orders can have a significant effect on the Company's operating results and cash flows. Based on semiconductor capital equipment industry information available to the Company, management is optimistic that the industry's downcycle may improve during the second half of 1999 and continue the favorable trend in 2000; however, no assurance can be given that such improvement in the industry will occur. Management believes the cash requirements in 1999 will be provided by operations and supplemented by borrowings on the Company's credit facility, cash infusions from certain of the Company's noteholders in return for convertible debt, deferral of substantially all cash interest on long-term debt through September 30, 1999, and customer deposits on certain orders. Without such supplemental sources of cash, the Company is susceptible to severe cash shortages which may impact its ability to operate. While management believes that its plans and implemented programs, along with the supplemental sources of cash, will result in adequately funding its 1999 working capital and cash requirements, certain of these plans, programs, and supplemental cash sources are contingent upon future events that are not within the Company's control; therefore, there can be no assurances that management's actions will be successful or certain of the supplemental cash sources will be available. Inflation has not significantly affected the Company's financial position or operations. Inflation will have the general effect of increasing the Company's operating expenses. A substantial portion of the Company's indebtedness bears interest that fluctuates with the LIBOR rate. No assurance can be given that the LIBOR rate of interest will not fluctuate significantly, which could have an adverse effect on operations. The substantial losses the Company incurred have burdened the Company with a level of debt that has severely limited the Company's access to working capital. The Company has retained an investment-banking firm to advise on the Company's strategic alternatives, including possible ways to restructure the balance sheet. 14 15 YEAR 2000 The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the result of computer programs and equipment that were written and manufactured using two digits rather than four to define the applicable year. Date-sensitive computer programs and equipment may recognize a date using only the last two digits. This could result in the Year 2000 being recognized as the year 1900. System failures or miscalculations can occur, which would cause disruptions in operations and/or the inability to process normal business transactions. In November 1997, the Company initiated a company-wide Year 2000 Project to address this issue. Utilizing both internal and external resources, the Company has been defining, assessing, converting, or replacing, various programs, hardware and equipment instrumentation systems to make them Year 2000 compatible. The Company has incurred costs of approximately $50,000 through December 31, 1998 to address the Year 2000 issue and it expects to incur additional costs of approximately $100,000. Information Technology ("IT") systems have been evaluated and assessed for Year 2000 readiness. All network IT systems are in the process of being upgraded as part of a corporate upgrade program that will also address identified Year 2000 related issues and concerns. Non-IT systems typically include embedded technology such as microcontrollers. These types of systems are more difficult to assess and repair than IT systems. In fact, the Company will have to replace non-IT systems since they cannot be repaired. All upgrades and replacement programs are expected to be completed in 1999. Manufactured equipment that the Company supplies to its customers have been identified and assessed for Year 2000 readiness. A report system outlines known issues of concerns regarding sub-systems and sub components integrated into the Company's equipment. A corrective action plan has been developed and deployment of the plan is in effect. The Company is alerting all of its customers to the concerns regarding Year 2000, though it is inevitably the responsibility of the end-users to deploy all recommended corrective action plans. Third parties who supply the Company with real time goods and services have been identified and are being assessed. Approximately 90% of these third parties have stated their readiness and capabilities to successfully supply their goods and services through the Year 2000 and beyond without interruption in deliveries of goods and services. The potential risk to the Company due to the Year 2000 related issues are as follows. Disruptions in computer hardware, software or delivery of supplier goods and services could result in the inability to engineer, schedule and deliver manufactured equipment and services to customers as well as the failure to fulfill contractual agreements. Customers may experience Year 2000 related problems that could interrupt their abilities to perform business and financial transactions thus interrupting collections or bank processes. Disruptions in supplier services may interfere with the Company's ability to communicate to its customers and adversely effect delivery of products. The amount of total potential liability and lost revenue cannot be reasonably estimated at this time. The Company is preparing to handle the most reasonably likely worst case scenarios. Secondary critical suppliers are available in many cases. Communication capabilities are vast through many different medias. All computers and software will be standardized with secondary systems available to perform any critical tasks in the event of a system failure. The Company believes it will be adequately prepared for any significant Year 2000-related issues that may occur. The Company believes it has sufficient hardware and resources to address such issues on a timely basis. 15 16 FORWARD-LOOKING STATEMENTS This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe-harbor created by such sections. Such forward-looking statements concern the Company's operations, economic performance and financial condition, including in particular the Company's financing arrangements and liquidity and capital resources. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; changes in customer preferences; competition; changes in technology; changes in business strategy; the indebtedness of the Company; quality of management, business abilities and judgment of the Company's personnel; the availability, terms and deployment of capital; and various other factors references in this Report. The forward-looking statements are made as of the date of this Report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplemental Schedule Page ---- Report of Independent Auditors 17 Consolidated Balance Sheets as of December 31, 1998 and 1997 18 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 19 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1998, 1997 and 1996 20 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 21 Notes to Consolidated Financial Statements 22 Supplemental Schedule 43
16 17 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS SUBMICRON SYSTEMS CORPORATION We have audited the accompanying consolidated balance sheets of SubMicron Systems Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SubMicron Systems Corporation as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that SubMicron Systems Corporation will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring net losses and has working capital and stockholders' equity deficits at December 31, 1998. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The 1998 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 31, 1999 17 18 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ASSETS 1998 1997 -------- -------- Current assets: Cash and cash equivalents $ 1,982 $ 8,228 Accounts receivable, net of allowance for doubtful accounts of $1,752 and $945 8,676 16,632 Inventories 7,787 13,152 Prepaid expenses and other 1,979 2,288 -------- -------- Total current assets 20,424 40,300 -------- -------- Property and equipment, net 5,926 13,815 Goodwill, net 1,232 1,457 Intangibles and other assets, net 3,155 4,136 -------- -------- $ 30,737 $ 59,708 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Line of credit $ 4,824 $ 3,024 Current portion of long-term debt 2,530 1,849 Accounts payable 3,635 6,830 Accrued expenses and other 9,928 15,617 Deferred revenues 3,745 3,955 -------- -------- Total current liabilities 24,662 31,275 -------- -------- Long-term debt 35,187 31,023 -------- -------- Commitments and contingencies (Note 12) Stockholders' equity (deficit): Preferred Stock, $0.01 par value, 5,000 shares authorized -- -- Series A Convertible Preferred Stock, stated value, 89 and 685 shares issued and outstanding 58 4,900 Common Stock, $.0001 par value, 100,000,000 shares authorized, 19,669,825 and 18,338,949 shares issued and outstanding 2 2 Additional paid-in capital 60,518 53,067 Accumulated deficit (89,690) (60,559) -------- -------- Total stockholders' equity (deficit) (29,112) (2,590) -------- -------- $ 30,737 $ 59,708 ======== ========
See accompanying notes. 18 19 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------- --------- --------- Systems sales .............................. $ 35,706 $ 71,809 $ 140,823 Other sales ................................ 6,499 26,086 30,661 --------- --------- --------- Total net sales ................... 42,205 97,895 171,484 Cost of systems sales ...................... 35,161 66,370 118,800 Cost of other sales ........................ 3,536 24,181 23,948 --------- --------- --------- Total cost of sales ............... 38,697 90,551 142,748 --------- --------- --------- Gross profit ............. 3,508 7,344 28,736 Selling, general and administrative expenses 15,092 32,230 41,337 Research and development expenses .......... 7,849 9,225 9,373 Restructuring charges ...................... 5,086 5,639 -- --------- --------- --------- Total operating expenses .......... 28,027 47,094 50,710 --------- --------- --------- Operating loss ........... (24,519) (39,750) (21,974) Interest expense and other income, net: Interest income ....................... 274 190 383 Interest expense ...................... (6,805) (4,885) (5,244) Other income, net ..................... 1,919 3,541 160 --------- --------- --------- Total other expense, net .......... (4,612) (1,154) (4,701) --------- --------- --------- Loss before income taxes and extraordinary charge ..................... (29,131) (40,904) (26,675) Income tax expense (benefit) ............... -- 5,480 (6,566) --------- --------- --------- Loss before extraordinary charge ........... (29,131) (46,384) (20,109) Extraordinary charge ....................... -- (1,169) -- --------- --------- --------- Net loss ................................... $ (29,131) $ (47,553) $ (20,109) ========= ========= ========= Loss per Common share ...................... $ (1.51) $ (2.77) $ (1.20) ========= ========= ========= Loss per Common share - assuming dilution ..................... $ (1.51) $ (2.77) $ (1.20) ========= ========= =========
See accompanying notes. 19 20 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
Retained Earnings Additional (Accum- Preferred Stock Common Stock Paid-in ulated Deferred Notes Shares Amount Shares Amount Capital Deficit) Compensation Receivable Total - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1996 -- $ -- 16,563 $ 2 $ 39,223 $ 7,103 $ (224) $ (81) $ 46,023 Exercise of stock options and warrants -- -- 181 -- 979 -- -- -- 979 Payment on notes receivable -- -- -- -- -- -- -- 81 81 Issuance of Common Stock under employee Stock purchase plan -- -- 146 -- 627 -- -- -- 627 Value ascribed to warrants and options issued for services -- -- -- -- 851 -- -- -- 851 Amortization of deferred compensation -- -- -- -- -- -- 224 -- 224 Net loss -- -- -- -- -- (20,109) -- -- (20,109) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 -- -- 16,890 2 41,680 (13,006) -- -- 28,676 Exercise of stock options -- -- 23 -- 78 -- -- -- 78 Issuance of Preferred Stock 1 9,181 -- -- -- -- -- -- 9,181 Conversion of Preferred Stock to Common Stock -- (4,281) 1,235 -- 4,281 -- -- -- -- Issuance of Common stock under the employee stock purchase plan -- -- 191 -- 412 -- -- -- 412 Value ascribed to warrants issued with senior subordinated notes -- -- -- -- 6,616 -- -- -- 6,616 Net loss -- -- -- -- -- (47,553) -- -- (47,553) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 1 4,900 18,339 2 53,067 (60,559) -- -- (2,590) Conversion of Preferred Stock to Common Stock (1) (4,842) 1,193 -- 4,842 -- -- -- -- Issuance of Common Stock under the employee stock purchase plan -- -- 138 -- 109 -- -- -- 109 Value ascribed to warrants issued with senior subordinated notes -- -- -- -- 2,500 -- -- -- 2,500 Net loss -- -- -- -- -- (29,131) -- -- (29,131) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 -- $ 58 19,670 $ 2 $ 60,518 $(89,690) $ -- $ -- $(29,112) ==================================================================================================================================
See accompanying notes. 20 21 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 -------- -------- -------- Cash flows used in operating activities: Net loss .......................................... $(29,131) $(47,553) $(20,109) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..................... 5,811 6,902 5,124 Extraordinary loss on debt extinguishment ......... -- 1,169 -- Gain on sale of PRIMAXX(TM) ....................... (1,465) -- -- Gain on sales of Systems Chemistry and PRIMAXX(TM) license .......................... (500) (3,805) -- Write-off of property and equipment ............... 3,286 -- -- Provision for valuation allowances ................ 5,342 7,746 2,831 Amortization of deferred compensation ............. -- -- 224 Deferred tax provision (benefit) .................. -- 5,480 (4,222) Accretion of note discount ........................ 1,764 532 1,179 Non-cash interest expense ......................... 2,195 -- -- Non-cash compensation for services ................ -- -- 851 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ........ 6,599 17,125 (1,779) Decrease (increase) in inventories ................ 831 6,588 (6,537) Decrease (increase) in prepaid expenses and other . 309 4,266 (1,514) Decrease (increase) in other assets ............... 163 590 (1,294) Decrease in accounts payable ...................... (3,195) (10,882) (4,348) (Decrease) increase in accrued expenses ........... (5,639) 2,024 7,889 Increase in deferred revenues ..................... 48 2,837 384 -------- -------- -------- Net cash used in operating activities ................ (13,582) (6,981) (21,321) -------- -------- -------- Cash flows provided by (used in) investing activities: Capital expenditures .............................. (520) (1,475) (6,724) Net proceeds from sale of PRIMAXX(TM) ............. 2,142 -- -- Net proceeds from sale of Systems Chemistry assets, net of cash sold ....................... 500 14,805 -- Net proceeds from sale of license ................. -- 1,062 -- Purchase of intangible assets ..................... (83) (352) (182) -------- -------- -------- Net cash provided by (used in) investing activities .. 2,039 14,040 (6,906) -------- -------- -------- Cash flows provided by (used in) financing activities Net borrowings (payments) on line of credit ....... 1,800 (25,076) 11,861 Proceeds from sales-leaseback ..................... -- -- 5,287 Proceeds from issuance of convertible debt ........ -- 13,384 -- Value ascribed to warrants issued with convertible debt ................................ 2,400 6,616 -- Deferred debt issuance costs ...................... -- (1,877) -- Proceeds from long-term debt ...................... 2,118 5,000 -- Collection on notes receivable .................... -- -- 81 Proceeds from exercise of stock options and warrants and Employee Stock Purchase Plan ....... 109 490 1,606 Principal payments on long-term debt and capital lease obligations ....................... (1,130) (2,794) (1,192) -------- -------- -------- Net cash provided by (used in) financing activities .. 5,297 (4,257) 17,643 -------- -------- -------- Net (decrease) increase in cash and cash equivalents ....................................... (6,246) 2,802 (10,584) Cash and cash equivalents, beginning of year ......... 8,228 5,426 16,010 -------- -------- -------- Cash and cash equivalents, end of year ............... $ 1,982 $ 8,228 $ 5,426 ======== ======== ========
See accompanying notes. 21 22 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: Background SubMicron Systems Corporation (the "Company" or "SMS") designs, manufactures and markets advanced wet surface preparation and cleaning equipment used in the manufacture of microelectronic devices such as semiconductors, integrated circuits (IC's), and for the production of raw silicon wafers on which such devices are manufactured. The Company was founded in November 1988, and became a public company in August 1993. The Company acquired the assets of DiPiero, Inc. (d/b/a Universal Plastics) in May 1994 by assuming its net liabilities of $2.3 million. For financial accounting purposes, the acquisition was accounted for as a purchase. In February 1995, the Company acquired all of the outstanding stock of Systems Chemistry Incorporated (Systems Chemistry) for 3,400,000 shares of Common Stock. In March 1996, the Company acquired all of the outstanding stock of Imtec Acculine, Inc. (Imtec) for 575,000 shares of Common Stock. The Systems Chemistry and Imtec transactions were accounted for as poolings of interests. As described in Note 3, substantially all of the net assets of PRIMAXX(TM) Corporation's operations ("PRIMAXX(TM)") were sold in October 1998. In addition, substantially all the net assets of Systems Chemistry and Imtec were sold in August and December 1997, respectively. Going Concern The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In 1998, 1997, and 1996, the Company's operating activities have required a net use of cash totaling $13.6 million, $7.0 million, and $21.3 million, respectively. During these years, debt and other credit arrangements, additional private placements of debt and equity securities, and sales of assets relating to products inconsistent with the Company's core business primarily funded the net cash needs from operations. The Company incurred net losses of $29.1 million, $47.6 million, and $20.1 million in 1998, 1997, and 1996, respectively. At December 31, 1998, the Company had a stockholders' deficit of $29.1 million and current liabilities exceeded current assets by $4.2 million. Further, the Company operates in the semiconductor capital equipment industry which has been in a severe downcycle, primarily due to excess chip factory capacity and inventory oversupply, as well as worsened economic conditions in Asia. The Company was not in compliance with certain covenants under its $21.2 million 12% Senior Subordinated Notes as of December 31, 1998, due to no longer meeting the requirement for continued listing by NASDAQ and not meeting certain minimum financial requirements. Additionally, the Company, based on its current projections, anticipates that it will not be in compliance with certain financial covenants under these notes during 1999. However, the Company has obtained waivers from these noteholders for the existing and expected covenant violations through January 1, 2000. The Company's current credit facility, which matures on January 1, 2000 and is annually renewable upon agreement of both parties, permits the lender, in the event of a material adverse change in the Company's business or financial condition in the lender's good faith judgment, to exercise its rights under a covenant violation, including ceasing making additional funds available under the facility, declaring all or part of the outstanding balance immediately payable, and taking possession of the pledged collateral. Additionally, the terms of the credit facility contain a borrowing base related to the Company's eligible receivables and inventory; periodically, such borrowing base has been insufficient to fund the Company's cash needs, principally due to the long lead time required to manufacture many of the Company's products and relatively small additional funding availability created by work-in-process inventory. The substantial losses the Company incurred have burdened the Company with a level of debt that has severely limited the Company's access to working capital. The Company has retained an investment banking firm to advise on the Company's strategic alternatives, including possible ways to restructure the balance sheet. 22 23 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The conditions describe above raise substantial doubt about the Company's ability to continue as a going concern. The 1998 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. In 1997, the Company hired a new management team and implemented a worldwide restructuring plan. The restructuring plan was developed based on an evaluation of the Company's current products, its available technology, its relationships with its customers, and its financial position. A summary of management's actions completed thus far, as well as certain actions initiated that are expected to continue into 1999 to address the financial conditions described above, include the following: - - Divested three subsidiaries with products inconsistent with the Company's core business, using certain of the proceeds to significantly reduce its outstanding and maximized line of credit; - - Refinanced its remaining line of credit balance with term debt and an additional credit facility; - - Renegotiated $2 million of additional borrowings above the borrowing base of qualified accounts receivable and inventory as defined by the credit facility through September 30, 1999, as well as an extension of the remainder of the facility through January 1, 2000; - - Established in 1999 an arrangement whereby certain of the Company's noteholders will provide, at their sole discretion, cash infusions when requested by the Company in return for the issuance of convertible debt; - - Reduced the Company's cash usage through workforce reductions of over 30%, facilities consolidation from three buildings to one, and reductions in other spending; - - Initiated improvements in the cost structure and manufacturability by engineering the Company's core product lines to use less materials while maintaining process integrity and reducing costly product refinements and rework during production thereby improving gross margins; - - Initiated procedures to shorten installation time through improving the quality controls on the product before it leaves the manufacturing facility and through better coordination with the customer regarding the timing and prerequisites of the installation which will reduce installation delays, reduce costs to the Company, increase customer satisfaction, and accelerate payments of receivables; - - Improved the sales quoting process to involve all functional areas so as to more accurately estimate costs thereby improving gross margins. - - Initiated and completed a program to fix system operating problems in the field using a more focused approach toward customer requirements thereby accelerating the collection of past due receivables and improving customer satisfaction; - - Initiated a Product and Cycle Time Excellence program to refocus the Company's new product development efforts and reduce the number of development projects to those with strong market and margin potential; - - Initiated improvements in cash flow through negotiating customer deposits and extended payment terms with vendors; - - Developed comprehensive and timely measures for ongoing monitoring of cash flow to more effectively manage the Company's upcoming annual cash requirements; and - - Established a detailed budget to manage the upcoming year's operating activity with defined timely reporting periods and ongoing monitoring of strict adherence to budgeted amounts. 23 24 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Management believes many of the actions taken have contributed to the improved gross margins on shipments in the last two quarters of 1998; however, management also believes that future results of operations will be influenced by a number of factors, including general economic conditions, the volume, mix and timing of orders received, timely new product introductions and testing, and numerous other factors. Additionally, the semiconductor industry and related capital equipment suppliers, such as the Company, have experienced a reduction in demand which has led and could continue to lead to reduced sales and increased pricing pressures. Since a significant portion of the Company's sales represent custom equipment orders for which pricing can range from $300,000 to over $3,000,000, the volume and timing of orders can have a significant effect on the Company's operating results and cash flows. Based on semiconductor capital equipment industry information available to the Company, management is optimistic that the industry's downcycle may improve during the second half of 1999 and continue the favorable trend in 2000; however, no assurance can be given that such improvement in the industry will occur. Management believes the cash requirements in 1999 will be provided by operations and supplemented by borrowings on the Company's credit facility, cash infusions from certain of the Company's noteholders in return for convertible debt, deferral of substantially all cash interest on long-term debt through September 30, 1999, and customer deposits on certain orders. Without such supplemental sources of cash, the Company is susceptible to severe cash shortages which may impact its ability to operate. While management believes that its plans and implemented programs, along with the supplemental sources of cash, will result in adequately funding its 1999 working capital and cash requirements, certain of these plans, programs, and supplemental cash sources are contingent upon future events that are not within the Company's control; therefore, there can be no assurances that management's actions will be successful or certain of the supplemental cash sources will be available. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: SubMicron Systems, Inc., Systems Chemistry, SubMicron Wet Process Stations, Inc. (Universal Plastics), Imtec, SubMicron Systems Investment Corporation, SMICRON(S) PTE., LTD. (a Singapore Corporation), SubMicron Systems International Ltd., and PRIMAXX(TM) Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents which generally consist of weekly and overnight repurchase agreements. Inventories Inventories consist principally of raw materials, purchased components, parts and work-in-process and are stated at the lower of cost (first-in, first-out basis) or market. Property and Equipment Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, ranging principally from three to five years. Amortization of assets under capital leases and leasehold improvements, which is included in depreciation, is determined using the straight-line method over the shorter of the lease term or the economic life of the asset, ranging from three to five years. 24 25 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Goodwill and Other Intangible Assets Goodwill represents the excess of liabilities assumed over the estimated fair value of assets acquired. Goodwill of approximately $2.3 million is being amortized on a straight-line basis over ten years and is presented net of accumulated amortization of approximately $1,039,000 and $814,000 at December 31, 1998 and 1997, respectively. Intangible assets consist of patent, trademark and deferred financing costs and are presented net of accumulated amortization. Patents and trademarks are stated at cost and amortized using the straight-line method over five years. Deferred financing costs consist of fees incurred as part of the issuance of debt which are being amortized over the term of the debt. Accounting for Long-Lived Assets In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The carrying amounts of the long-lived assets, including intangibles, are reviewed if facts and circumstances suggest that they may be impaired. If this review indicates that book value of assets to be held or disposed of exceed the undiscounted future cash flows, an impairment loss would be recognized for the excess of book over fair values. In 1998, as part of the Company's restructuring plan, the Company wrote-off certain assets approximating $3.3 million, including assets held for sale which were written down to their fair value less costs to sell. Included in the restructuring charge is the write-off of $1.0 million of leasehold improvements associated with the consolidation of facilities and $2.3 million of equipment associated with the discontinuance of expected programs due to insufficient resources. Revenue Recognition Systems sales consists of new systems and product enhancements. Sales are recognized at the time of shipment. Other sales consist of spare parts and service sales. Service and spare parts sales are recognized when the service has been performed or when the parts are shipped. Revenue in 1997 and 1996 from construction services which were performed solely by Systems Chemistry, is recognized when the service has been completed using a method similar to percentage-of-completion and is included in other sales. Warranty and Installation The Company generally provides its customers with a warranty on systems for a 12-month period commencing upon final customer acceptance. A provision for the estimated cost of warranty and installation is recorded when the related revenue is recognized. The Company revised its warranty and installation provision estimate, increasing its net loss by approximately $2.4 million ($0.14 per Common share) and $2.7 million ($0.16 per Common share) in 1997 and 1996, respectively. Research and Development Research and development costs are charged to expense as incurred. 25 26 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Accounting for Stock-Based Compensation In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The Statement encourages all entities to adopt a fair value based method of accounting, but allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company implemented SFAS No. 123 on January 1, 1996. Management did not adopt the measurement provisions of SFAS No. 123, although the Company has complied with the pro forma disclosure requirements of the Statement. Income Taxes The Company files a consolidated federal tax return and separate state tax returns. Certain income and expense items are recorded for financial reporting purposes in different time periods than for income tax purposes. Provisions for current and deferred taxes are made in recognition of the temporary differences. Loss per Share Under the requirements for calculating basic loss per share, the dilutive effect of stock options and convertible securities has been excluded. Diluted loss per share has not assumed the conversion of all potentially dilutive securities since to do so would be antidilutive. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentations. 26 27 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. SALE OF CERTAIN ASSETS On October 14, 1998, the Company completed the sale of substantially all of the net assets of PRIMAXX(TM) for $2.1 million. The Company recorded a gain on the sale of $1.5 million in the fourth quarter of 1998. Results for the year ended December 1998 reflect the results of operation of PRIMAXX(TM) through October 14, 1998. The Company retained the rights to future royalty payments discussed below. On December 31, 1997, the Company completed the sale of certain net assets of Imtec in exchange for a note of approximately $1.5 million payable to the Company through December 2004. Interest is payable semiannually on June 30 and December 31 at the lesser of 10% or the rate then paid to the Company's principal secured lender (10% at December 31, 1998). The sales proceeds approximated the net book value of the net assets sold. On September 8, 1997, the Company signed a licensing agreement with AG Associates (Israel) for its PRIMAXX(TM) dry cleaning technology in a specific field of use. The agreement resulted in a gain of approximately $1.1 million with additional royalties of up to $2.5 million, based on the number of units sold, over a multiyear period. The Company recorded the $1.1 million gain on the licensing agreement in its statement of operations for the year ended December 31, 1997. On August 7, 1997, the Company sold substantially all of the net assets of Systems Chemistry for $20.8 million, which amount includes a non-interest bearing loan of $5 million due in three years. The Company applied the proceeds of $18.5 million, after transaction costs and bank fees, to reduce the amount borrowed under its credit facility. The Company recorded a gain on the sale of $2.7 million in 1997 and, due to a post-closing negotiated adjustment, $0.5 million in 1998. Results for the year ended December 31, 1997 reflect the results of operations of Systems Chemistry through August 7, 1997. 27 28 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Pro forma results presented below reflect the results of operations of the Company as if the sales of Systems Chemistry and Imtec had occurred on January 1, 1997. The pro forma financial information presented is not necessarily indicative of the results of operations that the Company would have obtained had such events occurred at the beginning of the period. Pro forma information is as follows (in thousands, except per share data):
Year ended December 31, 1997 ----------------------------- Net sales ........................................................ $ 65,293 ======== Loss before extraordinary charge ................................. ($47,280) ======== Basic and diluted loss before extraordinary charge per Common share..................................................... $ (2.76) ========
4. INVENTORIES:
December 31, ----------------------------- 1998 1997 -------- -------- (in thousands) Raw materials, purchased components and parts $ 9,376 $ 11,856 Work in progress and finished goods ......... 2,674 4,810 -------- -------- 12,050 16,666 Excess and obsolescence reserve ............. (4,263) (3,514) -------- -------- $ 7,787 $ 13,152 ======== ========
In 1998, 1997 and 1996, the Company wrote off certain inventory and increased reserve provisions, increasing its net loss by approximately $4.2 million ($0.22 per Common share), $7.7 million ($0.45 per Common share) and $2.0 million ($0.07 per Common share), respectively. 5. PROPERTY AND EQUIPMENT:
December 31, ---------------------------- 1998 1997 -------- ------- (in thousands) Production equipment ................... $ 7,558 $ 8,014 Office furniture equipment and leasehold improvements ....................... 6,931 8,136 Equipment under capital lease .......... 5,335 10,101 -------- ------- 19,824 26,251 Less - Accumulated depreciation and amortization ....................... (14,328) (12,436) -------- ------- 5,496 13,815 Assets held for sale ................... 430 -- -------- ------- $ 5,926 $13,815 ======== =======
Accumulated amortization on equipment under capital leases was approximately $2.9 million and $2.0 million at December 31, 1998 and 1997, respectively. 28 29 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. INTANGIBLES AND OTHER ASSETS:
December 31, --------------------------- 1998 1997 ------- ------- (in thousands) Patent filing costs and trademarks ... $ 944 $ 1,072 Deferred financing costs ............. 1,489 2,024 Security deposits .................... 231 237 Note receivable from sale of Imtec ... 1,122 1,154 Other ................................ 4 130 ------- ------- 3,790 4,617 Less - Accumulated amortization ...... (635) (481) ------- ------- $ 3,155 $ 4,136 ======= =======
7. CREDIT FACILITY: In November 1998, the Company renewed its credit facility with Greyrock Capital, a division of Nations Credit Commercial Corporation ("Greyrock"). As part of the renewal, the facility was extended through January 1, 2000 and reduced from $15 million to $10 million. Borrowings under this facility bear interest at "LIBOR" plus 5.375% (11.0038% at December 31, 1998) and are secured by the Company's assets. The facility contains a borrowing base related to the Company's eligible receivables and inventory. Borrowings under the credit facility were $4.8 million at December 31, 1998, including $2 million of additional borrowings above the available borrowing base as of December 31, 1998. These additional borrowings of $2.0 million are due September 30, 1999. The facility matures on January 1, 2000, and is renewable upon agreement of both parties. The terms of the facility limit certain actions of the Company, including the payment of dividends, and permit Greyrock, in the event of a material adverse change in the Company's business or financial condition in Greyrock's good faith judgment, to exercise its rights under a default, including ceasing making additional funds available under the facility, declaring all or part of the outstanding balance immediately payable, and taking possession of the pledged collateral. Consequently, the credit facility is classified as a current liability at December 31, 1998. 8. ACCRUED EXPENSES AND OTHER:
December 31, -------------------------- 1998 1997 ------- ------- (in thousands) Warranty and installation costs ...... $ 3,259 $ 5,691 Commissions .......................... 1,267 1,294 Restructuring charges ................ 1,758 2,675 Purchase commitments and other ....... 416 1,239 Professional fees .................... 386 1,588 Other ................................ 2,842 3,130 ------- ------- $ 9,928 $15,617 ======= =======
29 30 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. LONG-TERM DEBT:
December 31, ---------------------------- 1998 1997 -------- -------- (in thousands) 12% Senior Subordinated Notes, due February 2002, principal amount of $21,241,000 (net of unamortized discount) ....................... $ 16,098 $ 13,494 8% convertible subordinated notes, principal amount of $8,692,000, due March 2002 ..................................................... 8,692 8,692 $5,000,000 principal amount non-interest bearing note, due August 2000 (net of unamortized discount) ................................... 4,261 3,860 Series B 12% Senior Subordinated Notes, due February 2002, principal amount of $5,410,519 (net of unamortized discount) .............. 2,953 -- Various capital lease obligations with interest from 5% to 14%, payable monthly with varying maturities through October 2001 .... 5,081 6,153 Other ............................................................... 632 673 -------- -------- 37,717 32,872 Less current portion ................................................ (2,530) (1,849) -------- -------- $ 35,187 $ 31,023 ======== ========
The following is a schedule of aggregate long-term debt maturities (principal amount) and future minimum capital lease payments at December 31, 1998:
Long-Term Capital Debt Leases ---- ------ (in thousands) 1999 $ 632 $1,898 2000 5,000 1,878 2001 -- 1,305 2002 32,886 -- ------- ------ $38,518 $5,081 ======= ======
30 31 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company's long term debt arrangements below require the maintenance of certain financial covenants and limits certain actions of the Company, including the level of research and development and capital expenditures, issuance of additional capital stock, and payment of dividends. In December 1998, the Company issued $4.5 million of Series B 12% Senior Subordinated Notes due February 1, 2002 ("Series B Senior Subordinated Notes") with associated warrants to purchase 22,500,000 shares of the Company's Common Stock at prices ranging from $.36 - $.52 per share, subject to customary adjustment for changes in capitalization and below market issuances. Interest is payable quarterly. The Company used the net proceeds to fund operations. The carrying amount of the debt is net of unamortized discount of $2,358,000 at December 31, 1998. As of August 1, 1998, the Company began issuing Series B Senior Subordinated Notes in lieu of the specified cash interest payments on certain of its outstanding 12% and 8% notes. Such notes were issued with 720 detachable warrants for each $1,000 of principal amount of notes. The Series B Senior Subordinated Notes in the principal amount of $910,519 with warrants to purchase 655,574 shares of Common Stock at prices ranging from $.36 to $.52 per share, subject to customary adjustment for changes in the capitalization and below market issuances, are carried net of unamortized discount of $100,000 at December 31, 1998. Interest is payable quarterly, and, beginning October 1, 1999, only in cash. In November 1997, the Company completed a $20 million private placement of securities consisting of $20 million principal amount of 12% Senior Subordinated Notes due February 1, 2002 ("Senior Subordinated Notes"), with associated warrants to purchase 6,616,367 shares of the Company's Common Stock at $2.25 per share, subject to customary adjustment for changes in capitalization and below market issuances. The Company used the net proceeds to repay its bank debt, fund operations and fund its restructuring activities. In 1998, the Company exercised its option with these noteholders to issue additional Senior Subordinated Notes in the principal amount of $1,241,000 in lieu of cash interest payments for 50% of the interest due in 1998. Interest is payable monthly, and, beginning October 1, 1999, only in cash. The carrying amount of the Senior Subordinated Notes is net of unamortized discount of $5,143,000 and $6,506,000 at December 31, 1998 and 1997, respectively. At December 31, 1998, the Company was not in compliance with certain covenants under the Senior Subordinated Notes. In addition, the Company, based on its current projections, anticipates that it will not be in compliance with certain financial requirements under the Senior Subordinated Notes during 1999. However, the Company has obtained waivers from the note holders for the existing and expected covenant violations through January 1, 2000. In March 1997, the Company issued shares of its Series A Convertible Non-Redeemable Preferred Stock convertible into approximately 2.7 million shares of Common Stock ("Convertible Preferred Stock") and approximately $8.7 million principal amount of its 8% convertible subordinated notes due March 26, 2002 ("New Notes") to previous holders of its 9% convertible subordinated notes due December 1997 and associated Warrants. The New Notes are convertible into shares of Common Stock at $3.70 per share, subject to customary adjustments for changes in capitalization, among others. Interest is payable quarterly. Results for the year ended December 31, 1997 include an extraordinary charge for debt extinguishment of $1.2 million, or $0.07 per Common share, in connection with the Company's issuance of the New Notes and Convertible Preferred Stock. The $5 million non-interest bearing note due in August 2000, received in connection with the sale of substantially all the net assets of Systems Chemistry, carries a discount based on imputed interest at 10% of $739,000 and $1,140,000 at December 31, 1998 and 1997, respectively. This note is collateralized by foreign accounts receivable of SubMicron Systems Corporation. In September 1996, the Company completed a sale-leaseback transaction which included a refinancing of an existing capital lease for net proceeds of $5.3 million. The capital leases have an effective interest rate of 8%, and are payable over a five-year period. The assets in this transaction were sold at cost, resulting in no gain or loss. The fair value of the Company's long-term debt, using estimated current borrowing rates, approximates its carrying value. Subsequent to year end and through March 31, 1999, the Company issued $1,250,000 of Series 1999 12% Senior Subordinated Convertible Notes due February 1, 2002. These notes are convertible at the holders' option into approximately 2.4 million shares of Common Stock at a conversion rate equal to 110% of the Company's Common Stock closing market value on the date of issuance of the note, subject to customary adjustment for changes in capitalization and below market issuances. 31 32 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. RESTRUCTURING CHARGES Results for 1998 include restructuring charges of approximately $5.1 million ($.26 per Common share) including severance costs of $1.2 million, write-off of leasehold improvements and certain fixed assets (see Note 2), and lease termination costs associated with the further consolidation of facilities. Results for 1997 include restructuring charges of approximately $5.6 million ($0.33 per Common share) including severance costs of $2.3 million and lease termination costs associated with the vacancy of the Company's corporate office. These restructuring charges were incurred as a result of a plan to restructure the corporate organization and to refocus the Company on its core technology. In the fourth quarter of 1998, the Company reversed $587,000 of its estimated restructuring charges stemming from a favorable lease termination settlement and lower than anticipated severance costs. Amounts paid in 1998 and 1997 of $2.4 million and $2.9 million, respectively, include severance costs of $1.9 million in 1998 in $1.0 million in 1997. As of December 31, 1998, the remaining accrued restructuring charge totaled $1,758,000. 11. LOSS PER SHARE The following table set forth the reconciliation of weighted shares outstanding for purposes of computing basic and diluted loss per share:
1998 1997 1996 ------------ ------------ ------------ Numerator (in thousands): Net loss $ (29,131) $ (47,553) $ (20,109) Numerator for basic earnings per share - income available to Common stockholders (29,131) (47,553) (20,109) ------------ ------------ ------------ Effect of dilutive securities convertible debentures -- -- -- ------------ ------------ ------------ Numerator for diluted earnings per share - income available to Common stockholders after assumed conversion $ (29,131) $ (47,553) $ (20,109) ============ ============ ============ Denominator: Denominator for basic earnings per share - weighted average shares 19,311,137 17,152,839 16,712,610 Effect of dilutive securities: Employee stock options -- -- -- Warrants -- -- -- Convertible debentures -- -- -- ------------ ------------ ------------ -- -- -- Dilutive potential Common shares adjusted weighted average shares and assumed conversions diluted 19,311,137 17,152,839 16,712,610 ============ ============ ============ Basic earnings per share $ (1.51) $ (2.77) $ (1.20) ============ ============ ============ Diluted earnings per share $ (1.51) $ (2.77) $ (1.20) ============ ============ ============
Approximately 34.1 million potentially dilutive securities are outstanding as of December 31, 1998, including convertible debt and preferred stock, stock options, and warrants to purchase common stock. 32 33 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. COMMITMENTS AND CONTINGENCIES: The Company leases its office and production facilities and several vehicles under long-term non-cancelable operating leases which expire at various dates through 2005. Rent expense was approximately $1.2 million, $1.3 million and $1.4 million in 1998, 1997 and 1996, respectively. Minimum annual operating lease payments for each of the next five years and in the aggregate are as follows:
(in thousands) 1999 $1,183 2000 657 2001 284 2002 242 2003 241 Thereafter 461 ------ $3,068 ======
Included in the operating lease commitments above are approximately $575,000 of payments which are included in the Company's restructuring reserve as the Company has consolidated its operations and is currently attempting to negotiate the termination of two existing leases. At December 31, 1998 and 1997, the Company had inventory purchase commitments which exceed the inventory's net realizable value. Amounts related to such commitments of approximately $416,000 and $1.1 million have been accrued as of December 31, 1998 and 1997, respectively. On July 14, 1992, an action was commenced against the Company for patent infringement. The complaint alleged that SMS infringed on three of the plaintiff's patents embodying its megasonic cleaning apparatus and method. On March 31, 1995, the Company and the plaintiff reached a settlement whereby the Company obtained a license to use the patented technology. The Company can utilize this technology for sale of replacement parts only for units that are already in the market. The Company agreed to a prepaid licensing fee of $2.0 million. During 1997, the Company expensed the remaining licensing fee of $680,000 as management determined it had no future economic benefit. A charge of approximately $142,000 was recorded in the 1996 statement of operations based on the units shipped in 1996. The Company is subject to claims, from time to time, arising in the ordinary course of business. Other claims, although presently unasserted, may also be raised in the future based on decisions made and certain actions taken and the reporting thereof. Management believes the ultimate resolution of all such claims will not have a material adverse effect on its financial position and results of operations. Certain of the Company's officers and other key employees have existing employment agreements that require the payment of severance benefits upon termination without cause, resignation for good reason, or a change in control. 13. CUSTOMER AND GEOGRAPHIC INFORMATION: The Company's operations are conducted in one business segment and sales are primarily made to customers in the business of manufacturing semiconductors. Foreign sales (Europe and Asia) represented 25%, 43%, and 30% of net sales in 1998, 1997 and 1996, respectively. Sales to foreign customers are transacted in U.S. dollars. The following table summarizes significant customers with sales in excess of 10% of total net sales for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Customer A 12% Customer B 13% Customer C 30% Customer D 12% --- --- --- 42% 12% 13% ==== === ===
33 34 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1998, approximately 66% of the Company's accounts receivable were due from three customers. 14. OTHER INCOME: Other income in 1998 consists primarily of gains recognized on the sale of substantially all of the net assets of PRIMAXX(TM) of $1.5 million and a $500,000 working capital settlement from the 1997 sale of substantially all of the net assets of Systems Chemistry. Other income in 1997 consists primarily of gains recognized on the sale of substantially all of the net assets of Systems Chemistry and the PRIMAXX(TM) license. 15. INCOME TAXES: The Company's income tax expense (benefit) for 1998, 1997 and 1996 is as follows:
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ------ ------- ------- (in thousands) Federal Current ...... $ -- $ -- $(2,344) Deferred ..... -- 4,270 (3,012) ------ ------- ------- Total .... -- 4,270 (5,356) ------ ------- ------- State Current ...... -- -- -- Deferred ..... -- 1,210 (1,210) ------ ------- ------- Total .... -- 1,210 (1,210) ------ ------- ------- $ -- $ 5,480 $(6,566) ====== ======= =======
The following is a reconciliation of the statutory federal income tax expense (benefit) to the effective tax expense (benefit) for 1998, 1997 and 1996 (dollars in thousands):
% of % of % of Pretax Pretax Pretax 1998 Loss 1997 Loss 1996 Income -------- ---- -------- ---- ------- ---- Statutory income tax ........ $(10,196) (35.0)% $(14,726) (35.0)% $(9,336) (35.0)% State income taxes, net of federal benefit ........... (1,763) (6.1) (2,299) (5.5) (577) (2.2) Other nondeductible costs ... 58 .2 205 .5 222 0.8 Valuation allowance ......... 12,000 41.2 22,300 53.0 2,600 9.7 Other ....................... (99) (.3) -- -- 525 2.1 -------- ---- -------- ---- ------- ----- $ -- - % $ 5,480 13.0% $(6,566) (24.6)% ======== ==== ======== ==== ======= ====
34 35 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The net deferred tax assets consist of the following:
December 31, 1998 1997 -------- -------- (in thousands) Deferred tax assets Warranty and installation reserve ........... $ 1,331 $ 2,325 Allowance for doubtful accounts ............. 716 357 Allowance for excess and obsolete inventories 1,741 2,048 Accrued licensing fees ...................... 102 102 Deferred compensation ....................... 410 410 Uniform inventory capitalization ............ 104 166 Salary and benefit accruals ................. 227 59 Net operating loss carryforwards ............ 30,573 17,374 Federal credit carryforward ................. 320 320 Amortization ................................ 200 189 Commissions ................................. 518 529 Restructuring expenses ...................... 718 1,093 Other ....................................... 1,085 1,360 -------- -------- Total deferred tax assets ............... 38,045 26,332 Valuation allowance for deferred tax assets . (36,900) (24,900) -------- -------- 1,145 1,432 -------- -------- Deferred tax liabilities Depreciation ................................ (33) (320) Gain on litigation settlement ............... (1,097) (1,097) Other ....................................... (15) (15) -------- -------- Total deferred tax liabilities ............ (1,145) (1,432) -------- -------- Net deferred tax assets ........................ $ -- $ -- ======== ========
At December 31, 1998, the Company had approximately $79 million of federal and $37 million of state net operating loss carryforwards available. These carryforwards expire in various years through 2018. The Company's valuation allowance for deferred tax assets will be available to offset future income tax expense when it becomes more likely than not that such deferred tax assets will be realized. The valuation allowance was increased $22.3 million and $2.6 million in 1997 and 1996, respectively. 16. STOCK OPTIONS AND WARRANTS: The Company has stock options outstanding to participants under four stock option plans which are the 1995 Stock Option Plan for Non-Employee Directors, the 1997 Stock Option Plan for Non-Employee Directors, the Amended and Restated 1991 Stock Option Plan and the Executive Stock Option Plan. The Company has granted nonqualified stock options to officers, directors and key employees under these plans at prices not less than fair market value on the date of grant. Generally, options become exercisable over a four-year period after the date of grant and expire ten years from the date of grant. In 1995, the Company adopted a Stock Option Plan for Non-Employee Directors. At December 31, 1998, 21,000 options are outstanding and exercisable under the 1995 Stock Option Plan for Non-Employee Directors. Exercise prices range from $3.38 to $10.13. In connection with the adoption of the 1997 Stock Option Plan for Non-Employee Directors, the Board of Directors has discontinued use of the 1995 Plan. In 1997, the Company adopted the 1997 Stock Option Plan for Non-Employee Directors. Under the plan, non-employee directors of the Company are each granted options to purchase 75,000 shares of the Common stock upon appointment to the Board of Directors. The aggregate number of options that may be issued under the plan is 600,000, 35 36 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subject to adjustment for stock dividends, stock splits, recapitalization or certain other adjustments. At December 31, 1998, 315,000 options have been granted and are outstanding (at $1.69- $3.13 per share) under the 1997 Stock Option Plan for Non-Employee Directors. The Company's Amended and Restated 1991 Stock Option Plan (1991 Plan) provides both incentive and non-qualified stock options to be granted to officers, employees, consultants and advisors. Under the plan, options may be granted for the purchase of up to 5,000,000 shares of Common Stock, subject to adjustments for stock dividends, stock splits, recapitalization or certain other adjustments. The number of options to be granted and the option prices are determined by the Board of Directors or the stock option plan committee in accordance with the terms of the plan. The exercise price of incentive stock options granted under the plan must be at least equal to the fair market value of such shares on the date of grant and the maximum exercise period is ten years. At December 31, 1998, 1,312,847 options are available for grant under the 1991 Plan. The Company also has an Executive Stock Option Plan (Executive Plan) that provides for the issuance of up to 588,495 shares of Common Stock. All available options under this plan have been granted. Summary information with respect to options under the plans, is as follows:
Amended and Restated Executive 1991 Stock Option Plan Stock Option Plan -------------------------------- ------------------------------- Outstanding Option Outstanding Option Options Prices Options Prices ---------- ------------- -------- ------------- Outstanding Options Balance, January 1, 1996 838,168 $2.39-11.13 536,250 $ 6.00 Granted 1,046,066 5.00-11.25 -- -- Exercised (118,628) (2.39- 6.00) -- -- Canceled (170,449) (2.39-11.25) -- -- ---------- ------------- -------- ------------- Balance, December 31, 1996 1,595,157 2.39-11.13 536,250 6.00 Granted 2,856,766 2.63-4.38 -- -- Exercised (22,934) (3.02-4.44) -- -- Canceled (1,341,772) (2.39-11.13) -- -- ---------- ------------- -------- ------------- Balance, December 31, 1997 3,087,217 2.39-11.00 536,250 6.00 Granted 3,863,859 (.38-2.81) 268,125 1.69 Exercised -- -- -- -- Canceled (3,486,960) (.77-11.00) (536,250) (1.69-6.00) ---------- ------------- -------- ------------- Balance, December 31, 1998 3,464,116 $ .38-11.00 268,125 $ 6.00 ========== ============= ======== =============
On May 19, 1998, the Company's Board of Directors authorized the repricing of incentive stock options then outstanding and previously granted under the 1991 Plan. Only current employees were eligible to receive repriced options. Approximately 2.7 million options were canceled (exercise prices of the options canceled ranged from $1.75 to $11.00) and new options were granted with an exercise price of $1.69, which approximated market. The terms of each newly repriced option assumed the remaining life and vesting provisions of the terminated options. No options were repriced for directors or non-employees. At December 31, 1998, there were 1,190,781 exercisable options under the Amended and Restated 1991 Stock Option Plan, 268,125 exercisable options under the Executive Stock Option Plan, 21,000 exercisable options under the 1995 36 37 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Option Plan for Non-Employee Directors, and 60,000 exercisable options under the 1997 Stock Option Plan for Non-Employee Directors. In 1993, the Company issued warrants to purchase 150,000 shares of Common Stock at $5 per share and 63,750 shares at $6 per share. Warrants to purchase 63,750 shares at $6 were exercised during 1996. Warrants to purchase 40,000 shares at $5 per share were exercised prior to 1996, and the remaining warrants expired in August 1998. The Company applies the measurement principles of APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for the Company's stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS Statement 123, the Company's pro forma net loss for basic and diluted loss per share purposes for 1998, 1997 and 1996 would have been increased by $500,000, or $.03 per Common share, $3.8 million, or $0.23 per Common share and $2.9 million, or $0.17 per Common share, respectively. In November 1997, 6,616,367 warrants, exercisable at $2.25 per share, were issued in connection with the Company's $20 million private placement of Senior Subordinated Notes. In December 1998, 22,500,000 warrants, exercisable at prices ranging from $.36-$.52 per share, were issued in connection with an additional $4.5 million private placement of Series B Senior Subordinated Notes. Also in 1998, 655,574 warrants, exercisable at $.36-$.52 per share, were issued in connection with the Company's Series B Senior Subordinated Notes. All of these warrants expire in November 2007. Activity in the 1991 Plan and Executive Plan is summarized as follows:
Shares Under Weighted Average Options Exercise Price ------- -------------- Balance, January 1, 1996 1,374,418 $5.81 Options granted 1,046,066 8.40 Options exercised (118,628) 5.04 Options canceled (170,449) 8.87 ---------- ----- Balance, December 31, 1996 2,131,407 6.91 Options granted 2,856,766 3.24 Options exercised (22,934) 3.40 Options canceled (1,341,772) 6.14 ---------- ----- Balance, December 31, 1997 3,623,467 4.29 Options granted 4,131,984 1.54 Options exercised -- -- Options canceled (4,023,210) 3.09 ---------- ----- Balance, December 31, 1998 3,732,241 $1.28 ========== =====
Stock options outstanding at December 31, 1998 are summarized as follows:
Range of Weighted Average Weighted Weighted Exercise Number Remaining Average Average Prices Outstanding Contractual Life Exercise Price Fair Value ------ ----------- ---------------- -------------- ---------- $ .38 - 1.69 2,902,331 8.7 years $ 1.46 $ .81 1.70-11.00 829,910 4.8 years 6.60 2.91 --------------- ------- --------- --------- --------- $ .38-11.00 3,732,241 7.8 years $ 2.59 $ 1.28 =============== ========= ========== ========= =========
37 38 SUBMICRON SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The weighted average fair value of options granted during 1998, 1997 and 1996 were $1.10 , $1.35, and $3.40, respectively. Fair value is estimated based on the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1998, 1997 and 1996: dividend yield of 0%; expected volatility of 75% in 1998 and 45% in 1997 and 1996; risk-free interest rates of 4.5% in 1998, 5.3% in 1997, and 6.5% in 1996; and expected lives of four years. 17. PREFERRED STOCK: The Company has authorized 5,000 shares of Preferred Stock, $.01 par value per share. The Board of Directors can designate and issue from time to time one or more classes or series of Preferred stock and may fix and determine the relative rights, preferences and limitations of each class or series so authorized. In March 1997, the Company issued 1,303 shares of Series A Convertible Preferred Stock (the "Series A Stock") convertible into approximately 2.7 million shares of Common Stock (see Note 9). Holders of Series A Stock receive a liquidation preference of $3.70 per Common share. During 1998 and 1997, 596.4 and 617.7 shares of Series A Stock were converted into 1,192,800 and 1,235,400 Common Shares, respectively. Each remaining share of Series A Stock is convertible into 2,000 shares of the Company's Common stock. 18. RELATED PARTY TRANSACTIONS Included on the Company's Board of Directors, in accordance with the terms of the Senior Subordinated Notes, are representatives of KB Mezzanine Fund II L.P. and Celerity Partners L.L.C. In 1998 and 1997, the Company incurred interest and other charges, excluding original issue discounts, of approximately $2.8 million and $241,000 payable to the KB Mezzanine Fund II L.P. and Celerity Partners L.L.C. As of December 31, 1998, approximately 27.1 million warrants to purchase Common Stock of the Company are held by related parties. 19. EMPLOYEE BENEFIT PLANS: The Company maintains a defined contribution savings and investment retirement plan under section 401(k) of the Internal Revenue Code in which all employees are eligible to participate after completing three months of service. Participants may contribute from 1% to 15% of their compensation each year. The Company does not make matching contributions and does not maintain any other pension or post-retirement benefit plans. The Company maintains an employee stock purchase plan whereby up to 800,000 shares of Common Stock can be purchased by employees. Purchases are made each June 30 and December 31 at a price equal to 85% of the fair market value of the stock on the lower of the first or last day of the six-month period then ended. Purchases are limited as defined in the plan. The plan is available to all eligible employees of the Company and its subsidiaries who are not beneficial owners of 5% or more of the outstanding Common stock. During 1998 and 1997, a total of 138,076 and 191,601 shares, respectively, were purchased under the plan. 358,913 shares remain available for purchase under this plan. Approximately 218,000 shares were issued subsequent to year end to satisfy the Plan's obligation as of December 31, 1998. 20. SUPPLEMENTAL CASH FLOWS DISCLOSURES: Interest paid was $2.7 million , $4.1 million and $5.2 million in 1998, 1997 and 1996, respectively. Income tax paid was $364,000 in 1996. During 1997 and 1996, capital lease obligations of $601,000 and $6.5 million, respectively, were incurred when the Company entered into a financing lease for equipment purchases. 38 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 39 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information with respect to the Company's Directors will be contained in the Company's definitive proxy statement with respect to the Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto. ITEM 11. EXECUTIVE COMPENSATION This information will be contained in the Company's definitive Proxy Statement with respect to the Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year and is hereby incorporated by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information will be contained in the Company's definitive Proxy Statement with respect to the Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year and is hereby incorporated by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information will be contained in the Company's definitive Proxy Statement with respect to the Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year and is hereby incorporated by reference thereto. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are included in Part II, Item 8: Report of Independent Auditors Financial Statements: Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) The following financial schedule is submitted herewith: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 40 41 (3) Exhibits included herein: 3.1 The Company's Certificate of Incorporation (1) 3.2 The Company's By-Laws (1) 3.3 Certificate of Designations, Preferences and Rights of Series A Convertible Non- Redeemable Preferred stock (2) 4.1 Form of Warrant to Purchase Common stock (3) 4.2 Indenture dated January 29, 1998, between SubMicron Systems Corporation, a Delaware corporation, and United States Trust Company of New York, a New York corporation (4) 4.3 Purchase Agreement dated November 26, 1997, regarding 12% Senior Subordinated Notes due February 2002 and Warrants, including Form of Note (5) 4.4 Warrant Agreement dated November 26, 1997, including Form of Warrant (5) 4.5 Form of Series B 12% Senior Subordinated Note due February 1, 2002. 4.6 Form of Warrant accompanying Series B 12% Senior Subordinated Note due February 1, 2002. 4.7 Form of Series 1999 12% Senior Subordinated Convertible Note due February 1, 2002. 10.1 Amended and Restated 1991 Stock Option Plan (6)(7) 10.2 Executive Stock Option Plan (1)(6) 10.3 1994 Employee Stock Purchase Plan (6)(7) 10.4 1995 Stock Option Plan for Non-Employee Directors (3) (6) 10.5 1997 Stock Option Plan for Non-Employee Directors (6)(7). 10.6 Stockholder Agreement dated November 26, 1997 (5) 10.7 Employment Agreement between the Company and James S. Molinaro (1)(6) 10.8 Employment Agreement between the Company and David J. Ferran (6)(8). 10.9 Employment Agreement between the Company and John W. Kizer (6)(8). 10.10 Severance/Consulting Agreement between the Company and David F. Levy (6)(8). 10.11 Lease Agreement, as amended, dated as of January 16, 1992, between Rouse and Associates ("Rouse) and SSC, as amended by Letter Agreement dated February 13, 1992, between Realprop Management, Inc., (an affiliate of Rouse) and SubMicron (1) 10.12 Loan and Security Agreement among Greyrock Business Credit, a division of NationsCredit Commercial Corporation, SubMicron Systems, Inc. and SubMicron Wet Process Stations, Inc. dated November 25, 1997 (8). 10.12(a) Amendment to Credit Facility with Greyrock 10.13 Tax Indemnification Agreement dated May 22, 1992, among SubMicron, David F. Levy and James S. Molinaro (1) 10.14 Indemnity Agreement, dated April 1992, by and among SubMicron, David Levy and James Molinaro (1) 41 42 10.15 Form of Subordinated Note and Preferred Stock Purchase Agreement (8) 10.16 Asset Purchase Agreement among SubMicron Systems Corporation, Systems Chemistry Incorporated and The BOC Group, Inc.(8) 21 List of Subsidiaries 23 Consent of Ernst & Young LLP 27 Financial Data Schedule - ----------------------- (1) Incorporated by reference to an Exhibit filed as part of the Company's Registration Statement on Form S-4, File No. 33-64500. (2) Incorporated by reference to an exhibit filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to an Exhibit filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to an exhibit filed as part of the Company's Registration Statement on Form S-4, File No. 333-38741. (5) Incorporated by reference to an exhibit filed as part of the Company's Current Report on Form 8-K dated November 26, 1997. (6) Constitutes a compensatory plan or arrangement required to be filed as an exhibit to this Form. (7) Incorporated by reference to an exhibit filed as part of the Company's Registration Statement on Form S-8, File No. 333-69695. (8) Incorporated by reference to an exhibit filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (b) Reports on Form 8-K: 8-K filed December 24, 1998 42 43 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance at Beginning Charged to Costs Other Balance at of Period and Expenses Accounts Deductions End of Period --------- ------------ -------- ---------- ------------- For the year ended December 31, 1998: Allowances for doubtful accounts receivable $ 945,000 $ 1,080,000 $ -- $ (273,000) $1,752,000 ========== =========== =========== =========== ========== For the year ended December 31, 1997: Allowances for doubtful accounts receivable $1,297,000 $ 813,000 $ (90,000) $(1,075,000) $ 945,000 ========== =========== =========== =========== ========== For the year ended December 31, 1996: Allowances for doubtful accounts receivable $ 473,000 $ 824,000 $ -- $ -- $1,297,000 ========== =========== =========== =========== ==========
43 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUBMICRON SYSTEMS CORPORATION By: /s/ David J. Ferran _________________________________ David J. Ferran, President Date: March 31, 1999 Pursuant to the requirements to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ David J. Ferran President and Director March 31, 1999 ________________________________________ (Principal Executive Officer) David J. Ferran /s/ John W. Kizer Chief Financial Officer March 31, 1999 ________________________________________ (Principal Financial and John W. Kizer Accounting Officer) /s/ Mark R. Benham Director March 31, 1999 ________________________________________ Mark R. Benham /s/ Ronald B. Booth Director March 31, 1999 ________________________________________ Ronald B. Booth /s/ Robert J. Wickey Director March 31, 1999 ________________________________________ Robert J. Wickey /s/ Bonaparte H. Liu Director March 31, 1999 ________________________________________ Bonaparte H. Liu /s/ Kevin M. Lynch Director March 31, 1999 ________________________________________ Kevin M. Lynch /s/ James E. Newton Director March 31, 1999 ________________________________________ James E. Newton /s/ Donald Zito Director March 31, 1999 ________________________________________ Donald Zito
44 EX-4.5 2 FORM OF SERIES B 12% SENIOR SUBORDINATED, 02/01/02 1 EXHIBIT 4.5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. THIS NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT. PURSUANT PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL ISSUE DISCOUNT AND TREASURY REGULATIONS THEREUNDER, THE ISSUER OF THIS NOTE WILL, BEGINNING NO LATER THAN TEN DAYS AFTER THE ISSUE DATE HEREOF, PROMPTLY MAKE AVAILABLE TO ANY HOLDER UPON REQUEST TO SUBMICRON SYSTEMS CORPORATION, 6330 HEDGEWOOD DRIVE, #150, ALLENTOWN, PENNSYLVANIA 18106, ATTENTION: CHIEF FINANCIAL OFFICER, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE PRICE OF THIS NOTE, THE ISSUE DATE OF THIS NOTE, AND THE YIELD TO MATURITY OF THIS NOTE. SUBMICRON SYSTEMS CORPORATION Date SERIES B 12% SENIOR SUBORDINATED NOTE DUE FEBRUARY 1, 2002 No: U.S. $ SUBMICRON SYSTEMS CORPORATION, a Delaware corporation (the "Company"), for value received, promises to pay to ______________ or its registered assigns (the "Holder"), on February 1, 2002, the principal amount of $ _____ (or such lesser principal amount as is then unpaid) and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount hereof at the rate of 12% per annum. The Company shall pay interest on the unpaid principal amount of this Series B Note (as hereinafter defined) quarterly in arrears. Interest due and payable (i) up to and including September 30, 1999, will be payable in the form of Interest Units and (ii) thereafter will be payable in cash. Certain capitalized terms shall have the meanings specified in Section 10 hereof. Interest accruing from the date of issuance through the immediately following March 31, June 30, September 30 or December 31, as applicable, shall be payable on such date. Thereafter, interest shall be payable quarterly in arrears as described above, until the principal amount hereof shall have been paid in full. Notwithstanding the foregoing, if there has occurred and is continuing any Event of Default under Sections 10(a)(i) or 10(a)(ii) of this Series B Note, then interest on all unpaid amounts outstanding hereunder (including overdue installments of principal or interest) shall be payable at the Default Rate, compounded monthly (to the extent permitted by applicable law).The Company may treat the Person in whose name this Series B Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes. The principal and interest on this Series B Note payable in cash is payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Company may pay principal and interest by federal funds bank wire transfer, or by check payable in such legal tender. 2 1. The Series B Notes. This note (a "Series B Note") is one of a series of promissory notes of the Company, designated as "Series B 12% Senior Subordinated Notes due February 1, 2002" and which are issued or may be issued in connection with (a) the Company's offering of New Units pursuant to a Confidential Private Offering Memorandum dated December 2, 1998 (the "Offering Memorandum"), (b) incentives which may be granted to certain of the Company's management, (c) the issuance of notes to certain holders of the Company's 8% Convertible Subordinated Notes due March 26, 2002 and the Company's 12% Senior Subordinated Notes due February 1, 2002 (the "Series 1997 Notes") in lieu of certain cash interest payments, (d) additional issuances of notes by the Company which are designated as Series B 12% Senior Subordinated Notes due February 1, 2002 and (e) the payment of interest under any of the foregoing which is scheduled to be paid on or before October 1, 1999 (such notes as may be issued from time to time under (a) through (e) above are collectively referred to as the "Series B Notes"). This Series B Note ranks pari passu with the Series 1997 Notes and all other Series B Notes. 2. Redemption. (a) The Company may redeem this Series B Note at any time in whole or from time to time in part, at a redemption price equal to 100% of the principal amount of this Series B Note, plus accrued interest to the redemption date, plus a redemption premium equal to 2% of the principal amount redeemed. If fewer than all of the Series B Notes are to be redeemed, the Company shall select the Series B Notes to be redeemed on a substantially pro rata basis among all holders of Series B Notes. (b) If at any time on or prior to February 1, 2002, there is a Redemption Event, Holders of a majority in principal amount of the outstanding Series B Notes may, by written notice to the Company, require that the Company redeem all, but not less than all, of the outstanding Series B Notes at a redemption price equal to 100% of the principal amount of the Series B Notes so being redeemed, plus accrued interest to the redemption date, plus a redemption premium equal to 2% of the principal amount redeemed; provided, however, that in the event of closing of any public offering of any equity or debt securities of the Company, the amount redeemed shall not exceed the amount of net proceeds received by the Company in connection with such public offering. (c) If at any time on or prior to February 1, 2002, there is a Refinancing Event, each Holder may, by written notice to the Company, require that the Company redeem up to one-half of the principal amount of the Series B Notes held by such Holder at a redemption price equal to 100% of the principal amount of the Series B Notes so being redeemed, plus accrued interest to the redemption date, plus a redemption premium equal to 2% of the principal amount redeemed; provided, however, that the amount redeemed shall not exceed the net proceeds received by the Company in connection with such Refinancing Event. 3. Redemption Procedure. (a) At least 10 days but not more than 30 days before a redemption date, the Company shall mail a notice of redemption to each Holder whose Series B Note is to be redeemed. The notice shall: (i) identify the Series B Notes to be redeemed and shall state the redemption date; (ii) state the redemption price (principal amount plus accrued interest through such date); (iii) indicate, if any Series B Note is being redeemed in part, the portion of the principal amount of such Series B Note to be redeemed and that, after the redemption date, upon surrender of such Series B Note, a new Series B Note or Series B Notes in principal amount equal to the unredeemed portion will be issued; (iv) state that Series B Notes called for redemption must be surrendered to the Company to collect the redemption price; and (v) state that interest on the Series B Notes called for redemption ceases to accrue on and after the redemption date, unless the Company has defaulted on the payment of the redemption price. (b) Once notice of redemption is mailed, Series B Notes called for redemption -2- 3 become due and payable on the redemption date at the redemption price. (c) Upon surrender of a Series B Note that is redeemed in part, the Company shall issue a new Series B Note equal in principal amount to the unredeemed portion of the Series B Note surrendered. 4. Covenants of the Company. So long as any of the Series B Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Series B Notes as follows: (a) Obligations under Other Documents. Subject to performance by the holder of its obligations thereunder, the Company shall satisfy all of its obligations under the Warrants and the Security Documents (as defined herein). (b) SEC Reports. The Company shall deliver to the Holders within 15 days after it files them with the Securities and Exchange Commission copies of any reports, proxy statements and other information which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. (c) Stay, Extension and Usury Laws. The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter enforce, which may affect the covenants or the performance of its obligations under this Series B Note; and the Company (to the extent it may lawfully do so) each hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. (d) Limitation on Dividends and Redemption. The Company shall not, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to the holders (as such) in respect of, any shares of its capital stock, other than in shares of it common stock, par value $.0001 per share; (ii) purchase, redeem or otherwise acquire or retire for value any equity interests (including warrants, options or other rights to acquire such equity interests) of the Company or any subsidiary (other than any such equity interest of a directly or indirectly wholly-owned subsidiary of the Company) or other Affiliate (as defined under Rule 501 under the Securities Act of 1933, as amended) of the Company; (iii) permit any subsidiary to declare or pay any dividend on, or make any distribution to the holders (as such) in respect of, any shares of its capital stock except to the Company or another directly or indirectly wholly owned subsidiary of the Company; or (iv) permit any subsidiary to purchase, redeem or otherwise retire for value any equity interests (including warrants, options or other rights to acquire such equity interests) of it, the Company or any Affiliate of either of them (other than any such Equity Interests owned by the Company or any other directly or indirectly wholly owned subsidiary of the Company). 5. Covenants of the Holder. By Holder's acceptance of this Series B Note, Holder acknowledges and warrants to any Senior Lender that the Subordinated Indebtedness (as defined in Section 10 hereof) is and shall continue to be (a) unsecured, except for a second-priority security interest created by the Security Agreement dated November 26, 1997, as amended (the "Security Agreement"), and the Patent Security -3- 4 Agreement dated November 26, 1997, as amended (the "Patent Security Agreement"), (or any subsequent security agreements approved by the Senior Lender) and (b) not subject to any guaranties by any direct or indirect subsidiaries of the Company other than the Continuing Guaranty dated November 26, 1997, as amended (the "Guaranty"), or any subsequent guarantees approved by the Senior Lender. 6. Subordination. (a) Series B Notes Subordinated to Senior Indebtedness. By Holder's acceptance of this Series B Note, Holder covenants and agrees that this Series B Note, the Guaranty and the other Security Documents shall be subordinated in right of payment in accordance with the provisions of this Section 6 to the prior indefeasible payment in full of all amounts payable under or in respect of Senior Indebtedness (as such term is defined in Section 10). (b) Priority and Payment Over of Proceeds in Certain Events. (i) Subordination on Dissolution, Liquidation or Reorganization of the Obligor. Upon any payment or distribution of assets or securities of Obligor, of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of Obligor, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts payable under or in respect of Senior Indebtedness shall first be indefeasibly paid in full, or payment provided for, before the Holder shall be entitled to receive any payment or distribution of any cash, property or securities under or in respect of Subordinated Indebtedness. Before any payment may be made by Obligor or in respect of Subordinated Indebtedness upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of cash, property or securities of Obligor of any kind or character to which the Holder would be entitled, except for the provisions of this Section 6, shall be made by Obligor or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution directly to the Senior Lender (as defined in Section 10) or its representatives to the extent necessary to pay all the Senior Indebtedness in full after giving effect to any concurrent payment or distribution to the Senior Lender. (ii) Subordination on Default in Senior Indebtedness. (A) No direct or indirect payment by or on behalf of Obligor under or in respect of the Subordinated Indebtedness, whether pursuant to the terms of the Subordinated Indebtedness or upon acceleration, offer to purchase or otherwise, shall be made if, at the time of such payment, there exists a default in the payment (including, without limitation, any payment default resulting from any acceleration of the Senior Indebtedness) under or in respect of the Senior Indebtedness and (A) the collateral agent under the Security Agreement (the "Agent") has received written notice thereof, if any, as provided in Section 6(i) and (B) such default shall not have been cured or waived in writing or the benefits of this sentence waived in writing by the Senior Lender. (B) During the continuance of any other default with respect to the Senior Indebtedness, upon the receipt by the Agent of written notice from the Senior Lender specifying all events of default with respect to the Senior Indebtedness, which the person executing such notice on behalf of the Senior Lender reasonably believes to exist as of the date of such notice after due inquiry, no payment may be made by Obligor under or in respect of Subordinated Indebtedness for a period ("Payment Blockage Period") commencing on the date of receipt of any such notice and ending at the earlier of (X) the date when all events of default which were specified by the Senior Lender in the notice which triggered such Payment Blockage Period have been cured or waived, and (Y) 90 days after the date of receipt of such notice (unless such Payment Blockage Period shall be terminated earlier by written notice to the Agent from the Senior Lender). (C) During any Payment Blockage Period, the Company will promptly provide Holder with a copy of any written notice delivered to the Company by the Senior Lender stating that all events of default which were specified by the Senior Lender in the notice which -4- 5 triggered such Payment Blockage Period have been cured or waived. Notwithstanding anything herein to the contrary (1) in no event will a Payment Blockage Period extend more than 90 days from the date such notice is effective, and (2) payments due but not made with respect to the Subordinated Indebtedness during the Payment Blockage Period may be made at any time after the expiration of the Payment Blockage Period (unless another Payment Blockage Period is in effect or payment is otherwise prohibited pursuant to this Section 6, including, without limitation, in connection with a payment default). No more than two Payment Blockage Periods may be commenced for any reason during any period of 360 consecutive days. For all purposes of this Section 6(b)(ii), no event of default under the Senior Indebtedness which the person executing such notice on behalf of the Senior Lender reasonably believed (after due inquiry) to exist and be continuing on the date of the commencement of any Payment Blockage Period (whether or not such event of default was included in the notice required to be given under this Section 6(b)(ii)) shall be, or be made, the basis for the commencement of any subsequent Payment Blockage Period whether or not within a period of 360 consecutive days. (iii) Rights and Obligations of the Holder of the Series B Note. In the event that, notwithstanding the foregoing provision prohibiting such payment or distribution, any holder of the Subordinated Indebtedness shall have received any payment under or in respect of the Subordinated Indebtedness at a time when such payment was prohibited by this Section 6, then and in such event (subject to the provisions of Section 6(g)) such payment or distribution shall be received and held in trust for the Senior Lender and shall be paid over or delivered to the Senior Lender promptly, in accordance with Section 6(b)(i) without notice or demand therefor, to the extent necessary to pay in full all amounts due under or in respect of the Senior Indebtedness in accordance with its terms after giving effect to any concurrent payment or distribution to the Senior Lender. (iv) Acceleration of the Subordinated Indebtedness and Exercise of Remedies With Respect Thereto. The holders of the Subordinated Indebtedness shall give the Senior Lender 30 days prior written notice of any acceleration of the maturity of the Subordinated Indebtedness with respect to an Event of Default under Section 9(a)(i), (ii), (iii) or (iv) hereof. All Senior Indebtedness then or thereafter due or declared to be due shall first be indefeasibly paid in full before the holders of the Subordinated Indebtedness are entitled to receive any payment from Obligor under or in respect of Subordinated Indebtedness. (v) Right to Rely Upon Orders and Decrees With Respect to Payments and Distributions. Upon any payment or distribution of cash, assets or securities referred to in this Section 6, the holders of the Subordinated Indebtedness shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, and upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making any such payment or distribution, delivered for the purpose of ascertaining the persons entitled to participate in such distribution, and the holders of other indebtedness of Obligor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 6. (c) Payments May be Paid Prior to Dissolution. Nothing in this Section 6 shall prevent Obligor, except under the conditions described in Sections 6(b), 6(d) or 6(g) (including, without limitation, if a payment default has occurred and is continuing with respect to the Senior Indebtedness), from making payments at any time under or in respect of Subordinated Indebtedness to the holders thereof entitled thereto unless at least two Business Days prior to the date upon which such payment would otherwise (except for the prohibitions contained in Section 6(b)) become due and payable, the Holder or the Agent shall have received the written notice provided for in Section 6(g). An Obligor shall give prompt written notice to the Agent and the Holder of any dissolution, winding up, liquidation or reorganization of such Obligor. (d) Rights of Senior Lender Not to be Impaired. No right of the Senior Lender to -5- 6 enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act in good faith by the Senior Lender or by any noncompliance by Obligor with the terms and provisions and covenants in this Section 6, regardless of any knowledge thereof the Senior Lender may have or otherwise be charged with. The provisions of this Section 6 are intended to be for the benefit of, and shall be enforceable directly by, the Senior Lender. The Holder agrees not to amend the Series B Notes, including without limitation, for all purposes of this Section 6(d), to increase the interest rate payable by Obligor, increase the fees payable to the Holder or add new fees payable to the Holder, in each case other than fees payable by the issuance of additional notes or an equity interest, or provide for amortization of the principal amount of the Series B Notes prior to the dates provided for in the Series B Notes. Notwithstanding any other provision contained in the Series B Notes or otherwise, prior to the earlier of repayment in full of all obligations owed by Obligor to Senior Lender and January 1, 2000, Obligor shall not make any payment on, or in connection with, the Series B Notes, except for (i) payments made by the issuance of Interest Units or an equity interest to the Holder or (ii) interest as currently provided herein. (e) Subrogation. Upon the indefeasible payment in full of all amounts payable under or in respect of the Senior Indebtedness, the holders of the Subordinated Indebtedness shall be subrogated to the rights of the Senior Lender to receive payments or distributions to the Senior Lender of any cash, property or securities to which holders of the Subordinated Indebtedness would be entitled except for the provisions of this Section 6, and no payment pursuant to the provisions of this Section 6 to the Senior Lender by the holders of the Subordinated Indebtedness, shall, as between Obligor, its creditors other than the Senior Lender and the holders of the Subordinated Indebtedness, be deemed to be a payment by Obligor to or on account of such Subordinated Indebtedness, it being understood that the provisions of this Section 6 are solely for the purpose of defining the relative rights of the Senior Lender, on the one hand, and the holders of the Subordinated Indebtedness, on the other hand. If any payment or distribution to which the holders of the Subordinated Indebtedness would otherwise have been entitled but for the provisions of this Section 6 shall have been applied, pursuant to the provisions of this Section 6, to the payment of all amounts payable under the Senior Indebtedness, then and in such case, the holders of the Subordinated Indebtedness, together with any holders of indebtedness ranking pari passu with the Subordinated Indebtedness, shall be entitled to receive from the Senior Lender any payments or distributions received by the Senior Lender in excess of the amount sufficient to pay in full all amounts payable under or in respect of the Senior Indebtedness. (f) Obligations of the Obligor Unconditional. Nothing contained in this Section 6, or any of the Series B Notes is intended to or shall impair, as between Obligor and the holders of the Subordinated Indebtedness, the obligations of Obligor, which are absolute and unconditional, to pay to the holders of the Subordinated Indebtedness all amounts which may be payable thereunder or in respect thereof (including, without limitation, the principal of and interest on the Subordinated Indebtedness) as and when the same shall become due and payable in accordance with the terms thereof, or is intended to or shall affect the relative rights of the holders of the Subordinated Indebtedness and creditors of Obligor other than the Senior Lender, nor shall anything herein or therein prevent any holder of the Subordinated Indebtedness from exercising all rights and remedies otherwise permitted by applicable law upon default under the Subordinated Indebtedness, subject to Section 6(b) and to the rights, if any, under this Section 6 of the Senior Lender in respect of cash, property or securities of Obligor received upon the exercise of any such right or remedy. The failure of Obligor to make payment on account of principal or interest on the Subordinated Indebtedness and all other amounts may be payable in respect thereof by reason of any provision of this Section 6 shall not be construed as preventing the occurrence of an event of default under the Subordinated Indebtedness. (g) Holder Entitled to Assume Payments not Prohibited in Absence of Notice. The Holder shall not at any time be charged with the knowledge of the existence of any facts other than any acceleration of the Subordinated Indebtedness which would prohibit the receipt of any payment to the Holder, unless and until the Agent or the Holder shall have received written notice thereof from or on behalf of Obligor, the Senior Lender or from any trustee, representative or agent therefor which notice shall specify the applicable provision of this Section 6 which prohibits or restricts receipt of payment by -6- 7 the Holder; and, prior to the receipt of any such written notice by the Agent or the Holder, the Holder shall be entitled to assume conclusively that no such facts exist. Unless at least two Business Days prior to the date on which by the terms of the Subordinated Indebtedness any monies are to be paid by Obligor to the Holder for any purpose (including, without limitation, the payment of the principal or interest on the Subordinated Indebtedness), the Agent or the Holder shall have received the notice provided for in the preceding sentence, the Holder shall have full power and authority to receive such monies and shall be entitled to keep and retain the same, and shall not be affected by any notice to the contrary which may be received by it on or after such date; provided, however, that the foregoing shall not apply with reference to a payment of Subordinated Indebtedness pursuant to an acceleration thereof unless the Senior Lender has received written notice of such acceleration pursuant to Section 6(b)(iv) (if required) which notice shall have been received by the Senior Lender not less than thirty days in advance of the date of such payment. Notwithstanding the foregoing, if any payment is made by Obligor after the occurrence and during the continuance of a payment default with respect to the Senior Indebtedness, the Holder shall promptly pay over and deliver to the Senior Lender such payment if (i) the Senior Lender notifies the Agent of such payment default not more than two Business Days after such payment is made to the Holder, or (ii) the payment is made after the acceleration of the Subordinated Indebtedness. It is understood that for purposes of this Section 6, "payment default" with respect to the Senior Indebtedness means any late payment under the Senior Indebtedness regardless of whether any applicable grace period has expired. Each of the Agent and the Holder shall be entitled to rely on the delivery to it of a written notice by a person representing himself, herself or itself to be an authorized signatory for the Senior Lender (or a trustee, representative or agent on behalf of, or other representative of, the Senior Lender) to establish that such notice has been given by or on behalf of the Senior Lender. (h) Reliance by Senior Lender. The Holder by acceptance hereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to the Senior Lender, whether the Senior Indebtedness was created or acquired before or after the issuance of this Note, to acquire or continue to hold the Senior Indebtedness and the Senior Lender shall be deemed conclusively to have relied on such subordination provisions in acquiring or continuing to hold any Senior Indebtedness. (i) Notice by Senior Lender. The Company agrees to use reasonable efforts to have the Senior Lender agree to notify the Agent and to have the Company or the Agent notify the Holder upon the happening of any of the following: (a) the transmittal by the Senior Lender of a notice of default to Obligor; or (b) the acceleration of the Senior Indebtedness; or (c) the transfer by assignment and novation of any Senior Indebtedness, specifying the name and address of the transferee; provided, however, that the failure by the Senior Lender to give any notice to the Agent or the Holder required by this Section 6(i)(c) shall not result in any liability on the part of the Senior Lender or have any other effect except as expressly set forth in Sections 6(b), 6(c) and 6(g). Notwithstanding anything in this Note to the contrary, any notice required to be given herein by the Senior Lender to the Agent or the Holder, or which the Senior Lender desires to give to the Holder, under or in connection with this Note (including without limitation all notices under this Section 6), may be give to the Agent at United States Trust Company of New York, 114 West 47th Street, 25th Floor, New York, NY 10036, Attn: Corporate Trust, or at such other address as the Agent may designate by written notice to the Senior Lender, and receipt by the Agent of any such written notice shall, for all purposes of this Note, be deemed to be receipt thereof by the Holder. (j) Notice By the Holder . The Holder agrees to notify the Senior Lender upon the -7- 8 happening of any of the following: (a) the transmittal by the Holder of a notice of default to Obligor; or (b) acceleration of the Subordinated Indebtedness; or (c) the transfer of any Subordinated Indebtedness, specifying the name and address of the transferee; provided, however, that the failure by the Holder to give any notice to the Senior Lender required by this Section shall not result in any liability on the part of the Holder or have any other effect except as expressly set forth in Section 6(b). 7. Security Documents. In order to secure the Company's obligation to pay the principal of this Series B Note, the Company has granted the Holder, pursuant to the terms of the Security Agreement and pro rata based on the relationship that the dollar amount of this Series B Note bears to the aggregate dollar amount of all Series B Notes and Series 1997 Notes outstanding from time to time, a lien and security interest on substantially all of the assets of the Company. The Company's obligations under this Series B Note have also been guarantied by SubMicron Systems, Inc. and SubMicron Wet Process Stations, Inc. (the "Subsidiary Guarantors") pursuant to the Guaranty. The Subsidiary Guarantors' obligations under such guaranties have been secured by a security interest in certain of their assets pursuant to the terms of the Security Agreement, and, with respect to SubMicron Systems, Inc., the Patent Security Agreement (and together with the Security Agreement and the Guaranty, the "Security Documents"). The Holder acknowledges and agrees that such lien and guaranties are second priority liens and guaranties, junior to the liens and guarantees granted (or may in the future be granted) to holders of Senior indebtedness. 8. Acceptance of Series B Note. The Holder, by acceptance of this Series B Note, (i) agrees to be bound by the terms of (a) the Security Documents, including without limitation, the indemnification provisions contained therein, and (b) the Intercreditor Agreement dated November 24, 1998 (the "Intercreditor Agreement") and (ii) agrees with, ratifies and confirms the appointment of (x) the Collateral Agent under each of the Security Documents (as such term is defined in each such Security Document), as such Holder's attorney-in-fact under the Security Documents and authorizes the Collateral Agent to take such action as may be necessary to effectuate the purposes of the Security Documents and (y) the Collateral Agent under the Security Agreement as the Agent hereunder. Copies of the Security Documents and the Intercreditor Agreement, together with any amendments or replacements shall be maintained at the principal executive offices of the Company and shall be available for inspection by Holder on reasonable notice. -8- 9 9. Modification of Notes. The Series B Notes may be modified without prior notice to any Holder but with the written consent of the Holders of a majority in principal amount of the Series B Notes then outstanding. The Holders of a majority in principal amount of the Series B Notes then outstanding may waive compliance by the Company with any provision of the Series B Notes without prior notice to any Holder. However, without the consent of each Holder affected and subject to Section 6(d), an amendment, supplement or waiver may not (a) alter the amount of Series B Notes whose Holders must consent to an amendment, supplement or waiver, (b) alter the rate or the time for payment of interest on any Series B Note, (c) alter the principal or the maturity of any Series B Note or alter the redemption or prepayment provisions with respect thereto or (d) make any Series B Note payable in money or property other than as stated in the Series B Notes. Notwithstanding the foregoing, by acceptance of this Series B Note as described in Section 8 above, the Holder, pursuant to the terms of the Intercreditor Agreement, has agreed to vote or consent to the certain actions as forth in the Intercreditor Agreement. 10. Defaults and Remedies. (a) Events of Default. An "Event of Default" hereunder occurs if: (i) the Company defaults in the payment of the principal of any Series B Note when the same becomes due and payable at maturity, upon redemption or otherwise; (ii) the Company defaults in the payment of interest on any Series B Note when the same becomes due and payable and the default continues for a period of three days; (iii) the Company fails to comply in any material respect with any of the covenants hereunder and the Default (as hereinafter defined) continues for the period and after the notice specified below; (iv) there occurs any Event of Default with respect to the Series 1997 Notes (as an Event of Default is defined in the Series 1997 Notes from time to time and subject to any applicable grace periods or waivers thereof); (v) the Company or any of its material subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) generally is unable to pay its debts as the same become due; or (vi) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its material subsidiaries in an involuntary case, -9- 10 (B) appoints a Custodian of the Company or any of its material subsidiaries or for all or substantially all of its property, or (C) orders the liquidation of the Company or any of its material subsidiaries, and the order or decree remains unstayed and in effect for 60 days. The term "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. For the purposes of this Section 9(a), "Default" means any event which is, or after notice or passage of time would be, an Event of Default. A Default under Section 9(a)(iii) is not an Event of Default until the Holders of at least 25% in aggregate principal amount of the then outstanding Series B Notes notify the Company of the Default and the Company does not cure the Default within 30 days. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." (b) Acceleration of Notes. If an Event of Default (other than an Event of Default specified in clauses (v) and (vi) of Section 9(a)) occurs and is continuing, the holders of at least 25% in aggregate principal amount of the then outstanding Series B Notes, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (v) or (vi) of Section 9(a) occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Holder. The holders of a majority in principal amount of the then outstanding Series B Notes by notice to the Company may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. (c) Other Remedies. If an Event of Default occurs and is continuing, holders of the Series B Notes may pursue any available remedy to collect the payment of principal or interest on the Series B Notes or to enforce the performance of any provision of the Series B Notes; provided, however, that acceleration of the Series B Notes shall be governed by Section 9(b) hereof. A delay or omission by any holder of any Series B Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. (d) Waiver of Past Defaults. The holders of a majority in principal amount of the then outstanding Series B Notes by notice to the Company may waive an existing default of Event of Default and its consequences except a continuing default or Event of Default in the payment of the principal of or interest on any Series B Notes. (e) Rights of Holders to Receive Payment. Except as otherwise provided in Section 6 hereof, the right of any holder of a Series B Note to receive payment of principal and interest on the Series B Note, on or after the respective due dates expressed in the Series B Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder. (f) Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Series B Note, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, -10- 11 including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 11. Definitions. The terms defined in this Section 11 shall, for all purposes of this Series B Note, have the meanings herein specified, unless the context otherwise requires. "Change of Control" shall occur or be deemed to have occurred if (i) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) shall beneficially own (other than the purchaser or any transferees of the purchasers) at least 30% of the Company's voting stock and the purchasers shall beneficially own, directly or indirectly, less voting stock than such other Person or "group" or (ii) a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the first issuance of Series B Notes or (ii) was nominated for election or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Company" means SubMicron Systems Corporation, a Delaware corporation. "Default Rate" means 15% per annum. "Holder" means the Person in whose name a Series B Note is registered on the Company's books. "Interest Unit" means units consisting of Series B Notes in a principal amount equal to the amount of interest otherwise payable in cash on an interest payment date with respect to a Series B Note and Warrants to purchase 720 shares of Common Stock for each $1,000 principal amount of Series B Notes issued with respect to such interest payment (pro rated for Series B Notes not in multiples of $1,000). "New Units" means units, each unit consisting of $1,000 principal amount of Series B Notes and Warrants to purchase 5,000 shares of the Company's Common Stock. "Obligor" means any one of the Company, SubMicron Systems, Inc., a Pennsylvania corporation, and SubMicron Wet Process Stations, Inc., a California corporation. "Person" means any individual, partnership, corporation, trust, unincorporated organization or government or agency or political subdivision thereof. "Redemption Event" shall occur or be deemed to have occurred if any of the following events occur: (i) the merger or consolidation of the Company with or into any other entity; (ii) the consummation of a sale or disposition by the Company of all or substantially all of its assets or the stock or assets of a material business division or Subsidiary of the Company; (iii) a Change of Control of the Company; (iv) the closing of any public offering of any equity or debt securities of the Company; or (v) approval by the Board of Directors of a plan of complete liquidation or dissolution of the Company. "Refinancing Event" shall occur or be deemed to have occurred if the Company consummates, or is able to consummate using its reasonable best efforts, a financing in which the -11- 12 Company or its Subsidiaries incur Senior Indebtedness that refinances or increases the principal amount of any Senior Indebtedness previously outstanding or available to the Company, and that bears an initial interest rate of less than 12% per annum, and that permits redemption of the Series B Notes as provided herein. "Senior Indebtedness" means (a) all monetary obligations, whether now existing or hereafter arising, under the Loan Agreement between the Company, the Subsidiary Guarantors and the Senior Lender, in effect from time to time, including, without limitation, (A) obligations in respect of payments of principal or interest on all Loans or mandatory prepayments thereof, and (B) commitment or other fees, yield protection and indemnity amounts, enforcement expenses or other amounts on or with respect thereto, and (b) any amendments, modifications, deferrals, renewals, extensions, substitutions, future advances or increases of any monetary obligations described in clause (a) above, or debentures, notes or evidences of indebtedness heretofore or hereafter issued in evidence of or in exchange for such indebtedness or payment obligations; provided, however, that the aggregate amount of Senior Indebtedness shall be limited to $20,000,000 principal amount of Senior Indebtedness, plus accrued interest thereon, plus reasonable attorneys fees incurred in connection with the Senior Indebtedness. Nothing herein shall prohibit Senior Lender from lending additional amounts in excess of the limits of Senior Indebtedness as set forth in the previous sentence. Any such lending of amounts in excess of the limit of Senior Indebtedness set forth above shall not cause any amounts otherwise qualifying as Senior Indebtedness up to the limit set forth above not to be classified as Senior Indebtedness. "Senior Lender" means Greyrock Business Credit, a Division of NationsCredit Commercial Corporation and any subsequent holder of Senior Indebtedness. "Subordinated Indebtedness" means (a) all monetary obligations, whether now existing or hereafter arising, under (i) the Series B Notes and (ii) any guaranties issued by any Obligor in favor of the holders of any Series B Notes, as the foregoing may from time to time be in effect, including, without limitation, (A) obligations in respect of payments of principal or interest thereon or mandatory prepayments thereof and including any principal and interest payable with respect to any offer to purchase any Series B Notes, and (B) commitment or other fees, yield protection and indemnity amounts, enforcement expenses or other amounts on or with respect thereto, and (b) any amendments, modifications, deferrals, renewals, extensions, substitutions, future advances or increases of any monetary obligations described in clause (a) above, or debentures, notes or evidences of indebtedness heretofore or hereafter issued in evidence of or in exchange for such indebtedness or payment obligations. "Warrant" means a warrant to purchase shares of the Company's Common Stock, substantially in the form of Exhibit B to the Offering Memorandum. 12. Non-Waiver. No course of dealing between the Company and the Holder of this Note or any delay or failure on the part of the Holder hereof in exercising any rights hereunder shall operate as a waiver of any rights of any holder hereof, except to the extent expressly waived in writing by the Holder hereof. 13. Governing Law. This Note shall be construed in accordance with and governed by the internal laws of the State of New York. 14. Successors and Assigns. -12- 13 All of the covenants, promises and agreements in this Note shall bind the Company's successors and assigns, whether so expressed or not. 15. Headings. The headings of the sections and paragraphs of this Note are inserted for convenience only and shall not be deemed to constitute a part hereof. IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by a duly authorized officer and to be dated as of the day and year first above written. SUBMICRON SYSTEMS CORPORATION Dated: By: Name: Title: -13- 14 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ _________________________________agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: _____________ Your Signature:______________________________________ _____________________________________________________ (Sign exactly as your name appears on the front of this Note) Signature Guarantee: -14- EX-4.6 3 FORM OF WARRANT ACCOMPANYING SERIES B 12%... 1 EXHIBIT 4.6 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. No. Warrants Warrant Certificate SubMicron Systems Corporation This Warrant Certificate certifies that _____________or registered assigns, is the registered holder (the "Holder" ) of the number of Warrants (the "Warrants") set forth above to purchase common stock, $0.0001 par value (the "Common Stock"), of SubMicron Systems Corporation, a Delaware corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company one fully paid and nonassessable share of Common Stock of the Company at the initial exercise price (the "Exercise Price") of $_____ [110% of fair market value (currently average of the closing bid and asked price) of a share of Common Stock on the respective issue date of each Warrant] payable in lawful money of the United States of America, upon surrender of this Warrant Certificate and payment of the Exercise Price at the office of the Company. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants (the "Series B Warrants") which are issued in units in conjunction with the Company's Series B Notes, as defined in the Company's Private Offering Memorandum dated November 23, 1998 regarding the offering of units of the Company's Series B 12% Senior Subordinated Notes due February 1, 2002 and Warrants. The shares of Common Stock issuable on exercise of the Series B Warrants are referred to herein as the "Warrant Shares." 1. Exercise of Warrants. (a) Subject to the terms hereof, the Holder shall have the right, which may be exercised at any time or from time to time commencing on the date hereof until 5:00 p.m., New York City time, on November 26, 2007 (the "Exercise Period") to receive from the Company the number of fully paid and nonassessable Warrant Shares (and such other consideration) which the Holder may at the time be entitled to receive on exercise of the Warrants and payment of the Exercise Price then in effect for such Warrant Shares. In lieu of payment of the Exercise Price, the Holder may exercise the right, during the Exercise Period, to receive Warrant Shares on a net basis, such that, without the exchange of any funds, the Holder receives that number of Warrant Shares (and such other consideration) otherwise issuable (or payable) upon exercise of its Warrants less that number of Warrant Shares having an aggregate Current Market Value (as defined in Section 2(f)) at the time of exercise equal to the aggregate Exercise Price that would otherwise have been paid by the Holder for the Warrant Shares. Each Warrant not exercised during the Exercise Period shall become void and all rights thereunder and all rights in respect thereof under this Warrant Certificate shall cease as of such time. (b) A Warrant may be exercised upon surrender to the Company at its office of the Warrant Certificate to be exercised with the form of election to purchase attached thereto duly filled in and signed, and upon payment to the Company of the Exercise Price for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made in cash or by certified or official bank check payable to the order of the Company or, at the election of the Holder, through the surrender to the Company of Series B Notes, the aggregate principal amount of which, together with any unpaid accrued interest thereon, equals the aggregate Exercise Price, or in the manner provided in Section 1(a) above. (c) Subject to the provisions of Section 7 hereof, upon such surrender of Warrants and payment of the Exercise Price the Company shall issue and cause to be delivered with all reasonable 2 dispatch to or upon the written order of the Holder and in such name or names as such Holder may designate a certificate or certificates for the number of full Warrant Shares issuable upon the exercise of such Warrants (and such other consideration as may be deliverable upon exercise of such Warrants) together with cash for fractional Warrant Shares as provided in Section 5. Such certificate or certificates shall be deemed to have been issued and the person so named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price, irrespective of the date of delivery of such certificate or certificates for Warrant Shares. (d) Each Warrant shall be exercisable during the Exercise Period, at the election of the Holder thereof, either in full or from time to time in part and, in the event that the Warrant Certificate is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued and delivered pursuant to the provisions of this Section 1. 2. Adjustment of Exercise Price and Number of Warrant Shares Issuable. The number of shares of Common Stock issuable upon the exercise of each Warrant (the "Warrant Number") is initially one. The Exercise Price and Warrant Number are subject to adjustment from time to time upon the occurrence of the events enumerated in, or as otherwise provided in, this Section 2. (a) Adjustment for Change in Capital Stock(a) Adjustment for Change in Capital Stock If the Company: (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (2) subdivides or reclassifies its outstanding shares of Common Stock into a greater number of shares; (3) combines or reclassifies its outstanding shares of Common Stock into a smaller number of shares; (4) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (5) issues by reclassification of its Common Stock any shares of its capital stock; then the Warrant Number in effect immediately prior to such action shall be proportionately adjusted so that the holder of any Warrant thereafter exercised may receive the aggregate number and kind of shares of capital stock of the Company which he or it would have owned immediately following such action if such Warrant had been exercised immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. If the occurrence of any event listed above results in an adjustment under subsections (b) or (c) below, no adjustment shall be made under this subsection (a). (b) Adjustment for Rights Issue(b) Adjustment for Rights Issue -2- 3 If the Company distributes any rights, options or warrants (whether or not immediately exercisable) to holders of its Common Stock entitling them to purchase shares of Common Stock at a price per share less than the Specified Value (as defined in subsection (f) below) per share on the record date relating to such distribution, the Warrant Number shall be adjusted in accordance with the formula: W' = W x O + N ---------- O + N x P ----- M where: W' = the adjusted Warrant Number. W = the Warrant Number immediately prior to the record date for any such distribution. O = the number of Fully Diluted Shares (as defined in subsection (p) below) outstanding on the record date for any such distribution. N = the number of additional shares of Common Stock issuable upon exercise of such rights, options or warrants. P = the exercise price per share of such rights, options or warrants. M = the Specified Value per share of Common Stock on the record date for any such distribution. The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If at the end of the period during which all or a portion of such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the Warrant shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued with respect to such portion that is no longer exercisable. (c) Adjustment for Other Distributions(c) Adjustment for Other Distributions If the Company distributes to holders of its Common Stock (i) any evidences of indebtedness of the Company or any of its subsidiaries, (ii) any assets of the Company or any of its subsidiaries (other than cash dividends which are paid out of retained earnings of the Company), or (iii) any rights, options or warrants to acquire any of the foregoing or to acquire any other securities of the Company, the Warrant Number shall be adjusted in accordance with the formula: W' = W x M ----- M - F -3- 4 where: W' = the adjusted Warrant Number. W = the Warrant Number immediately prior to the record date mentioned below. M = the Specified Value per share of Common Stock on the record date mentioned below. F = the fair market value on the record date mentioned below of the indebtedness, assets, rights, options or warrants distributable to the holder of one share of Common Stock. The adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. If an adjustment is made pursuant to this subsection (c) as a result of the issuance of rights, options or warrants and at the end of the period during which all or a portion of any such rights, options or warrants are exercisable, not all such rights, options or warrants (or portion thereof) shall have been exercised, the Warrant shall be immediately readjusted as if "F" in the above formula was the fair market value on the record date of the indebtedness or assets actually distributed upon exercise of such rights, options or warrants, with respect to such portion that is no longer exercisable, divided by the number of shares of Common Stock outstanding on the record date. This subsection does not apply to rights, options or warrants referred to in subsection (b) of this Section 2. (d) Adjustment for Common Stock Issue(d) Adjustment for Common Stock Issue If the Company issues shares of Common Stock for a consideration per share less than the Specified Value per share on the date the Company fixes the offering price of such additional shares, the Warrant Number shall be adjusted in accordance with the formula: W' = W x A ----- O + P - M where: W' = the adjusted Warrant Number. W = the Warrant Number immediately prior to any such issuance. O = the number of Fully Diluted Shares outstanding immediately prior to the issuance of such additional shares of Common Stock. P = the aggregate consideration received for the issuance of such additional shares of Common Stock. M = the Specified Value per share of Common Stock on the date of issuance of such additional shares. A = the number of Fully Diluted Shares outstanding immediately after the issuance of such additional shares of Common Stock. The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. -4- 5 This subsection (d) does not apply to: (1) any of the transactions described in subsection (a) of this Section 2; or (2) the issuance of Common Stock in connection with (i) the exercise of Warrants, or (ii) the conversion, exchange or exercise of any options, warrants, or other securities convertible into or exchangeable or exercisable for Common Stock. (e) Adjustment for Convertible Securities Issue(e) Adjustment for Convertible Securities Issue If the Company issues any options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock (other than securities issued in transactions described in subsection (b) or (c) of this Section 2) for a consideration per share of Common Stock initially deliverable upon conversion, exchange or exercise of such securities less than the Specified Value per share on the date of issuance of such securities, the Warrant Number shall be adjusted in accordance with this formula: W' = W x O + D ------ O + P - M where: W' = the adjusted Warrant Number. W = the Warrant Number immediately prior to any such issuance. O = the number of Fully Diluted Shares outstanding immediately prior to the issuance of such securities. P = the aggregate consideration received for the issuance of such securities. M = the Specified Value per share of Common Stock on the date of issuance of such securities. D = the maximum number of shares of Common Stock deliverable upon conversion or in exchange for or upon exercise of such securities at the initial conversion, exchange or exercise rate. The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance. If all of the Common Stock deliverable upon conversion, exchange or exercise of such securities has not been issued when such securities are no longer outstanding, then the Warrant Number shall promptly be readjusted to the Warrant Number which would then be in effect had the adjustment upon the issuance of such securities been made on the basis of the actual number of shares of Common Stock issued upon conversion, exchange or exercise of such securities. This subsection (e) does not apply to the issuance of the Warrants or the grant to employees or directors of options having an exercise price of not less than the Market Price (as defined below) of the Common Stock as of the date of the grant. (f) Specified Value(f) Specified Value "Specified Value" per share of Common Stock shall be the greater of the Current Market Value or the Exercise Price. -5- 6 "Current Market Value" per share of Common Stock at any date shall be the average of the daily Market Prices of the Common Stock for each business day during the period commencing 30 business days before such date and ending on the date one day prior to such date or, if the Security has been registered under the Securities Exchange Act of 1934 (the "Exchange Act") for less than 30 consecutive business days before such date, then the average of the daily Market Prices for all of the business days before such date for which daily Market Prices are available. If the Market Price is not determinable for at least 15 business days in such period, the Current Market Value of the Security shall be determined based on the good faith determination of the Board of Directors of the Company. Market Price for security (a "Security") on each business day means: (i) if the Security is listed or admitted to trading on any securities exchange, the closing price, regular way, on such day on the principal exchange on which such Security is traded, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (ii) if such Security is not then listed or admitted to trading on any securities exchange, the last reported sale price on such day, or if there is no such last reported sale price on such day, the average of the closing bid and the asked prices on such day, as reported by a reputable quotation source designated by the Company, or (iii) if neither clause (i) nor (ii) is applicable, the average of the reported high bid and low asked prices on such day, as reported by the "Over-The-Counter" Bulletin Board or other reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City of New York, customarily published on each business day, designated by the Company or (iv) if clause (iii) is not applicable, the Market Price of the Security shall be determined based on the good faith determination of the Board of Directors of the Company. (g) Consideration Received(g) Consideration Received For purposes of any computation respecting consideration received pursuant to subsections (d) and (e) of this Section 2, the following shall apply: (1) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (2) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof (irrespective of the accounting treatment thereof) as determined in good faith by the Board of Directors; and (3) in the case of the issuance of options, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion, exchange or exercise thereof (the consideration in each case to be determined in the same manner as provided in clauses (1) and (2) of this subsection). (h) When De Minimis Adjustment May Be Deferred No adjustment in the Warrant Number need be made unless the adjustment would require an increase or decrease of at least 0.5% in the Warrant Number. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment, provided that no such adjustment shall be deferred beyond the date on which a Warrant is exercised. All calculations under this Section 2 shall be made to the nearest 1/1000th of a share. -6- 7 (i) When No Adjustment Required If an adjustment is made upon the establishment of a record date for a distribution subject to subsections (a), (b) or (c) of this Section 2 and such distribution is subsequently cancelled, the Warrant Number then in effect shall be readjusted, effective as of the date when the Board of Directors determines to cancel such distribution, to that which would have been in effect if such record date had not been fixed. To the extent the Warrants become convertible into cash, no adjustment need be made thereafter as to the amount of cash into which such Warrants are exercisable. Interest will not accrue on the cash. (j) Notice of Adjustment (j) Notice of Adjustment Whenever the Warrant Number or Exercise Price is adjusted, the Company shall provide the notices required by Section 9 hereof. (k) Voluntary Reduction (k) Voluntary Reduction The Company from time to time may reduce the Exercise Price by any amount for any period of time (including, without limitation, permanently) if the period is at least 20 days and if the reduction is irrevocable during the period. Whenever the Exercise Price is reduced, the Company shall mail to Warrant Holders a notice of the reduction. The Company shall mail the notice at least 15 days before the date the reduced Exercise Price takes effect. The notice shall state the reduced Exercise Price and the period it will be in effect. A reduction of the Exercise Price under this Subsection (k) (other than a permanent reduction) does not change or adjust the Exercise Price otherwise in effect for purposes of subsections (a), (b), (c), (d) or (e) of this Section 2. (l) When Issuance or Payment May Be Deferred In any case in which this Section 2 shall require that an adjustment in the Warrant Number be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the Holder of any Warrant exercised after such record date the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise on the basis of the Warrant Number prior to such adjustment, and (ii) paying to such Holder any amount in cash in lieu of a fractional share pursuant to Section 5; provided, however, that the Company shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares, other capital stock and cash upon the occurrence of the event requiring such adjustment. -7- 8 (m) Reorganizations (i) In case of any capital reorganization, other than in the cases referred to in Sections 2(a), (b), (c), (d) or (e) hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale of the property of the Company as an entirety or substantially as an entirety (collectively such actions being hereinafter referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of any Warrant (in lieu of the number of shares of Common Stock theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock that would otherwise have been deliverable upon the exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a duly adopted resolution certified by the Company's Secretary or Assistant Secretary, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of Warrants. (ii) The Company shall not effect any such Reorganization unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such Reorganization or the corporation purchasing or leasing such assets or other appropriate corporation or entity shall expressly assume, by a written acknowledgement executed and delivered to the Holder(s), the obligation to deliver to each such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase, and all other obligations and liabilities under this Warrant Certificate. (n) Adjustment in Exercise Price Upon each adjustment of the Warrant Number pursuant to this Section 2, the Exercise Price in effect prior to the making of the adjustment in the Warrant Number shall thereafter be adjusted as follows: E' = E x W --- W' where: E' = the adjusted Exercise Price. E = the Exercise Price prior to adjustment. W' = the adjusted Warrant Number. W = the Warrant Number prior to adjustment. (o) Form of Warrants(o) Form of Warrants Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Warrant Certificate. -8- 9 (p) Miscellaneous For purpose of this Section 2, the term "shares of Common Stock" shall mean (a) shares of any class of stock designated as Common Stock of the Company at the date of this Warrant Certificate, and (b) shares of any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. For purposes of this Section 2, the term "Fully Diluted Shares" shall mean (a) shares of Common Stock outstanding as of a specified date, and (b) shares of Common Stock into or for which rights, options, warrants or other securities outstanding as of such date are exercisable or convertible (other than the Warrants), provided that either: (i) such rights, options, warrants or other securities are issued and outstanding as of the date of this Warrant Certificate, or (ii) the conversion or exercise price of such rights, options, warrants or other securities is not greater than 120% of the fair market value, as of their issue date, of the Common Stock issuable upon conversion or exercise thereof. In the event that at any time, as a result of an adjustment made pursuant to this Section 2, the holders of Warrants shall become entitled to purchase any securities of the Company other than, or in addition to, shares of Common Stock, thereafter the number or amount of such other securities so purchasable upon exercise of each Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in subsections (a) through (o) of this Section 2, inclusive, and the provisions of Sections 1, 4, 5 and 7 with respect to the Warrant Shares or the Common Stock shall apply on like terms to any such other securities. (q) No Adjustment for Series B Notes or Series B Warrants Notwithstanding anything in this Warrant Certificate to the contrary, there shall be no adjustments made under this Section 2 with respect to the offer or issuance of any Series B Notes or Series B Warrants. 3. Restrictions on Transfer; Registration of Transfers and Exchanges. (a) The Warrants (and any Warrant Shares issued upon the exercise of the Warrants) may not be transferred except in compliance with applicable securities laws, except that such holder may transfer any or all of the Warrants or the Warrant Shares to any of its general partners, limited partners, shareholders or affiliates, or any combination of the foregoing, if such transfer is effected in accordance with such securities laws and this Warrant Certificate. (b) Prior to any proposed transfer of the Warrants or the Warrant Shares, unless such transfer is made pursuant to Rule 144 or an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), the transferring Holder will deliver to the Company an opinion of counsel, reasonably satisfactory in form and substance to the Company, to the effect that the Warrants or Warrant Shares, as applicable, may be sold or otherwise transferred without registration under the Securities Act. The Company will reimburse the transferring Holder for the reasonable fees and expenses incurred in obtaining any such opinion of counsel. Upon original issuance thereof, and until such time as the same shall have been registered under the Act or sold pursuant to Rule 144 promulgated thereunder (or any similar rule or regulation), each Warrant Certificate or certificate for Warrant Shares shall bear any legend required pursuant to the Act. (c) The Company shall from time to time register the transfer of any outstanding Warrant Certificates in a Warrant register to be maintained by the Company upon surrender thereof accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered Holder or Holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be canceled and disposed of by the Company. (d) Warrant Certificates may be exchanged at the option of the Holder(s) thereof, when surrendered to the Company at its office for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant -9- 10 Certificates surrendered for exchange shall be canceled and disposed of by the Company. 4. Reservation of Warrant Shares; Valid Issuance; Exchange Listing. (a) The Company shall at all times reserve and keep available, free from preemptive rights, of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. (b) The Company covenants that all Warrant Shares and other capital stock issued upon exercise of Warrants will, upon payment of the Exercise Price therefor and issue, be validly authorized and issued, fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof, except as otherwise provided in Section 7 hereof. (c) The Company shall from time to time take all action which may be necessary or appropriate so that the Warrant Shares, immediately upon their issuance following an exercise of Warrants, will be listed on the principal securities exchanges and markets within the United States of America, if any, on which other shares of Common Stock are then listed. 5. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 5, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the fair market value of the Warrant Share so issuable (as determined in good faith by the Board of Directors), multiplied by such fraction. 6. Registration Rights (a) Demand Registration (i) Request for Registration by Certain Holders of Registrable Securities. At any time the Company receives from the holder(s) of 50% of the outstanding Registrable Securities (as defined in Section 6(i)) a written request that the Company effect a registration or qualification of at least 25% of the Registrable Securities then outstanding (a "Demand Registration"), the Company will: (A) promptly give written notice of the proposed registration or qualification to all other holders of Registrable Securities known to the Company, which holders may request in writing within 10 days after receipt of such notice that Registrable Securities held by them be included in such Demand Registration, and the number of Registrable Securities requested to be so included shall be deemed a part of such Demand Registration; and (B) as soon as practicable, use its best efforts to effect such registration or qualification (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under the applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as is reasonably necessary to permit or facilitate the sale and distribution of all or such portion of such holder's or holders' Registrable Securities as is specified in such request; provided that the Company will not be obligated to effect more than two Demand Registrations pursuant to a request under this Section 6. -10- 11 Subject to the foregoing provisions, the Company will file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, but in any event within 90 days, after receipt of the request or requests of the initiating holders. (ii) Effective Registration and Expenses. A registration of Registrable Securities will not count as a Demand Registration until it has become effective and has remained effective for 180 days or until all Registrable Securities included therein have been sold, if earlier. The Company will pay all Registration Expenses (as hereinafter defined) in connection with any registration initiated as a Demand Registration, whether or not it becomes effective. (iii) Priority on Demand Registrations. If the holder or holders of a majority in number of the Registrable Securities to be registered in a Demand Registration under this Section 6 so elect, the offering of such Registered Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. In such event, if the managing underwriter or underwriters of such offering advise the Company and the holders in writing that in their opinion the number of Registrable Securities requested to be included in such offering is sufficiently large so as to adversely affect the success of the offering, then the Company will include in such registration the maximum amount of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such adverse effect. Subject to the advice of the managing underwriter or underwriters concerning the size and composition of the offering, the Company will include Registrable Securities or other Common Stock in such registration in accordance with the following priorities: (i) first, pro rata among all holders of Registrable Securities who have requested to be included in such registration pursuant to Section 6(a) hereof, in proportion to the number of shares each such holder requested to be included in the offering; and (ii) second, pro rata among the other holders of Common Stock of the Company who have requested to be included in such registration pursuant to piggy-back registration provisions of other registration rights agreements, in proportion to the number of shares each such holder requested be included in the offering pursuant to their piggy-back rights; and (iii) third, any Common Stock proposed to be issued or sold for the account of the Company. (iv) Selection of Underwriters. If any Demand Registration is to be in the form of an underwritten offering, the investment banker or bankers and manager or managers that will administer the offering will be selected by the holders of a majority in number of the Registrable Securities to be included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. (b) Piggy-Back Registration. If at any time the Company shall determine to file a registration statement under the Securities Act relating to a proposed sale to the public of any of its securities, except for nonconvertible debt securities (other than a registration statement on Form S-8 or Form S-4 or any successor to such Forms) either for its own account or the account of a security holder or holders, the Company shall: (i) promptly give to each holder of a Registrable Security known to the Company written notice thereof (which notice will include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws, the proposed offering price, and the plan of distribution); (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after such written notice from the Company, by any holder or holders of Registrable Securities; -11- 12 (iii) use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering, if any, to permit the Registrable Securities requested to be included in the registration statement for such offering to be included on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering advise the Company in writing that, in their opinion, marketing considerations require a limitation on the number of shares of Common Stock or other Registrable Securities offered pursuant to any registration statement subject to this Section, then subject to the advice of said managing underwriter or underwriters as to the size and composition of the offering, the Company will include Common Stock and other Registrable Securities in such registration in accordance with the following priorities: (i) first, Common Stock to be sold for the account of the Company or, if such registration statement is filed at the demand of a selling shareholder or shareholders, in accordance with the provisions of such requirement; and (ii) second, pro rata with respect to all holders of Registrable Securities or other Common Stock of the Company who have requested to be included in the registration pursuant to this Section 6(b) or pursuant to other, analogous piggy-back registration provisions of other agreements, in proportion to the number of shares each such holder requested to be included in the offering pursuant to their piggy-back rights. The Company will bear all Registration Expenses in connection with a piggy-back registration. Holders of Registrable Securities may exercise piggy-back registration rights under this Section 6(b) at any time or from time to time, so long as such holders continue to hold Registrable Securities. (c) Hold-Back Agreements (i) Restrictions on Public Sale by Holders of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Sections 6(a) or 6(b) hereof agrees, if requested in writing by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 7-day period prior to, and during the 180-day period following, the effective date of the Registration Statement for each underwritten offering made pursuant to such Registration Statement, to the extent timely requested in writing by the Company or the managing underwriters. (ii) Restrictions on Public Sale by the Company and Others. The Company agrees: (A) not to effect any public or private sale or distribution of its debt or equity securities, including a sale pursuant to Regulation D under the Securities Act, during the 7-day period prior to, and during the 90-day period following, the effective date of the Registration Statement for each underwritten offering made pursuant to a Registration Statement filed under Section 6 hereof, to the extent timely requested in writing by the managing underwriters (except as part of such underwritten registration or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms); and (B) to cause each holder of its privately placed debt or equity securities issued by the Company at any time on or after the date of this Warrant Certificate to agree not to effect any public sale or distribution, including a sale pursuant to Rule 144 under the Securities Act, of any such securities during the period set forth in clause (1) above with respect to a Registration Statement filed under Section 6(a) hereof, to the extent timely requested in writing by the managing underwriters (except as part of such underwritten registration, if permitted). -12- 13 (d) Registration Procedures In connection with the Company's registration obligations pursuant to Sections 6(a) and 6(b) hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof (provided, however, the Company shall have no obligation to proceed with or maintain the effectiveness of any Registration Statement under Section 6(b) hereof), and pursuant thereto the Company will as expeditiously as possible: (i) with respect to Registration Statement under Section 6(a) hereof, before filing a Registration Statement or Prospectus or any amendments or supplements thereto, furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be made available for prior review by such holders and underwriters, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority in number of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (ii) with respect to Registration Statement under Section 6(a) hereof, prepare and file with the Securities and Exchange Commission (the "SEC") such amendments and post-effective amendments to any Registration Statement, and such supplements to the Prospectus, as may be reasonably requested by any holder of Registrable Securities or any underwriter of Registrable Securities or as may be required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or otherwise necessary to keep such Registration Statement effective for the applicable period and cause the Prospectus as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (B) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (C) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by paragraph (xiv) below cease to be true and correct, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (F) of the existence of any fact which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading; -13- 14 (iv) with respect to a Registration Statement under Section 6(a) hereof, make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (v) with respect to a Registration Statement under Section 6(a) hereof, if reasonably requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, immediately incorporate in a Prospectus supplement or post-effective amendment such necessary information as the managing underwriters or the holders of a majority in number of the Registrable Securities being sold reasonably request to have included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (vi) at the request of any selling holder of Registrable Securities, furnish to such selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (vii) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such persons may reasonably request; the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (viii) with respect to a Registration Statement under Section 6(a) hereof, prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject; (ix) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (x) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof and the underwriters, if any, to consummate the disposition of such Registrable Securities; (xi) with respect to a Registration Statement under Section 6(a) hereof, if any fact contemplated by Section 6(d)(iii)(F) shall exist, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; -14- 15 (xii) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed, if requested by the holders of a majority in number of such Registrable Securities or by the managing underwriters, if any; (xiii) not later than the effective date of the applicable Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable trustee(s) or transfer agent(s) with printed certificates for the Registrable Securities which are in a form eligible for deposit with Depositary Trust Company; (xiv) with respect to a Registration Statement under Section 6(a) hereof, enter into agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (A) make such representations and warranties and give indemnities to the holders of such Registrable Securities and the underwriters, if any, in form, scope and substance as are customarily made by issuers to underwriters in primary underwritten offerings; (B) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions shall be reasonably satisfactory in form, scope and substance to the managing underwriters, if any, and the holders of a majority in number of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (C) if an underwritten offering, obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with primary underwritten offerings; (D) if an underwriting agreement is entered into, cause the same to set forth in full the indemnification provisions and procedures of Section 6(f) hereof (or such other substantially similar provisions and procedures as the underwriters shall reasonably request) with respect to all parties to be indemnified pursuant to said Section; and (E) deliver such documents and certificates as may be reasonably requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with paragraph (xi) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at the effectiveness of such Registration Statement, each closing under any underwriting or similar agreement as and to the extent required thereunder and from time to time as may reasonably be requested by any selling holder in connection with the disposition of Registrable Securities pursuant to such Registration Statement, all in a manner consistent with customary industry practice; (xv) with respect to a Registration Statement under Section 6(a) hereof, make available to a representative of the holders of a majority in number of the Registrable Securities, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by the sellers or underwriter all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the registration, with respect to each at such time or times as the Company -15- 16 shall reasonably determine; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order; (xvi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 15 months after the effective date of a Registration Statement; (xvii) with respect to a Registration Statement under Section 6(a) hereof, cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD") and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); and (xviii) with respect to a Registration Statement under Section 6 hereof, promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement) provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(d)(xi), such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(d)(xi), or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods mentioned in Section 6(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either receives the copies of the supplemented or amended prospectus contemplated by Section 6(d)(xi) hereof or is advised in writing by the Company that the use of the Prospectus may be resumed. Notwithstanding any other provisions of this Warrant Certificate, upon receipt by the Purchaser of a written notice signed by the President, the Chief Executive Officer, the Chief Financial Officer or any Vice President of the Company, to the effect set forth below, the Company shall not be obligated during a reasonable period of time thereafter to effect any registrations pursuant to this Warrant Certificate, and the holders of Registrable Securities agree to immediately suspend sales of any securities under any effective Registration Statement for a reasonable period of time, in either case not to exceed 90 days, at any time during which, in the Company's reasonable judgment, (i) there is a development involving the Company or any of its affiliates which is material but which has not yet been publicly disclosed or (ii) sales pursuant to the Registration Statement would materially and adversely affect an underwritten public offering for the account of the Company or any other material financing project or a proposed or pending material merger or other material acquisition or material business combination or material disposition of the Company's assets, to which the Company or any of its affiliates is, or is expected to be, a party. In the event sales pursuant to an effective Registration Statement are suspended in accordance with this paragraph, there shall be added to the period during which the Company is obligated to keep a registration effective the number of days for which sales were suspended. The Company may not provide more than one such notice during any 360-day period. In addition, the Company has entered into a Registration Rights Agreement dated as of November 26, 1997 with The KB Mezzanine Fund II, L.P. and Celerity Silicon, L.L.C. (the "Registration Rights Agreement"). Pursuant to such Agreement, -16- 17 the Company has agreed not to effect, and to cause each holder of its privately placed debt or equity securities not to effect, any public sale of equity securities during the 7-day period prior to and the 90-day period following the effective date of an underwritten demand registration pursuant to such Agreement, to the extent timely requested in writing by the managing underwriters of such offering. The holders of Registrable Securities acknowledge such restriction and agree that each holder of Registrable Securities and the Company shall comply with such provision of the Registration Rights Agreement. (e) Registration Expenses (i) All expenses incident to the Company's performance of or compliance with this Warrant Certificate will be paid by the Company, regardless whether the Registration Statement becomes effective, including, without limitation: (A) all registration and filing fees (including, without limitation, with respect to filings required to be made with the NASD); (B) fees and expenses of compliance with securities or blue sky laws (including, without limitation, fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of Registrable Securities being sold may designate); (C) printing (including, without limitation, expenses of printing or engraving certificates for the Registrable Securities in a form eligible for deposit with Depositary Trust Company and of printing prospectuses), messenger, telephone and delivery expenses; (D) fees and disbursements of counsel for the Company, for the underwriters and for the selling holders of the Registrable Securities (subject to the provisions of Section 6(e)(ii) hereof); (E) fees and disbursements of all independent certified public accountants of the Company (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (F) fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of any person other than the Company, the underwriters and the selling holders); (G) fees and expenses of other persons retained by the Company; and (H) fees and expenses associated with any NASD filing required to be made in connection with the Registration Statement, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained in accordance with the rules and regulations of the NASD (all such expenses being herein called "Registration Expenses"). The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any person, including special experts, retained by the Company. -17- 18 (ii) In connection with each Registration Statement required hereunder, the Company will reimburse the holders of Registrable Securities being registered pursuant to such Registration Statement for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a legal opinion is required from more than one counsel by the terms of any underwriting agreement relating to the registered offering) chosen by the holders of a majority of such Registrable Securities. (f) Indemnification (i) Indemnification by the Company. The Company agrees to indemnify and hold harmless each holder of Registrable Securities, its officers, directors, employees and agents and each person who controls such holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Holder") from and against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company by any holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if (i) such holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities and (ii) the Prospectus would have completely corrected such untrue statement or omission; and provided further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and if, having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of a Registrable Security to the person asserting such loss, claim, damage, liability or expense who purchased such Registrable Security which is the subject thereof from such holder. This indemnity will be in addition to any liability which the Company may otherwise have. If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel satisfactory to such Indemnified Holder and the payment of all expenses; provided, however, the failure to so notify the Company shall not affect any obligation the Company may have to indemnify the Indemnified Holder except to the extent the Company is materially adversely affected by such failure. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expense of such Indemnified Holder unless (a) the Company has agreed to pay such fees and expenses or (b) the Company shall have failed to assume the defense of such action or proceeding or shall have failed to employ counsel satisfactory to such Indemnified Holder in any such action or proceeding or (c) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Holder and the Company, and such Indemnified Holder shall have been advised by counsel that representation of both parties by the same counsel would be inappropriate due to actual or potential material differing interests between them (in which case, if such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder, it being understood, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the -18- 19 reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders, which firm shall be designated in writing by such Indemnified Holders). The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. (ii) Indemnification by Holder of Registrable Securities. Each holder of Registrable Securities severally agrees to indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such holder, but only with respect to information relating to such holder furnished in writing by such holder expressly for use in any Registration Statement or Prospectus, or any amendment or supplement thereto, or any preliminary prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a holder of Registrable Securities, such holder shall have the rights and duties given the Company and the Company or its directors or officers or such controlling person shall have the rights and duties given to each holder by the preceding paragraph. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any Prospectus or Registration Statement or any amendment or supplement thereto, or any preliminary prospectus. (iii) Contribution. If the indemnification provided for in this Section 6(f) is unavailable to an indemnified party under Section 6(f)(i) or Section 6(f)(ii) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and of the indemnified or indemnifying Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the indemnified or indemnifying Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the indemnified or indemnifying Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 6(f)(i) hereof, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 6(f)(iii) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 6(f)(iii), an indemnified or indemnifying Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities sold by such indemnified or indemnifying Holder or its affiliated indemnified or indemnifying Holders and distributed to the public were offered to the public exceeds the amount of any damages which such indemnified or indemnifying Holder, or its affiliated indemnified or indemnifying Holders, has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent -19- 20 misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (g) Rule 144 The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such information and requirements. (h) Participation in Underwritten Registrations No holder (or its successors or assigns) may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's securities on the basis provided in any underwriting arrangements approved by the underwriters and other persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. (i) Definitions (i) Registrable Securities: The Warrant Shares (and any other securities issued or issuable with respect to the Warrant Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization) issued or issuable upon exercise of the Series B Warrants; provided that a security ceases to be a Registrable Security when it is no longer a Transfer Restricted Security. (ii) Transfer Restricted Security: Securities acquired by the holder thereof other than pursuant to an effective registration under Section 5 of the Securities Act or pursuant to Rule 144; provided that a Security that has ceased to be a Transfer Restricted Security cannot thereafter become a Transfer Restricted Security. 7. Payment of Taxes. The Company will pay all documentary stamp taxes and other governmental charges (excluding all foreign, federal or state income, franchise, property, estate, inheritance, gift or similar taxes) in connection with the issuance or delivery of the Warrants hereunder, as well as all such taxes attributable to the initial issuance or delivery of Warrant Shares upon the exercise of Warrants and payment of the Exercise Price. The Company shall not, however, be required to pay any tax that may be payable in respect of any subsequent transfer of the Warrants or any transfer involved in the issuance and delivery of Warrant Shares in a name other than that in which the Warrants to which such issuance relates were registered, and, if any such tax would otherwise be payable by the Company, no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax, or it is established to the reasonable satisfaction of the Company that any such tax has been paid. 8. Mutilated or Missing Warrant Certificates. If any Warrant Certificate or certificate evidencing Warrant Shares shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution therefor and upon cancellation of the mutilated Warrant Certificate or other certificate, or in lieu of and substitution for the Warrant Certificate or other certificate lost, stolen or destroyed, a new Warrant Certificate or other certificate of like tenor and representing an equivalent number of Warrants or Warrant Shares. 9. Notices to Warrant Holders. Upon any adjustment pursuant to Section 2 hereof, the Company shall promptly thereafter (i) cause to be filed with the Company a certificate of an officer of the Company setting forth the Warrant Number and Exercise Price after such adjustment and setting forth in -20- 21 reasonable detail the method of calculation and the facts upon which such calculations are based, and (ii) cause to be given to each of the registered holders of the Warrant Certificates at his or its address appearing on the Warrant register written notice of such adjustments by first class mail, postage prepaid. Where appropriate, such notice may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 9. In case: (a) the Company shall authorize the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of shares of Common Stock of assets, including cash, evidences of its indebtedness, or other securities; or (c) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company proposes to take any action that would require an adjustment to the Warrant Number or the Exercise Price pursuant to Section 2 hereof; or then the Company shall cause to be given to each of the registered holders of the Warrant Certificates at his or its address appearing on the Warrant register, at least 30 days prior to the applicable record date hereinafter specified, or the date of the event in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section 9 or any defect therein shall not affect the legality or validity of any action taken requiring such notice. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holders of Warrants (prior to the exercise of such Warrants) the right to vote or to consent or to receive notice as shareholder in respect of the meetings of shareholders or the election of Directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company; provided that nothing in the foregoing provision is intended to detract from any rights explicitly granted to any Holder hereunder. 10. Notices to the Company and Warrant Holders. (a) All notices and other communications provided for or permitted hereunder shall be made by hand-delivery, first-class mail, telex, telecopier, or overnight air courier guaranteeing next day delivery. (b) All such notices and communications shall be deemed to have been duly given: -21- 22 at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back if telexed; when receipt acknowledged, if telecopied; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the addresses to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 11. Governing Law. This Warrant Certificate shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. 12. Severability. In the event that one or more of the provisions of this Warrant Certificate shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant Certificate, but this Warrant Certificate shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 13. Captions. The captions used in this Warrant Certificate are for convenience only; they form no part of this Warrant Certificate and shall not affect its interpretation. SUBMICRON SYSTEMS CORPORATION By:________________________________ Title: -22- 23 FORM OF ELECTION TO PURCHASE (To Be Executed Upon Exercise Of Warrant) The undersigned holder hereby represents that he or it is the registered holder of this Warrant Certificate, and hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive ______ shares of Common Stock, $.0001 par value, of SubMicron Systems Corporation and herewith tenders payment for such shares to the order of SubMicron Systems Corporation the amount of $______ in accordance with the terms hereof (unless the holder is exercising Warrants pursuant to the net exercise provisions of Section 1 of this Warrant Certificate). The undersigned requests that a certificate for such shares be registered in the name of the undersigned or nominee hereinafter set forth, and further that such certificate be delivered to the undersigned at the address hereinafter set forth or to such other person or entity as is hereinafter set forth. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of the undersigned or nominee hereinafter set forth, and further that such certificate be delivered to the undersigned at the address hereinafter set forth or to such other person or entity as is hereinafter set forth. Certificate to be registered as follows: Name:__________________________________________ Address:_______________________________________ _______________________________________ _______________________________________ Social Security or Taxpayer Identification No.:______________________________ Certificate to be delivered as follows: Name:__________________________________________ Address:_______________________________________ _______________________________________ _______________________________________ Signature:______________________________ Date:________________ -23- 24 ASSIGNMENT FORM To assign this Warrant, fill in the form below: (I) or (we) assign and transfer this Warrant to ___________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________ agent to transfer this Warrant on the books of the Company. The agent may substitute another to act for him. Date: Your Signature:______________________________ (Sign exactly as your name appears on the other side of this Warrant) Signature Guarantee: -24- EX-4.7 4 FORM OF SERIES 1999 12% SENIOR SUB CONV, 02/01/02 1 EXHIBIT 4.7 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. SUBMICRON SYSTEMS CORPORATION ____________, 1999 SERIES 1999 12% SENIOR SUBORDINATED CONVERTIBLE NOTE DUE FEBRUARY 1, 2002 No:____________ U.S. $___________ SUBMICRON SYSTEMS CORPORATION, a Delaware corporation (the "Company"), for value received, promises to pay to _____________________________ or its registered assigns (the "Holder"), on February 1, 2002 (the "Maturity Date"), the principal amount of $_________ (or such lesser principal amount as is then unpaid) and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount hereof at the rate of 12% per annum. The Company shall pay interest on the unpaid principal amount of this Series 1999 Note (as hereinafter defined) monthly in arrears. Interest due and payable (i) up to and including September 30, 1999, will be payable in the form of Series 1999 Notes (which shall accrue monthly as set forth above but be payable on a quarterly basis) and (ii) thereafter will be payable in cash; provided, that on any interest payment date after September 30, 1999 through and including January 1, 2000, the Company may, at its option, issue additional Series 1999 Notes in lieu of payment of up to one-half of the accrued interest due on such interest payment date. For each interest payment which the Company issues additional Series 1999 Notes in lieu of all or a portion of the interest then due as provided herein, the Company shall, pursuant to this paragraph, deliver additional Series 1999 Notes, dated such interest payment date, in a principal amount equal to the amount of interest not paid in cash in respect of this Series 1999 Note on such interest payment date. Each issuance of additional Series 1999 Notes in lieu of cash payments of interest on the Series 1999 Notes shall be made pro rata with respect to the outstanding Series 1999 Notes. Any such additional Series 1999 Notes shall be subject to the same terms (including the Maturity Date and the rate of interest from time to time payable 2 thereon) as this Series 1999 Note (except, as the case may be, with respect to the issuance date and aggregate principal amount). The Holder may, at its option, receive additional Series 1999 Notes in lieu of the cash interest otherwise due with respect to any Series 1999 Notes through the Maturity Date. Certain capitalized terms shall have the meanings specified in Section 12 hereof. Interest shall be payable monthly in arrears as described above, until the principal amount hereof shall have been paid in full. Notwithstanding the foregoing, if there has occurred and is continuing any Event of Default under Sections 11(a)(i) or 11(a)(ii) of this Series 1999 Note, then interest on all unpaid amounts outstanding hereunder (including overdue installments of principal or interest) shall be payable at the Default Rate, compounded monthly (to the extent permitted by applicable law) during the continuance of such Event of Default. The Company may treat the Person in whose name this Series 1999 Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes. The principal and interest on this Series 1999 Note payable in cash is payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Company may pay principal and interest by federal funds bank wire transfer, or by check payable in such legal tender. 1. Series 1999 Notes. This note (a "Series 1999 Note") is one of a series of promissory notes of the Company, designated as "Series 1999 12% Senior Subordinated Convertible Notes due February 1, 2002," including, without limitation, additional Series 1999 Notes issued in lieu of cash interest payments as provided in the Series 1999 Notes (all Series 1999 Notes as may be issued from time to time are collectively referred to as the "Series 1999 Notes"). This Series 1999 Note ranks pari passu with all other Series 1999 Notes. 2. Conversion. (a) Subject to and upon compliance with the delivery provisions set forth in Section 2(b), the Holder shall have the right, at the Holder's option, at any time and from time to time until the earlier of the Maturity Date or the Redemption Date (as hereinafter defined), by delivering a notice of conversion to the Company within the time period set forth in Section 2(b), to convert all or any portion of this Series 1999 Note into that number of shares of the Company's common stock, par value $.0001 per share (the "Common Stock"), equal to the principal amount (or portion thereof) of the Series 1999 Note being converted plus any accrued but unpaid cash interest thereon divided by $._______ (the "Conversion Price"). The person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date (as hereinafter defined). From and after the Conversion Date, interest on this Series 1999 Note (to the extent converted) will cease to accrue and the sole right of the Holder of this Series 1999 Note (with respect to the portion converted) shall be to receive the Common Stock issuable upon such conversion. (b) In order to effectuate the conversion of this Series 1999 Note pursuant to Section 2(a), the Holder shall give written notice to the Company, which notice shall be delivered at least five (5) days before the date of conversion (the "Conversion Date") specified in the Conversion -2- 3 Notice. On or prior to the Conversion Date, the Holder shall deliver this Series 1999 Note, duly endorsed (but effective only on the Conversion Date), or notify the Company that this Series 1999 Note has been lost, stolen or destroyed and promptly execute an agreement reasonably satisfactory to the Company to indemnify the Company from any loss which may be incurred by it in connection with the Series 1999 Note. Upon conversion of only a portion of this Series 1999 Note, the Company shall either make appropriate notation on this Series 1999 Note of the principal amount so converted and return this Series 1999 Note to the Holder or issue a new Series 1999 Note in the principal amount not so converted. The Common Stock issuable upon conversion shall be computed on the basis of the aggregate unpaid principal amount of the Series 1999 Note (or portion thereof) so converted plus accrued but unpaid interest thereon. The Company shall use its best efforts to, or cause the transfer agent to, issue and deliver as promptly as practicable and in no event later than five (5) business days after the Conversion Date, or after receipt of such agreement and indemnification, to such Holder or to its designee, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled. The Company shall not be required to issue any fractional shares of Common Stock; the Company shall pay cash in lieu of any fractional shares based on the then applicable Conversion Price. (c) In the event that the Company (i) declares a dividend of Common Stock on its Common Stock, (ii) subdivides its outstanding Common Stock into a larger number of shares of Common Stock by reclassification, stock split or otherwise, or (iii) combines its outstanding Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall be adjusted proportionally so that thereafter (as to the Conversion Price) the Holder of this Series 1999 Note shall be entitled to receive upon conversion of this Series 1999 Note the number of shares of Common Stock which such Holder would have owned after the happening of any of the events described above had this Series 1999 Note been converted immediately prior to the happening of such event; provided, that in no event shall the Conversion Price be reduced to less than the par value of the shares of Common Stock issuable upon conversion. An adjustment made pursuant to this Section 2(c) shall become effective immediately after the record date in the case of a dividend, or the payment date if no record date is fixed to determine the stockholders entitled to receive such dividend (and adjusted back to the Conversion Price in effect prior to such adjustment if the dividend is not paid), and shall become effective immediately after the effective date in the case of a subdivision or combination. This Section 2(c) shall apply to successive reclassifications of Common Stock. (d) In case of any capital reorganization, other than that referred to in Section 2(c) above, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale of the property of the Company as an entirety or substantially as an entirety (any such action being hereinafter referred to as a "Reorganization"), there shall thereafter be deliverable upon conversion of this Series 1999 Note (in lieu of the number of shares of Common Stock theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock that would otherwise have been deliverable upon the conversion of this Series 1999 Note would have been entitled upon such Reorganization if such Series 1999 Note had been converted in full immediately prior to such Reorganization. In case of any Reorganization, appropriate -3- 4 adjustment, as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a duly adopted resolution certified by the Company's Secretary or Assistant Secretary, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon conversion of this Series 1999 Note. 3. Redemption. (a) Subject to Section 2 above and provided that the Fair Market Value of the Common Stock is equal to or exceeds two times the Conversion Price for a period of thirty consecutive business days ending within five days of the mailing of the notice of redemption pursuant to Section 4(a) hereof, the Company may redeem this Series 1999 Note at any time in whole or from time to time in part, at a redemption price equal to 100% of the principal amount of this Series 1999 Note, plus accrued interest to the Redemption Date (as hereinafter defined), plus a redemption premium equal to 2% of the principal amount redeemed. If fewer than all of the Series 1999 Notes are to be redeemed, the Company shall select the Series 1999 Notes to be redeemed on a substantially pro rata basis among all holders of Series 1999 Notes. (b) If at any time on or prior to February 1, 2002, there is a Redemption Event, Holders of a majority in principal amount of the outstanding Series 1999 Notes may, by written notice to the Company, require that the Company redeem all, but not less than all, of the outstanding Series 1999 Notes at a redemption price equal to 100% of the principal amount of the Series 1999 Notes so being redeemed, plus accrued interest to the redemption date, plus a redemption premium equal to 2% of the principal amount redeemed; provided, however, that in the event of closing of any public offering of any equity or debt securities of the Company, the amount redeemed shall not exceed the amount of net proceeds received by the Company in connection with such public offering. (c) If at any time on or prior to February 1, 2002, there is a Refinancing Event, each Holder may, by written notice to the Company, require that the Company redeem up to one-half of the principal amount of the Series 1999 Notes held by such Holder at a redemption price equal to 100% of the Series 1999 Notes so being redeemed, plus accrued interest to the redemption date, plus a redemption premium equal to 2% of the principal amount redeemed; provided, however, that the amount redeemed shall not exceed the net proceeds received by the Company in connection with such Refinancing Event. 4. Redemption Procedure. (a) At least 10 days but not more than 30 days before a Redemption Date, the Company shall mail a notice of redemption to each Holder whose Series 1999 Note is to be redeemed. The notice shall: (i) identify the Series 1999 Notes to be redeemed and shall state the redemption date (the "Redemption Date"); (ii) state the redemption price (principal amount plus accrued interest through such date) for the Series 1999 Note or portion thereof being redeemed; (iii) indicate, if any Series 1999 Note is being redeemed in part, the portion of the principal amount of such Series 1999 Note to be redeemed and that, after the redemption date, upon surrender of such Series 1999 Note, a new Series 1999 Note or Series 1999 Notes in principal amount equal to the -4- 5 unredeemed portion will be issued; (iv) state that Series 1999 Notes called for redemption must be surrendered to the Company to collect the redemption price; and (v) state that interest on the Series 1999 Notes or portion thereof called for redemption ceases to accrue on and after the Redemption Date, unless the Company has defaulted on the payment of the redemption price. (b) Once notice of redemption is mailed, Series 1999 Notes, or portion thereof, called for redemption become due and payable on the Redemption Date at the redemption price (unless converted by the Holder prior to the Redemption Date pursuant to Section 2 hereof). (c) Upon surrender of a Series 1999 Note that is redeemed in part, the Company shall issue a new Series 1999 Note equal in principal amount to the unredeemed portion of the Series 1999 Note surrendered. 5. Covenants of the Company. So long as any of the Series 1999 Notes remain unpaid and outstanding, the Company covenants to the Holders of outstanding Series 1999 Notes as follows: (a) Payment of Series 1999 Notes; Satisfaction of Obligations. The Company shall pay the principal of and interest on the Series 1999 Notes on the dates and in the manner provided herein. If there has occurred and is continuing any Event of Default under Sections 11(a)(i) or 11(a)(ii) hereof, then to the extent lawful, the Company shall pay interest (including interest accruing after the commencement of any proceeding under any Bankruptcy Law) on all unpaid amounts outstanding under the Series 1999 Notes (including overdue installments of principal or interest) at the Default Rate, compounded monthly. Subject to performance by the Holder of its obligations thereunder, the Company shall satisfy all of its obligations under the Security Documents (as defined herein). (b) SEC Reports. The Company shall deliver to the Holder within 15 days after it files them with the Securities and Exchange Commission copies of any reports, proxy statements and other information which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. (c) Compliance Certificate. (i) The Company shall deliver to the Holders, within 45 days after the end of each fiscal quarter and within 90 days after the end of each fiscal year of the Company an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal quarter or fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Series 1999 Note, and further stating, as to each such Officer signing such certificate, that to his knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Series 1999 Note (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge) and that to his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the -5- 6 Securities are prohibited or if such event has occurred, a description of the event. The Officers' Certificate shall set forth all financial calculations for such fiscal quarter or fiscal year necessary to demonstrate the Company's compliance with the covenants contained in this Section 5. (ii) The Company will deliver to the Holders, forthwith upon becoming aware of any Default or Event of Default, an Officers' Certificate specifying in reasonable detail such Default, Event of Default or default and the nature of any remedial or corrective action the Company proposes to take with respect thereto. (d) Stay, Extension and Usury Laws. The Company covenants and agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter enforce, which may affect the covenants or the performance of its obligations under this Series 1999 Note; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law has been enacted. (e) Limitation on Dividends and Redemption. The Company shall not, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to the holders (as such) in respect of, any shares of its capital stock, other than in shares of Common Stock; (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any Subsidiary (other than any such Equity Interests of a directly or indirectly wholly-owned Subsidiary of the Company) or other Affiliate of the Company; (iii) permit any Subsidiary to declare or pay any dividend on, or make any distribution to the holders (as such) in respect of, any shares of its Capital Stock except to the Company or another directly or indirectly wholly owned Subsidiary of the Company; or (iv) permit any Subsidiary to purchase, redeem or otherwise retire for value any Equity Interests of it, the Company or any Affiliate of either of them (other than any such Equity Interests owned by the Company or any other directly or indirectly wholly owned Subsidiary of the Company). (f) Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Subsidiaries in accordance with the respective organizational documents of each of them and the corporate rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or corporate existence, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole and that the loss thereof is not adverse in any material respect to any Holder. -6- 7 (g) Same Business. The Company and its Subsidiaries will not engage in businesses which are not of the same general type as conducted by the Company and its Subsidiaries on the date hereof or businesses which do not have a substantial connection thereto. (h) Taxes. The Company shall, and shall cause its Subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies except as contested in good faith and by appropriate proceedings. (i) Investment Company Act; United States Real Property Holding Corporation. Neither the Company nor any of its Subsidiaries shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. Neither the Company nor any of its Subsidiaries shall become a United States real property holding corporation as defined in Section 897(c)(2) of the Code. (j) No Merger, etc. Neither the Company nor any of its Subsidiaries shall consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of their respective assets to, any Person; provided, however, that any Subsidiary of the Company may consolidate or merge with or into the Company or any of its other wholly-owned Subsidiaries if such consolidation or merger is otherwise permissible under Section 5(f). (k) Limitation on Additional Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become or remain directly or indirectly liable with respect to (collectively, "Incur") any Indebtedness other than (A) the Indebtedness represented by the Series 1999 Notes, (B) up to $10,000,000 aggregate principal amount of new Senior Indebtedness, (C) Indebtedness between or among the Company and its Subsidiaries and/or between or among the Company's Subsidiaries, (D) Indebtedness outstanding on March 5, 1999, and (E) up to $29,000,000 aggregate principal amount of other Indebtedness at any time outstanding. (l) Limitation on Transactions With Affiliates. (i) Neither the Company nor any of its Subsidiaries shall sell, lease, transfer or otherwise dispose of any of its properties or assets to or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, an Affiliate (an "Affiliate Transaction"), except on terms that are no less favorable to the Company or the relevant Subsidiary than those that could have been obtained in a comparable transaction by the Company or such Subsidiary from an unrelated person; provided, however, that the Company and its wholly-owned Subsidiaries may engage in any sale, lease, transfer, or other disposition of property among themselves and may enter into any contract, agreement, understanding, loan, advance or guarantee among themselves. (ii) Neither the Company nor any Subsidiary may enter into an Affiliate Transaction or series of related Affiliate Transactions involving or having a potential value of more than $50,000 unless such transaction has been approved by the Holders of a majority in principal amount of the Series 1999 Notes; provided, however, that the Company and its wholly-owned Subsidiaries may engage in any sale, lease, transfer, or other disposition of property -7- 8 among themselves and may enter into any contract, agreement, understanding, loan, advance or guarantee among themselves. (iii) The limitations set forth in this Section 5(l) will not apply to any compensatory transaction approved in good faith by the Board of Directors, with an officer, director or employee entered into the ordinary course of business, including, without limitation, compensation, indemnity and employee benefit arrangements. (m) Restrictions on Liens. The Company will not itself, and will not permit any Subsidiary, to create or suffer to exist any Liens upon any assets of the Company or any Subsidiary or any shares of capital stock of any Subsidiary, in either case now owned or hereafter acquired, provided, however, that this Section 5(m) shall not prohibit the creation or continuing existence of any Permitted Liens. If the Company at any time pledges shares of capital stock to the Senior Lender, the Company shall execute and deliver to and for the benefit of the Holders, a pledge agreement in substantially the same form as executed in favor of the Senior Lender, except that any pledges in favor of the Holders shall be second in priority to that of the Senior Lender pursuant to subordination agreements containing substantially similar terms and conditions as are contained in Section 7 hereof. (n) Sale of Assets. (i) Except with respect to Permitted Asset Sales, neither the Company nor any of its Subsidiaries shall sell, lease, convey or otherwise dispose of (whether in one transaction or a series of transactions) any assets (including capital stock of any Subsidiaries), other than sales of inventory in the ordinary course of business (an "Asset Sale"), if the aggregate Net Proceeds of all Asset Sales during any fiscal year exceed $250,000. (ii) Neither the Company nor any of its Subsidiaries shall, without the consent of the Holders of a majority in principal amount of the Series 1999 Notes, enter into any Asset Sale if the consideration paid is less than an amount equal to the greater of (x) the fair market value of such asset and (y) the book value of such asset; provided, however, that assets with a fair market value of not greater than $100,000 in the aggregate may be sold during any fiscal year without regard to the foregoing requirement if the amount of consideration received for such assets is promptly applied to the purchase of comparable assets. (iii) Except with respect to Permitted Asset Sales, at least 90% of the consideration for each such Asset Sale received by the Company or such Subsidiary shall be in the form of cash; provided, however, that the amount of (i) any liabilities (as shown on the Company's or such Subsidiary's most recent balance sheet or in the notes thereto) of the Company or any Subsidiary that are assumed by the transferee of any such assets or stock sold, leased, conveyed or disposed of and (ii) any notes or other obligations received by the Company or any Subsidiary from such transferee that are immediately converted by the Company or such Subsidiary into cash, shall be deemed to be cash for purposes of this Section 5(n). (o) Ownership of Subsidiaries. Except with respect to Permitted Asset Sales or as permitted by Section 5(f) or 5(n) above, the Company shall maintain (along with one or more Subsidiaries in -8- 9 the case of an indirect Subsidiary) good and valid title to those Equity Interests of each of its Subsidiaries owned by it, free and clear of any Lien other than Permitted Liens. Except with respect to Permitted Asset Sales and notwithstanding the provisions of Section 5(n) above, neither the Company nor any Subsidiary shall dispose of the Capital Stock of any Subsidiary, if, after giving effect to such disposition, the Company would own less than a majority of the outstanding economic and voting interests in such Subsidiary or former Subsidiary. (p) Insurance. The Company shall maintain liability, casualty and other insurance with a reputable insurer or insurers in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets. In addition to the foregoing, the Company shall maintain in full force and effect, with a reputable insurer or insurers, to the extent obtainable at a commercially reasonable price, a key-man life insurance policy or policies on Mr. David Ferran in an aggregate insured amount at least equal to the lesser of (i) $10,000,000 or (ii) the aggregate amount of the Company's outstanding obligations under the Series 1999 Notes and all Senior Indebtedness, naming the Company as beneficiary and any holder of Senior Indebtedness and the Holder of Series 1999 Notes as loss payees. (q) Minimum Interest Coverage Ratio. The Company shall furnish to the Holder an Officers' Certificate within 45 days after the end of each fiscal quarter of the Company (but 90 days after the end of its fiscal year), commencing with the quarterly period ending June 30, 1999, setting forth the Company's Interest Coverage Ratio for its four immediately preceding full fiscal quarter. The Company's Interest Coverage Ratio for the four-quarter period ending on each such quarterly date shall not be less than the amount set forth below alongside the date shown:
Interest Date Coverage Ratio ---- -------------- June 30, 1999 (0.31):1 September 30, 1999 2.53:1 December 31, 1999 and each fiscal 2.40:1 year-end thereafter
(r) Minimum EBITDA. The Company shall furnish to the Holder an Officers' Certificate within 45 days after the end of each fiscal quarter of the Company (but 90 days after the end of its fiscal year), commencing with the quarterly period ending June 30, 1999, setting forth the Company's EBITDA for its four immediately preceding full fiscal quarters. The Company's EBITDA for the four-quarter period ending on each such quarterly date shall not be less than the amount set forth below next to the date shown: -9- 10
Date EBITDA ---- ------ June 30, 1999 $(897,000) September 30, 1999 $7,081,000 December 31, 1999 $7,743,000 March 31, 2000 $14,000,000
(s) Issuances of Capital Stock. Neither the Company nor any of its Subsidiaries shall issue for cash consideration any shares of Capital Stock, or rights, warrants, options or other securities exercisable or exchangeable for or convertible into Capital Stock, at any time after the date hereof; provided, however, that the Company may issue shares of Capital Stock, or such rights, warrants, options or other securities (a) to finance the acquisition of related businesses, including the real or personal property used in such businesses or, (b) if the net proceeds of any such issuance are applied to the payment of Senior Indebtedness or the Series 1999 Notes in accordance with the optional redemption provisions thereof or (c) to employees of the Company or its Subsidiaries pursuant to stock incentive plans of the Company, but only to the extent that the aggregate number of shares of Common Stock issuable under such plans does not exceed the number of shares subject to outstanding options as of March 5, 1999 plus 1,000,000 (as adjusted for any stock split or reclassification). (t) Compensation; Management Fees. The salary, bonus and other benefits (or any increases therein) paid or accrued for each employee of the Company or any Subsidiary who receives total compensation in excess of $100,000 per year shall be approved by a Compensation Committee of the Board of Directors of the Company, a majority of which Committee shall be comprised of directors who are neither officers nor employees of the Company or any Subsidiary. Neither the Company nor any of its Subsidiaries shall pay, agree to pay, or cause to be paid to any holder of Capital Stock of the Company, or any Affiliate of any such holder, any management fees without the prior written consent of the Holders of the Series 1999 Notes. (u) Employee Plans. The Company shall not, directly or indirectly, (i) terminate any employee pension benefit plan subject to Title IV of ERISA so as to result in any material liability to the Company or its Subsidiaries, (ii) make a complete or partial withdrawal (within the meaning of Section 4201 of ERISA) from any multi-employer plan so as to result in any material liability to the Company or its Subsidiaries, or (iii) adopt, establish, maintain or enter into any obligation to contribute to any new employee benefit plan or multi-employer plan, modify any existing employee benefit plan so as to materially increase its obligations thereunder, or increase a contribution obligation to any multi-employer plan, without the written consent of the Holders of a majority in principal amount of the then outstanding Series 1999 Notes. This Section shall not be deemed to prohibit the Company from modifying its medical, dental or other employee Welfare Plans in the ordinary course of business. -10- 11 As used in this Section 5, the terms "employee pension benefit plan," "multi-employer plan," and "employee benefit plan" shall have the meanings assigned to such terms in ERISA. (v) ERISA Notices. Promptly, but in any event within 15 days, the Company shall deliver to the Holder, if and when the Company or any of its Subsidiaries (i) gives or is required to give notice to the Pension Benefit Guaranty Corporation (the "PBGC") of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any employee pension benefit plan which might constitute grounds for a termination of such plan under Title IV of ERISA or the imposition of a tax under Section 4971 of the Code, or knows that the plan administrator of any such plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC, (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any multi-employer plan is in reorganization or has been terminated, a copy of such notice, (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any employee pension benefit plan, a copy of such notice, (iv) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application, (v) gives notice of intent to terminate any employee pension benefit plan under Title IV of ERISA, a copy of such notice and other information filed with the PBGC or (vi) fails to make any payment or contribution to any employee pension benefit plan (or multi-employer plan or in respect of any benefit arrangement) or makes any amendment to any employee benefit plan or benefit arrangement which could result in the imposition of a lien or the posting of a bond or other security, a certificate of the Chief Financial Officer of the Company setting forth details as to such occurrence and action, if any, which the Company is required or proposes to take. (w) Maintenance of Net Worth. The Company shall furnish to the Holder an Officers' Certificate within 90 days after the end of each fiscal year of the Company, commencing with the fiscal year ending December 31, 1999, setting forth the Company's Net Worth as of such year-end. The Company's Net Worth as of each such year-end shall not be less than the amount set forth below under the date shown:
1999 2000 2001 ---- ---- ---- December 31, $(22,200,000) $12,000,000 $16,000,000
(x) Limitation on Capital Expenditures. The Company shall furnish to the Holder an Officers' Certificate within 90 days after the end of its fiscal year, commencing with the fiscal year ending December 31, 1999, setting forth the Company's total Capital Expenditures, on a consolidated basis, for its immediately preceding fiscal year. The Company's total Capital Expenditures, on a consolidated basis, for the fiscal year ending on December 31, 1999 and each fiscal year end thereafter shall not be greater than $500,000 . -11- 12 (y) Maximum Lease Payments. The Company shall furnish to the Holder an Officers' Certificate within 45 days after the end of each fiscal quarter of the Company (but 90 days after the end of its fiscal year), commencing with the quarterly period ending June 30, 1999, setting forth the Company's total Rental Obligations, on a consolidated basis, for the immediately preceding fiscal quarter. The Company's total Rental Obligations, on a consolidated basis, for any such quarter shall not exceed $500,000. (z) Inconsistent Agreements. The Company shall not, and shall not permit its Subsidiaries to, (i) enter into any agreement or arrangement which is inconsistent with, or would be reasonably likely to impair the ability of the Company to fulfill, its obligations under this Series 1999 Note, (ii) prepay, redeem or defease any Indebtedness of the Company or any Subsidiary that is subordinated to the Series 1999 Notes in right of payment, or supplement, amend or otherwise modify the terms of any agreement or instrument evidencing, governing or affecting the terms of any such Indebtedness if the effect thereof would materially shorten the maturity or increase the amortization thereof, or otherwise be materially adverse to the Holders or (iii) supplement, amend or otherwise modify the terms of its Articles or Certificate of Incorporation or Bylaws, if the effect thereof would be materially adverse to the Holders, including without limitation to increase the liquidation preference of, or the rate of dividends payable on, any series of preferred stock. (aa) Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Company to (a) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary of the Company, (b) make loans or advances to the Company or a Subsidiary of the Company or (c) transfer any of its properties or assets to the Company or to any Subsidiary of the Company, except for such encumbrances or restrictions with respect to a Subsidiary of the Company that is not a Subsidiary of the Company on the date hereof, in existence at the time such Person becomes a Subsidiary of the Company. Nothing contained in this Section 5(o) shall prevent the Company or any of its Subsidiaries from entering into any agreement (i) permitting or providing for the incurrence of Liens otherwise permitted by Section 5(m) or (ii) restricting the sale or other disposition of property securing Indebtedness. (bb) Limitation on Acquisitions. Except with respect to Capital Expenditures permitted under Section 5(x), the Company shall not, directly or indirectly, and shall not permit any Subsidiary to, acquire, in one transaction or a series of transactions, any stock or assets of any Person (an "Acquisition") involving or having an aggregate value in excess of $200,000, unless such Acquisition has been approved in writing by the Holders of a majority in principal amount of the then outstanding Series 1999 Notes). -12- 13 (cc) Limitation on Research and Development Expenditures. The Company's total research and development expenditures for any fiscal year, commencing with the fiscal year ending December 31, 1999, shall not exceed 12% of the Company's total revenues for the fiscal year ending December 31, 1999 and 10% of the Company's total revenues for the fiscal year ending December 31, 2000 and each fiscal year-end thereafter, as reflected in the Company's audited annual financial statements. (dd) Compliance with Laws. The Company will, and will cause its Subsidiaries to, comply with all statutes, ordinances, governmental rules and regulations, judgments, orders and decrees (including all Environmental Laws) to which any of them is subject, and obtain and keep in effect all licenses, permits, franchises and other governmental authorizations necessary to the ownership or operation of their respective properties or the conduct of their respective businesses, except to the extent that the failure to so comply or obtain and keep in effect would not have a Material Adverse Effect. (ee) Payment of BOC Note. The Company agrees to use its best efforts to refinance or amend its $5,000,000 Subordinated Promissory Note due 2000 payable to The BOC Group, Inc. (the "BOC Note") so that such note (or refinancing thereof) will have a maturity date not earlier than February 15, 2002. The Company agrees that it will not repay any principal amount of the BOC Note while the Series 1999 Notes are outstanding without obtaining the written consent of the Holders of a majority in principal amount of the outstanding Series 1999 Notes, which consent will not be unreasonably withheld so long as (i) the Company has a source of funds with which to make such repayment without materially adversely affecting the Company's ability to meet its current obligations as they become due and (ii) no Default or Event of Default has occurred and is continuing or is reasonably likely to occur as a result of such repayment. (ff) Reservation of Shares of Common Stock. The Company shall reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue shares of Common Stock upon conversion of the Series 1999 Notes. The number of shares so reserved may be reduced by the number of shares actually delivered pursuant to conversion of Series 1999 Notes. 6. Covenants of the Holder. By Holder's acceptance of this Series 1999 Note, Holder acknowledges and warrants to any Senior Lender that the Subordinated Indebtedness is and shall continue to be (a) unsecured, except for a second-priority security interest created by the Security Agreement dated March 5, 1999 (the "Security Agreement") and the Patent and Trademark Security Agreement dated March 5, 1999 (the "Patent Security Agreement") (or any subsequent security agreements approved by the Senior Lender) and (b) not subject to any guaranties by any direct or indirect subsidiaries of the Company other than the Continuing Guaranty dated March 5, 1999 (the "Guaranty"), or any subsequent guarantees approved by the Senior Lender. The Security Agreement, the Patent Security Agreement and the Guaranty are sometimes collectively referred to as the "Security Documents." -13- 14 7. Subordination. (a) Series 1999 Notes Subordinated to Senior Indebtedness. By Holder's acceptance of this Series 1999 Note, Holder covenants and agrees that this Series 1999 Note, the Guaranty and the other Security Documents shall be subordinated in right of payment in accordance with the provisions of this Section 7 to the prior indefeasible payment in full of all amounts payable under or in respect of Senior Indebtedness (as such term is defined in Section 12). (b) Priority and Payment Over of Proceeds in Certain Events. (i) Subordination on Dissolution, Liquidation or Reorganization of the Obligor. Upon any payment or distribution of assets or securities of Obligor, of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of Obligor, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts payable under or in respect of Senior Indebtedness shall first be indefeasibly paid in full, or payment provided for, before the Holder shall be entitled to receive any payment or distribution of any cash, property or securities under or in respect of Subordinated Indebtedness. Before any payment may be made by Obligor or in respect of Subordinated Indebtedness upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of cash, property or securities of Obligor of any kind or character to which the Holder would be entitled, except for the provisions of this Section 7, shall be made by Obligor or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution directly to the Senior Lender or its representatives to the extent necessary to pay all the Senior Indebtedness in full after giving effect to any concurrent payment or distribution to the Senior Lender. (ii) Subordination on Default in Senior Indebtedness. (A) No direct or indirect payment by or on behalf of Obligor under or in respect of the Subordinated Indebtedness, whether pursuant to the terms of the Subordinated Indebtedness or upon acceleration, offer to purchase or otherwise, shall be made if, at the time of such payment, there exists a default in the payment (including, without limitation, any payment default resulting from any acceleration of the Senior Indebtedness) under or in respect of the Senior Indebtedness and (I) the collateral agent under the Security Agreement (the "Agent") has received written notice thereof, if any, as provided in Section 7(i) and (II) such default shall not have been cured or waived in writing or the benefits of this sentence waived in writing by the Senior Lender. (B) During the continuance of any other default with respect to the Senior Indebtedness, upon the receipt by the Agent of written notice from the Senior Lender specifying all events of default with respect to the Senior Indebtedness, which the person executing such notice on behalf of the Senior Lender reasonably believes to exist as of the date of such notice after due inquiry, no payment may be made by Obligor under or in respect of Subordinated Indebtedness for a period ("Payment Blockage Period") commencing on the date of receipt of any such notice and ending at the earlier of (I) the date when all events of default which were specified by the Senior Lender in the notice which triggered such Payment Blockage Period have been cured or waived, and (II) 90 days after the date of receipt of such notice (unless -14- 15 such Payment Blockage Period shall be terminated earlier by written notice to the Agent from the Senior Lender). (C) During any Payment Blockage Period, the Company will promptly provide Holder with a copy of any written notice delivered to the Company by the Senior Lender stating that all events of default which were specified by the Senior Lender in the notice which triggered such Payment Blockage Period have been cured or waived. Notwithstanding anything herein to the contrary (I) in no event will a Payment Blockage Period extend more than 90 days from the date such notice is effective, and (II) payments due but not made with respect to the Subordinated Indebtedness during the Payment Blockage Period may be made at any time after the expiration of the Payment Blockage Period (unless another Payment Blockage Period is in effect or payment is otherwise prohibited pursuant to this Section 7, including, without limitation, in connection with a payment default). No more than two Payment Blockage Periods may be commenced for any reason during any period of 360 consecutive days. For all purposes of this Section 7(b)(ii), no event of default under the Senior Indebtedness which the person executing such notice on behalf of the Senior Lender reasonably believed (after due inquiry) to exist and be continuing on the date of the commencement of any Payment Blockage Period (whether or not such event of default was included in the notice required to be given under this Section 7(b)(ii)) shall be, or be made, the basis for the commencement of any subsequent Payment Blockage Period whether or not within a period of 360 consecutive days. (iii) Rights and Obligations of the Holder of the Series 1999 Note. In the event that, notwithstanding the foregoing provision prohibiting such payment or distribution, any holder of the Subordinated Indebtedness shall have received any payment under or in respect of the Subordinated Indebtedness at a time when such payment was prohibited by this Section 7, then and in such event (subject to the provisions of Section 7(g)) such payment or distribution shall be received and held in trust for the Senior Lender and shall be paid over or delivered to the Senior Lender promptly, in accordance with Section 7(b)(i) without notice or demand therefor, to the extent necessary to pay in full all amounts due under or in respect of the Senior Indebtedness in accordance with its terms after giving effect to any concurrent payment or distribution to the Senior Lender. (iv) Acceleration of the Subordinated Indebtedness and Exercise of Remedies With Respect Thereto. The holders of the Subordinated Indebtedness shall give the Senior Lender 30 days prior written notice of any acceleration of the maturity of the Subordinated Indebtedness with respect to an Event of Default under Section 11(a)(i), (ii), (iii) or (iv) hereof. All Senior Indebtedness then or thereafter due or declared to be due shall first be indefeasibly paid in full before the holders of the Subordinated Indebtedness are entitled to receive any payment from Obligor under or in respect of Subordinated Indebtedness. (v) Right to Rely Upon Orders and Decrees With Respect to Payments and Distributions. Upon any payment or distribution of cash, assets or securities referred to in this Section 7, the holders of the Subordinated Indebtedness shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, and upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making any such payment or distribution, -15- 16 delivered for the purpose of ascertaining the persons entitled to participate in such distribution, and the holders of other indebtedness of Obligor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 7. (c) Payments May be Paid Prior to Dissolution. Nothing in this Section 7 shall prevent Obligor, except under the conditions described in Sections 7(b), 7(d) or 7(g) (including, without limitation, if a payment default has occurred and is continuing with respect to the Senior Indebtedness), from making payments at any time under or in respect of Subordinated Indebtedness to the holders thereof entitled thereto unless at least two Business Days prior to the date upon which such payment would otherwise (except for the prohibitions contained in Section 7(b)) become due and payable, the Holder or the Agent shall have received the written notice provided for in Section 7(g). An Obligor shall give prompt written notice to the Agent and the Holder of any dissolution, winding up, liquidation or reorganization of such Obligor. (d) Rights of Senior Lender Not to be Impaired. No right of the Senior Lender to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act in good faith by the Senior Lender or by any noncompliance by Obligor with the terms and provisions and covenants in this Section 7, regardless of any knowledge thereof the Senior Lender may have or otherwise be charged with. The provisions of this Section 7 are intended to be for the benefit of, and shall be enforceable directly by, the Senior Lender. The Holder agrees not to amend the Series 1999 Notes, including without limitation, for all purposes of this Section 7(d), to increase the interest rate payable by Obligor, increase the fees payable to the Holder or add new fees payable to the Holder, in each case other than fees payable by the issuance of additional Series 1999 Notes or an equity interest, or provide for amortization of the principal amount of the Series 1999 Notes prior to the dates provided for in the Series 1999 Notes. Notwithstanding any other provision contained in the Series 1999 Notes or otherwise, prior to the earlier of repayment in full of all obligations owed by Obligor to Senior Lender and January 1, 2000, Obligor shall not make any payment on, or in connection with, the Series 1999 Notes, except for (i) payments made by the issuance of additional Series 1999 Notes or an equity interest to the Holder or (ii) interest as currently provided herein. (e) Subrogation. Upon the indefeasible payment in full of all amounts payable under or in respect of the Senior Indebtedness, the holders of the Subordinated Indebtedness shall be subrogated to the rights of the Senior Lender to receive payments or distributions to the Senior Lender of any cash, property or securities to which holders of the Subordinated Indebtedness would be entitled except for the provisions of this Section 7, and no payment pursuant to the provisions of this Section 7 to the Senior Lender by the holders of the Subordinated Indebtedness, shall, as between Obligor, its creditors other than the Senior Lender and the holders of the Subordinated Indebtedness, be deemed to be a payment by Obligor to or on account of such Subordinated Indebtedness, it being understood that the provisions of this Section 7 are solely for the purpose of defining the relative rights of the Senior Lender, on the one hand, and the holders of the Subordinated Indebtedness, on the other hand. If any payment or distribution to which the holders of the Subordinated Indebtedness would otherwise have been entitled but for the provisions of this Section 7 shall have been applied, pursuant to the provisions of this Section 7, to the payment of all amounts payable under the Senior Indebtedness, then and in such case, the holders of the Subordinated Indebtedness, together with -16- 17 any holders of indebtedness ranking pari passu with the Subordinated Indebtedness, shall be entitled to receive from the Senior Lender any payments or distributions received by the Senior Lender in excess of the amount sufficient to pay in full all amounts payable under or in respect of the Senior Indebtedness. (f) Obligations of the Obligor Unconditional. Nothing contained in this Section 7 is intended to or shall impair, as between Obligor and the holders of the Subordinated Indebtedness, the obligations of Obligor, which are absolute and unconditional, to pay to the holders of the Subordinated Indebtedness all amounts which may be payable thereunder or in respect thereof (including, without limitation, the principal of and interest on the Subordinated Indebtedness) as and when the same shall become due and payable in accordance with the terms thereof, or is intended to or shall affect the relative rights of the holders of the Subordinated Indebtedness and creditors of Obligor other than the Senior Lender, nor shall anything herein prevent any holder of the Subordinated Indebtedness from exercising all rights and remedies otherwise permitted by applicable law upon default under the Subordinated Indebtedness, subject to Section 7(b) and to the rights, if any, under this Section 7 of the Senior Lender in respect of cash, property or securities of Obligor received upon the exercise of any such right or remedy. The failure of Obligor to make payment on account of principal or interest on the Subordinated Indebtedness and all other amounts may be payable in respect thereof by reason of any provision of this Section 7 shall not be construed as preventing the occurrence of an event of default under the Subordinated Indebtedness. (g) Holder Entitled to Assume Payments not Prohibited in Absence of Notice. The Holder shall not at any time be charged with the knowledge of the existence of any facts other than any acceleration of the Subordinated Indebtedness which would prohibit the receipt of any payment to the Holder, unless and until the Agent or the Holder shall have received written notice thereof from or on behalf of Obligor, the Senior Lender or from any trustee, representative or agent therefor which notice shall specify the applicable provision of this Section 7 which prohibits or restricts receipt of payment by the Holder; and, prior to the receipt of any such written notice by the Agent or the Holder, the Holder shall be entitled to assume conclusively that no such facts exist. Unless at least two Business Days prior to the date on which by the terms of the Subordinated Indebtedness any monies are to be paid by Obligor to the Holder for any purpose (including, without limitation, the payment of the principal or interest on the Subordinated Indebtedness), the Agent or the Holder shall have received the notice provided for in the preceding sentence, the Holder shall have full power and authority to receive such monies and shall be entitled to keep and retain the same, and shall not be affected by any notice to the contrary which may be received by it on or after such date; provided, however, that the foregoing shall not apply with reference to a payment of Subordinated Indebtedness pursuant to an acceleration thereof unless the Senior Lender has received written notice of such acceleration pursuant to Section 7(b)(iv) (if required) which notice shall have been received by the Senior Lender not less than thirty days in advance of the date of such payment. Notwithstanding the foregoing, if any payment is made by Obligor after the occurrence and during the continuance of a payment default with respect to the Senior Indebtedness, the Holder shall promptly pay over and deliver to the Senior Lender such payment if (i) the Senior Lender notifies the Agent of such payment default not more than two Business Days after such payment is made to the Holder, or (ii) the payment is made after the acceleration of the Subordinated Indebtedness. It is understood that for purposes of this Section 7, "payment default" with respect to the Senior Indebtedness -17- 18 means any late payment under the Senior Indebtedness regardless of whether any applicable grace period has expired. Each of the Agent and the Holder shall be entitled to rely on the delivery to it of a written notice by a person representing himself, herself or itself to be an authorized signatory for the Senior Lender (or a trustee, representative or agent on behalf of, or other representative of, the Senior Lender) to establish that such notice has been given by or on behalf of the Senior Lender. (h) Reliance by Senior Lender. The Holder by acceptance hereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to the Senior Lender, whether the Senior Indebtedness was created or acquired before or after the issuance of this Note, to acquire or continue to hold the Senior Indebtedness and the Senior Lender shall be deemed conclusively to have relied on such subordination provisions in acquiring or continuing to hold any Senior Indebtedness. (i) Notice by Senior Lender. The Company agrees to use reasonable efforts to have the Senior Lender agree to notify the Agent and to have the Company or the Agent notify the Holder upon the happening of any of the following: (i) the transmittal by the Senior Lender of a notice of default to Obligor; or (ii) the acceleration of the Senior Indebtedness; or (iii) the transfer by assignment and novation of any Senior Indebtedness, specifying the name and address of the transferee; provided, however, that the failure by the Senior Lender to give any notice to the Agent or the Holder required by this Section 7(i)(iii) shall not result in any liability on the part of the Senior Lender or have any other effect except as expressly set forth in Sections 7(b), 7(c) and 7(g). Notwithstanding anything in this Series 1999 Note to the contrary, any notice required to be given herein by the Senior Lender to the Agent or the Holder, or which the Senior Lender desires to give to the Holder, under or in connection with this Note (including without limitation all notices under this Section 7), may be give to the Agent at Equinox Investment Partners, L.L.C., Attention: Robert J. Wickey, 405 Lexington Avenue, 21st Floor, New York, New York, 10174, or at such other address as the Agent may designate by written notice to the Senior Lender, and receipt by the Agent of any such written notice shall, for all purposes of this Note, be deemed to be receipt thereof by the Holder. (j) Notice By the Holder . The Holder agrees to notify the Senior Lender upon the happening of any of the following: (i) the transmittal by the Holder of a notice of default to Obligor; or (ii) acceleration of the Subordinated Indebtedness; or (iii) the transfer of any Subordinated Indebtedness, specifying the name and address of the transferee; provided, however, that the failure by the Holder to give any notice to the Senior Lender required by this Section shall not result in any liability on the part of the Holder or have any other effect except as expressly set forth in Section 7(b). -18- 19 8. Security Documents. In order to secure the Company's obligation to pay the principal of this Series 1999 Note, the Company has granted the Holder, pursuant to the terms of the Security Agreement and pro rata based on the relationship that the dollar amount of this Series 1999 Note bears to the aggregate dollar amount of all Series 1999 Notes outstanding from time to time, a lien and security interest on substantially all of the assets of the Company. The Company's obligations under this Series 1999 Note have also been guarantied by SubMicron Systems, Inc. and SubMicron Wet Process Stations, Inc. (the "Subsidiary Guarantors") pursuant to the Guaranty. The Subsidiary Guarantors' obligations under such guaranties have been secured by a security interest in certain of their assets pursuant to the terms of the Security Agreement, and, with respect to SubMicron Systems, Inc., the Patent and Trademark Security Agreement. The Holder acknowledges and agrees that such lien and guaranties are second priority liens and guaranties, junior to the liens and guarantees granted (or may in the future be granted) to holders of Senior indebtedness. 9. Acceptance of Series 1999 Note. The Holder, by acceptance of this Series 1999 Note, (i) agrees to be bound by the terms of the Security Documents, including without limitation, the indemnification provisions contained therein, and (ii) agrees with, ratifies and confirms the appointment of (x) the Collateral Agent under each of the Security Documents (as such term is defined in each such Security Document), as such Holder's attorney-in-fact under the Security Documents and authorizes the Collateral Agent to take such action as may be necessary to effectuate the purposes of the Security Documents and (y) the Collateral Agent under the Security Agreement as the Agent hereunder. Copies of the Security Documents, together with any amendments or replacements shall be maintained at the principal executive offices of the Company and shall be available for inspection by Holder on reasonable notice. 10. Modification of Series 1999 Notes. The Series 1999 Notes may be modified without prior notice to any Holder but with the written consent of the Holders of a majority in principal amount of the Series 1999 Notes then outstanding. The Holders of a majority in principal amount of the Series 1999 Notes then outstanding may waive compliance by the Company with any provision of the Series 1999 Notes without prior notice to any Holder. However, without the consent of each Holder affected and subject to Section 7(d), an amendment, supplement or waiver may not (a) alter the amount of Series 1999 Notes whose Holders must consent to an amendment, supplement or waiver, (b) alter the rate or the time for payment of interest on any Series 1999 Note, (c) alter the principal or the maturity of any Series 1999 Note or alter the redemption or prepayment provisions with respect thereto or (d) make any Series 1999 Note payable in money or property other than as stated in the Series 1999 Notes. -19- 20 11. Defaults and Remedies. (a) Events of Default. An "Event of Default" hereunder occurs if: (i) the Company defaults in the payment of the principal of any Series 1999 Note when the same becomes due and payable at maturity, upon redemption or otherwise; (ii) the Company defaults in the payment of interest on any Series 1999 Note when the same becomes due and payable and the default continues for a period of three days; (iii) the Company fails to comply in any material respect with any of the covenants hereunder and the Default (as hereinafter defined) continues for the period and after the notice specified below; (iv) there occurs any Event of Default with respect to the Series 1997 Notes and/or the Series B Notes (as an Event of Default is defined in the Series B Notes or the Series 1997 Notes, as applicable, from time to time and subject to any applicable grace periods or waivers thereof); (v) the Company or any of its material subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) generally is unable to pay its debts as the same become due; or (vi) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its material subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its material subsidiaries or for all or substantially all of its property, or (C) orders the liquidation of the Company or any of its material subsidiaries, and the order or decree remains unstayed and in effect for 60 days. -20- 21 The term "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. For the purposes of this Section 11(a), "Default" means any event which is, or after notice or passage of time would be, an Event of Default. A Default under Section 11(a)(iii) is not an Event of Default until the Holders of at least 25% in aggregate principal amount of the then outstanding Series 1999 Notes notify the Company of the Default and the Company does not cure the Default within 30 days of such notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." (b) Acceleration of Series 1999 Notes. If an Event of Default (other than an Event of Default specified in clauses (v) and (vi) of Section 11(a)) occurs and is continuing, the holders of at least 25% in aggregate principal amount of the then outstanding Series 1999 Notes, by notice to the Company, may declare the unpaid principal of and any accrued interest on all the Series 1999 Notes to be due and payable. Immediately upon such declaration, the principal and interest shall be due and payable. If an Event of Default specified in clause (v) or (vi) of Section 11(a) occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Holder. The holders of a majority in principal amount of the then outstanding Series 1999 Notes by notice to the Company may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. (c) Other Remedies. If an Event of Default occurs and is continuing, holders of the Series 1999 Notes may pursue any available remedy to collect the payment of principal or interest on the Series 1999 Notes or to enforce the performance of any provision of the Series 1999 Notes; provided, however, that acceleration of the Series 1999 Notes shall be governed by Section 10(b) hereof. A delay or omission by any holder of any Series 1999 Notes in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. (d) Waiver of Past Defaults. The holders of a majority in principal amount of the then outstanding Series 1999 Notes by notice to the Company may waive an existing default of Event of Default and its consequences except a continuing default or Event of Default in the payment of the principal of or interest on any Series 1999 Notes. (e) Rights of Holders to Receive Payment. Except as otherwise provided in Section 7 hereof, the right of any holder of a Series 1999 Note to receive payment of principal and interest on the Series 1999 Note, on or after the respective due dates expressed in the Series 1999 Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder. -21- 22 (f) Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Series 1999 Note, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. 12. Definitions. The terms defined in this Section 12 shall, for all purposes of this Series 1999 Note, have the meanings herein specified, unless the context otherwise requires. "Affiliate" means with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether in the capacity of officer or director of such Person, through the ownership of voting securities, by agreement or otherwise. "Capital Expenditures" means for any fiscal period, the aggregate expenditures (whether paid in cash or accrued as a liability, including without limitation payments under Capital Leases) for capital assets which would be included in property, plant and equipment on a balance sheet prepared in accordance with GAAP. Amounts expended by the Company or its Subsidiaries for Acquisitions in compliance with the provisions of Section 5(p) shall not constitute Capital Expenditures for purposes of Section 5(m) hereof. "Capital Lease" means any lease of any property which would in accordance with GAAP be required to be classified and accounted for on the balance sheet of the lessee as a capital lease. "Capitalized Lease Obligation" means with respect to any Person for any period, any obligation of such Person to pay rent or other amounts under a Capital Lease; the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock or other equity interests, including without limitation all common stock and preferred stock. "Change of Control" shall occur or be deemed to have occurred if (i) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) shall beneficially own (other than KB Mezzanine Fund II, L.P., Celerity Silicon, L.L.C. or any of their respective Affiliates) at least 30% of the Company's voting stock and KB Mezzanine Fund II, L.P., Celerity Silicon, L.L.C. and any of their respective Affiliates, in the aggregate, shall beneficially own, directly or indirectly, less voting stock than such other Person or "group" or (ii) a majority of the members of the Board of Directors of the Company are not Continuing Directors. -22- 23 "Consolidated Net Income" means for any period, the aggregate of the Net Income of the Company and its consolidated Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, provided that (i) the Net Income of any Person which is not a Subsidiary of the Company or is accounted for by the Company by the equity method of accounting shall be included in Consolidated Net Income only to the extent of the amount of dividends or distributions actually paid by such Person to the Company or a Subsidiary of the Company, (ii) the Net Income of any Person acquired by the Company in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded from Consolidated Net Income and (iii) the Net Income of any Subsidiary of the Company that is subject to restrictions, direct or indirect, on the payment of dividends or the making of distributions to the Company shall be excluded from Consolidated Net Income to the extent of such restrictions. "Net Income" of any Person shall mean the net income (loss) of such Person, determined in accordance with GAAP, excluding, however, any gain (but not loss) realized upon the sale or other disposition (including, without limitation, dispositions pursuant to sale and leaseback transactions) of any real property or equipment of such Person which is not sold or otherwise disposed of in the ordinary course of business and any gain (but not loss) realized upon the sale or other disposition of any capital stock of such Person or a subsidiary of such Person. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on March 5, 1999 or (ii) was nominated for election or elected to such Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Company" means SubMicron Systems Corporation, a Delaware corporation. "Default Rate" means 15% per annum. "EBITDA" means for any period, the sum of the Company's (i) Consolidated Net Income, plus (ii) consolidated interest expense (including without limitation amortization of original issue discount), plus (iii) provisions for income taxes plus (iv) depreciation and amortization (in each case, with respect to clauses (ii), (iii) and (iv), as determined in accordance with GAAP and to the extent included in the computation of Consolidated Net Income). "Environmental Laws" means any and all federal, state or local laws, statutes, ordinances, rules, regulations, judgments, orders, decrees, permits, licenses, or other governmental restrictions or requirements and the common law relating to pollution or protection of public or employee health or the environment, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended and Resource Conservation and Recovery Act of 1976, as amended. "Equity Interest" means Capital Stock or warrants, options or other rights to acquire Capital Stock (but excluding any debt security which is convertible into, or exchangeable for, Capital Stock). -23- 24 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute or law thereto. "Fair Market Value" for each day means (i) if the Company's Common Stock is listed or admitted to trading on any securities exchange, the closing price, regular way, on such day on the principal exchange on which the Common Stock is traded, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (ii) if the Common Stock is not then listed or admitted to trading on any securities exchange, the last reported sale price on such day, or if there is no such last reported sale price on such day, the average of the closing bid and the asked prices on such day, as reported by a reputable quotation source designated by the Company, or (iii) if neither clause (i) nor (ii) is applicable, the average of the reported high bid and low asked prices on such day, as reported by the "Over-The-Counter" Bulletin Board or other reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City of New York, customarily published on each business day, designated by the Company or (iv) if clauses (i), (ii), (iii) and (iv) are not applicable, the Fair Market Value of the Common Stock shall be determined based on the good faith determination of the Board of Directors of the Company. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date hereto so as to properly reflect the financial conditions, and the results of operations and cash flows, of the Company and its consolidated Subsidiaries, except that any accounting principle or practice required to be changed by the Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee of such boards) in order to continue as a generally accepted accounting principle or practice may so be changed. In the event of a change in GAAP, this Series 1999 Note, to the extent GAAP applies, shall continue to be construed in accordance with GAAP as in existence on the date hereof; provided, however, the Holder and the Company will thereafter negotiate in good faith to revise any affected covenants to make such covenants consistent with GAAP as then in effect, and, after any such revision, the Series 1999 Note will be construed in accordance with GAAP as then in effect. "Holder" means the Person in whose name a Series 1999 Note is registered on the Company's books. "Indebtedness" means with respect to any Person, the aggregate amount of, without duplication, the following: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except Trade Payables, accrued commissions and other similar accrued current -24- 25 liabilities in respect of such obligations, if such liabilities are not overdue and arise in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations or liabilities of others secured by a Lien on any asset owned by such Person or Persons whether or not such obligation or liability is assumed; (f) all obligations of such Person or Persons, contingent or otherwise, in respect of any letters of credit or bankers' acceptances; and (g) all guaranties. "Interest Coverage Ratio" means for any period, the ratio of (i) the Company's EBITDA for such period to (ii) the consolidated interest expense (including the interest component of Capital Leases, but excluding non-cash interest and the amortization of debt issuance costs and original issue discount) for such period with respect to all Indebtedness of the Company and its Subsidiaries outstanding on the date of determination. "Junior Indebtedness" means the Company's (i) 12% Senior Subordinated Notes due February 1, 2002, (ii) Series B 12% Senior Subordinated Notes due February 1, 2002, (iii) 8% Convertible Subordinated Notes due 2002 and (iv) $5,000,000 Subordinated Promissory Note due 2000. "Lien" means any material mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in a charge against real or personal property, or security interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Material Adverse Effect" means (i) any material adverse effect whatsoever upon the validity, perfection or enforceability of the Series 1999 Notes or Security Documents, (ii) any material adverse effect on the results of operations, financial condition, properties, assets, business or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) any material adverse effect on the ability of the Company or the Subsidiary Guarantors to fulfill their obligations under the Series 1999 Notes or Security Documents and any instrument governing Indebtedness of the Company or a Subsidiary incurred as of March 5, 1999, or any document contemplated hereby or thereby. "Net Worth" means at any date, the sum of (i) the total shareholders' equity reflected on the balance sheet of the Company as of such date, determined in accordance with GAAP, excluding (to the extent included in the calculation of shareholders' equity) the cumulative effect of any net operating loss carry forward benefit reported in the notes to the Company's financial statements from time to time for any period commencing after March 5, 1999 plus (ii) the aggregate liquidation preference of the outstanding Preferred Stock of the Company plus (iii) the outstanding principal amount of any Junior Indebtedness. -25- 26 "Obligor" means any one of the Company, SubMicron Systems, Inc., a Pennsylvania corporation, and SubMicron Wet Process Stations, Inc., a California corporation. "Officers' Certificate" means a certificate signed by any two officers, one of whom must be the Chairman of the Board, the President, the Chief Executive Officer or Chief Financial Officer, the Treasurer or a Vice President of the Company. "Operating Lease" means any lease other than a Capital Lease. "Permitted Asset Sales" means sales of excess or obsolete inventory. "Permitted Liens" means, with respect to any Person: (i) pledges or deposits by such Person under workmen's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States Government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent; (ii) Liens imposed by law, such as carriers, warehousemen's and mechanics' Liens or Liens arising out of judgments or awards against such Person with respect to which such Person shall then be prosecuting appeal or other proceedings for review; (iii) Liens securing the payment of taxes, assessments and governmental charges or levies which are not yet subject to penalties for non-payment or which are being contested in good faith and by appropriate proceedings; (iv) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; (v) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning of other restrictions as to the use of real properties or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not incurred in connection with Indebtedness or other extensions of credit and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (vi) Liens in existence on March 5, 1999; (vii) Liens on assets owned by the Company or its Subsidiaries in favor of any holder of Senior Indebtedness securing Senior Indebtedness permitted hereunder; (viii) purchase money Liens upon or in any real or personal property (including fixture and other equipment) acquired or held by the Company or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition or improvement of such property, or Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition) provided that (X) no such Lien shall extend to or cover any property other than the property being acquired or improved and (Y) any such Indebtedness would be permitted to be incurred pursuant to Section 5(k) hereof; and (ix) Liens securing Capital Leases or Operating Leases. "Person" means any individual, partnership, corporation, trust, unincorporated organization or government or agency or political subdivision thereof. -26- 27 "Redemption Event" shall occur or be deemed to have occurred if any of the following events occur: (i) the merger or consolidation of the Company with or into any other entity; (ii) the consummation of a sale or disposition by the Company of all or substantially all of its assets or the stock or assets of a material business division or Subsidiary of the Company; (iii) a Change of Control of the Company; (iv) the closing of any public offering of any equity or debt securities of the Company; or (v) approval by the Board of Directors of a plan of complete liquidation or dissolution of the Company. "Refinancing Event" shall occur or be deemed to have occurred if the Company consummates, or is able to consummate using its reasonable best efforts, a financing in which the Company or its Subsidiaries incur Senior Indebtedness that refinances or increases the principal amount of any Senior Indebtedness previously outstanding or available to the Company, and that bears an initial interest rate of less than 12% per annum, and that permits redemption of the Series 1999 Notes as provided herein. "Rental Obligations" means the maximum aggregate fixed rentals paid or payable by a lessee under any Operating Lease during a specified period (excluding amounts paid or payable on account of maintenance, ordinary repairs, insurance, taxes, assessments and other similar charges, whether or not designated as rental or additional rental), regardless of any amounts received by such lessee as sublessor under any Operating Lease. "Senior Indebtedness" means (a) all monetary obligations, whether now existing or hereafter arising, under the Loan Agreement between the Company, the Subsidiary Guarantors and the Senior Lender, in effect from time to time, including, without limitation, (i) obligations in respect of payments of principal or interest on all loans or mandatory prepayments thereof, and (ii) commitment or other fees, yield protection and indemnity amounts, enforcement expenses or other amounts on or with respect thereto, and (b) any amendments, modifications, deferrals, renewals, extensions, substitutions, future advances or increases of any monetary obligations described in clause (a) above, or debentures, notes or evidences of indebtedness heretofore or hereafter issued in evidence of or in exchange for such indebtedness or payment obligations; provided, however, that the aggregate amount of Senior Indebtedness shall be limited to $20,000,000 principal amount of Senior Indebtedness, plus accrued interest thereon, plus reasonable attorneys fees incurred in connection with the Senior Indebtedness. Nothing herein shall prohibit Senior Lender from lending additional amounts in excess of the limits of Senior Indebtedness as set forth in the previous sentence. Any such lending of amounts in excess of the limit of Senior Indebtedness set forth above shall not cause any amounts otherwise qualifying as Senior Indebtedness up to the limit set forth above not to be classified as Senior Indebtedness. "Senior Lender" means Greyrock Capital, a Division of NationsCredit Commercial Corporation and any subsequent holder of Senior Indebtedness. "Subordinated Indebtedness" means (a) all monetary obligations, whether now existing or hereafter arising, under (i) the Series 1999 Notes and (ii) any guaranties issued by any Obligor in favor of the holders of any Series 1999 Notes, as the foregoing may from time to time be in effect, including, without limitation, (A) obligations in respect of payments of principal or interest thereon or mandatory prepayments thereof and including any principal and interest payable with respect to any offer to purchase any Series 1999 Notes, and (B) commitment or -27- 28 other fees, yield protection and indemnity amounts, enforcement expenses or other amounts on or with respect thereto, and (b) any amendments, modifications, deferrals, renewals, extensions, substitutions, future advances or increases of any monetary obligations described in clause (a) above, or debentures, notes or evidences of indebtedness heretofore or hereafter issued in evidence of or in exchange for such indebtedness or payment obligations. "Subsidiary" means with respect to any Person (the "Parent"), any corporation, association or other business entity of which securities or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the Parent or one or more subsidiaries of the Parent or by the parent and one or more subsidiaries of the Parent. "Subsidiary Guarantors" means SubMicron Systems, Inc. and SubMicron Wet Process Stations, Inc. "Trade Payables" means with respect to any Person, accounts payable and other similar accrued current liabilities in respect of obligations or indebtedness to trade creditors created, assumed or guaranteed by such Person or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of property or services. 13. Board Representation. In the event that the Representative (as defined below) is not otherwise entitled to designate two individuals as nominees for election to the Company's Board of Directors or does not otherwise have two designees on the Board of Directors, then so long as The KB Mezzanine Fund II, L.P. ("KB") and Celerity Silicon, L.L.C. ("Celerity") together own at least $3,500,000 in aggregate principal amount of the Series 1999 Notes, the Board of Directors will elect as directors of the Company of such class as the Company may determine two individuals (the "Nominees") designated by the Representative for a minimum term of one year, consistent with the staggered board requirements of the Company's Certificate of Incorporation. Upon the expiration of the term of either such Nominee, if KB and Celerity continue to own at least $3,500,000 in aggregate principal amount of the Series 1999 Notes, the Company will, at the request of the Representative, nominate such Nominee or another nominee designated by the Representative, for reelection as a director of the Company. The foregoing obligations of the Company are subject to the Nominees agreeing, prior to service on the Board, that each such Nominee will resign as a director effective on the date that at least $3,500,000 in aggregate principal amount of the Series 1999 Notes is not owned by KB and Celerity. For purposes of this Section 13, the term "Representative" shall mean a person designated by KB and Celerity. 14. No Voting Rights. Nothing contained in this Series 1999 Note shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent or receive notice as a shareholder in respect of any meeting of shareholders or any rights whatsoever as a stockholder of the Company, unless and to the extent converted in accordance with the terms of Section 2 hereof. 15. Non-Waiver. -28- 29 No course of dealing between the Company and the Holder of this Note or any delay or failure on the part of the Holder hereof in exercising any rights hereunder shall operate as a waiver of any rights of any holder hereof, except to the extent expressly waived in writing by the Holder hereof. 16. Governing Law. This Note shall be construed in accordance with and governed by the internal laws of the State of New York. 17. Successors and Assigns. All of the covenants, promises and agreements in this Note shall bind the Company's successors and assigns, whether so expressed or not. 18. Headings. The headings of the sections and paragraphs of this Note are inserted for convenience only and shall not be deemed to constitute a part hereof. IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by a duly authorized officer and to be dated as of the day and year first above written. SUBMICRON SYSTEMS CORPORATION Dated:___________________ By:________________________________________ Title:_____________________________________ -29- 30 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: _____________ Your Signature:__________ (Sign exactly as your name appears on the front of this Note) Signature Guarantee: -30- EX-10.12A 5 AMENDMENT TO CREDIT FACILITY WITH GREYROCK 1 EXHIBIT 10.12A AMENDMENT TO LOAN DOCUMENTS BORROWER: SUBMICRON SYSTEMS, INC. ADDRESS: 6330 HEDGEWOOD DRIVE ALLENTOWN, PENNSYLVANIA 18106 BORROWER: SUBMICRON WET PROCESS STATIONS, INC. ADDRESS: 3381 EDWARDS AVENUE SANTA CLARA, CALIFORNIA 95054 DATE: DECEMBER 2, 1998 THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK CAPITAL, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION (formerly Greyrock Business Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated November 25, 1997 (the "Loan Agreement"), as follows. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by Greyrock and the Borrower, and all other written documents and agreements between Greyrock and the Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. CREDIT LIMIT. Section 1(1) of the Schedule to the Loan Agreement, which presently reads as follows: "1. Credit Limit (Section 1.1). An amount not to exceed the lesser of (1) or (2) below: "(1) $15,000,000 at any one time outstanding; or "(2) an amount equal to "(i) 80% of the amount of Borrower's Eligible Receivables (as defined in Section 8 above), plus "(ii) the lesser of 10% of the Value of Borrower's Eligible Inventory (as defined in Section 8 above) or $2,000,000. "Value", as used herein, means the lower of cost or wholesale market value. "Loans will be made separately to each Borrower based on the Collateral of each Borrower." is amended to read as follows: "1. Credit Limit (Section 1.1). An amount not to exceed the lesser of (1) or (2) below: "(1) $10,000,000 at any one time outstanding; or "(2) an amount equal to -1- 2 GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS "(i) 80% of the amount of Borrower's Eligible Receivables (as defined in Section 8 above) (the `Receivable Loans'), plus "(ii) the lesser of the following (the `Inventory Loans'), 10% of the Value of Borrower's Eligible Inventory (as defined in Section 8 above) or $2,000,000, plus "(iii) $2,000,000 (the `Overadvance Loans'). "Receivable Loans and Inventory Loans will be made separately to each Borrower based on the Collateral of each Borrower. `Value', as used above, means the lower of cost or wholesale market value. On September 30, 1999 all Overadvance Loans shall be due and payable, and thereafter no further Overadvance Loans will be made. The making of Overadvance Loans shall be a matter of Greyrock's sole and absolute discretion." 2. EXTENSION. Section 4 of the Schedule is amended in its entirety to read as follows: "4. Maturity Date (Section 6.1): January 1, 2000, subject to automatic renewal as provided in Section 6.1 above, and early termination as provided in Section 6.2 above. 3. CONDITIONS. Notwithstanding any execution and delivery of this Agreement by Greyrock and Borrower, it shall not be deemed effective unless and until the following conditions have been satisfied on or before December 9, 1998, and Borrower shall provide Greyrock with evidence satisfactory to Greyrock confirming the same by said date: (a) The Borrower shall receive cash in an amount not less than $4,000,000 in consideration for the issuance by Borrower of its equity and/or subordinated debt securities on or after the date hereof. (b) The Borrower shall enter into written agreements with The KB Mezzanine Fund II, L.P. ("KB") and Celerity Silicon, L.L.C. ("Celerity") providing for KB and Celerity to agree to accept equity and/or subordinated debt securities in lieu of cash interest payments which are due and payable with respect to the Parent's 12% Senior Subordinated Notes due 2002 (the "12% Notes") from July 2, 1998 through September 30, 1999. (c) The Borrower shall enter into written agreements with holders of Parent's 8% Convertible Subordinated Notes due 2002 (the 8% Notes"), which shall agreements shall provide that (i) at least 80% of the aggregate interest due with respect to the 8% Notes from October 1, 1998 through September 30, 1999 shall be payable in the form of subordinated debt securities and warrants in lieu of cash interest payments, and (ii) at least 80% of each quarterly interest payment due with respect to the 8% Notes from February 1, 1999 through September 30, 1999 shall be payable in the form of subordinated debt securities and warrants in lieu of cash interest payments. 4. FEE. In consideration for Greyrock entering into this Amendment, the Borrower shall concurrently pay Greyrock a fee in the amount of $100,000, payable in 12 consecutive equal monthly installments commencing January 1, 1999. Said fee shall be non-refundable and in addition to all interest and other fees payable to Greyrock under the Loan Documents. Greyrock is authorized to charge said fee to Borrower's loan account. 5. REPRESENTATIONS TRUE. Borrower represents and warrants to Greyrock that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. -2- 3 GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS 6. CONSENT TO ISSUANCE OF SUBORDINATED DEBT. Greyrock hereby consents to (a) the issuance by Parent of its Series B 12% Senior Subordinated Notes due February 1, 2002 (the "Series B Notes"), including without limitation the issuances contemplated by Section 3 hereof, and pursuant to the Security Agreement dated November 26, 1997, as amended, the Patent Security Agreement dated November 26, 1997, as amended, and the Continuing Guaranty dated November 26, 1997, as amended, each relating to the 12% Notes and, as amended, to the 12% Notes and the Series B Notes, in the forms previously provided to Greyrock. 7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. Borrower: GBC: Submicron Systems, Inc. Greyrock Business Credit, a Division of NationsCredit Commercial Corporation By_______________________________ By_______________________________ President or Vice President Title____________________________ Borrower: SUBMICRON WET PROCESS STATIONS, INC. By_______________________________ President or Vice President -3- 4 GREYROCK CAPITAL AMENDMENT TO LOAN DOCUMENTS CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. The signatures of the undersigned shall be fully effective even if other persons named below fail to sign this Consent. Submicron Systems Corporation By_______________________________ Title_____________________________ -4- EX-21 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES SubMicron Systems, Inc., a Pennsylvania Corporation SubMicron Wet Process Stations, Inc., a California Corporation d/b/a Universal Plastics 45 EX-23 7 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-71900, 33-91986, 333-4514, and 333-69695 and Form S-3 Nos. 33-64500 and 333-4516) of SubMicron Systems Corporation of our report dated March 31, 1999, with respect to the consolidated financial statements and schedule of SubMicron Systems Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 31, 1999 46 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 DEC-31-1998 1,982 0 10,428 1,752 7,787 20,424 20,254 14,328 30,737 24,662 37,717 0 58 2 (29,172) 30,737 42,205 42,205 38,697 38,697 28,027 1,080 6,805 (29,131) 0 (29,131) 0 0 0 (29,131) (1.51) (1.51)
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