PLASMA & MATERIALS TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
FORM 10-K

[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER: 0-26482
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PLASMA & MATERIALS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 95-4054321
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

9255 DEERING AVENUE, CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(818) 886-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
COMMON STOCK, NO PAR VALUE

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 periods 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 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 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. [_]

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on March 15, 1996, based on the closing price of the Common Stock
as reported by the Nasdaq National Market on such date, was approximately
$59,477,197. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of March 15, 1996, the Registrant had outstanding 8,648,609 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's Annual Meeting of Shareholders
are incorporated by reference into Part III hereof.
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PLASMA & MATERIALS TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

PAGE
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PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 17
Item 3. Legal Proceedings.............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............ 17
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters........................................................ 18
Item 6. Selected Consolidated Financial Data........................... 19
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 21
Item 8. Financial Statements and Supplementary Data.................... 26
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure........................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant............. 27
Item 11. Executive Compensation......................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management. 27
Item 13. Certain Relationships and Related Transactions................. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 28

2

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements are in the fourth
paragraph under "Business--Customers", in the first paragraphs under each of
"Business--Marketing, Sales and Customer Support" and "Backlog", in the first
paragraphs under each of "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Product Sales" and
"--Selling, General and Administrative Expenses", and in the second paragraph
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Product Sales." Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below under "Risk Factors." For a list of companies that are
named in this Annual Report on Form 10-K, see page 29.

INTRODUCTION

Plasma & Materials Technologies, Inc. ("PMT" or the "Company") designs,
manufactures and markets advanced high density, low pressure plasma sources,
process modules and plasma processing systems. These products are used for
etch and chemical vapor deposition (CVD) applications and are sold to
semiconductor and flat panel display manufacturers worldwide. PMT currently
offers a modular line of etch equipment which utilizes the MORI(TM) source for
polysilicon and metal etch applications in the fabrication of semiconductor
devices. In addition, semiconductor manufacturers use the MORI(TM) source for
plasma CVD of silicon dioxide films and photoresist stripping. Certain other
manufacturers also use the MORI(TM) source for the plasma etching of films in
the fabrication of large area active matrix liquid crystal displays. Some of
the customers that have purchased or have placed orders for the Company's
plasma processing systems include Texas Instruments, Dallas Semiconductor, LG
Semicon, Hyundai, Samsung, Toshiba and Canon Sales.

PRODUCTS

PMT offers a line of modular solutions which are designed to meet the
varying requirements of its customers for etching of polysilicon, metal and
oxide films, stripping of photoresist, and CVD of oxide films. PMT's line of
equipment includes the MORI(TM) plasma source, the MORI(TM) stand-alone
process module for etch, strip or CVD applications, the APEX 7000(R) system,
the PINNACLE 8000(R) system, and the PINNACLE 8000R(TM) system. All of PMT's
systems products are Manufacturing Equipment Standard Configuration (MESC)
compatible.

Each step of the manufacturing process for integrated circuits (ICs)
requires specialized manufacturing equipment. The three primary steps in
manufacturing ICs are the deposition of insulating or conducting materials
onto the wafer (deposition), the projection of a pattern through a mask onto
light sensitive materials known as photoresist (photolithography), and the
etching or removal of the deposited material not covered by the patterned
photoresist (etching). Plasma technology plays an important role in the etch
and deposition operations. Today, plasmas are used for virtually all etching
processed, as well as a significant and increasing percentage of deposition
processes, most notably CVD.

PMT's MORI(TM) plasma source is currently sold as a subsystem on a limited
geographic and application basis to OEM licensees of PMT's MORI(TM)
technology. PMT currently sells the MORI(TM) source to Leybold of Germany for
incorporation into Leybold's systems that are sold worldwide for etching large
area, active matrix liquid crystal displays. The Company sells its MORI(TM)
source to Canon Sales for incorporation into Canon Sales' systems for
photoresist stripping that are sold in the Japanese and Korean markets, and to
NEC Anelva for incorporation into NEC Anelva's systems for metal and oxide
etching that are sold in the Japanese market.

PMT's stand-alone process module, common to the Company's APEX 7000(R),
PINNACLE 8000(R) and PINNACLE 8000R(TM) systems, incorporates the MORI(TM)
plasma source and can be configured for etch, strip or CVD applications. The
process module can be sold to customers either to increase the capacity of
existing system platforms, or to provide additional process capability. The
process module requires less than eight square feet of floorspace. List price
for a standard process module configured for etch applications is currently
$500,000.

3

The APEX 7000(R) is a single module, single wafer cassette, vacuum
loadlocked system for development, evaluation or single chamber production
applications. System throughput varies depending on the film application, and
is typically 20-30 wafers per hour for this single chamber configuration as
compared to a throughput of 15-20 wafers per hour for competitive single
module systems. Floorspace required for the APEX 7000(R) is approximately 26
square feet. List price for a standard APEX 7000(R) system is currently
$975,000.

In December 1995, the Company introduced its PINNACLE 8000R(TM) cluster tool
platform, a more compact version of its existing PINNACLE 8000(R) system that
includes certain additional features that enable increased ease in operation.
Each of the Company's PINNACLE 8000(R) and PINNACLE 8000R(TM) systems is a
dual wafer cassette, vacuum loadlocked cluster tool which can incorporate up
to four MESC-compatible process modules. The dual wafer cassette loadlock
configuration enables the system to continuously process wafers. System
throughput varies, and is primarily dependent on the film application, the
operating configuration and the number of process modules attached to the
system. For a typical polysilicon etch process, with each process module
performing the same process, throughput varies from 40-60 wafers per hour for
a two module configuration, to 70-90 wafers per hour for a four module
configuration. This compares to a throughput of 30-40 wafers per hour for
competitive two module systems. Floorspace required for a PINNACLE 8000R(TM)
is approximately 44 square feet with two process modules and 65 square feet
with four process modules. By comparison, floorspace required for a Pinnacle
8000(R) is approximately 88 square feet with four process modules. List price
for the PINNACLE 8000R(TM) currently ranges from $1,900,000 for a standard two
module system to $3,100,000 for a four module system.

CUSTOMERS

The Company sells its systems to semiconductor manufacturers located
throughout the United States, Europe, Asia/Pacific and Japan. The following is
a list of customers who have purchased or have current orders for PMT products
either directly with the Company or through its distribution and OEM
relationships:

AT&T OKI
Dallas Samsung
Semiconductor SEMATECH
Fujitsu Sharp
Hitachi Texas Instruments
Hyundai TriQuint Semiconductor
LG Semicon Toshiba
NEC

The Company has received multiple purchase orders for MORI(TM) plasma
sources for etch applications from NEC, OKI, and Sharp, and has received a
repeat order for a PINNACLE 8000(R) system from Hyundai and Dallas
Semiconductor. The Company shipped its first beta (pre-production evaluation)
PINNACLE 8000(R) and APEX 7000(R) plasma etch systems in 1993. The Company's
first shipments of plasma etch systems to end use customers began in June
1994, and the Company's first shipments of its PINNACLE 8000R(TM) system began
in December 1995.

The Company's total revenue includes amounts from certain individual
customers that exceed 10% of total revenue. Revenue from five customers
represented 19%, 15%, 12%, 11% and 11% each of total revenue for the year
ended December 31, 1995, revenue from six customers represented 19%, 17%, 17%,
15%, 15% and 12% each of total revenue for the ten months ended December 31,
1994, and revenue from two customers represented 46% and 39% each of total
revenue for the year ended February 28, 1994.

International sales accounted for approximately 47%, 66% and 50% of total
revenue in the year ended December 31, 1995, the ten months ended December 31,
1994, and the year ended February 28, 1994, respectively. The Company
anticipates that international sales will continue to account for a
significant portion of its total revenue. In particular, the Company expects
that sales to Japanese and Korean semiconductor manufacturers will continue to
represent a significant percentage of the Company's product sales through at
least

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1996. During the year ended December 31, 1995, sales to Alcan-Tech, Canon
Sales and NEC Anelva in Japan, and to LG Semicon and Hyundai in Korea,
accounted for 25% and 18% of the Company's total revenue, respectively, for
that period. During the ten months ended December 31, 1994, sales to Canon
Sales and NEC Anelva in Japan, and to Samsung and Hyundai in Korea, accounted
for 31% and 32% of the Company's total revenue, respectively, for that period.
During the year ended February 28, 1994, sales to Alcan-Tech and NEC Anelva in
Japan accounted for 44% of the Company's total revenue for that period. There
were no sales in Korea during the year ended February 28, 1994. The Company's
operating results could be materially adversely affected by any loss of
business from the cancellation of orders by or decreases in the prices of
products sold to these or other customers located in Japan and Korea. See
"Risk Factors--International Sales; Concentration in Japanese and Korean
Markets" and Note 1 of Notes to Consolidated Financial Statements.

MARKETING, SALES AND CUSTOMER SUPPORT

The Company's long range goal is to market its products and services
directly to all end use customers to the extent it is efficient and cost
effective. In the current stage of the Company's growth, it is not efficient
or cost effective to market products and services through a direct sales force
in all regions. Consequently, PMT has established multiple sales channels to
market products and services to match the Company's efforts in each region.
The Company currently markets and sells its products primarily through three
separate sales channels, direct sales, distributor arrangements and OEM
agreements. In selected regions and countries, the Company uses a combination
of direct sales, distributor arrangements, OEM agreements and sales
representatives.

In the United States, the Company markets and sells its products principally
through its direct sales organization. In Korea, the Company markets and sells
its products direct through the sales staff of its wholly owned subsidiary,
Plasma & Materials Technologies (Korea) Co., Ltd. The Korean market is served
by a direct sales group in order to meet Korean semiconductor manufacturers'
requirements of having direct local representation for sales, customer support
and spare parts.

The Company believes that the most efficient strategy for penetrating the
Japanese market is to enter into a distribution agreement with a well
established and experienced sales organization. The Company has appointed
Canon Sales as its exclusive etch system distributor in Japan, and in July
1995 entered into a definitive agreement for such appointment. Although
management believes that it maintains a good relationship with Canon Sales,
there can be no assurance that the relationship will continue. In the event of
a termination of the Company's agreement with Canon Sales, the Company's
ability to increase its sales in Japan would be adversely affected.

In addition, the Company has established relationships in Taiwan and Europe
with sales representatives and distributors that have significant experience
in the semiconductor industry and that provide a high level of visibility for
the Company's products and services. In Taiwan, the Company markets etch
systems through Techlink, and in Europe, PMT has entered into a distribution
agreement with Metron to market its etch systems.

The Company maintains active OEM agreements in Japan and Europe. PMT
currently sells the M^RI(TM) source to Leybold of Germany for incorporation
into Leybold's systems that are sold worldwide for etching large area, active
matrix liquid crystal displays. The Company sells its M^RI(TM) source to NEC
Anelva for incorporation into NEC Anelva's systems for metal and oxide etching
and that are sold in the Japanese market, and to Canon Sales for incorporation
into Canon Sales' systems for photoresist stripping that are sold in the
Japanese and Korean markets.

The Company believes that providing its customers with evaluation systems of
its equipment products is critical to its sales efforts. The ability to
evaluate the Company's plasma processing systems on a trial basis is expected
by the semiconductor manufacturing customers to whom the Company markets.
Consequently, as the Company expands its sales efforts, it believes that it
will need to significantly increase its inventory investment in evaluation
systems. The failure or inability of the Company to convert an evaluation
system placed with a customer to a final sale could have a material adverse
effect on the Company.

5

The Company believes that customer support is a key component in a
customer's decision in selecting a semiconductor equipment supplier. The
ability to provide a processing system with a high degree of reliability, low
cost, high yield, high uptime and high mean time between failure greatly
influences a customer's purchase decision. This requires experienced,
responsive local support with quality personnel and ready availability of
spare parts. The Company believes that a focused field support organization
that works closely with its customers provides invaluable feedback from
customers with respect to system cost effectiveness, and typically results in
technical advances through continuous design improvement. To further ensure
customer satisfaction, the Company also provides service and maintenance
training as well as process application training for its customers' personnel
on a fee basis. The Company maintains an extensive inventory of spare parts
which allows the Company to provide overnight delivery for many parts. The
Company currently provides a one-year warranty on its systems.

All international sales of the Company's products are denominated in U.S.
dollars in order to reduce the risks associated with the fluctuation of
foreign currency exchange rates. All export sales must be licensed by the
Office of Export Administration of the U.S. Department of Commerce. Although
the Company has experienced no difficulty in obtaining these licenses, failure
to obtain these licenses in the future could have a material adverse effect on
the Company's results of operations.

RESEARCH, DEVELOPMENT AND ENGINEERING

The Company believes that its future success will depend, in part, upon its
ability to continue to improve its systems and its process technologies and to
develop new technologies and systems which compete effectively on the basis of
total cost of ownership and performance. These technologies and systems will
also need to meet customer requirements and emerging industry standards.
Accordingly, the Company devotes a significant portion of its personnel and
financial resources to research and development programs and seeks to maintain
close relationships with its customers in order to remain responsive to their
product needs.

As of December 31, 1995, the Company employed 30 professional and technical
personnel in research, development and engineering. These employees are
organized in the following departments: research and development, hardware
engineering, software engineering, customer specials engineering, systems
engineering, documentation and manufacturing engineering, and customer
applications.

The research and development group is responsible for identifying new
technology applications and developing processes to meet customer
requirements. Major research and development programs currently address
polysilicon and integrated stack etch applications, metal etch applications,
including aluminum, and oxide etch applications.

The engineering group is responsible for the conceptual design of the
Company's products, selection or design of components and subassemblies, and
integration of the system into a product that effectively meets customer
needs. The Company has developed both its PINNACLE 8000(R) and Pinnacle
8000R(TM) cluster tool platforms utilizing the SEMI MESC cluster tool
architecture standard. In addition, the Company has developed MACSE(TM), its
own proprietary software, to control its products and to provide the
automation, operator and facility interfaces required by the customer.

The customer applications group is responsible for demonstrating the
capability of the Company's products to meet specific customer process
requirements. The Company currently maintains two clean rooms and two
development labs to support process development and customer demonstrations.

The Company's research, development and engineering expenses were $4.6
million and $3.6 million for the year ended December 31, 1995 and the ten
months ended December 31, 1994, respectively, and represented 22% and 41% of
total revenue for these two periods, respectively. During the period from
August 1994 through March 1995, Watkins-Johnson reimbursed the Company in the
amount of $1.4 million for research, development and engineering activity
carried out by the Company in the development of a process module configured
for CVD

6

applications. The Company's agreement with Watkins-Johnson provides that
technology which is jointly developed is co-owned by the Company and Watkins-
Johnson. The Company does not currently anticipate any further research and
development efforts by, or additional product sales to, Watkins-Johnson in the
future. The Company's research, development and engineering expenses stated
above represent the net expenses after such reimbursement. For the year ended
February 28, 1994, research, development and engineering expenses were $2.8
million representing 35% of the Company's total revenue for that period.

In addition to the Company's direct research, development and engineering
expenses, significant expenditures in research, development and engineering
have been made by Leybold, Canon Sales and NEC Anelva, with whom the Company
has entered into OEM agreements. These arrangements provide the Company with
expanded resources and knowledge to broaden the use of PMT's MORI(TM) plasma
technology in the etch, strip, CVD and flat panel markets. No information on
the amount of these expenditures has been disclosed to the Company; however,
the Company believes that the total exceeds the Company's direct expenditures
for the same applications research over the same periods identified above.

Although the Company believes that it has allocated sufficient resources to
its research, development and engineering efforts, the success of new system
introductions is dependent on a number of factors, including timely completion
of new system designs and market acceptance. There can be no assurance that
the Company will be able to improve its existing systems and process
technologies or develop new technologies or systems. In addition, the Company
may incur substantial unanticipated costs to establish the functionality and
reliability of its future product introductions early in the product's life
cycle.

MANUFACTURING

The Company's manufacturing operations are located in Chatsworth,
California, and consist of materials planning and procurement, assembly,
system integration and final test. The Company employs a just-in-time
manufacturing strategy coupled with the outsourcing of components and
subassemblies from outside suppliers.

The Company's modular product line, which is designed around the SEMI MESC
industry standard, enables the Company to use a large number of components and
subassemblies which are common not only to the Company's product line but also
to systems manufactured by other companies in the industry, both competitive
and non-competitive. Examples of subassemblies which are common to products
manufactured by other companies include the robotics, wafer aligner and vacuum
cassette elevators obtained from Brooks Automation in Massachusetts, and RF
power supplies obtained from RF Power Products in New Jersey. Examples of
subassemblies obtained from outside suppliers and that are unique to the
Company's systems products include gas box assemblies and fabricated vacuum
chambers.

The Company relies on outside suppliers to manufacture substantially all of
the components and subassemblies used in its plasma processing systems.
Certain of these are obtained from a sole supplier or a limited group of
suppliers. For example, the wafer cassette elevator load locks used in the
Company's APEX 7000(R), PINNACLE 8000(R) and PINNACLE 8000R(TM) plasma
processing systems are sole sourced from Brooks Automation. The Company's
reliance on outside suppliers generally, and a sole or limited group of
suppliers in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components, as well as
reduced control over pricing and timely delivery of components. Because the
manufacture of certain of these components and subassemblies is a complex
process and can require long lead times, there can be no assurance that delays
or shortages caused by suppliers will not occur. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company
to seek alternate sources of supply or to manufacture such components
internally could delay the Company's ability to ship its systems and could
have a material adverse effect on the Company.

The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals and gases used during its customer demonstrations and in
research and development activities. Public attention has increasingly been
focused on the environmental

7

impact of operations which use hazardous materials. Failure to comply with
present or future regulations could result in substantial liability to the
Company, suspension or cessation of the Company's operations, restrictions on
the Company's ability to expand at its present locations, or requirements for
the acquisition of significant equipment or other significant expense. To
date, compliance with environmental rules and regulations has not had a
material effect on the Company's operations. At the present time, the Company
believes that it is in material compliance with all applicable environmental
rules and regulations.

COMPETITION

The markets served by the Company's products are highly competitive and
subject to rapid technological change. Significant competitive factors include
system performance, cost of ownership (which is dependent upon yield,
throughput and reliability), size of installed base, depth and breadth of
product line and customer support.

The Company faces significant competition from various suppliers of systems
that utilize alternative technologies. In the etch market, the Company faces
competition from suppliers of reactive ion etch (RIE) systems, including
Applied Materials, Lam Research and Tokyo Electron. The Company's MORI(TM)
based etch systems also face competition from inductively coupled plasma (ICP)
based etch systems marketed by Applied Materials and Lam Research, as well as
the electron cyclotron resonance (ECR) based etch system marketed by Hitachi.
In the high density plasma CVD market, the Company's primary competitors are
Applied Materials, Novellus and Lam Research. In addition, under the terms of
an OEM agreement that the Company entered into with Watkins-Johnson, PMT may
not compete directly in the CVD market with Watkins-Johnson until July 1996.
In the FPD market, the Company faces competition primarily from Applied
Materials, Lam Research, Tokyo Electron and Plasma-Therm. The Company's
MORI(TM) sources face competition from competitors that manufacture and market
sources that utilize various alternative technologies, including RIE, ICP and
ECR based plasma sources.

All of the Company's primary competitors are substantially larger companies
with broader product lines, and have well established reputations in the etch
and CVD markets, longer operating histories, greater experience with high
volume manufacturing, broader name recognition, substantially larger customer
bases, and substantially greater financial, technical, manufacturing and
marketing resources than the Company. The Company also faces potential
competition from new entrants in the market, including established
manufacturers in other segments of the semiconductor capital equipment market,
who may decide to diversify into the Company's market segment. There can be no
assurance that the Company's competitors will not develop enhancements to or
future generations of competitive products that will offer price and
performance features that are superior to those offered by the Company's
systems.

INTELLECTUAL PROPERTY

The Company relies on a variety of types of intellectual property protection
to protect its proprietary technology, including patent, copyright, trademark
and trade secret laws, non-disclosure agreements, and other intellectual
property protection methods. Although the Company believes that its patents
and trademarks may have value, the Company believes that its future success
will also depend on the innovation, technical expertise and marketing
abilities of its personnel. The Company currently holds five patents in the
United States, has one patent application pending in South Korea, has two
patent applications pending in each of Japan and Europe, and intends to file
additional patent applications as appropriate. The Company's patents and
patent applications relate to the Company's MORI(TM) plasma source. The
Company also holds a copyright on its MACSE(TM) proprietary software. In
addition, the Company has six trademarks that are registered with the United
States patent and trademark office, including PMT(R), APEX 7000(R) and
PINNACLE 8000(R).

There can be no assurance that the additional patents will be issued on the
pending applications or that competitors will not be able to legitimately
ascertain proprietary information embedded in the Company's products which is
not covered by patent or copyright. In such case, the Company may be precluded
from preventing the competitor from making use of such information. In
addition, should the Company wish to assert

8

its patent rights against a particular competitor's product, there can be no
assurance that any claim in a Company patent will be sufficiently broad nor,
if sufficiently broad, any assurance that the Company patent will not be
challenged, invalidated or circumvented, or that the Company will have
sufficient resources to prosecute its rights. The Company's policy is to
vigorously protect and defend its patents, trademarks and trade secrets.

There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claim where the Company has received notice that it is infringing intellectual
property rights of others. There can be no assurance, however, that such
infringement claims will not be asserted in the future nor can there be any
assurance, if such claims were made, that the Company would be able to defend
against such claims successfully or, if necessary, obtain licenses on
reasonable terms. In addition, the Company believes that litigation in its
industry over patent rights has been increasing in recent years.

The Company's involvement in any patent dispute or other intellectual
property dispute or in any action to protect trade secrets and know-how, even
if successful, could have a material adverse effect on the Company and its
business. Adverse determinations in any such action could subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which might not be available, and possibly prevent the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company and its business.

BACKLOG

As of December 31, 1995, the Company's backlog was $8.7 million, as compared
to $2.1 million at December 31, 1994. The Company's backlog at December 31,
1995 consisted primarily of orders for its PINNACLE 8000(R) systems; however,
the Company expects that most of its product sales in the near term will be
derived from sales of its newer PINNACLE 8000R(TM) system.

The Company includes in its backlog all purchase orders that provide for
delivery within twelve months. The Company's business is characterized by
large purchase contracts for standard products with related customized
options. All orders are subject to cancellation or delay by the customer with
limited or no penalty. Because of possible changes in delivery schedules and
cancellations of orders, the Company's backlog at any particular date is not
necessarily representative of actual sales for any succeeding periods.

EMPLOYEES

At December 31, 1995, the Company had 87 regular employees, including 30
engaged in research, development and engineering, six in sales and marketing,
28 in customer support, ten in manufacturing, and 13 in general administration
and finance. The Company intends to hire additional personnel during the next
12 months in all of these areas.

The Company believes its future success will depend in large part on its
ability to attract and retain highly skilled employees, particularly those
highly skilled design, process and test engineers involved in the manufacture
of existing systems and the development of new systems and processes. The
competition for such personnel is intense. The Company faces the task of
quickly identifying, recruiting, training and integrating new employees. There
can be no assurances that the Company will be successful in doing so or, if
successful, in retaining such employees.

None of the employees of the Company are covered by a collective bargaining
agreement, and the Company has not entered into employment agreements with any
of its employees. The Company considers its relationships with its employees
to be good.

JOINT DEVELOPMENT ARRANGEMENTS

On December 4, 1995, PMT agreed in principle to extend its original OEM and
licensing agreement with NEC Anelva. Under the terms of the proposed
agreement, the two companies would jointly develop, market,

9

and manufacture an intermetal dielectric CVD system based upon PMT's MORI(TM)
source. Under the agreement, upon the completion of this system's development
PMT will manufacture the high density plasma intermetal dielectric CVD system
utilizing its primary cluster tool platform, the Pinnacle 8000R(TM). NEC
Anelva will have exclusive marketing rights in Japan, Taiwan and the Asia
Pacific region, and PMT will have exclusive marketing rights in the U.S.,
Korea and Europe. Although management believes that it maintains a good
relationship with NEC Anelva, there can be no assurance that the relationship
will continue or that the parties will enter into a definitive agreement. In
the event of a termination of the Company's relationship with NEC Anelva or
the failure by the parties to develop an intermetal dielectric CVD system
based on PMT's technology, the Company's ability to penetrate the high density
plasma intermetal dielectric CVD market would be adversely affected.

Also in December 1995, PMT and LG Semicon announced that the two companies
would jointly develop an oxide etch process utilizing the Company's PINNACLE
8000R(TM) cluster tool. The Company's wholly-owned Korean subsidiary, Plasma &
Materials Technologies (Korea) Co., Ltd., will manage the process development
work that will be conducted at LG Semicon's Cheong-Ju research and development
facility in South Korea, and PMT's headquarters in California. PMT believes
that this joint development project will help the Company's PINNACLE 8000R(TM)
system achieve acceptance in the oxide etch market. Although management
believes that it maintains a good relationship with LG Semicon, there can be
no assurance that the relationship will remain positive, that the joint
development project will be completed. In the event of a termination of the
Company's agreement with LG Semicon, or the failure by the parties to
successfully develop an oxide etch process based on PMT's PINNACLE 8000R(TM)
cluster tool, the Company's ability to penetrate the oxide etch market would
be adversely affected.

10

RISK FACTORS

The following Risk Factors should be carefully reviewed in addition to the
other information contained in this Annual Report on Form 10-K.

HISTORY OF LOSSES

The Company did not begin selling its plasma processing systems to end use
customers until June 1994, and historically has derived its revenue primarily
from the sales of MORI(TM) plasma sources and the licensing of its plasma
source technology. Historically, the Company has incurred significant losses
and has experienced a substantial negative cash flow. The Company had an
accumulated deficit as of December 31, 1995 of approximately $7.6 million, and
operating losses of $0.4 million, $3.7 million, and $1.2 million for the
fiscal year ended December 31, 1995, the ten months ended December 31, 1994,
and the year ended February 28, 1994, respectively. Although the Company
posted net income of $117,885 for the fiscal year ended December 31, 1995,
there can be no assurance that the Company will be able to sustain such
profitability. The Company is currently increasing its expense levels,
including the hiring of additional personnel, and continuing its investment in
inventory, including its investment in evaluation systems. As a result, the
Company will be dependent upon continuing increases in revenue in order to
maintain profitability. If the Company's product sales do not increase to
support the higher level of operating expenses, the Company would be
materially adversely affected.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

The Company currently derives most of its revenue from the sale of a small
number of etch systems which typically have list prices ranging from
approximately $975,000 to $3,100,000. As a result, the timing of recognition
of revenue from a single transaction could have a significant impact on the
Company's product sales and operating results. For example, during the last
week of the second, third, and fourth quarters of fiscal year 1995, the
Company shipped the majority of its systems that were shipped in such
quarters. The Company's product sales and operating results for a particular
period could be adversely affected if an anticipated order for even one system
is not received in time to permit shipment during that period. Historically,
the Company's backlog at the beginning of a quarter has not included all sales
required to achieve the Company's sales objectives for that quarter.
Consequently, the Company's product sales and operating results for a quarter
depend on the actual shipment of the orders scheduled to be sold during that
quarter, as well as obtaining additional orders for systems to be shipped in
that same quarter. A delay in a shipment near the end of a particular quarter
may cause product sales in that quarter to fall significantly below the
Company's expectations, and may thus materially adversely affect the Company's
operating results for such quarter. Other factors which may lead to
fluctuations in the Company's quarterly and annual operating results include:
market acceptance of the Company's systems and its customers' products;
changes in overhead absorption levels due to changes in the number of systems
manufactured; timing of announcement and introduction of new systems by the
Company and its competitors; seasonality; changes in the mix of products or
the Company's distribution channels; and cyclicality in the semiconductor
industry and the markets served by the Company's customers.

Any delay or failure to receive anticipated orders, or any deferrals or
cancellations of existing orders, could adversely affect the Company's
financial performance. In addition, continued investments in research,
development and engineering, and the development of a worldwide sales and
marketing organization, will result in significantly higher fixed costs which
the Company will not be able to reduce rapidly if its sales goals for a
particular period are not met. The impact of these and other factors on the
Company's operating results in any future period cannot be forecasted
accurately. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

MARKET ACCEPTANCE OF SYSTEMS

The Company has shipped a limited number of its PINNACLE 8000(R), PINNACLE
8000R(TM) and APEX 7000(R) etch systems to a small number of customers. To
date, the substantial majority of the Company's sales

11

of systems have been initial purchases by customers of individual systems.
Typically, semiconductor manufacturers initially purchase individual systems
and deploy them in a development or pre-production environment prior to
purchasing multiple units for production. There can be no assurance that the
Company's customers will purchase additional systems for deployment in
production.

Given that the Company's systems represent an alternative to conventional
etch systems currently marketed by competitors, the Company believes that its
growth prospects depend in large part upon its ability to gain acceptance of
the Company's systems and technology. Due to the substantial investment
required by semiconductor manufacturers to install and integrate capital
equipment into a semiconductor production line, these manufacturers will tend
to choose equipment manufacturers based on past relationships, product
compatibility and proven financial performance. Once a semiconductor
manufacturer has selected a particular vendor, the Company believes that the
manufacturer generally relies upon the equipment supplied by that vendor for
the specific production line application, and frequently will attempt to
consolidate its other capital equipment requirements with the same vendor. As
a result, semiconductor manufacturers will normally engage in a long period of
analysis and planning before determining to convert to a new vendor in order
to fulfill their equipment purchasing requirements. Given these factors, there
can be no assurance that the Company will be successful in obtaining broader
acceptance of its systems and technology.

INTERNATIONAL SALES; CONCENTRATION IN JAPANESE AND KOREAN MARKETS

International sales accounted for approximately 47%, 66%, and 50% of total
revenue in the year ended December 31, 1995, in the ten months ended December
31, 1994, and in the year ended February 1994, respectively. The Company
anticipates that international sales will continue to account for a
significant portion of its total revenue. In particular, the Company expects
that product sales to Japanese and Korean semiconductor manufacturers will
continue to represent a significant percentage of the Company's product sales
through at least 1996. During the year ended December 31, 1995, sales to
Alcan-Tech, Canon Sales and NEC Anelva in Japan, and to LG Semicon and Hyundai
in Korea, accounted for 25% and 18% of the Company's total revenue,
respectively, for that period. During the ten months ended December 31, 1994,
sales to Canon Sales and NEC Anelva in Japan, and to Samsung and Hyundai in
Korea, accounted for 31% and 32% of the Company's total revenue, respectively,
for that period. During the year ended February 28, 1994, sales to Alcan-Tech
and NEC Anelva in Japan accounted for 44% of the Company's total revenue for
that period. There were no sales in Korea during the year ended February 28,
1994. The Company's operating results could be materially adversely affected
by the loss of business from the cancellation of orders or decreases in the
prices of products sold to these and other customers located in Japan and
Korea. See "Business--Customers" and Note 1 of Notes to Consolidated Financial
Statements.

International sales are subject to certain risks, including unexpected
changes in regulatory requirements, exchange rates, tariffs and other
barriers, political and economic instability, difficulties in accounts
receivable collections, extended payment terms, the challenges of maintaining
a readily available supply of spare parts, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations, and potentially adverse tax consequences. In
particular, the Company cannot predict whether recent trade negotiations
between the United States and Japan will result in quotas, duties, taxes or
other charges or restrictions implemented by the United States or Japan and
that would be detrimental to the business and operations of the Company. The
Company's international sales are also subject to certain governmental
restrictions, including the Export Administration Act and the regulations
promulgated thereunder. There can be no assurance that any of these factors
will not have a material adverse effect on the Company. In addition,
international sales may be materially adversely affected by currency risks
associated with devaluation of certain currencies. See "Business--Marketing,
Sales and Customer Support."

The Company believes that strong sales to Japanese and Korean semiconductor
manufacturers will be essential to its future financial performance. As part
of its strategy for penetrating the Japanese market, in July 1995 the Company
entered into an exclusive distribution agreement with Canon Sales for sales of
the Company's

12

systems in Japan. The Company is substantially dependent upon Canon Sales to
address the Japanese market. Although management believes that it maintains a
good relationship with Canon Sales, there can be no assurance that the
relationship will continue. In the event of a termination of the Company's
agreement with Canon Sales, the Company's ability to increase its sales in
Japan would be adversely affected. See "Business--Marketing, Sales and
Customer Support."

RAPID TECHNOLOGICAL CHANGE; NEW SYSTEMS

The markets in which the Company and its customers compete are characterized
by rapidly changing technology, the introduction of alternative technologies,
evolving industry standards and continuous improvements in products and
services. For example, recent developments in the market for metal etch
applications include the development of the damascene process, a new and
promising technology that could replace metal etch applications. No assurances
can be given that the damascene process or other technological innovations
will not prove to be superior to the processes currently being marketed and
developed by the Company. The Company believes that its future success will
depend, in part, upon its ability to continue to improve its systems and its
process technologies and to develop new technologies and systems which compete
effectively on the basis of total cost of ownership and performance and which
adequately address customer requirements.

The Company must adapt its systems and processes to address technological
changes and to support emerging target market industry standards. For example,
the Company believes that in order to continue to be successful, it will
eventually need to develop a full complement of systems for a variety of etch
and CVD applications, including an oxide etch application. To this end, the
Company has entered into an agreement in principle with NEC Anelva for the
development, manufacture and marketing of an intermetal dielectric CVD system
based upon PMT's MORI(TM) source, and has entered into an agreement with LG
Semicon for the joint development of an oxide etch process utilizing the
Company's PINNACLE 8000R(TM) cluster tool. There can be no assurance that the
Company's arrangements with either NEC Anelva or LG Semicon will continue, or
that the joint development of these systems will be successful. In the event
of a termination of the Company's relationships with NEC Anelva or LG Semicon,
or the failure by PMT and these parties to develop these systems, the
Company's ability to penetrate the intermetal dielectric CVD and oxide etch
markets would be adversely affected.

The success of new system introductions is dependent on a number of factors,
including timely completion of new system designs and market acceptance. There
can be no assurance that the Company will be able to improve its existing
systems and process technologies or develop new technologies or systems on a
timely basis. In addition, the Company may incur substantial unanticipated
costs to establish the functionality and reliability of its future product
introductions early in the product's life cycle. See "Business--Research,
Development and Engineering," and "--Joint Development Arrangements."

LENGTHY SALES CYCLE

Sales of the Company's systems typically involve a lengthy period during
which the Company may expend substantial funds and management effort. Sales of
the Company's systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity or to expand current
manufacturing capacity, both of which involve a significant capital
commitment. The amount of time from initial contact with a customer to the
first order is typically nine to twelve months or longer, and may involve
competing capital budget considerations for the customer, thus making the
timing of customer's orders uneven and difficult to predict. The Company's
ability to receive orders from potential customers may depend upon such
customers undertaking an evaluation for new equipment. For many potential
customers, such an evaluation may occur infrequently. In addition, the ability
to evaluate the Company's plasma processing systems on a trial basis is
expected by the semiconductor manufacturing customers to whom the Company
markets. Consequently, the Company believes it must significantly increase its
inventory investment in evaluation systems. Following initial system
qualification,

13

the Company often experiences further delays in finalizing system sales while
the customer evaluates and receives approvals for the purchase of the
Company's systems and completes a new or expanded facility. The failure or
inability of the Company to convert an evaluation system with a customer to a
final sale could have a material adverse effect on the Company. There can be
no assurance that any of the Company's efforts will be successful. See
"Business--Marketing, Sales and Customer Support."

CYCLICALITY OF SEMICONDUCTOR INDUSTRY

The Company's business depends upon capital expenditures by manufacturers of
semiconductor devices, including manufacturers that are opening new or
expanding existing fabrication facilities, which in turn depend upon the
current and anticipated market demand for such devices and the products
utilizing such devices. There can be no assurances that such demand will exist
in the future. In addition, the semiconductor industry is highly cyclical, and
historically has experienced periods of oversupply, resulting in significantly
reduced demand for capital equipment. The Company's sales and operating
results will be materially adversely affected if unanticipated downturns or
slowdowns in the semiconductor market occur in the future. In recent years,
the semiconductor industry has experienced significant growth, resulting in
significant growth in the capital equipment industry. There can be no
assurance that such growth will be sustained. See "Business--Marketing, Sales
and Customer Support."

HIGHLY COMPETITIVE INDUSTRY

The markets served by the Company's products are highly competitive and
subject to rapid technological change. Significant competitive factors include
system performance, cost of ownership (which is dependent upon yield,
throughput and reliability), size of installed base, depth and breadth of
product line, and customer support.

The Company faces significant competition from various suppliers of systems
that utilize alternative technologies. In the etch market, the Company faces
competition from suppliers of reactive ion etch (RIE) systems, including
Applied Materials, Lam Research and Tokyo Electron. The Company's MORI(TM)
based etch systems also face competition from inductively coupled plasma (ICP)
based etch systems marketed by Applied Materials and Lam Research, as well as
the electron cyclotron resonance (ECR) based etch system marketed by Hitachi.
In the high density plasma CVD market, the Company's primary competitors are
Applied Materials, Novellus and Lam Research. In addition, under the terms of
the Company's OEM agreement with Watkins-Johnson, PMT may not compete directly
in the CVD market with Watkins-Johnson until July 1996. In the FPD market, the
Company faces competition primarily from Applied Materials, Lam Research,
Tokyo Electron and Plasma-Therm. The Company's MORI(TM) sources face
competition from competitors that manufacture and market sources that utilize
various alternative technologies, including RIE, ICP and ECR based plasma
sources.

All of the Company's primary competitors are substantially larger companies
with broader product lines, and have well established reputations in the etch
and CVD markets, longer operating histories, greater experience with high
volume manufacturing, broader name recognition, substantially larger customer
bases, and substantially greater financial, technical and marketing resources
than the Company. The Company also faces potential competition from new
entrants in the market, including established manufacturers in other segments
of the semiconductor capital equipment market, who may decide to diversify
into the Company's market segment. There can be no assurance that the
Company's competitors will not develop enhancements to or future generations
of competitive products that will offer price and performance features that
are superior to those offered by the Company's systems. See "Business--
Competition."

MANAGEMENT OF GROWTH

The Company's anticipated growth may strain the Company's available
management, manufacturing, financial and other resources. The Company is
currently increasing its expense levels, including the hiring of additional
manufacturing, research, development and engineering, and sales and
administrative personnel, and continuing its investments in inventory,
including its investment in evaluation systems. Any failure to expand

14

these areas in an efficient manner could have a material adverse effect on the
Company. Moreover, there can be no assurance that the Company's systems,
procedures and controls will be adequate to support the Company's expanded
operations. The Company's growth may require that it secure additional
facilities or expand in its current facility. Any move to new facilities or
expansion within its present facilities could be disruptive and could have a
material adverse effect on the Company.

The Company believes that its future success will depend in large part on
its ability to attract and retain highly skilled employees, particularly those
highly skilled design, process and test engineers involved in the manufacture
of existing systems and the development of new systems and processes. The
competition for such personnel is intense. The Company faces the task of
quickly identifying, recruiting, training and integrating new employees. There
can be no assurances that the Company will be successful in doing so or, if
successful, in retaining such employees. See "Business--Employees."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a large extent upon the efforts and
abilities of Dr. Gregor Campbell, President and Chief Executive Officer, and
James Marshall, Executive Vice President and Chief Operating Officer. The loss
of either Dr. Campbell or Mr. Marshall could have a material adverse effect on
the Company. The Company has not entered into written employment agreements
with any of its executive officers.

SOLE OR LIMITED SOURCES OF SUPPLY

The Company relies on outside suppliers to manufacture substantially all of
the components and subassemblies used in its plasma processing systems.
Certain of these are obtained from a sole supplier or a limited group of
suppliers. For example, the wafer cassette elevator load locks used in the
Company's APEX 7000(R), PINNACLE 8000(R) and PINNACLE 8000R(TM) plasma
processing systems are sole sourced from Brooks Automation. The Company's
reliance on outside suppliers generally, and a sole or a limited group of
suppliers in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components, as well as
reduced control over pricing and timely delivery of such components. Because
the manufacture of certain of these components and subassemblies is a complex
process and can require long lead times, there can be no assurance that delays
or shortages caused by suppliers will not occur. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company
to seek alternative sources of supply or to manufacture such components
internally could delay the Company's ability to ship its systems and could
have a material adverse effect on the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Manufacturing."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

The development and manufacture of the Company's systems and enhancements
requires a significant investment in inventory and working capital. In order
to remain competitive, the Company must continue to make significant
investment in the components and subassemblies used in its plasma processing
systems, in the expansion of its operations, in evaluation systems, and in
research and development. Such investment will require financial resources
such as was received from the Company's Initial Public Offering in August
1995, funds available under the Company's current revolving line of credit,
anticipated cash flow from operations, existing cash balances, and additional
equipment financing. Although no assurances can be given in this regard, the
Company anticipates that these capital resources will support its financing
requirements through at least the next twelve months. Thereafter, or to the
extent that such financial resources are insufficient to fund the Company's
activities, additional funds may be required. If necessary, the Company would
seek such additional funding either through collaborative arrangements or
through public or private equity or debt financings. There can be no assurance
that additional financing will be available on acceptable terms or at all. If
additional funds are raised by issuing equity securities, further dilution to
shareholders will result. If adequate funds are not available, the Company may
be required to delay, reduce the scope of or eliminate one or more of its
planned capital

15

expenditures or research or development programs, or to reduce its various
operating expenses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

FINANCIAL COVENANTS AND RESTRICTIONS IMPOSED BY LENDER

In June 1995, the Company entered into an amended line of credit. The
amended line of credit places certain restrictions on the Company that, among
other things, prohibit the Company from paying cash dividends or repurchasing
its stock, merging or consolidating with certain other corporations, entering
into certain transactions, including asset acquisitions, outside of the
ordinary course of business, and incurring any debts outside of the ordinary
course of business that would have a material adverse effect on the Company.
The amended line of credit also requires the Company to comply with certain
financial ratios and tests. The Company is currently in compliance with all
covenants and restrictions contained in the amended revolving line of credit.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and Note 4 of Notes to
Consolidated Financial Statements.

FUTURE ACQUISITIONS

The Company intends to pursue acquisitions of related businesses, products
or technologies as opportunities arise. Future acquisitions by the Company may
result in potentially dilutive issuances of equity securities, the incurrence
of additional debt, and amortization expenses related to goodwill and other
intangible assets, all of which could adversely affect the Company's
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products of the
acquired companies, the diversion of management's attention from other
business concerns, risks associated with the Company's entering markets in
which it has no or limited direct prior experience, and the potential loss of
key employees of the acquired company. In the event that such an acquisition
does occur, no assurances can be given as to the effect thereof on the
Company's business or operating results.

INTELLECTUAL PROPERTY RIGHTS

The Company relies on a variety of types of intellectual property protection
to protect its proprietary technology, including patent, copyright, trademark
and trade secret laws, non-disclosure agreements, and other intellectual
property protection methods. Although the Company believes that its patents
and trademarks may have value, the Company believes that its future success
will also depend on the innovation, technical expertise and marketing
abilities of its personnel. The Company currently holds five patents in the
United States, has one patent application pending in South Korea, has two
patent applications pending in each of Japan and Europe, and intends to file
additional patent applications as appropriate. The Company's patents and
patent applications relate to the Company's MORI(TM) plasma source. The
Company also holds a copyright on its MACSE(TM) proprietary software. In
addition, the Company has six trademarks that are registered with the United
States patent and trademark office, including PMT(R), APEX 7000(R) and
PINNACLE 8000(R).

There can be no assurance that the additional patents will be issued on the
pending applications or that competitors will not be able to legitimately
ascertain proprietary information embedded in the Company's products which is
not covered by patent or copyright. In such case, the Company may be precluded
from preventing the competitor from making use of such information. In
addition, should the Company wish to assert its patent rights against a
particular competitor's product, there can be no assurance that any claim in a
Company patent will be sufficiently broad nor, if sufficiently broad, any
assurance that the Company patent will not be challenged, invalidated or
circumvented, or that the Company will have sufficient resources to prosecute
its rights. The Company's policy is to vigorously protect and defend its
patents, trademarks and trade secrets.

There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claim where the Company has received notice that it is infringing intellectual
property rights of others. There can be no assurance, however, that such
infringement claims will not

16

be asserted in the future nor can there be any assurance, if such claims were
made, that the Company would be able to defend against such claims
successfully or, if necessary, obtain licenses on reasonable terms. In
addition, the Company believes that litigation in its industry over patent
rights has been increasing in recent years.

The Company's involvement in any patent dispute or other intellectual
property dispute or in any action to protect trade secrets and know-how, even
if successful, could have a material adverse effect on the Company and its
business. Adverse determinations in any such action could subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which might not be available, and possibly prevent the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company and its business. See "Business--Intellectual
Property."

ENVIRONMENTAL REGULATIONS

The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its customer demonstrations and in research
and development activities. Public attention has increasingly been focused on
the environmental impact of operations which use hazardous materials. Failure
to comply with present or future regulations could result in substantial
liability to the Company, suspension or cessation of the Company's operations,
restrictions on the Company's ability to expand at its present locations, or
requirements for the acquisition of significant equipment or other significant
expense. See "Business--Manufacturing."

POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION

The Company believes that a variety of factors could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business; fluctuations
in the Company's operating results and order levels; general conditions in the
semiconductor industry or the worldwide economy; announcements of
technological innovations; new products or product enhancements by the Company
or its competitors; developments in patents or other intellectual property
rights; and developments in the Company's relationships with its employees,
customers, distributors and suppliers. In addition, in recent years the stock
market in general, and the market for shares of small capitalization stocks in
particular, has experienced extreme price fluctuations which have often been
unrelated to the operating performance of affected companies. Such
fluctuations could adversely affect the market price of the Company's Common
Stock.

ITEM 2. PROPERTIES

The Company currently leases two buildings that comprise a total of 54,000
square feet in Chatsworth, California. The Company's 34,000 square foot
corporate headquarters building houses senior management, sales, marketing,
research and development, customer applications, engineering, and customer
support functions. The 20,000 square foot operations building houses all of
the Company's manufacturing operations, including materials planning,
purchasing, shipping and receiving, stockroom, assembly and test, as well as
sales order entry, finance and human resources. Current leases on both
buildings expire on December 31, 1996. The Company also leases on a month to
month basis an office in Seoul, Korea for sales and customer support.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company may be involved in legal
proceedings from time to time. As of the date hereof, there are no material
legal proceedings pending against the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

17

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Company's Common Stock began trading in the over-the-counter market on
August 23, 1995 upon effectiveness of the registration statement relating to
the Company's initial public offering (the "Initial Public Offering"), and is
quoted on the Nasdaq National Market System under the symbol "PMAT". The
quarterly high and low sale prices for the Company's Common Stock as reported
on the Nasdaq National Market System for each full quarterly period since
August 23, 1995 are as follows:

HIGH LOW
---- ---

1995
Fourth quarter................................................ $17.50 $ 9.00
1996
First quarter (through March 15, 1996)........................ $16.25 $8.625

As of March 15, 1996, there were 93 shareholders of record of the Company's
Common Stock.

The Company has not declared or paid cash dividends to its shareholders. The
Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore,
does not anticipate paying dividends on its Common Stock in the foreseeable
future. Declaration of dividends on the Common Stock will depend, among other
things, upon levels of indebtedness, future earnings, the operating and
financial condition of the Company, its capital requirements and general
business conditions. The agreements governing the Company's indebtedness
contain provisions which prohibit the Company from paying dividends on its
Common Stock. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

18

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. The selected consolidated financial data set forth below for the
year ended February 28, 1994, as of and for the ten months ended December 31,
1994, and as of and for the year ended December 31, 1995, have been derived
from the audited financial statements of the Company included elsewhere in
this Form 10-K. The selected consolidated financial data set forth below as of
and for the year ended February 28, 1992, as of and for the year ended
February 28, 1993, and as of February 28, 1994, have been derived from audited
financial statements of the Company not included in this Form 10-K. The
selected consolidated financial data for the ten months ended December 31,
1993 and for the twelve months ended December 31, 1994 have been derived from
unaudited consolidated financial statements of the Company, but include all
adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the results of
operations for the periods presented.

TEN MONTHS ENDED
DECEMBER 31, (1) YEAR ENDED FEBRUARY 28,
------------------ ---------------------------
TWELVE
YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 (2) 1994 (1) 1994 1993 1994 1993 1992
------------ ------------ -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENTS OF
OPERATIONS:
Revenues:
Product sales.......... $20,890 $ 9,813 $ 8,005 $ 4,435 $ 6,244 $ 4,215 $ 1,376
License revenue........ 400 700 700 1,900 1,900 -- 2,000
------- ------- -------- -------- -------- -------- -------
Total revenue......... 21,290 10,513 8,705 6,335 8,144 4,215 3,376
Costs and expenses:
Costs of goods sold.... 11,144 6,444 5,404 3,218 4,259 2,442 763
Research and
development........... 4,567 4,210 3,584 2,186 2,812 2,218 1,205
Selling, general and
administrative........ 5,943 3,917 3,382 1,688 2,224 1,806 1,083
------- ------- -------- -------- -------- -------- -------
Total costs and
expenses: 21,654 14,571 12,370 7,092 9,295 6,466 3,051
------- ------- -------- -------- -------- -------- -------
Income (loss) before
interest and income
tax provision......... (364) (4,058) (3,665) (757) (1,151) (2,251) 325
Other:
Interest expense....... (294) (159) (146) (213) (227) (94) (22)
Interest income........ 777 143 125 15 32 26 21
------- ------- -------- -------- -------- -------- -------
Income (loss) before
income tax provision.. 119 (4,074) (3,686) (955) (1,346) (2,319) 324
Income tax provision... 1 54 54 51 51 -- 196
------- ------- -------- -------- -------- -------- -------
Net income (loss)...... $ 118 $(4,128) $ (3,740) $ (1,006) $ (1,397) $ (2,319) $ 128
------- ------- -------- -------- -------- -------- -------
Net income (loss) per
share (3)............. $ 0.02 $ (0.82) $ (0.75)
------- ------- --------
Number of shares used
in per share
computation (3)....... 6,593 5,013 5,013
------- ------- --------

19

DECEMBER 31, (1) FEBRUARY 28,
---------------- --------------------
1995(2) 1994 1994 1993 1992
-------- ------ ------ ----- ------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital......................... $49,037 $6,171 $5,926 $609 $1,205
Total assets............................ 59,293 16,631 12,080 5,032 3,145
Long-term debt (capital lease
obligations), less current portion..... 686 733 145 387 119
Redeemable convertible preferred stock.. -- 14,205 8,705 1,250 --
Shareholders' equity (deficit),
excluding redeemable convertible
preferred stock........................ 53,413 (4,419) (646) 820 1,901

- --------
(1) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995. Information for the ten months ended
December 31, 1993 (unaudited) is provided for comparison to the
information for the ten months ended December 31, 1994.

(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in approximately $40,093,235 of net proceeds to the Company. The
funds are to be used to cover the Company's working capital needs, its
investment in evaluation systems and capital expenditures, and to continue
to expand its research and development and operational activities. The
Company may also use a portion of the net proceeds to acquire related
businesses, products or technologies.

(3) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto and "Selected Consolidated
Financial Data" included elsewhere in this Form 10-K.

OVERVIEW

The Company began operations in July 1986 to develop, manufacture and sell
advanced plasma technology products. From 1986 until 1990, the Company worked
with Leybold and commercialized the Company's Advanced Plasma Source (APS)
technology that was developed by Dr. Campbell while studying at UCLA. The
Company receives royalties from Leybold, which currently manufactures advanced
optical coating equipment utilizing the Company's APS technology. In 1990, the
Company began development of a second plasma technology, its MORI(TM) plasma
source, and signed licensing and OEM agreements with Alcan-Tech, an affiliate
of Canon Sales, in November 1991, with NEC Anelva in February 1992, with
Leybold in December 1992, and with Watkins-Johnson in December 1993. In
December 1995, the Company agreed in principle with NEC Anelva to extend its
original OEM and licensing agreement so that the two parties could jointly
develop, manufacture and market an intermetal dielectric CVD system based upon
PMT's MORI(TM) source. The Company introduced its plasma processing systems,
the APEX 7000(R) and the PINNACLE 8000(R), in 1993, and made its first
shipments to end use customers beginning in June 1994. The Company introduced
and made its first shipments to end use customers of its PINNACLE 8000R(R)
system in December 1995. When sold directly to end use customers, an APEX
7000(R) system has a list price of approximately $975,000. The Company's
PINNACLE 8000(R) and PINNACLE 8000R(R) systems have list prices ranging from
$1,800,000 to $2,800,000, and from $1,900,000 to $3,100,000, respectively,
depending upon the number of modules that are sold with the system.

The Company generally recognizes sales upon shipment of its products.
Accordingly, the Company's product sales are significantly affected by the
timing of product shipments. See "Risk Factors--Quarterly Fluctuations in
Operating Results." In addition, the Company often allows customers to
evaluate systems, and since customers can return such systems to the Company
at any time with limited or no penalty, the Company does not recognize a sale
of an evaluation system until it has been accepted by the customer. See Notes
1 and 3 of Notes to Consolidated Financial Statements. The Company's
collection practices and credit terms are consistent with industry practice
and, with respect to sales of systems, generally provide for a customer to be
invoiced upon shipment, with a substantial portion of the payment (typically
80% to 90%) due within a certain amount of time thereafter (typically 30
days), and with the balance of the system's purchase price due upon final
installation and acceptance. The purchase price for sales of the Company's
other products, including MORI(TM) sources and spare parts, is invoiced at
100% upon shipment, and is normally due within thirty days.

On August 29, 1995, the Company completed its Initial Public Offering,
resulting in approximately $40,093,235 of net proceeds to the Company. In
connection with the Initial Public Offering, the Board of Directors approved a
one-for-three reverse stock split of the Company's Common Stock. The reverse
stock split has been accounted for as if it had taken place as of the earliest
date presented. Effective August 29, 1995, all of the Company's outstanding
Preferred Stock (13,337,219 shares) automatically converted into 4,445,740
shares of Common Stock.

21

RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated:

TEN MONTHS ENDED
DECEMBER 31, (1)
-------------------
TWELVE
YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995(2) 1994(1) 1994 1993
------------ ------------ -------- --------

Product sales.................. 98.1% 93.3% 92.0% 70.0%
License revenue................ 1.9 6.7 8.0 30.0
----- ----- -------- --------
Total revenue................ 100.0 100.0 100.0 100.0
----- ----- -------- --------
Cost of goods sold............. 52.3 61.3 62.1 50.8
Research and development....... 21.5 40.0 41.2 34.5
Selling, general and
administrative................ 27.9 37.3 38.8 26.6
----- ----- -------- --------
Total costs and expenses..... 101.7 138.6 142.1 111.9
----- ----- -------- --------
Loss before interest and income
taxes......................... (1.7) (38.6) (42.1) (11.9)
Interest income (expenses),
net........................... 2.3 (0.2) (0.2) (3.1)
----- ----- -------- --------
Income (loss) before income tax
provision..................... 0.6 (38.8) (42.3) (15.0)
Income tax provision........... -- 0.5 0.6 0.8
----- ----- -------- --------
Net income (loss).............. 0.6% (39.3)% (42.9)% (15.8)%
----- ----- -------- --------
Gross margin on product sales.. 46.7% 34.3% 32.5% 27.4%

- --------
(1) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995. Information for the ten months ended
December 31, 1993 (unaudited) is provided for comparison to the
information for the ten months ended December 31, 1994.

(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in approximately $40,093,235 of net proceeds to the Company. The
funds are to be used to cover the Company's working capital needs, its
investment in evaluation systems and capital expenditures, and to continue
to expand its research and development and operational activities. The
Company may also use a portion of the net proceeds to acquire related
businesses, products or technologies.

Product Sales. Product sales increased to approximately $20.9 million for
the year ended December 31, 1995 from aproximately $9.8 million for the twelve
months ended December 31, 1994, an increase of 113%. These increases were
attributable to the market acceptance of the Company's advanced plasma
processing systems (primarily the PINNACLE 8000(R) system). Shipments of these
high density, low pressure plasma platforms increased to eight PINNACLE
8000(R) systems and one PINNACLE 8000R(R) system in fiscal 1995, compared to
three PINNACLE 8000(R) systems and three APEX 7000(R) systems in the twelve
months ended December 31, 1994. Product sales increased to approximately $8.0
million for the ten months ended December 31, 1994 from approximately $4.4
million for the ten months ended December 31, 1993, an increase of 82%. The
increase in the ten months ended December 31, 1994 was due primarily to
increased sales of systems and MORI(TM) sources, as well increased sales of
spare parts. The Company had no sales of Apex systems during 1995, and expects
that most of its product sales in the near term will be derived from sales of
its newer PINNACLE 8000R(R) system.

22

International sales accounted for approximately 47%, 66% and 66% of total
revenue in the year ended December 31, 1995, in the ten months ended December
31, 1994, and in the ten months ended December 31, 1993, respectively. The
Company anticipates that international sales will continue to account for a
significant portion of its total revenue. In particular, the Company expects
that product sales to Japanese and Korean semiconductor manufacturers will
continue to represent a significant percentage of the Company's revenue
through at least 1996; however, the Company's international sales as a
percentage of its total revenue should decrease in the future from historical
levels, as the Company anticipates an increase in the percentage of its
product sales made to domestic customers. In addition, because of the large
unit price associated with the Company's systems, the Company anticipates that
its product sales will continue to be made to a small number of customers in
any given quarter. See Note 1 of Notes to Consolidated Financial Statements.

License Revenue. The Company has entered into licensing agreements with
Leybold, Canon Sales, NEC Anelva and Watkins-Johnson which grant certain
rights for the use of the Company's MORI(TM) technology. These agreements
provide for an initial lump-sum license payment and generally provide the
licensee with the right, upon making further payments, to expand the scope of
the license. The agreement with Watkins-Johnson further provided for certain
joint development programs between Watkins-Johnson and the Company, and for
the purchase of a minimum quantity of Company products (which have been
purchased by Watkins-Johnson). The Company does not anticipate any further
joint development programs with, or product purchases by, Watkins-Johnson. See
"Business--Research, Development and Engineering." The Company believes that
the anticipated termination of these relationships with Watkins-Johnson will
not have a material effect upon the Company's future revenues or product
development efforts.

For the six months ended December 31, 1995, the Company received no license
revenue, as all these licenses were fully paid. For the year ended December
31, 1995, license revenue was $0.4 million compared to $0.7 million for the
twelve months ended December 31, 1994. For the ten months ended December 31,
1994, license revenue was $0.7 million compared to $1.9 million for the ten
months ended December 31, 1993. The Company does not anticipate the receipt of
any additional license revenue from its agreements with Canon Sales, NEC
Anelva or Watkins-Johnson, for at least the next twelve months. However, the
Company may enter into additional license agreements as it deems appropriate
in order to broaden the applications of its MORI(TM) technology, or to improve
the Company's market penetration.

Gross Margin on Product Sales. The Company's gross margin on product sales
has historically fluctuated and has been dependent primarily on the channels
through which sales are made in a particular period. In general, sales through
the Company's direct sales staff are normally made at higher selling prices
than those made through the Company's distributor and OEM channels. The
Company's gross margin on product sales was 46.7% in fiscal 1995 as compared
to 34.3% for the twelve months ended December 31, 1994, 32.5% for the ten
months ended December 31, 1994, and 27.4% for the ten months ended December
31, 1993. The increase in the margin for 1995 and 1994 is attributable to an
increase in units shipped through the Company's direct sales staff, which
resulted in improved production efficiencies, in addition to a higher average
selling price.

Research and Development Expenses. The Company believes that to remain in a
strong technological position in the industry, it is critical to continue to
make substantial investments in research and development. The Company's
research and development expenses have remained fairly constant at
approximately $1.0 million per quarter since January 1994, as the Company
maintained a relatively high level of spending to expand the applications for
its MORI(TM) technology. As the Company's revenue increased, these expenses
have become a smaller percentage of total revenue. PMT spent $4.6 million or
22% of total revenue on research and development related activities in fiscal
1995. This compared to $4.2 million or 40% of total revenue in the twelve
months ended December 31, 1994, $3.6 million or 41% of total revenue for the
ten months ended December 31, 1994, and $2.2 million or 35% of total revenue
for the ten months ended December 31, 1993. The major focus of the Company's
research and development efforts during fiscal 1995 was using the Company's
proprietary plasma source technology to develop new processes for advanced
etch requirements. This led to the development and introduction into
production in December 1995 of an integrated stack etch process for an EEPROM
device and the foundation for development programs in Korea and Japan.

23

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.9 million or 28% of total revenue in fiscal
1995. This compared to $3.9 million or 37% of total revenue in the twelve
months ended December 31, 1994, $3.4 million or 39% of total revenue for the
ten months ended December 31, 1994, and $1.7 million or 27% of total revenue
for the ten months ended December 31, 1993. These dollar increases are
primarily due to the expansion of the Company's customer service department to
support the increased number of systems (including evaluation systems) that
were installed at customer sites worldwide. In addition, the Company incurred
increased selling expenses associated with the expansion of its sales
organization. As a percentage of sales, these expenses have become a smaller
percentage of revenue due to increased revenue. The Company anticipates that
selling, general and administrative expenses will continue to grow in relation
to the growth in revenues. See "Risk Factors--History of Losses" and "--
Quarterly Fluctuations in Operating Results."

Loss from Operations. The Company realized a $0.4 million loss from
operations, or 2% of total revenue in fiscal 1995, as compared with a $4.1
million loss from operations, or 39% of total revenue in the twelve months
ended December 31, 1994. As a percentage of total revenue, the operating loss
has decreased due to the growth in revenue in addition to the decrease in
operating expenses as a percentage of total revenue. For the ten months ended
December 31, 1994, the Company sustained a $3.7 million loss from operations,
or 42% of revenue, as compared with a $0.8 million loss from operations, or
12% of total revenue, for the ten months ended December 31, 1993. As a
percentage of total revenue, the operating loss increased due to the expansion
of the Company's research, sales and service departments.

Interest Income/Expense. Interest income increased to $777,000 in 1995 from
$143,000 in the twelve months ended December 31, 1994, an increase of 443%.
This was due to income derived from the proceeds of the Company's Initial
Public Offering and resulted in the Company's profitability in fiscal 1995,
notwithstanding a $364,000 loss from operations. Interest income increased to
$125,000 for the ten months ended December 31, 1994 from $15,000 in the ten
months ended December 31, 1993, an increase of 773%, as larger cash balances
generated increased interest income.

Interest expense increased to $294,000 in 1995 from $159,000 in the twelve
months ended December 31, 1994, an increase of 84%. This was due to higher
capital lease expenses combined with the utilization of a revolving bank line
of credit in the first two quarters of fiscal year 1995. For the ten months
ended December 31, 1994, interest expense decreased 46% compared to the ten
months ended December 31, 1993 due to the limited use of the line of credit.

Income Taxes. The Company paid no income tax in fiscal 1995, due to the
ability to utilize past net operating loss carryforwards and research credits
that are available to be applied against future profits. There is no provision
for federal income taxes during the year ended December 31, 1995 and the ten
months ended December 31, 1994 other than the minimum state requirements due
to the reduction in the deferred tax valuation allowance resulting from the
utilization of past net operating losses. As of December 31, 1995, the Company
had research and development credit carryforwards of approximately $0.8
million and $0.3 million for federal and state tax purposes, respectively,
that expire at various dates through 2010. The Company also had net operating
loss carryforwards at December 31, 1995, for federal and state income tax
purposes, of approximately $5.4 million and $2.7 million, respectively, which
expire at various dates through 2008. The Company's utilization of its net
operating loss and credit carryforwards depends upon future income and is
subject to an annual limitation, required by the Internal Revenue Code of 1986
and similar state provisions. See Note 6 of Notes to Consolidated Financial
Statements.

Net Income (Loss). Net income in fiscal year 1995 was $0.1 million, compared
to a net loss of $4.1 million in the twelve months ended December 31, 1994.
The net income realized in 1995 was due primarily to the $777,000 in interest
income earned from the investment of Initial Public Offering proceeds and the
management of costs in relation to revenue in 1995. Net loss in the ten months
ended December 31, 1994 was $3.7 million as compared to a $1.0 million loss in
the ten months ended December 31, 1993 due to the increase in the Company's
operating expenses during the 1994 period.

24

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1995, the Company had $38.7 million in cash, cash
equivalents and short-term investments, compared to $3.6 million at December
31, 1994. This increase resulted from the proceeds of the Initial Public
Offering during the third quarter of fiscal 1995, in which the Company sold
3,162,500 shares of Common Stock with aggregate proceeds to the Company of
approximately $40.1 million. The Company anticipates that the proceeds will be
used primarily for working capital, investment in evaluation systems, expanded
research and development, and purchases of capital equipment. The Company may
also use a portion of such proceeds to acquire related businesses, products or
technologies.

The Company has a revolving line of credit agreement with a commercial bank
which provides borrowings up to the lessor of $3,000,000 or 75% of eligible
accounts receivable. Interest is payable monthly for borrowings at the bank
prime rate plus 1.5% (9.5% at December 31, 1995.) The revolving line of credit
agreement expires on June 5, 1996. At December 31, 1995, there were no
borrowings outstanding under the revolving credit line, and $3,000,000 was
available for borrowings under the agreement. The agreement places certain
restrictions on the Company which, among other things, prohibit the Company
from paying cash dividends or repurchasing its stock, and requires the Company
to comply with certain financial ratios and covenants. The Company is
currently in compliance with all covenants and restrictions contained in the
revolving line of credit. Although no assurances can be given in this regard,
the Company expects to negotiate an extension of this line of credit upon
similar terms.

In December 1993, the Company entered into a master equipment lease
agreement which provides for lease financing of certain equipment purchases in
an amount of up to $1.5 million. At June 30, 1995, the Company had financed
the maximum of approximately $1.5 million in equipment pursuant to this
facility, at an interest rate of 12.4%. See Note 7 of Notes to Consolidated
Financial Statements.

Net cash used in operating activities was $4.3 million, $6.9 million and
$1.2 million for the year ended December 31, 1995, the ten months ended
December 31, 1994, and the year ended February 28, 1994, respectively. Net
cash used in operating activities in 1995 consisted primarily of the $7.3
million increase in the Company's accounts receivable, partially offset by a
reduction in inventories. Net cash used in operating activities during the ten
months ended December 31, 1994 consisted primarily of the $3.7 million net
loss for the period plus the $3.9 million increase in the Company's
inventories, as well as the $1.0 million increase in deferred revenue. Net
cash provided by operating activities for the year ended February 28, 1994
consisted primarily of the $1.4 million net loss and a $2.0 million increase
in the Company's inventory, partially offset by the recognition of $1.0
million in deferred revenue. Net cash used in investing activities was
approximately $15.4 million, $1.6 million and $0.9 million for the year ended
December 31, 1995, the ten months ended December 31, 1994, and the year ended
February 28, 1994, respectively. Net cash used in investing activities in 1995
consisted primarily of the Company's purchase of certain short-term
investments using the proceeds from its initial public offering. Net cash
provided by financing activities was approximately $40.9 million, $7.1 million
and $6.5 million for the year ended December 31, 1995, the ten months ended
December 31, 1994, and the year ended February 28, 1994, respectively. Net
cash provided by financing activities in 1995 consisted primarily of the
proceeds from the Company's initial public offering, as well as approximately
$3.4 million in proceeds from the prior private sale of preferred stock, and
was partially offset by $3.8 million in prepayments of borrowings under the
Company's existing line of credit.

The Company anticipates that it will spend approximately $6.0 million for
capital expenditures during fiscal 1996. This is expected to include
investments in demonstration and test equipment, information systems, and
other capital items that should enable the Company to expand its ability to
support and develop new products and services. In addition, the Company
expects to increase its investment in inventory of evaluation systems at
customer sites.

The Company anticipates that the proceeds from its Initial Public Offering,
existing cash balances and additional equipment financing should be sufficient
to support its financial requirements through at least December 31, 1996.

25

In March 1996, the Company agreed to participate in a partnership with
certain third party investors to fund research and development costs and
expenses relating to CVD technology and applications. The Company does not
believe that its participation in such partnership will have an adverse impact
on liquidity during the Company's 1996 fiscal year.

IMPACT OF INFLATION

Although the Company cannot accurately anticipate the effect of inflation on
its operations, to date inflation has not had a material effect on the
Company's product sales or results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"), which will be effective for the Company's fiscal year ending
December 31, 1996. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
presented and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS No. 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Awards of Stock-Based Compensation to Employees ("SFAS
No. 123"), which will be effective for the Company's fiscal year ending
December 31, 1996. SFAS No. 123 provides alternative accounting treatment to
APB No. 25 with respect to stock-based compensation and requires certain
additional disclosures, including disclosures if the Company elects not to
adopt the accounting requirements of SFAS No. 123. The Company will adopt the
disclosure requirements of SFAS No. 123 in the first quarter of 1996, but will
elect to continue to measure compensation costs following present accounting
rules under APB No. 25. Consequently, the Company will provide pro forma
disclosures of what net income and earnings per share would have been had the
fair market value method of SFAS No. 123 been used for the relevant periods.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index included at "Item 14. Exhibits, Financial Statements
Schedules, and Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

26

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting, to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995,
and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting, to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995,
and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting, to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995,
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting, to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995,
and is incorporated herein by reference.

----------------

The following companies are mentioned in this Annual Report on Form 10-K:
Alcan-Tech Co., Inc. ("Alcan-Tech"), Anelva Corporation, a subsidiary of NEC
Corporation ("NEC Anelva"), Applied Materials, Inc. ("Applied Materials"),
AT&T Corp. ("AT&T"), Brooks Automation, Inc. ("Brooks Automation"), Canon
Sales Co., Inc. ("Canon Sales"), Dallas Semiconductor Corporation ("Dallas
Semiconductor"), Fujitsu Ltd. ("Fujitsu"), Hitachi, Ltd. ("Hitachi"), Hyundai
Corp. ("Hyundai"), Lam Research Corporation ("Lam Research"), Leybold AG
("Leybold"), LG International America ("LG Semicon"), Metron Semiconductors
Europe, B.V. ("Metron"), NEC Corporation ("NEC"), Novellus Systems, Inc.
("Novellus"), OKI Electric Industry Co., Ltd. ("OKI"), Plasma-Therm, Inc.
("Plasma-Therm"), Samsung Co. Ltd. ("Samsung"), SEMATECH, INC. ("SEMATECH"),
Sharp Corp. ("Sharp"), Techlink Semiconductor Co., Ltd. ("Techlink"), Texas
Instruments Incorporated ("Texas Instruments"), Tokyo Electron Ltd. ("Tokyo
Electron"), Toshiba Corporation ("Toshiba"), TriQuint Semiconductor ("TriQuint
Semi-conductor"), and Watkins-Johnson Company ("Watkins-Johnson").

27

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) (1) INDEX TO FINANCIAL STATEMENTS

PAGE
----

Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets--December 31, 1995 and 1994............... F-2
Consolidated Statements of Operations--Year ended December 31, 1995,
Ten months ended December 31, 1994, and the Year ended February 28,
1994.................................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit)--Year ended
December 31, 1995, Ten months ended December 31, 1994, and the Year
ended February 28, 1994............................................... F-5
Consolidated Statements of Cash Flows--Year ended December 31, 1995,
Ten months ended December 31, 1994, and the Year ended February 28,
1994.................................................................. F-6
Notes to Consolidated Financial Statements............................ F-7

(A) (2) INDEX TO FINANCIAL STATEMENT SCHEDULES

Schedule II--Valuation and Qualifying Accounts............................ S-1

All other schedules for which provision is made in the applicable
accounting requirements of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore
have been omitted.

(A) (3) LIST OF EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1* Sixth Restated Articles of Incorporation of the Company
3.2*** Seventh Restated Articles of Incorporation of the Company
3.3* Bylaws of the Company, as amended and currently in effect
4.1* Warrant to Purchase Common Stock issued to St. Paul Fire and Marine
Insurance Company on November 29, 1993
4.2* Warrant to Purchase Common Stock issued to Brentwood Associates V,
L.P. on November 29, 1993
4.3* Co-Investment Agreement made as of August 30, 1991 between BeneVent
and Brentwood V

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

10.1* 1991 Stock Option Plan of the Company

OTHER MATERIAL CONTRACTS

10.2*** International Technology License and Sales Agreement between the
Company and Alcan-Tech Co., Inc. dated November 15, 1991
10.3*** International Technology License and Sales Agreement between the
Company and Anelva Corporation, dated February 7, 1992

28

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.4* Technology License and Sales Agreement between the Company and Leybold
AG dated December 8,
1992
10.5*** Technology License and Sales Agreement between the Company and
Watkins-Johnson Company dated December 23, 1993
10.6* Master Lease Agreement between Phoenix Leasing Inc. and the Company,
effective December 16, 1993 and ending December 16, 1997
10.7* Royalty Agreement dated October 3, 1986 by and between the Company and
Messrs. Conn, Campbell and Goebel
10.8* Assignment of Royalty Rights dated June 8, 1990 executed by Messrs.
Conn and Campbell in favor of the Company
10.9* Agreement entered into the 25th day of June 1986 by and between the
Company and Leybold-Heraeus GmbH
10.10* Loan and Security Agreement between the Company as Borrower and
Silicon Valley Bank as Lender, dated September 9, 1993, as amended by
those Amendments to Loan Agreement dated June 14, 1994 and June 21,
1995, with schedules
10.11* Loan and Security Agreement (Exim) between the Company as Borrower and
Silicon Valley Bank as Lender, dated June 21, 1995, with schedules
10.12** Distribution Agreement dated July 1, 1995 by and between the Company
and Canon Sales
11.1 Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney

- --------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-4450) on July 11, 1995.

** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on July 28, 1995.

*** Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on August 22, 1995.

+ Certain portions of this exhibit have been omitted from the copies filed
as part of Amendment No. 1 or Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-94450), as the
case may be, and are the subject of an order granting confidential
treatment with respect thereto.

(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended December 31,
1995.

29

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Plasma & Materials Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Plasma &
Materials Technologies, Inc. and subsidiary as of December 31, 1995 and 1994,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the year ended December 31, 1995, the ten month
period ended December 31, 1994 and the year ended February 28, 1994. Our
audits also included the financial statement schedule listed in the index of
Item 14 (a) (2). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the 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 Plasma &
Materials Technologies, Inc. at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1995, the ten month period ended December 31, 1994 and the
year ended February 28, 1994, 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.

ERNST & YOUNG LLP

Woodland Hills, California
January 30, 1996

F-1

PLASMA & MATERIALS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
1995 1994
----------- -----------

Assets
Current assets:
Cash and cash equivalents............................ $24,770,363 $ 3,563,753
Short-term investments............................... 13,992,109 --
Accounts receivable, less allowance of $0 at December
31, 1995 and $33,522 at December 31, 1994......... 8,423,272 1,088,612
Inventories............................................ 5,453,835 5,629,477
Demonstration inventory.............................. 1,367,233 1,756,125
Prepaid expenses..................................... 223,970 189,614
Advances to employees/officer/shareholder............ -- 55,145
----------- -----------
Total current assets............................... 54,230,782 12,282,726
Property, equipment and leasehold improvements:
Machinery and equipment.............................. 5,178,478 3,945,026
Furniture and fixtures............................... 1,171,833 834,771
Leasehold improvements............................... 1,383,191 1,326,624
----------- -----------
7,733,502 6,106,421
Less accumulated depreciation and amortization....... 3,157,459 1,914,778
----------- -----------
4,576,043 4,191,643
Other assets........................................... 486,182 156,555
----------- -----------
Total assets........................................... $59,293,007 $16,630,924
=========== ===========

F-2

PLASMA & MATERIALS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

DECEMBER 31,
------------------------
1995 1994
----------- -----------

Liabilities and shareholders' equity (deficit)
Current liabilities:
Revolving line of credit.......................... $ -- $ 2,000,000
Accounts payable.................................. 3,724,984 3,096,955
Warranty expense.................................. 449,295 129,934
Accrued expenses.................................. 298,721 239,126
Accrued salaries and related liabilities.......... 228,998 148,064
Current portion of capital lease obligations...... 491,561 497,737
----------- -----------
Total current liabilities....................... 5,193,559 6,111,816
Capital lease obligations, less current portion..... 686,230 733,086
Redeemable convertible preferred stock (Series C, D,
E and F) Issued and outstanding--8,889,048 shares
at December 31, 1994............................... -- 14,205,000
Commitments and Contingencies
Shareholders' equity (deficit):
Preferred Stock undesignated
Authorized shares--20,000,000
Issued and outstanding--None
Convertible preferred stock (Series A and B), no
par value, aggregate liquidation preference of
$3,062,988 at December 31, 1994
Authorized shares--none at December 31, 1995 and
2,900,000 at December 31, 1994
Issued and outstanding--2,823,837 at December
31, 1994.................................... -- 3,035,903
Common Stock, no par value:
Authorized shares--16,666,666
Issued and outstanding--8,659,843 at December
31, 1995 and 938,590 at December 31, 1994... 60,975,483 179,259
Accumulated deficit............................... (7,562,265) (7,634,140)
----------- -----------
Total shareholders' equity.......................... 53,413,218 (4,418,978)
----------- -----------
Total liabilities and shareholders' equity.......... $59,293,007 $16,630,924
=========== ===========

See accompanying notes to the consolidated financial statements.

F-3

PLASMA & MATERIALS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1995 1994 1994
------------ ------------ ------------

Revenue:
Product sales......................... $20,889,713 $ 8,004,646 $ 6,243,900
License revenue....................... 400,000 700,000 1,900,000
----------- ----------- -----------
21,289,713 8,704,646 8,143,900
Costs and expenses:
Costs of goods sold................... 11,143,716 5,403,614 4,258,783
Research and development.............. 4,566,853 3,583,371 2,812,163
Selling, general and administrative... 5,943,702 3,382,246 2,224,116
----------- ----------- -----------
21,654,271 12,369,231 9,295,062
Interest:
Interest expense...................... (293,603) (146,343) (226,671)
Interest income....................... 776,846 125,630 32,053
----------- ----------- -----------
Income (loss) before income tax
provision.............................. 118,685 (3,685,298) (1,345,780)
Income tax provision.................... 800 54,400 50,800
----------- ----------- -----------
Net income (loss)....................... $ 117,885 $(3,739,698) $(1,396,580)
=========== =========== ===========
Net income (loss) per share............. $ 0.02 $ (0.75)
=========== ===========
Number of shares used in per share
computation............................ 6,593,311 5,013,127
=========== ===========

See accompanying notes to the consolidated financial statements.

F-4

PLASMA & MATERIALS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

CONVERTIBLE PREFERRED
STOCK (SERIES A AND B) COMMON STOCK
----------------------- ---------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ----------- --------- ----------- ----------- -----------

Balance at March 1,
1993................... 2,813,837 $ 3,032,403 947,223 $ 186,823 $(2,399,207) $ 820,019
Exercise of options.... -- -- 100 106 -- 106
Sale of (Series A)
Convertible Preferred
Stock................. 10,000 3,500 -- -- -- 3,500
Issue costs of (Series
C and D) Redeemable
Convertible Preferred
Stock................. -- -- -- -- (48,261) (48,261)
Repurchase of Common
Stock................. -- -- (23,333) (24,500) -- (24,500)
Net loss............... -- -- -- -- (1,396,580) (1,396,580)
---------- ----------- --------- ----------- ----------- -----------
Balance at February 28,
1994................... 2,823,837 3,035,903 923,990 162,429 (3,844,048) (645,716)
Exercise of options.... -- -- 14,600 15,330 -- 15,330
Sale of Common Stock
warrants.............. -- -- -- 1,500 -- 1,500
Issue costs of (Series
E) Redeemable
Convertible Preferred
Stock................. -- -- -- -- (50,394) (50,394)
Net loss............... -- -- -- -- (3,739,698) (3,739,698)
---------- ----------- --------- ----------- ----------- -----------
Balance at December 31,
1994................... 2,823,837 3,035,903 938,590 179,259 (7,634,140) (4,418,978)
Exercise of options.... -- -- 48,460 50,883 -- 50,883
Issue costs of (Series
F) Redeemable
Convertible Preferred
Stock................. -- -- -- -- (46,010) (46,010)
Conversion of warrants
to Common Stock....... -- -- 64,553 -- -- --
Common Stock issued
during the Initial
Public Offering........ -- -- 3,162,500 40,093,235 -- 40,093,235
Conversion of
convertible preferred
stock (Series A and B)
to Common Stock....... (2,823,837) (3,035,903) 941,279 3,035,903 -- --
Conversion of
redeemable convertible
preferred stock
(Series C, D, E and F)
to Common Stock....... -- -- 3,504,461 17,616,203 -- 17,616,203
Net income............. -- -- -- -- 117,885 117,885
---------- ----------- --------- ----------- ----------- -----------
Balance at December 31,
1995................... -- $ -- 8,659,843 $60,975,483 $(7,562,265) $53,413,218
========== =========== ========= =========== =========== ===========

See accompanying notes to the consolidated financial statements.

F-5

PLASMA & MATERIALS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 FEBRUARY 28, 1994
----------------- ----------------- -----------------

OPERATING ACTIVITIES
Net income (loss)............... $ 117,885 $(3,739,698) $(1,396,580)
Adjustments to reconcile net in-
come (loss) to net cash used in
operating activities:
Depreciation and amortization.. 1,242,681 773,617 530,612
Provision for loss on accounts
receivable.................... -- -- 10,000
Advances to
employees/officer/shareholder. 55,145 23,624 (66,652)
Changes in operating assets and
liabilities:
Accounts receivable........... (7,334,660) 231,089 (197,388)
Inventories................... 564,534 (3,978,006) (2,010,440)
Prepaid expenses and other
assets....................... (34,356) (154,898) (9,535)
Accounts payable and other
accrued expenses............. 1,087,919 1,003,799 933,836
Deferred revenue.............. -- (1,025,000) 1,025,000
------------ ----------- -----------
Net cash used in operating
activities..................... (4,300,852) (6,865,473) (1,181,147)
INVESTING ACTIVITIES
Purchases of property, equipment
and leasehold improvements..... (1,099,100) (1,644,143) (873,076)
Proceeds from sales of short-
term investments............... 3,000,000 -- --
Purchase of short-term
investments.................... (16,992,109) -- --
Other assets.................... (329,627) 17,749 (87,924)
------------ ----------- -----------
Net cash used in investing
activities..................... (15,420,836) (1,626,394) (961,000)
FINANCING ACTIVITIES
Borrowings under revolving line
of credit...................... 1,810,708 2,000,000 1,000,000
Repayment of revolving line of
credit......................... (3,810,708) -- (1,000,000)
Proceeds from notes payable to
bank and bridge financing...... -- -- 2,976,000
Repayment of notes payable and
bridge financing............... -- -- (2,114,000)
Proceeds from sale of warrants.. -- 1,500 --
Proceeds from sale of Preferred
Stock (net of issuance costs).. 3,365,193 5,449,606 5,860,239
Proceeds from Initial Public
Offering (Common Stock)........ 40,093,235 -- --
Proceeds from sale of Common
Stock.......................... 50,883 15,330 106
Repurchase of Common Stock...... -- -- (24,500)
Payments on capital lease
obligations.................... (581,013) (371,221) (212,620)
------------ ----------- -----------
Net cash provided by financing
activities..................... 40,928,298 7,095,215 6,485,225
------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents........... 21,206,610 (1,396,652) 4,343,078
Cash and cash equivalents at
beginning of period............ 3,563,753 4,960,405 617,327
------------ ----------- -----------
Cash and cash equivalents at end
of period...................... $ 24,770,363 $ 3,563,753 $ 4,960,405
============ =========== ===========

See accompanying notes to the consolidated financial statements.

F-6

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995

1.SIGNIFICANT ACCOUNTING POLICIES

Background

Plasma & Materials Technologies, Inc. (the Company) was incorporated in
California on December 24, 1985. The Company operates as one segment,
designing, manufacturing and marketing advanced high density, low pressure
plasma sources, process modules and plasma processing systems. These products
are used for etch and chemical vapor deposition applications and are sold to
semiconductor and flat panel display manufacturers worldwide.

The consolidated financial statements of the Company include the accounts of
its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents represent short-term investments that are highly liquid,
are of limited credit risk and have original maturities of three months or
less when purchased.

Short-Term Investments

Effective December 1995, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 requires investment securities to be
classified as trading, available for sale, or held to maturity. Management
determines the appropriate classification of its investments at the time of
purchase and reevaluates the classification at each balance sheet date. As of
December 31, 1995, all investments in the short-term investment portfolio are
classified as available for sale. Under SFAS 115, investments classified as
available for sale are required to be recorded at fair value and any temporary
difference between an investment's cost and its fair value is required to be
recorded as a separate component of shareholders' equity.

Major Customers and Concentration of Credit Risk

Accounts receivable consist primarily of amounts due from original equipment
manufacturers, end use customers, and distributors within the Company's
industry. At December 31, 1995, five customers represented 26%, 25%, 15%, 14%
and 12%, respectively, of the Company's total accounts receivable. At December
31, 1994, two customers represented 50% and 23%, respectively, of the
Company's total accounts receivable.

The Company performs credit evaluations and analysis of amounts due from its
customers; however, the Company does not require collateral. Credit losses
have been within management's expectations and an estimate of uncollectible
accounts has been provided for in the financial statements.

Total revenue includes amounts from certain individual customers that exceed
10% of total revenue. Revenue from five customers represented 19%, 15%, 12%,
11% and 11% each of total revenue for the year ended December 31, 1995,
revenue from six customers represented 19%, 17%, 17%, 15%, 15% and 12% each of
total

F-7

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
revenue for the ten months ended December 31, 1994, and revenue from two
customers represented 46% and 39% each of total revenue for the year ended
February 28, 1994.

The Company's revenue by geographic area approximated the following:

YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 FEBRUARY 28, 1994
----------------- ----------------- -----------------

United States............ $11,276,066 $2,929,896 $4,043,479
Europe................... 241,041 120,075 335,000
Asia Pacific (primarily
Japan and Korea)......... 9,772,606 5,654,675 3,765,421
----------- ---------- ----------
Total.................... $21,289,713 $8,704,646 $8,143,900
=========== ========== ==========

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or
market and consists of the following at December 31:

1995 1994
---------- ----------

Components................................................ $3,774,458 $2,730,131
Work-in-process........................................... 1,611,382 2,209,128
Finished goods............................................ 67,995 690,218
---------- ----------
$5,453,835 $5,629,477
---------- ----------
Demonstration inventory................................... $1,367,233 $1,756,125
========== ==========

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets (5 years) or the lease term,
whichever is shorter.

Revenue Recognition

Product sales consist primarily of system, component and spare parts sales.
Revenues related to system, component and spare parts sales are recognized
upon shipment and transfer of title or upon customer acceptance and transfer
of title in the case of demonstration inventory unit sales (see Note 3).
Estimated costs to be incurred by the Company related to product installation
(which are not significant) and warranty fulfillment are accrued at the date
of shipment.

License fee revenue is derived from the grant of the non-exclusive rights to
use, sell and manufacture certain technologies developed by the Company.

Advertising Expense

The cost of advertising is expensed as incurred. The Company incurred
$44,306, $99,509, and $55,772 of advertising costs in the year ended December
31, 1995, the ten months ended December 31, 1994 and the year ended February
28, 1994, respectively.

F-8

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25") and,
accordingly, recognizes no compensation for the stock option grants.

Accounting for Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under SFAS No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Net Income (Loss) Per Share

Net income (loss) per share is computed using the weighted average number of
shares of Common Stock outstanding. Common equivalent shares from stock
options and warrants (using the treasury stock method) have been included in
the computation when dilutive, and common equivalent shares from the
redeemable convertible Preferred Stock and convertible Preferred Stock which
converted into Common Stock in connection with the Company's Initial Public
Offering are included as if converted at the original date of issuance, even
though inclusion is anti-dilutive. Pursuant to the Securities and Exchange
Commission (SEC) Staff Accounting Bulletins, all common and common equivalent
shares issued by the Company at an exercise price below the Initial Public
Offering price of $14.00 per share during the twelve-month period prior to the
offering (cheap stock) have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method at the
Initial Public Offering price of $14.00 per share and the if-converted method
for redeemable convertible Preferred Stock and convertible Preferred Stock)
through the ten month period ended December 31, 1994. For the year ended
December 31, 1995, such cheap stock shares were treated as being outstanding
through the date of the Initial Public Offering.

Historical net loss per share is computed as described above, except that it
excludes the convertible preferred stock because it is anti-dilutive for
periods which incurred a net loss. Historical net loss per share is as
follows:

TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1994 FEBRUARY 28, 1994
----------------- -----------------

Net loss per share......................... $(1.89) $(0.70)
Shares used in computing net loss per
share..................................... 1,981,848 1,997,707

Impact on Financial Statements of Recently Issued Accounting Standards

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"), which will be effective for the Company's fiscal year ending
December 31, 1996. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
presented and the undiscounted cash flows estimated to be generated by those
assets

F-9

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
are less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS No. 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Awards of Stock-Based Compensation to Employees ("SFAS
No. 123"), which will be effective for the Company's fiscal year ending
December 31, 1996. SFAS No. 123 provides alternative accounting treatment to
APB No. 25 with respect to stock-based compensation and requires certain
additional disclosures, including disclosures if the Company elects not to
adopt the accounting requirements of SFAS No. 123. The Company will adopt the
disclosure requirements of SFAS No. 123 in the first quarter of 1996, but will
elect to continue to measure compensation costs following present accounting
rules under APB No. 25. Consequently, the Company will provide pro forma
disclosures of what net income and earnings per share would have been had the
fair market value method of SFAS No. 123 been used for the relevant periods.

Reclassifications

Certain amounts in 1994 and 1993 have been reclassified in the Consolidated
Financial Statements to be consistent with the 1995 presentation.

2.FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, cash equivalents,
short-term investments, accounts receivable, accounts payable, capital lease
obligations and borrowings under the revolving line of credit. The carrying
amounts of these financial instruments approximates their fair value.

F-10

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

Information about contractual maturities of short-term investments at
December 31, 1995 is as follows:

DUE AFTER ONE
DUE IN ONE YEAR YEAR THROUGH DUE AFTER
OR LESS THREE YEARS THREE YEARS
--------------- ------------- -----------

U.S. Treasury Securities and
obligations of U.S. Government
Agencies............................ $ 5,044,959 $1,000,000 $ --
U.S. Corporate Securities............ 5,025,190 1,021,960 --
Obligations of States and Political
Subdivisions........................ -- -- 1,900,000
----------- ---------- ----------
$10,070,149 $2,021,960 $1,900,000
=========== ========== ==========

At December 31, 1995, $12,006,158 of investments in debt securities are
included in cash and cash equivalents on the accompanying balance sheet
because their original maturity date is three months or less when purchased.

Gross unrealized holding gains and losses on sales of short-term investments
were not significant as of or for the year ended December 31, 1995. There were
no realized gains and losses on sales of short-term investments during the
year ended December 31, 1995. The Company manages its cash equivalents and
short-term investments as a single portfolio of highly marketable securities,
all of which are intended to be available to meet the Company's current cash
requirements.

The Company invests in a variety of financial instruments such as commercial
paper, commercial bonds, and municipal bonds. The Company, by policy, limits
the amount of credit exposure with any one financial institution or commercial
issuer.

3.DEMONSTRATION INVENTORY

Demonstration or evaluation units represent completed systems located at
certain strategic customer sites or at the Company's facilities. The Company
provides these demonstration systems at no charge for a specified evaluation
period. All operating costs incurred during the evaluation period are paid by
the customer. At the conclusion of the agreed upon evaluation period, provided
that the equipment performs to required specifications, management expects
that the customer, while not obligated to do so, will purchase the system.
Demonstration inventory is stated at lower of cost or estimated net realizable
value. Demonstration inventory is not amortized.

4. REVOLVING LINE OF CREDIT

At December 31, 1995, the Company has a revolving line of credit agreement
with a commercial bank which provides borrowings up to the lessor of
$3,000,000 or 75% of eligible accounts receivable. Interest is payable monthly
for borrowings on accounts receivable at the bank prime rate plus 1.5% (9.5%
at December 31, 1995.) The revolving line of credit agreement expires on June
5, 1996. At December 31, 1995, there were no borrowings outstanding under the
revolving credit line and $3,000,000 was available for borrowings under the
agreement. The agreement places certain restrictions on the Company which
among other things, prohibit the Company from paying cash dividends or
repurchasing its stock, and requires the Company to comply with certain
financial ratios and covenants.

5.DEVELOPMENT CONTRACTS

In August 1994, the Company entered into an original equipment manufacturing
and joint development agreement with a customer. This arrangement ended in
March 1995. Under this agreement, the Company incurred costs on behalf of the
customer and received reimbursement of approximately $350,000 in 1995 and

F-11

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$1,000,000 in 1994. Such costs were primarily for the customer's share of
supplies and prototype materials used under the agreement. The reimbursement
of costs incurred were netted against the related research and development
expense. Any technology developed under this agreement is jointly owned by the
Company and the customer.

6.INCOME TAXES

The Company's provision for income taxes consists primarily of the minimum
state taxes required in each of the periods presented of $800 and foreign
income taxes of $53,600 in the ten month period ended December 31, 1994 and
$50,000 in the year ended February 28, 1994. Federal income taxes have not
been provided for in any of the periods presented as the Company incurred a
loss for these periods.

Significant components of the Company's deferred tax liabilities and assets
are as follows at December 31:

1995 1994
---------- ----------

Deferred tax liabilities:
State taxes not benefited.............................. $ 132,081 $ 227,000
Deferred tax assets:
Allowances not currently deductible for tax purposes... 102,435 99,590
Accrued expenses not currently deductible for tax
purposes.............................................. 321,542 158,642
Book depreciation in excess of tax depreciation........ 73,890 92,245
Net operating loss carryforwards....................... 2,075,098 2,282,828
Foreign tax credit carryforward........................ 273,277 273,277
Research tax credit carryforward....................... 1,123,346 1,071,820
---------- ----------
3,969,588 3,978,402
Less valuation reserve................................. 3,837,507 3,751,402
---------- ----------
Net deferred tax assets.................................. 132,081 227,000
---------- ----------
$ -- $ --
========== ==========

A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of income (loss) before tax provision, is as
follows:

TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1995 1994 1994
------------ ------------ ------------

Statutory federal income tax rate--
provision (benefit).................... 34% (34)% (34)%
Change in valuation reserve attributable
to utilization of operating
loss carryforward...................... (34) -- --
Change in valuation reserve due to net
operating loss carryforwards
not utilized........................... -- 34 34
Foreign income taxes.................... -- 2 4
--- --- ---
-- 2 4
--- --- ---

At December 31, 1995, the Company had research and development credit
carryforwards of approximately $804,702 and $318,644 for federal and state tax
purposes, respectively, that expire at various dates through 2010. At December
31, 1994 the Company also had net operating loss carryforwards for federal and
state income tax purposes of approximately $5,365,170 and $2,698,284,
respectively, which expire at various dates through 2009.

F-12

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's utilization of its net operating loss and credit carryforwards
depends upon future income and is subject to an annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions.

7.LEASES

The Company leases certain equipment under capital leases. The Company also
leases its offices, manufacturing facilities and certain equipment under
noncancelable lease agreements.

Cost of equipment under capital leases included in property and equipment at
December 31, 1995 and 1994 was $2,832,531 and $2,304,550, and accumulated
amortization was $946,298 and $548,344, respectively. Amortization expense
under these leases is included in depreciation expense.

Future minimum lease payments under capital leases and noncancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1995:

CAPITAL OPERATING
LEASES LEASES
---------- ---------

1996...................................................... $ 614,169 $403,874
1997...................................................... 559,220 393,970
1998...................................................... 213,990 12,746
1999...................................................... 4,052 --
---------- --------
1,391,431 $810,590
--------
Less amounts representing imputed interest................ (213,640)
----------
Present value of net minimum lease payments,
including $491,561 classified as current................. $1,177,791
----------

Rental expense for operating leases was $338,834, $288,524 and $215,046 for
the year ended December 31, 1995, the ten months ended December 31, 1994, and
the year ended February 28, 1994, respectively.

8.PREFERRED STOCK, CONVERTIBLE PREFERRED STOCK, CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND WARRANTS

The Board of Directors has the authority to issue up to 20,000,000 shares of
Preferred Stock in one or more series with rights, preferences, privileges and
restrictions to be determined at the Board's discretion.

On August 24, 1995, the Company converted 2,823,837 shares of Preferred
Stock (Series A and B) into 941,279 shares of Common Stock and 10,513,382
shares of Preferred Stock (Series C, D, E and F) into 3,504,461 shares of
Common Stock in connection with its Initial Public Offering.

In November 1991 and July 1992, the Company issued warrants to purchase an
aggregate of 21,940 shares of Common Stock (the 1992 Common Stock Warrants) at
an exercise price of $3.90 per share exercisable at any time through the date
which is five years following the closing of an initial public offering of the
Company's Common Stock. In September 1995, the warrants were exercised and the
Company issued 17,470 shares of Common Stock, and the remaining warrants were
canceled in consideration of the exercise. In connection with the Company's
guaranty for their eligible inventory line of credit (Note 4) in June 1994,
the Company issued warrants to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $1.05 per share exercisable at any time
through June 5, 2000 (the 1994 Common Stock Warrants). In August 1995, the
warrants were exercised and the Company issued 47,083 shares of Common Stock,
and the remaining warrants were canceled in consideration of the exercise. In
connection with the issuance of the Series D Preferred Stock in

F-13

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
November 1993, the Company issued warrants to purchase an aggregate of 80,000
shares of Common Stock at an exercise price of $4.50 per share exercisable at
any time through December 31, 1998 (the 1993 Common Stock Warrants). The fair
market value of these warrants was deemed to be immaterial on the date of
issuance.

9.STOCK OPTION PLAN

In December 1994, the Company changed its "Non-Qualified" Employee Option
Plan to an Incentive Stock Option Plan (the Option Plan) on a go forward
basis. The Option Plan provides options to purchase up to 900,000 shares, at
December 31, 1995, of the Company's Common Stock for officers, directors, and
key employees, at an exercise price equal to the fair market value on the date
of grant as determined by the Board of Directors. The shares issued under the
Option Plan shall become vested over periods up to five years. A summary of
the changes in the status of options is as follows:

SHARES PRICE RANGE
OUTSTANDING PER SHARE
----------- ------------

Outstanding at February 28, 1993....................... 163,799
Granted.............................................. 162,333 $1.05
Canceled............................................. (23,666) 1.05
Exercised............................................ (100) 1.05
------- ------------
Outstanding at February 28, 1994....................... 302,366 1.05
Granted.............................................. 128,834 1.05
Canceled............................................. (37,800) 1.05
Exercised............................................ (14,600) 1.05
------- ------------
Outstanding at December 31, 1994....................... 378,800 1.05
Granted.............................................. 392,807 1.65-13.625
Canceled............................................. (60,868) 1.05
Exercised............................................ (48,460) 1.05-8.00
------- ------------
Outstanding at December 31, 1995....................... 662,279 $1.05-13.625
------- ------------

At December 31, 1995, December 31, 1994, and February 28, 1994, 95,518,
83,213, and 41,080 shares were exercisable, respectively.

Option shares available for grant at December 31, 1995 were 166,042.

10.SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION

TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1995 1994 1994
------------ ------------ ------------

Supplemental statements of cash flows
information:
Cash paid during the period for:
Interest.............................. $ 289,796 $ 134,230 $ 89,000
Taxes (primarily foreign)............. 800 50,000 100,000
Non-cash investing and financing
activities:
Equipment acquired under capital
lease................................ 527,981 1,216,653 629,539
Conversion of Series (A, B, C, D, E
and F) Preferred Stock
to Common Stock...................... 17,616,203 -- --

F-14

PLASMA & MATERIALS TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

11.EMPLOYEE BENEFIT PLAN

In November 1993, the Company established a 401(k) plan (the Plan) covering
substantially all of its employees. The Plan allows eligible employees to
contribute up to 15% of their compensation. Company contributions are
voluntary and at the discretion of the Board of Directors. There were no
contributions made by the Company for the year ended December 31, 1995, the
ten month period ended December 31, 1994, or the year ended February 28, 1994.

12.INITIAL PUBLIC OFFERING

On August 29, 1995, the Company completed its Initial Public Offering,
resulting in approximately $40,093,235 of net proceeds to the Company.

In connection with the Initial Public Offering, the Board of Directors
approved a one-for-three reverse stock split of the Company's Common Stock.
The reverse stock split has been accounted for as if it had taken place as of
the earliest date presented. Effective August 29, 1995, all of the Company's
outstanding Preferred Stock (13,337,219 shares) automatically converted into
4,445,740 shares of Common Stock.

F-15

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.

Date: March 29, 1996

PLASMA & MATERIALS TECHNOLOGIES,
INC.

/s/ John W. LaValle
By: .................................
John W. LaValle
Vice President, Chief Financial
Officer and Secretary

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dr. Gregor A. Campbell and John W. LaValle, and
each of them his true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to this report, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of 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 TITLE DATE
--------- ----- ----

/s/ Dr. Gregor A. Campbell
................................ Director, President and Chief March 29, 1996
DR. GREGOR A. CAMPBELL Executive Officer (Principal
Executive Officer)

/s/ John W. LaValle
................................ Vice President, Chief Financial March 29, 1996
JOHN W. LAVALLE Officer and Secretary (Principal
Financial Accounting Officer)

/s/ John A. Rollwagen
................................ Director and Chairman March 29, 1996
JOHN A. ROLLWAGEN of the Board

/s/ Brian D. Jacobs
................................ Director March 29, 1996
BRIAN D. JACOBS

/s/ G. Bradford Jones
................................ Director March 29, 1996
G. BRADFORD JONES

/s/ Russell J. Robelen
................................ Director March 29, 1996
RUSSELL J. ROBELEN

EXHIBIT INDEX

EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------------- ----------- -------------

3.1* Sixth Restated Articles of
Incorporation of the Company
3.2*** Seventh Restated Articles of
Incorporation of the Company
3.3* Bylaws of the Company, as
amended and currently in
effect
4.1* Warrant to Purchase Common
Stock issued to St. Paul
Fire and Marine Insurance
Company on November 29, 1993
4.2* Warrant to Purchase Common
Stock issued to Brentwood
Associates V, L.P. on
November 29, 1993
4.3* Co-Investment Agreement made
as of August 30, 1991
between BeneVent and
Brentwood V

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
---------------------------------------------

10.1* 1991 Stock Option Plan of
the Company

OTHER MATERIAL CONTRACTS
------------------------

10.2***+ International Technology
License and Sales Agreement
between the Company and
Alcan-Tech Co., Inc. dated
November 15, 1991
10.3***+ International Technology
License and Sales Agreement
between the Company and
Anelva Corporation, dated
February 7, 1992
10.4*+ Technology License and Sales
Agreement between the
Company and Leybold AG dated
December 8, 1992
10.5***+ Technology License and Sales
Agreement between the
Company and Watkins-Johnson
Company dated December 23,
1993
10.6* Master Lease Agreement
between Phoenix Leasing Inc.
and the Company, effective
December 16, 1993 and ending
December 16, 1997
10.7* Royalty Agreement dated
October 3, 1986 by and
between the Company and
Messrs. Conn, Campbell and
Goebel
10.8* Assignment of Royalty Rights
dated June 8, 1990 executed
by Messrs. Conn and Campbell
in favor of the Company
10.9* Agreement entered into the
25th day of June 1986 by and
between the Company and
Leybold-Heraeus GmbH
10.10* Loan and Security Agreement
between the Company as
Borrower and Silicon Valley
Bank as Lender, dated
September 9, 1993, as
amended by those Amendments
to Loan Agreement dated June
14, 1994 and June 21, 1995,
with schedules
10.11* Loan and Security Agreement
(Exim) between the Company
as Borrower and Silicon
Valley Bank as Lender, dated
June 21, 1995, with
schedules
10.12**+ Distribution Agreement dated
July 1, 1995 by and between
the Company and Canon Sales
11.1 Computation of Per Share
Earnings
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney

- --------
*Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-94450) on July 11, 1995.
**Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on July 28, 1995.
***Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on August 22, 1995.
+Certain portions of this exhibit have been omitted from the copies filed as
part of Amendment No. 1 or Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450), as the case may be, and
are the subject of an order granting confidential treatment with respect
thereto.