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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-22248
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ULTRATECH STEPPER, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
3050 Zanker Road, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
-------------------------
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
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Indicate the number of shares of the issuer's class of common stock, as of the
latest practical date:
Class Outstanding as of November 9, 1998
- ----------------------------------- ------------------------------------------
common stock, $.001 par value 21,086,099
1
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ULTRATECH STEPPER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31,1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended September 30, 1998 and 1997 and
the nine months ended September 30, 1998 and 1997. . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . 9
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . 24
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 30, Dec. 31,
(In thousands) 1998 1997*
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments $139,121 $164,349
Accounts receivable, net 15,258 45,947
Inventories 44,870 37,337
Deferred income taxes 5,142 5,142
Other 7,621 4,248
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Total current assets 212,012 257,023
Equipment and leasehold
improvements, net 25,904 22,285
Restricted investments 5,481 5,325
Leases receivable, net 5,402 11,354
Other assets 8,929 4,014
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Total assets $257,728 $300,001
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $1,579 $94
Accounts payable 7,833 12,295
Other current liabilities 20,929 21,408
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Total current liabilities 30,341 33,797
Other liabilities 2,474 2,572
Stockholders' equity 224,913 263,632
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Total liabilities and stockholders' equity $257,728 $300,001
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</TABLE>
* The Balance Sheet as of December 31, 1997 has been derived from the audited
financial statements at that date.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
(In thousands, except per share amounts) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $12,359 $36,752 $62,536 $113,539
Cost of sales 10,931 17,524 42,997 53,299
Cost of sales - write-down of inventory 15,231 - 15,231 -
- ------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (13,803) 19,228 4,308 60,240
OPERATING EXPENSES:
Research, development, and
engineering 6,884 7,092 20,898 20,105
Selling, general, and
administrative 6,473 6,488 19,241 19,409
Acquired in-process research
and development - - 12,566 3,619
Special charges 5,775 - 5,775 -
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Operating income (loss) (32,935) 5,648 (54,172) 17,107
Interest expense (183) (58) (292) (143)
Other income, net 1,818 1,920 5,113 5,415
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Income (loss) before income taxes (31,300) 7,510 (49,351) 22,379
Income taxes (benefit) (3,134) 2,105 (6,182) 6,714
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Net income (loss) (28,166) 5,405 (43,169) 15,665
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Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities 695 137 763 157
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Comprehensive income (loss) ($27,471) $5,542 ($42,406) $15,822
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Net income (loss) per share - basic ($1.34) $0.26 ($2.06) $0.76
Number of shares used in
per share computations - basic 21,014 20,626 20,914 20,483
Net income (loss) per share - diluted ($1.34) $0.25 ($2.06) $0.72
Number of shares used in
per share computations - diluted 21,014 21,851 20,914 21,621
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
SEPT. 30, Sept. 30,
(In thousands) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($43,169) $15,665
Charges to income not affecting cash 20,866 8,416
Net effect of changes in operating assets
and liabilities 20,236 (21,625)
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Net cash provided by (used in) operating activities (2,067) 2,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,480) (5,694)
Net reduction (investment) in available-for-sale securities 36,941 (8,999)
Purchase of certain assets of Lepton Inc. - (3,101)
Purchase of certain assets and liabilities of Integrated
Solutions, Inc., net of cash acquired (19,429) -
Segregation of restricted investments (91) (93)
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Net cash provided by (used in) investing activities 7,941 (17,887)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,485 99
Repayment of note payable - (99)
Net proceeds from issuance of common stock
pursuant to employee stock plans 3,377 3,285
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Net cash provided by financing activities 4,862 3,285
Net increase (decrease) in cash and cash equivalents 10,736 (12,146)
Cash and cash equivalents at beginning
of period 43,898 47,771
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Cash and cash equivalents at end of period $54,634 $35,625
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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ULTRATECH STEPPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for fair presentation have been included. See
Notes (4) and (6).
USE OF ESTIMATES - The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's third fiscal quarter in 1998 and 1997 ended on October 3, 1998 and
October 4, 1997, respectively. For convenience of presentation, the Company's
financial statements have been shown as ending on September 30, 1998 and
September 30, 1997.
Operating results for the three-month and nine-month periods ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998, or any future period.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec.31, 1997
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(In thousands) (Unaudited)
<S> <C> <C>
Raw materials. . . . . . . . . . . . . . $17,876 $20,297
Work-in-process. . . . . . . . . . . . . 12,719 9,739
Finished products. . . . . . . . . . . . 14,275 7,301
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$44,870 $37,337
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--------------- ---------------
</TABLE>
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec.31, 1997
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(In thousands) (Unaudited)
<S> <C> <C>
Salaries and benefits. . . . . . . . . . $4,369 $5,018
Warranty reserves. . . . . . . . . . . . 5,401 5,871
Advance billings . . . . . . . . . . . . 126 872
Income taxes payable . . . . . . . . . . 351 3,034
Settlement/Japan distributor . . . . . . - 3,051
Reserve for losses on purchase
order commitments. . . . . . . . . . . 3,765 -
Other. . . . . . . . . . . . . . . . . . 6,917 3,562
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$20,929 $21,408
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</TABLE>
(4) COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards Board Statement
No. 128 (FAS 128), "Earnings Per Share" in the fourth fiscal quarter of 1997.
Under the provision of FAS 128, primary net income per share has been replaced
by basic net income per share, which does not include the dilutive effect of
stock
6
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options in its calculation. In addition, fully diluted net income per share has
been replaced by diluted net income per share. All prior period net income per
share amounts have been replaced by basic and diluted net income per share. Net
income has not been adjusted for any period presented for purposes of computing
basic and diluted net income per share.
The following sets forth the computation of basic and diluted net income (loss)
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Unaudited, in thousands, except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ($28,166) $5,405 ($43,169) $15,665
Denominator:
Denominator for basic net income (loss) per share 21,014 20,626 20,914 20,483
Effect of dilutive employee stock options - 1,225 - 1,138
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Denominator for diluted net income (loss) per share 21,014 21,851 20,914 21,621
------- ------- ------- -------
Net income (loss) per share - basic ($1.34) $0.26 ($2.06) $0.76
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - diluted ($1.34) $0.25 ($2.06) $0.72
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
For the three-month and nine-month periods ended September 30, 1998, options to
purchase 2,660,000 shares of Common Stock at an average exercise price of $15.89
were excluded from the computation of diluted net loss per share as the effect
would have been antidilutive. This compares to the exclusion of 156,000 options
at an average exercise price of $33.52 and 171,000 options at an average
exercise price of $33.52 for the three-month and nine-month periods ended
September 30, 1997, respectively. Options are anti-dilutive when the Company
has a net loss or when the exercise price of the stock option is greater than
the average market price of the Company's Common Stock.
(5) ACQUISITIONS
On June 11, 1998, the Company completed the acquisition of substantially all of
the assets and the assumption of certain liabilities of Integrated Solutions,
Inc. (ISI), a privately held manufacturer of i-line and deep ultra-violet
reduction lithography systems. The purchase price consisted of net cash
consideration of approximately $19.4 million, and $13.7 million for transaction
expenses and assumed liabilities. As a result of this acquisition, the Company
recognized a charge in the quarter ended June 30, 1998 for acquired in-process
research and development expense of $12.6 million, or $0.60 per share net of tax
benefits, representing products in development stage that were not considered to
have reached technological feasibility and had no alternative future use. Based
on the preliminary purchase price allocation, the Company recorded $2.7 million
in excess cost over fair value of net assets to be amortized on a straight-line
basis over a five-year period. The Company accounted for this acquisition based
on the purchase method of accounting. The results of ISI are included from the
date of acquisition.
During the quarter ended September 30, 1998, the Company completed the sale of
substantially all of the assets and liabilities of the resist processing
business formerly owned by ISI to Solitec Wafer Processing Inc., and completed
the sale of substantially all of the assets and liabilities of the prober
business formerly owned by ISI to International Business Machines Corporation.
In recent weeks, public communications from the Securities and Exchange
Commission have resulted in uncertainty and confusion about valuation practices
regarding acquired in-process research and development. Based on the Company's
understanding of the Commission's position, it will be necessary for the Company
to obtain a second valuation of acquired in-process research and development
reflecting the Commission's valuation methodology. The revised valuation may
indicate a value for acquired in-process research and development that is
7
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significantly lower than the initial estimated valuation. The Company had
originally placed a value on acquired in-process research and development
expense that it deemed appropriate, based on information that was available
at the time. However, the acquired in-process research and development
expense recognized by the Company in the second quarter may need to be
reduced in the fourth quarter when the revised valuation is completed. Any
adjustment to reduce acquired in-process research and development expense
will increase the Company's carrying value of purchased intangibles.
The following unaudited pro forma net sales, net income (loss) and net income
(loss) per share combine the historical net sales, net income (loss) and net
income (loss) per share of the Company and ISI for the nine months ended
September 30, 1998 and September 30, 1997, as if the acquisition had occurred at
the beginning of the earliest period presented. These balances do not reflect
the charge for acquired in-process research and development of $12.6 million, or
$0.60 per share, due to its non-recurring nature.
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
Sept. 30, Sept. 30,
(In thousands, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 74,747 $ 145,581
Net income (loss) . . . . . . . . . . . . . (40,874) 15,190
Net income (loss) per share - basic . . . . (1.95) 0.74
Net income (loss) per share - diluted . . . (1.95) 0.70
Number of shares used - basic. . . . . . . . 20,914 20,483
Number of shares used - diluted. . . . . . . 20,914 21,621
</TABLE>
During the first quarter of 1997, the Company completed the acquisition of
certain assets of Lepton Inc., a developer of electron beam lithography systems.
As a result of this acquisition, the Company recognized a one-time pre-tax
charge in the quarter ended March 31, 1997 for acquired in-process research and
development expense of $3.6 million, or $0.12 per share, net of related income
tax benefits.
(6) SPECIAL CHARGES - WRITE-DOWN OF INVENTORY AND OTHER
During the quarter ended September 30, 1998, the Company recognized a special
charge of $15.2 million related to the write-down of inventories and provisions
for estimated losses on open purchase commitments. The charge was a direct
result of the Company's lower sales and bookings levels in the quarter ended
September 30, 1998, combined with revised production demand forecasts for 1999.
The Company also recognized special charges in the amount of $5.8 million
related to collection uncertainty of a lease receivable, the Company's
previously announced reduction in workforce, the consolidation of certain
facilities and certain other reserves.
(7) REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (FAS 130) "Reporting
Comprehensive Income" is effective beginning with the Company's first fiscal
quarter of 1998. FAS 130 requires that, for all periods presented, comprehensive
income be reported with the same prominence as other financial statements. As
such, the Company has included these amounts on the face of the income
statement.
Comprehensive income includes net income plus other comprehensive income. Other
comprehensive income for the Company is comprised of changes in unrealized gains
or losses on available-for-sale securities, net of tax. Accumulated other
comprehensive income and changes thereto in 1998 consist of:
8
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<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
(Unaudited, in thousands) Sept. 30, 1998 Sept. 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated other comprehensive income at December 31, 1997:
Unrealized gain on available-for sale securities, net of tax . . . . . $271
Accumulated other comprehensive income at June 30, 1998:
Unrealized gain on available-for sale securities, net of tax. . . . . . $339
Change for the nine months ended September 30, 1998:
Unrealized gain on available-for sale securities, net of tax . . . . . 763
Change for the three months ended September 30, 1998:
Unrealized gain on available-for sate securities, net of tax . . . . . 695
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Accumulated other comprehensive income at September 30, 1998 . . . . . . . $1,034 $1,034
------------- ----------------
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</TABLE>
(8) SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which is required to be applied for years beginning after December
15, 1997. FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for annual financial statements for fiscal
years beginning after December 15, 1997, and therefore the Company will adopt
the new requirements retroactively in 1998. The Company anticipates that the
adoption of this statement will not have a significant effect on the
presentation of the Company's financial statements.
(9) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
(FAS 133), "Accounting for Derivative Instruments and Hedging Activities", which
is required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits
(ICs), thin film heads (TFHs) for disk drives and micromachined components. The
Company supplies step-and-repeat systems based on one-to-one and reduction
optical technologies to customers located throughout the United States, Europe,
Asia/Pacific and Japan. These products range from low-cost systems for
high-volume manufacturing to advanced systems for cost-effective production of
leading-edge devices and for research and development applications.
Additionally, within the past year, the Company shipped its first UltraBeam
Model V2000 electron beam pattern generation system based on vector-scan
technology for use in the development and production of photomasks for the IC
industry.
9
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On June 11, 1998, the Company completed the acquisition of substantially all of
the assets and the assumption of certain liabilities of Integrated Solutions,
Inc. ("ISI"), a privately held manufacturer of i-line and deep ultra-violet
(DUV) reduction lithography systems (the "Acquisition") for approximately $19.4
million in cash and the assumption of certain liabilities and expenses.
The following discussion should be read in conjunction with the Company's 1997
Annual Report on Form 10-K, which is available upon request.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future depending upon a variety
of factors, including substantial cyclicality in the Company's target markets;
various competitive factors including price-based competition and competition
from vendors employing other technologies; the timing and terms of significant
orders; lengthy sales cycles for the Company's products; delayed shipments to
customers due to customer configuration changes and other factors; acquisition
activities requiring the devotion of substantial management resources; the mix
of products sold; lengthy manufacturing cycles for the Company's products;
lengthy product development cycles for new products; the timing of new product
announcements and releases by the Company or its competitors; market acceptance
of new products and enhanced versions of the Company's products; manufacturing
inefficiencies associated with the startup of new product introductions;
customer concentration; ability to volume produce systems and meet customer
requirements; patterns of capital spending by customers; product discounts;
changes in pricing by the Company, its competitors or suppliers; political and
economic instability throughout the world, in particular the Asia/Pacific
region; natural disasters; regulatory changes; and business interruptions
related to the Company's occupation of its facilities. The Company's gross
profit as a percentage of sales has been and will continue to be significantly
affected by a variety of factors, including the mix of products sold;
nonlinearity of shipments during the quarter; increased competition in the
Company's targeted markets; the rate of capacity utilization; the introduction
of new products, which typically have higher manufacturing costs until
manufacturing efficiencies are realized and are typically discounted more than
existing products until the products gain market acceptance; the percentage of
international sales, which typically have lower gross margins than domestic
sales principally due to higher field service and support costs; and the
implementation of subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales of a
relatively small number of new systems, which typically range in price from
$800,000 to $4.0 million. Additionally, the Company's UltraBeam Model V2000
electron beam lithography system has an approximate price range of $6.0 million
to $9.0 million. As a result of these high sale prices, the timing of
recognition of revenue from a single transaction has had and will continue to
have a significant impact on the Company's net sales and operating results. The
Company's backlog at the beginning of a period typically does not include all of
the sales needed to achieve the Company's objectives for that period. In
addition, orders in backlog are subject to cancellation, delay, deferral or
rescheduling by a customer with limited or no penalties. Consequently, the
Company's net sales and operating results for a period have been and 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 reschedulings,
delays, deferrals or cancellations by customers, additional customer
configuration requirements, or to unexpected manufacturing difficulties or
delays in deliveries by suppliers due to their long production lead times or
otherwise, has caused and may continue to cause net sales in a particular period
to fall significantly below the Company's expectations, which has and could
continue to materially adversely affect the Company's operating results for such
period. In particular, the significantly long manufacturing cycles of the
Company's Titan-TM- and Saturn-TM- steppers, and the Company's newly acquired
XLS advanced reduction stepper and 193nm small-field research and development
reduction stepper (both product lines were acquired through the acquisition of
certain assets and liabilities of ISI), and the long lead time for lenses and
other materials, could cause shipments of such products to be delayed from one
quarter to the next, which could materially adversely affect the Company's
financial condition and results of operations for
10
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a particular quarter. Additionally, the Company has very limited experience in
the manufacture of its UltraBeam Model V2000 electron beam pattern generation
system, and the Company is in the process of documenting the manufacturing
processes for this product. The UltraBeam Model V2000 production process is
extremely complex and the product has significantly long manufacturing and sales
cycles, which greatly increases the likelihood of delays in shipments from one
quarter to the next. Due to the high list price for these systems, shipment
delays would materially adversely affect the Company's financial condition and
results of operations for a particular quarter if the shipment were delayed to
the following quarter. Additionally, the Company may experience difficulties in
assimilating the operations acquired in the Acquisition. (See "Development of
New Product Lines; Expansion of Operations; Assimilation of Acquired Product
Lines"). The impact of these and other factors on the Company's sales and
operating results in any future period cannot be forecast with certainty.
The Company's business has in prior years been subject to seasonality, although
the Company believes such seasonality has been masked in recent years by
cyclical trends within the semiconductor and thin film industries. In addition,
the need for continued expenditures for research and development, capital
equipment purchases and ongoing training and customer service and support
worldwide, among other factors, will make it difficult for the Company to reduce
its significant operating expenses in a particular period if the Company fails
to achieve its net sales goals for the period. Additionally, the Company has
recently experienced manufacturing inefficiencies associated with shifts in
product demand and under-utilization of manufacturing capacity and the Company
presently anticipates that these trends will continue for at least the next few
quarters. Such continuation would materially adversely affect the Company's
business, financial condition and results of operations.
Based on current market conditions in both the semiconductor and thin film head
industries and nonlinearity of system shipments, the Company presently expects
that net sales for the three-month period ending December 31, 1998 will be
significantly lower than net sales in the comparable period in 1997. Due to lack
of order visibility and the current trend of order delays, deferrals and
cancellations, the Company can give no assurance that it will be able to achieve
or maintain its current sales levels. The Company presently expects to recognize
an operating and net loss for the quarter ending December 31, 1998, exclusive of
any additional charges the Company may take during the period. Should current
market conditions continue to deteriorate, the Company may incur operating and
net losses in subsequent periods. Additionally, management continues to evaluate
market conditions in both the semiconductor and thin film head industries in
order to assess the need to take further action to more closely align its cost
structure with anticipated revenues. Any subsequent actions by the Company could
result in restructuring charges, inventory write-downs and provisions for the
impairment of long-lived assets, which could materially adversely affect the
Company's business, financial condition and results of operations.
Certain of the statements contained in this Report on Form 10-Q may be
considered forward-looking statements that may involve a number of risks and
uncertainties. In addition to the factors discussed herein, among other factors
that could cause actual results to differ materially include the following:
highly competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; importance of the Company's
mix-and-match strategy; year 2000 compliance; future acquisitions; expansion of
the Company's product lines; dependence on key personnel; sole or limited
sources of supply; intellectual property matters; environmental regulations;
effects of certain anti-takeover provisions; volatility of stock price; and the
other risk factors listed from time to time in the Company's SEC reports,
including but not limited to the Company's 1997 Annual Report on Form 10-K and
this Quarterly Report on Form 10-Q.
Due to these and additional factors, certain statements, historical results and
percentage relationships discussed below will not necessarily be indicative of
the results of operations for any future period.
NET SALES
Net sales consist of revenue from system sales, spare parts sales, and service.
Net sales for the quarter ended September 30, 1998 were $12.4 million, a
decrease of 66% as compared with net sales of $36.8 million for the comparable
period in 1997. For the nine months ended September 30, 1998, net sales were
$62.5 million, a decrease of 45% as compared with net sales of $113.5 million
for the comparable period in 1997. Both the current quarter and year-to-date
declines, relative to the comparable periods in 1997, were primarily attributed
to significantly lower unit system sales across all of the Company's 1X product
lines. Overall, unit shipments for the three and nine-month periods ended
September 30, 1998 declined 81% and 57%, respectively, from the comparable
periods in 1997, while the weighted-average selling price of all units sold
decreased modestly. Spare parts and service revenue for the three and nine-month
periods ended September 30, 1998 increased 39% and 37%, respectively, from the
comparable periods in 1997, primarily as a result of the Acquisition and a
higher level of technology upgrades.
The Company believes that its sales have been and continue to be materially
adversely affected by reduced capital capacity spending levels within the
semiconductor industry, including the Japanese and other Asian marketplaces. The
Company continues to experience shipment delays and purchase order
restructurings by several of its customers, and is also experiencing purchase
order cancellations. There can be no assurance that this trend
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will not continue in the future. Accordingly, the Company can give no assurance
that it will be able to achieve or maintain its current or prior level of sales.
The Company believes that the relative strength of the U.S. dollar, particularly
in relation to the Japanese yen, places the Company at a competitive
disadvantage (See "Additional Risk Factors: Highly Competitive Industry").
Additionally, the Company has experienced a significant downturn in orders from
customers in the thin film head industry. Several companies within the thin film
head and disk drive industries have announced significantly lower than expected
earnings, layoffs and restructuring or other charges. The Company believes these
events indicate that, as the Company has experienced, the thin film head and
disk drive industries have excess capacity in the near-term. This will continue
to result in lower sales as a result of cancellations, delays and deferrals of
customer orders from these industries, which will materially adversely affect
the Company's business, financial condition and results of operations in the
near-term. Based on current market conditions in both the semiconductor and thin
film head industries and nonlinearity of system shipments, the Company presently
expects that net sales for the three-month period ending December 31, 1998 will
be significantly lower than net sales in the comparable period in 1997. Due to
lack of order visibility and the current trend of order delays, deferrals and
cancellations, the Company can give no assurance that it will be able to achieve
or maintain its current sales levels.
International net sales for the quarter ended September 30, 1998 were $4.7
million, as compared with $15.9 million for the comparable period in 1997. For
the nine months ended September 30, 1998, international net sales were $26.9
million, as compared with $43.7 million for the comparable period in 1997.
International net sales represented 38% and 43% of total net sales for the three
and nine-month periods ended September 30, 1998, respectively. This compares to
43% and 39% in the comparable periods in 1997. The Company's operations in
foreign countries are not generally subject to significant exchange rate
fluctuations, principally because sales contracts for the Company's systems are
generally denominated in U.S. dollars. In Japan, however, the Company has
commenced direct sales operations and orders are typically denominated in
Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. International sales expose the Company to
a number of additional risk factors, including fluctuations in the value of
local currencies relative to the U.S. dollar, which, in turn, impact the
relative cost of ownership of the Company's products. (See "Additional Risk
Factors: International Sales; Japanese Market").
Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and market
acceptance of the Company's products, there can be no assurance that the Company
will exceed or maintain its current level of net sales for any period in the
future. Additionally, the Company believes that the market acceptance and volume
production of its UltraBeam Model V2000 electron beam lithography system, XLS
advanced reduction stepper (acquired from ISI), and its Titan and Saturn
families of wafer steppers, are of critical importance to its future financial
results. To the extent that these products do not achieve significant sales due
to difficulties involving manufacturing or engineering, the inability to reduce
the current long manufacturing cycles for such products, competition, excess
capacity in the semiconductor industry, or any other reason, the Company's
business, financial condition and results of operations would be materially
adversely affected. Additionally, the Company is presently transitioning from
its Model 1700 MVS Series steppers, which address the market for back-end
processing of inductive thin film heads, to the Model 1800 MVS Series steppers,
which address the market for back-end processing of magneto-resistive (MR) thin
film heads. To the extent that the Model 1800 Series steppers do not achieve
significant sales due to competition from alternative technologies, excess
capacity in the thin film industry or any other reason, the Company's business,
financial condition and results of operations could be materially adversely
affected.
GROSS PROFIT (LOSS)
Gross margin (loss) for the quarter ended September 30, 1998 was (111.7%) of net
sales, as compared with positive gross margin of 52.3% for the comparable period
in 1997. For the nine months ended September 30, 1998, gross margin was 6.9% of
net sales, as compared with 53.1% for the comparable period in 1997. During the
three-month period ending September 30, 1998, the Company recognized a $15.2
million special charge related primarily to the write-down of inventories and
provisions for estimated losses associated with open purchase commitments. This
charge was a direct result of the Company's lower sales and bookings levels in
the three-month period ended September 30, 1998, combined with revised
production demand forecasts for 1999.
Excluding the above-mentioned charge, gross margin for the three and nine-month
periods ended September 30, 1998 would have been 11.6% and 31.2%, respectively.
This decline in gross profit as a percentage of net sales, as compared with the
comparable periods in 1997, was primarily attributed to a higher percentage of
spare parts and service revenues (which typically have lower gross margins than
system sales), relative to total net sales,
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manufacturing and after-sales inefficiencies caused by significant
under-utilization of capacity, non-linearity of shipments during the period and
higher inventory reserve requirements. During the nine months ended September
30, 1998, gross margins were also negatively impacted by Acquisition-related
issues, which resulted in a "stepped-up" basis for purposes of determining cost
of sales of product lines acquired from ISI. Additionally, despite higher
standard costs, weighted-average selling prices declined during the 1998
periods, as compared to the comparable periods in 1997, due to the highly
competitive environment in which the Company is operating, resulting in a
further deterioration of gross margins.
The Company believes that increased competition from Canon Inc., Nikon Inc., and
ASM Lithography, Ltd. ("ASML"), among others, together with generally weak
conditions in the markets the Company serves, will make it difficult for the
Company to increase gross margin percentages in the near term. Additionally, the
Company has recently added capacity for the anticipated volume production of
several new products that are outside of the Company's core reflective and
refractive optical technologies. In addition to the purchase of significant
levels of plant and equipment for these new products, the commencement of
production of the UltraBeam V2000 electron beam lithography system has resulted
and will continue to result in the purchase and retention of significant levels
of inventory to support manufacturing requirements, hiring of additional
production and manufacturing support personnel and the incurrence of other
related manufacturing overhead costs. (See "Additional Risk Factors: Development
of New Product Lines; Expansion of Operations; Assimilation of Acquired Product
Lines"). The purchase of additional inventories has and will continue to result
in a significantly higher risk of obsolescence, which may require additional
inventory reserves and would negatively impact gross margins. Additionally, new
products generally have lower gross margins until production and after-sales
efficiencies can be achieved. Should these new products fail to develop or
generate significant market demand, the Company's business, financial condition
and results of operations would be materially adversely affected. As a result of
these and other factors, the Company presently expects that gross profit as a
percentage of net sales will be significantly lower for the three-month period
ending December 31, 1998, relative to levels achieved in the comparable period
in 1997, exclusive of any additional special charges the Company may take during
the remainder of 1998.
RESEARCH, DEVELOPMENT, AND ENGINEERING
The Company's research, development, and engineering expenses, net of third
party funding, were $6.9 million for the quarter ended September 30, 1998, as
compared with $7.1 million for the comparable period in 1997. For the nine
months ended September 30, 1998, research, development, and engineering
expenses, net of third party funding, were $20.9 million, as compared with $20.1
million for the comparable period in 1997. Despite lower net sales, the Company
continues to invest significant resources in the development and enhancement of
its UltraBeam electron beam lithography system and in the development of its
Verdant rapid thermal annealing/laser doping systems and technologies, together
with continuing expenditures for its 1X and reduction optical products and
technologies. The Company presently expects the absolute dollar amount of
research, development and engineering expenses for the quarter ending December
31 1998, to decline relative to the quarter ended September 30, 1998, primarily
as a result of the Company's recent workforce reduction, abbreviated work
schedules and various seasonal factors. (See "Special Charges" and "Additional
Risk Factors: Development of New Product Lines; Expansion of Operations;
Assimilation of Acquired Product Lines").
SELLING, GENERAL, AND ADMINISTRATIVE
The Company's selling, general, and administrative expenses were $6.5 million
for the three months ended September 30, 1998, as compared with $6.5 million for
the comparable period in 1997. As a percentage of net sales, selling, general,
and administrative expenses increased to 52.4% for the three months ended
September 30, 1998, as compared with 17.7% for the comparable period in 1997.
For the nine months ended September 30, 1998, selling, general, and
administrative expenses were $19.2 million, as compared with $19.4 million for
the comparable period in 1997. As a percentage of net sales, selling, general,
and administrative expenses increased to 30.8% for the nine months ended
September 30, 1998, as compared with 17.1% for the comparable period in 1997.
Higher general and administrative expenses related to the operations acquired in
the Acquisition and higher general and administrative expenses for the Company's
Verdant and UltraBeam operations were offset by cost containment measures
implemented during the year and lower expenses typically associated with a
reduction in sales. The Company presently anticipates that selling, general and
administrative expenses will decline during the quarter ending December 31, 1998
relative to the quarter ending September 30, 1998, due primarily to the
Company's recent reduction in workforce, abbreviated work schedules and various
seasonal factors. (See "Special Charges" and "Additional Risk Factors:
Development of New Product Lines; Expansion of Operations; Assimilation of
Acquired Product Lines").
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ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During the quarter ended June 30, 1998, the Company completed the acquisition of
substantially all of the assets and certain liabilities of ISI, a privately held
manufacturer of i-line and deep ultra-violet (DUV) reduction lithography
systems. As a result of this Acquisition, the Company recognized a charge in the
quarter ended June 30, 1998 for acquired in-process research and development
expense of $12.6 million, or $0.60 per share, net of tax benefits.
In recent weeks, public communications from the Securities and Exchange
Commission have resulted in uncertainty and confusion about valuation
practices regarding acquired in-process research and development. Based on
the Company's understanding of the Commission's position, it will be
necessary for the Company to obtain a second valuation of acquired in-process
research and development reflecting the Commission's valuation methodology.
The revised valuation may indicate a value for acquired in-process research
and development that is significantly lower than the estimated initial
valuation. The Company had originally placed a value on acquired in-process
research and development expense that it deemed appropriate, based on
information that was available at the time. However, the acquired in-process
research and development expense recognized in the second quarter may need to
be reduced in the fourth quarter when the revised valuation is completed. Any
adjustment to reduce acquired in-process research and development expense
will increase the Company's carrying value of purchased intangibles.
During the first quarter of 1997, the Company completed the acquisition of
certain assets of Lepton Inc., a developer of electron beam lithography systems.
As a result of this acquisition, the Company recognized a pre-tax charge in the
quarter ended March 31, 1997 for acquired in-process research and development
expense of $3.6 million, or $0.12 per share, net of related income tax
benefits.
SPECIAL CHARGES Due primarily to the downturn in the thin film head and
semiconductor industries, the Company realized significantly lower sales and
bookings levels during the quarter ended September 30, 1998. As a result, the
Company significantly reduced its production demand forecast for 1999. This
action, in turn, resulted in the Company implementing various cost
containment measures during the quarter ended September 30, 1998 and
recognizing certain reserves related to impairment of the value of its
assets. In addition to write-downs for excess inventories and provisions for
estimated losses on open purchase commitments, the Company recognized special
charges in the amount of $5.8 million related to collection uncertainty of a
lease receivable, the Company's previously announced reduction in workforce,
the consolidation of certain facilities and certain other reserves.
OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $1.8 million
for the quarter ended September 30, 1998, as compared with $1.9 million for the
comparable period in 1997. For the nine months ended September 30, 1998, other
income, net, was $5.1 million, as compared with $5.4 million for the comparable
period in 1997.
INCOME TAXES (BENEFIT)
The Company recognized a benefit from income taxes of $3.1 million and $6.2
million for the three and nine months ended September 30, 1998, respectively.
This benefit was primarily attributed to the Company's pre-tax loss, exclusive
of special charges. This compares with effective tax rates of 28% and 30% for
the three and nine-month periods ended September 30, 1997. The Company's
effective tax rate differs from the U.S. statutory rate as a result of state
income taxes and benefits associated with the Company's foreign sales
corporation, tax-exempt income and credits for research and development, net of
other individually immaterial benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $2.1 million in operating activities during the nine-month
period ended September 30, 1998, consisting of the net loss for the period of
$43.2 million, partially offset by non-cash charges to income of $20.9
million and a positive net effect of changes in operating assets and
liabilities of $20.2 million. This compares to cash generated from operations
of $2.5 million in the comparable period in 1997. Non-cash charges for the
nine months ended September 30, 1998 include a $12.6 million charge for the
write-off of acquired in-process research and development expense associated
with the Company's purchase of certain assets and liabilities of ISI. The
positive net effect from changes in operating assets and liabilities, net of
the impact of the acquired assets and liabilities from ISI, was primarily due
to a decrease in accounts receivable of $33.7 million, a decrease in lease
receivables of $6.3 million and a decrease in inventories of $3.5 million,
partially offset by a decrease in other current liabilities of $13.9 million,
a decrease in accounts payable of $7.6 million and an increase in other
assets of $2.0 million. The significant dollar decrease in accounts
receivable was partially the result of the factoring of
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approximately $9.0 million of accounts receivable to Wells Fargo HSBC Trade Bank
N.A. The Company presently anticipates that the current trend of non-linear
shipments and extended customer payment cycles will continue for some time.
Accordingly, the Company expects that accounts receivable will remain at
unusually high levels throughout the remainder of 1998. Such trends, should they
continue, would expose the Company to numerous risks, which could materially
adversely affect the Company's business, financial condition and results of
operations. The Company may continue to attempt to mitigate the impact of
extended payment terms by factoring up to a substantial portion of its accounts
receivable in the future. There can be no assurance that this financing will be
available on reasonable terms, or at all.
The Company believes that because of the relatively long manufacturing cycle of
certain of its systems, particularly newer products, the Company's investment in
inventories will continue to represent a significant portion of working capital.
Additionally, the Company has incurred significant additional levels of
inventory, plant and equipment as a result of the anticipated volume production
of its electron beam lithography system and anticipated introduction of its
rapid thermal annealing/laser doping system. As a result of such investment in
inventories, plant and equipment, the Company may be subject to an increased
risk of inventory obsolescence, impairment of long-lived assets and other
factors which could materially adversely affect the Company's operating results
and financial condition.
At September 30, 1998, the Company had working capital of $181.7 million. The
Company's principal sources of liquidity at September 30, 1998 consisted of
$139.1 million in cash, cash equivalents and short-term investments and $4.0
million in various unsecured lines of credit. As of September 30, 1998, $1.6
million was outstanding under such lines of credit.
For the nine-month period ended September 30, 1998, cash provided by
investment activities was $7.9 million. Cash generated by the net proceeds
from the sale on $36.9 million in available-for-sale securities was partially
offset by the net cash expenditure of $19.4 million for the purchase of
certain assets and liabilities of ISI and $9.5 million for capital
expenditures. The significant level of capital expenditures during 1998 was
primarily attributed to facilities expansions for the manufacture and sales
demonstration support of the Company's electron beam lithography and rapid
thermal annealing/laser doping systems, together with fixed assets acquired
from ISI. As a result of these capital expenditures, the Company's
depreciation and amortization costs have increased significantly and may
negatively impact the Company's results of operations in the event of a
continued downturn in the Company's business cycles.
For the nine-month period ended September 30, 1998, cash provided by financing
activities was $4.9 million, principally as a result of borrowings on the
Company's lines of credit of $1.5 million and the proceeds of $3.4 million from
the issuance of Common Stock pursuant to the exercise of employee stock options.
The development and manufacture of new lithography systems and enhancements are
highly capital-intensive. In order to be competitive, the Company must continue
to make significant expenditures for capital equipment, sales, service, training
and support capabilities; investments in systems, procedures and controls;
expansion of operations and research and development, among many other items.
The Company expects that anticipated cash flow from operations, its cash, cash
equivalents and short-term investments and funds available under its lines of
credit will be sufficient to meet the Company's cash requirements for the next
twelve months. Beyond the next twelve months, the Company may require additional
equity or debt financing to address its working capital or capital equipment
needs. Additionally, the Company may in the future pursue additional
acquisitions of complementary product lines, technologies or businesses. Future
acquisitions by the Company may result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect any Company profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies and products of the acquired companies; the
diversion of management's attention from other business concerns; risks of
entering markets in which the Company has no or limited direct prior experience;
and the potential loss of key employees of the acquired company. In the event
the Company acquires product lines, technologies or businesses which do not
complement the Company's business, or which otherwise do not enhance the
Company's sales or operating results, the Company may incur substantial
write-offs and higher recurring operating costs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event that any such acquisition does occur, there can be no
assurance as to the effect thereof on the Company's business or operating
results. Additionally, the Company is experiencing continued interest in its
equipment leasing program. Continued success of this strategy may result in the
further formation of significant long-term receivables and would require the use
of substantial amounts of working capital. The formation of significant
long-term receivables and the granting of extended customer payment terms
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exposes the Company to additional risks, including potentially higher customer
concentration and higher potential operating expenses relating to customer
defaults. During the three-month period ended September 30, 1998, the Company
took a significant reserve against a non-performing lease receivable. If
defaults on additional lease receivables were to occur, the Company's business,
financial condition and results of operations would be materially adversely
affected. To the extent that the Company's financial resources are insufficient
to fund the Company's activities, additional funds will be required. There can
be no assurance that additional financing will be available on reasonable terms,
or at all.
YEAR 2000 READINESS DISCLOSURE:
Many currently installed computer systems and software products are coded to
accept only two digit entries in the attached date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately one year, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" (Y2K) requirements. The
Company has commenced, for all of its information systems, key vendors, physical
plant and software contained in the products it sells, a Y2K conversion project
to address necessary code changes, testing, and implementation and contingency
plans. Although the Company is still in the process of identifying the total
scope and impact of the required changes, the Company is currently in the
process of implementing known required changes to its internal information
systems and to the software that is contained in the products it sells. The
Company presently expects such modifications to be made on a timely basis and
that the total cost for the project will not exceed one million dollars.
Significant resources for the project have already been incurred and the Company
presently estimates that the project is approximately 50% complete. However, the
Company anticipates that additional requirements will be identified and
unscheduled costs may be incurred as the project proceeds. Accordingly, there
can be no assurance that the Company, or its vendors, will be able to timely and
cost-effectively cure its products' errors and defects associated with Y2K date
functions, and this may result in material costs to the Company, including costs
associated with detecting and fixing such defects and costs incurred in
litigation due to any such defects. In addressing customer inquiries regarding
the Company's Y2K readiness and in making inquiries of the Company's key
vendors, the Company has adopted the Sematech process for investigating and
responding to the Y2K subject. This process includes a survey form, a readiness
matrix and a testing scenario.
Many commentators have predicted that a significant amount of litigation will
arise out of year 2000 compliance issues and the Company is aware of several
such suits which are currently pending. Because of the unprecedented nature of
such litigation and the highly technical nature of the Company's products, there
can be no assurance that the Company will not be materially adversely affected
by claims related to Y2K compliance. Although the Company presently believes
that it will timely cure known required changes to the software in its products,
it believes that the greatest potential for future claims is from unknown
impacts to its customers' manufacturing processes, which could potentially
adversely impact product yields and throughput. In addition to possible
litigation, the Company could incur substantially higher product returns and
warranty related expenses, either of which could materially adversely affect the
Company's business, financial condition and results of operations. Additionally,
the Company's customers may be required to devote substantial financial
resources to their own internal Y2K audit and compliance. This may result in
fewer financial resources available to purchase the Company's products, fewer
system sales by the Company, and could have a material adverse affect on the
Company's business, financial condition and results of operations.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for Y2K, there can be no
assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
technology used in its internal operating systems, which are composed
primarily of third party software and hardware technology. Additionally,
although the Company has made inquiries of its key information technology,
physical plant and materials vendors, and is in the process of collecting and
reviewing survey responses, the Company believes it will not be able to
obtain adequate assurances from all its key vendors. Even where assurances
are received from third parties, there remains a risk that failure of systems
and products of other companies on which the Company relies could have a
material adverse affect on the Company. Accordingly the Company is in the
process of assessing the relative degree of risk to the Company and is
preparing contingency plans. These contingency plans may result, among other
things, in the development of alternative suppliers and the purchase of
additional inventories. There can be no assurance that such contingency plans
will be adequate and that the Company will not incur significant additional
costs or business interruptions in connection with such transition, either of
which could have a material
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adverse affect on the Company's business, financial condition
and results of operations. (See "Additional Risk Factors: Sole or Limited
Sources of Supply").
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Y2K issue. The Company's evaluation is ongoing and it expects that new and
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES The
Company's business depends in significant part upon capital expenditures by
manufacturers of semiconductors, photomasks and thin film head magnetic
recording devices, which in turn depend upon the current and anticipated
market demand for such devices and products utilizing such devices. The
semiconductor industry is highly cyclical and historically has experienced
recurring periods of oversupply, as evidenced by the current prolonged
downturn in the semiconductor capital equipment industry. This has, from time
to time, resulted in significantly reduced demand for capital equipment
including the systems manufactured and marketed by the Company. The Company
believes that markets for new generations of semiconductors will also be
subject to similar fluctuations. In the past, the semiconductor industry has
experienced significant growth, which, in turn, has caused significant growth
in the capital equipment industry. However, the semiconductor industry has
been experiencing a substantial and lengthy cyclical downturn, which has
resulted in a significant reduction in capital spending. Additionally, the
Company has been experiencing cancellation of purchase orders, shipment
delays and purchase order restructurings by several of its customers and
there can be no assurance that this trend will not continue in the future.
Accordingly, the Company can give no assurance that it will be able to
achieve or maintain its current level of sales.
The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and magnetic recording head markets, as well as
diversifying into new markets such as photolithography for micromachining and
the development of photomasks. Despite such efforts, when one or more of such
markets experiences a downturn or slowdown, such as is currently occurring in
the semiconductor and thin film head markets, the Company's net sales and
operating results are materially adversely affected, and has resulted in net
losses for the Company. Based on current market conditions in both the
semiconductor and thin film head industries and nonlinearity of system
shipments, the Company presently expects that net sales for the three-month
period ending December 31, 1998 will be significantly lower than net sales in
the comparable period in 1997. Due to lack of order visibility and the
current trend of order delays, deferrals and cancellations, the Company can
give no assurance that it will be able to achieve or maintain its current
sales levels. The Company presently expects to recognize an operating and net
loss for the quarter ending December 31, 1998, exclusive of any additional
charges the Company may take during the period. Should current market
conditions continue to deteriorate, the Company may incur operating and net
losses in subsequent periods. Additionally, management continues to evaluate
market conditions in both the semiconductor and thin film head industries in
order to assess the need to take further action to more closely align its
cost structure with anticipated revenues. Any subsequent actions by the
Company could result in restructuring charges, inventory write-downs and
provisions for the impairment of long-lived assets, which could materially
adversely affect the Company's business, financial condition and results of
operations.
During 1997 and 1996, approximately 50% and 40%, respectively, of the
Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. During the nine month period ended September
30, 1998, sales to thin film head manufacturers and micromachining customers
represented approximately 50% of the Company's net sales, as compared with
50% during the comparable period a year ago. The Company has experienced a
significant decline in orders from customers in the thin film head market in
terms of absolute dollars. Additionally, several companies within the thin
film head and disk drive industries have announced significantly lower than
expected earnings and have announced restructuring or other non-recurring
charges. The Company believes these events indicate that the thin film head
and disk drive industries have excess capacity in the near-
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term. This has and will continue to result in lower sales and delays or
deferrals of customer orders from these industries, which will continue to
materially adversely affect the Company's business, financial condition and
results of operations in the near term. Additionally, the Company is
experiencing increased competition in this market from Canon, Nikon and ASML.
The Company's business and operating results would be materially adversely
affected by downturns or slowdowns in the thin film head market or by loss of
market share.
HIGHLY COMPETITIVE INDUSTRY The capital equipment industry in which the
Company operates is intensely competitive. A substantial investment is
required to install and integrate capital equipment into a semiconductor or
thin film head production line. The Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and, to the extent possible, subsequent generations of
similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number
of leading foreign and domestic stepper manufacturers, such as Nikon, Canon,
ASML and Silicon Valley Group, Inc.'s Micralign products, all of which have
substantially greater financial, marketing, technical and other resources
than the Company. Nikon supplies a 1X stepper for use in the manufacture of
liquid crystal displays and both Canon and Nikon offer reduction steppers for
thin film head fabrication. Additionally, the XLS reduction stepper product
line acquired from ISI competes directly with advanced reduction steppers
offered by Canon, Nikon and ASML. The Company believes that future thin film
head production may involve manufacturing steps that require critical feature
sizes. Although the reduction stepper product lines acquired from ISI address
critical feature sizes, additional development of these product lines may be
necessary to fully address the unique requirements of thin film head
manufacturing. Additionally, in the market for mix-and-match semiconductor
applications, Nikon and Canon are shipping their own widefield mix-and-match
lithography systems. (See: "Additional Risk Factors: Importance of
Mix-and-Match Strategy"). ASML has recently announced its intent to compete
in the low-cost lithography market. The Company's UltraBeam model V2000
electron beam pattern generation system competes against systems produced by
ETEC Systems, Inc.; Hitachi, Ltd.; Leica Camera AG; and JEOL, Ltd. ("Japan
Electron Optical Laboratory"). In addition, the Company believes that the
high cost of developing new lithography tools has caused its competitors to
collaborate with customers and other parties in various areas such as
research and development, manufacturing and marketing, thereby resulting in a
combined competitive threat with significantly enhanced financial, technical
and other resources. The Company expects its competitors to continue to
improve the performance of their current products. These competitors have
stated that they will introduce new products with improved price and
performance characteristics that will compete directly with the Company's
products. This could cause a decline in sales or loss of market acceptance of
the Company's steppers, and thereby materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that enhancements to, or future generations of, competing products
will not be developed that offer superior cost of ownership and technical
performance features. The Company believes that to be competitive, it will
require significant financial resources in order to continue to invest in new
product development, features and enhancements, to introduce next generation
stepper systems on a timely basis, and to maintain customer service and
support centers worldwide. In marketing its products, the Company may also
face competition from vendors employing other technologies. In addition,
increased competitive pressure has led to intensified price-based
competition, resulting in lower prices and margins. This pressure has been
caused, in part, from the relative weakness of the Japanese yen versus the
U.S. dollar and the current cyclical downturn in both the semiconductor and
thin film head industries. Should these competitive trends continue, the
Company's business, financial condition and operating results would continue
to be materially adversely affected. There can be no assurance that the
Company will be able to compete successfully in the future.
Japanese IC manufacturers have a significant share of the worldwide market for
certain types of ICs for which the Company's systems are used. However, the
Japanese stepper manufacturers are well established in the Japanese stepper
market, and it is extremely difficult for non-Japanese lithography equipment
companies to penetrate the Japanese stepper market. To date, the Company has not
established itself as a major competitor in the Japanese IC equipment market and
there can be no assurance that the Company will be able to achieve significant
sales to Japanese IC manufacturers in the future. (See "International Sales;
Japanese Market").
LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to restructure current manufacturing facilities, both 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
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of significant risks, including inventory obsolescence and fluctuations in
operating results, over which the Company has little or no control.
CUSTOMER CONCENTRATION Historically, the Company has sold a substantial
number of its systems to a limited number of customers. In 1997, sales to two
customers accounted for 14%, and 10% of the Company's net sales. In 1996, sales
to two customers accounted for approximately 17% and 12% of the Company's net
sales. For the nine-month period ended September 30, 1998, one customer
accounted for approximately 33% of the Company's net sales. The Company expects
that sales to relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes that the
Company's financial results depend in significant part upon the success of these
major customers, and the Company's ability to meet their future capital
equipment needs. Although the composition of the group comprising the Company's
largest customers may vary from period to period, the loss of a significant
customer or any reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the
semiconductor or magnetic recording head industries or in the industries that
manufacture products utilizing integrated circuits or thin film heads, may have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's ability to maintain or increase its sales
in the future will depend, in part, upon its ability to obtain orders from new
customers as well as the financial condition and success of its customers and
the general economy, of which there can be no assurance. (See "Cyclicality of
Semiconductor and Magnetic Recording Head Industries").
In addition to the business risks associated with the dependence on these major
customers, these significant customer concentrations have in the past resulted,
and currently result in significant concentrations of accounts receivable and
leases receivable. In particular, sales to a relatively few customers in the
thin film head industry currently make up a significant portion of the Company's
receivables. Recently, the Company has increased its level of customer leasing
activity and has granted extended payment terms to many of its customers. The
formation of significant and concentrated long-term receivables and the granting
of extended payment terms exposes the Company to additional risks, including the
risk of default by one or more customers representing a significant portion of
the Company's total receivables. During the three month period ended September
30, 1998, the Company took a significant reserve against a non-performing lease
receivable. If defaults on additional lease receivables were to occur, the
Company's business, financial condition and results of operations would be
materially adversely affected.
DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF
ACQUIRED PRODUCT LINES Currently, the Company is devoting significant
resources to the development, introduction and commercialization of new products
and technologies that are outside of the Company's core reflective and
refractive optical businesses (see "Research, Development and Engineering").
During 1998, the Company has continued to develop these products and will
continue to incur significant operating expenses in the areas of research,
development and engineering and general and administrative in order to further
develop and support these new products. Additionally, gross profit margins and
inventory levels may be further adversely impacted in the future by 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 establishment 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 new products. If the Company is unable to achieve significantly
increased net sales or its sales fall below expectations, the Company's
operating results will be materially adversely affected until, among other
factors, inventory levels and expenses can be reduced.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of ISI, a privately
held manufacturer of i-line and deep ultra-violet (DUV) reduction lithography
systems (the "Acquisition"). Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies; diversion of management's attention from other
business concerns; risks of entering markets in which the Company has no or
limited direct experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines,
technologies or businesses which do not complement the Company's business, or
which otherwise do not enhance the Company's sales or operating results, the
Company may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Accordingly, there can be no
assurance as to the effect of the Acquisition on the Company's business,
financial condition or operating results. Additionally, the Securities and
Exchange Commission has recently been reviewing more closely the accounting
for acquisitions and the resulting charges for acquired "in-process" research
and
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development. Any resulting restatement of the acquired "in-process" research and
development charge the Company recognized in conjunction with the Acquisition
would, most likely, result in a lesser charge to income for "in-process"
technology and the creation of a higher value of acquired technology, an
intangible asset. The creation of additional intangible assets would have the
impact of increasing amortization expense, which would have a material adverse
affect on the Company's results of operations. Additionally, ISI had recently
completed several significant restructurings of its businesses and organization
and had incurred substantial operating losses prior to the Acquisition, and the
Company is presently in the process of consolidating certain acquired facilities
and evaluating the requirements for additional restructuring.
The Company has recently purchased significant levels of inventories and plant
and equipment for the anticipated volume production of the UltraBeam V2000
electron beam lithography system. To date, the Company has shipped one V2000
system to a customer, as part of a joint development effort targeted at
developing a "production-ready" system. The future success of the product
line is dependent, in part, on customers' ability to integrate this highly
technical product into their existing processes.
In December 1997, the Company terminated its distributor relationship with
Innotech, its Japan distributor. The Company has recently expanded its
operations in Japan by establishing a direct sales force and has leased
additional facilities and has made significant capital expenditures for sales
and applications support. Should additional gross profit on sales to the Japan
marketplace not be sufficient to fund these expanded operations, the Company's
business, financial condition and results of operations would be materially
adversely affected.
IMPORTANCE OF MIX-AND-MATCH STRATEGY A principal element of the Company's
strategy is to sell its 1X lithography systems to advanced semiconductor
fabrication facilities for mix-and-match applications. This strategy depends, in
significant part, upon the recognition by semiconductor manufacturers that costs
can be reduced by using the Company's systems to perform exposure on
semiconductor process layers requiring feature sizes of 0.65 microns or greater
and the willingness of such manufacturers to implement processes to lower
manufacturing costs. Many semiconductor fabrication facilities have limited or
no experience with integrating lithography tools in the manner necessary for
full implementation and acceptance of a mix-and-match manufacturing strategy,
and there can be no assurance that semiconductor manufacturers will adopt such a
strategy. The Company has designed certain of its systems to operate in a
compatible manner with its newly acquired i-line and DUV reduction steppers and
its competitors' reduction steppers and step-and-scan systems, which are used to
process layers with feature sizes below 0.65 microns. The successful
implementation of the Company's strategy, however, will result in a loss of
sales by manufacturers of reduction steppers and will cause these competitors to
respond with lower prices, productivity improvements or new technical designs
for their systems that may eliminate the need for the Company's steppers or make
it difficult for the Company's systems to attain compatibility with such
systems. Also, certain of the Company's competitors, which also manufacture
widefield systems, including Nikon and Canon, are shipping their own widefield
mix-and-match lithography systems. The introduction, development and sales of
such competitive systems could materially adversely affect the Company's
business, financial condition and results of operations.
To facilitate its mix-and-match strategy, the Company has developed and is
continuing to develop a family of products. In 1995, the Company commenced
shipment and volume production of the Titan Wafer Stepper-Registered
Tradmark- and commenced shipment of the Saturn Wafer Stepper-Registered
Tradmark-. Additionally, during 1997 the Company added multiple versions of
its Titan and Saturn wafer steppers in order to more fully address the needs
of the mix-and-match market. As is typical with newly introduced systems in
the capital equipment industry, the Company has experienced and may continue
to experience technical or other difficulties with its mix-and-match family
of products. The Company believes that the market acceptance and process
verification combined with volume production of the mix-and-match family of
products is of critical importance to the successful implementation of its
mix-and-match strategy and its future financial results. Recently, this
market segment of the Company's business has experienced a pronounced
downturn due, in part, to the recent cyclical downturn in the semiconductor
industry and the strength of the U.S. dollar in relationship to the Japanese
yen. Additionally, the Company believes that existing capital budgets of
semiconductor manufacturers are currently focusing on technology buys, and
not capacity additions. This places the Company at a disadvantage, since its
steppers address non-critical geometries. To the extent that the
mix-and-match family of products does not achieve or maintain significant
sales due to a continued cyclical downturn in the semiconductor industry;
technical, manufacturing or other difficulties associated with these
products; lack of customer acceptance; an inability to reduce the
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significantly long manufacturing cycle of these products; an inability to
increase capacity for the production of the mix-and-match family of products;
direct competition from other widefield mix-and-match systems from Nikon and
Canon, among others; or any other reason, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the increase in mix-and-match stepper production has resulted and will
continue to result in higher inventory levels and operating expenses. Failure to
achieve or maintain significant sales of these steppers has led and could
continue to lead, among other things, to an increase in inventory obsolescence
and an increase in expenses without corresponding sales, both of which have and
could continue to have a material adverse affect on the Company's business,
financial condition and results of operations.
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 Family and the
Saturn Wafer Stepper Family and is in the process of assimilating the product
lines acquired from ISI. Because new product development commitments must be
made well in advance of sales, new product decisions must anticipate both future
demand and the technology that will be available to supply that demand. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products and related software tools
or enhancing its existing products and related software tools. Any such failure
would materially adversely affect the Company's business, financial condition
and results of operations.
Because of the large number of components in the Company's systems, significant
delays can occur between a system's introduction and the commencement by the
Company of volume production of such systems. The Company has experienced delays
from time to time in the introduction of, and technical and manufacturing
difficulties with, certain of its systems and enhancements and related software
tools and may experience delays and technical and manufacturing difficulties in
future introductions or volume production of new systems or enhancements and
related software tools. In particular, the Company has very little experience in
manufacturing its UltraBeam V2000 electron beam lithography system. Due to the
significant manufacturing cycle time required for the production of this system,
its lengthy sales cycle, lack of adequate documentation for the product and the
complex nature of this system, delays in production and/or shipment will result
from time to time. This system presently has an approximate price range of $6
million to $9 million. Due to the high selling price of this system, delays in
shipments from one quarter to the next would have a material adverse effect on
the results of operations for that quarter. Additionally, the Company is in the
process of assimilating the operations acquired in the Acquisition and
developing related marketing and product development plans. This has resulted
and could continue to result in a delays of any eventual volume production of
the products acquired. (See "Development of New Product Lines; Expansion of
Operations; Assimilation of Acquired Product Lines").
There can be no assurance that the Company will not encounter 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 its inability to
manufacture and ship these systems or enhancements and related software tools in
volume and in time to meet the requirements for manufacturing the future
generation of semiconductor or thin film head devices would materially adversely
affect the Company's business, financial condition and results of operations. In
addition, the Company may incur substantial unanticipated costs to ensure the
functionality and reliability of its products early in the products' life
cycles. If new products have reliability or quality problems, reduced orders or
higher manufacturing costs, delays in collecting accounts receivable and
additional service and warranty expenses may result. Any of such events may
materially adversely affect the Company's business, financial condition and
results of operations.
INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 33% and 53% of total net sales for the years 1997 and 1996,
respectively. For the first nine months of 1998, international sales accounted
for 43% of total net sales, as compared with 39% during the comparable period a
year ago. The Company
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anticipates that international sales, which typically have lower gross margins
than domestic sales, principally due to higher field service and support costs,
will continue to account for a significant portion of total net sales. As a
result, a significant portion of the Company's sales will be subject to certain
risks, including unexpected changes in regulatory requirements, difficulty in
satisfying existing regulatory requirements, exchange rate fluctuations, tariffs
and other barriers, political and economic instability, difficulties in accounts
receivable collections, natural disasters, difficulties in staffing and managing
foreign subsidiary and branch operations and potentially adverse tax
consequences. Although the Company generally transacts its international sales
in U.S. dollars, international sales expose the Company to a number of
additional risk factors, including fluctuations in the value of local currencies
relative to the U.S. dollar, which, in turn, impact the relative cost of
ownership of the Company's products and may further impact the purchasing
ability of its international customers. In Japan, however, the Company has
recently commenced direct sales operations and orders are typically denominated
in Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. The Company is also subject to the risks
associated with the imposition of legislation and regulations relating to the
import or export of semiconductors and magnetic recording head products. The
Company cannot predict whether quotas, duties, taxes or other charges or
restrictions will be implemented by the United States, Japan or any other
country upon the importation or exportation of the Company's products in the
future. There can be no assurance that any of these factors or the adoption of
restrictive policies will not have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company believes that the severe currency and equity market fluctuations that
have been experienced recently by many of the Asian markets have caused and may
continue to cause a further reduction in orders of the Company's products,
particularly in the short-term, which will have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company has sold a number of its systems to Japanese thin film head
manufacturers, to date, the Company has made limited sales of its systems to
Japanese semiconductor manufacturers. The Japanese semiconductor market segment
is large, represents a substantial percentage of the worldwide semiconductor
manufacturing capacity, and is difficult for foreign companies to penetrate. The
Company is at a competitive disadvantage with respect to Japanese semiconductor
capital equipment suppliers that have been engaged for some time in
collaborative efforts with Japanese semiconductor manufacturers, and currently
dominate the Japanese stepper market. The Company believes that increased
penetration of the Japanese market is critical to its financial results and
intends to continue to invest significant resources in Japan in order to meet
this objective. As part of its strategy to penetrate the Japanese market, in
1993, the Company entered into a distribution agreement with Innotech
Corporation, a local distributor of products. This agreement was terminated in
December 1997, and the Company has recently expanded its operations in Japan by
establishing a direct sales force and creating sales and applications support
organizations. (See "Additional Risk Factors: Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines").
INTELLECTUAL PROPERTY RIGHTS Although there are no pending lawsuits against
the Company regarding infringement claims with respect to any existing patent
or any other intellectual property right, the Company has at times been
notified of claims that it may be infringing intellectual property rights
possessed by third parties. Certain of the Company's customers have received
notices of infringement from Technivision Corporation and the Lemelson
Medical, Education and Research Foundation, Limited Partnership alleging that
the manufacture of certain semiconductor products and/or the equipment used
to manufacture those semiconductor products infringes certain issued patents.
The Company has been notified by certain of such customers that the Company
may be obligated to defend or settle claims that the Company's products
infringe any of such patents and, in the event it is subsequently determined
that the customer infringes any of such patents, they intend to seek
reimbursement from the Company for damages and other expenses resulting from
this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement claims
by third parties or claims for indemnification resulting from infringement
claims in the future will not be asserted, or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of any
litigation. With respect to any such future claims, the Company may seek to
obtain a license under the third party's intellectual property rights. There can
be no assurance, however, that a license will be available on reasonable terms
or at all. The Company could decide, in the alternative, to resort to litigation
to challenge such claims. Such challenges could be extremely expensive and time
consuming and could materially adversely affect the Company's business,
financial condition and results of operations, regardless of the outcome of any
litigation.
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SOLE OR LIMITED SOURCES OF SUPPLY The Company is relying increasingly on
outside vendors to manufacture certain components of its products. In
addition, certain critical components, subassemblies and services necessary
for the manufacture of the Company's systems are obtained from a single
supplier or a limited group of suppliers in order to ensure overall quality
and timeliness of delivery. The Company's reliance on sole or a limited
group of suppliers and the Company's increasing reliance on subcontractors
involve several risks, including a potential inability to obtain an adequate
supply of required components due to the suppliers' failure or inability to
provide such components in a timely manner, or at all, and reduced control
over pricing and timely delivery of components. Although the timeliness,
yield and quality of deliveries to date from the Company's subcontractors
have been acceptable, manufacture of certain of these components and
subassemblies is an extremely complex process, and long lead-times are
required. Any inability to obtain adequate deliveries or any other
circumstance that would require the Company to seek alternative sources of
supply or to manufacture such components internally could delay the Company's
ability to ship its products, which could damage relationships with current
and prospective customers and therefore would have a material adverse effect
on the Company's business, financial condition and results of operations.
(See "Year 2000 Readiness Disclosure").
DEPENDENCE ON KEY PERSONNEL The Company's future operating results
depend, in significant part, upon the continued contributions of its executive
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 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, and
technical, sales and support personnel for its operations. There are only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult for the Company to hire such personnel
over time. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract or retain such persons would materially
adversely affect the Company's business, financial condition and results of
operations.
During the last several years, the Company has experienced an increased level of
employee turnover. The Company believes that this increase has been due to
several factors, including: the recent semiconductor industry slowdown, which
resulted in planned reductions in the Company's workforce during the fourth
fiscal quarter of 1996 and the third fiscal quarter of 1998, and which has
further resulted in an increased level of uncertainty within the workforce; an
expanding economy within the geographic area that the Company maintains its
principal business offices, making it more difficult for the Company to retain
its employees; and the declining value of stock options granted to employees,
relative to their total compensation, as a result of the full vesting of options
granted prior to the Company's initial public offering and significant numbers
of options granted at prices well in excess of the current market value of the
Company's stock. Due to these and other factors, the Company may continue to
experience high levels of employee turnover, which could adversely affect the
Company's business, financial condition and results of operations.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's
Certificate of Incorporation, equity incentive plans, Shareholder Rights Plan,
Bylaws and Delaware law may discourage certain transactions involving a change
in control of the Company. In addition to the foregoing, the Company's
classified board of directors, the shareholdings of the Company's officers,
directors and persons or entities that may be deemed affiliates and the ability
of the Board of Directors to issue "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of the Company and may adversely affect the voting and other
rights of holders of Common Stock.
VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's operating results, sales of securities of the Company into the
marketplace, general conditions in the semiconductor and magnetic recording head
industries or the worldwide or regional economies, an outbreak of hostilities, a
shortfall in revenue or earnings from, or changes, in analysts' expectations,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks in
particular, including the Company's, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not continue to experience significant fluctuations
in the future, including fluctuations that may be unrelated to the Company's
performance.
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PART 2: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 4.6.2 Second Amendment to Shareholder Rights Agreement
dated February 11, 1997 between Registrant and
BankBoston, N.A. (formerly known as the First
National Bank of Boston) as of October 12, 1998,
and Certification of Compliance with Section 27
thereof.
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the quarter ended
September 30, 1998. The report, which reported the June 1998
acquisition of certain of the assets and the assumption of
certain liabilities of Integrated Solutions, Inc., was
originally filed on June 26, 1998 and was amended on
August 25, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRATECH STEPPER, INC.
- --------------------------------------------------------------------------------
(Registrant)
Date: November 13, 1998 By: /s/William G. Leunis, III
------------------------ ----------------------------------------
William G. Leunis, III
Senior Vice President Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial and Accounting Officer)
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EXHIBIT 4.6.2
SECOND AMENDMENT TO THE RIGHTS AGREEMENT
AND CERTIFICATION OF COMPLIANCE WITH SECTION 27 THEREOF
Pursuant to Section 27 of the Amended Rights Agreement (the
"Agreement") dated as of February 11, 1997 (as amended March 18, 1998), between
Ultratech Stepper, Inc., a Delaware corporation (the "Company"), and BankBoston,
N.A., a national banking association (the "Rights Agent"), the Company and the
Rights Agent hereby amend the Agreement as of October 12, 1998, as provided
below.
1. CERTAIN DEFINITIONS. Section 1 of the Agreement shall be amended
as follows:
(1) The phrase "upon approval by a majority of the Continuing
Directors (as such term is hereinafter defined)" in subsection (a)(i) shall be
deleted from the definition of Acquiring Person;
(2) The word "Continuing" in subsection (a)(iii) shall be
replaced by the words "Board of";
(3) The phrase "upon the affirmative vote of a majority of the
Continuing Directors" which appears in subsection (c)(ii) shall be deleted; and
(4) The definition of Continuing Directors shall be deleted.
2. ISSUE OF RIGHTS CERTIFICATES. Section 3(a) of the Agreement
shall be amended by deleting the phrase "upon approval by a majority of the
Continuing Directors".
3. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS. Section 11 shall be amended as follows:
(1) The word "Continuing" in subsection (a)(iii) shall be
replaced with the words "Board of"; and
(2) The phrase "upon approval by a majority of the Continuing
Directors" which appears in the second paragraph of subsection (a)(ii), several
times in subsection (a)(iv), in subsection (b), in subsection (c), in subsection
(d)(i), and in subsection (d)(ii) shall be deleted.
4. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER. Section 13(d) shall be amended by deleting the phrase "upon approval by
a majority of the Continuing Directors".
5. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. Section 14(a) shall be
amended by deleting the phrase "upon approval by a majority of the Continuing
Directors" each time that it appears.
6. ISSUANCE OF NEW RIGHTS CERTIFICATES. Section 22 shall be amended
by deleting the phrase "upon approval by a majority of the Continuing Directors"
each time that it appears.
7. REDEMPTION AND TERMINATION. Section 23 shall be amended as
follows:
(1) The word "Continuing" each time that it appears in
subsection (a) shall be replaced with the words "Board of"; and
(2) The phrase "upon approval by a majority of the Continuing
Directors" in subsection (a) shall be deleted.
8. EXCHANGE. Section 24 shall be amended as follows:
(1) The word "Continuing" each time that it appears in
subsection (a) shall be replaced with the words "Board of"; and
<PAGE>
(2) The phrase "upon approval by a majority of the Continuing
Directors" each time that it appears in subsection (d) shall be deleted.
9. SUPPLEMENTS AND AMENDMENTS. Section 27 shall be amended by
deleting the phrase "upon approval by a majority of the Continuing Directors"
each time that it appears.
10. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. Section 29
shall be amended as follows:
(1) The phrase "(and, where specifically provided for herein,
only upon approval by a majority of the Continuing Directors)" shall be deleted;
(2) The phrase "or the Continuing Directors" shall be deleted;
and
(3) The phrase "(or, where specifically provided for herein,
upon approval by a majority of the Continuing Directors)" shall be deleted.
11. SEVERABILITY. Section 31 shall be amended by deleting the phrase
"upon approval by a majority of the Continuing Directors.
12. SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES. Exhibit C shall
be amended as follows:
(1) The word "Continuing" in the fourth line of the tenth
paragraph shall be replaced by the words "Board of"; and
(2) The phrase "upon the approval of a majority of the
Continuing Directors" which appears in the thirteenth paragraph and the
fourteenth paragraph shall be deleted.
13. COMPREHENSIVE AMENDMENT. For the avoidance of doubt, all
instances of the phrase "upon approval by a majority of the Continuing
Directors," or similar words to that effect are hereby deleted from the
Agreement, and all exhibits thereto. In any other sentence in the Agreement or
any exhibit thereto in which the phrase "Continuing Directors" appears, it is
hereby stricken and replaced by the phrase "Board of Directors."
The undersigned officer of the Company, being an appropriate officer
of the Company and authorized to do so by resolution of the Board of Directors
of the Company dated as of October 12, 1998 hereby certifies to the Rights Agent
that these amendments are in compliance with the terms of Section 27 of the
Agreement.
ULTRATECH STEPPER, INC., a
Delaware corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
Acknowledged and Agreed:
BankBoston, N.A.,
as Rights Agent
By: ________________________________
Name: ________________________________
Title: ________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 54,634
<SECURITIES> 84,487
<RECEIVABLES> 17,836
<ALLOWANCES> 2,578
<INVENTORY> 44,870
<CURRENT-ASSETS> 212,012
<PP&E> 45,961
<DEPRECIATION> 20,057
<TOTAL-ASSETS> 257,728
<CURRENT-LIABILITIES> 30,341
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 224,892
<TOTAL-LIABILITY-AND-EQUITY> 257,728
<SALES> 50,905
<TOTAL-REVENUES> 62,536
<CGS> 51,232
<TOTAL-COSTS> 58,228
<OTHER-EXPENSES> 33,464
<LOSS-PROVISION> 3,535
<INTEREST-EXPENSE> 292
<INCOME-PRETAX> (49,351)
<INCOME-TAX> (6,182)
<INCOME-CONTINUING> (43,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,169)
<EPS-PRIMARY> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
