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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-22248
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ULTRATECH STEPPER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3050 ZANKER ROAD 95134
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(408) 321-8835
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE;
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 17, 2000, as reported on the
Nasdaq National Market was approximately $290,000,000. 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 17, 2000, the Registrant had 21,461,942 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 1, 2000 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, including advanced
packaging processes, photomasks, 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 North America, Europe, Japan and the rest of Asia. Ultratech believes
that its 1X steppers offer cost and certain performance advantages, as compared
with competitors' reduction steppers, to semiconductor device manufacturers for
applications involving line geometries of 0.65 microns or greater ("noncritical
feature sizes") and to thin film head manufacturers. The Company's 1X steppers
do not currently address applications involving line geometries of less than
0.65 microns ("critical feature sizes"). Advanced packaging for integrated
circuits, specifically "bump or flipchip" techniques, requires lithography steps
in the fabrication process. Ultratech has provided equipment to this emerging
market, both for development and production. Ultratech has developed and has
commenced shipment of its Saturn Spectrum 3 stepper, with specific design
modifications to address the requirements of this market segment. 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 1X photolithography systems to
thin film head manufacturers and believes that its steppers offer advantages
over certain competitive reduction lithography tools with respect to field size,
throughput, specialized substrate handling and cost. Additionally, the Company
supplies 1X photolithography equipment to the micromachining market, where
certain technical features such as high resolution at g-line wavelengths and
superior depth of focus may offer advantages over competitive tools.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet (DUV) reduction lithography systems (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 expanded
its photolithography stepper product line to include reduction steppers. The
reduction steppers complement the 1X steppers for use in the integrated circuit,
thin film head and micromachining markets, as their resolution requirements go
below 0.65 microns.
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.
2
The Company's products and markets are more fully described, below.
BACKGROUND
The fabrication of devices such as integrated circuits ("semiconductors" or
"ICs") and thin film magnetic recording heads ("thin film heads" or "TFHs")
requires a large number of complex processing steps, including deposition,
photolithography and etching. Deposition is a process in which a layer of either
electrically insulating or electrically conductive material is deposited on the
surface of a wafer. The photolithographic imaging process imprints device
features on a light sensitive polymer photoresist. After development of the
photoresist, etching selectively removes material from areas not covered by the
imprinted pattern.
Photolithography is one of the most critical and expensive steps in IC and
TFH device manufacturing. According to the Semiconductor Industry Association, a
significant portion of the cost of processing silicon wafers in the fabrication
of ICs is related to photolithography. Photolithography exposure equipment is
used to image device features on the surface of thin deposition films by
selectively exposing a light sensitive polymer photoresist coated on the wafer
surface, through a photomask containing the master image of a particular device
layer. Exposure of each process layer imprints a different set of features on
the device. These device layers must be properly aligned to previously defined
layers before imaging takes place, so that structures formed on the wafers are
correctly placed, one on top of the other, in order to ensure a functioning
device.
Since the introduction of the earliest commercial photolithography tools for
IC manufacturing in the early 1960s, a number of tools have been introduced to
enable manufacturers to produce increasingly complex devices that incorporate
progressively finer line widths. In the late 1970s, photolithography tools known
as step-and-repeat projection aligners, or steppers, were introduced. Unlike
prior tools, such as contact printers which required the photomask to physically
contact the wafer in order to transfer the entire pattern during a single
exposure, and scanners, which transferred the device image by scanning a narrow
slit of light across the entire photomask and wafer in a single, continuous
motion, steppers expose only a small square or rectangular portion of the wafer
in a single exposure, then move or "step" to an adjacent site to repeat the
exposure. This stepping process is repeated as often as necessary until the
entire wafer has been exposed. By imaging a small area, steppers are able to
achieve finer resolution and better alignment between the multiple device layers
and higher yield and productivity in certain devices than possible with earlier
tools. Since the late 1980s, 1X steppers have become a critical tool for the
fabrication of thin film heads because of their performance characteristics.
Thin film heads are devices that form the small read/write component in the most
advanced disk drives and have enabled disk drives to increase in speed and
memory capacity and perform more efficiently. Steppers are currently the
predominant lithography tools used in the manufacture of devices such as ICs and
TFHs. The Company believes that manufacturers of leading-edge TFH devices are
relying increasingly on reduction steppers to address the more critical feature
sizes for these devices in their front-end applications.
According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market
research firm, the two principal types of steppers currently in use by the
semiconductor industry are reduction steppers, which are the most widely used
steppers, and one-to-one steppers. Reduction steppers, which typically have
reduction ratios of four or five-to-one, are tools in which the photomask
pattern containing the design is typically four or five times larger than the
device pattern that is to be exposed on the wafer surface. Additionally,
step-and-scan systems have been introduced recently in order to address device
sizes of .18 micron and below. In contrast to steppers, which expose the entire
field in a single exposure, step-and-scan systems scan across the field until
the entire field is exposed.
The 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
3
below. The Company's reduction stepper product line includes DUV systems at
248nm, 193nm and 157nm wavelengths.
The principal advantage of reduction steppers and step-and-scan systems is
that they may be used in manufacturing steps requiring critical feature sizes
and are therefore necessary for manufacturing advanced ICs. One-to-one steppers,
on the other hand, are tools in which the photomask containing the design is the
same size as the device pattern that is exposed on the wafer surface. Current
one-to-one steppers, unlike most current reduction steppers, are based on
different technology which incorporates both reflective and refractive elements
in its optical lens imaging system that, although highly sophisticated in
design, is much simpler than a current reduction stepper's lens imaging system
which incorporates only refractive elements. As a result, current 1X steppers
are generally less expensive than current reduction steppers required for
critical feature sizes. Because of their optical design, 1X steppers typically
are also able to deliver greater energy to the wafer surface, which generally
results in higher throughput than is achievable with most reduction steppers.
One-to-one steppers, however, are currently limited to use in manufacturing
steps involving noncritical feature sizes. Accordingly, the Company believes
that sales of these systems are highly dependent upon capacity expansions by its
customers.
In the past, manufacturers of ICs and similar devices purchased capital
equipment based principally on technological capabilities. In view of the
significant capital expenditures required to construct, equip and maintain
fabrication facilities, relatively short product cycles and manufacturers'
increasing concern for overall fabrication costs, the Company believes that
manufacturers of ICs and thin film heads increasingly are focusing on reducing
their total cost to manufacture a device. A major component of this cost is the
cost of ownership of the equipment used for a particular application in a
fabrication facility. Cost of ownership is measured in terms of the costs
associated with the acquisition of equipment as well as factors such as
throughput, yield, up-time, service, labor overhead, maintenance, and various
other costs of owning and using the equipment. With increasing importance being
placed upon a system's overall cost of ownership, in many cases the system with
the most technologically advanced capabilities will not necessarily be the
manufacturing system of choice. As part of the focus on cost reduction, the
Company believes that device manufacturers are attempting to extend the useful
life and enhance the production capabilities of fabrication facilities by
selecting equipment that can replace existing tools while offering better
performance in a cost-effective manner.
PRODUCTS
The Company currently offers three different series of 1X systems for use in
the semiconductor fabrication process: the model 1500 Series, which addresses
the markets for scanner replacement 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-, which addresses the markets for scanner
replacement and high volume/low cost semiconductor fabrication. These steppers
currently offer feature size capabilities ranging from 2.0 microns to 0.65
microns and typically range in price from $800,000 to $2.1 million. The model
1500 Series and the Titan Wafer Stepper offer g- and h-line illumination
specifications. The Saturn Wafer Stepper Family features an i-line illumination
specification that is designed to make them compatible with advanced i-line
reduction steppers. In bump processing, the Saturn Spectrum 3 stepper is used in
conjunction with electroplating to produce a pattern of bumps, or metal
connections, on the bond pads of the die for flip chip devices. This pattern can
be placed in a tight array across the entire die, as opposed to the conventional
method of wire bonding which is limited to the periphery of the die. This allows
manufacturers to shrink the die size. The flip chip device can then be placed in
a small outline package or directly on a printed circuit board. The Saturn and
Titan widefield systems have a unique D-shaped field that allows for a
one-to-one field match with step-and-scan systems, or a two-to-one match with
reduction steppers. The D-shaped field is designed to allow the semiconductor
manufacturer to optimize overlay and throughput for its non-critical
mix-and-match layers. The Company also offers a reduction stepper product
4
line for selected semiconductor markets. These products include the Mercury XLS
200, Mercury XLS 248, XLS 193nm and XLS 157nm systems.
The Mercury XLS 200 is an i-line reduction system with a minimum resolution
of 0.35 microns, providing a high resolution i-line reduction stepper option for
selected semiconductor markets. The Mercury XLS 248 is a DUV (248nm) reduction
stepper providing a minimum resolution of 0.25 microns for selected
semiconductor applications requiring sub-0.35 micron resolution. The XLS 193nm
(small field) and XLS 157nm (small and mid field) systems are DUV tools used for
advanced research and development semiconductor materials and processes.
The XLS 9800 and XLS 9900 provide i-line and DUV wavelengths capabilities
and are designed to meet TFH customers' requirements for shrinking geometries on
their critical layers. In addition, the Company provides a 1700 Series stepper
capable of patterning features on rowbars utilizing an alternate alignment
system (Machine Vision System, or "MVS"). The model 1700 Series steppers are
used to expose the Air Bearing Surface (ABS) pattern on these rowbars. The
Company's TFH steppers offer feature size capabilities ranging from 2.0 to
0.25 microns and typically range in price from $800,000 to $3.6 million.
The Company also offers photolithography equipment for use in the
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 1500
Series steppers 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 .18 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 has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
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.
5
Features of the Company's current stepper systems are set forth below:
MINIMUM FEATURE
PRODUCT LINE WAVELENGTH SIZE(MICRON)
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SEMICONDUCTOR/MICRO-MACHINING:
Model 1500 Series............................ gh-line 0.8 - 1.0
Saturn Wafer Stepper......................... i-line 0.65
Saturn Spectrum 3............................ ghi-line 2.0
Titan Wafer Stepper.......................... gh-line 0.75
XLS (Reduction) Stepper Family:
Mercury XLS 200............................ i-line 0.35
Mercury XLS 248............................ DUV (248 nm) 0.25
XLS 193nm.................................. DUV (193 nm) 0.16
XLS 157nm.................................. DUV (157 nm) 0.10
PHOTOMASK:
UltraBeam "V" Model.......................... n/a 0.18
THIN-FILM HEAD:
Model 1700 Series............................ gh-line 1.0
Reduction Steppers
XLS 9800................................... i-line 0.35
XLS 9900................................... DUV (248nm) 0.25
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 research and development and process insertion for the Verdant
rapid thermal annealing/laser doping systems and technologies; continued
development of the Company's 1X and 4X reduction optical products, including the
Company's 1X 300mm tool for bump processing and Company's XLS 157nm DUV
reduction stepper; and development of larger and more flexible optical systems.
Other research and development efforts are currently focused on reliability
improvement; manufacturing cost reduction; and performance enhancement and
development of new features for existing systems, both for inclusion in the
Company's systems and to meet specific customer order requirements. These
research and development efforts are undertaken, principally, by the Company's
research, development and engineering organizations and costs are generally
expensed as incurred. Other operating groups within the Company support the
above referenced research, development and engineering efforts, and the
associated costs are charged to these organizations as incurred. The Company
also has programs devoted to the development of new photolithography systems,
including new generations of photolithography systems for existing and new
markets, enhancements and extensions of existing photolithography systems for
existing and new markets and custom engineering for specific customers.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or
6
otherwise cease operations of its electron beam technology unit. In such a
scenario, significant uncertainties exist and circumstances currently unknown
may result in the need to recognize an impairment of the Company's electron beam
technology assets in future financial periods, although management believes it
will be able to realize its net investment in the technology and related net
assets. Should an impairment occur, the Company's financial condition and
results of operations would be materially adversely impacted. The Company did
not recognize any revenue related to its electron beam technology during 1998
and 1999.
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, 1999, the Company had approximately 106 full-time employees engaged
in research, development, and engineering. For 1999, 1998 and 1997, total
research, development, and engineering expenses were approximately
$27.7 million, $26.7 million and $26.4 million, respectively, and represented
24.5%, 32.7% and 17.9% of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in North America 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. (See "Additional Risk Factors: International Sales;
Japanese Market").
Ultratech's service personnel are based throughout the United States,
Europe, Japan and the rest of Asia. The Company currently 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, the Company maintains an on-line
computerized network of its parts inventory in the United States, Europe and
Japan.
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
7
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 46,000 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 subassemblies for its systems in a timely manner. However,
disruption or termination of certain of these sources could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is relying 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.
8
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 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. Current thin film head
front-end production involves manufacturing steps that require critical feature
sizes. Although the reduction stepper product lines acquired address critical
feature sizes, additional development of these product lines may be necessary to
fully address the unique requirements of thin film head manufacturing.
Additionally, ASML has entered the low-cost lithography market. ASML and Nikon
have each introduced an i-line step-and-scan system as a lower cost alternative
to the DUV step-and-scan system for use on the less critical layers. These
systems compete with widefield steppers, such as the Saturn and Titan steppers,
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; Toshiba and JEOL, Ltd.
("Japan Electron Optical Laboratory"). In addition, the Company believes that
the high cost of developing new lithography tools has increasingly caused its
competitors to collaborate with customers and other parties in various areas
such as research and development, manufacturing and marketing, or to acquire
other competitors, thereby resulting in a combined competitive threat with
significantly enhanced financial, technical and other resources. The Company
expects its competitors to continue to improve the performance of their current
products. These competitors have stated that they will introduce new products
with improved price and performance characteristics that will compete directly
with the Company's products. This could cause a decline in sales or loss of
market acceptance of the Company's steppers, and thereby materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that enhancements to, or future generations of,
competing products will not be developed that offer superior cost of ownership
and technical performance features. The Company believes that to be competitive,
it will require significant financial resources in order to continue to invest
in new product development, features and enhancements, to introduce next
generation stepper systems on a timely basis, and to maintain customer service
and support centers worldwide. In marketing its products, the Company may also
face competition from vendors employing other technologies. In addition,
increased competitive pressure has led to intensified price-based competition,
resulting in lower prices and margins. Should these competitive trends continue,
the Company's business, financial condition and operating results would continue
to be materially adversely affected. There can be no assurance that the Company
will be able to compete successfully in the future.
Foreign 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
9
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 December 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.
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.
10
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 North America, Europe, Japan
and the rest of Asia. Semiconductor manufacturers have purchased the model 1500
Series steppers, the Saturn Wafer Stepper, the Titan Wafer Stepper and the XLS
product family for the fabrication of microprocessors, microcontrollers, DRAMs,
ASICs and other devices. Such systems are used in mix-and-match environments
with other lithography tools, as replacements for scanners and contact printers,
in start-up fabrication facilities, in packaging for ultrathin and flip chip
applications and for high volume, low cost noncritical feature size
semiconductor production. The Company's reduction stepper product line, acquired
in the Acquisition, will continue to address selected semiconductor markets.
Thin film head manufacturers have purchased the model 1700 Series steppers due
to their throughput and overall cost of ownership. The XLS 9800, first
introduced in 1998, is an i-line reduction stepper designed specifically for the
thin film head market. The XLS 9900, a DUV reduction stepper, is also offered to
manufacturers of leading-edge TFH devices. Manufacturers of micromachined
components have purchased the model 1500 Series steppers and Saturn/Titan wafer
stepper families because of high throughput and flexible field size advantages
along with cost-effective, submicron imaging capabilities.
Historically, the Company has sold a substantial portion of its systems to a
limited number of customers. In 1999, no single customer accounted for 10% or
more of the Company's net sales. 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. 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, the semiconductor and thin film head industries
and the economy in general, of which there can be no assurance. (See "Additional
Risk Factors: Cyclicality of Semiconductor and Thin Film Head Industries").
In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted in significant concentrations of accounts receivable and leases
receivable. The formation of significant and concentrated receivables exposes
the Company to additional risks, including the risk of default by one or more
customers representing a
11
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 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, 1999, the Company's backlog
was approximately $27.8 million, compared with approximately $29.4 million as of
December 31, 1998.
EMPLOYEES
At December 31, 1999, the Company had approximately 476 full-time employees,
including 106 engaged in research, development, and engineering, 26 in sales and
marketing, 164 in customer service and support, 115 in manufacturing and 65 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. 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. 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
12
markets experiences a downturn or slowdown, such as is currently occurring in
the thin film head market, the Company's net sales and operating results are
materially adversely affected.
During 1999, 1998 and 1997, approximately 30%, 50% and 50%,respectively, of
the Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. The Company believes the TFH market is currently
in a state of over-capacity and expects this situation to last for at least the
next several quarters. This has and will continue to result in lower sales and
delays or deferrals of customer orders from these industries, which will
continue to materially adversely affect the Company's business, financial
condition and results of operations in the near term. Additionally, the Company
is experiencing increased competition in this market from Nikon, Canon and ASML.
The Company's business and operating results would be materially adversely
affected by continued downturns or slowdowns in the thin film head market or by
loss of market share.
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 2000, 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.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for
13
sharing future development funding in electron beam technology, sell its
electron beam technology unit, or otherwise cease operations of its electron
beam technology unit. In such a scenario, significant uncertainties exist and
circumstances currently unknown may result in the need to recognize an
impairment of the Company's electron beam technology assets in future financial
periods, although management believes it will be able to realize its net
investment in the technology and related net assets. Should an impairment occur,
the Company's financial condition and results of operations would be materially
adversely impacted. The Company did not recognize any revenue related to its
electron beam technology during 1998 and 1999.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor and magnetic recording head manufacturing industries are subject
to rapid technological change and new product introductions and enhancements.
The Company's ability to be competitive in these and other markets will depend,
in part, upon its ability to develop new and enhanced systems and related
software tools, and to introduce these systems and related software tools at
competitive prices and on a timely and cost-effective basis to enable customers
to integrate them into their operations either prior to or as they begin volume
product manufacturing. The Company will also be required to enhance the
performance of its existing systems and related software tools. Any success of
the Company in developing new and enhanced systems and related software tools
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the technology that will be available to supply that demand.
There can be no assurance that the Company will be successful in selecting,
developing, manufacturing 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.
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 53%, 47% and 33% of total net sales for the years 1999, 1998 and
1997, 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
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
14
and branch operations and potentially adverse tax consequences. Although the
Company generally transacts its international sales in U.S. dollars,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products and may further impact the purchasing ability of its international
customers. In Japan, however, the Company has commenced direct sales operations
and orders are 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.
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.
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.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED
RESULTS OF OPERATIONS The Company prepares its financial statements to conform
with generally accepted accounting principles, or GAAP. GAAP are subject to
interpretation by the American Institute of Certified Public Accountants, the
SEC and various bodies formed to interpret and create appropriate accounting
policies. A change in those policies can have a significant effect on the
Company's reported results and may even affect its reporting of transactions
completed before a change is announced.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at
15
the beginning of the quarter ending March 31, 2000. This charge will appear as a
non-operating item in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
Accounting policies affecting many other aspects of our business, including
rules relating to purchase and pooling-of-interests accounting for business
combinations, revenue recognition, in-process research and development charges,
employee stock purchase plans and stock option grants, have recently been
revised or are under review. Changes to those rules or the questioning of
current practices may have a material adverse effect on the Company's reported
financial results or on the way it conducts business. In addition, the Company's
preparation of financial statements in accordance with GAAP requires that it
make estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting
period. A change in the facts and circumstances surrounding those estimates
could result in a change to the Company's estimates and could impact its future
operating results.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, 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 four leased facilities, totaling approximately 228,000
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 2010. The Company
also leases 6.4 acres of undeveloped land near its headquarters in San Jose.
This lease expires in November 2000. As part of this transaction, the Company
presently has segregated $5.5 million of its securities as collateral for
certain obligations of the lessor
16
pertaining to this land. The Company also leases four sales and support offices
in the United States in Phoenix, Arizona; Allentown, Pennsylvania; Austin,
Texas; and Richardson, Texas under leases with terms expiring between one and
four 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.
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1999, 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................ 60 Chairman of the Board of Directors and Chief
Executive Officer
Daniel H. Berry...................... 54 President and Chief Operating Officer
Bruce R. Wright...................... 51 Senior Vice President, Finance, Chief Financial
Officer and Secretary
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal 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 serves in this capacity until
April 1999. Between September 1990 and March 1993, he was President of the
Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President
of General Signal's Semiconductor Equipment Group International, a semiconductor
equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was
President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company
that he founded in August 1980, and which was later sold to General Signal in
1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of
Kayex, a semiconductor equipment manufacturer, which is a unit of General
Signal. Mr. Zafiropoulo is a director of SEMI (Semiconductor Equipment and
Materials International), an international trade association representing the
semiconductor, flat panel display equipment and materials industry;
Semi/Sematech, which represents majority United States-owned and controlled
suppliers of equipment, materials and services to the semiconductor
manufacturing industry; Advanced Energy Industries, Inc., a leading manufacturer
of power conversion and control systems; and Intelligent Reasoning
Systems, Inc., a provider of optical inspection tools which utilize artificial
intelligence software for Printed Wiring Assemblies (PWA) and High-Density
Interconnect (HDI) markets.
Mr. Berry has served as Chief Operating Officer and President of the Company
since April 1999. Between June 1998 and April 1999, Mr. Berry was the Chief
Operating Officer and Executive Vice President of the Company. Between
March 1993 and June 1998, he served as Senior Vice President, Sales and Service
of the Company. Between December 1990 and March 1993, he served as Vice
President, Sales and Service of the Predecessor. From November 1989 to
December 1990, Mr. Berry was director of
17
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. Prior to Perkin-Elmer, Mr. Berry spent nine years at
Bell Laboratories, Murray Hill, New Jersey, working on various optical and
lithography development projects. Since December 1998, Mr. Berry has served as a
director of Rudolph Technologies, Inc. Flanders, New Jersey, a manufacturer of
precision film metrology instruments for semiconductor markets
Mr. Wright has served as Senior Vice President, Finance, Chief Financial
Officer and Secretary of the Company since June 1, 1999. Mr. Wright is
responsible for all aspects of finance, legal and information services. Before
he joined the Company, Mr. Wright served as Executive Vice President, Finance
and CFO of Spectrian Corporation. From 1991 through 1997, Mr. Wright was CFO of
Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997,
which formed KLA-Tencor Corporation. Mr. Wright holds an MBA degree in Finance
and Operations Management from the Massachusetts Institute of Technology, a BS
degree in Mechanical Engineering from the California Institute of Technology,
and a BA degree in Physics from Pomona College.
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 1999--FISCAL QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------- -------- -------- ------------ -----------
Market Price:(1) High................. $20.6250 $15.4688 $15.0625 $19.4375
Low.................. $13.6875 $12.9375 $12.5000 $12.7500
FISCAL 1998--FISCAL QUARTER ENDED
- -----------------------------------------
Market Price:(1) High................. $24.0000 $26.6250 $23.0000 $20.5000
Low.................. $18.1250 $18.5000 $14.0000 $12.7500
- ------------------------
(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, 1999, the Company had approximately 740 stockholders of record.
The Company's fiscal quarters in 1999 ended on April 3, 1999, July 3, 1999,
October 2, 1999 and December 31, 1999, and the Company's fiscal quarters in 1998
ended on April 4, 1998, July 4, 1998, October 3, 1998, and December 31, 1998,
respectively. For convenience of presentation, the Company's 1999 fiscal
quarters have been shown as ending on March 31, 1999, June 30, 1999,
September 30, 1999 and December 31, 1999, and 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.
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.
18
ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998*** 1997** 1996 1995 1994 1993* 1992*
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
OPERATIONS:
Net sales......................... $113,123 $ 81,457 $147,349 $193,508 $157,831 $91,344 $54,136 $35,309
Gross profit (loss)............... 44,420 (1,319) 77,678 104,893 82,288 46,037 26,683 17,548
Gross profit (loss) as a percentage
of net sales.................... 39% (2)% 53% 54% 52% 50% 49% 50%
Operating income (loss)........... $(11,213) $(70,426) $ 18,001 $ 46,678 $ 31,782 $15,291 $ 6,833 $ 2,220
Income (loss) before income taxes
(benefit)....................... (4,168) (64,126) 25,094 52,707 36,170 16,445 6,689 2,089
Pre-tax income (loss) as a
percentage of net sales......... (4)% (79)% 17% 27% 23% 18% 12% 6%
Net income (loss)................. $ (4,168) $(57,944) $ 17,566 $ 35,311 $ 24,234 $11,019 $ 4,123 $ 1,304
Net income (loss) per
share--basic.................... $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A N/A
Number of shares used in per share
computation--basic.............. 21,279 20,958 20,553 20,079 18,425 16,293 N/A N/A
Net income (loss) per
share--diluted.................. $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A N/A
Number of shares used in per share
computation--diluted............ 21,279 20,958 21,681 21,271 20,154 16,917 N/A N/A
BALANCE SHEET:
Cash, cash equivalents and short-
term investments................ $143,544 $146,107 $164,349 $167,409 $161,356 $50,246 $26,242 $ 176
Working capital................... 163,601 166,417 223,226 212,684 176,174 69,368 32,977 6,307
Total assets...................... 236,808 245,935 300,001 280,772 245,428 104,789 56,381 16,765
Long-term obligations, less current
portion......................... -- -- -- -- -- 400 800 --
Stockholders' equity.............. 204,214 210,151 263,632 239,947 199,658 80,027 38,091 8,323
OTHER DATA:
Return on average equity.......... (2)% (24)% 7% 16% 17% 19% 18% 15%
Book value per common share
outstanding..................... $ 9.55 $ 9.96 $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00 N/A
Current ratio..................... 6.06 5.81 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 0.00 0.02 0.00
Capital expenditures.............. $ 6,948 $ 9,510 $ 9,337 $ 7,849 $ 9,760 $ 7,759 $ 2,752 $ 972
Income tax/benefit as percentage of
pre-tax income/loss............. 0% 10% 30% 33% 33% 33% 38% 38%
QUARTERLY DATA
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA 1ST 2ND 3RD 4TH
- ---------------------------------------------- -------- -------- -------- --------
1999
Net sales................................................... $25,779 $ 29,284 $ 30,413 $ 27,647
Gross profit................................................ 8,721 11,295 13,088 11,316
Operating loss.............................................. (4,377) (2,725) (1,195) (2,916)
Net income (loss)........................................... (2,529) (1,074) 434 (999)
Net income (loss) per share--basic.......................... $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--basic....... 21,124 21,264 21,344 21,386
Net income (loss) per share--diluted........................ $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--diluted..... 21,124 21,264 21,740 21,386
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
- ------------------------------
* 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.
19
*** Gross profit (loss) in 1998 includes special charges of $15,231,000 and
$11,177,000 in the third and fourth quarters, respectively, relating
primarily to the write-down of inventories and provisions for estimated
losses on purchase commitments. Results of operations in 1998 include a
charge of $12,566,000 in the second quarter, or $0.60 per share--basic and
diluted, to reflect acquired in-process research and development incurred in
conjunction with the acquisition of ISI, and a related adjustment to
operations of $7,458,000 in the fourth quarter, or $0.35 per share, to
reduce the in-process research and development charge as a result of the
final purchase price allocation. Additionally, results of operations in 1998
include special charges of $5,775,000 and $5,400,000 in the third and fourth
quarters, respectively, reflecting provisions for doubtful accounts and
leases receivable, provisions for sales returns and allowances and costs
associated with a reduction in the Company's workforce.
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 components. The Company
supplies step-and-repeat systems based on one-to-one and reduction optical
technologies to customers located throughout North America, Europe, Japan and
the rest of Asia. These products range from low-cost systems for high-volume
manufacturing to advanced systems for cost-effective production of leading-edge
devices and for research and development applications. 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 integrated circuits ("IC") industry.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems (the "Acquisition") for approximately
$19.2 million in cash, $2.6 million in transaction costs and the assumption of
certain liabilities.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and will continue to fluctuate significantly in the future. Such variability
depends 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; the mix of products sold; inventory and open purchase commitment
reserve positions; concentration of credit risk; lengthy development cycles for
new products; market acceptance of new products and enhanced versions of the
Company's products; delayed shipments to customers due to customer configuration
changes and other factors; acquisition activities requiring the devotion of
substantial management resources; lengthy manufacturing cycles for the Company's
products; the timing of new product announcements and releases by the Company or
its competitors; manufacturing
20
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 product discounts and increased
competition in the Company's targeted markets; the mix of products sold;
inventory and open purchase commitment reserve provisions; the rate of capacity
utilization; nonlinearity of shipments during the quarter; the introduction of
new products, which typically have higher manufacturing costs until
manufacturing efficiencies are realized and are typically discounted more than
existing products until the products gain market acceptance; the percentage of
international sales, which typically have lower gross margins than domestic
sales principally due to higher field service and support costs; and the
implementation of subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.4 million for the Company's 1X steppers, and
$1.5 million to more than $6 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 dependent 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 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 Wafer Stepper-Registered Trademark-
and Saturn Wafer Stepper-Registered Trademark-, and the Company's reduction
stepper product offerings (acquired through the acquisition of certain assets
and liabilities of ISI in 1998), 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
increase 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 was delayed to the following quarter. 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 head industries. In
addition, the need for continued expenditures for research and development,
capital equipment, ongoing training and worldwide customer service and support,
among other factors, will make
21
it difficult for the Company to reduce its operating expenses in a particular
period if the Company fails to achieve its net sales goals for the period.
Additionally, the Company continues to operate at less than optimal capacity
utilization, resulting in manufacturing inefficiencies that adversely affect the
Company's gross margins and results of operations. The Company presently
anticipates that this trend will continue for at least the next few quarters.
The Company presently expects that net sales for the three-month period
ending March 31, 2000 will be higher than net sales in the comparable period in
1999. However, 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
Irrespective of the impact of SAB 101, the Company presently expects to
recognize an operating and net loss for the quarter ending March 31, 2000. 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.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
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; year 2000 compliance; future
acquisitions; expansion of the Company's product lines; dependence on key
personnel; sole or
22
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.
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
1999 VS. 1998
Net sales consist of revenue from system sales, spare parts sales, and
service. For the year ended December 31, 1999, net sales were $113.1 million, an
increase of 39% as compared with net sales of $81.5 million for 1998. The
increase, relative to 1998, was primarily attributed to improved conditions
within the semiconductor industry, which has resulted in higher capital spending
levels, partially offset by lower front-end equipment sales to the thin film
head industry. For the year ended December 31, 1999, the Company's unit system
shipments increased 70%, relative to 1998, while the weighted-average selling
price of all systems sold declined slightly. Service revenue increased 11% for
the year ended December 31, 1999, as compared to 1998, primarily as a result of
the acquisition of the product lines and related service business of ISI in June
of 1998. Net sales of spare parts and product upgrades declined 9% for the year
ended December 31, 1999, as compared to 1998.
For the year ended December 31, 1999, international net sales were
$60.0 million, as compared with $38.5 million for 1998, an increase of 56%.
International net sales represented 53% of total net sales for the year ended
December 31, 1999, as compared with 47% for 1998. This year-over-year increase,
in absolute dollars, was primarily attributed to sales to back-end thin film
head manufacturers in Asia, excluding Japan. However, the Company continues to
be cautious in its outlook for the Asian markets. The Company believes that the
severe currency and equity market fluctuations that have been experienced in
recent years by many of the Asian markets has resulted in the past, and may
continue to result, in delays, deferrals and cancellations of orders of the
Company's products, particularly in the short-term, which would 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, 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 and may place the Company at a competitive disadvantage. (See
"Additional Risk Factors: International Sales; Japanese Market").
During 1997 and 1998, the Company experienced a significant level of
shipment delays and purchase order restructuring 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. Additionally, the TFH market is currently in an
over-capacity situation. This factor had a material adverse impact on net sales
for the quarter ended December 31, 1999 and may further adversely impact net
sales for at least the next several quarters.
The Company presently expects that net sales for the three-month period
ending March 31, 2000 will be higher than net sales in the comparable period in
1999. However, 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.
23
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
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 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.
1998 VS. 1997
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
product upgrades increased 2% 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.
GROSS PROFIT (LOSS)
1999 VS. 1998
The Company's gross profit as a percentage of net sales ("gross margin") was
39.3% for the year ended December 31, 1999, as compared with a gross loss as a
percentage of net sales of (1.6%) for 1998. In 1998, the Company recognized
$26.4 million in special charges related primarily to the write-down of
inventories and provisions for estimated losses associated with open purchase
commitments. These charges
24
were primarily a result of the Company's lower sales and bookings levels in
1998, revised sales demand forecasts for 1999 and delays in the
production-readiness of the Company's electron beam lithography system. In
addition to the special charges recognized in 1998, the increase in gross profit
as a percentage of net sales in 1999 can be further attributed to significantly
higher capacity utilization; favorable changes in product mix; and a lower
percentage of service revenue relative to total net sales, which typically has
lower standard margins than system sales; partially offset by lower
weighted-average selling prices.
The Company believes that gross profit as a percentage of net sales for the
first quarter of 2000 may be comparable to levels achieved during the
three-month period ended March 31, 1999. Intense competition in the markets the
Company serves may make it difficult for the Company to increase or maintain its
current gross margin percentages in the near term.
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; unfavorable 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.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
1999 VS. 1998
The Company's research, development and engineering expenses were
$27.7 million for 1999, as compared with $26.7 million for 1998. The Company
continued to invest significant resources in the development and enhancement of
its UltraBeam electron beam lithography system and its Verdant rapid thermal
annealing/laser doping systems and technologies, together with continued
expenditures for its 1X and reduction optical products and technologies. The
Company presently expects that the absolute dollar amount of research,
development and engineering expenses for the quarter ending March 31, 2000 will
be significantly higher, relative to the comparable period in 1999, due
primarily to increased spending on its 1X and reduction optical products and
technologies.
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 invested
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 continued
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.
25
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1999 VS. 1998
Selling, general and administrative expenses were $26.3 million for 1999, as
compared with $25.1 million recorded for 1998. As a percentage of net sales,
selling, general and administrative expenses decreased to 23.3% of net sales in
1999, as compared to 30.8% of net sales in 1998, primarily as a result of higher
net sales and cost containment measures implemented in the second half of 1998.
The Company presently anticipates that the absolute dollar amount of selling,
general and administrative expenses will increase significantly during the
quarter ending March 31, 2000, relative to the comparable period in 1999,
primarily as a result of higher anticipated net sales.
1998 VS. 1997
Selling, general and administrative expenses were $25.1 million for 1998, as
compared with $26.0 million in 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 30.8% of net sales in 1998, as
compared to 17.7% 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 second half of the year. Additionally, lower expenses as are typically
associated with a reduction in sales.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc., a privately held manufacturer of i-line and deep ultra-violet
reduction lithography systems. As a result, the Company recognized a charge for
acquired in-process research and development ("IPR&D") expense of $5.1 million,
or $0.24 per share net of tax benefits, representing products in development
stage that were not considered to have reached technological feasibility and had
no alternative future use.
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 was 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.
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 were 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 included: the development of high resolution optical systems with
- -ffUaxis 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
26
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 estimated that as of the acquisition date, the remaining
research and development work on these projects would cost approximately
$35.0 million and would be completed over the next one to five years. These
projects had 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 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 were 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.
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.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, which consists primarily of interest income,
was $7.4 million for 1999 as compared with $6.7 million for 1998 and
$7.3 million for 1997.
INCOME TAXES (BENEFIT)
The Company did not recognize an income tax benefit on its pre-tax loss for
1999, due to uncertainty related to the utilization of its net operating loss
carry-forward. Income taxes (benefit) represented 10% and 30% of income (loss)
before income taxes for 1998 and 1997, 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 carry-forward and certain deferred tax asset
reserves recognized during the year.
27
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.4 million for the year
ended December 31, 1999, as compared with $6.9 million provided by operating
activities during 1998. Positive cash flows from operating activities during
1999 were primarily attributed to non-cash charges to income of $12.9 million, a
reduction in inventories of $7.8 million, an increase in income taxes payable of
$3.5 million, an increase in advance billings of $3.2 million and a reduction of
prepaid expenses and other current assets of $3.0 million, partially offset by
the net loss of $4.2 million for the year ended December 31, 1999, an increase
in accounts receivable of $9.0 million, a decline in accrued expenses of
$6.9 million and an increase in other assets of $2.1 million.
The increase in accounts receivable, as compared with December 31, 1998, was
primarily attributed to a combination of higher sales levels and lower levels of
accounts receivable sales to third parties, partially offset by improved
collections. The Company sells certain of its accounts receivable in order to
mitigate its credit risk and to enhance cash flow. Sales of accounts receivable
typically precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product.
From time-to-time the Company has repurchased certain accounts and leases
receivable in accordance with these terms. At December 31, 1999, $5.6 million of
sold accounts receivable were outstanding to third-party financial institutions.
The Company may continue to attempt to mitigate the impact of extended payment
terms and non-linear shipments by selling a substantial portion of its accounts
receivable in the future. There can be no assurance that this financing will be
available on reasonable terms, or at all.
The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working capital.
Additionally, as of December 31, 1999, the Company had approximately
$4.7 million of net inventories and $6.2 million of net long-lived assets
related to several new product lines, including its electron beam lithography
technologies. 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.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
During the year ended December 31, 1999, the Company used $16.5 million of
net cash in its investing activities, primarily as a result of the net
investment of $7.5 million in "available-for-sale" securities, capital
expenditures of $6.9 million, and $2 million for the purchase of licensed
technology.
For the year ended December 31, 1999, there was $27,000 net cash provided by
financing activities, as $1.4 million generated from the issuance of Common
Stock pursuant to the exercise of employee stock
28
options and the Company's employee stock purchase plan was partially offset by
$1.4 million used in repayment of a note payable.
At December 31, 1999, the Company had working capital of $163.6 million. The
Company's principal sources of liquidity at December 31, 1999 consisted of
$143.5 million in cash, cash equivalents and short-term investments.
The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales, service,
training and support capabilities; investments in systems, procedures and
controls and expansion of operations and research and development, among many
other items. The Company expects that anticipated cash flows from operations and
its cash, cash equivalents and short-term investments will be sufficient to meet
the Company's cash requirements for the next twelve months. Beyond the next
twelve months, the Company may require additional equity or debt financing to
address its working capital or capital equipment needs. Additionally, the
Company may in the future pursue additional acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
may result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
any Company profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies; the diversion of management's attention from
other business concerns; risks of entering markets in which the Company has no
or limited direct experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines, technologies
or businesses which do not complement the Company's business, or which otherwise
do not enhance the Company's sales or operating results, the Company may incur
substantial write-offs and higher recurring operating costs, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that any such acquisition does occur, there
can be no assurance as to the effect thereof on the Company's business or
operating results. Additionally, the Company may experience renewed interest in
its equipment leasing program and this may result in the further formation of
significant long-term receivables, which, in turn, would require the use of
substantial amounts of working capital. The formation of significant long-term
receivables and the granting of extended customer payment terms exposes the
Company to additional risks, including potentially higher customer concentration
and higher potential operating expenses relating to customer defaults. During
the three-month periods ended September 30, 1998 and December 31, 1998, the
Company took significant reserves against certain leases receivable, which are
currently non-performing. If additional reserves on lease receivables were
required in the future, the Company's business, financial condition and results
of operations could be materially adversely affected. To the extent that the
Company's financial resources are insufficient to fund the Company's activities,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms, or at all.
YEAR 2000 DISCLOSURE
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
March 2000 update:
Through the first two months of the year 2000, the Company's operations
around the world are fully functioning and have not experienced any significant
issues associated with the Year 2000 problem. Our customer-support operations
continue to communicate to us that the Company's customers have not reported any
consequential Year 2000 incidents. At the Company's sites worldwide, we have not
experienced any significant Year 2000-related issue that would affect our
ability to manufacture, ship, sell or service our products. While we are
encouraged by the success of our Year 2000 efforts and that of our
29
customers and suppliers, the Company will continue to offer Year 2000 support to
customers and monitor our own operations.
The Company presently estimates that the total cost for the entire Y2K
project approximated one million dollars and that there are no significant
project costs remaining. However, additional requirements may be identified in
the future and unscheduled costs may be incurred. Accordingly, despite favorable
results so far, 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.
Year 2000 readiness overview:
Many currently installed computer systems and software products were coded
to accept only two digit entries in the attached date code field. Beginning in
the year 2000, these date code fields needed to accept four digit entries to
distinguish 21(st) century dates from 20(th) century dates. As a result,
computer systems and/or software used by many companies needed 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 estimates that the
total cost for the entire Y2K project approximated $1.0 million and that the
remaining project cost is insignificant. 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 had 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 made 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 may 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 established, 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 has completed the related compliance
testing. The Company has also provided for contingency plans to further minimize
risks to its business system associated with Y2K.
30
Although the Company is not aware of any remaining 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 has collected and reviewed survey responses, the Company believes
it has not been able to obtain adequate assurances from all its key vendors.
Even where assurances were received from third parties, there remained 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 to prepare
contingency plans. The Company has worked 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.
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 and implemented the required changes for its
products' hardware and software components to attain Y2K readiness and is
currently working with customers to assist in understanding these requirements.
The Company has obligations to provide these modifications to customers with
systems under warranty or currently under service contract. The Company has
commenced the process of installing and testing these upgrades at customer sites
and believes this process has been completed 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 has collected
and reviewed survey responses, the Company believes it has not been 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 to prepare contingency plans. These
contingency plans may result, among other things, in the development of
alternative suppliers and the purchase of additional inventories. The Company
has worked 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.
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
31
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.
ADOPTION OF THE EURO
The introduction of a European single currency, the Euro, was initially
implemented as of January 1, 1999, and the transition period will continue
through Jan 1, 2002. As of December 31, 1999, the adoption of the Euro has not
had a material effect on the Company's foreign exchange and hedging activities
or the Company's use of derivative instruments. While the Company will continue
to evaluate the impact of the Euro introduction over time, based on currently
available information, management does not believe that the introduction of the
Euro currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk due to potential changes in interest
rates, relates primarily to the Company's investment portfolio, which consisted
primarily of fixed interest rate instruments as of December 31, 1999. 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, 1999, that are
sensitive to changes in interest rates. These instruments are comprised of cash,
cash equivalents, short-term investments and restricted long-term investments.
These instruments are not leveraged and are held for purposes other than
trading. The modeling techniques used 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, 1999. 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:
VALUATION OF SECURITIES GIVEN VALUATION OF SECURITIES GIVEN
AN INTEREST RATE DECREASE OF NO CHANGE IN AN INTEREST RATE INCREASE OF
X BASIS POINTS INTEREST RATE X BASIS POINTS
-------------------------------- ------------- ------------------------------
SHORT-TERM INVESTMENTS, IN THOUSANDS (150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS
- ------------------------------------ --------- --------- -------- ------------- -------- -------- --------
U.S. Treasury securities and obligations of
U.S. government agencies.................. $ 27,086 $ 26,799 $26,510 $ 26,223 $ 25,936 $ 25,646 $ 25,359
Obligations of states and political
subdivisions.............................. 10,477 10,477 10,477 10,477 10,477 10,477 10,477
U.S. corporate debt securities.............. 95,568 95,070 94,571 94,207 93,842 93,344 92,845
-------- -------- -------- -------- -------- -------- --------
Total short-term investments.............. $133,131 $132,346 $131,558 $130,907 $130,255 $129,467 $128,681
======== ======== ======== ======== ======== ======== ========
RESTRICTED LONG-TERM INVESTMENTS, IN THOUSANDS
- ----------------------------------------------
U.S. Treasury securities and obligations of
U.S. government agencies.................. $ 5,422 $ 5,416 $ 5,411 $ 5,405 $ 5,400 $ 5,394 $ 5,389
U.S. corporate debt securities.............. 74 74 74 74 74 74 74
-------- -------- -------- -------- -------- -------- --------
Total long-term restricted investments.... $ 5,496 $ 5,490 $ 5,485 $ 5,479 $ 5,474 $ 5,468 $ 5,463
======== ======== ======== ======== ======== ======== ========
$138,627 $137,836 $137,043 $136,386 $135,729 $134,935 $134,144
======== ======== ======== ======== ======== ======== ========
The table was developed based on the fact that a 50-BPS move in the Federal
Funds Rate has occurred in nine of the last ten years; a 100-BPS move in the
Federal Funds Rate has occurred in six of the last ten years; and a 150-BPS move
in the Federal Funds Rate has occurred in four for the last ten years.
32
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.
The Company has not materially altered its investment objectives or criteria
and believes that, although the composition of the Company's portfolio has
changed from the preceding year, the portfolio's sensitivity to changes in
interest rates is materially the same.
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, 1999 there were approximately $10.6 million outstanding foreign
currency forward contracts.
33
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, 1999 and 1998..... 35
Consolidated Statements of Operations--Years ended December
31, 1999, 1998, and 1997.................................. 36
Consolidated Statements of Cash Flows--Years ended December
31, 1999, 1998 and 1997................................... 37
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1999, 1998 and 1997.......................... 38
Notes to Consolidated Financial Statements.................. 39-54
Report of Ernst & Young LLP, Independent Auditors........... 55
34
ULTRATECH STEPPER, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998
- ------------------------------------------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,978 $ 54,142
Short-term investments.................................... 96,566 91,965
Accounts receivable, less allowance for doubtful accounts
of $2,046 in 1999 and $2,196 in 1998.................... 19,993 11,023
Inventories............................................... 28,975 36,750
Leases receivable--current portion, less allowance for
doubtful accounts of $1,049 in 1999 and $841 in 1998.... 1,354 2,012
Prepaid expenses and other current assets................. 2,040 5,088
-------- --------
Total current assets........................................ 195,906 200,980
Equipment and leasehold improvements, net................... 20,486 23,319
Restricted investments...................................... 5,479 5,510
Leases receivable, less allowance for doubtful accounts of
$3,244 in 1999 and $5,603 in 1998......................... 282 1,536
Intangible assets, net...................................... 8,940 8,438
Other assets................................................ 5,715 5,276
-------- --------
Total assets................................................ $236,808 $245,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 490 $ 1,881
Accounts payable.......................................... 7,931 8,541
Accrued expenses.......................................... 13,958 20,817
Advance billings.......................................... 4,845 1,694
Income taxes payable...................................... 5,081 1,630
-------- --------
Total current liabilities................................... 32,305 34,563
Other liabilities........................................... 289 345
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:
21,392,117 at December 31, 1999 and 21,105,733 at
December 31, 1998....................................... 21 21
Additional paid-in capital................................ 175,573 174,155
Accumulated other comprehensive (loss) income, net........ (2,408) 779
Retained earnings......................................... 31,028 35,196
-------- --------
Total stockholders' equity.................................. 204,214 210,151
-------- --------
Total liabilities and stockholders' equity.................. $236,808 $245,059
======== ========
See accompanying notes to condensed consolidated financial statements.
35
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- -------------------------------------- -------- -------- --------
Net sales
Products.................................................. $ 95,473 $ 65,569 $136,677
Services.................................................. 17,650 15,888 10,672
-------- -------- --------
Total net sales............................................. 113,123 81,457 147,349
Cost of sales
Cost of products sold..................................... 56,471 46,016 62,995
Cost of services.......................................... 12,232 10,352 6,676
Write-down of inventory................................... -- 20,559 --
Provision for estimated losses on purchase commitments.... -- 5,849 --
-------- -------- --------
Gross profit (loss)......................................... 44,420 (1,319) 77,678
Research, development, and engineering...................... 27,678 26,654 26,431
Selling, general, and administrative........................ 26,325 25,115 26,036
Acquired in-process research and development................ -- 5,108 3,619
Special charges............................................. -- 11,175 3,450
Amortization of goodwill.................................... 1,630 1,055 141
-------- -------- --------
Operating income (loss)..................................... (11,213) (70,426) 18,001
Interest expense............................................ (374) (445) (165)
Interest and other income, net.............................. 7,419 6,745 7,258
-------- -------- --------
Income (loss) before income taxes (benefit)................. (4,168) (64,126) 25,094
Income taxes (benefit)...................................... -- (6,182) 7,528
-------- -------- --------
Net income (loss)........................................... $ (4,168) $(57,944) $ 17,566
======== ======== ========
Net income (loss) per share--basic.......................... $ (0.20) $ (2.76) $ 0.85
Number of shares used in per share computations--basic...... 21,279 20,958 20,553
Net income (loss) per share--diluted........................ $ (0.20) $ (2.76) $ 0.81
Number of shares used in per share computations--diluted.... 21,279 20,958 21,681
See accompanying notes to consolidated financial statements.
36
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (4,168) $ (57,944) $ 17,566
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 8,187 7,672 5,600
Amortization.............................................. 4,370 2,934 1,634
Loss on disposal of equipment............................. 390 1,179 93
Deferred income taxes..................................... -- 3,039 4,566
Write-off of acquired in-process research and
development............................................. -- 5,108 3,619
Changes in operating assets and liabilities:
Accounts receivable..................................... (8,970) 38,047 (6,102)
Inventories............................................. 7,775 10,580 (1,813)
Prepaid expenses and other current assets............... 3,048 677 (1,025)
Leases receivable--current portion...................... 658 396 (2,215)
Leases receivable--long term............................ 1,254 9,818 (10,929)
Intangible assets....................................... (133) -- (160)
Other assets............................................ (2,132) (1,747) (874)
Accounts payable........................................ (610) (6,957) 2,895
Accrued expenses........................................ (6,859) (4,751) (6,427)
Advance billings........................................ 3,151 32 226
Income taxes payable.................................... 3,451 (1,404) (251)
Other liabilities....................................... (56) 186 (761)
--------- --------- ---------
Net cash provided by operating activities................... 9,356 6,865 5,642
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (6,948) (9,510) (9,337)
Investments in securities................................... (361,398) (430,079) (681,316)
Proceeds from sales of investments.......................... 56,047 111,106 165,192
Proceeds from maturing investments.......................... 297,823 348,407 515,342
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) --
Purchase of licensed technology............................. (2,000) -- --
Restricted investments...................................... (71) (159) (175)
--------- --------- ---------
Net cash used in investing activities....................... (16,547) (2,054) (13,395)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) notes payable............. (1,391) 1,787 94
Proceeds from issuance of Common Stock...................... 1,418 3,646 3,786
--------- --------- ---------
Net cash provided by financing activities................... 27 5,433 3,880
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (7,164) 10,244 (3,873)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 54,142 43,898 47,771
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 46,978 $ 54,142 $ 43,898
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 337 $ 445 $ 185
Income taxes (refund), net.............................. (7,015) 840 3,254
Other non-cash changes
Systems transferred from inventory to equipment and other
assets.................................................. $ 2,806 $ 4,018 $ 4,208
See accompanying notes to consolidated financial statements.
37
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
IN THOUSANDS SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY
- ------------ -------- -------- ---------- ----------------- -------- -------------
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 loss
Net unrealized gain on available-for-sale
investments................................ -- -- -- 508 -- 508
Net loss..................................... -- -- -- -- (57,944) (57,944)
--------
Total comprehensive loss....................... (57,436)
------- --- -------- ------- -------- --------
Balance at December 31, 1998................... 21,106 $21 $174,155 $ 779 $35,196 $210,151
======= === ======== ======= ======== ========
Net issuance of Common Stock under stock option
plan and employee stock purchase plan........ 286 -- 1,418 -- -- 1,418
Components of comprehensive loss
Net unrealized loss on available-for-sale
investments................................ -- -- -- (3,187) -- (3,187)
Net loss..................................... -- -- -- -- (4,168) (4,168)
--------
Total comprehensive loss....................... (7,355)
------- --- -------- ------- -------- --------
Balance at December 31, 1999................... 21,392 $21 $175,573 $(2,408) $31,028 $204,214
======= === ======== ======= ======== ========
See accompanying notes to consolidated financial statements
38
ULTRATECH STEPPER, INC.
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
In 1999, no single customer accounted for 10% or more of the Company's net
sales. 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.
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) 1999 1998 1997
- -------------- -------- -------- --------
Net sales:
United States of America..................... $ 51,293 $36,192 $ 96,753
Germany...................................... 1,130 10,613 5,288
Japan........................................ 13,201 11,282 7,324
Rest of world................................ 47,499 23,370 37,984
-------- ------- --------
Total...................................... $113,123 $81,457 $147,349
======== ======= ========
Long-lived assets:
United States of America..................... $ 39,458 $42,130 $ 42,030
Rest of world................................ 1,444 1,949 948
-------- ------- --------
Total...................................... $ 40,902 $44,079 $ 42,978
======== ======= ========
The Company's operations in foreign countries are not currently subject to
significant exchange rate fluctuations, principally because sales contracts for
the Company's systems are generally denominated in U.S. dollars. However,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products.
39
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 are derived from sales
in various geographic areas, principally the U.S., Europe, Japan, and Asia, to
large companies within the integrated circuit, thin film head and micromachining
industries. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, whenever deemed necessary. The
Company maintains an allowance for uncollectible accounts 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
precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product, and
from time-to-time the Company has repurchased certain accounts receivable in
accordance with these terms. At December 31, 1999, $5.6 million of sold accounts
receivable were outstanding to third-party financial institutions, as compared
with $8.6 million at December 31, 1998.
As of December 31, 1999, the Company had approximately $4.7 million of
inventories and $6.2 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.
40
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999 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, 1999 and 1998, 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 accumulated other comprehensive income (loss), as a separate
component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization, as well as
interest, dividends, realized gains and losses and declines in value judged to
be other than temporary are included in interest and other income, net. The cost
of securities sold is based on the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment is depreciated on a straight-line basis
over the estimated useful lives (three to seven years). Leasehold improvements
are amortized on a straight-line basis over the life of the related assets or
the lease term, whichever is shorter.
Demonstration units, included in other assets, are stated at cost, less
accumulated depreciation, and are depreciated over 36 months.
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
41
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Company is evaluating its level of spending in electron beam technology
and may decide to either continue its efforts in electron beam technology, seek
a partner for sharing future development funding in electron beam technology,
sell its electron beam technology unit, or otherwise cease operations of its
electron beam technology unit. Although management believes it will be able to
realize its approximate $10 million net investment in the technology and related
net assets. In such a scenario, significant uncertainties exist and
circumstances currently unknown may result in the need to recognize an
impairment of the Company's electron beam technology assets in future financial
periods. Should an impairment occur, the Company's financial condition and
results of operations would be materially adversely impacted.
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, 1999, 1998 and 1997.
There were approximately $10.6 million and none of foreign exchange forward
contracts outstanding as of December 31, 1999 and 1998, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND SEC STAFF ACCOUNTING
BULLETINS
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 all fiscal
quarters of all fiscal years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
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
42
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 12 months from
the date of customer acceptance for material and labor to repair the product;
accordingly, a provision for the estimated cost of the warranty is recorded at
the time revenue is recognized.
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES
The Company is actively engaged in basic technology and applied research
programs designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments and elsewhere. Research, development and engineering costs are
charged to operations as incurred.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. As a result of this acquisition, the
Company recognized a charge for acquired in-process research and development
expense of $5.1 million in the consolidated statement of operation for the year
ended December 31, 1998.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
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.
43
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SPECIAL CHARGES
Due primarily to the downturn in the thin film head and semiconductor
industries in 1998, 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 in the third quarter of 1998. During 1998, the Company recognized
special non-cash charges in the amount of $26.4 million for the write-down of
excess inventories and provisions for estimated losses on open purchase
commitments. These charges were included in cost of sales.
During 1998, the Company recognized non-cash charges in the amount of
$8.6 million related to collection uncertainty of certain accounts and leases
receivable and provisions for sales returns and allowances. Additionally, during
1998, the Company recognized cash charges of $2.0 million and non-cash charges
of $0.6 million as a result of the reduction in the Company's workforce and the
consolidation of certain of its facilities. These charges were included in
operating expenses.
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.
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 (loss) and net income (loss)
per share are 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.
44
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1999 1998 1997
- -------------------------------------- -------- -------- --------
Numerator:
Net income (loss)......................................... $(4,168) $(57,944) $17,566
Denominator:
Denominator for basic net income (loss) per share......... 21,279 20,958 20,553
Effect of dilutive Employee Stock Options................. -- -- 1,128
------- -------- -------
Denominator for diluted net income (loss) per share....... 21,279 20,958 21,681
======= ======== =======
Net income (loss) per share--basic.......................... $ (0.20) $ (2.76) $ 0.85
======= ======== =======
Net income (loss) per share--diluted........................ $ (0.20) $ (2.76) $ 0.81
======= ======== =======
For the year ended December 31, 1999, options to purchase 3,428,000 shares
of Common Stock at an average exercise price of $16.11 were excluded from the
computation of diluted net loss per share as the effect would have been
anti-dilutive. This compares to the exclusion of 3,169,000 options at an average
exercise price of $16.20 for the year ended December 31, 1998, and 392,000
options at an average exercise price of $30.35 for the year ended December 31,
1997. Options are anti-dilutive when the Company has a net loss or when the
exercise price of the stock option is greater than the average market price of
the Company's Common Stock.
REPORTING COMPREHENSIVE INCOME
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 1999 1998 1997
- ------------ -------- -------- --------
Accumulated other comprehensive income at beginning of year
Unrealized gain, net of tax............................... $ 779 $271 $ 65
Change of accumulated other comprehensive income (loss)
during the year
Unrealized gain (loss) on available-for-sale securities... (3,187) 508 308
Tax effect................................................ -- -- (102)
------- ---- -----
Accumulated other comprehensive income (loss) at end of
year...................................................... $(2,408) $779 $ 271
======= ==== =====
45
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The Company classified all of its investments as "available for sale" as of
December 31, 1999 and 1998, 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 determined based on quoted market prices or pricing models using
current market rates. The Company deems all investments, except those
restricted, to be available to meet current working capital requirements.
The following is a summary of the Company's investments:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------- --------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED ------------------- ESTIMATED AMORTIZED ------------------- ESTIMATED
SHORT-TERM INVESTMENTS, IN THOUSANDS COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
- ------------------------------------ --------- -------- -------- ---------- --------- -------- -------- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ 27,027 $ -- $ 803 $ 26,224 $ 18,500 $196 $26 $ 18,670
Obligations of states and political
subdivisions...................... 10,477 -- -- 10,477 36,158 481 -- 36,639
U.S. corporate debt securities...... 95,645 120 1,560 94,205 65,045 240 46 65,239
-------- ---- ------ -------- -------- ---- --- --------
$133,149 $120 $2,363 $130,906 $119,703 $917 $72 $120,548
======== ==== ====== ======== ======== ==== === ========
RESTRICTED LONG-TERM INVESTMENTS, IN THOUSANDS
- -----------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ 5,466 $ -- $ 61 $ 5,405 $ 5,471 $ 47 $11 $ 5,507
Obligations of states and political
subdivisions...................... -- -- -- -- -- -- -- --
U.S. corporate debt securities...... 74 -- -- 74 3 -- -- 3
-------- ---- ------ -------- -------- ---- --- --------
$ 5,540 $ -- $ 61 $ 5,479 $ 5,474 $ 47 $11 $ 5,510
======== ==== ====== ======== ======== ==== === ========
$138,689 $120 $2,424 $136,385 $125,177 $964 $83 $126,058
======== ==== ====== ======== ======== ==== === ========
The following is a reconciliation of the Company's investments to the
balance sheet classifications at December 31:
IN THOUSANDS 1999 1998
- ------------ -------- --------
Cash equivalents........................................ $ 34,340 $ 28,583
Short-term investments.................................. 96,566 91,965
Restricted investments.................................. 5,479 5,510
-------- --------
Investments at estimated fair value..................... $136,385 $126,058
======== ========
Gross realized gains and losses were not material for the years ended
December 31, 1999, 1998 and 1997.
46
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of the Company's investments at
December 31, 1999, 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................................. $ 66,370 $ 66,414
Due after one year through five years................... 72,319 69,971
-------- --------
$138,689 $136,385
======== ========
5. BALANCE SHEET DETAILS
DECEMBER 31,
-------------------
IN THOUSANDS 1999 1998
- ------------ -------- --------
Inventories:
Raw materials......................................... $ 12,589 $ 21,668
Work-in-process....................................... 13,484 6,808
Finished products..................................... 2,902 8,274
-------- --------
Total............................................... $ 28,975 $ 36,750
======== ========
Equipment and leasehold improvements, net:
Machinery and equipment............................... $ 27,703 $ 23,750
Leasehold improvements................................ 3,903 4,960
Office equipment and furniture........................ 19,548 16,543
-------- --------
$ 51,154 $ 45,253
Accumulated depreciation and amortization............. (30,668) (21,934)
-------- --------
Total............................................... $ 20,486 $ 23,319
======== ========
Accrued expenses:
Salaries and benefits................................. $ 3,369 $ 3,865
Warranty reserves..................................... 3,997 4,207
Reserve for losses on purchase order commitments...... 2,423 5,849
Provision for sales return and allowances............. 1,471 2,000
Other................................................. 2,698 4,896
-------- --------
Total............................................... $ 13,958 $ 20,817
======== ========
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
47
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK BASED COMPENSATION (CONTINUED)
expire ten years from date of grant. The plan will terminate on the earlier of
January 6, 2003, or the date on which all shares available for issuance under
the Plan have been issued. The plan 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 980,000 and 733,000 options were available for issuance at
December 31, 1999 and 1998, respectively.
A summary of the Company's stock option activity, and related information
follows:
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding at January 1..... 3,168,965 $16.20 2,560,252 $14.94 2,350,208 $12.34
Granted...................... 871,800 $13.67 1,132,250 $19.04 1,017,300 $20.37
Exercised.................... (189,273) $ 1.17 (232,642) $ 9.01 (379,730) $ 6.09
Forfeited.................... (423,972) $18.50 (290,895) $21.84 (427,526) $21.49
--------- ------ --------- ------ --------- ------
Outstanding at December 31... 3,427,520 $16.11 3,168,965 $16.20 2,560,252 $14.94
At December 31, 1999, options outstanding were as follows:
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------------ --------- ---------------- ---------------- --------- ----------------
$ 0.050 - $12.499.......... 474,631 3.43 $ 2.58 474,091 $ 2.58
$12.500 - $14.999.......... 678,640 9.03 $13.35 19,860 $13.28
$15.000 - $17.499.......... 345,131 7.38 $16.29 199,918 $16.53
$17.500 - $19.999.......... 1,473,218 7.90 $17.94 753,543 $17.96
$20.000 - $33.625.......... 455,900 6.87 $28.23 368,556 $28.66
--------- ---- ------ --------- ------
$ 0.050 - $33.625.......... 3,427,520 7.31 $16.11 1,815,968 $15.91
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 584,000 shares and 181,000 shares of
Common Stock were reserved and available for issuance at December 31, 1999 and
1998, 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
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
1999 1998 1997
-------- -------- --------
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............................... 6.3% 4.6% 5.6%
Volatility factor..................................... 0.54 0.56 0.62
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 1999, 1998 and 1997 were $5.83,
$8.36, and $9.74, respectively.
The weighted average fair value of purchase rights granted under the
Company's Employee Stock Purchase Plan during 1999, 1998 and 1997 were $6.23,
$7.64, and $7.73, 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 1999 1998 1997
- -------------------------------------- -------- -------- --------
Net income (loss) as reported............................... $ (4,168) $(57,944) $17,566
Pro forma net income (loss) under FAS 123................... $(10,226) $(62,174) $14,453
Net income (loss) per share--basic, as reported............. $ (0.20) $ (2.76) $ 0.85
Pro forma net income (loss) per share--basic, under FAS
123....................................................... $ (0.49) $ (3.03) $ 0.71
Net income (loss) per share--diluted, as reported........... $ (0.20) $ (2.76) $ 0.81
Pro forma net income (loss) per share--diluted, under FAS
123....................................................... $ (0.49) $ (3.03) $ 0.67
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
ULTRATECH STEPPER, INC.
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,
1999.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLANS
The Company currently sponsors a profit sharing plan and an executive
incentive bonus plan that distribute employee awards based on the achievement of
predetermined operating income targets. The Company has not recognized expense
under these various employee bonus plans for 1999, 1998 and 1997.
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 not
recognized expense relating to this benefit plan for 1999, 1998 and 1997.
9. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are
as follows:
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
Domestic........................................ $(5,694) $(65,582) $23,326
Foreign......................................... 1,526 1,456 1,768
------- -------- -------
Income (loss) before income taxes............... $(4,168) $(64,126) $25,094
======= ======== =======
50
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Income taxes included the following:
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
Federal:
Current.......................................... $ -- $(9,847) $2,142
Deferred......................................... -- 2,634 3,925
------ ------- ------
-- (7,213) 6,067
State:
Current.......................................... -- -- 365
Deferred......................................... -- 263 644
------ ------- ------
-- 263 1,009
Foreign:
Current.......................................... -- 768 455
Deferred......................................... -- -- (3)
------ ------- ------
-- 768 452
------ ------- ------
Total income tax provision (benefit)............... $ -- $(6,182) $7,528
====== ======= ======
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 for 1997, 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 1999 1998 1997
- ------------ -------- -------- --------
Tax computed at statutory rate................... $(1,417) $(22,444) $ 8,783
State income taxes, net of federal benefit....... -- 171 656
Foreign sales corporation........................ -- -- (90)
Tax exempt income................................ -- (1,142) (1,747)
Credits for research and development............. -- (1,304) (612)
Losses not benefited............................. 1,320 19,775 --
Other, net....................................... 97 (1,238) 538
------- -------- -------
Income tax provision (benefit)................... $ -- $ (6,182) $ 7,528
======= ======== =======
51
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of deferred income tax assets and liabilities are as
follows:
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ 7,848 $ -- $ --
Inventory valuation........................... 12,676 11,105 3,869
Bad debt reserve.............................. 1,414 2,503 652
Fixed assets.................................. 1,539 2,404 --
Tax credit carryforwards...................... 2,196 1,696 519
Warranty reserves............................. 1,109 542 2,141
Accrued vacation.............................. 250 136 590
Other......................................... 4,323 5,419 1,290
-------- -------- -------
Total deferred tax assets....................... 31,355 23,805 9,061
Valuation allowance............................. (22,666) (19,563) --
-------- -------- -------
Net deferred tax assets......................... $ 8,689 $ 4,242 $ 9,061
======== ======== =======
Deferred tax liabilities:
Lease revenue................................. $ (1,698) $ (1,489) $(1,489)
Deferred income............................... (1,372) (1,185) (3,919)
Inventory basis difference.................... (4,778) -- --
Other......................................... (841) (1,568) (614)
-------- -------- -------
Total deferred tax liabilities.................. $ (8,689) $ (4,242) $(6,022)
-------- -------- -------
Net deferred tax assets......................... $ -- $ -- $ 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 $3,103,000 and $19,563,000 during
the years ended December 31, 1999 and 1998, respectively. Approximately $750,000
of the valuation allowance is attributed to stock options, the benefit of which
will be credited to additional paid in capital when realized.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state tax purposes of $21,000,000 and $7,400,000, respectively.
The Company also had federal and state research and development tax credit
carryforwards of approximately $1,700,000 and $800,000, respectively. The
federal and state net operating loss carryforwards will expire at various dates
beginning in year 2002 through 2019, if not utilized. The tax credit
carryforwards will expire at various dates beginning in 2009 through 2019, if
not utilized.
Utilization of net operating loss and 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.
52
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 letter of credit requirements,
escalation charges and also retains certain renewal and purchase options.
Additionally, the table below is presented net of subleases the Company has
executed in the amount of $388,000, expiring through December, 2000. As of
December 31, 1999, the minimum annual rental commitments are as follows:
2000................................... $ 5,409,000
2001................................... 4,643,000
2002................................... 4,397,000
2003................................... 3,738,000
2004................................... 3,633,000
Thereafter............................. 11,944,000
-----------
$33,764,000
Rent expense was approximately $5,037,000, $5,147,000 and $3,744,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company presently leases 6.4 acres of land located in San Jose,
California. This lease expires in November 2000. As part of this transaction,
the Company has segregated a portion 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. At December 31, 1999 and 1998,
$5.5 million of securities were classified as restricted investments on the
consolidated balance sheets.
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, 1999, the
accumulated amortization related to the excess cost over fair value of this
acquisition was $1,150,000. The results of the acquired operations are included
from the date of acquisition.
53
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITION (CONTINUED)
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.
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ultratech Stepper, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ ERNST AND YOUNG LLP
San Jose, California
January 25, 2000
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 2000 Annual Meeting of
Stockholders to be held June 1, 2000 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 2000 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.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K
(1) Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statement Schedule (set forth in Item 8
of part II of this Form 10-K) are filed within this Annual Report on Form
10-K.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
PAGE NUMBER
-----------
Schedule II Valuation and Qualifying Accounts............... S-1
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
EXHIBIT DESCRIPTION
- --------------------- -----------
2.1(1) Asset Purchase Agreement, dated March 8, 1993, among
Registrant, General Signal Corporation and General Signal
Technology Corporation.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, filed October 6, 1993.
3.1.1(12) 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(14) 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).
10.3.1(10) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
as of April 27, 1998)
57
EXHIBIT DESCRIPTION
- --------------------- -----------
10.3.1(16)(17) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
as of January 4, 1999)
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.
10.11(17) 1995 Employee Stock Purchase Plan (Amended and Restated as
of March 16, 1999).
10.12(17) 1998 Supplemental Stock Option/Stock Issuance Plan.
10.12(18) 1998 Supplemental Stock Option/ Stock Issuance Plan filed on
December 27, 1999 (Amended and Restated as of October 19,
1999).
10.15(16) Employment agreement between Registrant and Mr. Bruce R.
Wright, Senior Vice President, Finance and Chief Financial
Officer.
11.1(11) 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(13) 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 (15) Sublease between Lam Research Corporation, as Sublessor, and
Registrant, as Sublessee dated September 16, 1998,
regarding the leased building premises known as 16 Jonspin
Road, Wilmington, Massachusetts.
11.3 Lease Agreement between Montague LLC, As Landlord, and
Registrant, As Tenant dated November 22, 1999.
11.4 Lease Agreement between Judith Ann Spinelli, as lessor, and
Registrant, as lessee dated December 28(th), 1999,
regarding the leased building premises known as 16 Jonspin
Road, Wilmington, Massachusetts.
58
EXHIBIT DESCRIPTION
- --------------------- -----------
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney.
27 Financial Data Schedule.
- ------------------------
(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 S-8, dated
April 27, 1998.
(11) Previously filed with the Company's Current Report on Form 8-K, dated
June 11, 1998.
(12) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Commission File No. 0-22248).
(13) Previously filed with the Company's Current Report on Form 8-K/A, dated
August 25, 1998.
(14) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (Commission File No. 0-22248).
(15) Previously filed with the Company's 1998 Annual Report on Form 10-K
(Commission File No. 0-22248).
(16) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (Commission File No. 0-22248).
(17) Previously filed with the Company's Current Report on Form S-8, dated
August 13, 1999.
(18) Previously filed with the Company's Current Report on Form S-8, dated
December 27, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) Exhibits. See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules. See list of schedules under (a)(2) above.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunder duly authorized.
ULTRATECH STEPPER, INC.
By: /s/ ARTHUR W. ZAFIROPOULO Date: March 24, 2000
---------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
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 and Chief
------------------------------------------- Executive Officer (Principal March 24, 2000
Arthur W. Zafiropoulo Executive Officer)
Senior Vice President,
/s/ BRUCE R. WRIGHT Finance, Chief Financial
------------------------------------------- Officer and Secretary March 24, 2000
Bruce R. Wright (Principal Financial and
Accounting Officer)
/s/ KENNETH LEVY
------------------------------------------- Director March 24, 2000
Kenneth Levy
/s/ GREGORY HARRISON
------------------------------------------- Director March 24, 2000
Gregory Harrison
/s/ LARRY R. CARTER
------------------------------------------- Director March 24, 2000
Larry R. Carter
/s/ THOMAS D. GEORGE
------------------------------------------- Director March 24, 2000
Thomas D. George
/s/ JOEL GEMUNDER
------------------------------------------- Director March 24, 2000
Joel Gemunder
60
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
- ----------- ------------ ---------- ---------- ------------- --------------
Allowance for doubtful accounts
Year ended December 31, 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
====== ====== ==== ======= ======
Year ended December 31, 1999
Trade accounts receivable...... $2,196 $ 6 $ -- $ (156) $2,046
Leases receivable.............. 6,444 506 529 (3,186) 4,293
------ ------ ---- ------- ------
$8,640 $ 512 $529 $(3,342) $6,339
====== ====== ==== ======= ======
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1