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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(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, 1998
/ / 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)
3050 ZANKER ROAD
SAN JOSE, CALIFORNIA 95134
(Address of principal executive (Zip Code)
offices)
(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; SERIES A PREFERRED STOCK
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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 22, 1999, as reported on the
Nasdaq National Market was approximately $246,000,000. 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 22, 1999, the Registrant had 21,124,464 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 3, 1999 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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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, photomasks for the
integrated circuit industry, thin film magnetic recording devices and
micromachined components. The Company supplies step-and-repeat systems based on
one-to-one ("1X") and reduction optical technology to customers located
throughout the United States, Europe, Asia/Pacific and Japan. 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"). The Company's 1X steppers are also used
in "mix-and-match" applications to complement reduction steppers and
step-and-scan systems in advanced semiconductor device fabrication. The
Company's 1X steppers also are 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 and consumer electronics. Ultratech also supplies 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 photolithography equipment to the micromachining market,
where certain technical features such as high resolution at g-line wavelengths
and superior depth of focus are seen as offering advantages over competitive
tools.
The Company markets and manufactures the UltraBeam "V" Model electron beam
pattern generation system based on vector-scan technology for use in the
development and production of photomasks for the integrated circuit industry.
The Company acquired this technology in February 1997 when it acquired the
assets of Lepton, Inc.
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 (the "Acquisition") for approximately $19.2
million in cash, $2.6 million in transaction costs and the assumption of certain
liabilities. With this Acquisition, the Company has expanded its
photolithography stepper product line to include reduction steppers. The
reduction steppers complement the 1X steppers for use in the thin film head,
micromachining, and selected semiconductor markets, as their resolution
requirements go below 0.65 microns.
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 wafer. The
1
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 Company believes that one of the fastest growing segments of the
photolithography equipment market is reduction steppers and step-and-scan
systems that use a deep ultra-violet light source ("DUV"). The lower DUV
wavelength allows IC manufacturers to produce critical geometries of 0.25
microns and below. The Company's 4X reduction stepper product line includes DUV
systems at both 248nm and 193nm wavelengths. The 248nm DUV system is a
production tool capable of 0.25 micron geometries. The 193nm DUV system is a
research and development tool that has assisted in the development of 193nm
photoresists throughout the semiconductor industry. In addition to the reduction
steppers, the Company markets certain of its 1X products in mix-and-match
applications with these lithography systems.
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
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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 expose larger areas and
deliver greater energy to the wafer surface, which generally results in higher
throughput than is achievable with most reduction steppers required for critical
feature sizes. 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. Competitors to Ultratech have also introduced their
own mix-and-match steppers to complement their critical layer tools.
Additionally, the Company believes that competition for the mix-and-match
business has increased due to the ability of manufacturers of reduction steppers
to mix-and-match their systems with step-and-scan systems. See "Risk Factors:
Importance of Mix-and-Match Strategy."
In recent years, the complexity of ICs has increased significantly while, at
the same time, product cycles have shortened and the price per function of such
devices has continued to decline. As device complexity has increased, the device
geometries have continued to shrink, which in turn has increased the need for
tools such as reduction steppers that are capable of imaging very critical
feature sizes. For example, fabrication of a 64-megabit dynamic random access
memory ("DRAM") device with a minimum feature size of 0.25 microns involves an
average of 22-25 mask levels and approximately 400 process steps. Certain mask
levels in the fabrication of advanced devices require photolithography equipment
such as DUV reduction steppers and step-and-scan systems that are capable of
imaging lines with critical feature sizes. A majority of the masking layers in
such devices, however, only require photolithography tools capable of imaging
lines with noncritical feature sizes. In addition, many IC devices, such as
application specific integrated circuits ("ASICs") used in various applications
including telecommunications, consumer electronics and automotive control
systems, can be manufactured using 1X steppers for the masking layers. Many
advanced thin film head devices, which currently require less critical feature
size imaging, are manufactured using 1X steppers for the masking layers.
However, the Company believes that future thin film head device manufacturing
will involve certain steps that require critical feature size imaging. The
Company has developed a reduction stepper specifically for the TFH market with
0.25 micron imaging capability to address this requirement.
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.
3
PRODUCTS
The Company currently offers three different series of 1X systems for use in
the semiconductor fabrication process: the model 1500 and 1500 MVS Series, which
address the markets for scanner replacement and high volume/low cost
semiconductor fabrication; 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- Family, which addresses the market for
photosensitive polyimide applications and bump processing for flip chip devices,
as well as the markets for scanner replacement and high volume/low cost
semiconductor fabrication. These steppers currently offer feature size
capabilities ranging from 1.4 microns to 0.65 microns and typically range in
price from $800,000 to $2.1 million. The model 1500 Series and the Titan Wafer
Stepper Family 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. The Company
shipped its first Saturn Wafer Stepper in the fourth quarter of 1995. The Saturn
Wafer Stepper Family, with its 0.65 micron capability, extends mix-and-match
applications to the 64/256-megabit dynamic random access memories and equivalent
logic technology. In bump processing, the Saturn and Titan steppers 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 Wafer Stepper Families also address, among other markets, an application
called photosensitive polyimide processing. This process is used in the
protective layer, between the inside of the device package and the active
device. The polyimide process is also commonly used in the manufacture of
advanced DRAMs and microprocessors. The primary advantage of a photosensitive
polyimide process is that it reduces process steps required in the fabrication
of these devices. The Saturn and Titan wafer stepper families can also be used
for advanced mix-and-match applications where the critical layers are produced
on step-and-scan systems. 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
allows the semiconductor manufacturer to optimize overlay and throughput for its
non-critical mix-and-match layers. The Company is also in the process of
defining the reduction stepper product line for selected semiconductor markets.
In the meantime, the Company continues to offer the existing reduction product
line acquired in the Acquisition. The major products include the XLS 7500, XLS
7800 and the XLS 193nm systems. The XLS 7500 is an i-line reduction system with
a minimum resolution of 0.5 microns. It is used primarily in low-cost, high
volume production applications. The XLS 7800 is a DUV version of the tool,
utilizing a DUV wavelength of 248nm. The XLS 7800 provides a low-cost entry
point into DUV processing. The XLS 193nm system is a small-field DUV tool used
for research and development of 193nm materials and processes.
The Company offers four different 1X systems for use in the fabrication of
thin film heads at the wafer, or substrate, level: the model 1700 series, which
the Company believes is the most widely used stepper for the TFH market; the
model 4700, which provides manufacturers the ability to print rowbars with a
single exposure, further enhancing both yields and magnetic recording head
performance; and the model 6700 and 6800, which extend the model 4700
capabilities into the submicron range by utilizing i-line and gh-line exposure,
respectively. The Company is presently in development of an i-line reduction
stepper, the XLS 9800, to meet customers' requirement for shrinking geometries
on their critical layers. In addition, the Company provides three steppers
capable of patterning features on rowbars utilizing an alternate alignment
system (Machine Vision System, or "MVS"). The model 1700 MVS and 1700 ABS are
used to expose the Air Bearing Surface (ABS) pattern, while the model 1800
extends capabilities to much smaller submicron patterns used for pole trimming.
The Company's TFH steppers offer feature size capabilities ranging from 2.0 to
0.35 microns and typically range in price from $800,000 to $2.6 million.
4
The Company also offers photolithography equipment for use in the
micromachining market. Micromachining 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. The Company believes that its model
1500 and 1500 MVS Series and the Saturn Wafer Stepper Family offer resolution
and depth of focus advantages over alternative technologies, to the
manufacturers of micromachined devices.
The UltraBeam "V" Model electron beam pattern generation system is based on
vector-scan technology and is designed for use in the development and production
of photomasks for the IC industry. The UltraBeam system addresses the production
requirements of photomasks for .25 micron design rule and below. Using the
vector/raster-scan technology employed by the Company, the electron beam moves
directly to those areas of the photomask that are to be exposed, bypassing
unexposed areas, and then rasters in the area to be exposed. In contrast,
alternative technologies use an electron beam that is scanned continuously back
and forth over the entire photomask. The Company believes that its UltraBeam "V"
Model system will offer certain cost and productivity advantages, as compared
with certain competitive systems.
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 significantly less than the purchase price for the Company's
newer systems.
Features of the Company's current stepper systems are set forth below:
FEATURE SIZE
PRODUCT LINE WAVELENGTH (MICRON)
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SEMICONDUCTOR/MICRO-MACHINING:
Model 1500; 1500 MVS........................................................ gh-line 1.0
Model 1500; 1500 MVS........................................................ gh-line 0.8
Saturn Wafer Stepper Family:
Saturn I; Saturn II; Saturn III........................................... i-line 1.0; 0.75; 0.65
Titan Wafer Stepper Family:
Titan I; Titan II; Titan III.............................................. gh-line 1.4;1.0; 0.75
Reduction Steppers
XLS 7500.................................................................. i-line 0.5
XLS 7800.................................................................. DUV (248 nm) 0.25
XLS 193nm................................................................. DUV (193 nm) 0.16
PHOTOMASK:
UltraBeam "V" Model......................................................... n/a 0.65
THIN-FILM HEAD:
1700 Series................................................................. gh-line 1.2; 1.0
1700 MVS.................................................................... gh-line 1.0
1700 ABS.................................................................... gh-line 2.0
1800........................................................................ gh-line 0.8
4700........................................................................ gh-line 1.0
6700........................................................................ i-line 0.65
6800........................................................................ gh-line 0.75
Reduction Steppers
XLS 9800.................................................................. i-line 0.35
5
RESEARCH, DEVELOPMENT AND ENGINEERING
The semiconductor and magnetic recording head manufacturing 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 are 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 development of the UltraBeam electron beam pattern generation
system, continued research and development of the Verdant system for rapid
thermal annealing/laser doping and creation of ultrashallow junctions, continued
development of the Company's 1X and 4X reduction optical products 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 world 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, 1998, the Company had approximately 103 full-time employees engaged in
research, development, and engineering. For 1998, 1997 and 1996, total research,
development, and engineering expenses were approximately $26.7 million, $26.4
million and $27.2 million, respectively, and represented 32.8%, 17.9% and 14.1%
of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in the United States and Europe
principally through its direct sales organization. The Company sells its
products in the Asia/Pacific region primarily through outside sales
organizations. In December 1997, the Company terminated its relationship with
its Japanese distributor, Innotech Corporation and has established a direct
sales force in Japan. This strategy contributed to higher selling, general and
administrative expenses in 1998, relative to 1997, related to transitional costs
as well as higher ongoing expenses. (See "Risk Factors: International Sales;
Japanese Market").
Ultratech's service personnel are based throughout the United States,
Europe, Asia/Pacific and Japan. The Company currently leases five sales and
service offices in the United States outside of California, maintains
subsidiaries in the United Kingdom, Japan, Korea and Thailand and leases offices
for its branch in Taiwan to service equipment and support customers in such
locations. As part of its customer service, Ultratech maintains an on-line
computerized network of the Company's parts inventory in the United States,
Europe and Japan.
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The Company believes that as semiconductor and thin film head manufacturers
produce increasingly complex devices, they will require a higher degree 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 customer's
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 45,000 square feet. These facilities are located in California,
Massachusetts, and New Jersey. Performing manufacturing operations in California
exposes the Company to a higher risk of natural disasters, particularly floods
and earthquakes.
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
the supplier. Prior to shipment, 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 certain of its critical systems' components,
subassemblies and services from a single supplier or a limited group of
suppliers in order to ensure overall quality and timeliness of delivery. To
date, the Company has been able to obtain adequate services and supplies of
components and
7
subassemblies for its systems in a timely manner. However, disruption or
termination of certain of these sources, due to year 2000 compliance issues or
other factors, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is relying
increasingly on outside vendors to manufacture certain components of its
products. 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. (See "Year
2000 Readiness Disclosure", as well as "Additional Risk Factors").
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 has maintained this certification uninterrupted through this report date.
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 or thin film head production line. The
Company believes that once a device manufacturer 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 ("SVG"), Inc.'s Micralign
products, all of which have substantially greater financial, marketing,
technical 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 XLS
reduction stepper product line acquired by the Company from ISI competes
directly with advanced reduction steppers offered by Canon, Nikon and ASML. The
Company believes that future thin film head production will involve
manufacturing steps that require critical feature sizes. Although the reduction
stepper product lines acquired from ISI 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, in the
market for mix-and-match semiconductor applications, Nikon and Canon are
shipping their own widefield mix-and-match lithography systems. (See:
"Additional Risk Factors: Importance of Mix-and-Match Strategy"). ASML has
recently announced its intent to compete in the low-cost lithography market. In
addition, ASML and Nikon have each introduced an i-line step-and-scan system as
a lower cost alternative to the DUV step-and-scan system for use on the less
critical layers. These systems are expected to compete with widefield steppers,
such as the Saturn and Titan families, for advanced mix-and-match applications.
The Company's UltraBeam "V" model electron beam pattern generation system
competes against systems produced by ETEC Systems, Inc.; Hitachi, Ltd.; Leica
Camera AG; and JEOL, Ltd. ("Japan Electron Optical Laboratory"). In addition,
the Company believes that the high cost of developing new lithography tools has
caused its competitors to collaborate with customers and other parties in
various areas such as
8
research and development, manufacturing and marketing, 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, resulting in lower prices and margins. This pressure
has been caused, in part, from the relative weakness of the Japanese yen versus
the U.S. dollar and the current cyclical downturn in both the semiconductor and
thin film head industries. 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 IC manufacturers have a significant share of the worldwide market
for certain types of ICs for which the Company's systems are used. However, 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. 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 July 2000
to February 2017, 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 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.
9
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patent or any other
intellectual property right, 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 such 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, 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 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, photomask, thin film head
and micromachining manufacturers located throughout the United States, Europe,
Asia/Pacific and Japan. Semiconductor manufacturers have purchased the model
1500 Series steppers, the Saturn Wafer Stepper Family, and the Titan Wafer
Stepper Family for the fabrication of microprocessors, microcontrollers, DRAMs
and ASICs. 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 new reduction stepper product line, acquired in
the Acquisition, will continue to address selected semiconductor markets with an
emphasis on low-cost, high-volume applications. Thin film head manufacturers
have purchased the model 1700 Series steppers, the model 4700 stepper and the
model 6700 stepper because of their advantages in yield, throughput and overall
cost of ownership. The XLS 9800, first introduced in 1998, is being developed as
an i-line reduction stepper designed specifically for the thin film head market.
Manufacturers of micromachined components have purchased the model 1500 Series
steppers and Saturn/
10
Titan wafer stepper families because of high throughput and flexible field size
advantages along with cost-effective, submicron imaging capabilities.
Additionally, during 1997 the Company introduced its UltraBeam electron beam
lithography system for the manufacture of photomasks for the IC industry.
Historically, the Company has sold a substantial portion of its systems to a
limited number of customers. Sales to one customer accounted for approximately
25% and 14% of the Company's net sales in 1998 and 1997, respectively.
Additionally, in 1997, a second customer accounted for approximately 10% of the
Company's net sales. In 1996, sales to two customers accounted for approximately
17% and 12% of the Company's net sales. The Company expects that sales to
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 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 and the general economy, of which there can be no
assurance. (See "Cyclicality of Semiconductor 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, and currently result in significant concentrations of accounts
receivable and leases receivable. In particular, sales to a relatively few
customers in the thin film head industry currently make up a significant portion
of the Company's receivables. Recently, the Company has increased its level of
customer leasing activity and has granted extended payment terms to many of its
customers. The formation of significant and concentrated long-term receivables
and the granting of extended payment terms exposes 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. During the three month
periods ended September 30 and December 31, 1998, the Company recorded
significant reserves against its trade accounts receivable and leases
receivable. If additional lease and accounts receivable reserves were to be
required, the Company's business, financial condition and results of operations
would be materially adversely affected.
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. For this 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
one-to-one and reduction optical technology systems for which it has accepted
purchase order numbers and assigned shipment dates within six months, all
customer orders for its electron beam lithography systems for which it has
accepted purchase order numbers and assigned
11
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, 1998, the Company's backlog was approximately $29.4 million,
compared with approximately $65.6 million as of December 31, 1997.
EMPLOYEES
At December 31, 1998, the Company had approximately 488 full-time employees,
including 103 engaged in research, development, and engineering, 23 in sales and
marketing, 167 in customer service and support, 124 in manufacturing and 71 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 AND THIN FILM HEAD INDUSTRIES
The Company's business depends in significant part upon capital expenditures
by manufacturers of semiconductors, photomasks and thin film head magnetic
recording devices, which in turn 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, as evidenced by the current prolonged downturn in the
semiconductor capital equipment industry. 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 will also be subject to similar fluctuations.
In the past, the semiconductor industry has experienced significant growth,
which, in turn, has caused significant growth in the capital equipment industry.
However, the semiconductor industry has been experiencing a substantial and
lengthy cyclical downturn, which has resulted in a significant reduction in
capital spending. Additionally, the Company has been experiencing cancellation
of purchase orders, shipment delays and purchase order restructurings by several
of its customers and there can be no assurance that this trend will not continue
in the future. Accordingly, the Company can give no assurance that it will be
able to achieve or maintain its current level of sales.
The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and thin film head markets, as well as diversifying into
new markets such as photolithography for micromachining and the development of
photomasks. Despite such efforts, when one or more of such markets experiences a
downturn or slowdown, such as is currently occurring in the semiconductor and
thin film head markets, the Company's net sales and operating results continue
to be materially adversely affected, and has resulted in net losses for the
Company in 1998. The Company presently expects that net sales for the
three-month period ending March 31, 1999 will be lower than net sales in the
comparable period in 1998. Additionally, due to lack of order visibility, the
Company can give no assurance that it will be able to achieve or maintain its
current sales levels. The Company presently expects to recognize an operating
and net loss for the quarter ending March 31, 1999. Due, in part, to the
significant level of planned research, development and engineering spending,
relative to anticipated sales, and the current low rate of capacity utilization,
these losses may extend to future quarters.
During 1998, 1997 and 1996, approximately 50%, 50% and 40%, respectively, of
the Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. The Company has experienced a significant decline
in orders from customers in the thin film head market in terms of absolute
dollars. Additionally, several companies within the thin film head and disk
drive
12
industries have announced significantly lower than expected earnings and have
announced restructuring or other non-recurring charges. The Company believes
these events indicate that the thin film head and disk drive industries continue
to have excess capacity in the near-term. 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 the thin film head
market or by loss of market share.
IMPORTANCE OF MIX-AND-MATCH STRATEGY A principal element of the Company's
strategy has been to sell its 1X lithography systems to advanced semiconductor
fabrication facilities for mix-and-match applications. This strategy depends, in
significant part, upon the recognition by semiconductor manufacturers that costs
can be reduced by using the Company's systems to perform exposure on
semiconductor process layers requiring feature sizes of 0.65 microns or greater
and the willingness of such manufacturers to implement processes to lower
manufacturing costs. Many semiconductor fabrication facilities have limited or
no experience with integrating lithography tools in the manner necessary for
full implementation and acceptance of a mix-and-match manufacturing strategy,
and there can be no assurance that semiconductor manufacturers will adopt such a
strategy. The Company has designed certain of its systems to operate in a
compatible manner with its i-line and DUV reduction steppers and its
competitors' reduction steppers and step-and-scan systems, which are used to
process layers with feature sizes below 0.65 microns. The successful
implementation of the Company's strategy, however, will result in a loss of
sales by manufacturers of reduction steppers and will cause these competitors to
respond with lower prices, productivity improvements or new technical designs
for their systems that may eliminate the need for the Company's steppers or make
it difficult for the Company's systems to attain compatibility with such
systems. Also, certain of the Company's competitors, which also manufacture
widefield systems, including Nikon and Canon, are shipping their own widefield
mix-and-match lithography systems. The introduction, development and sales of
such competitive systems could materially adversely affect the Company's
business, financial condition and results of operations.
To facilitate its mix-and-match strategy, the Company has developed and is
continuing to develop a family of products. In 1995, the Company commenced
shipment and volume production of the Titan Wafer Stepper and commenced shipment
of the Saturn Wafer Stepper. Additionally, during 1997 the Company added
multiple versions of its Titan and Saturn wafer steppers in order to more fully
address the needs of the mix-and-match market. As is typical with newly
introduced systems in the capital equipment industry, the Company has
experienced and may continue to experience technical or other difficulties with
its mix-and-match family of products. The Company believes that the market
acceptance and process verification combined with volume production of the
mix-and-match family of products is of critical importance to the successful
implementation of its mix-and-match strategy and its future financial results.
Recently, this market segment of the Company's business has experienced a
pronounced downturn due, in part, to the recent cyclical downturn in the
semiconductor industry and the strength of the U.S. dollar in relationship to
the Japanese yen. Additionally, the Company believes that existing capital
budgets of semiconductor manufacturers are currently focusing on technology
buys, and not capacity additions. This places the Company at a disadvantage,
since its steppers address non-critical geometries. To the extent that the
mix-and-match family of products does not achieve or maintain significant sales
due to a continued cyclical downturn in the semiconductor industry; technical,
manufacturing or other difficulties associated with these products; lack of
customer acceptance; an inability to reduce the significantly long manufacturing
cycle of these products; an inability to increase capacity for the production of
the mix-and-match family of products; direct competition from other widefield
mix-and-match and i-line step-and-scan systems from Nikon, Canon, and ASML,
among others; or any other reason, the Company's business, financial condition
and results of operations would be materially adversely affected. In addition,
the increase in mix-and-match stepper production has resulted and will continue
to result in higher inventory levels and operating expenses. Failure to achieve
or maintain significant sales of these steppers has led and could
13
continue to lead, among other things, to an increase in inventory obsolescence
and an increase in expenses without corresponding sales, both of which have and
could continue to have a material adverse affect on the Company's business,
financial condition and results of operations.
DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF
ACQUIRED PRODUCT LINES Currently, the Company is devoting significant resources
to the development, introduction and commercialization of new products and
technologies that are outside the Company's core businesses (see "Research,
Development and Engineering"). During 1999, the Company will continue to develop
these products and will continue to incur significant operating expenses in the
areas of research, development and engineering and general and administrative
costs in order to further develop 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 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.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of ISI, a privately held
manufacturer of i-line and DUV reduction lithography systems (the
"Acquisition"). Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations, technologies and products of the acquired
companies; 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, 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. Accordingly, there can be no assurance as to the effect of the
Acquisition on the Company's business, financial condition or operating results.
In conjunction with the Acquisition, significant intangible assets were
acquired. The creation of additional intangible assets has the impact of
increasing amortization expense, which may continue to have a material adverse
affect on the Company's results of operations should significant sales for these
newly acquired product lines not materialize. Additionally, prior to the
Acquisition, ISI had recently completed several significant restructurings of
its businesses and organization and had incurred substantial operating losses.
Additionally, the Company is presently in the process of consolidating certain
of its acquired facilities.
The Company has purchased significant levels of plant and equipment for the
anticipated volume production of the UltraBeam "V" Model electron beam
lithography system. To date, the Company has shipped one UltraBeam system to a
customer. The Company believes that any future success of this product line is
dependent, in large part, on the Company's ability to further develop this
system and the customers' ability to integrate this highly technical product
into their existing processes.
In December 1997, the Company terminated its distributor relationship with
Innotech, its Japan distributor. The Company expanded its operations in Japan
during 1998, by establishing a direct sales force, leasing additional facilities
and by making significant capital expenditures for sales and applications
support. Should additional gross profit on sales to the Japan marketplace not be
sufficient to fund these expanded operations, the Company's business, financial
condition and results of operations would be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor and magnetic recording head manufacturing industries are subject
to rapid technological change and new
14
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
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. In particular, the
Company has not yet fully defined the markets and applications for the Titan
Wafer Stepper Family and the Saturn Wafer Stepper Family and is in the process
of assimilating the product lines acquired from ISI. 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 and 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. In particular, the Company has very
little experience in manufacturing its UltraBeam electron beam lithography
system. Due to the significant manufacturing cycle time required for the
production of this system, its lengthy sales cycle, lack of adequate
documentation for the product and the complex nature of this system, delays in
production and/or shipment have resulted and will continue to result from time
to time. Due to the high selling price of this system, delays in shipments from
one quarter to the next would have a material adverse effect on the results of
operations for that quarter. Additionally, the Company is in the process of
assimilating the operations acquired in the Acquisition and developing related
marketing and product development plans. This has resulted and could continue to
result in a delay of any eventual volume production of the products acquired.
(See "Development of New Product Lines; Expansion of Operations; Assimilation of
Acquired Product Lines").
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.
INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 47%, 33% and 53% of total net sales for the years 1998, 1997 and
1996, respectively. The Company anticipates that international sales, which
typically have lower gross margins than domestic sales, principally due to
higher field service and support costs, will continue to account for a
significant portion of total net sales. As a result, a significant portion of
the Company's sales will continue to be subject to certain risks, including
15
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 recently commenced
direct sales operations and 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. 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 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. Additionally, the Company believes that the
severe currency and equity market fluctuations that have been experienced
recently by many of the Asian markets have caused and may continue to cause a
further reduction in orders of the Company's products, particularly in the
short-term, which will have a material adverse effect on the Company's business,
financial condition and results of operations.
Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its systems
to Japanese semiconductor manufacturers. The Japanese semiconductor market
segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies to
penetrate. The Company is at a competitive disadvantage with respect to Japanese
semiconductor capital equipment suppliers that have been engaged for some time
in collaborative efforts with Japanese semiconductor manufacturers, and
currently dominate the Japanese stepper market. The Company believes that
increased penetration of the Japanese market is critical to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective. As part of its strategy to penetrate the Japanese
market, in 1993, the Company entered into a distribution agreement with Innotech
Corporation, a local distributor of products. This agreement was terminated in
December 1997, and the Company expanded its operations in Japan during 1998 by
establishing a direct sales force and creating sales and applications support
organizations. (See "Additional Risk Factors: Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines").
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 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, 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.
During the last several years, the Company has experienced an increased
level of employee turnover. The Company believes that this increase has been due
to several factors, including: the continued semiconductor industry slowdown,
which resulted in planned reductions in the Company's workforce
16
during the fourth fiscal quarter of 1996 and the third fiscal quarter of 1998,
and which has further resulted in an increased level of uncertainty within the
workforce; an expanding economy within the geographic area that the Company
maintains its principal business offices, making it more difficult for the
Company to retain its employees; and the declining value of stock options
granted to employees, relative to their total compensation, as a result of the
full vesting of options granted prior to the Company's initial public offering
and significant numbers of options granted at prices well in excess of the
current market value of the Company's stock. Additionally, the Company has
implemented various cost-saving measures, including additional scheduled plant
shutdowns and required time-off for its employees. Due to these and other
factors, the Company may continue to experience high levels of employee
turnover, which could adversely affect the Company's business, financial
condition and results of operations.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, 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 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, 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, a
shortfall in revenue or earnings from, or changes, in analysts' expectations,
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 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.
ITEM 2. PROPERTIES
The Company maintains its headquarters and manufacturing operations in San
Jose, California in three leased facilities, totaling approximately 149,000
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 21,000 square
feet in New Providence, New Jersey for its UltraBeam product line, and
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 December 2000 to March 2005. The Company
also leases 6.4 acres of undeveloped land near its headquarters in San Jose.
This lease expires in November 1999. As part of this transaction, the Company
presently has segregated $5.5 million of its securities as collateral for
certain obligations of the lessor pertaining to this land. The Company also
leases five sales and support offices in the United States in Phoenix, Arizona;
Woburn, Massachusetts; Allentown, Pennsylvania; Austin, Texas; and Richardson,
Texas under leases with terms expiring between one month to five years. The
Company also maintains a branch office in Taiwan and sales, service and support
subsidiaries in Japan, Korea, the United Kingdom and Thailand, 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 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.
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, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1998, 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................................ 59 Chairman of the Board of Directors, Chief Executive
Officer and President
Daniel H. Berry...................................... 53 Chief Operating Officer, Executive Vice President
William G. Leunis, III............................... 43 Senior Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal Corporation 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 presently serves in this capacity.
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 Advanced Energy Inc., a manufacturer of advanced RF
and DC power supplies. In addition, Mr. Zafiropoulo is a director of
Semi/Sematech, an association of U.S.-owned suppliers of equipment, materials
and services to the semiconductor industry and SEMI (Semiconductor and Equipment
Materials International), an international trade association.
Mr. Berry has served as Chief Operating Officer and Executive Vice President
of the Company since June 1998, and Senior Vice President, Sales and Service of
the Company since March 1993. 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 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. 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. Leunis has served as Senior Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer of the Company since January 1997. Between
March 1993 and December 1996, he served as Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer of the Company. Between September
1990 and March 1993, he served as Vice President, Finance of the Predecessor.
From August 1986 to August 1990, Mr. Leunis was Chief Financial Officer of the
Predecessor. From 1978 to August 1986, Mr. Leunis held various financial
positions at General Signal.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for periods indicated, the range of high and
low sale prices of the Company's Common Stock, as reported by the National
Association of Securities Dealers, Inc.:
FISCAL 1998--FISCAL QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------- ----------- --------- ------------ ------------
Market Price: (1) High......................................... $ 24.000 $ 26.625 $ 23.000 $ 20.500
Low............................................ $ 18.125 $ 18.500 $ 14.000 $ 12.750
FISCAL 1997--FISCAL QUARTER ENDED
- ---------------------------------------------------------------
Market Price: (1) High......................................... $ 30.625 $ 25.375 $ 34.375 $ 34.500
Low............................................ $ 20.500 $ 17.000 $ 22.500 $ 18.500
(1) The Company's Common Stock is traded on the Nasdaq Stock
Market-Registered Trademark- 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, 1998, the Company had approximately 870 stockholders of record.
The Company's fiscal quarters in 1998 ended on April 4, 1998, July 4, 1998,
October 3, 1998 and December 31, 1998, and the Company's fiscal quarters in 1997
ended on April 5, 1997, July 5, 1997, October 4, 1997, and December 31, 1997,
respectively. For convenience of presentation, the Company's 1998 fiscal
quarters have been shown as ending on March 31, 1998, June 30, 1998, September
30, 1998 and December 31, 1998, and the Company's 1997 fiscal quarters have been
shown as ending on March 31, 1997, June 30, 1997, September 30, 1997 and
December 31, 1997.
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.
19
ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT
PER SHARE DATA 1998*** 1997** 1996 1995 1994 1993* 1992*
- ------------------------------ -------- --------- --------- --------- -------- -------- --------
OPERATIONS:
Net sales..................... $ 81,457 $ 147,349 $ 193,508 $ 157,831 $ 91,344 $ 54,136 $ 35,309
Gross profit (loss)........... (1,319) 77,678 104,893 82,288 46,037 26,683 17,548
Gross profit (loss) as a
percentage of net sales..... (2)% 53% 54% 52% 50% 49% 50%
Operating income (loss)....... $(70,426) $ 18,001 $ 46,678 $ 31,782 $ 15,291 $ 6,833 $ 2,220
Income (loss) before income
taxes (benefit)............. (64,126) 25,094 52,707 36,170 16,445 6,689 2,089
Pre-tax income (loss) as a
percentage of net sales..... (79)% 17% 27% 23% 18% 12% 6%
Net income (loss)............. $(57,944) $ 17,566 $ 35,311 $ 24,234 $ 11,019 $ 4,123 $ 1,304
Net income (loss) per
share--basic................ $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A N/A
Number of shares used in per
share computation--basic.... 20,958 20,553 20,079 18,425 16,293 N/A N/A
Net income (loss) per
share--diluted.............. $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A N/A
Number of shares used in per
share
computation--diluted........ 20,958 21,681 21,271 20,154 16,917 N/A N/A
BALANCE SHEET:
Cash, cash equivalents and
short-term investments...... $146,107 $ 164,349 $ 167,409 $ 161,356 $ 50,246 $ 26,242 $ 176
Working capital............... 166,417 223,226 212,684 176,174 69,368 32,977 6,307
Total assets.................. 245,935 300,001 280,772 245,428 104,789 56,381 16,765
Long-term obligations, less
current portion............. -- -- -- -- 400 800 --
Stockholders' equity.......... 210,151 263,632 239,947 199,658 80,027 38,091 8,323
OTHER DATA:
Return on average equity...... (24)% 7% 16% 17% 19% 18% 15%
Book value per common share
outstanding................. $ 9.96 $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00 N/A
Current ratio................. 5.70 7.60 6.40 4.94 3.93 2.89 1.76
Long term debt to equity
ratio....................... 0.00 0.00 0.00 0.00 0.00 0.02 0.00
Capital expenditures.......... $ 9,510 $ 9,337 $ 7,849 $ 9,760 $ 7,759 $ 2,752 $ 972
Income tax/benefit as
percentage of pre-tax
income/loss................. 10% 30% 33% 33% 33% 38% 38%
20
QUARTERLY DATA
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------- --------- ---------- ---------- ----------
1998 ***
Net sales.......................................................... $ 27,782 $ 22,395 $ 12,359 $ 18,921
Gross profit (loss)................................................ 11,864 6,247 (13,803) (5,627)
Operating loss..................................................... (1,785) (19,452) (32,935) (16,254)
Net income (loss).................................................. 361 (15,364) (28,166) (14,775)
Net income (loss) per share--basic................................. $ 0.02 $ (0.74) $ (1.34) $ (0.70)
Number of shares used in per share computation--basic.............. 20,833 20,895 21,014 21,090
Net income (loss) per share--diluted............................... $ 0.02 $ (0.74) $ (1.34) $ (0.70)
Number of shares used in per share computation--diluted............ 21,697 20,895 21,014 21,090
1997 **
Net sales.......................................................... $ 38,733 $ 38,054 $ 36,752 $ 33,810
Gross profit....................................................... 21,033 19,979 19,228 17,438
Operating income................................................... 4,916 6,543 5,648 894
Net income......................................................... 4,533 5,727 5,405 1,901
Net income per share--basic........................................ $ 0.22 $ 0.28 $ 0.26 $ 0.09
Number of shares used in per share computation--basic.............. 20,371 20,451 20,626 20,765
Net income per share--diluted...................................... $ 0.21 $ 0.27 $ 0.25 $ 0.09
Number of shares used in per share computation--diluted............ 21,526 21,442 21,851 21,862
- ------------------------
* ULTRATECH STEPPER, INC. (THE "COMPANY") ACQUIRED CERTAIN ASSETS AND
LIABILITIES OF THE ULTRATECH STEPPER DIVISION (THE "PREDECESSOR") OF GENERAL
SIGNAL CORPORATION 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 THE REDUCTION IN THE COMPANY'S WORKFORCE.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits,
thin film heads for disk drives and micromachined
21
components. The Company supplies step-and-repeat systems based on one-to-one and
reduction optical technologies to customers located throughout the United
States, Europe, Asia/Pacific and Japan. 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. Additionally, the Company manufactures and markets the UltraBeam
"V" Model electron beam pattern generation system based on vector-scan
technology for use in the development and production of photomasks for the IC
industry.
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 (the "Acquisition") for approximately $19.2 million in cash,
$2.6 million in transaction costs and the assumption of certain liabilities.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and will continue to fluctuate significantly in the future depending upon a
variety of factors, including substantial cyclicality in the Company's target
markets; various competitive factors including price-based competition and
competition from vendors employing other technologies; the timing and terms of
significant orders; lengthy sales cycles for the Company's products;
concentration of credit risk; delayed shipments to customers due to customer
configuration changes and other factors; acquisition activities requiring the
devotion of substantial management resources; the mix of products sold; lengthy
manufacturing cycles for the Company's products; lengthy product development
cycles for new products; the timing of new product announcements and releases by
the Company or its competitors; market acceptance of new products and enhanced
versions of the Company's products; manufacturing inefficiencies associated with
the startup of new product introductions; customer concentration; ability to
volume produce systems and meet customer requirements; patterns of capital
spending by customers; product discounts; changes in pricing by the Company, its
competitors or suppliers; political and economic instability throughout the
world, in particular the Asia/Pacific region; natural disasters; regulatory
changes; and business interruptions related to the Company's occupation of its
facilities. The Company's gross profit as a percentage of sales has been and
will continue to be significantly affected by a variety of factors, including
inventory and open purchase commitment reserve provisions; the rate of capacity
utilization; the mix of products sold; nonlinearity of shipments during the
quarter; increased competition in the Company's targeted markets; 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 $2.1 million for the Company's 1X steppers, and
$1.5 million to $4.0 million for the Company's reduction steppers. Additionally,
the Company's UltraBeam electron beam lithography system is anticipated to sell
in a range of $6.0 million to $9.0 million. As a result of these high sale
prices, the timing of recognition of revenue from a single transaction has had
and will continue to have a significant impact on the Company's net sales and
operating results. The Company's backlog at the beginning of a period typically
does not include all of the sales needed to achieve the Company's objectives for
that period. In addition, orders in backlog are subject to cancellation, delay,
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 dependant upon the Company obtaining orders for
systems to be shipped 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 during the particular period. Furthermore, a
substantial portion of the Company's net sales has historically
22
been realized near the end of each quarter. Accordingly, the failure to receive
anticipated orders or delays in shipments near the end of a particular quarter,
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, has 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 Titan and Saturn steppers, and the
Company's newly acquired XLS advanced reduction stepper and 193nm small-field
research and development reduction stepper (both product lines were acquired
through the acquisition of certain assets and liabilities of ISI), 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. Additionally, the Company has very limited experience in the
manufacture of its UltraBeam electron beam pattern generation systems. The
UltraBeam systems are extremely complex and the product has significantly long
manufacturing and sales cycles, which greatly increases the likelihood of delays
in shipments from one quarter to the next. Due to the high list price for these
systems, shipment delays would materially adversely affect the Company's
financial condition and results of operations for a particular quarter if the
shipment were delayed to the following quarter. Additionally, the Company may
experience difficulties in assimilating the operations acquired in the
Acquisition. (See "Additional Risk Factors: Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines"). The impact of
these and other factors on the Company's sales and operating results in any
future period cannot be forecast with certainty.
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 industries. In
addition, the need for continued expenditures for research and development,
capital equipment purchases and ongoing training and customer service and
support worldwide, among other factors, will make it difficult for the Company
to reduce its significant operating expenses in a particular period if the
Company fails to achieve its net sales goals for the period. Additionally, the
Company has recently experienced manufacturing inefficiencies associated with
shifts in product demand and under-utilization of manufacturing capacity and the
Company presently anticipates that these trends will continue for at least the
next few quarters. Such continuation would materially adversely affect the
Company's business, financial condition and results of operations.
The Company presently expects that net sales for the three-month period
ending March 31, 1999 will be lower than net sales in the comparable period in
1998. Additionally, due to lack of order visibility, the Company can give no
assurance that it will be able to achieve or maintain its current sales levels.
The Company presently expects to recognize an operating and net loss for the
quarter ending March 31, 1999. These losses may extend to future quarters due,
in part, to the significant level of planned research, development and
engineering spending, relative to anticipated sales; the current low rate of
capacity utilization; and the current backlog and order levels for the Company's
products.
Certain of the statements contained in this report may be considered
forward-looking statements that may involve a number of risks and uncertainties.
In addition to the factors discussed herein, among other factors that could
cause actual results to differ materially include the following: highly
competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; importance of the Company's
mix-and-match strategy; year 2000 compliance; future acquisitions; expansion of
the Company's product lines; dependence on key personnel; sole or limited
sources of supply; intellectual property matters; environmental regulations;
effects of certain anti-takeover provisions; volatility of stock price; and the
other risk factors listed from time to time in the Company's SEC reports.
23
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.
NET SALES
1998 vs. 1997
Net sales consist of revenue from system sales, spare parts sales, and
service. For the year ended December 31, 1998, net sales were $81.5 million, a
decrease of 45% as compared with net sales of $147.3 million for 1997. The
decline, relative to 1997, was primarily attributed to the extremely weak market
conditions in the semiconductor industry and the related markets for
semiconductor capital equipment. Within this market segment, the Company
experienced significantly lower unit system shipments across all product lines.
Additionally, the Company experienced lower system shipments for front-end thin
film head processing, micromachining applications and the production of
photomasks. For the year ended December 31, 1998, the Company's unit system
shipments decreased 53%, relative to 1997, while the weighted-average selling
price of all systems sold declined slightly. Net sales from spare parts and
service increased 31% for the year ended December 31, 1998, as compared to 1997,
primarily as a result of the acquisition of the product lines and related
service business of ISI.
For the year ended December 31, 1998, international net sales were $38.5
million, as compared with $48.4 million for 1997, a decline of 20%.
International net sales represented 47% of total net sales for the year ended
December 31, 1998, as compared with 33% for 1997. This year-over-year decline,
in absolute dollars, was primarily attributed to decreased system sales to the
Asian market. The Company believes that the severe currency and equity market
fluctuations that have been experienced recently by many of the Asian markets
has resulted, and may continue to result, in delays, deferrals and cancellations
of orders of the Company's products, particularly in the short-term, which will
have a material adverse effect on the Company's business, financial condition
and results of operations. 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, the Company has commenced direct sales operations
and 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").
The Company believes that its sales have been and continue to be adversely
impacted by reduced capital capacity spending levels within the semiconductor
and thin film head industries. During 1997 and 1998, the Company experienced a
significant level of shipment delays and purchase order restructurings by
several of its customers, and also experienced purchase order cancellations.
There can be no assurance that this trend will not continue in the future.
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 the
current strength of the U.S. dollar, particularly in relation to the Japanese
yen, places the Company at a competitive disadvantage. Additionally, the Company
has recently experienced a significant downturn in orders from customers in the
thin film head industry, particularly for front-end applications. Several
companies within the thin film head and disk drive industries have recently
announced lower than expected earnings, layoffs and restructuring or other
charges. The Company believes these events indicate that the thin film head and
disk drive industries have excess capacity in the near-term. This has resulted,
and will continue to result, in lower sales as a result of cancellations, delays
and deferrals of customer orders, which will materially adversely affect the
Company's business, financial condition and results of operations. Additionally,
the TFH industry is presently in the process of transitioning from the
production of magneto-resistive heads to giant magneto-resistive heads. This
transition could further disrupt the flow of orders for
24
new equipment from the TFH industry until, among other factors, customer
requirements are more fully defined. The Company presently expects that net
sales for the three-month period ending March 31, 1999 will be lower than net
sales in the comparable period in 1998. Additionally, due to lack of order
visibility, the Company can give no assurance that it will be able to achieve or
maintain its current 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 level of net sales for any period in the
future. Additionally, the Company believes that the market acceptance and volume
production of its UltraBeam electron beam lithography system, XLS advanced
reduction stepper (acquired from ISI), and its Titan, Saturn and 1000 series
families 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 industry, or any other reason, the Company's
business, financial condition and results of operations would be materially
adversely affected.
1997 vs. 1996
Net sales for 1997 were $147.3 million, a decrease of 24% as compared with
net sales of $193.5 million for 1996. The decline, relative to 1996, was
primarily attributed to significantly lower unit sales of the Company's Model
1500 Series steppers, which address the markets for scanner replacement and
high-volume/low-cost semiconductor fabrication, and lower unit sales of the
Company's Model 1700 Series steppers with machine vision system (MVS), which
address the market for back-end processing of thin film heads, partially offset
by the shipment of the Company's first UltraBeam "V" Model electron beam
lithography system. For the year ended December 31, 1997, the Company's system
shipments decreased 34%, relative to 1996, while the weighted-average selling
price of all systems sold was essentially unchanged. Net sales from spare parts
and service increased 10% for the year ended December 31, 1997, as compared to
1996. International sales for 1997 were $48.4 million, a decline of 53% over
international sales of $102.1 million in 1996. This year-over-year decline, in
absolute dollars, was primarily attributed to decreased system sales to the
Asian, European and Japanese markets. During 1997, international sales
represented 33% of total sales, as compared to 53% in 1996.
GROSS PROFIT (LOSS)
1998 vs. 1997
The Company's gross loss as a percentage of net sales was (1.6%) for the
year ended December 31, 1998, as compared with positive gross margin of 52.7%
for 1997. 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 decline in gross
profit as a percentage of net sales can be further attributed to significantly
lower capacity utilization; lower product margins as a result of higher
production costs; changes in product mix; a higher percentage of service and
spare parts sales relative to total net sales, which typically have lower
standard margins than system sales; and continued manufacturing inefficiencies
as a result of non-linearity of system shipments and customer cancellations,
deferrals and reschedulings.
The Company believes that increased competition from Canon, Nikon, ASML and
SVG, among others, together with generally weak conditions in the markets the
Company serves, will make it difficult for the Company to increase gross margin
percentages in the near term. Additionally, in 1998, the Company added capacity
for the anticipated volume production of several new products that are outside
25
the Company's core reflective and refractive optical technologies. In addition
to the purchase of significant levels of plant and equipment for these new
products, the commencement of production of the UltraBeam electron beam
lithography system has resulted and will continue to result in the purchase and
retention of significant levels of inventory to support manufacturing
requirements, hiring of additional production and manufacturing support
personnel and the incurrence of other related manufacturing overhead costs. (See
"Additional Risk Factors: Development of New Product Lines; Expansion of
Operations; Assimilation of Acquired Product Lines"). The purchase of additional
inventories will continue to result in a significantly higher risk of
obsolescence, which has required and may continue to require additional
inventory write-offs, which negatively impact gross margins. Additionally, new
products generally have lower gross margins until production and after-sales
efficiencies can be achieved. Should these new products, including products
recently acquired in the Acquisition, fail to develop or generate significant
market demand, the Company's business, financial condition and results of
operations would be materially adversely affected. As a result of these and
other factors, the Company presently expects that gross profit as a percentage
of net sales will be significantly lower for the three-month period ending March
31, 1999, relative to levels achieved in the comparable period in 1998.
1997 vs. 1996
The Company's gross profit as a percentage of sales was 52.7% for 1997 as
compared with 54.2% for 1996. This decline in gross margin as a percentage of
net sales can be primarily attributed to the shift away from the Company's more
mature product lines, which typically have higher margins due to manufacturing
efficiencies and lower required after-sales support, toward the Company's newer
and more advanced systems; manufacturing inefficiencies caused by
underutilization of manufacturing capacity; changes in the Company's shipment
schedule and an unusually high degree of nonlinearity of shipments during the
1997 periods; partially offset by lower required inventory reserves; lower
international sales relative to total sales for the Company; improved margins
from spare parts and service; and increased after-sales support efficiencies.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
1998 vs. 1997
The Company's research, development and engineering expenses, net of third
party funding for certain projects, were $26.7 million for 1998, as compared
with $26.4 million for 1997. Despite lower net sales, the Company continues to
invest significant resources in the development and enhancement of its UltraBeam
electron beam lithography system and in the development of its Verdant rapid
thermal annealing/laser doping systems and technologies, together with
continuing expenditures for its 1X optical products and technologies.
Additionally, in 1998 the Company commenced research, development and
engineering spending in the area of reduction lithography, as a direct result of
the Acquisition. The Company presently expects that the absolute dollar amount
of research, development and engineering expenses for the quarter ending March
31, 1999 will be lower, relative to the comparable period in 1998, due primarily
to cost containment measures implemented by the Company during the last half of
1998. (See "Additional Risk Factors: Development of New Product Lines; Expansion
of Operations; Assimilation of Acquired Product Lines").
1997 vs. 1996
The Company's research, development and engineering expenses, net of
third-party funding for certain porjects, were $26.4 million for 1997, as
compared with $27.2 million recorded for 1996. This decrease was primarily
attributed to decreased spending for the development, enhancement, manufacturing
support and sales demonstration support of the Company's Model 2244i stepper,
Model 4700 stepper, Titan Wafer Stepper family and Saturn Wafer Stepper family,
partially offset by increased spending for the
26
Company's Model 1800 MVS Series steppers, development of its electron beam
lithography system and development of its rapid thermal annealing/laser doping
technologies and systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1998 vs. 1997
Selling, general and administrative expenses were $26.2 million for both
1998 and 1997. As a percentage of net sales, selling, general and administrative
expenses increased to 32.1% of net sales in 1998, as compared to 17.8% of net
sales in 1997. In 1998, higher general and administrative expenses related to
the operations acquired in the Acquisition and higher general and administrative
expenses for the Company's Verdant and UltraBeam operations were offset by cost
containment measures implemented during the year and lower expenses as are
typically associated with a reduction in sales. The Company presently
anticipates that selling, general and administrative expenses will increase
during the quarter ending March 31, 1999 relative to the comparable period in
1998, due primarily to the amortization of intangible assets and additional
general and administrative expenses relative to the operations acquired in the
Acquisition, partially offset by cost containment measures implemented by the
Company during the last half of 1998. (See "Additional Risk Factors: Development
of New Product Lines; Expansion of Operations; Assimilation of Acquired Product
Lines").
1997 vs. 1996
Selling, general and administrative expenses were $26.2 million for 1997, a
decrease of 16% over the $31.0 million recorded for 1996. As a percentage of net
sales, selling, general and administrative expenses increased to 17.8% of net
sales in 1997, as compared to 16.0% of net sales in 1996. The dollar decrease
for the year ended 1997, relative to 1996, reflects in large part the Company's
decrease in sales, service and support expenses typically associated with a
decrease in sales; cost containment measures implemented during late 1996;
significantly lower required provisions for the Company's profit sharing and
executive incentive plans; and lower commission expense resulting from lower
sales and higher direct sales relative to total net sales for the period.
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 of this acquisition, 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.
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.
During late 1998, the SEC issued guidance on acquired in-process research
and development related to purchase acquisitions. During the quarter ended
December 31, 1998, the Company recognized an
27
adjustment of $7.5 million, or $0.35 per share, to reduce the IPR&D expense
relative to the acquisition of ISI in order to reflect the final purchase price
allocation.
The IPR&D associated with the ISI acquisition related to the development of
optical and post-optical lithography systems. Included were five projects: (i)
the XLS/ISIS 3160 and 3155 project, which was 73% complete as of the acquisition
date; (ii) the Unity project, which was 56% complete as of the acquisition date;
(iii) the XLS 193nm Mid-field and 157nm Small-field platforms, which were 70%
complete as of the acquisition date; (iv) the Scalpel engineering feasibility
project, which was 35% complete as of the acquisition date; and (v) the EUV
stage project, which was 38% complete as of the acquisition date. The
aforementioned completion percentages are based on an estimated weighted-average
of the time, cost, and complexity required to bring the projects to fruition.
The significant technological hurdles remaining to be addressed include: the
development of high resolution optical systems with off-axis illumination; the
integration of complex sub-systems into production worthy tools with user
friendly operator interfaces, while achieving more precise overlay; the ability
to design vacuum and inert gas containment systems without unacceptable
reductions in throughput; the development of CaF2 optical elements in sizes that
have never been built; and the development of an autofocus system that is four
times more accurate than any system ever developed. The Company estimates that
as of the acquisition date, the remaining research and development work on these
projects will cost approximately $35.0 million and will be completed over the
next one to five years. These projects have progressed more slowly than
originally projected due to lower than anticipated staffing. The lower staffing
levels were a result of the Company's actions to reduce expenses during a period
of reduced revenues and earnings. There can be no assurance that the Company
will be able to complete the development and successful marketing of any
products resulting from the completion of these projects. A failure to
successfully develop and market such products could have a material adverse
effect on the Company's business, financial condition and results of operations.
During the first quarter of 1997, the Company completed the acquisition of
the assets of Lepton Inc., a developer of electron beam lithography systems. As
a result of this acquisition, the Company recognized a charge for technology
acquired for a research and development project of $3.6 million, or $0.12 per
share, net of related income tax benefits.
SPECIAL CHARGE RELATING TO TERMINATION OF JAPAN DISTRIBUTOR
In December 1997, the Company terminated its relationship with its Japan
distributor, Innotech Corporation. This resulted in a special charge of $3.5
million, or $0.11 per share, in the quarter ended December 31, 1997, net of
related income tax benefits, primarily related to termination fees negotiated
between the Company and Innotech.
SPECIAL CHARGES
Due primarily to the continued downturn in the thin film head and
semiconductor industries, the Company realized 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 the third and fourth
quarters of 1998, the Company recognized special charges in the amount of $15.2
million and $11.2 million, respectively, for the write-down of excess
inventories and provisions for estimated losses on open purchase commitments.
These charges are included in cost of sales.
During the third and fourth quarters of 1998, the Company recognized charges
in the amount of $3.2 million and $5.4 million, respectively, related to
collection uncertainty of certain accounts and leases receivable and provisions
for sales returns and allowances. Additionally, during the third quarter of
1998, the Company recognized charges of $2.6 million as a result of the
reduction in the Company's workforce and the consolidation of certain of its
facilities. These charges have been included in operating expenses for 1998.
28
INTEREST AND OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $6.7
million for 1998 as compared with $7.3 million for 1997 and $6.3 million for
1996.
INCOME TAXES (BENEFIT)
Income taxes (benefit) represented 10%, 30% and 33% of income (loss) before
income taxes for 1998, 1997 and 1996, respectively. The decline in the tax rate
for 1998, relative to 1997, is primarily a result of not recognizing a benefit
for the 1998 net operating loss carryforward and certain deferred tax asset
reserves recognized during the year. The decrease in the tax rate for 1997,
relative to 1996, is primarily a result of benefits associated with the
Company's research and development efforts together with higher tax-exempt
income, relative to total income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $6.9 million for the year
ended December 31, 1998, as compared with $5.6 million provided by operating
activities during the comparable period in 1997. Positive cash flows from
operating activities during 1998 were primarily attributed to a reduction in
accounts and leases receivable of $47.4 million, a reduction in inventories of
$10.6 million and total non-cash charges to income of $19.9 million, partially
offset by the net loss of $57.9 million for the year ended December 31, 1998 and
a decline in accounts payable and accrued expenses of $10.8 million. The
significant dollar decrease in accounts receivable was partially the result of
the sale of accounts receivable to third-party financial institutions. The
Company sells certain of its accounts and leases receivable in order to mitigate
its credit risk and to enhance cash flow. Sales of accounts receivable typically
preceed 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, 1998, approximately $8.6 million of
sold accounts receivable and $11.0 million of sold leases receivable were
outstanding to third-party financial institutions. The Company presently
anticipates that the current trend of non-linear shipments and extended customer
payment cycles will continue for some time. Accordingly, the Company expects
that accounts receivable will remain at unusually high levels for at least the
next several quarters. Such trends, should they continue, would expose the
Company to numerous risks, which could materially adversely affect the Company's
business, financial condition and results of operations. The Company may
continue to attempt to mitigate the impact of extended payment terms by selling
up to 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.
Additionally, in 1998, the Company invested $2.2 million in plant and equipment
as a result of the anticipated volume production of its electron beam
lithography system, and $5.0 million in plant and equipment as a result of the
anticipated introduction of its rapid thermal annealing/laser doping system. As
of December 31, 1998, the Company had approximately $4.8 million of inventories
and $7.0 million of net long-lived assets related to these new product lines. As
such, these assets may be subject to a greater risk of impairment, which could
materially adversely affect the Company's operating results and financial
condition.
During the year ended December 31, 1998, the Company used $2.1 million of
cash in its investing activities, as cash investments of $9.5 million for
capital expenditures and $21.8 million for the Acquisition were partially offset
by a net $29.4 million in cash generated by the Company's investment activities.
The significant level of capital asset additions during 1998 was primarily
attributed to facilities expansions for
29
the manufacture and sales demonstration support of the Company's electron beam
lithography and rapid thermal annealing/laser doping systems, together with
fixed assets acquired from ISI. As a result of these capital expenditures and
the acquisition of ISI, the Company's depreciation and amortization costs have
increased significantly and may negatively impact the Company's results of
operations in the event of a continued downturn in the Company's business
cycles.
For the year ended December 31, 1998, cash provided by financing activities
was $5.4 million, principally as a result of $3.6 million generated from the
issuance of Common Stock pursuant to the exercise of employee stock options and
the Company's employee stock purchase plan and $1.8 million in additional
borrowings under the Company's existing lines of credit.
At December 31, 1998, the Company had working capital of $166.4 million. The
Company's principal sources of liquidity at December 31, 1998 consisted of
$146.1 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; expansion of operations and research and development, among many other
items. The Company expects that anticipated cash flow from operations, its cash,
cash equivalents and short-term investments and funds available under its lines
of credit 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 prior 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, 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 is experiencing continued 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. During
the three-month periods ended September 30, 1998 and December 31, 1998, the
Company took significant reserves against potentially non-performing leases
receivable. If defaults on additional lease receivables were to occur, the
Company's business, financial condition and results of operations would 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.
YEAR 2000 READINESS DISCLOSURE:
Many currently installed computer systems and software products are coded to
accept only two digit entries in the attached date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than
30
one year, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" (Y2K) requirements. The Company has
provided an assessment, below, of the state of readiness of its information and
non-information technology systems, together with a summary of the status of
related testing, remediation and implementation. The Company presently estimates
that the total cost for the entire Y2K project will approximate one million
dollars and that the remaining project cost is approximately $400,000. The
Company plans to fund these remaining costs from cash generated by operations or
from cash and short-term investments on hand. However additional requirements
may be identified and unscheduled costs may be incurred as the project proceeds.
Accordingly, there can be no assurance that the Company, or its vendors, will be
able to timely and cost-effectively update its products to avoid Y2K date
errors, and this may result in material costs to the Company, including costs
associated with detecting and fixing such errors and costs incurred in
litigation due to any such errors.
Many commentators have predicted that a significant amount of litigation
will arise out of year 2000 compliance issues and the Company is aware of
several such suits that are currently pending. Because of the unprecedented
nature of such litigation and the highly technical nature of the Company's
products, there can be no assurance that the Company will not be materially
adversely affected by claims related to Y2K compliance. Although the Company
presently believes that it has or will timely make required changes to the
software in its products, it believes that the most likely worst case scenario
is from unknown impacts to its customers' manufacturing processes, which could
potentially adversely impact product yields and throughput. In addition to
possible litigation, the Company could incur substantially higher product
returns and warranty related expenses, either of which could materially
adversely affect the Company's business, financial condition and results of
operations. Additionally, the Company's customers may be required to devote
substantial financial resources to their own internal Y2K audit and compliance.
This may result in fewer financial resources available to purchase the Company's
products, fewer system sales by the Company, and could have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company believes that its own Y2K efforts have resulted, and will continue
to result in, a diversion of management and financial resources, which has
further resulted in the delay or deferral of various information technology and
engineering projects.
INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its information systems, a Y2K
conversion project to address necessary code changes, testing, and
implementation and contingency plans. The Company has completed testing and
verification of its primary business/information system and has identified the
significant potential risks associated with Y2K. The Company believes it has
remedied these potential errors and that it has provided for contingency plans
to further minimize risks to its business system associated with Y2K.
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for Y2K, there can be no
assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
technology used in its internal operating systems, which are composed primarily
of third party software and hardware technology. Additionally, although the
Company has made inquiries of its key information technology vendors, and is in
the process of collecting and reviewing survey responses, the Company believes
it will not be able to obtain adequate assurances from all its key vendors. Even
where assurances are received from third parties, there remains a risk that
failure of systems and products of other companies on which the Company relies
could have a material adverse affect on the Company. Accordingly the Company
continues to assess the degree of risk to the Company and is preparing
contingency plans. The Company is presently working to minimize risk from
vendors through understanding and implementing necessary remediation and/or
contingency plans. There can be no assurance that such contingency plans will be
adequate and that the Company will not incur significant additional costs or
business interruptions in connection with such transition, either of which could
have a material adverse affect on the Company's business, financial condition
and results of operations.
31
NON-INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its key vendors, physical plant and
software contained in the products it sells, a Y2K conversion project to address
necessary remediation, testing, implementation and contingency plans. The
Company believes it has identified the required changes for its products'
hardware and software components to attain Y2K readiness and is currently
completing product modifications and working with customers to assist in
understanding these requirements. The Company presently expects such
modifications to be made on a timely basis. The Company has obligations to
provide these modifications to customers with systems under warranty or
currently under service contract. The Company presently expects that these
modifications will be installed on a timely basis. In addressing customer
inquiries regarding the Company's Y2K readiness and in making inquiries of the
Company's vendors, the Company has adopted the Sematech process for
investigating and responding to the Y2K subject. This process includes a survey
form, a readiness matrix and a testing scenario.
Although the Company has made inquiries of its key physical plant and
materials vendors in order to assess their state of readiness, and is in the
process of collecting and reviewing survey responses, the Company believes it
will not be able to obtain adequate assurances from all its key vendors. Even
where assurances are received from third parties, there remains a risk that
failure of systems and products of other companies on which the Company relies
could have a material adverse affect on the Company. Accordingly the Company
continues to assess the degree of risk to the Company and is preparing
contingency plans. These contingency plans may result, among other things, in
the development of alternative suppliers and the purchase of additional
inventories. The Company is presently working to minimize risk from vendors
through understanding and implementing necessary remediation and/or contingency
plans. There can be no assurance that such contingency plans will be adequate
and that the Company will not incur significant additional costs or business
interruptions in connection with such transition, either of which could have a
material adverse affect on the Company's business, financial condition and
results of operations. (See "Manufacturing").
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and vendors in addressing
the Y2K issue. The Company's evaluation is ongoing and it expects that new and
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.
ADOPTION OF THE EURO
The Company does not presently expect that introduction and use of the Euro
will materially affect the Company's foreign exchange and hedging activities or
the Company's use of derivative instruments. Management does not expect that the
introduction of the Euro will result in any material increase in costs to the
Company and all costs, if any, associated with the introduction of the Euro will
be expensed to operations as incurred. 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.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk, for changes in interest rates,
relates primarily to the Company's investment portfolio, which consisted
primarily of fixed interest rate instruments as of December 31, 1998. 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.
The following table presents the hypothetical changes in fair values in the
financial instruments held by the Company at December 31, 1998. 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 measures 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, 1998. 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 CHANGE
VALUATION OF SECURITIES GIVEN IN VALUATION OF SECURITIES GIVEN
AN INTEREST RATE DECREASE OF INTEREST AN INTEREST RATE INCREASE OF
X BASIS POINTS RATE X BASIS POINTS
---------------------------------- ---------- ----------------------------------
(150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS
---------- ---------- ---------- ---------- ---------- ---------- ----------
SHORT-TERM INVESTMENTS, IN THOUSANDS
- --------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies............................ $ 19,376 $ 19,142 $ 18,906 $ 18,672 $ 18,438 $ 18,202 $ 17,968
Obligations of states and political
subdivisions........................ 37,631 37,312 36,999 36,640 36,280 35,967 35,649
U.S. corporate debt securities........ 66,523 66,099 65,671 65,237 64,803 64,376 63,951
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total short-term investments.......... $ 123,530 $ 122,553 $ 121,576 $ 120,549 $ 119,521 $ 118,545 $ 117,568
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
RESTRICTED LONG-TERM INVESTMENTS, IN
THOUSANDS
- --------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies............................ $ 5,587 $ 5,560 $ 5,534 $ 5,507 $ 5,481 $ 5,455 $ 5,429
U.S. corporate debt securities........ 2 2 2 2 2 2 2
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total restricted long-term
investments......................... $ 5,589 $ 5,562 $ 5,536 $ 5,509 $ 5,483 $ 5,457 $ 5,431
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 129,119 $ 128,115 $ 127,112 $ 126,058 $ 125,004 $ 124,002 $ 122,999
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
The above table was developed based on the fact that a 50-BPS move in the
Federal Funds Rate has occurred in 9 of the last 10 years; a 100-BPS move in the
Federal Funds Rate has occurred in 6 of the last 10 years; and a 150-BPS move in
the Federal Funds Rate has occurred in 4 for the last 10 years.
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.
33
Although comparative information at December 31, 1997 is not presented, the
Company has not materially altered its investment objectives or criteria and
believes that, although the composition of the Company's portfolio has changed,
the portfolio's sensitivity to changes in interest rates would have been
materially the same as presented above.
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 has
commenced direct sales operations and 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. The realized gains and losses on these
contracts are deferred and offset against realized and unrealized gains and
losses from the settlement of the related yen-denominated receivables. At
December 31, 1998 there were no outstanding foreign currency 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, 1998 and 1997................................................. 35
Consolidated Statements of Operations--Years ended December 31, 1998, 1997, and 1996.................... 36
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996..................... 37
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998,
1997 and 1996......................................................................................... 38
Notes to Consolidated Financial Statements.............................................................. 39-54
Report of Ernst & Young LLP, Independent Auditors....................................................... 55
34
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997
- ---------------------------------------------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 54,142 $ 43,898
Short-term investments.......................................................... 91,965 120,451
Accounts receivable, less allowance for doubtful accounts of $2,196 in 1998 and
$2,258 in 1997................................................................ 11,899 45,947
Inventories..................................................................... 36,750 37,337
Leases receivable--current portion, less allowance for doubtful accounts of $841
in 1998 and $0 in 1997........................................................ 2,012 2,408
Prepaid expenses and other current assets....................................... 5,088 1,840
Deferred income taxes........................................................... -- 5,142
------------ ------------
Total current assets.............................................................. 201,856 257,023
Equipment and leasehold improvements, net......................................... 23,319 22,285
Restricted investments............................................................ 5,510 5,325
Leases receivable, less allowance for doubtful accounts of $5,603 in 1998 and $0
in 1997......................................................................... 1,536 11,354
Intangible assets, net............................................................ 8,438 355
Other assets...................................................................... 5,276 3,659
------------ ------------
Total assets...................................................................... $ 245,935 $ 300,001
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................... $ 1,881 $ 94
Accounts payable................................................................ 8,541 12,295
Accrued expenses................................................................ 21,693 17,502
Advance billings................................................................ 1,694 872
Income taxes payable............................................................ 1,630 3,034
------------ ------------
Total current liabilities......................................................... 35,439 33,797
Deferred income taxes............................................................. -- 2,103
Other liabilities................................................................. 345 469
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--21,105,733 at December
31, 1998 and 20,786,288 at December 31, 1997................................ 21 21
Additional paid-in capital...................................................... 174,155 170,200
Accumulated other comprehensive income, net..................................... 779 271
Retained earnings............................................................... 35,196 93,140
------------ ------------
Total stockholders' equity........................................................ 210,151 263,632
------------ ------------
------------ ------------
Total liabilities and stockholders' equity........................................ $ 245,935 $ 300,001
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Net sales
Products.................................................................... $ 65,569 $ 136,677 $ 185,058
Services.................................................................... 15,888 10,672 8,450
---------- ---------- ----------
Total net sales............................................................... 81,457 147,349 193,508
Cost of sales
Cost of products sold....................................................... 46,016 62,995 82,425
Cost of services............................................................ 10,352 6,676 6,190
Write-down of inventory..................................................... 20,559 -- --
Provision for estimated losses on purchase commitments...................... 5,849 -- --
---------- ---------- ----------
Gross profit (loss)........................................................... (1,319) 77,678 104,893
Research, development, and engineering........................................ 26,654 26,431 27,220
Selling, general, and administrative.......................................... 26,170 26,177 30,995
Acquired in-process research and development.................................. 5,108 3,619 --
Special charge relating to termination of Japan distributor................... -- 3,450 --
Special charges............................................................... 11,175 -- --
---------- ---------- ----------
Operating income (loss)....................................................... (70,426) 18,001 46,678
Interest expense.............................................................. (445) (165) (236)
Interest and other income, net................................................ 6,745 7,258 6,265
---------- ---------- ----------
Income (loss) before income taxes (benefit)................................... (64,126) 25,094 52,707
Income taxes (benefit)........................................................ (6,182) 7,528 17,396
---------- ---------- ----------
Net income (loss)............................................................. (57,944) 17,566 35,311
---------- ---------- ----------
Net income (loss) per share--basic............................................ $ (2.76) $ 0.85 $ 1.76
Number of shares used in per share computations--basic........................ 20,958 20,553 20,079
Net income (loss) per share--diluted.......................................... $ (2.76) $ 0.81 $ 1.66
Number of shares used in per share computations--diluted...................... 20,958 21,681 21,271
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ (57,944) $ 17,566 $ 35,311
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................... 7,672 5,600 4,449
Amortization........................................................... 2,931 1,634 1,611
Loss on disposal of equipment.......................................... 1,179 93 43
Deferred income taxes.................................................. 3,039 4,566 (898)
Write-off of acquired in-process research and development.............. 5,108 3,619 --
Changes in operating assets and liabilities:
Accounts receivable.................................................. 37,171 (6,102) (15,928)
Inventories.......................................................... 10,580 (1,813) (8,137)
Prepaid expenses and other current assets............................ 677 (1,025) 677
Leases receivable--current portion................................... 396 (2,215) (193)
Leases receivable--long term......................................... 9,818 (10,929) (425)
Intangible assets.................................................... -- (160) --
Other assets......................................................... (1,744) (874) (1,184)
Accounts payable..................................................... (6,957) 2,895 (3,525)
Accrued expenses..................................................... (3,875) (6,427) 712
Advance billings..................................................... 32 226 (3,425)
Income taxes payable................................................. (1,404) (251) 3,738
Other liabilities.................................................... 186 (761) (186)
----------- ----------- -----------
Net cash provided by operating activities.................................. 6,865 5,642 12,640
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................... (9,510) (9,337) (7,849)
Investments in securities.................................................. (430,079) (681,316) (593,545)
Proceeds from sales of investments......................................... 111,106 165,192 266,593
Proceeds from maturing investments......................................... 348,407 515,342 337,442
Purchase of certain assets of Lepton Inc................................... -- (3,101) --
Purchase of certain assets and liabilities of Integrated Solutions Inc.,
net of cash acquired..................................................... (21,819) -- --
Segregation of restricted investments...................................... (159) (175) (170)
----------- ----------- -----------
Net cash provided by (used in) investing activities........................ (2,054) (13,395) 2,471
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory note............................................... -- -- (400)
Proceeds from notes payable................................................ 1,787 99 7,500
Repayment of notes payable................................................. -- (5) (7,500)
Proceeds from issuance of Common Stock..................................... 3,646 3,786 2,699
----------- ----------- -----------
Net cash provided by financing activities.................................. 5,433 3,880 2,299
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 10,244 (3,873) 17,410
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 43,898 47,771 30,361
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 54,142 $ 43,898 $ 47,771
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................................... $ 445 $ 185 $ 238
Income taxes........................................................... 840 3,254 14,500
Other non-cash changes
Systems transferred from inventory to equipment and other assets....... $ 4,018 $ 4,208 $ 2,384
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
IN THOUSANDS SHARES AMOUNT CAPITAL INCOME EARNINGS EQUITY
- --------------------------------------------- --------- ----------- ---------- --------------- --------- ------------
Balance at December 31, 1995................. 19,802 $ 20 $ 159,154 $ 221 $ 40,263 $ 199,658
Net issuance of Common Stock under stock
option plan and employee stock purchase
plan....................................... 508 -- 2,700 -- -- 2,700
Income tax benefit from stock option and
stock purchase plan transactions........... -- -- 2,420 -- -- 2,420
Amortization of deferred compensation........ -- -- 14 -- -- 14
Components of comprehensive income
Net unrealized loss on available-for-sale
investments, net of tax.................. -- -- -- (156) -- (156)
Net Income................................. -- -- -- -- 35,311 35,311
------------
Total comprehensive income................... 35,155
--------- --- ---------- ----- --------- ------------
Balance at December 31, 1996................. 20,310 $ 20 $ 164,288 $ 65 $ 75,574 $ 239,947
--------- --- ---------- ----- --------- ------------
--------- --- ---------- ----- --------- ------------
Net issuance of Common Stock under stock
option plan and employee stock purchase
plan....................................... 476 1 3,785 -- -- 3,786
Income tax benefit from stock option and
stock purchase plan transactions........... -- -- 2,121 -- -- 2,121
Amortization of deferred compensation........ -- -- 6 -- -- 6
Components of comprehensive income
Net unrealized gain on available-for-sale
investments, net of tax.................. -- -- -- 206 -- 206
Net Income................................. -- -- -- -- 17,566 17,566
------------
Total comprehensive income................... 17,772
--------- --- ---------- ----- --------- ------------
Balance at December 31, 1997................. 20,786 $ 21 $ 170,200 $ 271 $ 93,140 $ 263,632
--------- --- ---------- ----- --------- ------------
--------- --- ---------- ----- --------- ------------
Net issuance of Common Stock under stock
option plan 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 income
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 $ 174,155 $ 779 $ 35,196 $ 210,151
--------- --- ---------- ----- --------- ------------
--------- --- ---------- ----- --------- ------------
See accompanying notes to consolidated financial statements
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND INDUSTRY INFORMATION
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments.
MAJOR CUSTOMERS
Sales to one customer accounted for 25% and 14% of the Company's net sales
in 1998 and 1997, respectively. Additionally, in 1997, a second customer
accounted for 10% of the Company's net sales. In 1996, sales to two customers
accounted for 17% and 12% of the Company's net sales.
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, photomasks for the production 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) 1998 1997 1996
- ----------------------------------------------------------- --------- ---------- ----------
Net sales:
United States of America................................. $ 36,192 $ 96,753 $ 89,156
Germany.................................................. 10,613 5,288 14,796
Japan.................................................... 11,282 7,324 16,084
Thailand................................................. 3,153 1,906 20,682
Rest of world............................................ 20,217 36,078 52,790
--------- ---------- ----------
Total.................................................. $ 81,457 $ 147,349 $ 193,508
--------- ---------- ----------
--------- ---------- ----------
Long-lived assets:
United States of America................................. $ 42,130 $ 42,030 $ 26,433
Rest of world............................................ 1,949 948 2,274
--------- ---------- ----------
Total.................................................. $ 44,079 $ 42,978 $ 28,707
--------- ---------- ----------
--------- ---------- ----------
The Company believes that the severe currency and equity market fluctuations
that have been experienced recently by many of the Asian markets has resulted,
and may continue to result in delays, deferrals and cancellations of orders of
the Company's products, particularly in the short-term, which will have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's operations in foreign countries are not
currently subject to significant exchange rate
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY AND INDUSTRY INFORMATION (CONTINUED)
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 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 and lease receivables
are derived from sales in various geographic areas, principally the U.S.,
Europe, Japan, South Korea, Taiwan and Southeast Asia, to large companies within
the integrated circuit, thin film head, photomask 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 and leases 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.
During 1998, the Company put in place a program to sell 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
preceed 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, 1998, $8.6 million of sold accounts
receivable and approximately $11.0 million of sold leases receivable were
outstanding to third-party financial institutions.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATIONS OF RISKS (CONTINUED)
As of December 31, 1998, the Company had approximately $4.8 million of
inventories and $7.0 million of net long-lived assets related to product lines
that are outside of the Company's core technologies. As such, these assets may
be subject to a greater risk of impairment.
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 1998 presentation.
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, 1998 and 1997, all investments in the Company's portfolio
were classified as "available for sale," in accordance with the provisions of
the Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported in 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 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. Demonstration units, included in
other assets, are stated at cost, less accumulated depreciation, and are
depreciated over 36 months.
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.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company applies the
provision of FAS No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of," in evaluating its fixed and
intangible assets.
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 in
interest and other income, net, when the hedged transaction occurs. These gains
and losses were immaterial for the years ended December 31, 1998, 1997 and 1996
and there were no hedge transactions outstanding as of December 31, 1998.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as assets or liabilities in the statement of financial position and measurement
of those instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 1999. 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.
REVENUE RECOGNITION
Sales of the Company's products are generally recorded upon shipment, which
usually precedes final customer acceptance, provided that final customer
acceptance and collection of the related receivable are probable. The Company
also sells service contracts for which revenue is deferred and recognized
ratably over the contract period.
From time to time, the Company leases its products to customers, typically
as sales-type leases, in accordance with the provisions of FASB Statement No.
13, "Accounting for Leases." These leases generally have a five-year term.
WARRANTY
The Company generally warrants its products for a period of up to 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.
The Company has entered into various research and development arrangements
with certain third parties to jointly develop new products and technology. Under
such programs, the Company generally
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
receives funding from the third parties over an extended period based on
achieving certain milestones or based on a cost-sharing arrangement. Such funds
are not anticipated to cover all the costs of the programs and are recorded as
reductions to research, development and engineering expense based on the
percentage of completion of each project. For the years ended December 31, 1998,
1997 and 1996, the Company recognized approximately $401,000, $580,000 and
$2,688,000, respectively, in related funding. As of December 31, 1998, there
were no amounts remaining to be funded on these contracts.
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 of
$5.1 million.
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.
During the first quarter of 1997, the Company completed the acquisition of
the assets of Lepton Inc., a developer of electron beam lithography systems. As
a result of this acquisition, the Company recognized a charge in the quarter
ended March 31, 1997 for a research and development project of $3.6 million.
SPECIAL CHARGE RELATING TO TERMINATION OF JAPAN DISTRIBUTOR
In December 1997, the Company terminated its relationship with its Japan
distributor, Innotech Corporation. This resulted in a special charge of $3.5
million in the quarter ended December 31, 1997, related primarily to termination
fees negotiated between the Company and Innotech.
SPECIAL CHARGES
Due primarily to the continued downturn in the thin film head and
semiconductor industries, the Company realized 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 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 are 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
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 have been
included in operating expenses.
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 Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options and stock purchase
plan. Pro forma information regarding net income and net income per share is
disclosed as required by the FASB's Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), which also requires that the information be
determined as if the Company accounted for its stock-based compensation
subsequent to December 31, 1994 under the fair value method of that Statement.
BASIC AND DILUTED NET INCOME (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 1998 1997 1996
- -------------------------------------------------------------------------------- ---------- --------- ---------
Numerator:
Net income (loss)............................................................. $ (57,944) $ 17,566 $ 35,311
Denominator:
Denominator for basic net income (loss) per share............................. 20,958 20,553 20,079
Effect of dilutive Employee Stock Options..................................... -- 1,128 1,192
---------- --------- ---------
Denominator for diluted net income (loss) per share........................... 20,958 21,681 21,271
---------- --------- ---------
---------- --------- ---------
Net income (loss) per share--basic.............................................. $ (2.76) $ 0.85 $ 1.76
---------- --------- ---------
---------- --------- ---------
Net income (loss) per share--diluted............................................ $ (2.76) $ 0.81 $ 1.66
---------- --------- ---------
---------- --------- ---------
For the year ended December 31, 1998, options to purchase 3,169,000 shares
of Common Stock at an average exercise price of $16.20 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 392,000 options at an average
exercise price of $30.35 for the year ended December 31, 1997, and 363,000
options at an average exercise price of $31.75 for the year ended December 31,
1996. 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.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (FAS 130) "Reporting
Comprehensive Income" is effective beginning with the Company's first fiscal
quarter of 1998. FAS 130 requires that, for all periods presented, comprehensive
income be reported with the same prominence as other financial statements.
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 available-for-sale securities, net of tax. Accumulated other
comprehensive income and changes thereto at December 31 consist of:
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------- --------- --------- ---------
Accumulated other comprehensive income at beginning of year
Unrealized gain, net of tax............................................................ $ 271 $ 65 $ 221
Change of accumulated other comprehensive income during the year
Unrealized gain (loss) on available-for-sale securities................................ 508 308 (116)
Tax effect............................................................................. -- (102) (40)
--------- --------- ---------
Accumulated other comprehensive income at year end....................................... $ 779 $ 271 $ 65
--------- --------- ---------
--------- --------- ---------
4. INVESTMENTS
The Company classified all of its investments as "available for sale" as of
December 31, 1998 and 1997, in accordance with the provisions of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value. Fair
values are estimated 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.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The following is a summary of the Company's investments:
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- --------------------------------------
GROSS GROSS
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
SHORT-TERM AMORTIZED -------------- FAIR AMORTIZED -------------- FAIR
INVESTMENTS, IN THOUSANDS COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ---------------------------------------- --------- ----- ------ --------- --------- ----- ------ ---------
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 18,500 $196 $ 26 $ 18,670 $ 16,744 $ 9 $22 $ 16,731
Obligations of states and political
subdivisions.......................... 36,158 481 -- 36,639 106,459 311 16 106,754
U.S. corporate debt securities.......... 65,045 240 46 65,239 29,943 93 9 30,027
--------- ----- ------ --------- --------- ----- ------ ---------
$ 119,703 $917 $ 72 $ 120,548 $ 153,146 $413 $47 $ 153,512
--------- ----- ------ --------- --------- ----- ------ ---------
--------- ----- ------ --------- --------- ----- ------ ---------
RESTRICTED LONG-TERM
INVESTMENTS, IN THOUSANDS
- ----------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 5,471 $ 47 $ 11 $ 5,507 $ 3,606 $ 7 $-- $ 3,613
Obligations of states and political
subdivisions.......................... -- -- -- -- -- -- -- --
U.S. corporate debt securities.......... 3 -- -- 3 1,712 -- -- 1,712
--------- ----- ------ --------- --------- ----- ------ ---------
$ 5,474 $ 47 $ 11 $ 5,510 $ 5,318 $ 7 $-- $ 5,325
--------- ----- ------ --------- --------- ----- ------ ---------
$ 125,177 $964 $ 83 $ 126,058 $ 158,464 $420 $47 $ 158,837
--------- ----- ------ --------- --------- ----- ------ ---------
--------- ----- ------ --------- --------- ----- ------ ---------
The following is a reconciliation of the Company's investments to the
balance sheet classifications at December 31:
IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------- ---------- ----------
Cash equivalents...................................................... $ 28,583 $ 33,061
Short-term investments................................................ 91,965 120,451
Restricted investments................................................ 5,510 5,325
---------- ----------
Investments, at estimated fair value.................................. $ 126,058 $ 158,837
---------- ----------
---------- ----------
Gross realized gains and losses were not material for the years ended
December 31, 1998, 1997 and 1996.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of the Company's investments at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without prepayment penalties.
AMORTIZED
IN THOUSANDS COST FAIR VALUE
- ---------------------------------------------------------------------- ---------- ----------
Due in one year or less............................................... $ 48,042 $ 48,140
Due after one year through five years................................. 77,135 77,918
---------- ----------
$ 125,177 $ 126,058
---------- ----------
---------- ----------
5. BALANCE SHEET DETAILS
DECEMBER 31,
----------------------
IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------- ---------- ----------
Inventories:
Raw materials....................................................... $ 21,668 $ 20,297
Work-in-process..................................................... 6,808 9,739
Finished products................................................... 8,274 7,301
---------- ----------
Total............................................................. $ 36,750 $ 37,337
---------- ----------
---------- ----------
Equipment and leasehold improvements:
Machinery and equipment............................................. $ 23,750 $ 18,739
Leasehold improvements.............................................. 4,960 2,877
Office furniture and equipment...................................... 16,543 15,457
---------- ----------
$ 45,253 $ 37,073
Accumulated depreciation and amortization............................. (21,934) (14,788)
---------- ----------
Total............................................................. $ 23,319 $ 22,285
---------- ----------
---------- ----------
Accrued expenses:
Salaries and benefits............................................... $ 3,865 $ 5,018
Warranty reserves................................................... 4,207 5,871
Settlement/Japan distributor........................................ -- 3,051
Reserve for losses on purchase order commitments.................... 5,849 --
Provision for sales return and allowances........................... 2,000 684
Other............................................................... 5,772 2,878
---------- ----------
Total............................................................. $ 21,693 $ 17,502
---------- ----------
---------- ----------
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
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK BASED COMPENSATION (CONTINUED)
on which all shares available for issuance under the Plan have been issued. The
plan includes 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 the immediately preceding fiscal
year, through the year 2000. Under the plan, approximately 733,000 and 883,000
options were available for issuance at December 31, 1998 and 1997, respectively.
A summary of the Company's stock option activity, and related information
follows:
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ----------------- ---------- ----------------- ---------- -----------------
Outstanding at January 1.......... 2,560,252 $ 14.94 2,350,208 $ 12.34 2,295,735 $ 9.95
Granted........................... 1,132,250 $ 19.04 1,017,300 $ 20.37 787,349 $ 17.92
Exercised......................... (232,642) $ 9.01 (379,730) $ 6.09 (421,329) $ 3.45
Forfeited......................... (290,895) $ 21.84 (427,526) $ 21.49 (311,547) $ 20.86
---------- ------ ---------- ------ ---------- ------
Outstanding at December 31........ 3,168,965 $ 16.20 2,560,252 $ 14.94 2,350,208 $ 12.34
At December 31, 1998, options outstanding were as follows:
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING -----------------------------
RANGE OF CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------------------- ---------- ----------------- ----------------- ---------- -----------------
$ 0.050 - $14.499................ 666,095 4.40 $ 2.20 662,398 $ 2.15
$14.500 - $19.999................ 1,892,496 8.71 17.71 516,132 $ 17.49
$20.000 - $33.625................ 610,374 8.20 26.80 262,690 $ 29.72
---------- ------ ------ ---------- ------
$ 0.050 - $33.625................ 3,168,965 7.70 $ 16.20 1,441,220 $ 12.67
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Company established an Employee Stock Purchase Plan. The
plan permits virtually all employees to 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. Under the Plan, approximately 181,000 shares and 268,000 shares of
Common Stock were reserved and available for issuance at December 31, 1998 and
1997, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related Interpretations in
accounting for employee stock-based compensation because, as discussed below,
the alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK BASED COMPENSATION (CONTINUED)
Pro forma information regarding net income and net income per share is
required by FAS 123, which also requires that the information be determined 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 of that Statement. 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:
1998 1997 1996
----- ----- -----
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........................... 4.6 % 5.6 % 6.1 %
Volatility factor................................. 0.56 0.62 0.50
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 1998, 1997 and 1996 were $8.36,
$9.74, and $7.32 respectively.
The weighted average fair value of purchase rights granted under the
Company's Employee Stock Purchase Plan during 1998, 1997 and 1996 were $7.64,
$7.73, and $6.51, 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 1998 1997 1996
- -------------------------------------------------------------------------------- ---------- --------- ---------
Net income (loss) as reported................................................... $ (57,944) $ 17,566 $ 35,311
Pro forma net income (loss) under FAS 123....................................... $ (62,174) $ 14,453 $ 31,985
Net income (loss) per share--basic, as reported................................. $(2.76) $0.85 $1.76
Pro forma net income (loss) per share--basic, under FAS 123..................... $(3.03) $0.71 $1.61
Net income (loss) per share--diluted, as reported............................... $(2.76) $0.81 $1.66
Pro forma net income (loss) per share--diluted, under FAS 123................... $(3.03) $0.67 $1.52
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect was not fully reflected until 1998.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY--SHAREHOLDER RIGHTS PLAN
In January 1997, the Board approved the adoption of a Shareholder Rights
Plan ("Rights Plan"). Among other things, the Rights Plan provides that each
Right will be distributed as a dividend at the rate of one Preferred Share
Purchase Right on each outstanding share of the Company's Common Stock held by
stockholders of record as of the close of business on February 24, 1997. The
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 a transaction is approved by the
Company's Board of Directors. 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,
1998.
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 recognized expense of
$0, $0, and $2,126,000 under these various employee bonus plans for 1998, 1997
and 1996, respectively.
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. Company contributions will be made only if certain
predetermined operating income targets are achieved. The Company has recognized
expense of $0, $0, and $797,000 relating to this benefit plan for 1998, 1997 and
1996, respectively.
9. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are
as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
IN THOUSANDS 1998 1997 1996
- -------------------------------------------------------------------------------- ---------- --------- ---------
Domestic........................................................................ $ (65,582) $ 23,326 $ 48,058
Foreign......................................................................... 1,456 1,768 4,649
---------- --------- ---------
Income (loss) before income taxes............................................... $ (64,126) $ 25,094 $ 52,707
---------- --------- ---------
---------- --------- ---------
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Income taxes included the following:
YEARS ENDED DECEMBER 31,
--------------------------------
IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------- ---------- --------- ---------
Federal:
Current........................................................................ $ (9,847) $ 2,142 $ 14,513
Deferred....................................................................... 2,634 3,925 (847)
---------- --------- ---------
(7,213) 6,067 13,666
State:
Current........................................................................ -- 365 2,301
Deferred....................................................................... 263 644 (31)
---------- --------- ---------
263 1,009 2,270
Foreign:
Current........................................................................ 768 455 1,480
Deferred....................................................................... -- (3) (20)
---------- --------- ---------
768 452 1,460
---------- --------- ---------
Total income tax provision (benefit)............................................. $ (6,182) $ 7,528 $ 17,396
---------- --------- ---------
---------- --------- ---------
The tax benefit associated with stock options and employee stock purchase
plan transactions increased tax refunds receivable by $309,000 for 1998, and
reduced taxes currently payable by $2,121,000 and $2,420,000 for 1997 and 1996,
respectively. 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 1998 1997 1996
- --------------------------------------------------------------------------------- ---------- --------- ---------
Tax computed at statutory rate................................................... $ (22,444) $ 8,783 $ 18,447
State income taxes, net of federal benefit....................................... 171 656 1,476
Foreign sales corporation........................................................ -- (90) (1,179)
Tax exempt income................................................................ (1,142) (1,747) (1,640)
Credits for research and development............................................. (1,304) (612) (693)
Losses not benefited............................................................. 19,775 -- --
Other, net....................................................................... (1,238) 538 985
---------- --------- ---------
Income tax provision (benefit)................................................... $ (6,182) $ 7,528 $ 17,396
---------- --------- ---------
---------- --------- ---------
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of deferred income tax assets and liabilities are as
follows:
IN THOUSANDS 1998 1997
- ------------------------------------------------------------------------------------------- ---------- ---------
Deferred tax assets:
Inventory valuation...................................................................... 11,105 3,869
Bad debt reserve......................................................................... 2,503 652
Fixed assets............................................................................. 2,404 --
Tax credit carryforwards................................................................. 1,696 519
Warranty reserves........................................................................ 542 2,141
Accrued vacation......................................................................... 136 590
Other.................................................................................... 5,419 1,290
---------- ---------
Total deferred tax assets.................................................................. $ 23,805 $ 9,061
Valuation allowance........................................................................ (19,563) --
---------- ---------
Net deferred tax assets.................................................................... $ 4,242 $ 9,061
---------- ---------
---------- ---------
Deferred tax liabilities:
Lease revenue............................................................................ (1,489) (1,489)
Deferred income.......................................................................... (1,185) (3,919)
Other.................................................................................... (1,568) (614)
---------- ---------
Total deferred tax liabilities............................................................. (4,242) (6,022)
---------- ---------
---------- ---------
Net deferred tax assets.................................................................... $ 0 $ 3,039
---------- ---------
---------- ---------
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes the Company's historical operating
performance and the reported cumulative net losses in all prior years, the
Company has provided a full valuation allowance against its net deferred tax
assets.
The net valuation allowance increased by $19,563,000 during the year ended
December 31, 1998.
As of December 31, 1998, the Company had federal research and development
tax credit carryforwards of approximately $1,304,000. The tax credit
carryforwards will expire at various dates beginning in 2001 through 2018, if
not utilized.
Utilization of tax credit carryforwards may be subject to a substantial
annual limitation due to the ownership change limitation provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of the tax credit carryforwards before utilization.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities, undeveloped land and certain equipment
under operating leases expiring through December, 2015. Under certain of its
leasing arrangements, the Company is subject to escalation charges and also
retains certain renewal and purchase options. Additionally, the table below is
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
presented net of subleases the Company has executed in the amount of $777,000,
expiring through December, 2000. As of December 31, 1998, the minimum annual
rental commitments are as follows:
1999........................................................... $4,581,000
2000........................................................... 3,614,000
2001........................................................... 2,403,000
2002........................................................... 1,729,000
2003........................................................... 1,164,000
Thereafter..................................................... 1,906,000
----------
$15,397,000
----------
----------
Rent expense was approximately $4,783,000, $3,401,000 and $2,841,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company presently leases 6.4 acres of land located in San Jose,
California. This lease expires in November 1999. As part of this transaction,
the Company has segregated $5.5 million of its securities as collateral for the
debt obligations of the lessor pertaining to this land. These securities are
restricted as to withdrawal, and are managed, subject to certain limitations, by
the Company under its investment policy.
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, 1998, the accumulated amortization related to
the excess cost over fair value of this acquisition was $914,000. 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.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITION (CONTINUED)
The following unaudited pro forma net sales, net income (loss) and net
income (loss) per share combine the historical net sales, net income (loss) and
net income (loss) per share of the Company and ISI for the year ended December
31, 1998 and December 31, 1997, as if the acquisition had occurred at the
beginning of the earliest period presented. These balances do not reflect the
charge for acquired in-process research and development of $5.1 million, or
$0.24 per share, due to its non-recurring nature.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- ---------------------------------------------------------------------- ---------- ----------
Net sales............................................................. $ 93,668 $ 194,730
Net income (loss)..................................................... (55,993) 13,734
Net income (loss) per share--basic.................................... (2.67) 0.67
Net income (loss) per share--diluted.................................. (2.67) 0.63
Number of shares used--basic.......................................... 20,958 20,553
Number of shares used--diluted........................................ 20,958 21,681
54
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ultratech Stepper, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 29, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
55
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 1999 Annual Meeting of
Stockholders to be held June 3, 1999 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 1999 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, Item 4 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.
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.
56
(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(11) Amended and Restated Certificate of Incorporation of the
Registrant, filed
June 17, 1998.
3.2(6) Bylaws of Registrant, as amended.
3.3(6) Certified 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(7) Shareholder Rights Agreement between Registrant and the
First National Bank of Boston dated February 11, 1997.
4.6.1(9) 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(11) 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.
10.1(1)(2) Distributor Agreement dated June 22, 1993 between the
Company and Innotech Corporation.
10.2(1)(5) 1993 Stock Option/Stock Issuance Plan and form of
Nonstatutory Stock Option Agreement with respect to the
automatic option grant program, as amended.
10.3(8) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
on August 8, 1997).
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(3) Executive Incentive Plan.
10.7(3) Profit Sharing Plan.
10.8(4) Standard Industrial Lease Mutual Tenant, Full Net between
Orchard Investment Company Number 701, As Landlord, and
Registrant, As Tenant dated May 17, 1994 and as amended,
October 18, 1994.
10.8.1(9) Second Amendment to Lease and Agreement to Release between
the Receiver of the Estate of Orchard Investment Company
Number 701, As Original Landlord, Orchard Properties, and
Registrant, As Tenant dated May 25, 1995.
10.8.2(9) Third Amendment to Lease between Orchard Investment Company
Number 701, As Landlord, and Registrant, As Tenant dated
November 16, 1995.
10.8.3(9) Fourth Amendment to Lease between San Jose Acquisition Co.,
L.L.C. (successor of Orchard Investment Company Number 701),
As Landlord, and Registrant, As Tenant dated February 6,
1996.
10.8.4(9) Fifth Amendment to Lease between Silicon Valley Properties,
L.L.C. (successor of San Jose Acquisition Co., L.L.C., and
Orchard Investment Company Number 701), As Landlord and
Registrant, As Tenant dated December 1, 1997.
10.11(5) 1995 Employee Stock Purchase Plan.
57
EXHIBIT DESCRIPTION
- ----------------- ------------------------------------------------------------
11.1(10) 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(12) 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 Sublease between Lam Research Corporation, as Sublessor, and
Registrant, as Sublessee dated September 16, 1998.
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney
27 Financial Data Schedule
27.1(9) Financial Data Schedule for fiscal year ended 1997.
27.2(9) Financial Data Schedule for fiscal quarters ended March 31,
June 30, and September 31, 1997, respectively.
27.3(9) Financial Data Schedule for fiscal quarters ended March 31,
June 30, and September 31, 1996, respectively, and fiscal
years ended December 31, 1996 and 1995, respectively.
- ------------------------
(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) Confidential Treatment has been granted for the deleted portions of this
document.
(3) Previously filed with the Company's 1993 Annual Report on Form 10-K
(Commission File No. 0-22248).
(4) Previously filed with the Company's 1994 Annual Report on Form 10-K
(Commission File No. 0-22248).
(5) Previously filed with the Company's 1995 Annual Report on Form 10-K
(Commission File No. 0-22248).
(6) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Commission File No. 0-22248).
(7) Previously filed with the Company's Current Report on Form 8-K, dated
February 26, 1997.
(8) Previously filed with the Company's Current Report on Form S-8, dated
August 8, 1997.
(9) Previously filed with the Company's 1997 Annual Report on Form 10-K
(Commission File No. 0-22248).
(10) Previously filed with the Company's Current Report on Form 8-K, dated June
11, 1998.
(11) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Commission File No. 0-22248).
(12) Previously filed with the Company's Current Report on Form 8-K/A, dated
August 25, 1998.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1998.
(c) Exhibits. See list of exhibits under (a)(3) above. 3
(d) Financial Statement Schedules. See list of schedules under (a)(2)
above.
58
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.
Date: March 30, 1999 ULTRATECH STEPPER, INC.
/s/ ARTHUR W. ZAFIROPOULO
----------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
By:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ ARTHUR W. ZAFIROPOULO Directors, Chief
- ------------------------------ Executive Officer March 30, 1999
Arthur W. Zafiropoulo (Principal Executive
Officer) and President
Senior Vice President,
Finance, Chief Financial
/s/ WILLIAM G. LEUNIS, III Officer, Secretary and
- ------------------------------ Treasurer (Principal March 30, 1999
William G. Leunis, III Financial and Accounting
Officer)
/s/ KENNETH A. LEVY
- ------------------------------ Director March 30, 1999
Kenneth A. Levy
/s/ GREGORY HARRISON
- ------------------------------ Director March 30, 1999
Gregory Harrison
/s/ LARRY R. CARTER
- ------------------------------ Director March 30, 1999
Larry R. Carter
/s/ THOMAS D. GEORGE
- ------------------------------ Director March 30, 1999
Thomas D. George
/s/ JOEL GEMUNDER
- ------------------------------ Director March 30, 1999
Joel Gemunder
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ----------------------------------------------- ------------- ----------- ------------- ------------- -----------
Allowance for doubtful accounts
Year ended December 31, 1996
Trade accounts receivable.................. $ 613 $ 1,225 $ -- $ (687) $ 1,151
------ ----------- ----- ------------- -----------
Year ended December 31, 1997
Trade accounts receivable.................. $ 1,151 $ 2,205 $ -- $ (1,098) $ 2,258
------ ----------- ----- ------------- -----------
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
------ ----------- ----- ------------- -----------
------ ----------- ----- ------------- -----------
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1