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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number 0-22248
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ULTRATECH STEPPER, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
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(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
3050 Zanker Road, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
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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 re-
quired to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares of the issuer's class of common stock, as of the
latest practical date:
Class Outstanding as of November 9, 1997
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Common Stock, $.001 par value 20,757,066
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ULTRATECH STEPPER, INC.
INDEX
Page No.
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996................................... 3
Condensed Consolidated Statements of Income for the three
months ended September 30, 1997 and 1996 and nine months
ended September 30, 1997 and 1996............................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996..................... 5
Notes to Condensed Consolidated Financial Statements ........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 8
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 20
ITEM 2. CHANGES IN SECURITIES........................................ 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 20
ITEM 5. OTHER INFORMATION............................................ 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 20
SIGNATURES............................................................. 21
2
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PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPT. 30, Dec. 31,
(In thousands) 1997 1996*
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ASSETS (Unaudited)
Current assets:
Cash, cash equivalents and
short-term investments $164,328 $167,409
Accounts receivable, net 41,706 39,845
Inventories 32,014 35,524
Current portion of leases receivable, prepaid
expenses and other current assets 5,501 848
Deferred income taxes 9,744 8,439
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Total current assets 253,293 252,065
Equipment and leasehold
improvements, net 19,613 19,242
Restricted investments 5,221 5,129
Leases receivable 14,947 425
Other assets 3,258 3,911
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Total assets $296,332 $280,772
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,340 $9,400
Other current liabilities 26,179 29,981
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Total current liabilities 34,519 39,381
Other liabilities 1,057 1,444
Stockholders' equity 260,756 239,947
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Total liabilities and stockholders' equity $296,332 $280,772
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* The Balance Sheet as of December 31, 1996 has been derived from the audited
financial statements at that date.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
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SEPT. 30 Sept. 30 SEPT. 30 Sept. 30
(In thousands, except per share amounts) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales $36,752 $46,502 $113,539 $150,008
Cost of sales 17,524 21,159 53,299 68,909
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Gross profit 19,228 25,343 60,240 81,099
OPERATING EXPENSES:
Research, development, and
engineering 7,092 6,421 20,105 21,121
Acquired in-process research
and development - - 3,619 -
Selling, general, and
administrative 6,488 7,300 19,409 24,298
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Operating income 5,648 11,622 17,107 35,680
Interest expense (58) (61) (143) (192)
Other income, net 1,920 1,521 5,415 4,741
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Income before income taxes 7,510 13,082 22,379 40,229
Income taxes 2,105 4,247 6,714 13,477
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Net income $5,405 $8,835 $15,665 $26,752
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Net income per share $0.25 $0.42 $0.72 $1.26
Number of shares used in
per share computations 21,879 21,204 21,693 21,311
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
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(In thousands) SEPT. 30, 1997 Sept. 30, 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,665 $26,752
Charges to income not affecting cash 8,416 1,817
Net effect of changes in operating assets
and liabilities (21,625) (26,044)
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Net cash provided by operating activities 2,456 2,525
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,694) (6,422)
Net investment in available-for-sale securities (8,999) 12,482
Purchase of certain assets of Lepton Inc. (3,101) -
Segregation of restricted investments (93) (32)
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Net cash provided by (used in) investing activities (17,887) 6,028
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt - (400)
Proceeds from issuance of short-term debt 99 7,500
Repayment of short-term debt (99) (7,500)
Net proceeds from issuance of common stock 3,285 1,994
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Net cash provided by financing activities 3,285 1,594
Net increase (decrease) in cash and cash
equivalents (12,146) 10,147
Cash and cash equivalents at beginning
of period 47,771 30,361
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Cash and cash equivalents at end of period $35,625 $40,508
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ULTRATECH STEPPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for fair presentation have been included.
USE OF ESTIMATES - The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's third fiscal quarter in 1997 and 1996 ended on October 4, 1997 and
September 28, 1996, respectively. For convenience of presentation, the
Company's financial statements have been shown as ending on September 30, 1997
and September 30, 1996.
Operating results for the three-month and nine month periods ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997, or any future period.
(2) INVENTORIES
Inventories consist of the following:
Sept. 30, 1997 Dec. 31, 1996
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(In thousands) (Unaudited)
Raw materials. . . . . . . . . . . . . . . . $19,241 $17,625
Work-in-process. . . . . . . . . . . . . . . 9,027 11,971
Finished products. . . . . . . . . . . . . . 3,746 5,928
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$32,014 $35,524
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(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
Sept. 30, 1997 Dec. 31, 1996
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(In thousands) (Unaudited)
Salaries and benefits. . . . . . . . . . . . $5,004 $7,132
Warranty reserves. . . . . . . . . . . . . . 7,655 9,424
Advance billings . . . . . . . . . . . . . . 1,074 646
Income taxes payable . . . . . . . . . . . . 7,326 5,406
Other. . . . . . . . . . . . . . . . . . . . 5,120 7,373
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$26,179 $29,981
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(4) NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which the Company will be required to adopt on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute net income per share and to restate all prior
periods. The new requirements will include a calculation of "basic" net income
per share, which will exclude the dilutive effect of stock options. The
calculation of basic net income per share for the three months ended
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September 30, 1997 and 1996 results in basic net income per share of $0.26 and
$0.44, respectively. The calculation of basic net income per share for the nine
months ended September 30, 1997 and 1996 results in basic net income per share
of $0.76 and $1.33, respectively. A calculation of "diluted" net income per
share will also be required. However, this calculation is not expected to
differ materially from the net income per share amounts reported for the years
presented.
(5) ACQUISITION OF LEPTON INC.
In February 1997, the Company completed the acquisition of the assets of Lepton
Inc., a developer of electron beam lithography systems. As a result of this
acquisition, the Company recognized approximately $3.6 million, or $0.12 per
share net of related income tax benefits, of in-process research and development
expense during the first quarter of 1997.
(6) JAPAN OPERATIONS
The Company is currently reviewing the manner in which it conducts business
in Japan and is contemplating actions which may result in charges against
operating results in the fourth quarter of 1997, or subsequent quarters.
These charges would consist primarily of expenses incurred by the Company in
conjunction with ending its distributor relation with Innotech Corporation,
and could adversely impact the Company's results of operations in those
periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits
(ICs), thin film heads (TFHs) for disk drives and micromachined components. The
Company supplies step-and-repeat systems based on one-to-one reflective and
refractive optical technology to customers located throughout the United States,
Europe, Asia/Pacific and Japan. These products range from low-cost systems for
high-volume manufacturing to advanced systems for cost-effective production of
leading-edge devices.
With the exception of historical facts, the statements contained in this
discussion may include forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, including, but not
limited to, future sales, gross margins, the anticipated increase in inventories
and operating expenses and the sufficiency of financial resources to support
operations, and are subject to the Safe Harbor provisions created by that
statute. Such Statements are based on current expectations that involve risks
and uncertainties, including those discussed below and under the heading
"Additional Risk Factors," that could cause actual results to differ materially
from those expressed. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. This discussion should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements presented on pages 3 to 7 of this Quarterly
Report and the Company's 1996 Annual Report on Form 10-K, available upon
request, for a complete understanding of the Company's financial position and
results of operations.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future depending upon a
variety of factors, including cyclicality in the Company's target markets;
the timing of significant orders; lengthy sales cycles for the Company's
products; the mix of products sold; lengthy manufacturing cycles for the
Company's products; lengthy product development cycles for new products; the
timing of new product announcements and releases by the Company or its
competitors; market acceptance of new products and enhanced versions of the
Company's products; manufacturing inefficiencies associated with the startup
of new product introductions; customer concentration; ability to volume
produce systems and meet customer requirements; patterns of capital spending
by customers; product discounts; changes in pricing by the Company, its
competitors or suppliers; political and economic instability; 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 mix of products sold; the percentage of international sales,
which typically have lower gross margins than domestic sales principally due
to higher field service and support costs; increased competition in the
Company's targeted markets; nonlinearity of shipments during the quarter; the
introduction of new products, which typically have higher manufacturing costs
until manufacturing efficiencies are realized and are typically discounted
more than existing products until the products gain market acceptance; the
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. See "Additional Risk Factors -
International Sales; Japanese Market; Dependence on Local Distributor."
The Company derives a substantial portion of its total net sales from sales 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
8
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revenue from a single transaction has had and will continue to have a
significant impact on the Company's net sales and operating results. The
Company's backlog at the beginning of a period typically does not include all of
the sales needed to achieve the Company's objectives for that period. In
addition, orders in backlog are subject to cancellation, delay, deferral or
rescheduling by a customer with limited or no penalties. Consequently, the
Company's net sales and operating results for a period have been and 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 period to fall significantly below the Company's expectations, which
would materially adversely affect the Company's operating results for such
period. In particular, the significantly long manufacturing cycles of the
Company's linear motor-based steppers, which include the Model 2244i stepper,
Model 4700 stepper, Model 6700 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 materially adversely affect the Company's financial condition and results
of operations for a particular quarter. The impact of these and other factors on
the Company's sales and operating results in any future period cannot be
forecast with certainty.
The Company's business has in prior years been subject to seasonality, although
the Company believes such seasonality has been masked in recent years by
cyclical trends within the semiconductor industry. In addition, the need for
continued expenditures for research and development, capital equipment purchases
and ongoing training and customer service and support worldwide, among other
factors, will make it difficult for the Company to reduce its significant
operating expenses in a particular period if the Company fails to achieve its
net sales goals for the period. Additionally, the Company has recently
experienced manufacturing inefficiencies associated with shifts in product
demand and underutilization of manufacturing capacity and the Company presently
anticipates that these trends will continue for at least the next several
quarters.
Due to these and additional factors, historical results and percentage
relationships discussed below will not necessarily be indicative of the results
of operations for any future period.
NET SALES
Net sales consist of revenue from system sales, spare parts sales, and service.
Net sales for the quarter ended September 30, 1997 were $36.8 million, a
decrease of 21% as compared with net sales of $46.5 million for the comparable
period in 1996. For the nine months ended September 30, 1997, net sales were
$113.5 million, a decrease of 24% as compared with net sales of $150.0 million
for the comparable period in 1996. The current quarter decline, relative to the
comparable period in 1996, was primarily attributed to significantly lower unit
sales of the Company's Model 1700 Series steppers with machine vision system
(MVS), which address the market for back-end processing of thin film heads,
partially offset by higher unit sales of the Company's Titan Wafer Stepper,
which addresses the market for photosensitive polyimide applications as well as
the markets for scanner replacement and high volume/low cost semiconductor
fabrication. The year-to-date decline, relative to the comparable period in
1996, was primarily attributed to significantly lower unit sales of the
Company's Model 1500 Series steppers, which address the markets for scanner
replacement and high volume/low cost semiconductor fabrication and lower unit
sales of the Company's Model 1700 MVS Series steppers. Overall, the Company's
system shipments for the quarter ended September 30, 1997 decreased 28%,
relative to the comparable period in 1996, while the weighted average selling
price of all systems sold was essentially unchanged. For the nine months ended
September 30, 1997, the Company's system shipments decreased 34%, relative to
the comparable period in 1996, while the weighted average selling price of all
systems sold was essentially unchanged. Net sales from spare parts and service
in the third quarter of 1997 increased 30% over the comparable period in 1996.
For the nine months ended September 30, 1997, net sales from spare parts and
service increased 5% over the comparable period in 1996.
9
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The Company believes that its sales have been and continue to be adversely
impacted by reduced capital capacity spending levels within the semiconductor
industry. The Company continues to experience shipment delays and purchase
order restructurings by several of its customers, and has also experienced
purchase order cancellations and there can be no assurance that this trend
will not continue in the future. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current or prior
level of sales. The Company believes that the current strength of the U.S.
dollar, particularly in relation to the Japanese yen, places the Company at a
competitive disadvantage. Additionally, the Company has recently experienced
a downturn in orders from customers in the thin film head industry. Several
companies within the thin film head and disc drive industries have recently
announced lower than expected earnings or have announced the possibility of
future restructuring or other charges. The Company believes these events may
indicate that the thin film head and disc drive industries may have excess
capacity in the near-term. This could result in lower sales or delays or
deferrals of customer orders from these industries, which could materially
adversely affect the Company's business, financial condition and results of
operations. See "Additional Risk Factors - Cyclicality of Semiconductor and
Magnetic Recording Head Industries." Based on current market conditions and
nonlinearity of system shipments, the Company expects that future quarterly
comparisons, through at least the fourth quarter of 1997, will indicate a
period-over-comparable period decline in the Company's net sales and may
result in a decline in sales relative to the quarter ended September 30,
1997.
International net sales for the quarter ended September 30, 1997 were $15.9
million, as compared with $27.4 million for the comparable period in 1996.
International net sales represented 43% of total net sales for the quarter
ended September 30, 1997, as compared with 59% for the comparable period in
1996. This year-over-year decline, both in absolute dollars and as a
percentage of total sales, was primarily attributed to decreased system sales
to the Asia market. For the nine months ended September 30, 1997,
international net sales were $43.7 million, as compared with $75.9 million
for the comparable period in 1996. International net sales represented 39% of
total net sales for the nine-month period ended September 30, 1997, as
compared with 51% for the comparable period in 1996. This year-over-year
decline, both in absolute dollars and as a percentage of total sales, was
primarily attributed to decreased system sales to the Europe and Asia
markets. The Company's operations in foreign countries are not currently
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S.
dollars. However, international sales expose the Company to a number of
additional risk factors, including fluctuations in the value of local
currencies relative to the U.S. dollar, which, in turn, impact the relative
cost of ownership of the Company's products. See "Additional Risk Factors:
International Sales; Japanese Market; Dependence on Local Distributor." The
Company believes that the severe currency and equity market fluctuations that
have been experienced recently by many of the Asian markets may cause a
reduction in orders of the Company's products, particularly in the
short-term, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and market
acceptance of the Company's products, there can be no assurance that the Company
will exceed or maintain its current level of net sales for any period in the
future. Additionally, the Company believes that the market acceptance and volume
production of the Titan Wafer Stepper and Saturn Wafer Stepper are of critical
importance to the successful implementation of its mix-and-match strategy and
its future financial results. To the extent that the Company's mix-and-match
products do not achieve significant sales due to difficulties involving
manufacturing or engineering, an inability to reduce the current long
manufacturing cycles for such products, direct competition from mix-and-match
systems manufactured by the Company's competitors, or any other reason, the
Company's business, financial condition and results of operations would be
materially adversely affected. Additionally, the Company is presently
10
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transitioning from its Model 1700 MVS Series steppers, which address the market
for back-end processing of inductive thin film heads, to the Model 1800 MVS
Series steppers, which address the market for back-end processing of magneto
resistive (MR) thin film heads. To the extent that the Model 1800 Series
steppers do not achieve significant sales due to competition from alternative
technologies, excess capacity in the thin film industry, or any other reason,
the Company's business, financial condition and results of operations would be
materially adversely affected.
GROSS PROFIT
Gross margin for the quarter ended September 30, 1997 was 52.3%, as compared
with 54.5% for the comparable period in 1996. For the nine months ended
September 30, 1997, gross margin was 53.1%, as compared with 54.1% for the
comparable period in 1996. Both the current quarter and year-to-date declines in
gross margin as a percentage of net sales, as compared with the comparable
periods in 1996, can be primarily attributed to the shift away from the
Company's more mature product lines toward the Company's more advanced systems;
manufacturing inefficiencies caused by underutilization of manufacturing
capacity, changes in the Company's shipment schedule and an unusually high
degree of nonlinearity of shipments during the 1997 periods; partially offset by
lower required inventory reserves due to lower inventory levels and improved
inventory management, improved margins from spare parts and service, increased
after-sales support efficiencies and fewer system shipments to the Japanese
market. As a result of its distribution agreement with Innotech Corporation, the
Company's Japanese distributor, gross profit as a percentage of total net sales
may be negatively impacted in any particular period by significant system
shipments to the Japanese market. See "Additional Risk Factors - International
Sales; Japanese Market; Dependence on Local Distributor."
The Company believes that increased competition from Canon Inc. and Nikon Inc.,
among others, together with generally weak conditions in the markets the Company
serves, will make it difficult for the Company to maintain recent gross margin
percentages. Additionally, the Company is proceeding with capacity additions for
the eventual production of several new products that are outside of the
Company's core technologies (See "Additional Risk Factors: Development of New
Product Lines; Management of Growth"). Commencement of production of these new
products has resulted and will continue to result in the purchase of significant
levels of inventory to support manufacturing requirements, hiring of additional
production and manufacturing support personnel, purchase of significant levels
of plant and equipment and the incurrence of other related manufacturing
overhead costs. The purchase of additional inventories will result in a
significantly higher risk of obsolescence, which may require additional
inventory reserves and would negatively impact gross margins. Additionally, new
products generally have lower gross margins until production and after-sales
efficiencies can be achieved. Should these new products fail to develop or
generate significant market demand, the Company's business, financial condition
and results of operations would be materially adversely impacted.
RESEARCH, DEVELOPMENT, AND ENGINEERING
The Company's research, development, and engineering expenses, net of third
party funding, were $7.1 million for the quarter ended September 30, 1997, an
increase of 10% as compared with $6.4 million for the comparable period in 1996.
This increase in the current quarter, relative to the comparable period in 1996,
was primarily attributed to increased spending on the development and testing of
the Company's electron beam lithography system and the development of the
Company's Model 1800 MVS Series steppers. For the nine months ended September
30, 1997, research, development, and engineering expenses, net of third party
funding, were $20.1 million, a decrease of 5% as compared with $21.1 million for
the comparable period in 1996. This year-to-date decrease, as compared to the
comparable period in 1996, was primarily attributed to decreased spending in
absolute dollars for the development, enhancement, manufacturing support and
sales demonstration support of the Company's Model 2244i stepper, Model 4700
stepper, Titan Wafer Stepper and Saturn Wafer Stepper; partially offset by
increased spending for the Company's Model 1800 MVS Series steppers, development
of its electron beam lithography system and development of its gas immersion
laser doping technologies and systems. However, the Company intends to continue
to invest significant resources in the development of new products, such as the
Company's gas immersion laser doping and electron beam lithography systems, and
enhancements of existing semiconductor and thin film head lithography systems.
Due
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to these and other factors, the Company expects the absolute dollar amount of
research, development and engineering expenses for the fourth quarter of 1997 to
increase substantially in absolute dollars, relative to the current quarter.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During the first quarter of 1997, the Company completed the acquisition of the
assets of Lepton Inc., a developer of electron beam lithography systems. As a
result of this acquisition, the Company recognized a one-time pre-tax charge in
the quarter ended March 31, 1997 for acquired in-process research and
development expense of $3.6 million, or $0.12 per share net of related income
tax benefits.
SELLING, GENERAL, AND ADMINISTRATIVE
The Company's selling, general, and administrative expenses were $6.5 million
for the quarter ended September 30, 1997, a decrease of 11% as compared with
$7.3 million for the comparable period in 1996. As a percentage of net sales,
selling, general, and administrative expenses increased to 17.7% for the
quarter ended September 30, 1997, as compared with 15.7% for the comparable
period in 1996. For the nine months ended September 30, 1997, selling,
general, and administrative expenses were $19.4 million, a decrease of 20% as
compared with $24.3 million for the comparable period in 1996. As a
percentage of net sales, selling, general, and administrative expenses
increased to 17.1% for the nine months ended September 30, 1997, as compared
with 16.2% for the comparable period in 1996. The significant dollar decrease
in both the current quarter and year-to-date periods, relative to the
comparable periods in 1996, reflects in large part the Company's decrease in
sales, service and support expenses typically associated with a decrease in
sales; cost containment measures implemented during 1996; significantly lower
required provisions for the Company's profit sharing and executive incentive
plans and lower commission expense resulting from higher direct sales
relative to total net sales for the period, partially offset by certain
reserve requirements. The Company expects the absolute dollar amount of
selling, general, and administrative expenses for the fourth quarter of 1997
to increase relative to the current quarter. This increase is anticipated, in
part, to increased sales, service and support expenses associated with the
anticipated future introduction of the Company's electron beam lithography
and gas immersion laser doping systems.
OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $1.9 million
for the quarter ended September 30, 1997, as compared with $1.5 million for the
comparable period in 1996. For the nine months ended September 30, 1997, other
income, net, was $5.3 million, as compared with $4.5 million for the comparable
period in 1996. The improvement in the current quarter and year-to-date periods,
relative to the comparable periods in 1996, was primarily attributed to income
generated from increased investments in cash equivalents, short-term investments
and lease receivables.
INCOME TAXES
Income taxes represented 28% of income before income taxes for the quarter ended
September 30, 1997, as compared with 32.5% for the quarter ended 1996. For the
nine months ended September 30, 1997, income taxes represented 30% of income
before income taxes, as compared with 33.5% for the comparable period in 1996.
This decrease in the tax rate for 1997, relative to 1996, is primarily a result
of anticipated tax benefits associated with the Company's research and
development efforts together with higher tax exempt income, relative to total
income before income taxes. However, tax legislation and other factors may
impact this rate further. The Company's effective tax rate differs from the U.S.
statutory rate as a result of state income taxes and benefits associated with
the Company's foreign sales corporation, tax-exempt income and credits for
research and development, net of other individually immaterial benefits.
JAPAN OPERATIONS
The Company is currently reviewing the manner in which it conducts business
in Japan and is contemplating actions which may result in charges against
operating results in the fourth quarter of 1997, or subsequent quarters.
These charges would consist primarily of expenses incurred by the Company in
conjunction with ending its distributor relation with Innotech Corporation,
and could adversely impact the Company's results of operations in those
periods.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $2.5 million for the nine month
period ended September 30, 1997, as compared with $2.5 million provided by
operating activities during the comparable period in 1996. Positive cash flows
from operating activities during the first nine months of 1997 were attributed
to net income of $15.7 million and non-cash charges to income of $8.4 million,
which include a $3.6 million pre-tax charge for the write-off of in-process
research and development associated with the Company's purchase of the assets of
Lepton Inc., partially offset by changes in operating assets and liabilities of
$21.6 million. The negative net effect from changes in operating assets and
liabilities was primarily attributed to an increase of $18.1 million in leases
receivable, a $4.9 million decrease in accounts payable and other current
liabilities and a $1.9 million increase in accounts receivable, partially offset
by a $3.5 million decrease in inventory. The Company anticipates that the
current trend of nonlinearity of shipments and extended customer payment terms
will continue to keep accounts receivable levels at unusually high levels for at
least the next several quarters. Such trends, should they continue, would expose
the Company to numerous risks, which could materially adversely affect the
Company's business, financial condition and results of operations.
The Company believes that because of the relatively long manufacturing cycle of
certain of its systems, particularly newer products, and its plan to increase
demonstration units, the Company's investment in inventories will continue to
represent a significant portion of working capital. Additionally, the Company
has incurred and will continue to incur significant additional levels of
inventory as a result of the anticipated introduction of its electron beam
lithography and gas immersion laser doping systems. As a result of such
investment in inventories, the Company may be subject to an increased risk of
inventory obsolescence and other factors, which could materially adversely
affect the Company's operating results.
At September 30, 1997, the Company had working capital of $218.8 million. The
Company's principal sources of liquidity at September 30, 1997 consisted of
$164.3 million in cash, cash equivalents and short-term investments and $4
million in various unsecured lines of credit. As of September 30, 1997, there
were no outstanding amounts under these facilities. During the quarter ended
September 30, 1997, the Company cancelled its $25 million line of credit with
Wells Fargo Bank.
For the nine month period ended September 30, 1997, cash provided by financing
activities was $3.3 million, principally as a result of the issuance of common
stock pursuant to the exercise of employee stock options and the employee stock
purchase plan.
During the nine month period ended September 30, 1997, the Company used $17.9
million of cash in its investing activities, including $9.0 million for the net
investment of cash in short-term investments, $5.7 million for capital
expenditures and $3.1 million for the purchase of the assets of Lepton Inc. The
Company intends to continue to make significant capital expenditures throughout
the remainder of 1997 related to the expansion of its manufacturing facilities,
the manufacture of its steppers for sales demonstration and engineering
development purposes and additional capital expenditures related to research,
development and engineering, sales and service and management information
systems. As a result of these capital expenditures, the Company's depreciation
and amortization costs are anticipated to increase significantly and may
negatively impact the Company's results of operations in the event of a further
downturn in the Company's business cycles.
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 cash flow from operations, its cash, cash
equivalents and short-term investments and funds available under its lines of
credit will be sufficient to meet the Company's cash requirements for the next
twelve months. Beyond the next twelve months, the Company may require additional
equity or debt financing to address its working capital or capital equipment
needs. Additionally, the Company may in the future pursue acquisitions of
complementary product lines, technologies, or businesses, such as the
acquisition of the assets of Lepton.
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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 an acquisition does occur, there can be no assurance as to the effect
thereof on the Company's business or operating results. Additionally, the
Company is experiencing increased interest in its equipment leasing program.
Continued success of this strategy may result in the further formation of
significant long-term receivables and would require the use of substantial
amounts of working capital. To the extent that the Company's financial resources
are insufficient to fund the Company's activities; additional funds will be
required. There can be no assurance that additional financing will be available
on reasonable terms or at all.
ADDITIONAL RISK FACTORS
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, as evidenced by the current downturn in the
semiconductor capital equipment industry. This has, from time to time,
resulted in significantly reduced demand for capital equipment including the
systems manufactured and marketed by the Company. The Company believes that
markets for new generations of semiconductors will also be subject to similar
fluctuations. In the past, the semiconductor industry has experienced
significant growth, which, in turn, has caused significant growth in the
capital equipment industry. However, the semiconductor industry has more
recently experienced a cyclical downturn, and this has resulted in a
significant reduction in capital spending. The Company has recently
experienced cancellation of purchase orders, shipment delays and purchase
order restructurings by several of its customers and there can be no
assurance that this trend will not continue in the future. Accordingly, the
Company can give no assurance that it will be able to achieve or maintain its
current level of sales. Based on present market conditions and nonlinearity
of system shipments, the Company presently expects that future quarterly
comparisons, through at least the fourth quarter of 1997, will indicate a
period-over-comparable period decline in the Company's net sales and may
result in a decline in sales relative to the quarter ended September 30,
1997. Additionally, sales for the quarter ended December 31, 1997 may
indicate a sequential decline in sales relative to the quarter ended
September 30, 1997.
During 1996 and 1995, approximately 40% and 30%, respectively, of the
Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. During the nine month period ended September
30, 1997, sales to thin film head manufacturers and micromachining customers
represented approximately 50% of the Company's net sales, as compared with
40% during the comparable period a year ago. 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. The Company has
recently experienced a decline in orders from customers in the thin film head
market. Additionally, several companies within the thin film head and disc
drive industries have recently announced lower than expected earnings or have
announced the possibility of future restructuring or other charges. The
Company believes these events may indicate that the thin film head and disc
drive industries may have excess capacity in the near-term. This could result
in lower sales or delays or deferrals of customer orders from these
industries, which could materially adversely affect the Company's business,
financial conditions and results of operations. Accordingly, sales of its
steppers to thin film head manufacturers may decrease in the future.
Additionally, the Company is experiencing increased competition in this
market from Canon and Nikon. The Company's business and operating results
would be materially adversely affected by downturns or slowdowns in the thin
film head market or by loss of market share.
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 results
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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.
LENGTHY SALES CYCLE 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.
HIGHLY COMPETITIVE INDUSTRY 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, Canon, ASM Lithography, Ltd. 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 both Canon and Nikon offer
reduction steppers for thin film head fabrication. In addition, Nikon and Canon
are shipping their own widefield mix-and-match lithography systems (See:
"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. 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 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 "International sales; Japanese market; Dependence on Local Distributor."
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
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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, among others; or any other reason, the Company's business,
financial condition and results of operations would be materially adversely
affected. In addition, the increase in mix-and-match stepper production has
resulted and will continue to result in higher inventory levels and operating
expenses. Failure to achieve or maintain significant sales of these steppers
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.
INTERNATIONAL SALES; JAPANESE MARKET; DEPENDENCE ON LOCAL DISTRIBUTOR
International sales accounted for approximately 53% and 55% of total net sales
in 1996 and 1995, respectively. For the first nine months of 1997, international
sales accounted for 39% of total net sales, as compared with 51% during the
comparable period a year ago. The Company anticipates that international sales,
which typically have lower gross margins than domestic sales, principally due to
higher field service and support costs, will continue to account for a
significant portion of total net sales. As a result, a significant portion of
the Company's sales will be subject to certain risks, including unexpected
changes in regulatory requirements, difficulty in satisfying existing regulatory
requirements, exchange rate fluctuations, tariffs and other barriers, political
and economic instability, difficulties in accounts receivable collections,
natural disasters, difficulties in staffing and managing foreign subsidiary 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.
Additionally, the Company believes that the severe currency and equity market
fluctuations that have been experienced recently by many of the
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Asian markets may cause a reduction in orders of the Company's products,
particularly in the short-term, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its
systems to Japanese semiconductor manufacturers. The Japanese semiconductor
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies
to penetrate. The Company is at a competitive disadvantage with respect to
Japanese semiconductor capital equipment suppliers that have been engaged for
some time in collaborative efforts with Japanese semiconductor manufacturers.
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. Either party can terminate such agreement upon notice of
termination. The Company is currently reviewing the manner in which it
conducts business in Japan and is contemplating actions which may result in
charges against operating results in the fourth quarter of 1997, or
subsequent quarters. These charges would consist primarily of expenses
incurred by the Company in conjunction with ending its distributor relation
with Innotech Corporation, and could adversely impact the Company's results
of operations in those periods. There can be no assurance that these
restructuring and other one-time charges, if deemed necessary, will result in
increased sales and may result in lower sales to the Japanese market,
particularly in the near-term. Should the Company fail to achieve significant
sales to the Japanese market, its results of operations would be materially
adversely impacted. 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.
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. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both future demand and
the technology that will be available to supply that demand. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products and related software tools or enhancing
its existing products and related software tools. Any such failure would
materially adversely affect the Company's business, financial condition and
results of operations.
Because of the large number of components in the Company's systems, significant
delays can occur between a system's introduction and the commencement by the
Company of volume production of such systems. The Company has experienced delays
from time to time in the introduction of, and technical and manufacturing
difficulties with, certain of its systems and enhancements and related software
tools and may experience delays and technical and manufacturing difficulties in
future introductions or volume production of new systems or enhancements and
related software tools. There can be no assurance that the Company will not
encounter 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
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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, the Saturn Wafer Stepper, the Company's electron beam lithography
system and its gas immersion laser doping system, 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.
DEVELOPMENT OF NEW PRODUCT LINES; MANAGEMENT OF GROWTH Currently, the Company
is devoting significant resources to the development of new products and
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 during the
fourth quarter of 1997, relative to the third quarter, principally as a result
of the continued development of these new product lines. During the remainder of
1997, the Company will continue to develop these products and will 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.
CUSTOMER CONCENTRATION Historically, the Company has sold a substantial
number 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. The
Company expects that sales to relatively few customers will continue to account
for a high percentage of its net sales in the foreseeable future and believes
that the Company's financial results depend in significant part upon the success
of these major customers and the Company's ability to meet their future capital
equipment needs. Although the composition of the group comprising the Company's
largest customers may vary from period to period, the loss of a significant
customer or any reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the
semiconductor or magnetic recording head industries or in the industries that
manufacture products utilizing integrated circuits or thin film heads, may have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's ability to maintain or increase its sales
in the future will depend in part upon its ability to obtain orders from new
customers as well as the financial condition and success of its customers and
the general economy, of which there can be no assurance.
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 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
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Company's future operating results depend in significant part upon its ability
to attract and retain other qualified management, manufacturing, and technical,
sales and support personnel for its operations. There 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.
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 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.
YEAR 2000 COMPLIANCE Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than three years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company is currently transitioning to new versions of its
management information systems and additional versions will need to be completed
by the Company's software vendors, and implemented by the Company, in order to
be Year 2000 compliant. Any Year 2000 compliance problem of either the Company
or its customers could result in a material adverse effect on the Company's
business, operating results and financial condition.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, Bylaws and Delaware law may discourage certain transactions
involving a change in control of the Company. In addition to the foregoing, the
Company's classified board of directors, the shareholdings of the Company's
officers, directors and persons or entities that may be deemed affiliates and
the ability of the Board of Directors to issue "blank check" preferred stock
without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock.
VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's operating results, sales of securities of the Company into the
marketplace, general conditions in the semiconductor and magnetic recording head
industries or the worldwide 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.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION.
During the third quarter of 1997, Mr. Joe Parkinson resigned from the
Board of Directors in order to devote more time to his professional
endeavors.
Mr. Larry R. Carter, Vice President of Finance and Administration,
Chief Financial Officer and Secretary of Cisco Systems, Inc. joined
the Company's Board of Directors during the third quarter of 1997.
Mr. Thomas D. "Tommy" George, Ph.D., retired and former President and
General Manager of Motorola's semiconductor products sector joined
the Company's Board of Directors during the fourth quarter of 1997.
Mr. Joel Gemunder, President of Omnicare, Inc. joined the Company's
Board of Directors during the fourth quarter of 1997.
The Company canceled its $25 million line of credit with Wells Fargo
Bank during the third quarter of 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11.1 Statement of Computation of Net Income Per Share.
Exhibit 21.1 Subsidiaries of Registrant
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRATECH STEPPER, INC.
- - -------------------------------------------------------------------------------
(Registrant)
Date: November 17, 1997 By: /s/William G. Leunis, III
--------------------------- ----------------------------------
William G. Leunis, III
Senior Vice President Finance
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
21
<PAGE>
ULTRATECH STEPPER, INC.
EXHIBIT 11.1
STATEMENT OF COMPUTATION ON NET INCOME PER COMMON SHARE
Shares used in the net income per common share computation are the weighted
average number of common shares outstanding plus dilutive common share
equivalents.
Shares used in the per share computation are as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
(in thousands, except per share amounts) 1997 1996 1997 1996
- - --------------------------------------------------------------------------------
Weighted average common shares
outstanding 20,654 20,198 20,555 20,088
Common share equilavents from stock
options granted (using the treasury
stock method) 1,225 1,006 1,138 1,223
------- ------- ------ ------
Number of shares used in per share
calculation 21,879 21,204 21,693 21,311
------- ------- ------ ------
------- ------- ------ ------
Net income $5,405 $8,835 $15,665 $26,752
------- ------- ------ ------
------- ------- ------ ------
Net income per share $0.25 $0.42 $0.72 $1.26
------- ------- ------ ------
------- ------- ------ ------
22
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ULTRATECH STEPPER, INC.
The following is a list of Ultratech Stepper Inc.'s subsidiaries including their
state of incorporation as of September 30, 1997:
SUBSIDIARIES STATE AND COUNTRY OF INCORPORATION
Ultratech Stepper International, Inc. State of Delaware, USA
Ultratech Stepper UK Limited United Kingdom
Ultratech Stepper Foreign Sales Corporation Barbados
Ultratech Kabushiki Kaisha Japan
Ultratech Capital, Inc. State of Delaware, USA
UltraBeam Lithography, Inc. State of Delaware, USA
Ultratech Stepper (Thailand) Co., LTD. Thailand
Verdant Technologies, Inc. State of Delaware, USA
U.S. Advanced Lithography LLC State of Delaware, USA
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,625
<SECURITIES> 128,703
<RECEIVABLES> 43,412
<ALLOWANCES> 1,706
<INVENTORY> 32,014
<CURRENT-ASSETS> 253,293
<PP&E> 32,982
<DEPRECIATION> 13,369
<TOTAL-ASSETS> 296,332
<CURRENT-LIABILITIES> 34,519
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 260,736
<TOTAL-LIABILITY-AND-EQUITY> 296,332
<SALES> 33,827
<TOTAL-REVENUES> 36,752
<CGS> 15,850
<TOTAL-COSTS> 17,524
<OTHER-EXPENSES> 7,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 7,510
<INCOME-TAX> 2,105
<INCOME-CONTINUING> 5,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,405
<EPS-PRIMARY> 0.247
<EPS-DILUTED> 0.245
</TABLE>
