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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1996 0-22248
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ULTRATECH STEPPER, INC.
(REGISTRANT)
DELAWARE 94-3169580
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
3050 ZANKER ROAD 95134
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal
executive offices)
REGISTRANT'S TELEPHONE NUMBER: (408) 321-8835
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON 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 references in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 20, 1997, as
reported on the Nasdaq National Market was approximately $402,929,485. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 20, 1997, the Registrant had outstanding 20,399,680 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated into Part II of this Annual
Report on Form 10-K.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 1997, 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 Form 10-K contains, 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 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 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, thin film magnetic
recording devices and micromachined components. The Company supplies step-and-
repeat systems based on one-to-one ("1X") optical technology to customers
located throughout the United States, Europe, Asia/Pacific and Japan. Ultratech
believes that its 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 steppers do not currently address applications involving line
geometries of less than 0.65 microns ("critical feature sizes"). The Company's
steppers are used in "mix-and-match" applications to complement reduction
steppers in advanced semiconductor device fabrication. The Company's steppers
also are used as replacements for scanners in existing fabrication facilities to
enable semiconductor manufacturers to extend the useful life and increase the
capabilities of their facilities. In addition, the Company's steppers are used
to manufacture high volume, low cost semiconductors used in a variety of
applications such as telecommunications, automotive control systems and consumer
electronics. Ultratech also supplies photolithography systems to thin film head
manufacturers and believes that its steppers offer advantages over certain
competitive reduction lithography tools with respect to field size, throughput,
specialized substrate handling and cost. Additionally, the Company supplies
photolithography equipment to the micromachining market, where certain technical
features such as high resolution at g-line wavelengths and superior depth of
focus are seen as offering advantages over competitive tools.
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,
up to 35% 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.
2
Since the introduction of the earliest 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 tool used in the manufacture of devices such as ICs and
TFHs.
According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market
research firm, the two principal types of steppers currently in use are
reduction steppers, which are the most widely used steppers, and one-to-one
steppers. Reduction steppers, which typically have reduction ratios of
five-to-one, are tools in which the photomask pattern containing the design is
typically five times larger than the device pattern that is to be exposed on the
wafer surface.
The principal advantage of reduction steppers 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 current reduction steppers, are based on different technology
which incorporates both reflective and refractive elements in its optical lens
imaging system that, although highly sophisticated in design, is much simpler
than a current reduction stepper's lens imaging system which incorporates only
refractive elements. As a result, current 1X steppers are generally less
expensive than current reduction steppers required for critical feature sizes.
Because of their optical design, 1X steppers typically are also able to expose
larger areas and deliver greater energy to the wafer surface, which generally
results in higher throughput than is achievable with most reduction steppers
required for critical feature sizes. One-to-one steppers, however, are currently
limited to use in manufacturing steps involving noncritical feature sizes.
Competitors to Ultratech have also introduced their own mix-and-match steppers
to complement their critical layer tools. See "Risk Factors: Importance of
Mix-and-Match Strategy."
In recent years, the complexity of ICs has increased significantly while, at
the same time, product cycles have shortened and the price per function of such
devices has continued to decline. As device complexity has increased, the device
geometries have continued to shrink, which in turn has increased the need for
tools such as reduction steppers that are capable of imaging critical feature
sizes. For example, fabrication of a 64-megabit dynamic random access memory
("DRAM") device with a minimum feature size of 0.35 microns involves an average
of 22-25 mask levels and approximately 600 process steps. Certain mask levels in
the fabrication of advanced devices require photolithography equipment such as
reduction steppers that are capable of imaging lines with critical feature
sizes. A majority of the masking layers in such devices, however, only require
photolithography tools capable of imaging lines with noncritical feature sizes.
In addition, many IC devices, such as application specific integrated circuits
("ASICs") used in various applications including telecommunications, consumer
electronics and automotive control systems, can be manufactured using 1X
steppers for the masking layers. Most advanced thin film head devices, which
require noncritical feature size imaging, are manufactured using 1X steppers for
the masking layers.
3
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 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 model 2244i and Saturn Wafer Stepper-TM-, which address the
market for mix-and-match in advanced semiconductor fabrication; and the Titan
Wafer Stepper-TM-, which addresses the market for photosensitive polyimide
applications as well as the markets for scanner replacement and high volume/low
cost semiconductor fabrication. These steppers currently offer feature size
capabilities ranging from 1.2 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 model 2244i and
Saturn Wafer Stepper feature an i-line illumination specification that is
designed to make them compatible with advanced i-line reduction steppers. The
Company shipped its first Saturn Wafer Stepper in the fourth quarter of 1995.
The Saturn Wafer Stepper, with its 0.65 micron capability, extends mix-and-match
applications to the 64/256 megabit dynamic random access memories and equivalent
logic technology. The Titan Wafer Stepper addresses, among other markets, an
application called photosensitive polyimide processing. This process is used in
the protective layer between the inside of the device package and the active
device. Because it reduces the thickness of integrated circuits, this process is
useful for devices mounted on credit cards and can also be used in a number of
"micro" applications, such as laptop or palmtop computers. The polyimide process
is also commonly used in the manufacture of advanced DRAMs and microprocessors.
The primary advantage of a photosensitive polyimide process is that it reduces
process steps required in the fabrication of these devices.
The Company offers four different series of systems for use in the
fabrication of thin film heads: the model 1700 Series, which is the most widely
used stepper for the TFH market; the model 2700 Series, which is designed to
meet the needs of leading-edge manufacturers; the model 4700, which provides
manufacturers the ability to print rowbars with a single exposure, further
enhancing both yields and magnetic recording head performance and the model
6700, which extends the model 4700 capabilities into the submicron range by
utilizing i-line exposure. In addition, the model 1700 Series can be equipped
with an alternate alignment system (Machine Vision System, or "MVS"), which
makes this model suitable for the processing of rowbars. Rowbar processing is a
step in the later stages of TFH production that enhances the performance of the
final product. The Company's TFH steppers offer feature size capabilities
ranging from 1.2 to .65 microns and typically range in price from $800,000 to
$2.1 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
4
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's model 1500 Series and
Saturn steppers offer resolution and depth of focus advantages to the
manufacturers of micromachined devices.
The Company also provides upgrades and refurbishments for a fee to certain
of the 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.
The year of introduction and major features of the Company's current stepper
systems are set forth below:
THROUGHPUT
SPECIFICATIONS*
FIELD SIZE SPECIFICATIONS (WAFERS PER HOUR)
------------------------------
YEAR OF FEATURE SIZE MAXIMUM AREA MAXIMUM AREA ------------------------
PRODUCT LINE INTRODUCTION (microns) RECTANGLE (mm) SQUARE (mm) 6 INCH 8 INCH
- ----------------------------------- ------------- --------------- -------------- -------------- ----------- -----------
SEMICONDUCTOR/MICRO-MACHINING:
1500 Series 1988 1.0 34.2 x 13.6 18.0 x 18.0 55 30
1989 0.8 31.8 x 11.5 15.5 x 15.5 45 25
2244i 1992 0.75 44.0 x 22.0 26.7 x 26.7 90 80
Saturn Wafer Stepper 1994 0.65 44.0 x 22.0 25.2 x 25.2 90 80
Titan Wafer Stepper Series 1994 1.2 44.0 x 22.0 26.7 x 26.7 100 85
1995 1.2 50.0 x 25.0 30.1 x 30.1 103 88
1996 1.0 44.0 x 22.0 26.7 x 26.7 90 80
THROUGHPUT
SPECIFICATIONS*
FIELD SIZE SPECIFICATIONS (WAFERS PER HOUR)
------------------------------
YEAR OF FEATURE SIZE MAXIMUM AREA MAXIMUM AREA ------------------------
PRODUCT LINE INTRODUCTION (microns) RECTANGLE (mm) SQUARE (mm) 6 INCH 8 INCH
- ----------------------------------- ------------- --------------- -------------- -------------- ----------- -----------
THIN-FILM HEAD:
1700 Series 1991 1.2 34.2 x 13.6 18.0 x 18.0 70 50
1991 1.0 34.2 x 13.6 18.0 x 18.0 70 50
2700 Series 1992 1.2 34.2 x 13.6 18.0 x 18.0 78 68
1992 1.0 34.2 x 13.6 18.0 x 18.0 78 68
4700 1994 1.0 55.0 x 18.0 26.7 x 26.7 98 92
6700 1996 0.65 55.0 x 18.0 26.7 x 26.7 96 90
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* Actual throughput varies depending upon customer application.
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
5
Company to maintain its competitive position. The Company has made a substantial
investment in the research and development of its core optical technology, which
the Company believes is critical to its financial results. The Company intends
to continue to develop its technology and to develop innovative products and
product features to meet customer demands. Current engineering projects include
the continued development, documentation and transition to volume manufacturing
of the Saturn Wafer Stepper and model 6700 wafer stepper and development of
larger and more flexible optical systems. Other research and development efforts
are currently focused on reliability improvement, manufacturing cost reduction,
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. The Company also has programs devoted to the development of new
photolithography systems, including new generations of photolithography systems
for existing and new markets, enhancements and extensions of existing
photolithography systems for existing and new markets and custom engineering for
specific customers.
The Company works with many customers to develop technology required to
manufacture advanced devices or to lower the customer's cost of ownership. The
Company maintains an engineering department that supports customer design of 1X
stepper photomasks for both test and production purposes and an applications
engineering group, consisting of highly qualified engineers located throughout
the world that assist customers in optimizing the use of the Company's systems.
In February 1997, the Company completed the acquisition of certain assets of
Lepton Inc., a developer of electron beam lithography systems. This technology
has the potential to address the needs of the mask and reticle manufacturing
equipment market for 0.18 micron and below requirements. Additionally, the
Company is currently involved in long-term research and development programs
with third parties to develop advanced technology for current and future
photolithography equipment based on the Company's core optical technology. The
Company is working in conjunction with The United States Department of Defense's
Advanced Research Projects Agency to explore technologies to produce junctions
in semiconductor devices with critical feature sizes of less than 0.25 microns.
This lithography process, known as P-GILD (Projection Gas Immersion Laser
Doping), has shown the potential for replacing traditional doping processes and
may reduce the number of steps currently required in the manufacture of
integrated circuits. Additionally, this process has shown potential in the area
of rapid thermal annealing. There can be no assurance that such programs will be
successfully funded or completed, that commercial products will result from such
programs or that any products resulting from such programs will achieve market
acceptance. See "Risk Factors: Rapid Technological Change; Importance of Timely
Product Introduction" and "Expansion of Operations; Management of Growth."
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, 1996, the Company had approximately 111 full-time employees engaged in
research, development, and engineering. For 1996, 1995 and 1994, total research,
development, and engineering expenses were approximately $27.2 million, $22.7
million and $13.9 million, respectively, and represented 14.1%, 14.4% and 15.3%
of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in the United States principally
through its direct sales organization. The Company sells its products overseas
primarily through a direct sales staff and representatives in Europe and
Asia/Pacific. The Company has appointed Innotech as its exclusive distributor in
Japan. The current term of the agreement with Innotech expires on June 21, 1997,
with an automatic extension for successive one-year renewal periods, unless
either party gives notice of termination. Accordingly, there can be no assurance
that this agreement will not be terminated at any time in the future. See "Risk
Factors: International Sales; Japanese Market; Dependence on Local Distributor."
6
Ultratech's service personnel are based throughout the United States,
Europe, Asia/Pacific and Japan. The Company currently leases five sales and
service offices in the United States outside of California, maintains
subsidiaries in the United Kingdom and Japan and leases offices in Korea and
Taiwan to service equipment and support customers in such locations. As part of
its customer service, Ultratech maintains an on-line computerized network of the
Company's parts inventory in the United States, Europe and Japan.
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 in conjunction
with 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 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 approximately twenty
courses of instruction on the Company's systems, including instructions in
system hardware and software tools for optimizing the Company's systems. The
Company's customer training program also includes instructions in the
maintenance of the Company's systems. The Company's field support personnel work
with the customer's employees to install the system and demonstrate system
readiness. Technical support is also available through on-site Company
personnel.
In general, the Company warrants its new systems against defects in design,
materials and workmanship for one year. The Company offers its customers
additional support after the warranty period in the form of maintenance
contracts for specified time periods. Such contracts include various options
such as priority response, planned preventive maintenance, scheduled one-on-one
training, daily on-site support, and monthly system and performance analysis.
MANUFACTURING
The Company performs all of its manufacturing activities (final assembly,
system testing and certain subassembly) in a 30,000 square feet clean room
environment.
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 lenses, from
suppliers on purchase orders. The Company then designs the lenses and provides
the lens specifications to other suppliers that grind the lenses. The Company
then assembles and tests the optical 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.
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.
7
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 or results of
operations. The Company's reliance on sole or a limited group of suppliers and
the Company's increasing reliance on subcontractors involve several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing, quality 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 significantly increase
manufacturing costs and 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.
Ultratech maintains a company-wide quality program that it believes has a
direct effect on its results of operations. 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 achieved ISO 9001 certification in 1996.
COMPETITION
The capital equipment industry in which the Company competes 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
manufacturers, such as Nikon Inc. ("Nikon"), Canon Inc. ("Canon"), ASM
Lithography and Silicon Valley Group, Inc., all of which have substantially
greater financial, marketing, technical and other resources than the Company.
Nikon supplies a 1X stepper for use in the manufacture of liquid crystal
displays and offers a reduction stepper for thin film head fabrication. In
addition, Nikon and Canon are shipping their own widefield mix-and-match
lithography systems. See "Risk Factors: Importance of Mix-and-Match Strategy".
The Company believes that the high cost of developing new lithography tools has
caused its competitors to collaborate with customers and other parties in
various areas such as research and development, manufacturing and marketing.
Many companies in the semiconductor capital equipment market, including
photolithography equipment companies such as GCA, formerly a reduction stepper
division of General Signal Corporation, whose assets were purchased by
Integrated Solutions, Inc. ("ISI"), had experienced significant declines or had
withdrawn from this market. ISI now supplies the former GCA products, and
enhancements, to the semiconductor industry. Although the systems offered by the
Company do not address the technical requirements of semiconductor manufacturers
in the most advanced applications, the Company believes that it currently
competes favorably with its competitors in the markets it addresses based on the
cost of ownership advantages offered by its 1X steppers. However, Ultratech
expects its competitors to continue to improve the performance of their current
products. In addition, 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
8
enhancements to, or future generations of, competitive 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 will also face competition
from vendors employing other technologies, such as excimer lasers and
phase-shift mask technology, which may extend the capabilities of competitive
products beyond their current limits or increase their productivity. In
addition, increased competitive pressure could lead to intensified price-based
competition, resulting in lower prices and margins, which would materially
adversely affect the Company's business, financial condition and operating
results. There can be no assurance that the Company will be able to compete
successfully in the future.
Japanese IC manufacturers have a dominant share of the worldwide market for
certain types of integrated circuits for which the Company's systems are used.
In addition, the Japanese stepper manufacturers are well-established in the
Japanese stepper market, and it is extremely difficult for non-Japanese
lithography equipment companies to penetrate the Japanese stepper market. To
date, the Company has not established itself as a major competitor in the
Japanese IC equipment market and there can be no assurance that the Company will
be able to achieve significant sales to Japanese IC manufacturers in the future.
See "Risk Factors: International Sales; Japanese Market; Dependence on Local
Distributor."
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 twenty
United States patents which expire on dates ranging from July 2000 to February
2015 and has five additional patent applications pending in the United States.
In addition, the Company has ten foreign patents which expire on dates ranging
from May 2001 to October 2015, and has seven additional foreign patent
applications pending, three of which are in Japan. The Company also has sixteen
registered trademarks and thirty-eight copyright registrations covering 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 patents or any other
intellectual property rights, the Company has in prior years 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 Jerome Lemelson alleging that the
manufacture of semiconductor products and/or the equipment
9
used to manufacture semiconductor products infringes certain issued patents. The
Company has been notified in prior years by certain of such customers that the
Company may be obligated to defend or settle claims that the Company's products
infringe any of such patents, and, in the event it is subsequently determined
that the customer infringes any of such patents, they intend to seek
reimbursement from the Company for damages and other expenses resulting from
this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement claims
by third parties or claims for indemnification resulting from infringement
claims in the future will not be asserted, or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of any
litigation. With respect to any such future claims, the Company may seek to
obtain a license under the third party's intellectual property rights. There can
be no assurance, however, that a license will be available on reasonable terms
or at all. The Company could decide, in the alternative, to resort to litigation
to challenge such claims. Such challenges could be extremely expensive and time
consuming and could materially adversely affect the Company's business,
financial condition and results of operations, regardless of the outcome of any
litigation.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture or
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, thin film head and
micromachining manufacturers located throughout the United States, Europe,
Asia/Pacific and Japan. Semiconductor manufacturers have purchased the model
1500 Series steppers, the model 2244i stepper, the Titan Wafer Stepper Series
and the Saturn Wafer Stepper for the fabrication of microprocessors,
microcontrollers, DRAMs and ASICs. Such systems are used in mix-and-match
environments with other lithography tools, as replacements for scanners and
contact printers, in start-up fabrication facilities, in packaging for ultrathin
and flip chip applications and for high volume, low cost noncritical feature
size semiconductor production. Thin film head manufacturers have purchased the
model 1700 Series steppers, the model 2700 Series steppers, the model 4700
stepper and the model 6700 stepper because of their advantages in yield,
throughput and overall cost of ownership. Manufacturers of micromachined
components have purchased the model 1500 Series steppers and Saturn Wafer
Stepper because of high throughput and flexible field size advantages along with
cost-effective, submicron imaging capabilities.
Historically, Ultratech has sold a substantial portion of its systems to a
limited number of customers. In 1996, sales to two customers accounted for 17%
and 12% of the Company's net sales. In 1995, sales to one customer accounted for
approximately 12% of the Company's net sales. In 1994, sales to one customer
accounted for approximately 20% 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
10
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 increase its sales in the future will depend in part upon its ability to
obtain orders from new customers as well as the financial condition and success
of its customers and the general economy, of which there can be no assurance.
See "Cyclicality of Semiconductor and Magnetic Recording Head Industries."
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 involve
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. See "Fluctuations in Operating
Results; Limited System Sales."
During 1996, 1995 and 1994, international sales accounted for 53%, 55% and
56% of net sales, respectively. The Company's international system sales are
typically denominated in United States dollars or dollar equivalents. For
financial information concerning foreign and domestic operations and export
sales, please refer to Note 13 of the Ultratech Stepper, Inc. Consolidated
Financial Statements, incorporated by reference from page 41 of the Company's
Annual Report to Stockholders. See "Risk Factors: International Sales; Japanese
Market; Dependence on Local Distributor."
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 systems
which it has accepted purchase order numbers and assigned shipment dates within
six months, 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, 1996, the
Company's backlog was approximately $81.3 million, compared with approximately
$86.6 million as of December 31, 1995.
EMPLOYEES
At December 31, 1996, the Company had approximately 542 full-time employees,
including 111 engaged in research, development, and engineering, 41 in sales and
marketing, 163 in customer service and support, 163 in manufacturing and 64 in
general administration and finance. The Company believes any future success,
should it occur, will depend, in large part, on its ability to attract and
retain highly skilled employees. Recently, the Company has experienced an
increased level of employee turnover. The Company believes that this increase is
due to several factors, including: the recent semiconductor industry slowdown,
which resulted in a planned reduction in the Company's workforce during the
fourth fiscal quarter of 1996, and which has further resulted in an increased
level of uncertainty within the workforce; an expanding economy within the
geographic area that the Company maintains its principal business offices,
making it more difficult for the Company to retain its employees; and the
declining value of stock
11
options granted to employees, relative to their total compensation, as a result
of the full vesting of options granted prior to the Company's initial public
offering and significant numbers of options granted at prices well in excess of
the current market value of the Company's stock. Due to these, and other
factors, the Company may continue to experience high levels of employee
turnover, which could adversely impact the Company's business, financial
condition and results of operations. 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
FLUCTUATIONS IN OPERATING RESULTS; LIMITED SYSTEM SALES The Company's
operating results have fluctuated significantly in the past and will continue to
fluctuate significantly in the future depending upon a variety of factors,
including cyclicality in the Company's target markets; the mix of products sold;
the timing of new product announcements and releases by the Company or its
competitors; market acceptance of new products and enhanced versions of the
Company's products; the timing of significant orders; manufacturing
inefficiencies associated with the start up of new product introductions;
lengthy sales cycles for the Company's systems; 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, customers or suppliers; political and economic instability; natural
disasters; regulatory changes; business interruptions related to the Company's
occupation of its facilities; and various competitive factors including
price-based competition and competition from vendors employing other
technologies. 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
the percentage of international sales, which typically have lower gross margins
than domestic sales principally due to higher field service and support costs;
the introduction of new products, which typically have higher manufacturing
costs until manufacturing efficiencies are realized and are discounted more than
existing products until the products gain market acceptance; non-linearity of
shipments during the quarter; increased competition in the Company's targeted
markets; the mix of products sold; the rate of capacity utilization; and the
implementation of subcontracting arrangements. As a result of its distribution
agreement with Innotech Corporation, its Japanese distributor, gross profit as a
percentage of total net sales may be adversely impacted in any particular period
by significant system shipments to the Japanese market.
The Company derives a substantial portion of its total net sales from the
sale of a relatively small number of new systems which typically range in price
from $800,000 to $2.1 million. As a result, the timing of recognition of revenue
from a single transaction could have a significant impact on the Company's net
sales and operating results. The Company's backlog at the beginning of a period
may not include all of the stepper 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 continue to depend 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 unanticipated shipment reschedulings, cancellations, delays or
deferrals by customers or to unexpected manufacturing difficulties or delays in
deliveries by suppliers due to their long production lead times or otherwise,
may cause net sales in a particular quarter to fall significantly below the
Company's expectations, which would materially adversely affect the Company's
operating results for such quarter. In particular, the significantly long
manufacturing cycles of the Company's linear motor-based steppers, which include
the Model 2244i stepper, Model 4700 stepper, Titan Wafer Stepper-TM- and Saturn
Wafer Stepper-TM-, 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
12
materially adversely affect the Company's financial condition and results of
operations for a particular quarter. Furthermore, announcements by the Company
or its competitors of new products and technologies could cause customers to
defer or cancel purchases of the Company's existing systems, which would also
materially adversely affect the Company's business, financial condition and
results of operations.
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 its growth. In
addition, the need for continued expenditures for research and development,
capital equipment purchases, and ongoing training and customer service and
support worldwide, among other factors, will make it difficult for the Company
to reduce its significant operating expenses in a particular period if the
Company's net sales goals for the period are not met. The Company has
significantly increased its expense levels to support its recent growth, and
there can be no assurance that the Company will maintain or exceed its current
level of net sales or rate of growth for any period in the future. Accordingly,
there can be no assurance that the Company will be able to remain profitable or
that it will not sustain losses in future periods.
CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES The
Company's business depends in significant part upon capital expenditures by
manufacturers of semiconductors 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, resulting in significantly reduced demand for capital equipment
including the systems manufactured and marketed by the Company. The Company
believes that markets for new generations of semiconductors will also be subject
to similar fluctuations. In recent years, the semiconductor industry has
experienced significant growth which, in turn, has caused significant growth in
the capital equipment industry. However, the semiconductor industry has more
recently experienced a cyclical downturn, as evidenced by recent results of the
industry's book-to-bill ratio, as published by the Semiconductor Industry
Association. Although the most recent monthly book-to-bill ratios have exceeded
parity, bookings levels for the semiconductor industry remain significantly
below year-ago levels. Additionally, the semiconductor equipment industry's
book-to-bill ratio, as published by Semiconductor Equipment and Materials
International (an industry association), continues to show significant market
weakness, particularly among front-end equipment suppliers, which include the
Company. Additional evidence of an existing industry downturn is exhibited by
recent announcements by several semiconductor manufacturers of delays or
cancellations of previously planned capacity additions and continued weakness in
DRAM and other computer memory pricing. The Company has recently experienced
cancellation of purchase orders, shipment delays and purchase order
restructurings by several of its semiconductor customers and anticipates that
this trend will continue for some time. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current level of
sales. Additionally, based on present market conditions, the Company presently
expects that future quarterly comparisons, through at least the second quarter
of 1997, will indicate a period-over-comparable period decline in the Company's
net sales.
During 1996, 1995 and 1994, approximately 40%, 30% and 35%, respectively, of
the Company's net sales were derived from sales to thin film head manufacturers
and related applications. Although the thin film head segment of the magnetic
recording head industry has recently experienced significant growth, the Company
expects that the thin film head market segment may not sustain such a growth
rate in the future. Accordingly, sales of its steppers to thin film head
manufacturers may decrease in the future. The Company's business and operating
results would be materially adversely affected by downturns or slowdowns in the
thin film head market.
The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and magnetic recording head markets, as well as
diversifying into new markets such as photolithography for micromachining.
Nevertheless, there can be no assurance that the Company's net sales and
operating
13
results will not be materially adversely affected if downturns or slowdowns in
either market occur in the future; such effects are likely to be particularly
severe if both markets experience a downturn or slowdown at the same time.
IMPORTANCE OF MIX-AND-MATCH STRATEGY A principal element of the Company's
strategy is to sell its systems to advanced semiconductor fabrication facilities
for mix-and-match applications. This strategy depends, in significant part, upon
the recognition by semiconductor manufacturers that costs can be reduced by
using the Company's systems to perform exposure on semiconductor process layers
requiring feature sizes of 0.65 microns or greater and the willingness of such
manufacturers to implement processes to lower manufacturing costs. Many
semiconductor fabrication facilities have limited or no experience with
integrating lithography tools in the manner necessary for full implementation
and acceptance of a mix-and-match manufacturing strategy, and there can be no
assurance that semiconductor manufacturers will adopt such a strategy. The
Company has designed certain of its systems to operate in a compatible manner
with its competitors' reduction steppers, which are used to process layers with
feature sizes below 0.65 microns. The successful implementation of the Company's
strategy, however, will result in a loss of sales by manufacturers of reduction
steppers and will cause these competitors to respond with lower prices,
productivity improvements or new technical designs for their systems that
eliminate the need for the Company's steppers or make it difficult for
Ultratech's systems to attain compatibility with such systems. Also, certain of
the Company's competitors which also manufacture widefield systems, including
Nikon and Canon, are shipping their own widefield mix-and-match lithography
systems. The introduction, development and sales of such competitive systems
could materially adversely affect the Company's business, financial condition
and results of operations.
To facilitate its mix-and-match strategy, the Company has developed and is
continuing to develop a family of products. The Company shipped its first Model
2244i stepper during 1993, and commenced volume production in 1994. In 1995, the
Company commenced shipment and volume production of the Titan Wafer Stepper and
commenced shipment of the Saturn Wafer Stepper. As is typical with newly
introduced systems in the capital equipment industry, the Company has
experienced and may continue to experience technical or other difficulties with
its mix-and-match family of products. The Company believes that the market
acceptance and process verification combined with volume production of the
mix-and-match family of products is of critical importance to the successful
implementation of its mix-and-match strategy and its future financial results.
Recently, this market segment of the Company's business has experienced a
pronounced downturn due, in part, to the recent cyclical downturn in the
semiconductor industry. To the extent that the mix-and-match family of products
does not achieve or maintain significant sales due to a cyclical downturn in the
semiconductor industry; technical, manufacturing or other difficulties
associated with these products; lack of customer acceptance; an inability to
reduce the significantly long manufacturing cycle of these products; an
inability to increase capacity for the production of the mix-and-match family of
products; direct competition from other widefield mix-and-match systems from
Nikon and Canon; or any other reason, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the increase in mix-and-match stepper production has resulted and will
continue to result in higher inventory levels and operating expenses. Failure to
achieve or maintain significant sales of these steppers could lead, among other
things, to an increase in inventory obsolescence and an increase in expenses
without corresponding sales, either of which could materially adversely affect
the Company's business, financial condition and results of operations. See
"Fluctuations in Operating Results; Limited System Sales."
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH In recent years, the Company
has significantly increased the scale of its operations to support increased
levels of net sales. The increase has included the hiring of additional
personnel, increasing the number of steppers scheduled for production, and
commencing independent operations in Japan. This increase has resulted in higher
inventory levels and higher expenses and has required the Company to implement a
variety of systems, procedures and controls. Currently, the Company is devoting
significant resources to the development of new products and
14
technologies that are outside of the Company's core businesses (see "Research,
Development and Engineering"). The Company anticipates that its expenditures for
research, development and engineering will increase significantly in 1997,
relative to the comparable periods in 1996, principally as a result of the
continued development of these new product lines. The Company presently
anticipates that research, development and engineering expenses related to its
core businesses will remain flat, as compared with the comparable periods in
1996. Additionally, the Company will shortly be conducting evaluations of these
products and may decide to invest significant additional resources in plant and
equipment, inventory, personnel and other costs, to begin production of these
products and to provide the marketing, administration and after-sales support
required to support these new products. Accordingly, there can be no assurance
that gross profit margins and inventory levels will not be adversely impacted in
the future by start-up costs associated with the initial production of these new
product lines. These start-up costs include, but are not limited to, additional
manufacturing overhead, additional inventory reserve requirements and the
creation of 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 additional 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, inventory levels and expenses can be reduced.
The Company's expansion has caused and may continue to cause a significant
strain on the Company's management, financial and other resources. There can be
no assurance that net sales will increase or remain at recent levels or that the
Company's systems, procedures and controls will be adequate to support the
Company's operations. The Company's financial results depend in significant part
on its ability to continue to implement, improve and expand its systems,
procedures and controls. Any failure to implement, improve and expand such
systems, procedures and controls in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's business, financial condition and results of operations.
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. In particular, the Company has not yet fully
defined the markets and applications for the Titan Wafer Stepper and the Saturn
Wafer Stepper. Additionally, the Company has recently commenced shipment, and
has a significant customer backlog, of the Model 1700 stepper with MVS for
back-end thin film head processing. This is a relatively new application for the
Company's systems. Should the Company experience difficulty with this new
process, due to product limitations or the inability of customers to fully
implement this new technology, among other factors, the Company's financial
condition and results of operations would be materially adversely impacted,
especially in light of the current downturn in the semiconductor industry.
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.
15
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. Ultratech 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 technical, manufacturing or other difficulties that
could 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 to manufacture and ship these systems or enhancements and
related software tools, such as the Model 4700 stepper, the Model 6700 stepper,
the Titan Wafer Stepper and the Saturn Wafer Stepper, 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 steppers 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.
DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend
in significant part upon the continued contributions of its Chairman and Chief
Executive Officer, Arthur W. Zafiropoulo, as well as other members of the Board
of Directors, officers and other 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 Mr. Zafiropoulo or other key personnel would 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, technical, sales and support personnel for
its operations. There may be 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.
INTERNATIONAL SALES; JAPANESE MARKET; DEPENDENCE ON LOCAL
DISTRIBUTOR International sales accounted for approximately 53%, 55% and 56% of
total net sales in 1996, 1995 and 1994, 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 majority of total net sales. As a result, a significant portion
of the Company's sales will be subject to certain risks, including unexpected
changes in regulatory requirements, difficulty in satisfying existing regulatory
requirements, exchange rates, tariffs and other barriers, political and economic
instability, difficulties in accounts receivable collections, natural disasters,
difficulties in staffing and managing foreign subsidiary and branch operations
and potentially adverse tax consequences. 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
16
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. The Company believes that the Japanese companies
with which it competes have a competitive advantage because of their dominance
of the Japanese market segment. The Company believes that increased penetration
of the Japanese market is critical to its financial results and intends to
continue to invest significant resources in Japan in order to meet this
objective. As part of its strategy to penetrate the Japanese market, in 1993,
the Company entered into a distribution agreement with Innotech Corporation, a
local distributor of products. The Company believes that Innotech is an
important element of its strategy to increase its presence in Japan. Such
agreement can be terminated upon notice of termination by either party.
Accordingly, there can be no assurance that this agreement will continue on
present terms, or at all. If Innotech is not successful in selling such systems
or such agreement is terminated, the Company's strategy to increase product
sales into the Japanese market would be adversely affected. In addition,
recently, Japanese semiconductor manufacturers substantially reduced their
levels of capital spending on new fabrication facilities and equipment, thereby
increasing competitive pressures in the Japanese market segment. There can be no
assurance, however, that the Company will be able to achieve significant sales
to, or will be able to compete successfully in, the Japanese semiconductor
market segment.
FUTURE ACQUISITIONS The Company may in the future pursue acquisitions of
complementary product lines, technologies or businesses, such as the acquisition
of the assets of Lepton Inc. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. In the event that such acquisition does occur, there can be no
assurance as to the effect thereof on the Company's business or operating
results.
FUTURE CAPITAL NEEDS The development and manufacture of new lithography
systems and enhancements are highly capital intensive. In order to remain
competitive, the Company must continue to make significant expenditures for
capital equipment, sales, service, training and support capabilities,
investments in systems, procedures and controls, expansion of operations and
research and development, among many items. The Company expects that anticipated
cash flow from operations, its cash, cash equivalents and short-term investments
and funds available under a line of credit will be sufficient to meet the
Company's cash requirements for the next twelve months. To the extent that such
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.
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
17
industries or the worldwide economy, 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 are unrelated to the Company's performance.
ITEM 2. PROPERTIES
The Company maintains its headquarters and manufacturing operations in San
Jose, California in three leased facilities, totaling approximately 188,000
square feet, which contain general administration and finance, marketing and
sales, customer service and support, manufacturing and research, development,
and engineering. The leases for these facilities expire at various dates from
December 1997 to March 2005. The Company also leases 6.4 acres of undeveloped
land near its headquarters in San Jose. This lease expires in November 1997. As
part of this transaction, the Company segregated $5.0 million of its securities
as collateral for certain obligations of the lessor pertaining to this land. The
Company also leases five sales and support offices in the United States in
Tempe, Arizona; Woburn, Massachusetts; Austin, Texas; Richardson, Texas; and
Essex Junction, Vermont; under leases with terms expiring between 3 months to 2
years. The Company also maintains branch offices in Korea and Taiwan, a service
and support subsidiary in Japan and a sales, service and support subsidiary in
the United Kingdom. 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.
18
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, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1996, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, are as
follows:
NAME AGE POSITION WITH THE COMPANY
- -------------------------------- --- ------------------------------------------------------------------------------------------
Arthur W. Zafiropoulo........... 57 Chairman of the Board of Directors and Chief Executive Officer
James L. Schram................. 49 President and Chief Operating Officer
Daniel H. Berry................. 51 Senior Vice President, Sales and Service
William G. Leunis, III.......... 41 Senior Vice President, Finance, Chief Financial Officer, Secretary and Treasurer
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal Corporation and, since March 1993, has served as Chief Executive
Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as
President of the Company from March 1993 to March 1996. 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 RF Power Products Inc. Additionally, during 1995 Mr. Zafiropoulo served as a
director of OnTrak Systems Inc.
Mr. Schram has served as President and Chief Operating Officer since March
1996. Prior to joining the Company, from 1973 to February 1996, he was employed
in various positions at Watkins Johnson, Co., a semiconductor equipment
manufacturer, including President of their Semiconductor Equipment Group and
most recently as Vice President of corporate strategic planning.
Mr. Berry has served as Senior Vice President, Sales and Service since March
1993. Between December 1990 and March 1993, he served as Vice President, Sales
and Service of the Predecessor. From November 1989 to December 1990, Mr. Berry
was director of international operations for General Signal's Semiconductor
Equipment Group International, a semiconductor equipment company. From July 1976
to November 1989, he held various management positions including director of
marketing and optical lithography, at Perkin-Elmer Corporation, a semiconductor
equipment manufacturer.
Mr. Leunis has served as Senior Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer since January 1997. Between March 1993 and
December 1996, he served as Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer of the Company. Between September 1990 and March 1993,
he served as Vice President, Finance of the Predecessor. From August 1986 to
August 1990, Mr. Leunis was Chief Financial Officer of the Predecessor. From
1978 to August 1986, Mr. Leunis held various financial positions at General
Signal.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference from page
44 of the Company's 1996 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from page
20 of the Company's 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference from
pages 21-27 of the Company's 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Ernst & Young LLP, Independent Auditors, and consolidated
financial statements required by this Item are incorporated by reference from
pages 28-43 of the Company's 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
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 1997 Annual Meeting of
Stockholders to be held May 15, 1997 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 1997 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.
21
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 following consolidated financial statements of Ultratech Stepper,
Inc. are set forth in the Company's 1996 Annual Report to Stockholders
and incorporated by reference in Item 8.
ANNUAL REPORT
PAGE NUMBER
-------------
Consolidated Balance Sheets--December 31, 1996 and 1995. 28
Consolidated Statements of Income--Years ended December 31, 1996, 1995, and 1994. 29
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994. 30
Notes to Consolidated Financial Statements. 31-42
Report of Ernst & Young LLP, Independent Auditors. 43
(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.
3.2(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.
10.1(1)(2) Distributor Agreement dated June 22, 1993 between the Company and Innotech Corporation.
22
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
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(6) 1993 Stock Option/Stock Issuance Plan (Amended and Restated March 21, 1996).
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 Montague LLC (lease assigned from 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 Silicon Valley Properties (lease assigned
from Orchard Investment Company Number 701), As Landlord, and Registrant, As Tenant dated May 17,
1994 and as amended, October 18, 1994.
10.9(4) Credit Agreement dated November 23, 1994 Between Registrant and Wells Fargo Bank (formerly First
Interstate Bank of California).
10.9.1(5) Amendment to Credit Agreement dated November 23, 1994 between Registrant and Wells Fargo Bank
(formerly First Interstate Bank of California).
10.9.2(6) Second Amendment to Credit Agreement and Promissory Note between Registrant and Wells Fargo Bank
(formerly First Interstate Bank of California).
10.9.3 Third Amendment to Credit Agreement and Promissory Note between Registrant and Wells Fargo Bank.
10.10(4) Revolving Promissory Note dated November 23, 1994, between Registrant and Wells Fargo Bank (formerly
First Interstate Bank of California).
10.11(5) 1995 Employee Stock Purchase Plan.
10.12 Employment Agreement between Regristrant and Mr. James L. Schram, President and Chief Operating
Officer.
11.1 Calculation of Net Income Per Share.
13 Annual Report to Stockholders for the Year Ended December 31, 1996.
21.1 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (included on signature page).
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).
23
(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.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1996.
(c) Exhibits. See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules. See list of schedules under (a)(2)
above.
24
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
-----------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD, AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Arthur W. Zafiropoulo and William G. Leunis, III,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ ARTHUR W. ZAFIROPOULO Directors and Chief
- ------------------------------ Executive Officer March 27, 1997
Arthur W. Zafiropoulo (Principal Executive
Officer)
/s/ JAMES L. SCHRAM
- ------------------------------ President and Chief March 27, 1997
James L. Schram Operating Officer
Senior Vice President,
Finance, Chief Financial
/s/ WILLIAM G. LEUNIS, III Officer, Secretary and
- ------------------------------ Treasurer (Principal March 27, 1997
William G. Leunis, III Financial and Accounting
Officer)
/s/ MICHAEL C. CHILD
- ------------------------------ Director March 27, 1997
Michael C. Child
/s/ GREGORY HARRISON
- ------------------------------ Director March 27, 1997
Gregory Harrison
/s/ KENNETH A. LEVY
- ------------------------------ Director March 27, 1997
Kenneth A. Levy
/s/ JOSEPH L. PARKINSON
- ------------------------------ Director March 27, 1997
Joseph L. Parkinson
25
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
- ------------------------------------------------------- ------------- ----------- ------------- --------------- -------------
Year ended December 31, 1994:
Allowance for doubtful accounts...................... $ 210 $ 70 $ -- $ (38) $ 242
Year ended December 31, 1995:
Allowance for doubtful accounts...................... $ 242 $ 371 $ -- $ -- $ 613
Year ended December 31, 1996:
Allowance for doubtful accounts...................... $ 613 $ 1,225 $ -- $ (687) $ 1,151
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1