Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark one)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
------------------------
COMMISSION FILE NUMBER: 0-22248
ULTRATECH STEPPER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3050 ZANKER ROAD
SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
(408) 321-8835
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE;
PREFERRED STOCK PURCHASE RIGHTS
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if 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 voting stock held by non-affiliates based on
the closing sale price of the Common Stock on March 20, 2001, as reported on the
Nasdaq National Market was approximately $346,000,000. 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 20, 2001, the Registrant had 22,493,876 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 7, 2001 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1 BUSINESS
This Annual Report on Form 10-K may contain, in addition to historical
information, certain forward-looking statements that involve significant risks
and uncertainties. The Company's actual results could differ materially from the
information set forth in any such forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below under
"Additional Risk Factors", as well as those discussed elsewhere in this Annual
Report on Form 10-K.
THE COMPANY
Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops,
manufactures and markets photolithography equipment designed to reduce the cost
of ownership for manufacturers of integrated circuits, including advanced
packaging processes, thin film magnetic recording devices and microsystems
components. The Company supplies step-and-repeat systems based on one-to-one
("1X") and reduction optical technology to customers located throughout North
America, Europe, Japan and the rest of Asia. Ultratech believes that its 1X
steppers offer cost and certain performance advantages, as compared with
competitors' reduction steppers, to semiconductor device manufacturers for
applications involving line geometries of 0.65 microns or greater ("noncritical
feature sizes") and to thin film head manufacturers. The Company's 1X steppers
do not currently address applications involving line geometries of less than
0.65 microns ("critical feature sizes"). Advanced packaging for integrated
circuits, specifically "bump or wafer level CSP" techniques, requires
lithography steps in the fabrication process. Ultratech has developed and has
commenced shipment of its Saturn Spectrum 3 stepper, with specific design
modifications to address the requirements of this market segment. Additionally,
the Company has developed two new "bump specific lithography tools", the Saturn
Spectrum 300 and the Prisma-ghi in order to broaden its advanced packaging
market base into 300mm bumping and R&D packaging activities. The Company's 1X
steppers are also used as replacements for scanners in existing fabrication
facilities to enable semiconductor manufacturers to extend the useful life and
increase the capabilities of their facilities. In addition, the Company's
steppers are used to manufacture high volume, low cost semiconductors used in a
variety of applications such as telecommunications, automotive control systems,
power systems and consumer electronics. Ultratech also supplies 1X
photolithography systems to thin film head manufacturers and believes that its
steppers offer advantages over certain competitive reduction lithography tools
with respect to field size, throughput, specialized substrate handling and cost.
Additionally, the Company supplies 1X photolithography equipment to the
microsystems market, where certain technical features such as high resolution at
g-line wavelengths and depth of focus may offer advantages over competing tools.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet (DUV) reduction lithography systems for approximately
$19.2 million in cash, $2.6 million in transaction costs and the assumption of
certain liabilities. With this acquisition, the Company expanded its
photolithography stepper product line to include reduction steppers. The
reduction steppers complement the 1X steppers for use in the integrated circuit,
thin film head and microsystems markets, as their resolution requirements go
below 0.65 microns.
The Company's products and markets are more fully described, below.
BACKGROUND
The fabrication of devices such as integrated circuits ("semiconductors" or
"ICs") and thin film magnetic recording heads ("thin film heads" or "TFHs")
requires a large number of complex processing steps, including deposition,
photolithography and etching. Deposition is a process in which a layer of either
electrically insulating or electrically conductive material is deposited on the
surface of a
2
wafer. The photolithographic imaging process imprints device features on a light
sensitive polymer photoresist. After development of the photoresist, etching
selectively removes material from areas not covered by the imprinted pattern.
Photolithography is one of the most critical and expensive steps in IC and
TFH device manufacturing. According to the Semiconductor Industry Association, a
significant portion of the cost of processing silicon wafers in the fabrication
of ICs is related to photolithography. Photolithography exposure equipment is
used to image device features on the surface of thin deposition films by
selectively exposing a light sensitive polymer photoresist coated on the wafer
surface, through a photomask containing the master image of a particular device
layer. Exposure of each process layer imprints a different set of features on
the device. These device layers must be properly aligned to previously defined
layers before imaging takes place, so that structures formed on the wafers are
correctly placed, one on top of the other, in order to ensure a functioning
device.
Since the introduction of the earliest commercial photolithography tools for
IC manufacturing in the early 1960s, a number of tools have been introduced to
enable manufacturers to produce increasingly complex devices that incorporate
progressively finer line widths. In the late 1970s, photolithography tools known
as step-and-repeat projection aligners, or steppers, were introduced. Unlike
prior tools, such as contact printers which required the photomask to physically
contact the wafer in order to transfer the entire pattern during a single
exposure, and scanners, which transferred the device image by scanning a narrow
slit of light across the entire photomask and wafer in a single, continuous
motion, steppers expose only a small square or rectangular portion of the wafer
in a single exposure, then move or "step" to an adjacent site to repeat the
exposure. This stepping process is repeated as often as necessary until the
entire wafer has been exposed. By imaging a small area, steppers are able to
achieve finer resolution and better alignment between the multiple device layers
and higher yield and productivity in certain devices than possible with earlier
tools. Since the late 1980s, 1X steppers have become a critical tool for the
fabrication of thin film heads because of their performance characteristics.
Thin film heads are devices that form the small read/write component in the most
advanced disk drives and have enabled disk drives to increase in speed and
memory capacity and perform more efficiently. Steppers are currently the
predominant lithography tools used in the manufacture of devices such as ICs and
TFHs. The Company believes that manufacturers of leading-edge TFH devices are
relying increasingly on reduction steppers to address the more critical feature
sizes for these devices in their front-end applications.
According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market
research firm, the two principal types of steppers currently in use by the
semiconductor industry are reduction steppers, which are the most widely used
steppers, and one-to-one steppers. Reduction steppers, which typically have
reduction ratios of four or five-to-one, are tools in which the photomask
pattern containing the design is typically four or five times larger than the
device pattern that is to be exposed on the wafer surface. Additionally,
step-and-scan systems have been introduced recently in order to address device
sizes of .18 micron and below. In contrast to steppers, which expose the entire
field in a single exposure, step-and-scan systems scan across the field until
the entire field is exposed.
The principal advantage of reduction steppers and step-and-scan systems is
that they may be used in manufacturing steps requiring critical feature sizes
and are therefore necessary for manufacturing advanced ICs. One-to-one steppers,
on the other hand, are tools in which the photomask containing the design is the
same size as the device pattern that is exposed on the wafer surface. Current
one-to-one steppers, unlike most current reduction steppers, are based on
different technology which incorporates both reflective and refractive elements
in its optical lens imaging system that, although highly sophisticated in
design, is much simpler than a current reduction stepper's lens imaging system
which incorporates only refractive elements. As a result, current 1X steppers
are generally less expensive than current reduction steppers required for
critical feature sizes. Because of their optical design, 1X steppers typically
are also able to deliver greater energy to the wafer surface, which generally
results in
3
higher throughput than is achievable with most reduction steppers. One-to-one
steppers, however, are currently limited to use in manufacturing steps involving
noncritical feature sizes. Accordingly, the Company believes that sales of these
systems are highly dependent upon capacity expansions by its customers.
In the past, manufacturers of ICs and similar devices purchased capital
equipment based principally on technological capabilities. In view of the
significant capital expenditures required to construct, equip and maintain
fabrication facilities, relatively short product cycles and manufacturers'
increasing concern for overall fabrication costs, the Company believes that
manufacturers of ICs and thin film heads increasingly are focusing on reducing
their total cost to manufacture a device. A major component of this cost is the
cost of ownership of the equipment used for a particular application in a
fabrication facility. Cost of ownership is measured in terms of the costs
associated with the acquisition of equipment as well as factors such as
throughput, yield, up-time, service, labor overhead, maintenance, and various
other costs of owning and using the equipment. With increasing importance being
placed upon a system's overall cost of ownership, in many cases the system with
the most technologically advanced capabilities will not necessarily be the
manufacturing system of choice. As part of the focus on cost reduction, the
Company believes that device manufacturers are attempting to extend the useful
life and enhance the production capabilities of fabrication facilities by
selecting equipment that can replace existing tools while offering better
performance in a cost-effective manner.
PRODUCTS
The Company currently offers three different series of 1X systems for use in
the semiconductor fabrication process: the model 1500 Series, which addresses
the markets for scanner replacement, high volume/low cost semiconductor
fabrication and R&D packaging activities; the Saturn Wafer
Stepper-Registered Trademark- Family, which addresses the market for
mix-and-match in advanced semiconductor fabrication and bump processing for flip
chips; and the Titan Wafer Stepper-Registered Trademark-, which addresses the
markets for scanner replacement and high volume/low cost semiconductor
fabrication. These steppers currently offer feature size capabilities ranging
from 2.0 microns to 0.65 microns and typically range in price from $800,000 to
$3.2 million. The model 1500 Series and the Titan Wafer Stepper offer g- and
h-line illumination specifications. The Saturn Wafer Stepper Family features an
i-line illumination specification that is designed to make them compatible with
advanced i-line reduction steppers. In bump processing, the Company offers its
Saturn Spectrum 3, Saturn Spectrum 3e, Prisma-ghi and the Saturn Spectrum 300.
The Saturn Spectrum 3e was developed for high volume bump and wafer level CSP
manufacturing. The Prisma-ghi was developed as a lower cost, low volume/R&D bump
stepper. The Saturn Spectrum 300 is the Company's first product offering to
support 300mm bump manufacturing. All of these bump steppers provide broadband
(g, h and i-line) exposure, and are used in conjunction with electroplating to
produce a pattern of bumps, or metal connections, on the bond pads of the die
for flip chip devices. This pattern can be placed in a tight array across the
entire die, as opposed to the conventional method of wire bonding which is
limited to the periphery of the die. This allows manufacturers to shrink the die
size. The flip chip device can then be placed in a small outline package or
directly on a printed circuit board. The Saturn and Titan widefield systems have
a unique D-shaped field that allows for a one-to-one field match with
step-and-scan systems, or a two-to-one match with reduction steppers. The
D-shaped field is designed to allow the semiconductor manufacturer to optimize
overlay and throughput for its non-critical mix-and-match layers.
The Company also offers a reduction stepper product line for selected
semiconductor markets. These products include the XLS 200, XLS 248, XLS 193nm
and XLS 157nm systems. The XLS 200 is an i-line reduction system with a minimum
resolution of 0.35 microns, providing a high resolution i-line reduction stepper
option for selected semiconductor markets. The XLS 248 is a DUV (248nm)
reduction stepper providing a minimum resolution of 0.25 microns for selected
semiconductor applications requiring sub-0.35 micron resolution. The XLS 193nm
(small field) and XLS 157nm (small
4
and mid field) systems are DUV tools used for advanced research and development
semiconductor materials and processes.
The XLS 9800 and XLS 9900 provide i-line and DUV wavelengths capabilities
and are designed to meet TFH customers' requirements for shrinking geometries on
their critical layers. In addition, the Company provides a 1700 Series stepper
capable of patterning features on rowbars utilizing an alternate alignment
system (Machine Vision System, or "MVS"). The model 1700 Series steppers are
used to expose the Air Bearing Surface (ABS) pattern on these rowbars. The
Company's TFH steppers offer feature size capabilities ranging from 2.0 to 0.25
microns and typically range in price from $800,000 to $3.6 million.
The Company also offers photolithography equipment for use in the
microsystems market. Microsystems manufacturing combines electronics with
mechanics in small devices for detection and control of a wide variety of
parameters. Examples include accelerometers used to activate air bags in
automobiles, and membrane pressure sensors used in industrial control systems.
These micromachined devices are manufactured on silicon substrates using
photolithographic techniques similar to those used for manufacturing
semiconductors and thin film head devices. In 2000, the Company introduced and
shipped a new product into the microsystems market based on the 1500 Series
steppers, incorporating Dual Side Alignment (DSA) capability for applications
requiring lithography on both sides of a wafer. The Company believes that its
new 1600DSA stepper enhances the capabilities of the 1500 Series steppers by
offering the first stepper with Dual Side Alignment capability, providing
customers with a 1X stepper solution to this special processing requirement.
Additionally, the Company believes that its 1500 Series steppers and the Saturn
Wafer Stepper Family offer resolution and depth of focus advantages over
alternative technologies, to the manufacturers of microsystems.
The Company also sells upgrades and refurbishments to certain older product
lines in its installed base. These refurbished older systems typically have a
purchase price that is significantly lower than the purchase price for the
Company's new systems.
Features of the Company's current stepper systems are set forth below:
MINIMUM FEATURE
PRODUCT LINE WAVELENGTH SIZE (NM)
- ------------ -------------- ----------------
SEMICONDUCTOR/MICROSYSTEMS:
Model 1500 Series gh-line 0.8-1.0
1600DSA gh-line 1.0-2.0
Prisma-ghi ghi-line 4.0
Saturn Wafer Stepper i-line 0.65-1.0
Saturn Spectrum 3e ghi-line 2.0
Saturn Spectrum 300 ghi-line 2.0
Titan Wafer Stepper gh-line 0.75-1.2
Titan 300 Wafer Stepper gh-line 1.0-1.2
XLS (Reduction) Stepper Family:
XLS 200 i-line 0.35
XLS 248 DUV (248 nm) 0.25
XLS 193nm DUV (193 nm) 0.16
XLS 157nm DUV (157 nm) 0.10
THIN-FILM HEAD:
Model 1700 Series gh-line 1.0
Model 1900 gh-line 1.0
Reduction Steppers
XLS 9800 i-line 0.35
XLS 9900 DUV (248nm) 0.25
5
RESEARCH, DEVELOPMENT AND ENGINEERING
The semiconductor and microsystems (which includes thin film heads)
industries are subject to rapid technological change and new product
introductions and enhancements. The Company believes that continued and timely
development and introduction of new and enhanced systems is essential for the
Company to maintain its competitive position. The Company has made a substantial
investment in the research and development of its core optical technology, which
the Company believes is critical to its financial results. The Company intends
to continue to develop its technology and to develop innovative products and
product features to meet customer demands. Current engineering projects include:
the continued research and development and process insertion for the Verdant
rapid thermal annealing systems and technologies; continued development of the
Company's 1X and reduction optical products, including the Company's 1X 300mm
tool for bump processing and Company's XLS 157nm reduction stepper; and
development of larger and more flexible optical systems. Other research and
development efforts are currently focused on reliability improvement;
manufacturing cost reduction; and performance enhancement and development of new
features for existing systems, both for inclusion in the Company's systems and
to meet specific customer order requirements. These research and development
efforts are undertaken, principally, by the Company's research, development and
engineering organizations and costs are generally expensed as incurred. Other
operating groups within the Company support the above referenced research,
development and engineering efforts, and the associated costs are charged to
these organizations as incurred. The Company also has programs devoted to the
development of new photolithography systems, including new generations of
photolithography systems for existing and new markets, enhancements and
extensions of existing photolithography systems for existing and new markets and
custom engineering for specific customers.
The Company works with many customers to develop technology required to
manufacture advanced devices or to lower the customer's cost of ownership. The
Company maintains an engineering department that supports customer design of 1X
stepper photomasks for both test and production purposes and an applications
engineering group, consisting of highly qualified engineers located throughout
the Company's markets that assist customers in optimizing the use of the
Company's systems.
The Company has historically devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts in the future. As of
December 31, 2000, the Company had approximately 88 full-time employees engaged
in research, development, and engineering. For 2000, 1999 and 1998, total
research, development, and engineering expenses were approximately
$26.8 million, $27.7 million and $26.7 million, respectively, and represented
18.3%, 24.5% and 32.7% of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in North America, Europe and
Japan principally through its direct sales organization. The Company sells its
products in the Asia/Pacific region, excluding Japan, primarily through outside
sales organizations. In January 2001, the Company terminated its relationship
with its Taiwanese distributor and is in the process of establishing a direct
sales force in Taiwan. (See "Additional Risk Factors: International Sales;
Japanese Market").
Ultratech's service personnel are based throughout the United States,
Europe, Japan and the rest of Asia. The Company currently has four sales and
service offices in the United States outside of California, five sales and/or
service offices in the United Kingdom, Japan, Korea, Taiwan and Philippines, and
personnel in Thailand, to service equipment and support customers in such
locations. As part of its customer service, the Company maintains an on-line
computerized network of its parts inventory in the United States, Europe and
Japan.
6
The Company believes that as semiconductor and thin film head manufacturers
produce increasingly complex devices, they will require an increased level of
support. Reliability, performance, yield, cost, uptime and mean time between
failure are increasingly important factors by which customers evaluate potential
suppliers of photolithography equipment. The Company believes that the strength
of its worldwide service and support organization is an important factor in its
ability to sell its systems, maintain customer loyalty and reduce the
maintenance costs of its systems. In addition, the Company believes that working
with its suppliers and customers is necessary to ensure that the Company's
systems are cost effective, technically advanced and designed to satisfy
customer requirements.
The Company supports its customers with field service, technical service
engineers and training programs. The Company provides its customers with
comprehensive support and service before, during and after delivery of its
systems. To support the sales process and to enhance customer relationships, the
Company works closely with prospective customers to develop hardware and
software test specifications and benchmarks, and often designs customized
applications to enable prospective customers to evaluate the Company's equipment
for their specific needs. Prior to shipment, Ultratech's support personnel
typically assist the customer in site preparation and inspection, and typically
provide customers with training at the Company's facilities or at the customer's
location. The Company currently offers to its customers various courses of
instruction on the Company's systems, including instructions in system hardware
and software tools for optimizing the Company's systems. The Company's customer
training program also includes instructions in the maintenance of the Company's
systems. The Company's field support personnel work with the customers'
employees to install the system and demonstrate system readiness. Technical
support is also available through on-site Company personnel.
In general, the Company warrants its new systems against defects in design,
materials and workmanship for one year. The Company offers its customers
additional support after the warranty period in the form of maintenance
contracts for specified time periods. Such contracts include various options
such as priority response, planned preventive maintenance, scheduled one-on-one
training, daily on-site support, and monthly system and performance analysis.
MANUFACTURING
The Company performs all of its manufacturing activities (final assembly,
system testing and certain subassembly) in clean room environments totaling
approximately 38,000 square feet. These facilities are located in California and
Massachusetts. Performing manufacturing operations in California exposes the
Company to a higher risk of natural disasters, including earthquake and flood.
Additionally, the recent electrical power shortage exposes the Company to a
higher risk of production and work stoppages as well as increased utilities
costs. The Company is not insured against natural disasters and power shortages
and the occurrence of such event would materially adversely impact the Company's
results of operations.
The Company's manufacturing activities consist of assembling and testing
components and subassemblies, which are then integrated into finished systems.
The Company is relying increasingly on outside vendors and subcontractors to
manufacture certain components and subassemblies. This strategy has enabled the
Company to increase its manufacturing capacity. The Company orders one of the
most critical components of its technology, the glass for its 1X lenses, from
suppliers on purchase orders. The Company designs the 1X lenses and provides the
lens specifications to other suppliers that grind the lens elements. The Company
then assembles and tests the optical 1X lenses in its metrology laboratory. The
Company has recorded the critical parameters of each of its optical lenses sold
since 1982, and believes that such information enables it to supply lenses to
its customers that match the characteristics of its customers' existing lenses.
Additionally, the Company orders reduction lenses from suppliers on purchase
orders. These lenses are designed to the Company's specifications and tested by
7
the supplier. Prior to shipment of the Company's systems, the customer's
engineers may perform acceptance tests at Ultratech's facility. After passing
the acceptance test, the system is packaged in the clean room environment and
prepared for shipment.
The Company procures many of its critical systems' components, subassemblies
and services from a single outside supplier or a limited group of outside
suppliers in order to ensure overall quality and timeliness of delivery. Many of
these components and subassemblies have significant production lead times. To
date, the Company has been able to obtain adequate services and supplies of
components and subassemblies for its systems in a timely manner. However,
disruption or termination of certain of these sources could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's reliance on sole or a limited group of suppliers and
the Company's increasing reliance on subcontractors involve several risks,
including a potential inability to obtain an adequate supply of required
components due to the suppliers' failure or inability to provide such components
in a timely manner, or at all, and reduced control over pricing and timely
delivery of components. Although the timeliness, yield and quality of deliveries
to date from the Company's subcontractors have been acceptable, manufacture of
certain of these components and subassemblies is an extremely complex process,
and long lead-times are required. 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 products, which could damage relationships with
current and prospective customers and therefore would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company maintains a company-wide quality program. The intent of the
program is to provide continuous improvement in the Company's steppers and
services to meet customer requirements. The Company trains all of its employees
in basic quality skills and regularly participates in quality sharing meetings
with other equipment manufacturers and customer quality audits of procedures and
personnel. The Company's 1X operation achieved ISO 9001 certification in 1996
and ISO 14001:1996 Certification in March 2001, and has maintained these
certifications uninterrupted through the date of this report.
COMPETITION
The capital equipment industry in which the Company operates is intensely
competitive. A substantial investment is required to install and integrate
capital equipment into a semiconductor, semiconductor packaging or thin film
head production line. The Company believes that once a device manufacturer or
packaging subcontractor has selected a particular vendor's capital equipment,
the manufacturer generally relies upon that equipment for the specific
production line application and, to the extent possible, subsequent generations
of similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number of
leading foreign and domestic stepper manufacturers, such as Nikon Inc.
("Nikon"), Canon Inc. ("Canon"), ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group Inc.'s ("SVG") Micralign products, all of which have substantially
greater financial, marketing and other resources than the Company. Nikon
supplies a 1X stepper for use in the manufacture of liquid crystal displays and
Canon, Nikon and ASML offer reduction steppers for thin film head fabrication.
Additionally, the Company's XLS reduction stepper product line competes directly
with advanced reduction steppers offered by Canon, Nikon and ASML. With respect
to the semiconductor packaging market, the Company receives intense competition
from various proximity aligner companies such as Suss Microtec AG (Karl Suss).
8
Current thin film head front-end production involves manufacturing steps
that require critical feature sizes. Although the reduction stepper product
lines address critical feature sizes, additional development of these product
lines may be necessary to fully address the unique requirements of thin film
head manufacturing. Additionally, ASML has entered the low-cost lithography
market. ASML and Nikon have each introduced an i-line step-and-scan system as a
lower cost alternative to the deep ultra-violet (DUV) step-and-scan system for
use on the less critical layers. These systems compete with widefield steppers,
such as the Company's Saturn and Titan steppers, for advanced mix-and-match
applications. In addition, the Company believes that the high cost of developing
new lithography tools has increasingly caused its competitors to collaborate
with customers and other parties in various areas such as research and
development, manufacturing and marketing, or to acquire other competitors,
thereby resulting in a combined competitive threat with significantly enhanced
financial, technical and other resources. The Company expects its competitors to
continue to improve the performance of their current products. These competitors
have stated that they will introduce new products with improved price and
performance characteristics that will compete directly with the Company's
products. This could cause a decline in sales or loss of market acceptance of
the Company's steppers, and thereby materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that enhancements to, or future generations of, competing products
will not be developed that offer superior cost of ownership and technical
performance features. The Company believes that to be competitive, it will
require significant financial resources in order to continue to invest in new
product development, features and enhancements, to introduce next generation
stepper systems on a timely basis, and to maintain customer service and support
centers worldwide. In marketing its products, the Company may also face
competition from vendors employing other technologies. In addition, increased
competitive pressure has led to intensified price-based competition in certain
of the Company's markets, resulting in lower prices and margins. Should these
competitive trends continue, the Company's business, financial condition and
operating results would continue to be materially adversely affected. There can
be no assurance that the Company will be able to compete successfully in the
future.
Foreign integrated circuit manufacturers have a significant share of the
worldwide market for certain types of ICs for which the Company's systems are
used. The Japanese stepper manufacturers are well established in the Japanese
stepper market, and it is extremely difficult for non-Japanese lithography
equipment companies to penetrate the Japanese stepper market. Although the
Company has experienced recent success in its introduction of its Saturn
Spectrum 3 into the Japanese marketplace, to date the Company has not
established itself as a major competitor in the Japanese equipment market and
there can be no assurance that the Company will be able to achieve significant
sales to Japanese manufacturers in the future. (See "International Sales;
Japanese Market").
INTELLECTUAL PROPERTY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
any success will depend more upon the innovation, technological expertise and
marketing abilities of its employees. Nevertheless, the Company has a policy of
seeking patents when appropriate on inventions resulting from its ongoing
research and development and manufacturing activities. The Company owns various
United States and foreign patents, which expire on dates ranging from
March 2001 to December 2018, and has various United States and foreign patent
applications pending. The Company also has various registered trademarks and
copyright registrations covering mainly software programs used in the operation
of its stepper systems. The Company also relies upon trade secret protection for
its confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be issued
or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation
9
may be necessary to enforce the Company's patents, copyrights or other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation. There can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company. Additionally, the Company presently has several agreements in force to
license certain of its technologies. Challenges or invalidation to patents
relative to those technologies would expose the Company to the risk of
forfeiture of revenues and further risk of litigation.
On February 29, 2000, in the U.S. District Court of Virginia, Ultratech
filed patent infringement lawsuits against Nikon, Canon and ASM Lithography. In
April of 2000, the Company reached settlement with Nikon Corporation. The
litigation against Canon and ASM Lithography is ongoing. In conjunction with
this litigation, Canon has filed a counter-claim against the Company alleging
infringement of its technologies. The Company is in the process of reviewing
this claim but believes that it is without merit and that it will not have a
material adverse impact on the results of operations or financial condition of
the Company.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patent or any other
intellectual property right (with the exception of the Canon counter-claim), the
Company has from time to time been notified of claims that it may be infringing
intellectual property rights possessed by third parties. Certain of the
Company's customers have received notices of infringement from Technivision
Corporation and the Lemelson Medical, Education and Research Foundation, Limited
Partnership alleging that the manufacture of certain semiconductor products
and/or the equipment used to manufacture those semiconductor products infringes
certain issued patents. The Company has been notified by certain of these
customers that the Company may be obligated to defend or settle claims that the
Company's products infringe any of such patents and, in the event it is
subsequently determined that the customer infringes any of such patents, they
intend to seek reimbursement from the Company for damages and other expenses
resulting from this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights (with the exception of the Canon counter-claim),
there can be no assurance that infringement claims by third parties or claims
for indemnification resulting from infringement claims in the future will not be
asserted, or that such assertions, if proven to be true, will not materially
adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of any litigation. With respect to any
such future claims, the Company may seek to obtain a license under the third
party's intellectual property rights. There can be no assurance, however, that a
license will be available on reasonable terms or at all. The Company could
decide, in the alternative, to resort to litigation to challenge such claims.
Such challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of any litigation.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's systems. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or
10
future regulations could result in substantial fines being imposed on the
Company, suspension of production, alteration of the manufacturing process or
cessation of operations. Such regulations could require the Company to acquire
expensive remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
CUSTOMERS, APPLICATIONS AND MARKETS
The Company sells its systems to semiconductor, advanced packaging,
microsystems and thin film head manufacturers located throughout North America,
Europe, Japan and the rest of Asia. Semiconductor manufacturers have purchased
the model 1500 Series steppers, the Saturn Wafer Stepper, the Saturn Spectrum 3
wafer stepper, the Titan Wafer Stepper and the XLS product family for the
fabrication and packaging of microprocessors, microcontrollers, DRAMs, ASICs and
other devices. Such systems are used in mix-and-match environments with other
lithography tools, as replacements for scanners and contact printers, in
start-up fabrication facilities, in packaging for ultrathin and flip chip
applications and for high volume, low cost noncritical feature size
semiconductor production. The Company's reduction stepper product line, acquired
from ISI, will continue to address selected semiconductor markets. The Company
believes that thin film head manufacturers have purchased the model 1700 Series
steppers due to their throughput and overall cost of ownership. The XLS 9800,
first introduced in 1998, is an i-line reduction stepper designed specifically
for the thin film head market. The XLS 9900, a DUV reduction stepper, is also
offered to manufacturers of leading-edge TFH devices. The Company believes that
manufacturers of microsystems have purchased the model 1500 Series steppers and
Saturn/Titan wafer stepper families because of their high throughput and
flexible field size advantages along with cost-effective, submicron imaging
capabilities.
Historically, the Company has sold a substantial portion of its systems to a
limited number of customers. In 2000, one customer accounted for approximately
10% of total net sales. In 1999, no single customer accounted for 10% or more of
the Company's net sales. Sales to one customer accounted for approximately 25%
of total net sales in 1998. The Company expects that sales to a relatively few
customers will continue to account for a high percentage of its net sales in the
foreseeable future and believes that the Company's financial results depend in
significant part upon the success of these major customers and the Company's
ability to meet their future capital equipment needs. Although the composition
of the group comprising the Company's largest customers may vary from period to
period, the loss of a significant customer or any reduction in orders by any
significant customer, including reductions due to market, economic or
competitive conditions in the semiconductor, semiconductor packaging or magnetic
recording head industries or in the industries that manufacture products
utilizing integrated circuits or thin film heads, may have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's ability to maintain or increase its sales in the future will
depend, in part, upon its ability to obtain orders from new customers as well as
the financial condition and success of its customers, the semiconductor and thin
film head industries and the economy in general, of which there can be no
assurance. (See "Additional Risk Factors: Cyclicality of Semiconductor,
Semiconductor Packaging and Thin Film Head Industries").
In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted in significant concentrations of accounts receivable and leases
receivable. These significant and concentrated receivables expose the Company to
additional risks, including the risk of default by one or more customers
representing a significant portion of the Company's total receivables. If the
Company were required to take additional lease and accounts receivable reserves
its business, financial condition and results of operations would be materially
adversely affected.
11
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. In view of the significant investment
involved in a system purchase, the Company has experienced and may continue to
experience delays following initial qualification of the Company's systems as a
result of delays in a customer's approval process. Additionally, the Company is
presently receiving orders for systems that have lengthy delivery schedules,
which may be due to longer production lead times or a result of customers'
capacity scheduling requirements. In order to maintain or exceed the Company's
present level of net sales, the Company is dependent upon obtaining orders for
systems that will ship and be accepted in the current period. There can be no
assurance that the Company will be able to obtain those orders. For these and
other reasons, the Company's systems typically have a lengthy sales cycle during
which the Company may expend substantial funds and management effort in securing
a sale. Lengthy sales cycles subject the Company to a number of significant
risks, including inventory obsolescence and fluctuations in operating results,
over which the Company has little or no control.
BACKLOG
The Company schedules production of its systems based upon order backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog all customer orders for its systems
for which it has accepted purchase order numbers and assigned shipment dates
within one year, as well as all orders for service, spare parts and upgrades.
All orders are subject to cancellation or rescheduling by the customer with
limited or no penalties. Because of orders received for systems to be shipped in
the same quarter in which the order is received, possible changes in system
delivery schedules, cancellations of orders and potential delays in system
shipments, the Company's backlog at any particular date may not necessarily be
representative of actual sales for any succeeding period. As of December 31,
2000, the Company's backlog was approximately $106.8 million, including
$15.7 million of systems shipped but not yet installed and accepted. As of
December 31, 1999, the Company's backlog, as restated to reflect the impact of
SAB 101 (see "Changes to Financial Accounting Standard May Affect the Company's
Reported Results of Operations"), was approximately $65.4 million, including
$37.6 million of systems shipped but not yet installed and accepted.
The Company believes that demand for semiconductors and semiconductor
equipment may currently be experiencing a cyclical downturn. As a result, the
Company may experience lower order booking rates in the near term, relative to
those achieved in 2000, and may experience an increased incidence of order
deferrals, rescheduling and cancellations. Fewer net bookings would result in
lower net sales and gross margin, which would materially adversely impact the
Company's business and results of operations.
EMPLOYEES
At December 31, 2000, the Company had approximately 516 full-time employees,
including 88 engaged in research, development, and engineering, 46 in sales and
marketing, 166 in customer service and support, 132 in manufacturing and 84 in
general administration and finance. The Company believes any future success,
should it occur, would depend, in large part, on its ability to attract and
retain highly skilled employees. None of the employees of the Company is covered
by a collective bargaining agreement. The Company considers its relationships
with its employees to be good.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR, SEMICONDUCTOR PACKAGING AND THIN FILM HEAD
INDUSTRIES The Company's business depends in significant part upon capital
expenditures by manufacturers of semiconductors and microsystems, including thin
film head magnetic recording devices, which in turn
12
depend upon the current and anticipated market demand for such devices and
products utilizing such devices. The semiconductor industry is highly cyclical
and historically has experienced recurring periods of oversupply. This has, from
time to time, resulted in significantly reduced demand for capital equipment
including the systems manufactured and marketed by the Company. The Company
believes that markets for new generations of semiconductors and semiconductor
packaging will also be subject to similar fluctuations. The Company believes
that demand for semiconductors and semiconductor equipment may currently be
undergoing such a cyclical downturn. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current or prior level
of sales.
The Company attempts to mitigate the risk of cyclicality by participating in
multiple markets including semiconductor, semiconductor packaging and
microsystems, as well as diversifying into new markets such as photolithography
for optical networking. Despite such efforts, when one or more of such markets
experiences a downturn or a situation of excess capacity, such as may be
occurring in the semiconductor and thin film head markets, the Company's net
sales and operating results are materially adversely affected.
During 2000, 1999 and 1998, approximately 18%, 30% and 50%, respectively, of
the Company's net sales were derived from sales to microsystems manufacturers,
including thin film head manufacturers. The Company believes the TFH market is
currently in a state of over-capacity and expects this situation to last for at
least the next several quarters. This has and will continue to result in lower
sales and delays or deferrals of customer orders from these industries, which
will continue to materially adversely affect the Company's business, financial
condition and results of operations in the near term. Additionally, the Company
is experiencing increased competition in this market from Nikon, Canon and ASML.
The Company's business and operating results would be materially adversely
affected by continued downturns or slowdowns in TFH market or by loss of market
share.
DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS Currently, the
Company is devoting significant resources to the development, introduction and
commercialization of its Verdant laser thermal processing system and its
advanced XLS 157nm reduction stepper, and to the volume production for its
Saturn Spectrum 3 wafer stepper. During 2001, the Company will continue to
develop these products and will continue to incur significant operating expenses
in the areas of research, development and engineering, manufacturing and general
and administrative costs in order to further develop, produce and support these
new products. Additionally, gross profit margins and inventory levels may be
further adversely impacted in the future by costs associated with the initial
production of these new product lines. These costs include, but are not limited
to, additional manufacturing overhead, additional inventory write-offs, costs of
demonstration systems and facilities, costs associated with managing multiple
sites and the establishment of additional after-sales support organizations.
Additionally, there can be no assurance that operating expenses will not
increase, relative to sales, as a result of adding additional marketing and
administrative personnel, among other costs, to support the Company's new
products. If the Company is unable to achieve significantly increased net sales
or its sales fall below expectations, the Company's operating results will be
materially adversely affected until, among other factors, costs and expenses can
be reduced.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor, semiconductor packaging and microsystems manufacturing industries
are subject to rapid technological change and new product introductions and
enhancements. The Company's ability to be competitive in these and other markets
will depend, in part, upon its ability to develop new and enhanced systems and
related software tools, and to introduce these systems and related software
tools at competitive prices and on a timely and cost-effective basis to enable
customers to integrate them into their operations either prior to or as they
begin volume product manufacturing. The Company will also be required to enhance
the performance of its existing systems and related software tools. Any success
of the Company in developing new and enhanced systems and related software tools
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and
13
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. Because new product
development commitments must be made well in advance of sales, new product
decisions must anticipate both future demand and the technology that will be
available to supply that demand. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing or marketing new products
and related software tools or enhancing its existing products and related
software tools. Any such failure would materially adversely affect the Company's
business, financial condition and results of operations.
Because of the large number of components in the Company's systems,
significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such systems. The Company
has experienced delays from time to time in the introduction of, and technical
and manufacturing difficulties with, certain of its systems and enhancements and
related software tools and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements and related software tools.
There can be no assurance that the Company will not encounter additional
technical, manufacturing or other difficulties that could further delay future
introductions or volume production of systems or enhancements. The Company's
inability to complete the development or meet the technical specifications of
any of its systems or enhancements and related software tools, or its inability
to manufacture and ship these systems or enhancements and related software tools
in volume and in time to meet the requirements for manufacturing the future
generation of semiconductor or thin film head devices would materially adversely
affect the Company's business, financial condition and results of operations. In
addition, the Company may incur substantial unanticipated costs to ensure the
functionality and reliability of its products early in the products' life
cycles. If new products have reliability or quality problems, reduced orders or
higher manufacturing costs, delays in collecting accounts receivable and
additional service and warranty expenses may result. Any of such events may
materially adversely affect the Company's business, financial condition and
results of operations.
SOLE OR LIMITED SOURCES OF SUPPLY The Company is relying increasingly on
outside vendors and subcontractors to manufacture certain components and
subassemblies. This strategy has enabled the Company to increase its
manufacturing capacity. The Company orders one of the most critical components
of its technology, the glass for its 1X lenses, from suppliers on purchase
orders. The Company designs the 1X lenses and provides the lens specifications
to other suppliers that grind the lens elements. The Company then assembles and
tests the optical 1X lenses in its metrology laboratory. The Company has
recorded the critical parameters of each of its optical lenses sold since 1982,
and believes that such information enables it to supply lenses to its customers
that match the characteristics of its customers' existing lenses. Additionally,
the Company orders reduction lenses from suppliers on purchase orders. These
lenses are designed to the Company's specifications and tested by the supplier.
Prior to shipment of the Company's systems, the customer's engineers may perform
acceptance tests at Ultratech's facility. After passing the acceptance test, the
system is packaged in the clean room environment and prepared for shipment.
14
In addition to glass, the Company procures many of its other critical
systems' components, subassemblies and services from a single outside supplier
or a limited group of outside suppliers in order to ensure overall quality and
timeliness of delivery. Many of these components and subassemblies have
significant production lead times. To date, the Company has been able to obtain
adequate services and supplies of components and subassemblies for its systems
in a timely manner. However, disruption or termination of certain of these
sources could result in a significant adverse impact on the Company's ability to
manufacture its systems. This, in turn, would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's reliance on sole or a limited group of suppliers and the Company's
increasing reliance on subcontractors involve several risks, including a
potential inability to obtain an adequate supply of required components due to
the suppliers' failure or inability to provide such components in a timely
manner, or at all, and reduced control over pricing and timely delivery of
components. Although the timeliness, yield and quality of deliveries to date
from the Company's subcontractors have been acceptable, manufacture of certain
of these components and subassemblies is an extremely complex process, and long
lead-times are required. 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 products, which could damage relationships with current and
prospective customers and therefore would have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL SALES; JAPANESE MARKET International net sales accounted for
approximately 54%, 53% and 47% of total net sales for the years 2000, 1999 and
1998, respectively. The Company anticipates that international sales, which
typically have lower gross margins than domestic sales, principally due to
increased competition and higher field service and support costs, will continue
to account for a significant portion of total net sales and may increase as a
percentage of total net sales in the near-term. As a result, a significant and
growing portion of the Company's net sales will continue to be subject to
certain risks, including dependence on outside sales representative
organizations; transitions to direct sales organizations from outside sales
representative organizations, such as the Company is currently undertaking in
Taiwan (see "Sales and Service"); unexpected changes in regulatory requirements;
difficulty in satisfying existing regulatory requirements; exchange rate
fluctuations; tariffs and other barriers; political and economic instability;
difficulties in accounts receivable collections; natural disasters; difficulties
in staffing and managing foreign subsidiary and branch operations; and
potentially adverse tax consequences. Although the Company generally transacts
its international sales in U.S. dollars, international sales expose the Company
to a number of additional risk factors, including fluctuations in the value of
local currencies relative to the U.S. dollar, which, in turn, impact the
relative cost of ownership of the Company's products and may further impact the
purchasing ability of its international customers. In Japan, however, the
Company has commenced direct sales operations and orders are often denominated
in Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. The Company is also subject to the risks
associated with the imposition of legislation and regulations relating to the
import or export of semiconductors and magnetic recording head products. The
Company cannot predict whether changes to quotas, duties, taxes or other charges
or restrictions will be implemented by the United States, Japan or any other
country upon the importation or exportation of the Company's products in the
future. There can be no assurance that any of these factors or the adoption of
restrictive policies will not have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend,
in significant part, upon the continued contributions of key personnel, many of
whom would be difficult to replace. None of such persons has an employment or
noncompetition agreement with the Company. The Company does not maintain any
life insurance on any of its key persons. The loss of key personnel could have a
material adverse effect on the business, financial condition and results of
operations of
15
the Company. In addition, the Company's future operating results depend in
significant part upon its ability to attract and retain other qualified
management, manufacturing, and technical, sales and support personnel for its
operations. There are only a limited number of persons with the requisite skills
to serve in these positions and it may become increasingly difficult for the
Company to hire such personnel over time. Competition for such personnel is
intense, particularly in the San Francisco Bay Area where the Company maintains
its headquarters and principal operations, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
failure to attract or retain such persons would materially adversely affect the
Company's business, financial condition and results of operations.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED
RESULTS OF OPERATIONS The Company prepares its financial statements to conform
with generally accepted accounting principles, or GAAP. These principles are
subject to interpretation by the American Institute of Certified Public
Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on the Company's reported results and may even affect its
reporting of transactions completed before a change is announced.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in
Financial Statements." The Company implemented the provisions of SAB 101
effective January 1, 2000. The Company previously recognized revenue from the
sales of its products generally upon shipment, which usually preceded
installation and final customer acceptance, provided that final customer
acceptance and collection of the related receivable were probable. Effective
January 1, 2000, the Company changed its method of accounting for product sales
to recognize such revenues when the contractual obligation for installation has
been satisfied, or when installation is substantially complete, and customer
acceptance provisions have lapsed, provided collection of the related receivable
are probable. The Company believes the change in accounting principle is
preferable based on guidance provided in SAB 101. The cumulative effect of this
change in accounting principle, $18,883,000 (or $0.89 per share, basic and
diluted) was reported as a charge to operations in the quarter ended March 31,
2000.
The cumulative effect of the change in accounting principle includes system
revenue, cost of sales and certain expenses, including warranty and commission
expenses, which were recognized when both installation and customer acceptance
provisions were satisfied, subsequent to January 1, 2000.
Accounting policies affecting many other aspects of our business, including
rules relating to derivatives, financial instruments, purchase and
pooling-of-interests accounting for business combinations, revenue recognition,
in-process research and development charges, employee stock purchase plans and
stock option grants, have recently been revised or are under review. Changes to
those rules or the questioning of current practices may have a material adverse
effect on the Company's reported financial results or on the way it conducts
business. In addition, the Company's preparation of financial statements in
accordance with GAAP requires that it make estimates and assumptions that affect
the recorded amounts of assets and liabilities, disclosure of those assets and
liabilities at the date of the financial statements and the recorded amounts of
expenses during the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to the Company's estimates
and could impact its future operating results.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, licensing agreements, Bylaws and Delaware law may discourage
certain transactions involving a change in control of the Company. In addition
to the foregoing, the Company's classified board of directors, the shareholdings
of the Company's officers, directors and persons or entities that may be deemed
affiliates and the ability of the Board of Directors to issue "blank check"
preferred stock without further stockholder approval
16
could have the effect of delaying, deferring or preventing a change in control
of the Company and may adversely affect the voting and other rights of holders
of Common Stock.
VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's operating results, a shortfall in revenue or earnings, changes in
analysts' expectations, sales of securities of the Company into the marketplace,
general conditions in the semiconductor and magnetic recording head industries
or the worldwide or regional economies, an outbreak of hostilities,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks and
semiconductor capital equipment stocks in particular, including the Company's,
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. There can be no assurance that
the market price of the Company's Common Stock will not continue to experience
significant fluctuations in the future, including fluctuations that may be
unrelated to the Company's performance.
Among other determinants, the market price of the Company's stock has a
major bearing on the number of stock options outstanding that are included in
the weighted-average shares used in determining the Company's net income (loss)
per share. During periods of extreme volatility, the impact of higher stock
prices can have a material dilutive effect on the Company's net income (loss)
per share (diluted).
CALIFORNIA ENERGY CRISIS The Company's headquarters and principal
operations are located in the San Francisco Bay Area of California. California
has recently found itself in a utility crisis caused, in part, by a lack of
affordable power sources and the financial instability of several of its primary
providers. The San Francisco Bay Area has undergone several periods of "rolling
blackouts", a technique used by the Company's power provider to conserve its
resources. The Company's operations have been temporarily halted on at least one
occasion as a result of these conservation measures. Additionally, the Company
has recently been notified of, and is presently experiencing, significantly
higher utility rates. Additional suspensions of the Company's operations or
increases in utility rates could result in materially higher costs and lost
revenues, either of which would materially adversely impact the Company's
business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company maintains its headquarters and manufacturing operations in San
Jose, California in three leased facilities, totaling approximately 194,000
square feet, which contain general administration and finance, marketing and
sales, customer service and support, manufacturing and research, development,
and engineering. Additionally, the company leases approximately 65,000 square
feet in Wilmington, Massachusetts for its reduction lithography product lines,
which contain manufacturing, research, and development, engineering and general
administration. The leases for these facilities expire at various dates from
February 2002 to March 2010. The Company also leases four sales and support
offices in the United States in Phoenix, Arizona; Allentown, Pennsylvania;
Austin, Texas; and Richardson, Texas under leases with terms expiring between
one and three years. The Company also maintains offices in Taiwan, Philippines,
Japan, Korea, and the United Kingdom, with terms expiring between one month and
fifteen years. The Company believes that its existing facilities will be
adequate to meet its currently anticipated requirements and that suitable
additional or substitute space will be available as needed.
17
ITEM 3. LEGAL PROCEEDINGS
The Company is presently engaged in two patent infringement lawsuits. The
first involves claims by the Company that ASML and Canon infringe upon a Company
owned patent relating to scanning photolithography. Discovery in this case is at
an early stage and the potential for a favorable outcome is uncertain at this
time. The second is a suit brought by Cannon against the Company alleging
infringement of certain of Canon's patents. This case was filed after the
Company's case against Canon and is also in an early stage. The Company's
potential liability in this case, if any, is also uncertain at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2000, the executive officers of the Company, who are
appointed by and serve at the discretion of the Board of Directors, were as
follows:
NAME AGE POSITION WITH THE COMPANY
---- -------- -------------------------
Arthur W. Zafiropoulo 61 Chairman of the Board of Directors and Chief Executive
Officer
Daniel H. Berry 55 President and Chief Operating Officer
Bruce R. Wright 52 Senior Vice President, Finance, Chief Financial Officer
and Secretary
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal Technology Corporation ("General Signal") and, since March 1993,
has served as Chief Executive Officer and Chairman of the Board. Additionally,
Mr. Zafiropoulo served as President of the Company from March 1993 to
March 1996, resumed the position of President of the Company in May 1997 and
served in this capacity until April 1999. Between September 1990 and
March 1993, he was President of the Predecessor. From February 1989 to
September 1990, Mr. Zafiropoulo was President of General Signal's Semiconductor
Equipment Group International, a semiconductor equipment company. From
August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive
Officer of Drytek, Inc., a plasma dry-etch company that he founded in
August 1980, and which was later sold to General Signal in 1986. From July 1987
to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor
equipment manufacturer, which is a unit of General Signal. Mr. Zafiropoulo is a
director of SEMI (Semiconductor Equipment and Materials International), an
international trade association representing the semiconductor, flat panel
display equipment and materials industry; Semi/Sematech, which represents
majority United States-owned and controlled suppliers of equipment, materials
and services to the semiconductor manufacturing industry; Advanced Energy
Industries, Inc., a leading manufacturer of power conversion and control
systems; and Intelligent Reasoning Systems, Inc., a provider of optical
inspection tools which utilize artificial intelligence software for Printed
Wiring Assemblies (PWA) and High-Density Interconnect (HDI) markets.
Mr. Berry has served as Chief Operating Officer and President of the Company
since April 1999. Between June 1998 and April 1999, Mr. Berry was the Chief
Operating Officer and Executive Vice President of the Company. Between
March 1993 and June 1998, he served as Senior Vice President, Sales and Service
of the Company. Between December 1990 and March 1993, he served as Vice
President, Sales and Service of the Predecessor. From November 1989 to
December 1990, Mr. Berry was director of international operations for General
Signal's Semiconductor Equipment Group
18
International, a semiconductor equipment company. From July 1976 to
November 1989, he held various management positions including director of
marketing for optical lithography, at Perkin-Elmer Corporation, a semiconductor
equipment manufacturer. Prior to Perkin-Elmer, Mr. Berry spent nine years at
Bell Laboratories, Murray Hill, New Jersey, working on various optical and
lithography development projects. Since December 1998, Mr. Berry has served as a
director of Rudolph Technologies, Inc. Flanders, New Jersey, a manufacturer of
precision film metrology instruments for semiconductor markets.
Mr. Wright has served as Senior Vice President, Finance, Chief Financial
Officer and Secretary of the Company since June 1, 1999. Before he joined the
Company, from May 1997 to May 1999, Mr. Wright served as Executive Vice
President, Finance and Chief Financial Officer of Spectrian Corporation. From
November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance
and Administration, and Chief Financial Officer of Tencor Instruments until its
acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor
Corporation, and from December 1991 through October 1994, Mr. Wright was Vice
President and Chief Financial Officer of Tencor Instruments.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for the periods indicated, the range of high
and low closing sale prices of the Company's Common Stock, as reported by the
National Association of Securities Dealers, Inc.'s Automated Quotation System:
FISCAL 2000--FISCAL QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------- -------- -------- ------------ -----------
Market Price: (1) High........................... $18.0000 $16.5625 $19.3750 $27.2500
Low............................... $13.0000 $11.3750 $14.6875 $14.8125
FISCAL 1999--FISCAL QUARTER ENDED
- -------------------------------------------------
Market Price: (1) High........................... $20.6250 $15.4688 $15.0625 $19.4375
Low............................... $13.6875 $12.9375 $12.5000 $12.7500
- ------------------------
(1) The Company's Common Stock is traded on the Nasdaq National Market(r) system
under the symbol UTEK. The market prices per share represent the highest and
lowest closing prices for the Company's Common Stock on the Nasdaq National
Market during each fiscal quarter. As of December 31, 2000, the Company had
approximately 619 stockholders of record.
The Company's fiscal quarters in 2000 ended on April 1, 2000, July 1, 2000,
September 30, 2000 and December 31, 2000, and the Company's fiscal quarters in
1999 ended on April 3, 1999, July 3, 1999, October 2, 1999, and December 31,
1999, respectively. For convenience of presentation, the Company's 2000 fiscal
quarters have been shown as ending on March 31, 2000, June 30, 2000,
September 30, 2000 and December 31, 2000, and the Company's 1999 fiscal quarters
have been shown as ending on March 31, 1999, June 30, 1999, September 30, 1999
and December 31, 1999.
The Company has not paid cash dividends on its Common Stock since inception,
and its Board of Directors presently plans to reinvest the Company's earnings in
its business. Accordingly, it is anticipated that no cash dividends will be paid
to holders of Common Stock in the foreseeable future.
20
ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE DATA 2000**** 1999 1998*** 1997** 1996 1995 1994 1993*
- ----------------------------------- --------- --------- --------- -------- -------- -------- -------- --------
OPERATIONS:
Net sales........ $ 146,655 $ 113,123 $ 81,457 $147,349 $193,508 $157,831 $ 91,344 $ 54,136
Gross profit (loss)... 57,667 44,420 (1,319) 77,678 104,893 82,288 46,037 26,683
Gross profit (loss) as a percentage
of net sales... 39% 39% (2)% 53% 54% 52% 50% 49%
Operating income (loss)... $(11,171) $(11,213) $(70,426) $ 18,001 $ 46,678 $ 31,782 $ 15,291 $ 6,833
Income (loss) before income taxes
(benefit) and cumulative effect
of a change in accounting
principle...... 12,159 (4,168) (64,126) 25,094 52,707 36,170 16,445 6,689
Pre-tax income (loss) as a
percentage of net sales... 8% (4)% (79)% 17% 27% 23% 18% 12%
Income taxes (benefit)... $ 2,433 $ -- $ (6,182) $ 7,528 $ 17,396 $ 11,936 $ 5,426 $ 2,566
Income (loss) before cumulative
effect of a change in accounting
principle...... 9,726 (4,168) (57,944) 17,566 35,311 24,234 11,019 4,123
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements"... (18,883) -- -- -- -- -- -- --
Net income (loss)... (9,157) (4,168) (57,944) 17,566 35,311 24,234 11,019 4,123
Income (loss) before cumulative
effect of a change in accounting
principle per share--basic... $ 0.46 $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements" per
share--basic... $ (0.89) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 N/A
Net income (loss) per
share--basic... $ (0.43) $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A
Number of shares used in per share
computation--basic... 21,236 21,279 20,958 20,553 20,079 18,425 16,293 N/A
Income (loss) before cumulative
effect of a change in accounting
principle per share--diluted... $ 0.46 $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements" per
share--diluted... $ (0.89) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 N/A
Net income (loss) per
share--diluted... $ (0.43) $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A
Number of shares used in per share
computation--diluted... 21,236 21,279 20,958 21,681 21,271 20,154 16,917 N/A
BALANCE SHEET:
Cash, cash equivalents and
short-term investments... $ 163,681 $ 143,544 $ 146,107 $164,349 $167,409 $161,356 $ 50,246 $ 26,242
Working capital... 151,434 163,601 166,417 223,226 212,684 176,174 69,368 32,977
Total assets..... 264,069 236,808 245,935 300,001 280,772 245,428 104,789 56,381
Long-term obligations, less current
portion........ -- -- -- -- -- -- 400 800
Stockholders' equity... 194,257 204,214 210,151 263,632 239,947 199,658 80,027 38,091
OTHER DATA:
Return on average equity... (5)% (2)% (24)% 7% 16% 17% 19% 18%
Book value per common share
outstanding.... $ 9.13 $ 9.55 $ 9.96 $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00
Current ratio.... 3.18 6.06 5.81 7.60 6.40 4.94 3.93 2.89
Long term debt to equity ratio... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02
Capital expenditures... $ 18,815 $ 6,948 $ 9,510 $ 9,337 $ 7,849 $ 0 $ 0 $ 2,752
Income tax/benefit as percentage of
pre-tax income/loss... N/C 0% 10% 30% 33% 33% 33% 38%
IN THOUSANDS, EXCEPT PER SHARE DATA 1992*
- ----------------------------------- --------
OPERATIONS:
Net sales........ $ 35,309
Gross profit (loss)... 17,548
Gross profit (loss) as a percentage
of net sales... 50%
Operating income (loss)... $ 2,220
Income (loss) before income taxes
(benefit) and cumulative effect
of a change in accounting
principle...... 2,089
Pre-tax income (loss) as a
percentage of net sales... 6%
Income taxes (benefit)... $ 785
Income (loss) before cumulative
effect of a change in accounting
principle...... 1,304
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements"... --
Net income (loss)... 1,304
Income (loss) before cumulative
effect of a change in accounting
principle per share--basic... N/A
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements" per
share--basic... N/A
Net income (loss) per
share--basic... N/A
Number of shares used in per share
computation--basic... N/A
Income (loss) before cumulative
effect of a change in accounting
principle per share--diluted... N/A
Cumulative effect on prior years of
SAB 101 "Revenue Recognition in
Financial Statements" per
share--diluted... N/A
Net income (loss) per
share--diluted... N/A
Number of shares used in per share
computation--diluted... N/A
BALANCE SHEET:
Cash, cash equivalents and
short-term investments... $ 176
Working capital... 6,307
Total assets..... 16,765
Long-term obligations, less current
portion........ --
Stockholders' equity... 8,323
OTHER DATA:
Return on average equity... 15%
Book value per common share
outstanding.... N/A
Current ratio.... 1.76
Long term debt to equity ratio... 0.00
Capital expenditures... $ 972
Income tax/benefit as percentage of
pre-tax income/loss... 38%
21
QUARTERLY DATA
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA 1ST 2ND 3RD 4TH
- ---------------------------------------------- -------- -------- -------- --------
2000****
Net sales................................................... $ 29,900 $33,528 $42,216 $41,011
Gross profit................................................ 9,413 12,283 17,020 18,951
Operating income (loss)..................................... (4,735) (9,494) (385) 3,443
Income (loss) before income taxes and cumulative effect of a
change in accounting principle............................ (3,023) (7,822) 17,504 5,500
Income taxes (benefit)...................................... -- -- 2,433 --
Income (loss) before cumulative effect of a change in
accounting principle...................................... (3,023) (7,822) 15,071 5,500
Cumulative effect on prior years of SAB 101 "Revenue
Recognition in Financial Statements"...................... (18,883) -- -- --
Net income (loss)........................................... (21,906) (7,822) 15,071 5,500
Income (loss) before cumulative effect of a change in
accounting principle per share--basic..................... $ (0.14) $ (0.37) $ 0.71 $ 0.26
Cumulative effect on prior years of SAB 101 "Revenue
Recognition in Financial Statements" per share--basic..... $ 0.86 $ 0.00 $ 0.00 $ 0.00
Net income (loss) per share--basic.......................... $ (1.02) $ (0.37) $ 0.71 $ 0.26
Number of shares used in per share computation--basic....... 21,442 21,178 21,093 21,233
Income (loss) before cumulative effect of a change in
accounting principle per share--diluted................... $ (0.14) $ (0.37) $ 0.70 $ 0.25
Cumulative effect on prior years of SAB 101 "Revenue
Recognition in Financial Statements" per share--diluted... $ (0.88) $ 0.00 $ 0.00 $ 0.00
Net income (loss) per share--diluted........................ $ (1.02) $ (0.37) $ 0.70 $ 0.25
Number of shares used in per share computation--diluted..... 21,442 21,178 21,669 22,056
1999
Net sales................................................... $ 25,779 $29,284 $30,413 $27,647
Gross profit................................................ 8,721 11,295 13,088 11,316
Operating loss.............................................. (4,377) (2,725) (1,195) (2,916)
Net income (loss)........................................... (2,529) (1,074) 434 (999)
Net income (loss) per share--basic.......................... $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--basic....... 21,124 21,264 21,344 21,386
Net income (loss) per share--diluted........................ $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--diluted..... 21,124 21,264 21,740 21,386
- ------------------------
* ULTRATECH STEPPER, INC. (THE "COMPANY") ACQUIRED CERTAIN ASSETS AND
LIABILITIES OF THE ULTRATECH STEPPER DIVISION (THE "PREDECESSOR") OF
GENERAL SIGNAL TECHNOLOGY CORPORATION ("GENERAL SIGNAL") ON MARCH 8,
1993. THE AMOUNTS, AS PRESENTED ABOVE, REFLECT HISTORICAL RESULTS AND DO
NOT INCLUDE PRO FORMA ADJUSTMENTS, WHICH MAY HAVE BEEN INCURRED AS AN
INDEPENDENT COMPANY. NET INCOME PER SHARE FOR EACH OF THE TWO YEARS IN
THE PERIOD ENDED DECEMBER 31, 1993 IS NOT PRESENTED BECAUSE OF A LACK OF
COMPARABILITY BETWEEN THE CAPITAL STRUCTURE OF THE COMPANY AND THE
PREDECESSOR.
** RESULTS OF OPERATIONS IN 1997 INCLUDE A CHARGE OF $3,619,000, OR $0.12
PER SHARE--BASIC AND DILUTED, TO REFLECT RESEARCH AND DEVELOPMENT COST
INCURRED IN THE FIRST QUARTER OF 1997 IN CONJUNCTION WITH THE
ACQUISITION OF THE ASSETS OF LEPTON INC., AND A SPECIAL CHARGE OF
$3,450,000, OR $0.12 PER SHARE--BASIC, $0.11 PER SHARE--DILUTED, TO
ACCOUNT FOR TERMINATION OF THE COMPANY'S JAPAN DISTRIBUTOR IN THE FOURTH
QUARTER OF 1997.
*** GROSS PROFIT (LOSS) IN 1998 INCLUDES SPECIAL CHARGES OF $15,231,000 AND
$11,177,000 IN THE THIRD AND FOURTH QUARTERS, RESPECTIVELY, RELATING
PRIMARILY TO THE WRITE-DOWN OF INVENTORIES AND PROVISIONS FOR ESTIMATED
LOSSES ON PURCHASE COMMITMENTS. RESULTS OF OPERATIONS IN 1998 INCLUDE A
CHARGE OF $12,566,000 IN THE SECOND QUARTER, OR $0.60 PER SHARE--BASIC
AND DILUTED, TO REFLECT ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
INCURRED IN CONJUNCTION WITH THE ACQUISITION OF ISI, AND A RELATED
ADJUSTMENT TO OPERATIONS OF $7,458,000 IN THE FOURTH QUARTER, OR $0.35
PER SHARE, TO REDUCE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AS A
RESULT OF THE FINAL PURCHASE PRICE ALLOCATION. ADDITIONALLY, RESULTS OF
OPERATIONS IN 1998 INCLUDE SPECIAL CHARGES OF $5,775,000 AND $5,400,000
IN THE THIRD AND FOURTH QUARTERS, RESPECTIVELY, REFLECTING PROVISIONS
FOR DOUBTFUL ACCOUNTS AND LEASES RECEIVABLE, PROVISIONS FOR SALES
RETURNS AND ALLOWANCES AND COSTS ASSOCIATED WITH A REDUCTION IN THE
COMPANY'S WORKFORCE.
22
**** OPERATING INCOME (LOSS) IN 2000 INCLUDES SPECIAL CHARGES OF $7,984,000
AND $1,686,000 IN THE SECOND AND THIRD QUARTERS, RESPECTIVELY, RELATING
TO THE SHUTDOWN OF THE COMPANY'S ULTRABEAM UNIT. NET INCOME (LOSS) IN
2000 INCLUDES A NON-OPERATING GAIN OF $15,983,000 IN THE THIRD QUARTER,
RELATING TO THE SALE OF LAND AND INCOME TAXES OF $2,433,000 RELATING TO
THE SALE OF LAND AND OTHER SPECIAL ITEMS. ADDITIONALLY, NET INCOME IN
2000 INCLUDES A CHARGE OF $18,883,000 IN THE FIRST QUARTER RELATED TO
THE CUMULATIVE EFFECT ON PRIOR YEARS OF THE APPLICATION OF SAB 101
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS."
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Certain of the statements contained in this report may be considered
forward-looking statements under Section 21E of the Securities Exchange Act of
1934, as amended, that may involve a number of risks and uncertainties. In
addition to the factors discussed herein, factors that could cause actual
results to differ materially include the following: cyclicality in the Company's
served markets; delays, deferrals and cancellations of orders by customers; high
degree of industry competition; lengthy sales cycles, including the timing of
system acceptances; manufacturing inefficiencies and the ability to volume
produce systems; mix of products sold; the ability and resulting costs to
attract or retain sufficient personnel to achieve the Company's targets for a
particular period; inventory obsolescence; integration and development of
Verdant operations; failure to develop and commercialize the Company's reduction
stepper products; timing and degree of success of technologies licensed to
outside parties; sole or limited sources of supply; international sales;
customer concentration; rapid technological change and the importance of timely
product introductions; dependence on key personnel; future acquisitions; changes
to financial accounting standards; intellectual property matters; environmental
regulations; effects of certain anti-takeover provisions; volatility of stock
price; and the other risk factors listed in this filing and other Company
filings with the SEC. The Company undertakes no obligation to update any of its
disclosures to reflect such future events.
Due to these and additional factors, certain statements, historical results
and percentage relationships discussed below will not necessarily be indicative
of the results of operations for any future period.
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits
(ICs), including advanced packaging processes, thin film heads (TFHs) for disk
drives and micromachined components. The Company supplies step-and-repeat
systems based on one-to-one and reduction optical technologies to customers
located throughout North America, Europe, Japan and the rest of Asia. These
products range from low-cost systems for high-volume manufacturing to advanced
systems for cost-effective production of leading-edge devices and for research
and development applications.
23
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated Solutions,
Inc. ("ISI"), a privately held manufacturer of i-line and deep ultra-violet
reduction lithography systems (the "Acquisition") for approximately
$19.2 million in cash, $2.6 million in transaction costs and the assumption of
certain liabilities.
In April 2000, the Company reached a decision to shut down its UltraBeam
operations. As a result of this decision, the Company recognized a charge of
$9.7 million, or $0.46 per share (diluted).
In June 2000, the Company settled litigation it had initiated against Nikon
Inc. ("Nikon"). In conjunction with the settlement agreement, the Company may
recognize licensing revenue in future quarters consistent with the terms of
settlement. The Company is presently proceeding with related actions against
Canon Inc. ("Canon") and ASM Lithography, Ltd. ("ASM"). There can be no
assurance that the Company will prevail in those actions.
In July 2000, the Company entered into an agreement with Applied Materials,
Inc. ("Applied Materials") under which Applied Materials has licensed the laser
thermal processing technology of the Company's Verdant Technologies Division.
Additionally, Ultratech develops, manufactures and markets its own laser thermal
processing systems used in the development and future production of advanced
devices.
In September 2000, the Company exercised an option it held to purchase 6.34
acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of
$16.0 million before related income taxes, or $0.75 per share (diluted).
The Applied Materials and Nikon agreements and the land sale resulted in
special income tax charges during the year ended December 31, 2000 of
$2.4 million, or $0.11 per share (diluted).
The Company previously recognized revenue from the sales of its systems
generally upon shipment, which usually preceded installation and final customer
acceptance, provided that final customer acceptance and collection of the
related receivable were probable. Effective January 1, 2000, the Company changed
its method of accounting for system sales to recognize such revenues when the
contractual obligations for installation and customer acceptance have been
satisfied, provided collections of the related receivable are probable. The
Company believes the change in accounting principle is preferable based on
guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements." In conjunction with this change in
accounting method, the Company recognized a charge in the quarter ended
March 31, 2000 of $18.9 million, or $0.89 per share (diluted), representing the
cumulative effect on prior years of the application of SAB 101.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and most likely will continue to fluctuate significantly in the future. Factors
that have caused operating results to fluctuate significantly in the past and
most likely will continue to cause fluctuations in the future include those
mentioned above as well as: inventory and open purchase commitment reserve
positions; concentration of credit risk; lengthy development cycles for new
products; market acceptance of new products and enhanced versions of the
Company's existing products; delayed shipments to customers due to customer
configuration changes and other factors; acquisition activities requiring
issuance of additional equity or debt securities, the expenditure of cash and
the devotion of substantial management resources; lengthy manufacturing cycles
for the Company's products; the timing of new product announcements and releases
by the Company or its competitors; manufacturing inefficiencies associated with
the startup of new product introductions; patterns of capital spending by
customers; product discounts; changes in pricing by the Company, its competitors
or suppliers; shutdown of operations; sale of assets; outcome
24
of litigation; political and economic instability throughout the world, in
particular the Asia/Pacific region; changes in sales or distribution agreements;
natural disasters; regulatory changes; and business interruptions related to the
Company's occupation of its facilities, including related to the recent energy
crisis in California, where the Company's headquarters and principal operations
are located.
The Company's gross profit as a percentage of sales has been and most likely
will continue to be significantly affected by a variety of factors, including
the mix of products sold; product discounts and competition in the Company's
targeted markets; inventory and open purchase commitment reserve provisions; the
rate of capacity utilization; nonlinearity of shipments during the quarter; the
introduction of new products, which typically have higher manufacturing costs
until manufacturing efficiencies are realized and are typically discounted more
than existing products until the products gain market acceptance; the percentage
of international sales, which typically have lower gross margins than domestic
sales principally due to higher field service and support costs; and the
implementation of subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.4 million for the Company's 1X steppers, and
$1.5 million to more than $6.0 million for the Company's reduction steppers. As
a result of these high sale prices, the timing of recognition of revenue from a
single transaction has had and most likely will continue to have a significant
impact on the Company's net sales and operating results for any particular
period.
The Company's backlog at the beginning of a period typically does not
include all of the sales needed to achieve the Company's sales objectives for
that period. In addition, orders in backlog are subject to cancellation,
shipment or customer acceptance delays, and deferral or rescheduling by a
customer with limited or no penalties. Consequently, the Company's net sales and
operating results for a period have been and will continue to be dependent upon
the Company obtaining orders for systems to be shipped and accepted in the same
period in which the order is received. The Company's business and financial
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
and customer acceptance during a particular period. Furthermore, a substantial
portion of the Company's shipments has historically been realized near the end
of each quarter. Delays in installation and customer acceptance due, for
example, to the inability of the Company to successfully demonstrate the
agreed-upon specifications or criteria at the customer's facility, or to the
failure of the customer to permit installation of the system in the agreed upon
time, may cause net sales in a particular period to fall significantly below the
Company's expectations, which may materially adversely affect the Company's
operating results for such period. Additionally, the failure to receive
anticipated orders or delays in shipments due, for example, to reschedulings,
delays, deferrals or cancellations by customers, additional customer
configuration requirements, or to unexpected manufacturing difficulties or
delays in deliveries by suppliers due to their long production lead times or
otherwise, have caused and may continue to cause net sales in a particular
period to fall significantly below the Company's expectations, which has and
could continue to materially adversely affect the Company's operating results
for such period. In particular, the long manufacturing cycles of the Company's
Saturn Wafer Stepper-Registered Trademark-, and the Company's reduction stepper
product offerings, and the long lead time for lenses and other materials, could
cause shipments of such products to be delayed from one quarter to the next,
which could materially adversely affect the Company's financial condition and
results of operations for a particular quarter.
The Company's business has in prior years been subject to seasonality,
although the Company believes such seasonality has been masked in recent years
by cyclical trends within the semiconductor and thin film head industries. In
addition, the need for continued expenditures for research and development,
capital equipment, ongoing training and worldwide customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in a particular period if the Company fails to achieve its
net sales goals for the period.
25
NET SALES
2000 VS. 1999
Net sales consist of revenues from system sales, spare parts sales, service
and licensing of technologies. For the year ended December 31, 2000, net sales
were $146.7 million, an increase of 30% as compared with net sales of
$113.1 million for 1999. System sales increased 35%, to $110.2 million, as a
result of a 15% increase in unit shipments, a product mix shift toward
higher-priced systems and an increase in weighted-average selling prices. The
year-over-year improvement in system sales was primarily attributable to
improved conditions within the semiconductor industry, which have resulted in
higher capital spending levels. Revenues from services declined 2.2%, to
$17.3 million, primarily as a result of fewer reduction steppers under service
contract. Revenues from licensing and licensing support increased to
$6.0 million, from $0 in 1999, as a result of licensing agreements entered in
2000. Spare part sales declined 6%, to 13.2 million, primarily as a result of
fewer system upgrades.
Approximately 25% of the Company's net sales for the year ended
December 31, 2000 resulted from systems shipped in 1999. At December 31, 2000,
the Company had approximately $15.7 million of deferred revenue resulting from
systems shipped but not yet installed and accepted, as compared with
$36.7 million at December 31, 1999. All of the revenue deferred at December 31,
1999 was recognized during 2000. Total Company backlog, including systems
shipped but not yet installed and accepted, was approximately $106.8 million as
of December 31, 2000, as compared with $65.4 million as of December 31, 1999.
The net result of shipments and acceptances during the year ended December 31,
2000 was a net reduction in deferred product and service income of approximately
$14.4 million (after giving effect to the cumulative adjustment resulting from
the implementation of SAB 101). During the year ended December 31, 2000,
deferred license income increased by $22.4 million, as a result of proceeds from
licensing and licensing support agreements entered into in 2000. Deferred income
relative to the Company's products is recognized upon installation and customer
acceptance of the systems. Deferred income relative to service revenue is
recognized over the life of the related service contract. Deferred income
relative to the Company's licensing activities is recognized over the longer of
the estimated useful life of the licensed technologies, or the period of any
technology transfer support arrangements.
The Company has substantially changed its operations to implement SAB 101.
The Company estimates that its sales for the year ended December 31, 2000 would
have approximated $126 million under its previous method of accounting for
revenue recognition. However, the Company believes that estimates of its system
revenue under its prior method of accounting are not indicative of results that
would have been achieved had the Company not substantially changed its
operations to implement SAB 101.
On a market application basis, system sales to the semiconductor industry
were $96.8 million for the year ended December 31, 2000, an increase of 58% as
compared with system sales of $61.1 million in 1999. Sales to the microsystems
market, which includes sales to thin film head manufacturers, were $13.4
million, a decline of 33% as compared with sales of $20.2 million in 1999. The
Company believes that this decline was primarily attributable to the continued
excess capacity situation within the thin film head industry. The increased
sales to the semiconductor industry were primarily a result of improved
conditions within the industry and higher sales of the Company's Saturn Spectrum
3 Wafer Stepper, which addresses the market for advanced packaging of integrated
circuits. During the year ended December 31, 2000, the Company recognized
revenue for its first 300mm Saturn Spectrum 3 Wafer Stepper, for advanced
packaging applications, and its first Verdant laser thermal processing system,
sold for research and development applications. Additionally, during 2000, the
Company recognized revenue for its first 157nm XLS reduction stepper system,
sold for research and development applications. Partially offsetting this
increase was a decline in unit sales of the Company's Model 1700, which serves
the market for back-end thin film head production. The thin film head
26
industry is currently experiencing a period of excess capacity, and the Company
presently anticipates that this trend will continue for at least the next
several quarters, which will continue to materially adversely impact the
Company's results of operations.
For the year ended December 31, 2000, international net sales were
$79.0 million, or 54% of total net sales, as compared with $60.0 million, or 53%
of total net sales for 1999. The increase in international sales, in terms of
absolute dollars, was primarily attributable to increased sales of the Company's
Saturn Spectrum 3 to semiconductor companies in Japan and Asia, excluding Japan,
partially offset by lower sales to thin film head customers in Asia, excluding
Japan. The Company anticipates that an increasing percentage of its overall
sales will come from semiconductor manufacturers in Japan and Asia, excluding
Japan, utilizing the Company's systems in the process of advanced semiconductor
packaging. The Company's operations in foreign countries are not generally
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S. dollars.
In Japan, however, orders are typically denominated in Japanese yen. This may
subject the Company to a higher degree of risk from currency fluctuations. The
Company attempts to mitigate this exposure through the use of foreign exchange
contracts; however, there can be no assurance of the success of any such
efforts. International sales expose the Company to a number of additional risks,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products. (See "Additional Risk Factors: International Sales; Japanese Market").
Although the Company's backlog of system orders increased substantially
during the year ended December 31, 2000, the anticipated timing of shipments and
customer acceptances of those orders will require the Company to fill a number
of production slots in the current period in order to meet its near-term sales
targets. Additionally, the Company is presently experiencing an increased level
of customer rescheduling of deliveries. If the Company is unsuccessful in its
efforts to secure those production orders, or if existing production orders are
delayed or cancelled, its results of operations will be materially adversely
impacted in the near-term. Accordingly, the Company can give no assurance that
it will be able to achieve or maintain its current or prior level of sales.
The Company believes that demand for semiconductors and semiconductor
equipment may currently be experiencing a cyclical downturn. As a result, the
Company may experience lower order booking rates in the near term, relative to
those achieved in 2000, and may experience an increased incidence of order
deferrals, rescheduling and cancellations. Fewer net bookings would result in
lower net sales and gross margin, which would materially adversely impact the
Company's business and results of operations.
The Company presently expects that net sales for the three-month period
ending March 31, 2001 may be substantially higher than net sales in the
comparable period in 2000. However, due to current production limitations,
customer delivery dates and uncertainty as to customer acceptances, the Company
can give no assurance that it will be able to achieve or maintain its current or
prior sales levels.
Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and market
acceptance of the Company's products, there can be no assurance that the Company
will exceed or maintain its current or prior level of net sales for any period
in the future. Additionally, the Company believes that the market acceptance and
volume production of its Saturn Spectrum 3, its XLS advanced reduction steppers
and its 1000 series family of wafer steppers, are of critical importance to its
future financial results. To the extent that these products do not achieve
significant sales due to difficulties involving manufacturing or engineering,
the inability to reduce the current long manufacturing cycles for such products,
competition, excess capacity in the semiconductor on thin film industry,
customer acceptances, or any other reason, the Company's business, financial
condition and results of operations would be materially adversely affected.
27
1999 VS. 1998
For the year ended December 31, 1999, net sales were $113.1 million, an
increase of 39% as compared with net sales of $81.5 million for 1998. The
increase, relative to 1998, was primarily attributable to improved conditions
within the semiconductor industry, which have resulted in higher capital
spending levels, partially offset by lower front-end equipment sales to the thin
film head industry. For the year ended December 31, 1999, the Company's unit
system shipments increased 70%, relative to 1998, while the weighted-average
selling price of all systems sold declined slightly. Service revenue increased
11% for the year ended December 31, 1999, as compared to 1998, primarily as a
result of the acquisition of the product lines and related service business of
ISI in June of 1998. Net sales of spare parts and product upgrades declined 9%
for the year ended December 31, 1999, as compared to 1998.
For the year ended December 31, 1999, international net sales were
$60.0 million, as compared with $38.5 million for 1998, an increase of 56%.
International net sales represented 53% of total net sales for the year ended
December 31, 1999, as compared with 47% for 1998. This year-over-year increase,
in absolute dollars, was primarily attributed to sales to back-end thin film
head manufacturers in Asia, excluding Japan. However, the Company continues to
be cautious in its outlook for the Asian markets.
GROSS PROFIT
2000 VS. 1999
The Company's gross profit as a percentage of net sales, or gross margin,
was 39.3% for the year ended December 31, 2000, as compared with a gross margin
of 39.3% for 1999. On a comparative basis, gross margins were adversely impacted
by a shift in product mix toward the Company's more advanced 1X lithography
systems and reduction steppers, which generally have lower gross margin
percentages than the Company's more mature product lines. Additionally,
comparisons with the prior year were adversely impacted by lower margins on
service revenues and higher inventory reserve requirements. However, these
adverse trends were offset by higher license revenues ($6.0 million in 2000, as
compared with $0 in 1999), higher weighted-average system selling prices and
from manufacturing efficiencies achieved as a result of higher production
levels.
The Company believes that gross profit as a percentage of net sales for the
quarter ending March 31, 2001 may be significantly higher than levels achieved
during the comparable period a year ago, primarily as a result of increased
licensing income, improved product pricing and higher levels of capacity
utilization. However, intense competition in the markets the Company serves may
make it difficult for the Company to increase or maintain its current gross
margin percentages in the near term. The Company is presently increasing
inventory purchases based on current and forecasted demand for its Saturn
Spectrum 3 wafer stepper, its Verdant laser thermal processing system and its
157nm advanced reduction stepper. The purchase of such additional inventories
will result in a higher risk of obsolescence, which may require inventory
write-offs, which would negatively impact gross margins. Additionally, new
products generally have lower gross margins until there is widespread market
acceptance and until production and after-sales efficiencies can be achieved.
Should the Saturn Spectrum 3, Verdant laser thermal processing system or the
Company's reduction stepper offerings, fail to develop or generate significant
market demand, the Company's business, financial condition and results of
operations would be materially adversely affected.
28
1999 VS. 1998
The Company's gross margin was 39.3% for the year ended December 31, 1999,
as compared with a gross loss as a percentage of net sales of (1.6%) for 1998.
In 1998, the Company recognized $26.4 million in special charges related
primarily to the write-down of inventories and provisions for estimated losses
associated with open purchase commitments. These charges were primarily a result
of the Company's lower sales and bookings levels in 1998, revised sales demand
forecasts for 1999 and delays in the production-readiness of the Company's
electron beam lithography system. In addition to the special charges recognized
in 1998, the increase in gross profit as a percentage of net sales in 1999 can
be further attributed to significantly higher capacity utilization; favorable
changes in product mix; and a lower percentage of service revenue relative to
total net sales, which typically has lower standard margins than system sales;
partially offset by lower weighted-average selling prices.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
2000 VS. 1999
The Company's research, development and engineering expenses were
$26.8 million for the year ended December 31, 2000, as compared with
$27.7 million for 1999. This decrease in spending was primarily attributable to
the shutdown of the Company's UltraBeam operations, which occurred early in the
second quarter of 2000, and lower spending on the Company's laser thermal
processing technology, partially offset by higher spending on the Company's
reduction stepper technologies and higher facilities and personnel costs.
The Company continues to invest significant resources in the development and
enhancement of its Verdant laser thermal processing systems and technologies,
together with continuing expenditures for its 1X and reduction optical products
and technologies. The Company presently expects that the absolute dollar amount
of research, development and engineering expenses for the quarter ending
March 31, 2001 may be higher than levels incurred in the comparable period in
2000, as the decline in spending relative to the UltraBeam shutdown is
anticipated to be more than offset by increased investments in the Company's
Verdant and photolithography technologies, together with higher facilities and
personnel costs.
1999 VS. 1998
The Company's research, development and engineering expenses were
$27.7 million for 1999, as compared with $26.7 million for 1998. The Company
continued to invest significant resources in the development and enhancement of
its UltraBeam electron beam lithography system and its Verdant rapid thermal
annealing/laser doping systems and technologies, together with continued
expenditures for its 1X and reduction optical products and technologies.
AMORTIZATION OF GOODWILL
2000 VS. 1999
Amortization of goodwill was $2.1 million for the year ended December 31,
2000, as compared with $1.6 million for the comparable period in 1999. The
additional amortization expense was directly related to intangible assets
purchased in December 1999.
1999 VS. 1998
Amortization of goodwill was $1.6 million for the year ended December 31,
1999, as compared with $1.1 million for the comparable period in 1998. The
additional amortization expense was directly related to a full year of goodwill
amortization relative to the acquisition of ISI. ISI was acquired in June 1998.
29
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2000 VS. 1999
Selling, general and administrative expenses were $30.3 million for the year
ended December 31, 2000, as compared with $26.3 million for the comparable
period in 1999. As a percentage of net sales, selling, general and
administrative expenses declined to 20.6% in 2000, as compared with 23.3% of net
sales for 1999. The increase, in terms of absolute dollars, is primarily
attributable to significant additions to the sales and marketing infrastructure
within the Company and higher facilities and personnel costs, partially offset
by the shutdown of the Company's UltraBeam operations. The Company presently
anticipates that selling, general and administrative expenses for the
three-month period ending March 31, 2001 will increase significantly, relative
to the comparable period in 1999, due primarily to higher anticipated sales,
service and support expenses resulting from an anticipated increase in net sales
and higher facilities and personnel costs.
1999 VS. 1998
Selling, general and administrative expenses were $26.3 million for 1999, as
compared with $25.1 million recorded for 1998. As a percentage of net sales,
selling, general and administrative expenses decreased to 23.3% of net sales in
1999, as compared to 30.8% of net sales in 1998, primarily as a result of higher
net sales and cost containment measures implemented in the second half of 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated Solutions,
Inc., a privately held manufacturer of i-line and deep ultra-violet reduction
lithography systems. As a result, the Company recognized a charge for acquired
in-process research and development ("IPR&D") expense of $5.1 million, or $0.24
per share net of tax benefits, representing products in development stage that
were not considered to have reached technological feasibility and had no
alternative future use.
SHUTDOWN OF OPERATIONS
During the quarter ended June 30, 2000, the Company shut down the operations
of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the quarter ended June 30, 2000 of $8.0 million, or $0.38
per share (diluted). During the quarter ended September 30, 2000, the Company
recognized an additional charge of $1.7 million, or $0.08 per share (diluted),
primarily attributable to revised estimates of amounts to be realized upon the
sale of operating assets. Of the year-to-date total charge of $9.7 million,
approximately $6.8 million related to the disposition of operating and capital
assets, $0.4 million related to termination benefits associated with the
termination of 14 employees, $2.3 million related to facilities and other
non-employee amounts paid for shutdown and $.2 million related to accrued
liabilities still outstanding as of December 31, 2000. There were no significant
revisions to the original termination provisions established by the Company.
SPECIAL CHARGES
Due primarily to the continued downturn in the thin film head and
semiconductor industries, the Company recognized significantly lower sales and
bookings levels during 1998. As a result, the Company significantly reduced its
production demand forecast for 1999 and implemented various cost containment
measures beginning in the third quarter of 1998. During 1998, the Company
recognized special charges in the amount of $26.4 million for the write-down of
excess inventories and provisions for estimated losses on open purchase
commitments. These charges were included in cost of sales.
30
During 1998, the Company recognized charges in the amount of $11.2 million
related to collection uncertainty of certain accounts and leases receivable,
provisions for sales returns and allowances and charges related to a reduction
in the Company's workforce and the consolidation of certain of its facilities.
These charges are included in operating expenses for 1998.
GAIN ON SALE OF LAND
In September 2000, the Company exercised an option it held to purchase 6.34
acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of
$16.0 million, or $0.75 per share (diluted), before related income taxes. In
conjunction with this transaction, the Company had collateralized a loan payable
by the former owner to a third party with securities valued at $5.5 million.
Upon completion of this transaction, the restriction on these securities was
removed.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, which consists primarily of interest income,
was $7.6 million for the year ended December 31, 2000, as compared with $7.4
million for 1999 and $6.7 million for 1998.
INCOME TAX EXPENSE
The Company recognized income taxes of $2.4 million during the year ended
December 31, 2000, or $0.11 per share (diluted). This provision for 2000
consists primarily of foreign withholding taxes, as well as state and federal
minimum taxes. There was no income tax benefit recognized in 1999 on the
Company's pre-tax loss due to uncertainty related to the utilization of its net
operating loss carry-forward. Income taxes (benefit) represented 10% of the loss
before income taxes for 1998. The difference between the rate recognized and the
statutory rate is primarily a result of not recognizing a benefit for the 1998
net operating loss carry-forward and certain deferred tax asset reserves
recognized during 1998.
The Company presently anticipates that it will recognize income tax expense
in 2001, primarily as a result of foreign income taxes and state and federal
minimum taxes. However, the Company believes that the tax rate in 2001 will be
substantially less than the statutory rate, primarily as a result of available
federal net operating loss carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17.2 million for the year
ended December 31, 2000, as compared with $9.4 million provided by operating
activities during 1999. Cash flow generated by operating activities was
primarily attributable to non-cash charges to income of $32.9 million and a net
change in operating assets and liabilities of $9.4 million, partially offset by
the Company's net loss for the year ended December 31, 2000, exclusive of the
non-operating gain on the sale of land, of $25.1 million. Included in both the
net loss and non-cash charges to income for the year ended December 31, 2000 is
an $18.9 million charge the Company took to operations, relating to the
cumulative effect of the implementation of SAB 101 on prior year financial
results.
The Company sells certain of its accounts receivable in order to mitigate
its credit risk and to enhance cash flow. Sales of accounts receivable typically
precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product, and
from time-to-time the Company has repurchased certain accounts and leases
receivable in accordance with these terms. At December 31, 2000, $5.6 million of
sold accounts receivable were outstanding to third party financial institutions.
The Company may continue to attempt to mitigate the impact of extended payment
terms and non-linear
31
shipments by selling a substantial portion of its accounts receivable in the
future. There can be no assurance that this financing will be available on
reasonable terms, or at all.
The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working capital.
In particular, the Company is increasing its purchases of inventory, long-term
demonstration inventory, long-term prepaid inventory and capital equipment for
its Saturn Spectrum 3 wafer stepper, Verdant laser thermal processing system and
its XLS 157nm advanced reduction stepper. Higher inventory and capital asset
levels may increase the risk of inventory obsolescence and asset impairment,
which may adversely impact the Company's results of operations. In conjunction
with its XLS 157nm system, the Company anticipates that it will be required to
make advanced payments related to lens production of approximately $2.0 million
during the quarter ending March 31, 2001. The Company intends to characterize
this expenditure as a long-term prepayment of inventories.
During the year ended December 31, 2000, net cash used in investing
activities was $6.6 million, primarily attributable to capital expenditures of
$18.4 million and a net increase in available-for-sale securities of
$9.8 million, partially offset by the proceeds from the sale of land of
$16.1 million and the release of restricted cash of $5.5 million. The capital
expenditures were primarily attributable to the relocation of certain of the
Company's facilities and further expansion in San Jose, California.
Cash used in financing activities was $2.2 million during the year ended
December 31, 2000, primarily attributable to the Company's previously announced
stock buyback. As of December 31, 2000, the Company had repurchased 475,000
shares of its common stock for $6.9 million. The Company has authorized the
repurchase of up to 2.0 million shares of its common stock at prevailing market
prices. The Company intends to finance the repurchase of its common stock from
its existing cash, cash equivalents and short term investments. During the year
ended December 31, 2000 the Company raised $4.0 million from stock issued
pursuant to the Company's stock option and employee stock purchase plans and
raised an additional $0.7 million from borrowings under its existing line of
credit pursuant to international hedging activities.
At December 31, 2000, the Company had working capital of $151.4 million. The
Company's principal source of liquidity at December 31, 2000 consisted of $163.7
million in cash, cash equivalents and short-term investments.
The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment; sales, service,
training and support capabilities; investments in systems, procedures and
controls; and expansion of operations and research and development, among many
other items. The Company expects that anticipated cash flows from operations and
its cash, cash equivalents and short-term investments will be sufficient to meet
the Company's cash requirements for the next twelve months. Beyond the next
twelve months, the Company may require additional equity or debt financing to
address its working capital or capital equipment needs.
Additionally, the Company may in the future pursue additional acquisitions
of complementary product lines, technologies or businesses. Future acquisitions
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, which could materially
adversely affect any Company profitability. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies; the diversion of
management's attention from other business concerns; risks of entering markets
in which the Company has no or limited direct experience; and the potential loss
of key employees of the acquired company. In the event the Company acquires
product lines, technologies or businesses which do not complement the Company's
business, or which otherwise do not enhance the Company's sales or operating
results,
32
the Company may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that any such
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business or operating results.
Additionally, the Company may experience renewed interest in its equipment
leasing program and this may result in the further formation of significant
long-term receivables, which, in turn, would require the use of substantial
amounts of working capital. The formation of significant long-term receivables
and the granting of extended customer payment terms exposes the Company to
additional risks, including potentially higher customer concentration and higher
potential operating expenses relating to customer defaults. If reserves on lease
receivables were required in the future, the Company's business, financial
condition and results of operations could be materially adversely affected.
To the extent that the Company's financial resources are insufficient to
fund the Company's activities, additional funds will be required. There can be
no assurance that additional financing will be available on reasonable terms, or
at all.
ADOPTION OF THE EURO
The introduction of a European single currency, the Euro, was initially
implemented as of January 1, 1999, and the transition period will continue
through Jan 1, 2002. As of December 31, 2000, the adoption of the Euro has not
had a material effect on the Company's foreign exchange and hedging activities
or the Company's use of derivative instruments. While the Company will continue
to evaluate the impact of the Euro introduction over time, based on currently
available information, management does not believe that the introduction of the
Euro currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK:
The Company's exposure to market risk due to potential changes in interest
rates, relates primarily to the Company's investment portfolio, which consisted
primarily of fixed interest rate instruments as of December 31, 2000. The
Company maintains a strict investment policy, which is designed to ensure the
safety and preservation of its invested funds by limiting market risk and the
risk of default.
33
The following table presents the hypothetical changes in fair values in the
financial instruments held by the Company at December 31, 2000, that are
sensitive to changes in interest rates. These instruments are comprised of cash,
cash equivalents, short-term investments and restricted long-term investments.
These instruments are not leveraged and are held for purposes other than
trading. The modeling techniques used measure the change in fair values arising
from selected hypothetical changes in interest rates. Assumed market value
changes to the Company's portfolio reflects immediate hypothetical parallel
shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and
150 BPS over a twelve-month time horizon. Beginning fair values represent the
market principal plus accrued interest for financial reporting purposes at
December 31, 2000. Ending fair values comprise the estimated market principal
plus accrued interest at a twelve-month time horizon, and assumes no change in
the investment principal or portfolio mix. This table estimates the fair value
of the portfolio at a twelve-month time horizon:
NO
VALUATION OF SECURITIES CHANGE
GIVEN AN INTEREST RATE IN VALUATION OF SECURITIES
DECREASE INTEREST GIVEN AN INTEREST RATE INCREASE
OF X BASIS POINTS RATE OF X BASIS POINTS
-------------------------------- -------- ---------------------------------
SHORT-TERM INVESTMENTS, IN THOUSANDS (150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS
- ------------------------------------ --------- --------- -------- -------- --------- --------- ---------
U.S. Treasury securities and
obligations of U.S. government
agencies............................. $ 28,185 $ 27,996 $ 27,806 $ 27,614 $ 27,423 $ 27,233 $ 27,046
Obligations of states and political
subdivisions......................... 3,707 3,707 3,707 3,707 3,707 3,707 3,707
U.S. corporate debt securities......... 117,887 117,311 116,732 116,228 115,722 115,143 114,567
-------- -------- -------- -------- -------- -------- --------
Total short-term investments........... $149,779 $149,014 $148,245 $147,549 $146,852 $146,083 $145,320
======== ======== ======== ======== ======== ======== ========
The table was developed based on the fact that a 50-BPS move in the Federal
Funds Rate has occurred in eighteen times in the last ten years; a 100-BPS move
in the Federal Funds Rate has occurred in twelve times in the last ten years;
and a 150-BPS move in the Federal Funds Rate has occurred in six times in the
last ten years.
The Company has not materially altered its investment objectives or criteria
and believes that, although the composition of the Company's portfolio has
changed from the preceding year, the portfolio's sensitivity to changes in
interest rates is materially the same.
CREDIT RISK:
The Company mitigates default risk by attempting to invest in high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification. To date, the Company has not experienced
liquidity problems with its portfolio.
FOREIGN EXCHANGE RISK:
The Company's operations in foreign countries are not generally subject to
significant exchange rate fluctuations, principally due to the limited scope of
those operations and because sales contracts for the Company's systems are
generally denominated in U.S. dollars. In Japan, however, the Company's orders
are often denominated in Japanese yen. This may subject the Company to a higher
degree of risk from currency fluctuations. The Company attempts to mitigate this
exposure through the use of foreign exchange contracts. The gains and losses on
these contracts generated up to the point of shipment are deferred until such
time as the revenue is recognized on the shipment. Gains and losses on these
contracts generated after the point of shipment are recognized in current
income. At
34
December 31, 2000 there were approximately $17.3 million of outstanding foreign
currency forward contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Selected Financial Data information contained in Item 6 of Part II
hereof is hereby incorporated by reference into this Item 8 of Part II of this
form 10-K.
ULTRATECH STEPPER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements included in Item 8:
PAGE NUMBER
-----------
Consolidated Balance Sheets--December 31, 2000 and 1999..... 36
Consolidated Statements of Operations--Years ended
December 31, 2000, 1999, and 1998......................... 37
Consolidated Statements of Cash Flows--Years ended
December 31, 2000, 1999, and 1998......................... 38
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 2000, 1999, and 1998......................... 39
Notes to Consolidated Financial Statements.................. 40-55
Report of Ernst & Young LLP, Independent Auditors........... 56
35
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 1999
- ------------------------------------------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 55,346 $ 46,978
Short-term investments.................................... 108,335 96,566
Accounts receivable, less allowance for doubtful accounts
of $327 in 2000 and $2,046 in 1999...................... 23,942 19,993
Inventories............................................... 30,262 28,975
Leases receivable--current portion, less allowance for
doubtful accounts of $0 in 2000 and $1,049 in 1999...... -- 1,354
Prepaid expenses and other current assets................. 3,129 2,040
-------- --------
Total current assets........................................ 221,014 195,906
Equipment and leasehold improvements, net................... 28,833 20,486
Restricted investments...................................... -- 5,479
Leases receivable, less allowance for doubtful accounts of
$0 in 2000 and $3,244 in 1999............................. 121 282
Intangible assets, net...................................... 6,880 8,940
Demonstration inventory, net................................ 6,542 5,015
Other assets................................................ 679 700
-------- --------
Total assets................................................ $264,069 $236,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 1,152 $ 490
Accounts payable.......................................... 12,228 7,931
Accrued expenses.......................................... 14,443 13,605
Deferred license income................................... 22,369 --
Deferred product and services income...................... 6,728 353
Advance billings.......................................... 7,470 4,845
Income taxes payable...................................... 5,190 5,081
-------- --------
Total current liabilities................................... 69,580 32,305
Other liabilities........................................... 232 289
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value: 2,000,000 shares
authorized; none issued................................. -- --
Common Stock, $.001 par value: 40,000,000 shares
authorized; issued and outstanding: 21,284,565 at
December 31, 2000 and 21,392,117 at December 31, 1999... 22 21
Additional paid-in capital................................ 179,530 175,574
Treasury Stock............................................ (6,867) (1)
Accumulated other comprehensive loss, net................. (299) (2,408)
Retained earnings......................................... 21,871 31,028
-------- --------
Total stockholders' equity.................................. 194,257 204,214
-------- --------
Total liabilities and stockholders' equity.................. $264,069 $236,808
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
- -------------------------------------- -------- -------- --------
Net sales
Products................................................ $123,407 $95,473 $ 65,569
Services................................................ 17,261 17,650 15,888
Licenses................................................ 5,987 -- --
-------- ------- --------
Total net sales........................................... 146,655 113,123 81,457
Cost of sales
Cost of products sold................................... 76,180 56,471 46,016
Cost of services........................................ 12,808 12,232 10,352
Write-down of inventory................................. -- -- 20,559
Provision for estimated losses on purchase
commitments........................................... -- -- 5,849
-------- ------- --------
Gross profit (loss)......................................... 57,667 44,420 (1,319)
Research, development, and engineering...................... 26,833 27,678 26,654
Amortization of goodwill.................................... 2,061 1,630 1,055
Selling, general, and administrative........................ 30,274 26,325 25,115
Acquired in-process research and development................ -- -- 5,108
Shutdown of operations...................................... 9,670 -- --
Special charges............................................. -- -- 11,175
-------- ------- --------
Operating loss.............................................. (11,171) (11,213) (70,426)
Gain on sale of land........................................ 15,983 -- --
Interest expense............................................ (251) (374) (445)
Interest and other income, net.............................. 7,598 7,419 6,745
-------- ------- --------
Income (loss) before income taxes (benefit) and cumulative
effect of a change in accounting principle................ 12,159 (4,168) (64,126)
Income taxes (benefit)...................................... 2,433 -- (6,182)
-------- ------- --------
Income (loss) before cumulative effect of a change in
accounting principle...................................... 9,726 (4,168) (57,944)
Cumulative effect on prior years of the application of
SAB 101 "Revenue Recognition in Financial Statements"..... (18,883) -- --
-------- ------- --------
Net loss.................................................... $ (9,157) $(4,168) $(57,944)
======== ======= ========
Net loss per share -- basic
Income (loss) before cumulative effect of a change in
accounting principle.................................... $ 0.46 $ (0.20) $ (2.76)
Cumulative effect on prior years of the application of SAB
101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ --
Net loss.................................................. $ (0.43) $ (0.20) $ (2.76)
Number of shares used in per share computations --
basic................................................... 21,236 21,279 20,958
Net loss per share -- diluted
Income (loss) before cumulative effect of a change in
accounting principle.................................... $ 0.46 $ (0.20) $ (2.76)
Cumulative effect on prior years of the application of SAB
101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ --
Net loss.................................................. $ (0.43) $ (0.20) $ (2.76)
Number of shares used in per share computations --
diluted................................................. 21,236 21,279 20,958
======== ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 2000 1999 1998
- ------------ -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (9,157) $ (4,168) $(57,944)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 7,093 8,187 7,672
Amortization.............................................. 4,536 4,370 2,934
Loss on disposal of equipment............................. 2,403 390 1,179
Deferred income taxes..................................... -- -- 3,039
Write-off of acquired in-process research and
development............................................. -- -- 5,108
Cumulative adjustment due to SAB 101...................... 18,883 -- --
Gain from sale of land.................................... (15,983) -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,049) (8,970) 38,047
Inventories............................................. (1,287) 7,775 10,580
Prepaid expenses and other current assets............... (1,089) 3,048 677
Leases receivable -- current portion.................... 1,354 658 396
Leases receivable -- long term.......................... 161 1,254 9,818
Intangible assets....................................... -- (133) --
Demonstration Inventory................................. (3,425) (1,942) (2,825)
Other assets............................................ 21 (190) 1,078
Accounts payable........................................ 4,297 (610) (6,957)
Accrued expenses........................................ 838 (5,719) (5,514)
Advance billings........................................ 2,625 3,151 32
Income taxes payable.................................... 109 3,451 (1,404)
Deferred product and services income, net............... (14,408) (1,140) 763
Deferred license income................................. 22,369 -- --
Other liabilities....................................... (57) (56) 186
-------- -------- --------
Net cash provided by operating activities................... 17,234 9,356 6,865
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................................ (18,439) (6,948) (9,510)
Investments in securities................................... (369,175) (361,398) (430,079)
Proceeds from sales of investments.......................... 74,489 56,047 111,106
Proceeds from maturing investments.......................... 284,831 297,823 348,407
Purchase of certain assets and liabilities of Integrated
Solutions Inc., net of cash acquired...................... -- -- (21,819)
Proceeds from sale of land.................................. 16,126 -- --
Purchase of licensed technology............................. -- (2,000) --
Restricted investments...................................... 5,549 (71) (159)
-------- -------- --------
Net cash used in investing activities....................... (6,619) (16,547) (2,054)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) notes payable............. 662 (1,391) 1,787
Proceeds from issuance of Common Stock...................... 3,957 1,418 3,646
Buy back of Common Stock.................................... (6,866) -- --
-------- -------- --------
Net cash provided by financing activities................... (2,247) 27 5,433
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 8,368 (7,164) 10,244
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 46,978 54,142 43,898
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 55,346 $ 46,978 $ 54,142
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 251 $ 337 $ 445
Income taxes (refund), net.............................. 3,089 (7,015) 840
Other non-cash changes:
Systems transferred from inventory to equipment and
other assets.......................................... $ 5,543 $ 2,806 $ 4,018
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED OTHER TOTAL
------------------- PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS'
IN THOUSANDS SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) EARNINGS EQUITY
- ------------ -------- -------- ---------- -------- ----------------- -------- -------------
Balance at December 31,
1997....................... 20,786 $21 $170,201 $ (1) $ 271 $93,140 $263,632
Net issuance of Common Stock
under stock option plans
and employee stock purchase
plan....................... 320 -- 3,646 -- -- -- 3,646
Income tax benefit from stock
option and stock purchase
plan transactions.......... -- -- 309 -- -- -- 309
Components of comprehensive
loss:
Net unrealized gain on
available-for-sale
investments.............. -- -- -- -- 508 -- 508
Net loss................... -- -- -- -- -- (57,944) (57,944)
--------
Total comprehensive loss..... (57,436)
------ --- -------- ------- ------- ------- --------
Balance at December 31,
1998....................... 21,106 $21 $174,156 $ (1) $ 779 $35,196 $210,151
====== === ======== ======= ======= ======= ========
Net issuance of Common Stock
under stock option plans
and employee stock purchase
plan....................... 286 -- 1,418 -- -- -- 1,418
Components of comprehensive
loss:
Net unrealized loss on
available-for-sale
investments.............. -- -- -- -- (3,187) -- (3,187)
Net loss................... -- -- -- -- -- (4,168) (4,168)
--------
Total comprehensive loss..... (7,355)
------ --- -------- ------- ------- ------- --------
Balance at December 31,
1999....................... 21,392 $21 $175,574 $ (1) $(2,408) $31,028 $204,214
====== === ======== ======= ======= ======= ========
Net issuance of Common Stock
under stock option plans
and employee stock purchase
plan....................... 368 1 3,956 -- -- -- 3,957
Buyback of Common Stock...... (475) -- -- (6,866) -- -- (6,866)
Components of comprehensive
loss:
Net unrealized loss on
available-for-sale
investments.............. -- -- -- -- 2,109 -- 2,109
Net loss................... -- -- -- -- -- (9,157) (9,157)
--------
Total comprehensive loss..... (7,048)
------ --- -------- ------- ------- ------- --------
Balance at December 31,
2000....................... 21,285 $22 $179,530 $(6,867) $ (299) $21,871 $194,257
====== === ======== ======= ======= ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND INDUSTRY INFORMATION
MAJOR CUSTOMERS
In 2000, one customer accounted for 10% of the Company's net sales. In 1999,
no single customer accounted for 10% or more of the Company's net sales. Sales
to one customer accounted for 25% of the Company's net sales in 1998.
BUSINESS SEGMENTS
In evaluating its business segments, the Company gave consideration to the
Chief Executive Officer's review of financial information and the organizational
structure of the Company's management. Based on this review, the Company
concluded that, at the present time, resources are allocated and other financial
decisions are made based, primarily, on consolidated financial information.
Accordingly, the Company has determined that it operates in one business
segment, which is the manufacture and distribution of photolithography equipment
to manufacturers of integrated circuits, thin film heads and micromachined
components.
ENTERPRISE-WIDE DISCLOSURES
The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through domestic and
foreign-based sales and service operations and independent sales organizations.
The following table presents enterprise-wide sales to external customers and
long-lived assets by geographic region:
(IN THOUSANDS) 2000 1999 1998
- -------------- -------- -------- --------
Net sales:
United States of America.................................. $ 67,328 $ 51,293 $36,192
Germany................................................... 2,147 1,130 10,613
Japan..................................................... 29,216 13,201 11,282
Rest of world............................................. 47,964 47,499 23,370
-------- -------- -------
Total................................................... $146,655 $113,123 $81,457
======== ======== =======
Long-lived assets:
United States of America.................................. $ 41,701 $ 39,458 $42,130
Rest of world............................................. 1,354 1,444 1,949
-------- -------- -------
Total................................................... $ 43,055 $ 40,902 $44,079
======== ======== =======
The Company's operations in foreign countries are not currently subject to
significant exchange rate fluctuations, principally because sales contracts for
the Company's systems are generally denominated in U.S. dollars. However,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products.
2. CONCENTRATIONS OF RISKS
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. For this and other reasons, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATIONS OF RISKS (CONTINUED)
and management effort in securing a sale. Additionally, the markets for the
Company's products are subject to rapid technological change, which requires the
Company to respond with new products and enhanced versions of existing products.
Lengthy sales cycles and rapid technological change subject the Company to a
number of significant risks, including inventory obsolescence, significant
after-sales support and fluctuations in operating results, which are difficult
to estimate and over which the Company has little or no control. Sole-source and
single-source suppliers provide critical components and services for the
manufacture of the Company's products. The reliance on sole or limited groups of
suppliers may subject the Company from time to time to quality, allocation and
pricing constraints.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term investments,
trade receivables and long-term customer financing. These credit risks include
the potential inability of an issuer or customer to honor their obligations
under the terms of the instrument. The Company places its cash equivalents,
short-term investments and restricted investments with high credit-quality
financial institutions. The Company invests its excess cash in commercial paper,
readily marketable debt instruments and collateralized funds of U.S. and state
government entities. The Company has established guidelines relative to credit
ratings, diversification and maturities that seek to maintain safety and
liquidity.
A majority of the Company's trade receivables are derived from sales in
various geographic areas, principally the U.S., Europe, Japan, and Asia, to
large companies within the integrated circuit, thin film head and micromachining
industries. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, whenever deemed necessary. The
Company maintains an allowance for uncollectible accounts receivable based upon
expected collectibility and a reserve for estimated returns and allowances. The
formation of significant long-term receivables and the granting of extended
customer payment terms exposes the Company to additional risks, including
potentially higher customer concentration and higher potential operating
expenses relating to customer defaults.
The Company sells certain of its accounts receivable to third-party
financial institutions, in order to mitigate its credit risk and to enhance cash
flow. Sales of accounts receivable typically precede final customer acceptance
of the system. Among other terms and conditions, the agreements include
provisions that require the Company to repurchase receivables if certain
conditions are present including, but not limited to, disputes with the customer
regarding suitability of the product, and from time-to-time the Company has
repurchased certain accounts receivable in accordance with these terms. At
December 31, 2000 and 1999, approximately $5.6 million of sold accounts
receivable were outstanding to third-party financial institutions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. Intercompany
balances and transactions have been eliminated.
Reclassifications have been made to the prior years' consolidated financial
statements to conform to the current year presentation.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The preparation of the 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 consist of highly liquid investments with a maturity date
at acquisition of three months or less. The carrying value of cash equivalents
approximates fair value.
INVESTMENTS
Management determines the appropriate classification of its investments at
the time of purchase and re-evaluates the classification at each balance sheet
date. At December 31, 2000 and 1999, all investments in the Company's portfolio
were classified as "available for sale" and are stated at fair value, with the
unrealized gains and losses, net of tax, reported in accumulated other
comprehensive income (loss), as a separate component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization, as well as
interest, dividends, realized gains and losses and declines in value judged to
be other than temporary are included in interest and other income, net. The cost
of securities sold is based on the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment is depreciated on a straight-line basis
over the estimated useful lives (three to seven years). Leasehold improvements
are amortized on a straight-line basis over the life of the related assets or
the lease term, whichever is shorter.
Demonstration inventory is stated at cost, less accumulated amortization.
Demonstration inventory is amortized over the estimated useful life of the
systems, generally four years.
Intangible assets are carried at cost less accumulated amortization, which
is being provided on a straight-line basis over the economic lives of the
respective assets, generally five to seven years. Intangible assets are
presented net of accumulated amortization of $4,390,000 and $3,354,000 as of
December 31, 2000 and 1999, respectively.
DERIVATIVE INSTRUMENTS AND HEDGING
Off-balance-sheet transactions, consisting of forward currency contracts,
have from time to time been utilized by the Company to hedge obligations
denominated in foreign currencies. The Company does not enter into derivative
financial instruments for trading purposes. Gains and losses related to
qualified accounting hedges of firm commitments are deferred and recognized into
operating income when the firm commitment is converted into income. Gains and
losses related to qualified accounting hedge of recognized financial assets and
liabilities are recognized in interest and other income, net.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
There were approximately $17.3 million and $10.6 million of foreign exchange
forward contracts outstanding as of December 31, 2000 and 1999, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND SEC STAFF ACCOUNTING
BULLETINS
In September 1999, the Financial Accounting Standards Board (FASB) issued
Statement no. 137 (FAS 137), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." FAS 137
amended the FASB issued Statement No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities" which was issued in September 1998 and was
to be effective for all fiscal quarters of fiscal year beginning after
September 16, 1999. FAS 137 deferred the effective date of FAS 133 to be
effective for all fiscal quarters of all fiscal years beginning after
September 15, 2000. In June 2000, the FASB issued FAS 138. "Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an Amendment of
FAS 133. Accordingly, the Company will adopt the provisions of FAS 133, as
amended by FAS 137 and FAS 138, in the first fiscal quarter of 2001 fiscal year.
FAS 133 establishes accounting and reporting standards for derivative
instruments and requires recognition of derivatives as assets or liabilities in
the statement of financial position and measurement of those instruments at fair
value. Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that replaces, in its entirety, FASB Statement No. 125. Although Statement 140
has changed many of the rules regarding securitizations, it continues to require
an entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with the criteria provided in the Statement. As
required, the Company will apply the new rules prospectively to transactions
beginning in the second quarter of 2001. The Company has not completed an
assessment of the potential financial statement impact of applying the new
Statement.
REVENUE RECOGNITION
The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final customer
acceptance, provided that final customer acceptance and collection of the
related receivable were probable. Effective January 1, 2000, the Company changed
its method of accounting for product sales to recognize such revenues when the
contractual obligation for installation has been satisfied, or when installation
is substantially complete, and customer acceptance provisions have lapsed,
provided collections of the related receivable are probable. The Company also
sells service contracts for which revenue is recognized ratably over the
contract period. The Company believes the change in accounting principle is
preferable based on guidance provided in SEC staff Accounting Bulletin No. 101
(SAB 101), "Revenue Recognition in Financial Statements." The cumulative effect
of the change in accounting principle, $18.9 million or $0.89 per share
(diluted), was reported as a charge in the quarter ended March 31, 2000 in the
accompanying statement of operations.
The cumulative effect of this change in accounting principle includes system
revenue, cost of sale and certain expenses, including warranty and commission
expenses, which will be recognized when both installation and customer
acceptance provisions are satisfied, subsequent to January 1, 2000.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 2000, the Company substantially changed its operations to implement
SAB 101. Approximately 25% of the Company's net sales for the year ended
December 2000, or $37,600,000, resulted from systems shipped in 1999 and
accepted in 2000. This reflects the Company's traditional time frame for
shipment, installation and customer acceptance. The net result of shipments and
acceptances during the year was a reduction of approximately $14.4 million in
deferred product and service income. The Company estimates that its sales for
the year ended December 31, 2000 would have approximated $126,000,000 under its
previous method of accounting for revenue recognition. However, the Company
believes that estimates of its system revenue under its prior method of
accounting are not indicative of results that would have been achieved had the
Company not substantially changed its operations to implement SAB 101.
WARRANTY
The Company generally warrants its products for a period of 12 months from
the date of customer acceptance for material and labor to repair the product;
accordingly, a provision for the estimated cost of the warranty is recorded at
the time revenue is recognized.
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES
The Company is actively engaged in basic technology and applied research
programs designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments and elsewhere. Research, development and engineering costs are
charged to operations as incurred.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. As a result of this acquisition, the
Company recognized a charge for acquired in-process research and development
expense (IPR&D) of $5.1 million in the consolidated statement of operation for
the year ended December 31, 1998.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
SHUTDOWN OF OPERATIONS
During the quarter ended June 30, 2000, the Company shutdown the operations
of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the quarter ended
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter
ended September 30, 2000, the Company recognized an additional charge of
$1.7 million, or $0.08 per share (diluted) primarily attributed to revised
estimates of amounts to be realized upon the sale of operating assets. Of the
year-to-date total charge of $9.7 million, approximately $6.8 million related to
the disposition of operating and capital assets, $0.4 million related to
termination benefits paid associated with the termination of 14 employees,
$2.3 million related to facilities and other non-employee amounts paid for
shutdown and $.2 million related to accrued liabilities still outstanding as of
December 31, 2000. There were no significant revisions to the original
termination provisions established by the Company.
SPECIAL CHARGES
Due primarily to the downturn in the thin film head and semiconductor
industries in 1998, the Company recognized significantly lower sales and
bookings levels during 1998. As a result, the Company significantly reduced its
production demand forecast for 1999 and implemented various cost containment
measures in the third quarter of 1998. During 1998, the Company recognized
special non-cash charges in the amount of $26.4 million for the write-down of
excess inventories and provisions for estimated losses on open purchase
commitments. These charges were included in cost of sales.
During 1998, the Company recognized non-cash charges in the amount of
$8.6 million related to collection uncertainty of certain accounts and leases
receivable and provisions for sales returns and allowances. Additionally, during
1998, the Company recognized cash charges of $2.0 million and non-cash charges
of $0.6 million as a result of the reduction in the Company's workforce and the
consolidation of certain of its facilities. These charges were included in
operating expenses.
GAIN ON SALE OF LAND
In September 2000, the Company exercised an option it held to purchase 6.34
acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of
$16.0 million before related income taxes, or $0.75 per share (diluted). In
conjunction with this transaction, the Company had collateralized a loan payable
by the former owner to a third party with securities valued at $5.5 million.
Upon completion of this transaction, the restriction on these securities was
removed.
FOREIGN CURRENCY ACCOUNTING
The U.S. dollar is the functional currency for all foreign operations.
Foreign exchange gains and losses, which result from the process of remeasuring
foreign currency financial statements into U.S. dollars or from transactions
during the period, have been immaterial and are included in interest and other
income, net.
STOCK-BASED COMPENSATION
The Company has elected to follow the intrinsic value method in accounting
for its employee stock options and stock purchase plan. Pro forma information
regarding net income (loss) and net income (loss) per share are disclosed as if
the Company accounted for its stock-based compensation subsequent to
December 31, 1994 under the fair value method.
45
BASIC AND DILUTED NET LOSS PER SHARE
The following sets forth the computation of basic and diluted net income
(loss) per share:
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
- -------------------------------------- -------- -------- --------
Numerator:
Income (loss) before cumulative effect of a change in
accounting principle.................................... $ 9,726 $(4,168) $(57,944)
Cumulative effect on prior years of the application of SAB
101 "Revenue Recognition in Financial Statements"....... (18,883) -- --
-------- ------- --------
Net loss.................................................. $ (9,157) $(4,168) $(57,944)
======== ======= ========
Denominator:
Denominator for earnings per share--basic................. 21,236 21,279 20,958
Effect of dilutive Employee Stock Options................. -- -- --
-------- ------- --------
Denominator for earnings per share--diluted............... 21,236 21,279 20,958
-------- ------- --------
EARNINGS PER SHARE--BASIC
Income (loss) before cumulative effect of a change in
accounting principle.................................... $ 0.46 $ (0.20) $ (2.76)
======== ======= ========
Cumulative effect on prior years of the application of SAB
101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ --
======== ======= ========
Net loss.................................................. $ (0.43) $ (0.20) $ (2.76)
======== ======= ========
EARNINGS PER SHARE--DILUTED
Income (loss) before cumulative effect of a change in
accounting principle.................................... $ 0.46 $ (0.20) $ (2.76)
======== ======= ========
Cumulative effect on prior years of the application of SAB
101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ --
======== ======= ========
Net loss.................................................. $ (0.43) $ (0.20) $ (2.76)
======== ======= ========
For the year ended December 31, 2000, options to purchase 3,864,000 shares
of Common Stock at an average exercise price of $15.23 were excluded from the
computation of diluted net loss per share as the effect would have been
anti-dilutive. This compares to the exclusion of 3,428,000 options at an average
exercise price of $16.11 for the year ended December 31, 1999, and 3,169,000
options at an average exercise price of $16.20 for the year ended December 31,
1998. Options are anti-dilutive when the Company has a net loss or when the
exercise price of the stock option is greater than the average market price of
the Company's Common Stock.
REPORTING COMPREHENSIVE INCOME
Comprehensive income includes net income plus other comprehensive income.
Other comprehensive income for the Company is comprised of changes in unrealized
gains or losses on
46
available-for-sale securities, net of tax. Accumulated other comprehensive
income and changes thereto at December 31 consist of:
IN THOUSANDS 2000 1999 1998
- ------------ -------- -------- --------
Accumulated other comprehensive income at beginning of year
Unrealized gain (loss), net of tax.......................... $(2,408) $ 779 $271
Change of accumulated other comprehensive income (loss)
during the year
Unrealized gain (loss) on available-for-sale securities..... 2,109 (3,187) 508
Tax effect.................................................. -- -- --
------- ------- ----
Accumulated other comprehensive income (loss) at end of
year...................................................... $ (299) $(2,408) $779
======= ======= ====
4. INVESTMENTS
The Company classified all of its investments as "available for sale" as of
December 31, 2000 and 1999. Accordingly, the Company states its investments at
estimated fair value. Fair values are determined based on quoted market prices
or pricing models using current market rates. The Company deems all investments,
except those restricted, to be available to meet current working capital
requirements.
The following is a summary of the Company's investments:
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------------------------- --------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED ------------------- ESTIMATED AMORTIZED ------------------- ESTIMATED
SHORT-TERM INVESTMENTS, IN THOUSANDS COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
- ------------------------------------ --------- -------- -------- ---------- --------- -------- -------- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ 27,788 $ 12 $ 186 $ 27,614 $ 27,027 $ -- $ 803 $ 26,224
Obligations of states and political
subdivisions...................... 3,707 -- -- 3,707 10,477 -- -- 10,477
U.S. corporate debt securities...... 116,451 444 667 116,228 95,645 120 1,560 94,205
-------- ---- -------- -------- -------- ---- ------ --------
$147,946 $456 $ 853 $147,549 $133,149 $120 $2,363 $130,906
======== ==== ======== ======== ======== ==== ====== ========
RESTRICTED LONG-TERM INVESTMENTS, IN
THOUSANDS
- ------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ -- $ -- $ -- $ -- $ 5,466 $ -- $ 61 $ 5,405
Obligations of states and political
subdivisions...................... -- -- -- -- -- -- -- --
U.S. corporate debt securities...... -- -- -- -- 74 -- -- 74
-------- ---- -------- -------- -------- ---- ------ --------
$ -- $ -- $ -- $ -- $ 5,540 $ -- $ 61 $ 5,479
-------- ---- -------- -------- -------- ---- ------ --------
$147,946 $456 $ 853 $147,549 $138,689 $120 $2,424 $136,385
======== ==== ======== ======== ======== ==== ====== ========
The following is a reconciliation of the Company's investments to the
balance sheet classifications at December 31:
IN THOUSANDS 2000 1999
- ------------ -------- --------
Cash equivalents........................................ $ 39,214 $ 34,340
Short-term investments.................................. 108,335 96,566
Restricted investments.................................. -- 5,479
-------- --------
Investments, at estimated fair value.................... $147,549 $136,385
======== ========
Gross realized gains and losses were not material for the years ended
December 31, 2000, 1999 and 1998.
The amortized cost and estimated fair value of the Company's investments at
December 31, 2000, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities
47
4. INVESTMENTS (CONTINUED)
because the issuers of the securities may have the right to prepay obligations
without prepayment penalties.
AMORTIZED FAIR
IN THOUSANDS COST VALUE
- ------------ --------- --------
Due in one year or less................................. $ 83,139 $ 83,018
Due after one year through five years................... 64,807 64,531
-------- --------
$147,946 $147,549
======== ========
5. BALANCE SHEET DETAILS
DECEMBER 31,
-------------------
IN THOUSANDS 2000 1999
- ------------ -------- --------
Inventories:
Raw materials............................................. $14,309 $12,589
Work-in-process........................................... 11,088 13,484
Finished products......................................... 4,865 2,902
------- -------
Total................................................... $30,262 $28,975
======= =======
Equipment and leasehold improvements, net:
Machinery and equipment................................... $34,682 $27,703
Leasehold improvements.................................... 5,651 3,903
Office equipment and furniture............................ 19,446 19,548
------- -------
$59,779 $51,154
Accumulated depreciation and amortization................. (30,946) (30,668)
------- -------
Total................................................... $28,833 $20,486
======= =======
Accrued expenses:
Salaries and benefits..................................... $ 4,551 $ 3,369
Warranty reserves......................................... 3,776 3,997
Reserve for losses on purchase order commitments.......... 3,203 2,423
Provision for sales return and allowances................. -- 1,471
Other..................................................... 2,913 2,345
------- -------
Total................................................... $14,443 $13,605
======= =======
6. STOCK BASED COMPENSATION
1993 STOCK OPTION PLAN
Under the Company's 1993 Stock Option Plan, as amended, qualified employees,
nonemployee Board members and consultants may receive options to purchase shares
of Common Stock at 85% to 100% of fair value at certain specified dates. These
options generally vest in equal monthly installments over a period of
approximately four years, with a minimum vesting period of twelve months from
grant date, and generally expire ten years from date of grant. The plan will
terminate on the earlier of January 6, 2003, or the date on which all shares
available for issuance under the Plan have been issued. The plan included a
provision to automatically increase the shares reserved for issuance by an
amount equal to 1.4% of the total number of shares of Common Stock outstanding
on the last trading day of
48
6. STOCK BASED COMPENSATION (CONTINUED)
the immediately preceding fiscal year. This provision expired in 2000. Under the
plan, approximately 603,000 options, 511,000 options and 676,000 options were
available for issuance at December 31, 2000, 1999 and 1998, respectively.
1998 SUPPLEMENTAL STOCK OPTION/STOCK ISSUANCE PLAN
Under the Company's 1998 Supplemental Stock Option/Stock Issuance Plan, as
amended, qualified employees may receive options to purchase shares of Common
Stock at 100% or above of fair value at certain specified dates. These options
generally vest in equal monthly installments over a period determined by the
Company's Plan Administrator, and generally expire ten years from date of grant.
The plan will terminate on the earlier of October 19, 2008, or the date on which
all shares available for issuance under the Plan have been issued. Under the
plan, approximately 354,000 options, 469,000 options and 57,000 options were
available for issuance at December 31, 2000, 1999 and 1998, respectively.
A summary of the Company's stock option activity, and related information
follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding at
January 1............. 3,427,520 $16.11 3,168,965 $16.20 2,560,252 $14.94
Granted................. 1,522,500 $13.98 871,800 $13.67 1,132,250 $19.04
Exercised............... (286,120) $ 9.88 (189,273) $ 1.17 (232,642) $ 9.01
Forfeited............... (800,081) $18.53 (423,972) $18.50 (290,895) $21.84
--------- ------ --------- ------ --------- ------
Outstanding at
December 31........... 3,863,819 $15.23 3,427,520 $16.11 3,168,965 $16.20
At December 31, 2000, options outstanding were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
REMAINING
RANGE OF EXERCISE CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------- --------- ---------------- ---------------- --------- ----------------
$ 0.0500-$11.9999 795,185 6.82 $ 7.86 292,685 $ 0.96
$12.0000-$14.8999 1,257,183 8.59 $13.94 312,504 $13.03
$14.9000-$17.4999 363,776 7.93 $16.07 170,908 $16.74
$17.5000-$19.9999 1,167,305 7.13 $18.03 754,477 $17.97
$20.0000-$33.6250 280,370 5.65 $29.12 249,686 $29.65
--------- ---- ------ --------- ------
$ 0.0500-$33.6250 3,863,819 7.51 $15.23 1,780,260 $15.83
EMPLOYEE STOCK PURCHASE PLAN
Under the provisions of the Company's Employee Stock Purchase Plan,
virtually all employees may purchase Common Stock through payroll deductions at
85% of the lower of the fair market value of the Common Stock on the first or
last day of the offering period. The offering periods are twelve months, with
one annual purchase date. In February 2001, the Company commenced a plan, which
allows twenty-four month offering periods with semi-annual purchase dates. Under
the Plan, approximately 503,000 shares and 584,000 shares of Common Stock were
reserved and available for issuance at December 31, 2000 and 1999, respectively.
49
6. STOCK BASED COMPENSATION (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses the intrinsic value method in accounting for employee
stock-based compensation because, as discussed below, the fair value accounting
method requires use of option valuation models that were not developed for use
in valuing employee stock options. Under the intrinsic value method no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.
Pro forma information regarding net income and net income per share is
required as if the Company had accounted for its employee stock options
(including purchase rights issued under the Employee Stock Purchase Plan)
granted subsequent to December 31, 1994 under the fair value method. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
2000 1999 1998
-------- -------- --------
Expected life (in years): stock options..................... 3.5 3.5 3.5
Expected life (in years): Employee Stock Purchase Plan...... 1.0 1.0 1.0
Risk-free interest rate..................................... 5.2% 6.3% 4.6%
Volatility factor........................................... 0.57 0.54 0.56
Dividend yield.............................................. 0% 0% 0%
The weighted-average expected life of stock options is computed assuming a
multiple-point approach with annual vesting periods. The weighted-average fair
value per share of stock options granted during 2000, 1999 and 1998 were $6.18,
$5.83, and $8.36, respectively.
The weighted average fair value of purchase rights granted under the
Company's Employee Stock Purchase Plan during 2000, 1999 and 1998 were $7.34,
$6.23, and $7.64, respectively.
For purposes of pro forma disclosures, the estimated fair value of options
granted is amortized to expense over the stock options' four-year vesting period
and the Employee Stock Purchase Plan's one year purchase period. Stock option
grants are divided into annual vesting periods, resulting in the recognition of
approximately 50% of the total compensation expense of the grant in the first
year. Additionally, the potential tax benefit associated with the issuance of
incentive stock options is not reflected until realized upon the disqualifying
disposition of the shares. The Company's pro forma information follows:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
- -------------------------------------- -------- -------- --------
Net loss as reported........................................ $ (9,157) $ (4,168) $(57,944)
Pro forma net loss.......................................... $(14,117) $(10,226) $(62,174)
Net loss per share--basic, as reported...................... $ (0.43) $ (0.20) $ (2.76)
Pro forma net loss per share--basic......................... $ (0.68) $ (0.49) $ (3.03)
Net loss per share--diluted, as reported.................... $ (0.43) $ (0.20) $ (2.76)
Pro forma net loss per share--diluted....................... $ (0.68) $ (0.49) $ (3.03)
50
7. STOCKHOLDERS' EQUITY
TREASURY STOCK
In April 2000, the Company's Board of Directors authorized the purchase of
up to 2,000,000 shares of the Company's Common Stock at prevailing market
prices. To date, the Company has purchased 475,000 shares of Common Stock at a
cost of $6,867,000.
SHAREHOLDER RIGHTS PLAN
The Company's Shareholder Rights Plan provides that Preferred Share Purchase
Rights ("Rights") are attached at the rate of one Right on each outstanding
share of the Company's Common Stock held by stockholders. These rights expire on
February 9, 2007.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer the consummation
of which would result in ownership by a person or group of 15% or more of the
Company's Common Stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of Junior Participating Preferred Stock
at an exercise price of $145.00 upon certain events.
The Rights are redeemable, in whole but not in part, at the option of the
Board of Directors at $.01 per Right, at any time within 10 days of the date
they become exercisable and in certain other circumstances and will not become
exercisable in certain instances where the Company's Board of Directors approves
a transaction. The Rights will not prevent a takeover of the Company, but should
encourage anyone seeking to acquire the Company to negotiate with the Company's
Board of Directors.
Shares reserved for issuance under the Plan were 350,000 at December 31,
2000.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLANS
The Company currently sponsors a profit sharing plan and an executive
incentive bonus plan that distribute employee awards based on the achievement of
predetermined operating income targets. The Company has not recognized expense
under these various employee bonus plans for 2000, 1999 and 1998.
EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company currently sponsors a 401(k) employee salary deferral plan that
allows voluntary contributions by all full-time employees of from 1% to 20% of
their pretax earnings. Prior to 2000, Company contributions were made only if
certain predetermined operating income targets were achieved. In 2000, the
Company's Board of Directors elected to provide Company matching of employee
contributions up to a maximum of $2,000 per employee. The Board of Directors has
made a similar election for 2001. In conjunction with this benefit plan, the
Company recognized $643,000, $0, and $0 of expense for 2000, 1999 and 1998,
respectively.
51
9. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes and
cumulative adjustments are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 2000 1999 1998
- ------------ -------- -------- --------
Domestic........................................ $10,834 $(5,694) $(65,582)
Foreign......................................... 1,325 1,526 1,456
------- ------- --------
Income (loss) before income taxes............... $12,159 $(4,168) $(64,126)
======= ======= ========
Income taxes included the following:
YEARS ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS 2000 1999 1998
- ------------ -------- --------- --------
Federal:
Current............................................. $1,035 $ -- $(9,847)
Deferred............................................ (859) -- 2,634
------ --------- -------
176 -- (7,213)
State:
Current............................................. 80 -- --
Deferred............................................ -- -- 263
------ --------- -------
80 -- 263
Foreign:
Current............................................. 2,177 -- 768
Deferred............................................ -- -- --
------ --------- -------
2,177 -- 768
------ --------- -------
Total income tax provision (benefit).................. $2,433 $ -- $(6,182)
====== ========= =======
The tax benefit associated with stock options and employee stock purchase
plan transactions increased tax refunds receivable by $309,000 for 1998. Such
benefits are credited to stockholders' equity when realized.
The difference between the provision (benefit) for income taxes and the
amount computed by applying the U.S. federal statutory rate (35 percent) to
income before income taxes is explained below:
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 2000 1999 1998
- ------------ -------- -------- --------
Tax computed at statutory rate................... $4,256 $(1,417) $(22,444)
State income taxes, net of federal benefit....... 52 -- 171
Foreign taxes.................................... 1,713 -- 258
Non-taxable income............................... (6,609)
Tax exempt income................................ -- -- (1,142)
Credits for research and development............. -- -- (1,304)
Losses not benefited............................. 2,353 1,320 19,775
Other, net....................................... 668 97 (1,496)
------ ------- --------
Income tax provision (benefit)................... $2,433 $ -- $ (6,182)
====== ======= ========
52
9. INCOME TAXES (CONTINUED)
Significant components of deferred income tax assets and liabilities are as
follows:
IN THOUSANDS 2000 1999
- ------------ -------- --------
Deferred tax assets:
Net operating loss carryforwards........................ $ 657 $ 7,848
Inventory valuation..................................... 6,881 12,676
Bad debt reserve........................................ 123 1,414
Fixed assets............................................ 1,502 1,539
Tax credit carryforwards................................ 3,633 2,196
Warranty reserves....................................... 1,298 1,109
Deferred license income................................. 9,114 --
Deferred product and services income.................... 1,675 --
Other................................................... 1,803 4,573
------- -------
Total deferred tax assets................................. 26,686 31,355
Valuation allowance....................................... (25,827) (22,666)
------- -------
Net deferred tax assets................................... $ 859 $ 8,689
======= =======
Deferred tax liabilities:
Lease revenue........................................... $ -- $(1,698)
Deferred income......................................... -- (1,372)
Inventory basis difference.............................. -- (4,778)
Other................................................... -- (841)
------- -------
Total deferred tax liabilities............................ $ -- $(8,689)
======= =======
Net deferred tax assets................................... $ 859 $ --
======= =======
Based upon the weight of available evidence, which includes the Company's
historical operating performance and carryback potential, the Company has
determined that a valuation allowance continues to be necessary.
The net valuation allowance increased by $3,161,000 and $3,103,000 during
the years ended December 31, 2000 and 1999, respectively. Approximately $700,000
of the valuation allowance as of December 31, 2000 is attributable to stock
options, the benefit of which will be credited to paid-in capital when realized.
As of December 31, 2000, the Company had net operating loss carryforwards
for federal and state tax purposes of $1,378,000 and $3,039,000, respectively.
The Company also had federal research and development tax credit carryforwards
of approximately $1,700,000. The federal and state net operating loss
carryforwards will expire at various dates beginning in year 2002 through 2019,
if not utilized. The tax credit carryforwards will expire at various dates
beginning in 2009 through 2019, if not utilized.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities, and certain equipment under operating
leases expiring through December 2015. Under certain of its leasing
arrangements, the Company is subject to letter of credit
53
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
requirements; escalation charges and also retains certain renewal options. As of
December 31, 2000, the minimum annual rental commitments are as follows:
2001................................................... $ 4,977,000
2002................................................... 4,383,000
2003................................................... 3,795,000
2004................................................... 3,784,000
2005................................................... 2,369,000
Thereafter............................................. 9,689,000
-----------
$28,997,000
Rent expense was approximately $5,964,000, $5,037,000 and $5,147,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The Company is not a party to any material litigation. From time to time,
however, the Company may be subject to claims and lawsuits arising in the normal
course of business.
11. ACQUISITION
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. The Company accounted for this
acquisition based on the purchase method of accounting and allocated the
purchase price based on fair values of assets acquired as of the acquisition
date. As a result of this acquisition, the Company recognized a charge for
acquired in-process research and development expense of $5.1 million. The final
purchase price consisted of net cash consideration of approximately
$19.2 million, $2.6 million for transaction costs and $8.9 million for assumed
liabilities. Based on the final purchase price allocation, the excess cost over
fair value of net assets was $9.1 million, to be amortized on a straight-line
basis over a period of three to seven years. As of December 31, 2000, the
accumulated amortization related to the excess cost over fair value of this
acquisition was $4,007,000. The results of the acquired operations are included
from the date of acquisition.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
12. PRO FORMA PRESENTATION
The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final customer
acceptance, provided that final customer acceptance and collection of the
related receivable were probable. Effective January 1, 2000, the Company changed
its method of accounting for product sales to recognize such revenues when the
54
12. PRO FORMA PRESENTATION (CONTINUED)
contractual obligation for installation has been satisfied, or when installation
is substantially complete, and customer acceptance provisions have lapsed,
provided collections of the related receivable are probable. In conjunction with
this change in accounting method, the Company recognized a charge in the first
fiscal quarter of 2000 of $18,883,000, or $0.89 per share (diluted) representing
the cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements."
During 2000, the Company substantially changed its operations to implement
SAB 101. Accordingly, the Company believes that the following pro forma
presentation is not necessarily indicative of the operating results that would
have been achieved in 1999 and 1998 under present revenue recognition processes.
The following table reflects pro forma presentations of the Company's
results of operations based on the Company's current method of revenue
recognition:
YEAR ENDED
DECEMBER 31,
-------------------
(IN THOUSANDS) 1999 1998
- -------------- -------- --------
Net sales as reported................................... $113,123 $ 81,457
Net loss after tax as reported.......................... $ (4,168) $(57,944)
Net Loss after tax, including pro forma adjustment for
the retroactive application of SAB 101 "Revenue
Recognition in Financial Statements".................. $ (9,998) $(38,387)
Net loss per share -- basic............................. $ (0.20) $ (2.76)
Pro forma net loss per share -- basic................... $ (0.47) $ (1.83)
Net loss per share -- diluted........................... $ (0.20) $ (2.76)
Pro forma net loss per share -- diluted................. $ (0.47) $ (1.83)
55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board Of Directors and Stockholders Of Ultratech Stepper, Inc.
We have audited the accompanying consolidated balance sheets of Ultratech
Stepper, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ultratech Stepper, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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.
/s/ ERNST & YOUNG LLP
San Jose, California
January 19, 2001
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
56
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A for its 2001 Annual Meeting of
Stockholders to be held June 7, 2001 and the information included therein is
incorporated herein by reference as set forth below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference from the Item captioned "Election of Directors" in the
Company's Proxy Statement for the 2001 Annual Meeting of Stockholders (the
"Proxy Statement"). The information required by this Item relating to the
Company's executive officers is included under the caption "Executive Officers
of the Registrant" in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Item captioned "Executive Compensation and Related Information" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Items captioned "Election of Directors" and "Ownership of Securities" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
item captioned "Certain Transactions" in the Proxy Statement.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K
(1) Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statement Schedule (set forth in Item 8
of part II of this Form 10-K) are filed within this Annual Report on
Form 10-K.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
Page Number
Schedule II Valuation and Qualifying Accounts S-1
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
2.1(1) Asset Purchase Agreement, dated March 8, 1993, among
Registrant, General Signal Corporation and General Signal
Technology Corporation.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, filed October 6, 1993.
3.1.1(7) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Registrant, filed
June 17, 1998.
3.2(3) Bylaws of Registrant, as amended.
3.2.1(15) Amendment to Bylaws of Registrant as amended.
3.3(3) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company dated May 17,
1995.
4.5(1) Specimen Common Stock Certificate of Registrant.
4.6(4) Shareholder Rights Agreement between Registrant and the
First National Bank of Boston dated February 11, 1997.
4.6.1(5) Shareholder Rights Agreement between Registrant and the
First National Bank of Boston, filed on February 11, 1997,
as amended on March 18, 1998.
4.6.2(9) Second Amendment to Shareholder Rights Agreement dated
February 11, 1997 between Registrant and BankBoston, N.A.
(formerly known as the First National Bank of Boston) as of
October 12, 1998, and Certification of Compliance with
Section 27 thereof.
10.3.2(13) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
as of January 3, 2000).
10.4(1) Form of Indemnification Agreement entered into between the
Registrant and each of its officers and directors.
10.5(1) Standard Industrial Lease--Single Tenant, Full Net between
The Equitable Life Assurance Society of the United States,
as Landlord, and Registrant, as Tenant, dated August 27,
1993.
10.6(2) Executive Incentive Plan.
10.7(2) Profit Sharing Plan.
10.11(12) 1995 Employee Stock Purchase Plan (Amended and Restated as
of March 16, 1999).
10.11.1 1995 Employee Stock Purchase Plan (Amended and Restated as
of October 17, 2000).
58
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
10.12.1(14) 1998 Supplemental Stock Option/Stock Issuance Plan filed on
August 17, 2000 (Amended and Restated effective June 29,
2000).
10.15(11) Employment agreement between Registrant and Mr. Bruce R.
Wright, Senior Vice President, Finance and Chief Financial
Officer.
11.1(6) Asset Purchase Agreement, dated May 19, 1998, by and among
the Registrant, Ultratech Stepper East, Inc. (formerly known
as Ultratech Acquisition Sub, Inc., formerly known as
Ultratech Capital, Inc., formerly known as Ultratech Stepper
Capital, Inc.), Integrated Solutions, Inc., and Integrated
Acquisition Corp.
11.1.1(8) Amendment to the Asset Purchase Agreement, dated May 19,
1998, by and among the Registrant, Ultratech Stepper
East, Inc. (formerly known as Ultratech Acquisition
Sub, Inc., formerly known as Ultratech Capital, Inc.,
formerly known as Ultratech Stepper Capital, Inc.),
Integrated Solutions, Inc., and Integrated Acquisition Corp.
11.2(10) Sublease between Lam Research Corporation, as Sublessor, and
Registrant, as Sublessee dated September 16, 1998, regarding
the leased building premises known as 16 Jonspin Road,
Wilmington, Massachusetts.
11.3 Lease Agreement between Montague LLC, As Landlord, and
Registrant, As Tenant dated November 22, 1999.
11.4 Lease Agreement between Judith Ann Spinelli, as lessor, and
Registrant, as lessee dated December 28th, 1999, regarding
the leased building premises known as 16 Jonspin Road,
Wilmington, Massachusetts.
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (contained in Signature page hereto).
- ------------------------
(1) Previously filed with the Company's Registration Statement on Form S-1
declared effective with the Securities and Exchange Commission on
September 28, 1993. File No. 33-66522.
(2) Previously filed with the Company's 1993 Annual Report on Form 10-K
(Commission File No. 0-22248).
(3) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Commission File No. 0-22248).
(4) Previously filed with the Company's Current Report on Form 8-K, dated
February 26, 1997.
(5) Previously filed with the Company's 1997 Annual Report on Form 10-K
(Commission File No. 0-22248).
(6) Previously filed with the Company's Current Report on Form 8-K, dated
June 11, 1998.
(7) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Commission File No. 0-22248).
(8) Previously filed with the Company's Current Report on Form 8-K/A, dated
August 25, 1998.
(9) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (Commission File No. 0-22248).
(10) Previously filed with the Company's 1998 Annual Report on Form 10-K
(Commission File No. 0-22248).
(11) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (Commission File No. 0-22248).
(12) Previously filed with the Company's Current Report on Form S-8, dated
August 13, 1999.
59
(13) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 (Commission File No. 0-22248).
(14) Previously filed with the Company's Current Report on Form S-8, dated
August 17, 2000.
(15) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 (Commission File No. 0-22248).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2000.
(c) Exhibits. See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules. See list of schedules under (a)(2)
above.
60
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, thereunder duly authorized.
ULTRATECH STEPPER, INC.
By: /s/ ARTHUR W. ZAFIROPOULO Date: March 20, 2001
---------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
The undersigned directors and officers of Ultratech Stepper, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint Arthur W.
Zafiropoulo and Bruce R. Wright, and each of them with full power to act without
the other, the undersigned's true and lawful attorney-in-fact, with full power
of substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead in the undersigned's capacity as an officer and/or
director of the Company, to execute in the name and on behalf of the undersigned
this Report and to file such Report, with exhibits thereto and other documents
in connection therewith and any and all amendments thereto, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done and to take any other action of any type
whatsoever in connection with the foregoing which, in the opinion of such
attorney-in-fact, may be of benefit to, in the best interest of, or legally
required of, the undersigned, it being understood that the documents executed by
such attorney-in-fact on behalf of the undersigned pursuant to this Power of
Attorney shall be in such form and shall contain such terms and conditions as
such attorney-in-fact may approve in such attorney-in-fact's discretion.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below (and the above Powers of Attorney granted) by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ ARTHUR W. ZAFIROPOULO Chairman of the Board of Directors and
--------------------------------- Chief Executive Officer (Principal March 20, 2001
Arthur W. Zafiropoulo Executive Officer)
Senior Vice President, Finance, Chief
/s/ BRUCE R. WRIGHT Financial Officer and Secretary
--------------------------------- (Principal Financial and Accounting March 20, 2001
Bruce R. Wright Officer)
/s/ KENNETH LEVY
--------------------------------- Director March 20, 2001
Kenneth Levy
61
SIGNATURES TITLE DATE
---------- ----- ----
/s/ GREGORY HARRISON
--------------------------------- Director March 20, 2001
Gregory Harrison
/s/ RICK TIMMINS
--------------------------------- Director March 20, 2001
Rick Timmins
/s/ THOMAS D. GEORGE
--------------------------------- Director March 20, 2001
Thomas D. George
/s/ JOEL GEMUNDER
--------------------------------- Director March 20, 2001
Joel Gemunder
/s/ NICHOLAS KONIDARIS
--------------------------------- Director March 20, 2001
Nicholas Konidaris
/s/ VINCENT F. SOLLITTO
--------------------------------- Director March 20, 2001
Vincent F. Sollitto
62
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) OF PERIOD
----------- ------------ ---------- ---------- -------------- --------------
Allowance for doubtful accounts
Year ended December 31, 1998
Trade accounts receivable..... $2,258 $1,907 $ 153 $(2,122) $2,196
Leases receivable............. -- 6,444 -- -- 6,444
------ ------ ------- ------- ------
$2,258 $8,351 $ 153 $(2,122) $8,640
====== ====== ======= ======= ======
Year ended December 31, 1999
Trade accounts receivable..... $2,196 $ 6 $ -- $ (156) $2,046
Leases receivable............. 6,444 506 529 (3,186) 4,293
------ ------ ------- ------- ------
$8,640 $ 512 $ 529 $(3,342) $6,339
====== ====== ======= ======= ======
Year ended December 31, 2000
Trade accounts receivable..... $2,046 $ (446) $(1,207) $ (66) $ 327
Leases receivable............. 4,293 237 673 (5,203) --
------ ------ ------- ------- ------
$6,339 $ (209) $ (534) $(5,269) $ 327
====== ====== ======= ======= ======
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-I