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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 MARCH 31, 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 (I.R.S. employer identification number)
of incorporation or organization)
3050 Zanker Road, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
---------------------------
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 May 12, 1998
- - --------------------------------- ---------------------------------
Common Stock, $.001 par value 20,889,269
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ULTRATECH STEPPER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997...................................................... 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended March 31, 1998 and 1997.................. 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 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............................... 8
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................... 20
ITEM 2. CHANGES IN SECURITIES....................................................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 20
ITEM 5. OTHER INFORMATION........................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 20
SIGNATURES............................................................................. 21
</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>
MAR. 31, Dec. 31,
(In Thousands) 1998 1997 *
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments $159,118 $164,349
Accounts receivable, net 39,154 45,947
Inventories 42,456 37,337
Current portion of leases receivable 2,857 2,408
Prepaid expenses and other current assets 2,448 1,840
Deferred income taxes 5,142 5,142
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Total current assets 251,175 257,023
Equipment and leasehold
improvements, net 26,946 22,285
Restricted investments 5,386 5,325
Leases receivable 10,876 11,354
Other assets 3,590 4,014
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Total assets $297,973 $300,001
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $106 $94
Accounts payable 13,784 12,295
Other current liabilities 16,443 21,408
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Total current liabilities 30,333 33,797
Other liabilities 2,539 2,572
Stockholders' equity 265,101 263,632
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Total liabilities and stockholders' equity $297,973 $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>
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Three Months Ended
----------------------
MAR. 31, Mar. 31
(In thousands, except per share amounts) 1998 1997
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<S> <C> <C>
Net sales $27,782 $38,733
Cost of sales 15,918 17,700
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Gross profit 11,864 21,033
Operating expenses:
Research, development, and
engineering 7,173 6,220
Selling, general, and
administrative 6,476 6,278
Acquired in-process research
and development 0 3,619
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Operating income (loss) (1,785) 4,916
Interest expense (27) (42)
Other income, net 1,703 1,696
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Income (loss) before income taxes (109) 6,570
Income taxes (benefit) (470) 2,037
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Net income 361 4,533
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Other comprehensive income, net of tax:
Unrealized gain (loss) on available-for-sale securities 134 (320)
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Comprehensive income $495 $4,213
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Net income per share - basic $0.02 $0.22
Number of shares used in
per share computations - basic 20,833 20,371
Net income per share - diluted $0.02 $0.21
Number of shares used in
per share computations - diluted 21,697 21,526
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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>
Three Months Ended
----------------------
MAR. 31, MAR. 31,
(In thousands) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $361 $4,533
Charges to income not affecting cash 2,444 4,879
Net effect of changes in operating assets
and liabilities (2,067) (6,547)
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Net cash provided by operating activities 738 2,865
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,609) (768)
Net reduction (investment) in available-for-sale
securities 2,243 (17,060)
Purchase of certain assets of Lepton Inc. 0 (3,101)
Segregation of restricted investments (51) (1)
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NET CASH USED IN INVESTING ACTIVITIES (4,417) (20,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt 12 99
Net proceeds from issuance of common stock 767 351
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Net cash provided by financing activities 779 450
Net decrease in cash and cash equivalents (2,900) (17,615)
Cash and cash equivalents at beginning
of period 43,898 47,771
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Cash and cash equivalents at end of period $40,998 $30,156
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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)
MARCH 31, 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 (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included.
USE OF ESTIMATES - The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
The Company's first fiscal quarter in 1998 and 1997 ended on April 4, 1998
and April 5, 1997, respectively. For convenience of presentation, the
Company's financial statements have been shown as ending on March 31, 1998
and March 31, 1997.
Operating results for the three months ended March 31, 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>
Mar. 31, 1998 Dec. 31, 1997
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Raw materials..................... $25,788 $20,297
Work-in-process................... 11,753 9,739
Finished products ................ 4,915 7,301
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$42,456 $37,337
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</TABLE>
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
Mar. 31, 1998 Dec. 31, 1997
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Salaries and benefits............. $5,050 $5,018
Warranty reserves................. 4,953 5,871
Advance billings.................. 792 872
Income taxes payable.............. 2,025 3,034
Settlement/Japan distributor...... 0 3,051
Other............................. 3,623 3,562
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$16,443 $21,408
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</TABLE>
(4) COMPUTATION OF NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standard 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 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 earnings per
share.
6
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The following sets forth the computation of basic and diluted net income per
share:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
Mar. 31, Mar. 31,
(in thousands, except per share amounts) 1998 1997
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income $361 $4,533
Denominator:
Denominator for basic net income per share 20,833 20,371
Effect of dilutive employee stock options 864 1,155
------ ------
Denominator for diluted net income per share 21,697 21,526
------ ------
Net income per share - basic $0.02 $0.22
------ ------
------ ------
Net income per share - diluted $0.02 $0.21
------ ------
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</TABLE>
(5) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.
During the first quarter of 1997, the Company completed the acquisition of
the assets of Lepton Inc., a developer of electron beam lithography systems.
As a result of this acquisition, the Company recognized a one-time pre-tax
charge in the quarter ended March 31, 1997 for acquired in-process research
and development expense of $3.6 million, or $0.12 per share, net of related
income tax benefits.
(6) SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is required to be applied for years beginning after December 15, 1997.
Statement 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 product and services, geographic
areas, and major customers. Statement 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 Company's financial statements.
(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, 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:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Accumulated other comprehensive income at December 31, 1997:
Unrealized gain on available-for-sale securities, net of tax ....... $271
Change for the three months ended March 31, 1998:
Unrealized gain on available-for-sale securities, net of tax ....... 134
----
Accumulated other comprehensive income at March 31, 1998: $405
----
----
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits
(ICs), thin film heads (TFHs) for disk drives and micromachined components. The
Company supplies step-and-repeat systems based on one-to-one reflective and
refractive optical technology to customers located throughout the United States,
Europe, Asia/Pacific and Japan. These products range from low-cost systems for
high-volume manufacturing to advanced systems for cost-effective production of
leading-edge devices. Additionally, during the quarter ended December 31, 1997,
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.
The following discussion should be read in conjunction with the Company's 1997
Annual Report on Form 10-K, 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 cyclicality in the Company's target markets; the timing of
significant orders; lengthy sales cycles for the Company's products; the mix of
products sold; lengthy manufacturing cycles for the Company's products; lengthy
product development cycles for new products; the timing of new product
announcements and releases by the Company or its competitors; market acceptance
of new products and enhanced versions of the Company's products; manufacturing
inefficiencies associated with the startup of new product introductions;
customer concentration; ability to volume produce systems and meet customer
requirements; patterns of capital spending by customers; product discounts;
changes in pricing by the Company, its competitors or suppliers; political and
economic instability throughout the world, in particular the Asia/Pacific
region; natural disasters; regulatory changes; business interruptions related to
the Company's occupation of its facilities; and various competitive factors
including price-based competition and competition from vendors employing other
technologies. The Company's gross profit as a percentage of sales has been and
will continue to be significantly affected by a variety of factors, including
the mix of products sold; nonlinearity of shipments during the quarter;
increased competition in the Company's targeted markets; the introduction of new
products, which typically have higher manufacturing costs until manufacturing
efficiencies are realized and are typically discounted more than existing
products until the products gain market acceptance; the rate of capacity
utilization; 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 $2.1 million. Additionally, the Company's UltraBeam Model V2000
electron beam lithography system, first shipped in the quarter ended December
31, 1997, has an approximate price range of $6 million to $9 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 unanticipated shipment reschedulings, cancellations, delays
or deferrals by customers or to unexpected manufacturing difficulties or delays
in deliveries by suppliers due to their long production lead times or otherwise,
may cause net sales in a particular period to fall significantly below the
8
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Company's expectations, which would materially adversely affect the Company's
operating results for such period. In particular, the significantly long
manufacturing cycles of the Company's linear motor-based steppers, which
include the Model 4700 stepper, Model 6700 stepper, Titan Wafer Stepper-TM-
Family and Saturn Wafer Stepper-TM- Family, and the long lead time for lenses
and other materials, could cause shipments of such products to be delayed
from one quarter to the next, which could materially adversely affect the
Company's financial condition and results of operations for a particular
quarter. Additionally, the Company has very limited experience in the
manufacture of its UltraBeam 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. 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 underutilization
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.
Certain of the statements contained in this Report on Form 10-Q are
forward-looking statements that involve a number of risks and uncertainties.
In addition to the factors discussed herein, among other factors that could
cause actual results to differ materially include the following: highly
competitive industry; 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 operations; management of
growth; 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 From 10-Q.
Due to these and additional factors, historical results and percentage
relationships discussed below will not necessarily be indicative of the
results of operations for any future period.
NET SALES
Net sales consist of revenue from system sales, spare parts sales, and
service. Net sales for the quarter ended March 31, 1998 were $27.8 million, a
decrease of 28% as compared with net sales of $38.7 million for the
comparable period in 1997. This decrease, relative to the comparable period
in 1997, was primarily attributed to lower unit system sales across all the
Company's product lines. Most notably, the Company experienced a significant
decline in sales to the TFH industry, particularly for front-end
applications. The TFH industry is presently experiencing over-capacity issues
and the Company presently anticipates this trend will continue for some time.
The market for front-end applications for the TFH industry is currently
served by the Company's Model 4700 and Model 6700 steppers. Additionally, the
Company experienced a decline in mix-and-match unit sales as capacity
increases in the semiconductor industry declined due to various market
factors, including softness in memory product pricing. The market for
mix-and-match is currently addressed by the Company's Saturn Wafer Stepper
Family. Overall, the Company's system shipments for the quarter declined 38%,
relative to the comparable period in 1997, while the weighted average selling
price of all systems sold increased by 3%. Net sales from spare parts and
service in the first quarter of 1998 increased 53% over the comparable period
in 1997, primarily due to technology upgrades.
The Company believes that its sales have been and continue to be materially
adversely impacted by reduced capital capacity spending levels within the
semiconductor industry, particularly in the Japanese and other Asian
9
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marketplaces. The Company continues to experience shipment delays and
purchase order restructurings by several of its customers, and has also
experienced purchase order cancellations. There can be no assurance that this
trend will not continue in the future. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current or prior
level of sales. The Company believes that the current strength of the U.S.
dollar, particularly in relation to the Japanese yen, places the Company at a
competitive disadvantage. Additionally, the Company has recently experienced
a 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 lower than expected earnings, layoffs and
restructuring or other charges. The Company believes these events indicate
that, as the Company has recently experienced, the thin film head and disk
drive industries have excess capacity in the near-term. This will 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
expects that sales for the quarter ending June 30, 1998 will be flat or
lower, compared to net sales for the quarter ended March 31, 1998.
Additionally, the Company may experience a net loss for the quarter ending
June 30, 1998, due primarily to continued high levels of incurred research
and development expense for its UltraBeam and Verdant product lines.
International net sales for the quarter ended March 31, 1998 were $13.7
million, as compared with $16.8 million for the comparable period in 1997.
This decline, in absolute dollars, was primarily a result of lower sales of
TFH equipment to the Asian market, partially offset by higher sales to
Europe. International net sales represented 49% of total net sales for the
quarter ended March 31, 1998, as compared with 43% for the comparable period
in 1997. The Company's operations in foreign countries are not currently
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S.
dollars. In Japan, however, the Company has recently commenced direct sales
operations and anticipates that future orders will be denominated in Japanese
Yen. This may subject the Company to a higher degree of risk from currency
fluctuations. 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, Titan Wafer Stepper Family and Saturn Wafer Stepper
Family 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, an inability to reduce
the current long manufacturing cycles for such products, direct competition,
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 would be materially adversely affected.
GROSS PROFIT
The Company's gross profit as a percentage of sales for the quarter ended
March 31, 1998 was 42.7%, as compared with 54.3% for the comparable period in
1997. This decline in gross margin can be primarily attributed to
manufacturing and after-sales inefficiencies caused by under-utilization of
capacity and non-linearity of shipments during the quarter, as well as higher
inventory reserve requirements. Additionally, due to the highly competitive
environment the Company is operating in, the Company is not able to pass
along additional product costs to its customers.
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 is nearing
10
<PAGE>
completion of capacity additions for the anticipated volume production of
several new products that are outside of the Company's core reflective and
refractive optical technologies. Commencement of production of these new
products 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, purchase of significant levels of plant and equipment and the
incurrence of other related manufacturing overhead costs. The purchase of
additional inventories will result in a significantly higher risk of
obsolescence, which may require additional inventory reserves and would
negatively impact gross margins. Additionally, new products generally have
lower gross margins until production and after-sales efficiencies can be
achieved. Should these new products fail to develop or generate significant
market demand, the Company's business, financial condition and results of
operations would be materially adversely affected. As a result of these and
other factors, the Company presently expects that gross profit as a
percentage of sales will be significantly lower in 1998, relative to levels
achieved in 1997.
RESEARCH, DEVELOPMENT, AND ENGINEERING The Company's research, development,
and engineering expenses, net of third party funding, were $7.2 million for
the quarter ended March 31, 1998, an increase of 15% as compared with $6.2
million for the comparable period in 1997. The significant current quarter
increase, relative to the comparable period in 1997, was primarily attributed
to increased spending for the development of the Company's rapid thermal
annealing/laser doping technologies and systems and increased spending for
the further development and enhancement of its electron beam lithography
system.
The Company intends to continue to invest significant resources in the
development of new products, such as its rapid thermal annealing/laser doping
and electron beam lithography systems, and enhancements of existing
semiconductor and thin film head lithography systems. Due to these and other
factors, the Company expects the absolute dollar amount of research,
development and engineering expenses for the remaining quarters of 1998 to
increase, independent of the Company's net sales, relative to the quarter
ended March 31, 1998.
SELLING, GENERAL, AND ADMINISTRATIVE The Company's selling, general, and
administrative expenses were $6.5 million for the quarter ended March 31,
1998, an increase of 3% as compared with $6.3 million for the comparable
period in 1997. As a percentage of net sales, selling, general, and
administrative expenses increased to 23.3% for the quarter ended March 31,
1998, as compared with 16.2% for the comparable period in 1997. The dollar
increase in the current quarter, relative to the comparable period in 1997,
was primarily attributed to increased expenses associated with the Company's
UltraBeam subsidiary, which is presently developing, marketing and
manufacturing its electron beam lithography system; and higher expenses
associated with the Company's Verdant Technologies subsidiary, which is
presently developing its rapid thermal annealing/laser doping technologies
and systems; partially offset by lower sales, service and support expenses
typically associated with a reduction in sales; lower required provisions for
the Company's profit sharing and executive incentive plans, which are
dependent upon the Company achieving certain operating income targets; and
lower commission expense due to lower commissions on international sales. The
Company expects the absolute dollar amount of these expenses for the
remainder of 1998 to increase, relative to the quarter ended March 31, 1998.
(See "Additional Risk Factors: Development of New Product Lines; Expansion of
Operations; Management of Growth").
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During the first quarter of 1997, the Company completed the acquisition of the
assets of Lepton Inc., a developer of electron beam lithography systems. As a
result of this acquisition, the Company recognized a one-time pre-tax charge in
the quarter ended March 31, 1997 for acquired in-process research and
development expense of $3.6 million, or $0.12 per share, net of related income
tax benefits.
OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $1.7 million
for the quarters ended March 31, 1998 and 1997. Higher interest income, relative
to the year-ago period, was partially offset by higher foreign exchange losses,
principally as a result of the appreciation of the U.S. Dollar versus the
Japanese Yen, and increased expenses due to various financing activities,
including the sale of certain accounts receivables.
INCOME TAXES (BENEFIT)
The Company recognized a benefit from income taxes of $470,000 for the
quarter ended March 31, 1998. This benefit was primarily attributed to the
anticipated carryback of certain tax benefits. This compares with an effective
tax rate of
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31% for the quarter ended March 31, 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
Cash flows provided by operating activities were $0.7 million for the
three-month period ended March 31, 1998, as compared with $2.9 million for
the comparable period last year. Positive cash flows from operating
activities during the first three months of 1998 were attributed to net
income of $0.4 million and non-cash charges to income of $2.4 million,
partially offset by a negative net effect from changes in operating assets
and liabilities of $2.1 million. The negative net effect from changes in
operating assets and liabilities was primarily attributed to a $5.1 million
increase in inventories and a $5.0 million decrease in other current
liabilities, partially offset by a $6.8 million decrease in accounts
receivable and a $1.5 million increase in accounts payable. The significant
dollar decrease in accounts receivable was primarily the result of the
factoring of approximately $6 million of accounts receivable to The Trade
Bank. The Company presently anticipates that the current trend of non-linear
shipments and extended customer payment terms will continue for some time.
Accordingly, the Company expects that accounts receivables 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 attempt to mitigate the impact of
extended payment terms by factoring certain of its accounts receivables in
the future. There can be no assurance that this financing will be available
on reasonable terms, or at all.
The significant dollar increase in inventories during the three months ended
March 31, 1998 was primarily attributed to the purchase of significant
inventories for the Company's UltraBeam subsidiary, together with
lower-than-anticipated net sales for the quarter. 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 and will continue to incur 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, 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.
At March 31, 1998, the Company had working capital of $221.0 million. The
Company's principal sources of liquidity at March 31, 1998 consisted of
$159.1 million in cash, cash equivalents and short-term investments and $4
million in various unsecured lines of credit. As of March 31, 1998, $0.1
million was outstanding under such facilities.
For the period ended March 31, 1998, cash provided by financing activities
was $0.8 million, principally as a result of the issuance of common stock
pursuant to the exercise of employee stock options.
During the quarter, the Company used $4.4 million of cash in its investing
activities. Capital expenditures of $6.6 million were partially offset by net
proceeds of $2.2 million from investing activities. The significant level of
capital expenditures during the quarter was primarily attributed to
facilities expansion for the manufacture and sales demonstration support of
the Company's electron beam lithography and rapid thermal annealing/laser
doping systems. As a result of these capital expenditures, the Company's
depreciation and amortization costs are anticipated to increase significantly
and may negatively impact the Company's results of operations in the event of
a further downturn in the Company's business cycles.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has commenced, for all of its information systems, key vendors and software
contained in the products it sells, a year 2000 conversion project to address
necessary code changes, testing and implementation. The Company expects such
modifications will be made on a timely basis and does not believe that the
cost of such modifications will have a material effect on the Company's
operating results. However, 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 year 2000 date functions, and this may
result in material costs to the Company, including costs
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associated with detecting and fixing such defects and costs incurred in
litigation due to any such defects. Many commentators have predicted that a
significant amount of litigation will arise out of year 2000 compliance
issues. The Company is aware of several such suits currently pending. Because
of the unprecedented nature of such litigation and the Company's current lack
of knowledge as to the extent its products contain defects relating to the
year 2000, there can be no assurance that the Company will not be materially
adversely affected by claims related to year 2000 compliance. Additionally,
the Company's customers may be required to devote substantial financial
resources to their own internal year 2000 issues. This may result in fewer
financial resources available to purchase the Company's products, which would
result in fewer system sales by the Company. This, in turn, could have a
material adverse impact 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 the year 2000, 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.
The development and manufacture of new lithography systems and enhancements
are highly capital intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities; investments in systems,
procedures and controls; expansion of operations and research and
development, among many items. The Company expects that 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 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 exposes the Company to additional
risks, including potentially higher customer concentration and higher
potential operating expenses relating to customer defaults. To the extent
that the Company's financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms, or at all.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES The
Company's business depends in significant part upon capital expenditures by
manufacturers of semiconductors, 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 downturn in the
semiconductor capital equipment industry. This has, from time to time,
resulted in significantly reduced demand for capital equipment including the
systems manufactured and marketed by the Company. The Company believes that
markets for new generations of semiconductors will also be subject to similar
fluctuations. In the past, the semiconductor industry has experienced
significant growth, which, in turn, has caused significant growth in the
capital equipment industry. However, the semiconductor industry has more
recently experienced a cyclical downturn, and this has resulted in a
significant reduction in capital spending. The Company has recently
experienced cancellation of purchase orders, shipment delays and purchase
order restructurings by several of its
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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 can be materially adversely affected, and may even result
in net losses for one or more quarters. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current level of
sales. Based on current market conditions in both the semiconductor and thin
film head industries and nonlinearity of system shipments, the Company
expects that sales for the quarter ending June 30, 1998 will be flat or
lower, compared to net sales for the quarter ended March 31, 1998.
Additionally, the Company may experience a net loss for the quarter ending
June 30, 1998, due primarily to continued high levels of incurred research
and development expense for its UltraBeam and Verdant product lines.
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 three month period ended March 31,
1998, sales to thin film head manufacturers and micromachining customers
represented approximately 55% of the Company's net sales, as compared with
60% during the comparable period a year ago. The Company has recently
experienced a significant decline in orders from customers in the thin film
head market. Additionally, several companies within the thin film head and
disk drive industries have announced 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-term. This will 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. The Company believes that future thin film head
production may involve manufacturing steps that require critical feature
sizes. The Company's current steppers do not address device layers below .65
microns. In addition, Nikon and Canon are shipping their own widefield
mix-and-match lithography systems. (See: "Additional Risk Factors: Importance
of Mix-and-Match Strategy"). Additionally, ASML has recently announced their
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
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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 could lead to intensified price-based
competition, resulting in lower prices and margins, which would materially
adversely affect the Company's business, financial condition and operating
results. There can be no assurance that the Company will be able to compete
successfully in the future.
Japanese IC manufacturers have a 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, either of which
typically involve a significant commitment of capital. In view of the
significant investment involved in a system purchase, the Company has
experienced and may continue to experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. For this and other reasons, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management effort in securing a sale. Lengthy sales cycles subject
the Company to a number of significant risks, including inventory
obsolescence and fluctuations in operating results, over which the Company
has little or no control.
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. 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,
and have currently resulted 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. If such default were to occur, the Company's business, financial
condition and results of operations would be materially adversely affected.
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DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; MANAGEMENT OF
GROWTH 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, and will continue to develop these products and will
continue to invest significant resources in plant and equipment, inventory,
personnel and other costs, to begin production of these products and to
provide the marketing, administration and after-sales support required to
support these new products. Accordingly, there can be no assurance that gross
profit margins and inventory levels will not be adversely impacted in the
future by start-up costs associated with the initial production of these new
product lines. These start-up costs include, but are not limited to,
additional manufacturing overhead, additional inventory reserve requirements
and the 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 additional products.
If the Company is unable to achieve significantly increased net sales or its
sales fall below expectations, the Company's operating results will be
materially adversely affected until, among other factors, inventory levels
and expenses can be reduced.
In December 1997, the Company terminated its distributor relationship with
Innotech, its Japanese distributor. The Company is presently in the process
of expanding its operations in Japan by establishing a direct sales force.
The Company has leased additional facilities and is making significant
capital expenditures for sales and applications support. For this and other
reasons, the Company expects that its selling, general and administrative
expenses will increase significantly in absolute dollars in 1998, relative to
the comparable periods in 1997. 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 impacted.
IMPORTANCE OF MIX-AND-MATCH STRATEGY A principal element of the Company's
strategy is to sell its systems to advanced semiconductor fabrication
facilities for mix-and-match applications. This strategy depends, in
significant part, upon the recognition by semiconductor manufacturers that
costs can be reduced by using the Company's systems to perform exposure on
semiconductor process layers requiring feature sizes of 0.65 microns or
greater and the willingness of such manufacturers to implement processes to
lower manufacturing costs. Many semiconductor fabrication facilities have
limited or no experience with integrating lithography tools in the manner
necessary for full implementation and acceptance of a mix-and-match
manufacturing strategy, and there can be no assurance that semiconductor
manufacturers will adopt such a strategy. The Company has designed certain of
its systems to operate in a compatible manner with its competitors' reduction
steppers 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 and commenced
shipment of the Saturn Wafer Stepper. 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. 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 cyclical downturn in the
semiconductor industry; technical, manufacturing or other difficulties
associated with these products; lack of customer acceptance; an inability to
reduce the significantly long manufacturing cycle of these products; an
inability to increase capacity for the production of the mix-and-match family
of products; direct competition from other widefield mix-and-match systems
from Nikon and Canon, among others; or any other reason, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the increase in mix-and-match stepper
production has resulted and will continue to result in higher inventory
levels and operating expenses. Failure to achieve or maintain significant
sales of these steppers could lead, among other things, to an increase in
inventory obsolescence and an increase in expenses without corresponding
sales, either of which could materially adversely affect the Company's
business, financial condition and results of operations.
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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. 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 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.
There can be no assurance that the Company will not encounter technical,
manufacturing or other difficulties that could delay future introductions or
volume production of systems or enhancements. The Company's inability to
complete the development or meet the technical specifications of any of its
systems or enhancements and related software tools or to manufacture and ship
these systems or enhancements and related software tools, such as the model
4700 stepper, the model 6700 stepper, the Titan Wafer Stepper Family, the
Saturn Wafer Stepper Family, the UltraBeam model V2000 electron beam
lithography system and the Company's rapid thermal annealing/laser doping
system, in volume and in time to meet the requirements for manufacturing the
future generation of semiconductor or thin film head devices would materially
adversely affect the Company's business, financial condition and results of
operations. In addition, the Company may incur substantial unanticipated
costs to ensure the functionality and reliability of its 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.
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
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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 experienced an increased level of
employee turnover. The Company believes that this increase was due to several
factors, including: the recent semiconductor industry slowdown, which
resulted in a planned reduction in the Company's workforce during the fourth
fiscal quarter of 1996, and which further resulted in an increased level of
uncertainty within the workforce; an expanding economy within the geographic
area that the Company maintains its principal business offices, making it
more difficult for the Company to retain its employees; and the declining
value of stock options granted to employees, relative to their total
compensation, as a result of the full vesting of options granted prior to the
Company's initial public offering and significant numbers of options granted
at prices well in excess of the current market value of the Company's stock.
Due to these and other factors, the Company may continue to experience high
levels of employee turnover, which could adversely impact the Company's
business, financial condition and results of operations.
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 three months of 1998, international sales
accounted for 49% of total net sales, as compared with 43% during the
comparable period a year ago. The Company anticipates that international
sales, which typically have lower gross margins than domestic sales,
principally due to higher field service and support costs, will continue to
account for a significant portion of total net sales. As a result, a
significant portion of the Company's sales will be subject to certain risks,
including unexpected changes in regulatory requirements, difficulty in
satisfying existing regulatory requirements, exchange rate fluctuations,
tariffs and other barriers, political and economic instability, difficulties
in accounts receivable collections, natural disasters, difficulties in
staffing and managing foreign subsidiary and branch operations and
potentially adverse tax consequences. 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 anticipates that future orders will be denominated in Japanese Yen. This
may subject the Company to a higher degree of risk from currency
fluctuations. 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 will 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 is presently in the process
of expanding 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;
Management of Growth").
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
18
<PAGE>
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 are unrelated to the Company's performance.
19
<PAGE>
<TABLE>
<S> <C> <C>
PART 2: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1998.
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRATECH STEPPER, INC.
- - ------------------------------------------------------------------------------
(Registrant)
Date: May 12, 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)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 40,998
<SECURITIES> 118,120
<RECEIVABLES> 40,672
<ALLOWANCES> 1,518
<INVENTORY> 42,456
<CURRENT-ASSETS> 251,175
<PP&E> 43,618
<DEPRECIATION> 16,672
<TOTAL-ASSETS> 297,973
<CURRENT-LIABILITIES> 30,333
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 265,080
<TOTAL-LIABILITY-AND-EQUITY> 297,973
<SALES> 24,774
<TOTAL-REVENUES> 27,782
<CGS> 14,099
<TOTAL-COSTS> 15,918
<OTHER-EXPENSES> 7,173
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (109)
<INCOME-TAX> (470)
<INCOME-CONTINUING> 361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
