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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
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1996 0-22248
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ULTRATECH STEPPER, INC.
(REGISTRANT)
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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)
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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.
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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.
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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
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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:
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THROUGHPUT
SPECIFICATIONS*
FIELD SIZE SPECIFICATIONS (WAFERS PER HOUR)
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YEAR OF FEATURE SIZE MAXIMUM AREA MAXIMUM AREA ------------------------
PRODUCT LINE INTRODUCTION (microns) RECTANGLE (mm) SQUARE (mm) 6 INCH 8 INCH
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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
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THROUGHPUT
SPECIFICATIONS*
FIELD SIZE SPECIFICATIONS (WAFERS PER HOUR)
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YEAR OF FEATURE SIZE MAXIMUM AREA MAXIMUM AREA ------------------------
PRODUCT LINE INTRODUCTION (microns) RECTANGLE (mm) SQUARE (mm) 6 INCH 8 INCH
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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
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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."
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------- --- ------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
-------------
<S> <C>
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
</TABLE>
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
<TABLE>
<CAPTION>
PAGE NUMBER
-------------
<S> <C>
Schedule II Valuation and Qualifying Accounts. S-1
</TABLE>
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:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
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.
</TABLE>
- ------------------------
(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
<PAGE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
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
</TABLE>
25
<PAGE>
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
- ------------------------------------------------------- ------------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1
<PAGE>
EXHIBIT 10.9.3
THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE
THIS THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE (this
"Amendment") is entered into as of November 22, 1996, by and between Ultratech
Stepper, Inc., a Delaware corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION, SUCCESSOR-BY-MERGER TO FIRST INTERSTATE BANK OF
CALIFORNIA, ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of November 23, 1994, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 6.02.(e) is hereby deleted in its entirety, and the following
substituted therefor:
"(e) DEBT. Create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist, any Debt, other than
(i) Debt reflected on the Borrower's financial statements referred
to in Section 5.01(e) hereof and other Debt existing on the date
hereof and set forth on Schedule 6.02(e) hereto; (ii) the Loans
contemplated herein; (iii) Debt relating to liens permitted under
Section 6.02(d); (iv) Debt of a Subsidiary to another Subsidiary
or to the Borrower; (v) reimbursement obligations with respect to
Letters of Credit issued hereunder in accordance with Section
2.05; (vi) Debt relating to Drafts accepted and discounted
pursuant to Section 2.06, and (vii) additional borrowings in an
aggregate outstanding principal amount not to exceed
$10,000,000.00."
2. Except as specifically provided herein, all terms and conditions of the
Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
3. Borrower hereby remakes all representations and warranties contained in the
Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no
Event of Default as defined in the Credit Agreement, nor any condition, act
or event which with the giving of notice or the passage of time or both
would constitute any such Event of Default.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
<TABLE>
<S> <C>
ULTRATECH STEPPER, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION,
SUCCESSOR-BY-MERGER TO
FIRST INTERSTATE BANK OF CALIFORNIA
By: /s/ WILLIAM G. LEUNIS III By: /s/ GUS MARTIN
------------------------------------------------
- ----------------------------- Gus Martin
William G. Leunis III
Title: Vice President, Finance, Title: Assistant Vice President
Chief Financial Officer,
Secretary and Treasurer
</TABLE>
27
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEEMENT BETWEEN REGRISTRANT AND MR. JAMES L. SCHRAM,
PRESIDENT AND CHIEF OPERATING OFFICER
Ultratech Stepper, Inc.
3050 Zanker Road,
San Jose, CA 95134
February 26, 1996
Dear Jim:
It is my pleasure to confirm our proforma offer of employment with Ultratech
Stepper, Inc. based on the following:
<TABLE>
<S> <C>
TITLE: President--Chief Operating Officer
CLASSIFICATION: Officer and Member of the Board of Directors
SALARY: $300,000 per year (See Attachment A)
PAID TIME OFF: 10 HOLIDAYS PER YEAR (See Schedule), PLUS VACATION AT THE
RATE, OF 2.31 HOURS PER WEEK FOR THE 1ST YEAR. Ultratech
Stepper also observes a mandatory shutdown twice a year (See
Schedule) equal to no more than 10 days.
STOCK OPTIONS: SHARES. As part of your terms of employment, you would be
eligible to receive Ultratech Stepper, Inc. stock options as
granted to all employees. Your grant of stock options is
subject to approval by the Compensation Committee of the
Ultratech Stepper, Inc. Board of Directors. The price of
your options will be the closing price on the day your
options are approved by the Compensation Committee. (See
Attachment A).
START DATE: March 5, 1996
REPORT TO: Arthur W. Zafiropoulo
DEPARTMENT: 970
</TABLE>
28
<PAGE>
Mr. James L. Schram
February 26, 1996
Page 2
This offer of employment is contingent upon your taking a pre-employment
physical and drug screening test, which will be scheduled.
Please understand that this offer does not constitute a GUARANTEE of
continued employment for any particular period, and your relationship with
Ultratech Stepper, Inc. is an "at will" relationship and is subject to
termination by either party at any time, for any reason, with or without cause.
Only the President of Ultratech Stepper, Inc. has the authority to alter the "at
will" nature of your employment status, and any such change in status may be
effected only by an express written employment contract signed by the President
of Ultratech Stepper, Inc.
Your acceptance of this offer with Ultratech Stepper, Inc. is contingent
upon your agreement that any future disputes with Ultratech Stepper, Inc.
regarding the termination of your employment will be resolved solely and
exclusively in accordance with the enclosed arbitration procedure. By accepting
this offer, you are agreeing that any decision issued by an arbitrator pursuant
to the referenced procedure will be final and binding upon Ultratech Stepper,
Inc. and you.
Finally, your employment with Ultratech Stepper, Inc. is contingent upon
your execution of the enclosed Employee Proprietary Information and Inventions
Agreement. Please complete this form and return it to the office of the
President with your signed acceptance copy of this letter.
Human Resources Department will contact you to arrange your orientation.
During orientation, Ultratech Stepper, Inc. comprehensive benefits will be
explained to you. The following forms should be filled out and signed:
- ULTRATECH STEPPER, INC. EMPLOYMENT APPLICATION (AVOID "SEE RESUME")
- TARGETED JOBS TAX CREDIT FORM
- FORM TO COLLECT DATA ABOUT DEPENDENTS (I.E., SOCIAL SECURITY NUMBER,
BIRTHDAY, ETC.)
- W-4 TAX WITHHOLDING FORM
- "EMPLOYMENT ELIGIBILITY VERIFICATION (FORM I-9)". FILL OUT AND SIGN
SECTION 1. BRING WITH YOU TO THE ORIENTATION THE APPROPRIATE DOCUMENTS
SHOWN IN SECTION 2 -- EITHER ONE DOCUMENT FROM LIST A OR ONE DOCUMENT FROM
LIST B AND ONE DOCUMENT FROM LIST C.
- PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
- MANDATORY ARBITRATION POLICY (FOR YOUR INFORMATION).
29
<PAGE>
<TABLE>
<S> <C>
SALARY $300,000/YEAR
In the event of involuntary termination, the full balance of salary for the first year will
be paid.
EXECUTIVE COMPENSATION 60% BASED ON ULTRATECH STEPPER PROGRAM (ENCLOSED), OR
$100,000 WHICHEVER IS GREATER.
In the event of involuntary termination after six months, and not after 12 months of
employment, $100,000 in cash will also be provided.
STOCK OPTIONS 200,000 SHARES UPON HIRING with pricing at the market value
at the time which options are approved by the Compensation
Committee.
AN ADDITIONAL 100,000 SHARES after the first year
anniversary.
/s/ ARTHUR W. ZAFIROPOULO /s/ JAMES L. SCHRAM
- ----------------------------- ------------------------------------
Presented By: ACCEPTED BY:
ARTHUR W. ZAFIROPOULO JAMES L. SCHRAM
PRESIDENT & CEO
DATE: February 26, 1996 DATE: February 27, 1996
</TABLE>
30
<PAGE>
EXHIBIT 11.1
CALCULATION OF 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 computations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average common shares outstanding.............. 20,131,000 18,429,000 15,026,000
Common equivalent shares from stock options granted
(using the treasury stock method)...................... 1,193,000 1,729,000 1,906,000
----------------- ----------------- -----------------
Shares used in computing net income per share........... 21,324,000 20,158,000 16,932,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income.............................................. $ 35,311,000 $ 24,234,000 $ 11,019,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income per share.................................... $ 1.66 $ 1.20 $ 0.65
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
- ------------------------
* All share and per share data have been restated to reflect a two-for-one
stock split distributed on May 10, 1995.
31
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993* 1992*
---------- ---------- ---------- --------- ---------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net sales.............................................. $ 193,508 $ 157,831 $ 91,344 $ 54,136 $ 35,309
Gross profit........................................... 104,893 82,288 46,037 26,683 17,548
Gross profit as a percentage of sales.................. 54% 52% 50% 49% 50%
Operating income....................................... $ 46,678 $ 31,782 $ 15,291 $ 6,833 $ 2,220
Income before income taxes............................. 52,707 36,170 16,445 6,689 2,089
Pretax income as percentage of sales................... 27% 23% 18% 12% 6%
Net income............................................. $ 35,311 $ 24,234 $ 11,019 $ 4,123 $ 1,304
Net income per share................................... $ 1.66 $ 1.20 $ 0.65 N/A N/A
Dividends per share.................................... -- -- -- -- --
Number of shares used in per share computation......... 21,324 20,158 16,932 N/A N/A
BALANCE SHEET:
Cash, cash equivalents and short-term investments...... $ 167,409 $ 161,356 $ 50,246 $ 26,242 $ 176
Working capital........................................ 212,684 176,174 69,368 32,977 6,307
Total assets........................................... 280,772 245,428 104,789 56,381 16,765
Long-term obligations, less current portion............ -- -- 400 800 --
Stockholders' equity................................... 239,947 199,658 80,027 38,091 8,323
OTHER DATA:
Return on average equity............................... 16% 17% 19% 18% 15%
Book value per common share outstanding................ $ 11.81 $ 10.08 $ 4.84 N/A N/A
Current ratio.......................................... 6.40 4.94 3.93 2.89 1.76
Long-term debt to equity ratio......................... 0.00 0.00 0.00 0.02 0.00
Capital expenditures................................... $ 7,849 $ 9,760 $ 7,759 $ 2,752 $ 972
Income tax as percentage of pretax income.............. 33% 33% 33% 38% 38%
</TABLE>
- ------------------------
* Ultratech Stepper, Inc. (the "Company") acquired certain assets and
liabilities of the Ultratech Stepper Division (the "Predecessor") of General
Signal Corporation on March 8, 1993. The amounts, as presented above,
reflect historical results and do not include pro forma adjustments, which
may have been incurred as an independent company. Net income per share for
each of the two years in the period ended December 31, 1993 is not presented
because of a lack of comparability between the capital structure of the
Company and the Predecessor.
32
<PAGE>
QUARTERLY DATA
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
--------- --------- --------- ---------
UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
1996
Net sales............................................................. $ 51,713 $ 51,793 $ 46,502 $ 43,500
Gross profit.......................................................... 27,654 28,102 25,343 23,794
Operating income...................................................... 11,527 12,531 11,622 10,998
Net income............................................................ 8,641 9,276 8,835 8,559
Net income per share.................................................. $ 0.41 $ 0.44 $ 0.42 $ 0.40
Number of shares used in per share computations....................... 21,225 21,279 21,204 21,359
1995
Net sales............................................................. $ 32,075 $ 36,255 $ 42,205 $ 47,296
Gross profit.......................................................... 16,225 18,712 22,122 25,229
Operating income...................................................... 5,628 6,995 8,693 10,466
Net income............................................................ 4,116 5,260 6,815 8,043
Net income per share.................................................. $ 0.22 $ 0.27 $ 0.32 $ 0.38
Number of shares used in per share computations....................... 18,360 19,533 21,355 21,356
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION
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.
The following discussion should be read in conjunction with the consolidated
financial statements, and notes thereto, included elsewhere herein. For a
further discussion of the Company's business, please refer to the Company's 1996
Annual Report on Form 10-K, which is included as an integral component of the
Annual Report to Stockholders.
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
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; nonlinearity 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 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 revenue from
a single transaction has had and could 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 may 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
34
<PAGE>
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, Titan Wafer Stepper and Saturn Wafer Stepper, 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. 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 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.
Certain of the statements contained in this Annual Report are
forward-looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed herein, among other factors that could cause
actual results to differ materially include the following: cyclicality of the IC
and magnetic recording head industries; importance of the Company's
mix-and-match strategy; expansion of the Company's operations; management of
growth; customer concentration; lengthy sales cycle; highly competitive
industry; rapid technological change; importance of timely product introduction;
dependence on key personnel; international sales; dependence on local
distributor in the Japanese market; sole or limited sources of supply;
intellectual property matters; environmental regulations; effects of certain
antitakeover provisions; volatility of stock price; and the other risk factors
listed from time to time in the Company's SEC reports, including but not limited
to the Company's 1996 Annual Report on Form 10-K.
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
1996 VS. 1995
Net sales consist of revenue from system sales, spare parts sales and
service. Net sales for 1996 were $193.5 million, an increase of 23% over net
sales of $157.8 million for 1995. This increase was primarily due to a
three-fold unit shipment increase in the Company's Model 1700 Series stepper
with machine vision system (MVS), which addresses the market for back-end
processing of thin film heads; 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; and a shift by thin film head manufacturers from the
Model 2700 stepper to the Company's more advanced Model 4700 stepper. These
factors were partially offset by lower unit sales of the Company's Model 2244i
stepper, which addresses the market for mix-and-match in advanced IC
fabrication, enabling customers to combine the Company's 1X steppers for
noncritical layers with reduction steppers for critical layers. Overall, the
Company's system shipments increased 11% and the weighted
35
<PAGE>
average selling price of all systems sold increased by 9%. Net sales from spare
parts and service in 1996 increased 22% over 1995 levels, resulting primarily
from an increased number of system upgrades and higher service and spares sales
resulting from a larger installed base of the Company's systems in 1996, as
compared with 1995. Strength in the Company's international markets also
contributed to the year-over-year dollar increase in net sales. International
sales for 1996 were $102.1 million, an increase of 17% over
international sales of $87.2 million in 1995. This increase was primarily due to
increased sales of the Company's Model 1700 MVS Series steppers to thin film
head manufacturers in Southeast Asia. During 1996, international sales
represented 53% of total sales, as compared to 55% of total sales in 1995. 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 typically 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. The Company believes that the current strength of the U.S. dollar,
particularly in relation to the Japanese yen, may place the Company at a
competitive disadvantage.
Although the thin film head segment of the magnetic recording head industry
has recently experienced significant growth, the Company expects that this
industry may not sustain such a growth rate in the future. Additionally, the
semiconductor industry has 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 levels from the comparable period one year
ago. 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 cancellations of purchase orders,
shipment delays and purchase order restructurings by several of its 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 or prior 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.
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 long manufacturing
cycles, 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.
1995 VS. 1994
Net sales for 1995 were $157.8 million, an increase of 73% over net sales of
$91.3 million for 1994. This increase was primarily due to higher unit sales for
the Company's Model 1500/1700 Series steppers and the Model 2244i stepper.
Overall, the Company's system shipments increased 73% and the average selling
price of all systems sold increased by 4%. Net sales from spare parts and
service in 1995 increased 34% over 1994 levels, resulting primarily from a
larger installed base of the Company's systems in 1995 as compared with 1994,
partially offset by increased reliability levels achieved by the Company's more
mature
36
<PAGE>
product lines. Strength in the Company's international markets also contributed
to the year-over-year increase in net sales. International sales for 1995 were
$87.2 million, an increase of 67% over international sales of $52.1 million in
1994, principally from sales to customers located in Europe and Asia/Pacific.
During 1995, international sales represented 55% of total sales, as compared to
56% in 1994.
GROSS PROFIT
1996 VS. 1995
The Company's gross profit as a percentage of net sales has been and will
continue to be 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; and increased
competition in the Company's targeted markets. As a result of its distribution
agreement with Innotech Corporation, its 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.
(Bar graph depicting Gross Profit as a Percentage of Net Sales)
The Company's gross profit as a percentage of sales was 54.2% for 1996, as
compared with 52.1% for 1995. This increase in gross profit percentage was
primarily attributed to a favorable product mix, higher weighted average selling
prices for the Company's systems, fewer system shipments to the Japanese market,
increased after-sales efficiencies and lower required provisions for the
Company's profit sharing and executive incentive plans. These positive factors
were partially offset by the impact of manufacturing inefficiencies caused by
changes in the Company's shipment schedule, underutilization of manufacturing
capacity and an unusually high degree of nonlinearity of shipments during the
Company's 1996 fiscal quarters.
1995 VS. 1994
The Company's gross profit as a percentage of sales was 52.1% for 1995 as
compared with 50.4% for 1994. This increase in gross profit percentage was
primarily attributed to increased manufacturing efficiencies resulting from
higher production levels of the Company's Model 1500/1700 Series steppers and
Model 2244i stepper and shortened manufacturing cycle times for the Company's
Model 2244i stepper, partially offset by increased after-sales support in the
Company's foreign markets. The gross profit percentage for 1995 also benefited
from a moderation in sales to Japan. Although net sales to Japan increased
during 1995, relative to 1994 levels, net sales to Japan declined as a
percentage of total net sales.
RESEARCH, DEVELOPMENT AND ENGINEERING
1996 VS. 1995
The Company's research, development and engineering expenses, net of
third-party funding, were $27.2 million for 1996, an increase of 20% over the
$22.7 million recorded for 1995. This increase was primarily attributed to the
continued 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; expenditures related to the
enhancement of features and functionality of the Company's Model 1500 and Model
1700 Series steppers; and certain advanced research projects. These factors were
partially offset by lower required provisions for the Company's profit sharing
and executive incentive plans.
(Bar graph depicting Research, Development and Engineering Expenses in millions
of dollars)
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 expects to recognize
37
<PAGE>
approximately $4 million, or $0.12 per share, net of related income tax
benefits, of in-process research and development cost during the first quarter
of 1997. Additionally, the acquisition of these operations may significantly
increase research, development and engineering expenses in the future. There can
be no assurance that these additional expenditures, or expenditures for other
advanced research projects, will be successful or that commercial products will
result from such projects.
The Company intends to continue to invest significant resources in the
development of new products and enhancements of existing semiconductor and thin
film head lithography systems and expects the absolute dollar amount of
research, development and engineering expenses for 1997 to increase as compared
with 1996. Additionally, the Company intends to expand its development and
application capabilities to certain foreign locations. The Company currently
anticipates that a significant portion of these expenditures may take place
during the latter half of 1997.
1995 VS. 1994
The Company's research, development and engineering expenses were $22.7
million for 1995, an increase of 62% over the $13.9 million recorded for 1994.
This increase was primarily attributed to research and development expenses for
the Company's Saturn Wafer Stepper; the continued development, enhancement,
manufacturing support and application support of the Company's Model 2244i
stepper; as well as development expenses for the Company's Titan Wafer Stepper
and Model 4700 stepper; and certain other advanced research projects.
SELLING, GENERAL AND ADMINISTRATIVE
1996 VS. 1995
Selling, general and administrative expenses were $31.0 million, an increase
of 11% over $27.9 million for 1995. As a percentage of net sales, selling,
general and administrative expenses declined to 16.0% of net sales in 1996, as
compared to 17.6% of net sales in 1995. The significant reduction in selling,
general and administrative expenses, as a percentage of net sales, can be
primarily attributed to cost containment measures implemented during the year,
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 year. The significant dollar increase in
1996 reflects the Company's increases in sales, service and support expenses
typically associated with an increase in sales, partially offset by the
Company's cost containment measures, 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.
The Company currently anticipates that it will add additional service
centers in Southeast Asia during the first half of 1997 as a result of recent
sales activity and in an attempt to expand market opportunities in that region.
Due to these and other factors, the dollar amount of selling, general and
administrative expense may increase significantly in 1997.
(Bar graph depicting Operating Income as a Percentage of Sales)
1995 VS. 1994
Selling, general and administrative expenses were $27.9 million for 1995, an
increase of 66% over the $16.8 million recorded for 1994. As a percentage of net
sales, selling, general and administrative expenses declined to 17.6% of net
sales in 1995 as compared to 18.4% of net sales in 1994. The significant dollar
increase in 1995 reflects the Company's increases in sales, service and support
expenses typically associated with an increase in sales, higher commissions
associated with increased international sales and expenses to support the
Company's expansion in Japan and the Far East.
38
<PAGE>
OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $6.3
million for 1996 as compared with $4.6 million for 1995 and $1.3 million for
1994. The increases in 1995 and 1996 were attributed to interest earned on
increased levels of cash equivalents and short-term investments.
INCOME TAXES
Income taxes represented 33% of income before income taxes for 1996, 1995
and 1994 and the Company presently anticipates that its effective tax rate in
1997 will remain at 33%. However, this rate may be impacted further by tax
legislation and other factors. The Company's effective tax rate currently
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $12.6 million for the year
ended December 31, 1996, as compared with $35.6 million for 1995. Positive cash
flows from operating activities during the year were attributed to net income of
$35.3 million and net noncash charges to income of $5.2 million, partially
offset by a negative net effect from changes in operating assets and liabilities
of $27.8 million. The negative net effect from changes in operating assets and
liabilities was primarily the result of an increase in accounts receivable of
$15.9 million, an increase in inventories of $8.1 million and a decline in
deposits received on advance billings of $3.4 million. The increase in accounts
receivable was primarily attributed to a significant percentage of the fiscal
fourth quarter's sales being recognized near the end of the year and longer
customer payment cycles. The Company anticipates this trend of nonlinearity of
shipments and extended customer payment cycles to continue for at least the next
several quarters. The increase in inventories was primarily attributed to a
shift in product mix and lower sales of the Company's mix-and-match family of
products. A significant portion of inventories at December 31, 1996 consist of
materials and subassemblies for the Company's mix-and-match family of steppers.
The Company believes that because of the relatively long manufacturing cycle of
certain of its systems, particularly newer products, the Company's investment in
inventories will continue to represent a significant portion of working capital.
At December 31, 1996, the Company had working capital of $212.7 million. The
Company's principal sources of liquidity at December 31, 1996 consisted of
$167.4 million in cash, cash equivalents and short-term investments, a $3
million unsecured line of credit that expires in May 1998 and a $25 million
unsecured line of credit that expires in June 1999. As of December 31, 1996, no
amounts were outstanding under such facilities.
(Bar graph depicting Capital Expenditures in millions of dollars)
Cash provided by financing activities was $2.3 million for the year ended
December 31, 1996, principally as a result of the issuance of Common Stock
pursuant to the exercise of employee stock options and the Company's Employee
Stock Purchase Plan.
For the year ended December 31, 1996, net investment activities provided
$2.5 million, as capital expenditures of $7.8 million were offset by a net $10.3
million reduction in the Company's available-for-sale securities.
The development and manufacture of new lithography systems and enhancements
are highly capital intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales, service,
training and support capabilities, investments in systems, procedures and
controls, expansion of operations and research and development, among many
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
39
<PAGE>
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. 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, in 1996, the Company formed a wholly owned subsidiary for
the purpose of financing customer purchases. If successful, this strategy may
result in the 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.
(Bar graph depicting Working Capital in millions of dollars)
40
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
IN THOUSANDS, EXCEPT SHARE
AMOUNTS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 47,771 $ 30,361
Short-term investments.......................................................... 119,638 130,995
Accounts receivable, less allowance for doubtful accounts of $1,151 in 1996 and
$613 in 1995.................................................................. 39,845 23,917
Inventories..................................................................... 35,524 27,387
Prepaid expenses and other current assets....................................... 848 1,332
Deferred income taxes 8,439 6,883
------------ ------------
Total current assets.............................................................. 252,065 220,875
Equipment and leasehold improvements, net......................................... 19,242 16,352
Restricted investments............................................................ 5,129 4,996
Other assets...................................................................... 4,336 3,205
------------ ------------
Total assets...................................................................... $ 280,772 $ 245,428
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 9,400 $ 12,925
Accrued expenses................................................................ 23,929 23,217
Advance billings................................................................ 646 4,071
Income taxes payable............................................................ 5,406 4,088
Promissory note................................................................. -- 400
------------ ------------
Total current liabilities......................................................... 39,381 44,701
Deferred income taxes............................................................. 732 171
Other liabilities................................................................. 712 898
Commitments and contingencies
Stockholders' equity:
Undesignated Preferred Stock, $.001 par value:
2,000,000 shares authorized; none issued and outstanding...................... -- --
Common Stock, $.001 par value:
30,000,000 shares authorized;
issued and outstanding--20,310,443 at December 31, 1996 and 19,802,411 at
December 31, 1995........................................................... 20 20
Additional paid-in capital...................................................... 164,288 159,154
Net unrealized gains on investments............................................. 65 221
Retained earnings............................................................... 75,574 40,263
------------ ------------
Total stockholders' equity........................................................ 239,947 199,658
------------ ------------
Total liabilities and stockholders' equity........................................ $ 280,772 $ 245,428
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C>
Net sales................................................................. $ 193,508 $ 157,831 $ 91,344
Cost of sales............................................................. 88,615 75,543 45,307
---------- ---------- ---------
Gross profit.............................................................. 104,893 82,288 46,037
Research, development and engineering..................................... 27,220 22,655 13,948
Selling, general and administrative....................................... 30,995 27,851 16,798
---------- ---------- ---------
Operating income.......................................................... 46,678 31,782 15,291
Interest expense.......................................................... (236) (206) (127)
Other income, net......................................................... 6,265 4,594 1,281
---------- ---------- ---------
Income before income taxes................................................ 52,707 36,170 16,445
Income taxes.............................................................. 17,396 11,936 5,426
---------- ---------- ---------
Net income................................................................ $ 35,311 $ 24,234 $ 11,019
---------- ---------- ---------
---------- ---------- ---------
Net income per share...................................................... $ 1.66 $ 1.20 $ 0.65
Number of shares used in per share computations........................... 21,324 20,158 16,932
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
IN THOUSANDS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 35,311 $ 24,234 $ 11,019
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 6,060 3,848 2,000
Loss on disposal of equipment............................................. 43 261 106
Deferred income taxes..................................................... (898) (2,369) (2,000)
Changes in operating assets and liabilities:
Accounts receivable..................................................... (15,928) (7,794) (4,669)
Inventories............................................................. (8,137) (5,570) (11,363)
Prepaid expenses and other current assets............................... 484 (911) (371)
Other assets............................................................ (1,609) (1,961) (85)
Accounts payable........................................................ (3,525) 7,428 582
Accrued expenses........................................................ 712 9,782 6,503
Advance billings........................................................ (3,425) 2,399 (656)
Income taxes payable.................................................... 3,738 5,917 2,390
Other liabilities....................................................... (186) 320 578
----------- ----------- ----------
Net cash provided by operating activities................................... 12,640 35,584 4,034
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (7,849) (9,760) (7,759)
Investments in securities................................................... (593,545) (896,010) (125,594)
Proceeds from sales of investments.......................................... 266,593 396,993 10,215
Proceeds from maturing investments.......................................... 337,442 404,273 91,730
Segregation of restricted investments....................................... (170) (4,996) --
----------- ----------- ----------
Net cash provided by (used in) investing activities......................... 2,471 (109,500) (31,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory note................................................ (400) (400) (920)
Proceeds from issuance of short-term debt................................... 7,500 3,000 1,950
Repayment of short-term debt................................................ (7,500) (3,000) (1,950)
Proceeds from issuance of Common Stock...................................... 2,699 90,222 29,232
----------- ----------- ----------
Net cash provided by financing activities................................... 2,299 89,822 28,312
----------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 17,410 15,906 938
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 30,361 14,455 13,517
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 47,771 $ 30,361 $ 14,455
----------- ----------- ----------
----------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................ $ 238 $ 187 $ 128
Income taxes............................................................ 14,500 8,517 5,048
Other noncash changes
Systems transferred from inventory to equipment and other assets........ $ 2,384 $ 3,570 $ 1,309
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Ultratech Stepper, Inc. (the "Company") and its subsidiaries develops,
markets and manufactures photolithography equipment for use in the integrated
circuit fabrication process; in the fabrication of thin film heads for
high-capacity disk drives; and in the manufacture of micromachined components
that are used extensively in telecommunications, automotive and medical
applications. Principal markets for the Company's products include the U.S.,
Europe and Asia.
2. CONCENTRATIONS OF RISKS
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. For this and other reasons, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort in securing a sale. Additionally, the
markets for the Company's products are subject to rapid technological change,
which requires the Company to respond with new products and enhanced versions of
existing products. Lengthy sales cycles and rapid technological change subject
the Company to a number of significant risks, including inventory obsolescence,
significant after-sales support and fluctuations in operating results, which are
difficult to estimate and over which the Company has little or no control.
Sole-source suppliers provide critical components and services for the
manufacture of the Company's products. The reliance on sole or limited groups of
suppliers may subject the Company from time to time to quality, allocation and
pricing constraints. For a further discussion of the Company's business and risk
factors, please refer to the Company's Annual Report on Form 10-K.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term investments,
trade receivables and long-term customer financing. The Company places its cash
equivalents, short-term investments and restricted investments with high
credit-quality financial institutions. The Company invests its excess cash in
commercial paper, readily marketable debt instruments and collateralized funds
of U.S. and state government entities. The Company has established guidelines
relative to credit ratings, diversification and maturities that seek to maintain
safety and liquidity. A majority of the Company's trade receivables are derived
from sales in various geographic areas, principally the U.S., Europe, Japan,
South Korea, Taiwan and Southeast Asia, to large companies within the integrated
circuit, thin film head and micromachining industries. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
collateral, such as letters of credit and security agreements, whenever deemed
necessary. The Company maintains an allowance for uncollectible accounts
receivable based upon expected collectibility of all accounts receivable.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. Intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity date
at acquisition of three months or less. The carrying value of cash equivalents
approximates fair value.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENTS
Management determines the appropriate classification of its investments at
the time of purchase and re-evaluates the classification at each balance sheet
date. All investments in the Company's portfolio are classified as "available
for sale," in accordance with the provisions of the Financial Accounting
Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization, as well as
interest, dividends, realized gains and losses and declines in value judged to
be other-than-temporary are included in other income, net. The cost of
securities sold is based on the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Demonstration units, included in
other assets, are stated at cost, less accumulated depreciation, and are
depreciated over 36 months.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment is depreciated on a straight-line basis
over the estimated useful lives (three to seven years). Leasehold improvements
are amortized on a straight-line basis over the life of the related assets or
the lease term, whichever is shorter.
OFF-BALANCE SHEET TRANSACTIONS
Off-balance sheet transactions, consisting of forward currency contracts,
have from time to time been utilized by the Company to hedge obligations
denominated in foreign currencies. To date, these transactions have been
immaterial to the consolidated operations of the Company.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales of the Company's products are generally recorded upon shipment, which
usually precedes final customer acceptance. Sales to the Company's Japanese
distributor are generally recorded upon shipment, for subsequent delivery to,
and final acceptance by, the distributor's customers. The Company also sells
service contracts for which revenue is deferred and recognized ratably over the
contract period.
WARRANTY
The Company generally warrants its products for a period of up to twelve
months from the date of customer acceptance for material and labor to repair the
product; accordingly, a provision for the estimated cost of the warranty is
recorded at the time revenue is recognized.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
The Company is actively engaged in basic technology and applied research
programs designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments. Research, development and engineering costs are charged to
operations as incurred.
The Company has entered into various research and development arrangements
with certain third parties to jointly develop new products and technology. Under
such programs, the Company generally receives funding from the third parties
over an extended period based on achieving certain milestones or based on a
cost-sharing arrangement. Such funds are not anticipated to cover all the costs
of the programs and are recorded as reductions to research, development and
engineering expense based on the percentage of completion of each project. For
the years ended 1996, 1995 and 1994, the Company recognized approximately
$2,688,000, $1,590,000 and $20,000, respectively, in related funding. The
remaining balance of available funding on these contracts aggregated
approximately $599,000 as of December 31, 1996.
FOREIGN CURRENCY ACCOUNTING
The U.S. dollar is the functional currency for all foreign operations.
Foreign exchange gains and losses, which result from the process of remeasuring
foreign currency financial statements into U.S. dollars or from transactions
during the period, have been immaterial and are included in other income, net.
NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of
Common and dilutive Common equivalent shares outstanding during the periods.
Common Stock equivalents consist solely of stock options.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options and stock purchase plan. Pro forma
information regarding net income and net income per share is disclosed as
required by the FASB's Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), which also requires that the information be determined
as if the Company accounted for its stock-based compensation subsequent to
December 31, 1994 under the fair value method of that Statement.
4. INVESTMENTS
The Company classifies all of its investments as "available for sale," in
accordance with the provisions of FASB Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the Company states its
investments at estimated fair value. Fair values are estimated based on quoted
market prices or pricing models using current market rates. The Company deems
all investments, except those restricted, to be available to meet current
working capital requirements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ------------------------ ESTIMATED AMORTIZED ------------------------
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES
- ------------------------------------------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 9,559 $ 11 $ 28 $ 9,542 $ 20,500 $ 85 $ 1
Obligations of states and political
subdivisions............................. 107,208 221 83 107,346 107,236 164 20
U.S. corporate debt securities............. 36,273 12 30 36,255 21,001 108 2
---------- ----- ----- ---------- ---------- ----- -----
$ 153,040 $ 244 $ 141 $ 153,143 $ 148,737 $ 357 $ 23
---------- ----- ----- ---------- ---------- ----- -----
---------- ----- ----- ---------- ---------- ----- -----
RESTRICTED INVESTMENTS
- -------------------------------------------
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 5,131 $ -- $ 5 $ 5,126 $ 4,942 $ 23 $ --
Obligations of states and political
subdivisions............................. 3 -- -- 3 -- -- --
U.S. corporate debt securities............. -- -- -- -- 31 -- --
---------- ----- ----- ---------- ---------- ----- -----
$ 5,134 $ -- $ 5 $ 5,129 $ 4,973 $ 23 $ --
---------- ----- ----- ---------- ---------- ----- -----
$ 158,174 $ 244 $ 146 $ 158,272 $ 153,710 $ 380 $ 23
---------- ----- ----- ---------- ---------- ----- -----
---------- ----- ----- ---------- ---------- ----- -----
<CAPTION>
ESTIMATED
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS FAIR VALUE
- ------------------------------------------- ----------
<S> <C>
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 20,584
Obligations of states and political
subdivisions............................. 107,380
U.S. corporate debt securities............. 21,107
----------
$ 149,071
----------
----------
RESTRICTED INVESTMENTS
- -------------------------------------------
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 4,965
Obligations of states and political
subdivisions............................. --
U.S. corporate debt securities............. 31
----------
$ 4,996
----------
$ 154,067
----------
----------
</TABLE>
The following is a reconciliation of the Company's investments to the
balance sheet classifications at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
IN THOUSANDS
<S> <C> <C>
Cash equivalents................................................................ $ 33,505 $ 18,076
Short-term investments.......................................................... 119,638 130,995
Restricted investments.......................................................... 5,129 4,996
---------- ----------
Investments, at estimated fair value............................................ $ 158,272 $ 154,067
---------- ----------
---------- ----------
</TABLE>
Gross realized gains and losses were not material for the years ended
December 31, 1996 and 1995. The adjustments to net unrealized gains and (losses)
on investments are included as a separate component of stockholders' equity and
totaled ($156,000) and $656,000, net of related taxes, for the years ended
December 31, 1996 and 1995, respectively.
The amortized cost and estimated fair value of the Company's investments at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ----------
IN THOUSANDS
<S> <C> <C>
Due in one year or less......................................................... $ 59,423 $ 59,424
Due after one year through five years........................................... 98,751 98,848
---------- ----------
$ 158,174 $ 158,272
---------- ----------
---------- ----------
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS
<S> <C> <C>
Raw materials........................................................... $ 17,625 $ 12,201
Work-in-process......................................................... 11,971 12,426
Finished products....................................................... 5,928 2,760
--------- ---------
$ 35,524 $ 27,387
--------- ---------
--------- ---------
</TABLE>
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS
<S> <C> <C>
Machinery and equipment................................................. $ 14,660 $ 9,543
Leasehold improvements.................................................. 1,701 3,541
Office furniture and equipment.......................................... 12,441 8,147
--------- ---------
28,802 21,231
Accumulated depreciation and amortization............................... (9,560) (4,879)
--------- ---------
$ 19,242 $ 16,352
--------- ---------
--------- ---------
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS
<S> <C> <C>
Salaries and benefits................................................... $ 7,132 $ 6,916
Warranty reserves....................................................... 9,424 9,328
Other................................................................... 7,373 6,973
--------- ---------
$ 23,929 $ 23,217
--------- ---------
--------- ---------
</TABLE>
8. CREDIT FACILITIES
The Company has credit facilities for borrowings in various currencies up to
$28,000,000 on an unsecured basis with various banks. These agreements include
facility fees, allow for borrowings at rates including the banks' prime
reference rate, require compliance with certain financial covenants and restrict
the Company's ability to pay cash dividends. A $3,000,000 credit facility
expires in May 1998 and the remaining $25,000,000 credit facility expires in
June 1999. At December 31, 1996 and 1995, there were no amounts outstanding
under these credit facilities.
9. STOCK-BASED COMPENSATION
1993 STOCK OPTION PLAN
Under the Company's 1993 Stock Option Plan, as amended, qualified employees,
nonemployee Board members and consultants may receive options to purchase shares
of Common Stock at 85% to 100% of fair value at certain specified dates. These
options generally vest in equal monthly installments over a period of
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
approximately four years, with a minimum vesting period of twelve months from
grant date, and generally expire ten years from date of grant. The plan will
terminate on the earlier of January 6, 2003, or the date on which all shares
available for issuance under the Plan have been issued. The Plan includes a
provision to automatically increase the shares reserved for issuance by an
amount equal to 1.4% of the total number of shares of Common Stock outstanding
on the last trading day of the immediately preceding fiscal year. Under the
Plan, approximately 739,000 and 337,000 options were available for issuance at
December 31, 1996 and 1995, respectively.
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1..... 2,295,735 $ 9.95 2,367,408 $ 4.40 2,220,000 $ 0.24
Granted...................... 787,349 $ 17.92 475,900 $ 30.23 677,050 $ 14.94
Exercised.................... (421,329) $ 3.45 (493,263) $ 2.94 (453,332) $ 0.22
Forfeited.................... (311,547) $ 20.86 (54,310) $ 9.20 (76,310) $ 1.70
---------- ------ ---------- ------ ---------- ------
Outstanding at December 31... 2,350,208 $ 12.34 2,295,735 $ 9.95 2,367,408 $ 4.40
</TABLE>
At December 31, 1996, options outstanding were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------------------- ---------- ------------------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.050-$0.4750.................... 871,217 6.19 $ 0.11 696,255 $ 0.12
$ 1.925-$18.000.................... 994,396 8.66 $ 15.61 130,772 $ 12.43
$18.375-$33.625.................... 484,595 8.78 $ 27.63 158,938 $ 28.76
---------- --- ------ --------- ------
$ 0.050-$33.625.................... 2,350,208 7.77 $ 12.34 985,965 $ 6.37
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Company established an Employee Stock Purchase Plan. The
Plan permits virtually all employees to purchase Common Stock through payroll
deductions at 85% of the lower of the fair market value of the Common Stock on
the first or last day of the offering period. The offering periods are twelve
months. Under the Plan, approximately 114,000 shares and 200,000 shares of
Common Stock were reserved and available for issuance at December 31, 1996 and
1995, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related Interpretations in
accounting for employee stock-based compensation because, as discussed below,
the alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 6.1%; a dividend yield
of 0%; volatility factor of the expected market price of the Company's Common
Stock of 0.50; and a weighted-average expected life of the option of four years,
assuming a multiple-point approach with annual vesting periods. The weighted
average fair value per share of all options granted during 1996 was $7.32.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted is amortized to expense over the options' four year vesting period.
Option grants are divided into annual vesting periods, resulting in the
recognition of approximately 50% of the total compensation expense of the grant
in the first year. Additionally, the potential tax benefit associated with the
issuance of incentive stock options is not reflected until realized upon the
exercise of the stock option. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C>
Pro forma net income................................................. $ 31,985 $ 22,886
Pro forma net income per share....................................... $ 1.52 $ 1.14
</TABLE>
The pro forma information, presented below, is a supplement to the required
pro forma presentation and includes estimated deferred tax benefits related to
incentive stock options granted to employees.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C>
Pro forma net income, as adjusted.................................... $ 32,771 $ 23,240
Pro forma net income per share, as adjusted.......................... $ 1.55 $ 1.16
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY
The following table summarizes stockholders' equity activity:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------
COMMON STOCK ADDITIONAL NET UNREALIZED TOTAL
---------------------- PAID-IN GAINS (LOSSES) RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ON INVESTMENTS EARNINGS EQUITY
--------- ----------- ---------- --------------- --------- ------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 12,696 $ 13 $ 33,068 $ -- $ 5,010 $ 38,091
Sale of Common Stock pursuant to to
offering, net of offering expenses of
$2,318................................ 3,400 4 29,129 -- -- 29,133
Net issuance of Common Stock under stock
option plan........................... 454 -- 99 -- -- 99
Income tax benefit from stock option
transactions.......................... -- -- 2,107 -- -- 2,107
Cumulative unrealized losses on
investments........................... -- -- -- (435) -- (435)
Amortization of deferred compensation... -- -- 13 -- -- 13
Net Income.............................. -- -- -- -- 11,019 11,019
--------- --- ---------- ------ --------- ------------
Balance at December 31, 1994............ 16,550 $ 17 $ 64,416 $ (435) $ 16,029 $ 80,027
--------- --- ---------- ------ --------- ------------
--------- --- ---------- ------ --------- ------------
Sale of Common Stock pursuant to
offering, net of offering expense of
$5,056................................ 2,760 3 88,770 -- -- 88,773
Net issuance of Common Stock under stock
option plan........................... 492 -- 1,449 -- -- 1,449
Income tax benefit from stock option
transactions.......................... -- -- 4,506 -- -- 4,506
Unrealized gain on investments, net of
tax effect............................ -- -- -- 656 -- 656
Amortization of deferred compensation... -- -- 13 -- -- 13
Net Income.............................. -- -- -- -- 24,234 24,234
--------- --- ---------- ------ --------- ------------
Balance at December 31, 1995............ 19,802 $ 20 $ 159,154 $ 221 $ 40,263 $ 199,658
--------- --- ---------- ------ --------- ------------
--------- --- ---------- ------ --------- ------------
Net Issuance of Common Stock under stock
option plan and employee stock
purchase plan......................... 508 -- 2,700 -- -- 2,700
Income tax benefit from stock option and
stock purchase plan transactions...... -- -- 2,420 -- -- 2,420
Net unrealized gain on investments, net
of tax effect......................... -- -- -- (156) -- (156)
Amortization of deferred compensation... -- -- 14 -- -- 14
Net Income.............................. -- -- -- -- 35,311 35,311
--------- --- ---------- ------ --------- ------------
Balance at December 31, 1996............ 20,310 $ 20 $ 164,288 $ 65 $ 75,574 $ 239,947
--------- --- ---------- ------ --------- ------------
--------- --- ---------- ------ --------- ------------
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
On April 24, 1995, the Company declared a two-for-one stock split and paid
it in the form of a 100 percent stock dividend to holders of record of the
Company's Common Stock on May 5, 1995. The dividend shares were distributed to
stockholders on May 10, 1995.
During 1995, the stockholders approved an increase in the authorized number
of shares of Common Stock to 30,000,000.
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLANS
The Company currently sponsors a profit sharing plan and a management
incentive bonus plan that distribute employee awards based on the achievement of
predetermined operating income targets. Employee awards under these various
employee bonus plans were $1,497,000, $2,087,000 and $1,580,000 for 1996, 1995
and 1994, respectively.
EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company currently sponsors a 401(k) employee salary deferral plan that
allows voluntary contributions by all full-time employees of from 1% to 20% of
their pretax earnings. Company contributions will be made only if certain
predetermined operating income targets are achieved. The Company has recognized
expense of $797,000, $898,000 and $596,000 relating to this benefit plan for
1996, 1995 and 1994, respectively.
12. INCOME TAXES
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
Domestic......................................................................... $ 48,058 $ 31,546 $ 15,257
Foreign.......................................................................... 4,649 4,624 1,188
--------- --------- ---------
Income before income taxes....................................................... $ 52,707 $ 36,170 $ 16,445
--------- --------- ---------
--------- --------- ---------
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Income taxes included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
Federal:
Current........................................................................ $ 14,513 $ 11,136 $ 5,827
Deferred....................................................................... (847) (2,355) (1,760)
--------- --------- ---------
13,666 8,781 4,067
State:
Current........................................................................ 2,301 1,764 1,184
Deferred....................................................................... (31) (172) (206)
--------- --------- ---------
2,270 1,592 978
Foreign:
Current........................................................................ 1,480 1,542 415
Deferred....................................................................... (20) 21 (34)
--------- --------- ---------
1,460 1,563 381
--------- --------- ---------
Total income tax provision....................................................... $ 17,396 $ 11,936 $ 5,426
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax benefit associated with stock option and employee stock purchase
plan transactions reduced taxes currently payable by $2,420,000, $4,506,000 and
$2,107,000 for 1996, 1995 and 1994, respectively. Such benefits are credited to
stockholders' equity when realized.
Income taxes reconcile to the amount computed by applying the U.S. statutory
rate to income before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
Tax computed at statutory rate................................................... $ 18,447 $ 12,660 $ 5,756
State income taxes (net of federal benefit)...................................... 1,476 1,035 636
Foreign sales corporation........................................................ (1,179) (671) (441)
Tax-exempt income................................................................ (1,640) (1,095) (447)
Credits for research and development............................................. (693) (328) (390)
Other, net....................................................................... 985 335 312
--------- --------- ---------
Income tax provision............................................................. $ 17,396 $ 11,936 $ 5,426
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Significant components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS
<S> <C> <C>
Deferred tax assets:
State taxes................................................................................ $ 1,071 $ 553
Warranty reserves.......................................................................... 3,317 3,229
Accrued vacation........................................................................... 615 481
Inventory valuation........................................................................ 6,251 3,913
Other...................................................................................... 1,432 963
Deferred tax liabilities:
Deferred income............................................................................ (4,247) (2,256)
Other...................................................................................... (732) (171)
--------- ---------
Net deferred tax assets...................................................................... $ 7,707 $ 6,712
--------- ---------
--------- ---------
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through export sales to
distributors, domestic and foreign-based sales and service operations and
independent sales organizations. The Company operates in one business segment,
which is the manufacture and distribution of photolithography equipment to
manufacturers of integrated circuits, thin film heads and micromachined
components.
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 12% of the Company's net
sales. In 1994, sales to one customer accounted for 20% of the Company's net
sales.
The following table summarizes the Company's operations by geographic
region.
<TABLE>
<CAPTION>
ADJUSTMENT
UNITED AND
STATES ASIA EUROPE ELIMINATIONS CONSOLIDATED
------------ --------- --------- ------------ ------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated domestic customers.......... $ 91,370 $ -- $ -- $ -- $ 91,370
Sales to unaffiliated foreign customers........... 76,242 1,593 24,303 -- 102,138
Transfers between geographic locations............ 19,191 5,711 857 (25,759) --
------------ --------- --------- ------------ ------------
Total net sales................................... $ 186,803 $ 7,304 $ 25,160 $ (25,759) $ 193,508
------------ --------- --------- ------------ ------------
Operating income.................................. $ 41,865 $ 297 $ 4,396 $ 120 $ 46,678
------------ --------- --------- ------------ ------------
Identifiable assets............................... $ 269,088 $ 1,995 $ 9,689 $ -- $ 280,772
------------ --------- --------- ------------ ------------
1995
Sales to unaffiliated domestic customers.......... $ 70,617 $ -- $ -- $ -- $ 70,617
Sales to unaffiliated foreign customers........... 57,333 1,014 28,867 -- 87,214
Transfers between geographic locations............ 22,479 4,575 301 (27,355) --
------------ --------- --------- ------------ ------------
Total net sales................................... $ 150,429 $ 5,589 $ 29,168 $ (27,355) $ 157,831
------------ --------- --------- ------------ ------------
Operating income.................................. $ 27,451 $ 254 $ 4,319 $ (242) $ 31,782
------------ --------- --------- ------------ ------------
Identifiable assets............................... $ 233,030 $ 1,858 $ 10,540 $ -- $ 245,428
------------ --------- --------- ------------ ------------
1994
Sales to unaffiliated domestic customers.......... $ 39,839 $ -- $ -- $ -- $ 39,839
Sales to unaffiliated foreign customers........... 40,202 999 10,304 -- 51,505
Transfers between geographic locations............ 7,800 2,157 344 (10,301) --
------------ --------- --------- ------------ ------------
Total net sales................................... $ 87,841 $ 3,156 $ 10,648 $ (10,301) $ 91,344
------------ --------- --------- ------------ ------------
Operating income.................................. $ 14,197 $ 125 $ 1,034 $ (65) $ 15,291
------------ --------- --------- ------------ ------------
Identifiable assets............................... $ 99,030 $ 963 $ 4,796 $ -- $ 104,789
------------ --------- --------- ------------ ------------
</TABLE>
Sales and transfers between geographic areas are made at transfer prices
that approximate arms-length distributor pricing between the domestic and
international operations.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS
The Company leases its facilities, undeveloped land and certain equipment
under operating leases. Under certain of its leasing arrangements, the Company
is subject to escalation charges and also retains certain renewal and purchase
options. As of December 31, 1996, the minimum annual rental commitments are as
follows (in thousands):
<TABLE>
<S> <C>
1997................................................... $3,252,000
1998................................................... 2,227,000
1999................................................... 1,866,000
2000................................................... 1,326,000
2001................................................... 1,046,000
Thereafter............................................. 3,398,000
----------
$13,115,000
----------
----------
</TABLE>
Rent expense was approximately $2,841,000, $2,721,000 and $1,600,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
The Company presently leases 6.4 acres of land located in San Jose,
California. This lease expires in November 1997. As part of this transaction,
the Company has segregated $5.1 million of its securities as collateral for
certain obligations of the lessor pertaining to this land. These securities are
restricted as to withdrawal, and are managed, subject to certain limitations, by
the Company under its investment policy.
15. SHAREHOLDER RIGHTS PLAN
In January 1997, the Board approved the adoption of a Shareholder Rights
Plan ("Rights Plan"). Among other things, the Rights Plan provides that each
Right will be distributed as a dividend at the rate of one Preferred Share
Purchase Right on each outstanding share of the Company's Common Stock held by
stockholders of record as of the close of business on February 24, 1997. The
rights expire on February 9, 2007.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer the consummation
of which would result in ownership by a person or group of 15% or more of the
Company's Common Stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $145.00 upon certain events.
The Rights are redeemable, in whole but not in part, at the option of the
Board of Directors at $.01 per Right, at any time within ten days of the date
they become exercisable and in certain other circumstances and will not become
exercisable in certain instances where a transaction is approved by the
Company's Board of Directors. The Rights will not prevent a takeover of the
Company, but should encourage anyone seeking to acquire the Company to negotiate
with the Company's Board of Directors.
56
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders Of Ultratech Stepper, Inc.
We have audited the accompanying consolidated balance sheets of Ultratech
Stepper, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ultratech Stepper, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
[SIGNATURE]
San Jose, California
January 23, 1997
57
<PAGE>
INVESTOR INFORMATION
Exchange: Nasdaq National Market
Symbol: UTEK
Closing price (12/31/96): $27.75
Dividend yield: Nil
Market capitalization (millions) at 12/31/96: $564
Industry: Semiconductor capital equipment
Market segments: Integrated circuits, thin film heads and micromachined
components
As of March 3, 1997, the Company had approximately 13,500 beneficial
stockholders, including 208 stockholders of record.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for periods indicated, the range of high and
low sale prices of the stock as reported by the National Association of
Securities Dealers, Inc.:
<TABLE>
<CAPTION>
STOCK PRICE RANGE
------------------------------------------
1996 1995
-------------------- --------------------
FISCAL QUARTER HIGH LOW HIGH LOW
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter..................................... $ 31.750 $ 15.875 $ 26.375 $ 17.000
Second Quarter.................................... 28.250 16.625 37.500 21.875
Third Quarter..................................... 21.500 14.000 47.500 30.750
Fourth Quarter.................................... 27.750 16.125 44.500 24.375
</TABLE>
The following graph sets forth, for periods indicated, the range of stock
price/earnings ratios, based on high, low and closing stock prices:
[GRAPH DEPICTING RANGE OF STOCK PRICE/EARNING RATIOS,
BASED ON HIGH, LOW & CLOSING STOCK PRICES]
DIVIDEND INFORMATION
The Company has not paid cash dividends on its Common Stock since inception,
and its Board of Directors presently plans to reinvest the Company's earnings in
its business. Accordingly, it is anticipated that no cash dividends will be paid
to holders of Common Stock in the foreseeable future.
58
<PAGE>
INQUIRIES CONCERNING THE COMPANY
Ultratech Stepper welcomes inquiries from its stockholders and other
interested investors. For additional copies of this report, the Form 10-K, or
other information, please contact:
Ultratech Stepper, Inc.
Investor Relations
3050 Zanker Road
San Jose, CA 95134
Phone: (408) 321-8835
TRANSFER AGENT AND REGISTRAR
Questions regarding misplaced stock certificates, change of address or the
consideration of accounts should be addressed to the Company's transfer agent:
The First National Bank of Boston
c/o Boston EquiServe LP
P.O. Box 644
Boston, MA 02102
ANNUAL MEETING
The Ultratech Stepper, Inc. annual meeting of stockholders will be held at
10:00 a.m. on Thursday, May 15, 1997, at the Beverly Heritage Hotel, Milpitas,
California.
INDEPENDENT AUDITORS
Ernst & Young LLP
San Jose, California
GENERAL COUNSEL
Brobeck, Phleger & Harrison LLP
Palo Alto, California
59
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ULTRATECH STEPPER, INC.
The following is a list of Ultratech Stepper Inc.'s subsidiaries including
their states of incorporation as of March 13, 1997:
<TABLE>
<CAPTION>
STATE AND COUNTRY OF
SUBSIDIARIES INCORPORATION
- ------------------------------------------------------------- -------------------------------
<S> <C>
Ultratech Stepper International, Inc......................... State of Delaware, USA
Ultratech Stepper UK Limited................................. United Kingdom
Ultratech Stepper Foreign Sales Corp......................... Barbados
Ultratech Kabushiki Kaisha................................... Japan
Ultratech Capital, Inc....................................... State of Delaware, USA
UltraBeam Lithography, Inc................................... State of Delaware, USA
</TABLE>
60
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Ultratech Stepper, Inc. of our report dated January 23, 1997, included
in the 1996 Annual Report to Stockholders of Ultratech Stepper, Inc.
Our audits included the financial statement schedule of Ultratech Stepper,
Inc. listed in Item 14(a). This Schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-92572) pertaining to the 1993 Stock Option/Stock
Issuance Plan and the 1995 Employee Purchase Plan of Ultratech Stepper, Inc. of
our report dated January 23, 1997 with respect to the consolidated financial
statements and schedule of Ultratech Stepper, Inc. incorporated by reference in
this Annual Report (Form 10-K) for the year ended December 31, 1996.
[SIGNATURE]
San Jose, California
March 17, 1997
61
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 47,771
<SECURITIES> 119,638
<RECEIVABLES> 40,996
<ALLOWANCES> 1,151
<INVENTORY> 35,524
<CURRENT-ASSETS> 252,065
<PP&E> 28,802
<DEPRECIATION> 9,560
<TOTAL-ASSETS> 280,772
<CURRENT-LIABILITIES> 39,381
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 239,927
<TOTAL-LIABILITY-AND-EQUITY> 280,772
<SALES> 185,058
<TOTAL-REVENUES> 193,508
<CGS> 82,425
<TOTAL-COSTS> 88,615
<OTHER-EXPENSES> 27,220
<LOSS-PROVISION> 1,225
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> 52,707
<INCOME-TAX> 17,396
<INCOME-CONTINUING> 35,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,311
<EPS-PRIMARY> 1.656
<EPS-DILUTED> 1.656
</TABLE>
