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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 0-22248
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ULTRATECH STEPPER, INC.
(REGISTRANT)
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DELAWARE 94-3169580
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
3050 ZANKER ROAD 95134
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal
executive offices)
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REGISTRANT'S TELEPHONE NUMBER: (408) 321-8835
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK; SERIES A PREFERRED STOCK
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 18, 1998, as
reported on the Nasdaq National Market was approximately $344,000,000. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 18, 1998, the Registrant had 20,857,848 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 are incorporated into Part II of this Annual
Report on Form 10-K.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 3, 1998 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K may contain, in addition to historical
information, certain forward-looking statements that involve significant risks
and uncertainties. The Company's actual results could differ materially from the
information set forth in any such forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below under
"Additional Risk Factors", as well as those discussed elsewhere in this Annual
Report on Form 10-K.
THE COMPANY
Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops,
manufactures and markets photolithography equipment designed to reduce the cost
of ownership for manufacturers of integrated circuits, thin film magnetic
recording devices and micromachined components. The Company supplies step-and-
repeat systems based on one-to-one ("1X") optical technology to customers
located throughout the United States, Europe, Asia/Pacific and Japan. Ultratech
believes that its steppers offer cost and certain performance advantages, as
compared with competitors' reduction steppers, to semiconductor device
manufacturers for applications involving line geometries of 0.65 microns or
greater ("noncritical feature sizes") and to thin film head manufacturers. The
Company's steppers do not currently address applications involving line
geometries of less than 0.65 microns ("critical feature sizes"). The Company's
steppers are used in "mix-and-match" applications to complement reduction
steppers and step-and-scan systems in advanced semiconductor device fabrication.
The Company's steppers also are used as replacements for scanners in existing
fabrication facilities to enable semiconductor manufacturers to extend the
useful life and increase the capabilities of their facilities. In addition, the
Company's steppers are used to manufacture high volume, low cost semiconductors
used in a variety of applications such as telecommunications, automotive control
systems and consumer electronics. Ultratech also supplies photolithography
systems to thin film head manufacturers and believes that its steppers offer
advantages over certain competitive reduction lithography tools with respect to
field size, throughput, specialized substrate handling and cost. Additionally,
the Company supplies photolithography equipment to the micromachining market,
where certain technical features such as high resolution at g-line wavelengths
and superior depth of focus are seen as offering advantages over competitive
tools.
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 integrated circuit industry. The Company acquired this technology in
February 1997 when it acquired the assets of Lepton, Inc.
BACKGROUND
The fabrication of devices such as integrated circuits ("semiconductors" or
"ICs") and thin film magnetic recording heads ("thin film heads" or "TFHs")
requires a large number of complex processing steps, including deposition,
photolithography and etching. Deposition is a process in which a layer of either
electrically insulating or electrically conductive material is deposited on the
surface of a wafer. The photolithographic imaging process imprints device
features on a light sensitive polymer photoresist. After development of the
photoresist, etching selectively removes material from areas not covered by the
imprinted pattern.
Photolithography is one of the most critical and expensive steps in IC and
TFH device manufacturing. According to the Semiconductor Industry Association,
up to 35% of the cost of processing silicon wafers in the fabrication of ICs is
related to photolithography. Photolithography exposure equipment is used to
image device features on the surface of thin deposition films by selectively
exposing a light sensitive polymer photoresist coated on the wafer surface,
through a photomask containing the master image of a particular device layer.
Exposure of each process layer imprints a different set of features on the
device.
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These device layers must be properly aligned to previously defined layers before
imaging takes place, so that structures formed on the wafers are correctly
placed, one on top of the other, in order to ensure a functioning device.
Since the introduction of the earliest photolithography tools for IC
manufacturing in the early 1960s, a number of tools have been introduced to
enable manufacturers to produce increasingly complex devices that incorporate
progressively finer line widths. In the late 1970s, photolithography tools known
as step-and-repeat projection aligners, or steppers, were introduced. Unlike
prior tools, such as contact printers which required the photomask to physically
contact the wafer in order to transfer the entire pattern during a single
exposure, and scanners, which transferred the device image by scanning a narrow
slit of light across the entire photomask and wafer in a single, continuous
motion, steppers expose only a small square or rectangular portion of the wafer
in a single exposure, then move or "step" to an adjacent site to repeat the
exposure. This stepping process is repeated as often as necessary until the
entire wafer has been exposed. By imaging a small area, steppers are able to
achieve finer resolution and better alignment between the multiple device layers
and higher yield and productivity in certain devices than possible with earlier
tools. Since the late 1980s, 1X steppers have become a critical tool for the
fabrication of thin film heads because of their performance characteristics.
Thin film heads are devices that form the small read/write component in the most
advanced disk drives and have enabled disk drives to increase in speed and
memory capacity and perform more efficiently. Steppers are currently the
predominant lithography tools used in the manufacture of devices such as ICs and
TFHs.
According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market
research firm, the two principal types of steppers currently in use are
reduction steppers, which are the most widely used steppers, and one-to-one
steppers. Reduction steppers, which typically have reduction ratios of
five-to-one, are tools in which the photomask pattern containing the design is
typically five times larger than the device pattern that is to be exposed on the
wafer surface. Additionally, step-and-scan systems have been introduced recently
in order to address device sizes of .18 micron and below. In contrast to
steppers, which expose the entire field in a single exposure, step-and-scan
systems scan across the field until the entire field is exposed.
The Company believes that one of the fastest growing segments of the
photolithography equipment market is reduction steppers and step-and-scan
systems that use a deep ultra-violet light source ("DUV"). The lower DUV
wavelength allows IC manufacturers to produce critical geometries of .25 microns
and below. The Company does not presently offer products for or compete in this
market. However, the Company markets certain of its products in mix-and-match
applications with these lithography systems.
The principal advantage of reduction steppers and step-and-scan systems is
that they may be used in manufacturing steps requiring critical feature sizes
and are therefore necessary for manufacturing advanced ICs. One-to-one steppers,
on the other hand, are tools in which the photomask containing the design is the
same size as the device pattern that is exposed on the wafer surface. Current
one-to-one steppers, unlike current reduction steppers, are based on different
technology which incorporates both reflective and refractive elements in its
optical lens imaging system that, although highly sophisticated in design, is
much simpler than a current reduction stepper's lens imaging system which
incorporates only refractive elements. As a result, current 1X steppers are
generally less expensive than current reduction steppers required for critical
feature sizes. Because of their optical design, 1X steppers typically are also
able to expose larger areas and deliver greater energy to the wafer surface,
which generally results in higher throughput than is achievable with most
reduction steppers required for critical feature sizes. One-to-one steppers,
however, are currently limited to use in manufacturing steps involving
noncritical feature sizes. Accordingly, the Company believes that sales of its
systems are highly dependent upon capacity expansions by its customers.
Competitors to Ultratech have also introduced their own mix-and-match steppers
to complement their critical layer tools. Additionally, the Company believes
that competition for the mix-and-match business has increased due to the ability
of manufacturers of reduction steppers to mix-and-match their systems with
step-and-scan systems. See "Risk Factors: Importance of Mix-and-Match Strategy."
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In recent years, the complexity of ICs has increased significantly while, at
the same time, product cycles have shortened and the price per function of such
devices has continued to decline. As device complexity has increased, the device
geometries have continued to shrink, which in turn has increased the need for
tools such as reduction steppers that are capable of imaging critical feature
sizes. For example, fabrication of a 64-megabit dynamic random access memory
("DRAM") device with a minimum feature size of 0.35 microns involves an average
of 22-25 mask levels and approximately 600 process steps. Certain mask levels in
the fabrication of advanced devices require photolithography equipment such as
reduction steppers and step-and-scan systems that are capable of imaging lines
with critical feature sizes. A majority of the masking layers in such devices,
however, only require photolithography tools capable of imaging lines with
noncritical feature sizes. In addition, many IC devices, such as application
specific integrated circuits ("ASICs") used in various applications including
telecommunications, consumer electronics and automotive control systems, can be
manufactured using 1X steppers for the masking layers. Most advanced thin film
head devices, which currently require noncritical feature size imaging, are
manufactured using 1X steppers for the masking layers. However, the Company
believes that future thin film head device manufacturing may involve certain
steps that require critical feature size imaging.
In the past, manufacturers of ICs and similar devices purchased capital
equipment based principally on technological capabilities. In view of the
significant capital expenditures required to construct, equip and maintain
fabrication facilities, relatively short product cycles and manufacturers'
increasing concern for overall fabrication costs, the Company believes that
manufacturers of ICs and thin film heads increasingly are focusing on reducing
their total cost to manufacture a device. A major component of this cost is the
cost of ownership of the equipment used for a particular application in a
fabrication facility. Cost of ownership is measured in terms of the costs
associated with the acquisition of equipment as well as factors such as
throughput, yield, up-time, service, labor overhead, maintenance, and various
other costs of owning and using the equipment. With increasing importance being
placed upon a system's overall cost of ownership, in many cases the system with
the most technologically advanced capabilities will not necessarily be the
manufacturing system of choice. As part of the focus on cost reduction, the
Company believes that device manufacturers are attempting to extend the useful
life and enhance the production capabilities of fabrication facilities by
selecting equipment that can replace existing tools while offering better
performance in a cost-effective manner.
PRODUCTS
The Company currently offers three different series of systems for use in
the semiconductor fabrication process: the model 1500 and 1500 MVS Series, which
address the markets for scanner replacement and high volume/low cost
semiconductor fabrication; the Saturn Wafer Stepper-TM- Family, which addresses
the market for mix-and-match in advanced semiconductor fabrication; and the
Titan Wafer Stepper-TM- Family, which addresses the market for photosensitive
polyimide applications, bump processing for flip chip devices, as well as the
markets for scanner replacement and high volume/low cost semiconductor
fabrication. These steppers currently offer feature size capabilities ranging
from 1.4 microns to 0.65 microns and typically range in price from $800,000 to
$2.1 million. The model 1500 Series and the Titan Wafer Stepper Family offer g-
and h-line illumination specifications. The Saturn Wafer Stepper Family features
an i-line illumination specification that is designed to make them compatible
with advanced i-line reduction steppers. The Company shipped its first Saturn
Wafer Stepper in the fourth quarter of 1995. The Saturn Wafer Stepper Family,
with its 0.65 micron capability, extends mix-and-match applications to the
64/256-megabit dynamic random access memories and equivalent logic technology.
The Titan Wafer Stepper Family addresses, among other markets, an application
called photosensitive polyimide processing. This process is used in the
protective layer, between the inside of the device package and the active
device. Because it reduces the thickness of integrated circuits, this process is
useful for devices mounted on credit cards and can also be used in a number of
"micro" applications, such as laptop or palmtop computers. The polyimide process
is also commonly used in the manufacture of advanced DRAMs and microprocessors.
The primary advantage of a photosensitive polyimide process is that it
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reduces process steps required in the fabrication of these devices. The Saturn
and Titan wafer stepper families are also used for bump processing. The Saturn
or Titan stepper is used in conjunction with electroplating to produce a pattern
of bumps, or metal connections, on the bond pads of the die for flip chip
devices. This pattern can be placed in a tight array across the entire die, as
opposed to the conventional method of wire bonding which is limited to the
periphery of the die. This allows manufacturers to shrink the die size. The flip
chip device can then be placed in a small outline package or directly on a
printed circuit board.
The Company offers four different series of systems for use in the
fabrication of thin film heads: the model 1700 Series, which is the most widely
used stepper for the TFH market; the model 2700 Series, which is designed to
meet the need for improved performance; the model 4700, which provides
manufacturers the ability to print rowbars with a single exposure, further
enhancing both yields and magnetic recording head performance; and the model
6700, which extends the model 4700 capabilities into the submicron range by
utilizing i-line exposure. In addition, the Company provides three steppers
capable of patterning features on rowbars utilizing an alternate alignment
system (Machine Vision System, or "MVS"). The model 1700 MVS and 1700 ABS are
used to expose the Air Bearing Surface (ABS) pattern, while the model 1800
extends capabilities to much smaller submicron patterns used for pole trimming.
The Company's TFH steppers offer feature size capabilities ranging from 2.0 to
.65 microns and typically range in price from $800,000 to $2.1 million.
The Company also offers photolithography equipment for use in the
micromachining market. Micromachining combines electronics with mechanics in
small devices for detection and control of a wide variety of parameters.
Examples include accelerometers used to activate air bags in automobiles, and
membrane pressure sensors used in industrial control systems. These
micromachined devices are manufactured on silicon substrates using
photolithographic techniques similar to those used for manufacturing
semiconductors and thin film head devices. The Company's model 1500 and 1500 MVS
Series and the Saturn Wafer Stepper Family offer resolution and depth of focus
advantages to the manufacturers of micromachined devices.
Additionally, in December 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. This product has an approximate price range of $6 million to $9
million. The model V2000 system addresses the production requirements of
photomasks for .25 micron design rule and below. Using the vector/raster-scan
technology employed by the Company, the electron beam moves directly to those
areas of the photomask that are to be exposed, bypassing unexposed areas, and
then rasters in the area to be exposed. In contrast, alternative technologies
use an electron beam that is scanned continuously back and forth over the entire
photomask. Key specifications for the model V2000 system include overlay of 25
nanometers, CD uniformity of 35 nanometers, CD linearity of 20 nanometers and a
maximum writing rate of 500 MHz. These specifications will vary depending on the
customer application. The Company believes that its V2000 system will offer
certain cost and productivity advantages, as compared with certain competitive
systems.
The Company also sells upgrades and refurbishments to certain older product
lines in its installed base. These refurbished older systems typically have a
purchase price significantly less than the purchase price for the Company's
newer systems.
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The year of introduction and major features of the Company's current stepper
systems are set forth below:
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THROUGHPUT
FIELD SIZE SPECIFICATIONS
------------------------------ SPECIFICATIONS* (WAFERS
MAXIMUM AREA PER HOUR)
YEAR OF FEATURE MAXIMUM AREA SQUARE ------------------------
PRODUCT LINE INTRODUCTION SIZE RECTANGLE (MM) (MM) 6 INCH 8 INCH
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SEMICONDUCTOR/MICRO-MACHINING:
1500 Series............................ 1988 1.0mm 34.2 x 13.6 18.0 x 18.0 55 30
1989 0.8mm 31.8 x 11.5 15.5 x 15.5 45 25
1500 Series MVS........................ 1997 1.0mm 34.2 x 13.6 18.0 x 18.0 50 25
1997 0.8mm 31.8 x 11.5 15.5 x 15.5 40 20
Saturn Wafer Stepper Family:
Saturn I............................. 1997 1.0mm 44.0 x 22.0 26.7 x 26.7 90 80
Saturn II............................ 1997 0.75mm 44.0 x 22.0 26.7 x 26.7 90 80
Saturn III........................... 1997 0.65mm 44.0 x 22.0 25.2 x 25.2 90 80
Titan Wafer Stepper Family:
Titan I.............................. 1997 1.4mm 50.0 x 25.0 27.4 x 27.4 103 88
Titan II............................. 1997 0.75mm 44.0 x 22.0 26.7 x 26.7 90 85
Titan III............................ 1997 0.65mm 44.0 x 22.0 25.2 x 25.2 90 85
PHOTOMASK:
UltraBeam V2000........................ 1997 0.65mm n/a n/a n/a n/a
THIN-FILM HEAD:
1700 Series............................ 1991 1.2mm 34.2 x 13.6 18.0 x 18.0 70 50
1991 1.0mm 34.2 x 13.6 18.0 x 18.0 70 50
1700 MVS............................... 1995 1.0mm 34.2 x 13.6 18.0 x 18.0 n/a n/a
1700 ABS............................... 1997 2.0mm 30.0 x 10.0 n/a n/a n/a
1800................................... 1997 0.8mm 28.0 x 2.0 n/a n/a n/a
2700 Series............................ 1992 1.2mm 34.2 x 13.6 18.0 x 18.0 78 68
1992 1.0mm 34.2 x 13.6 18.0 x 18.0 78 68
4700................................... 1994 1.0mm 55.0 x 18.0 26.7 x 26.7 98 92
6700................................... 1996 0.65mm 55.0 x 18.0 26.7 x 26.7 96 90
6800................................... 1997 0.75mm 55.0 x 18.0 26.7 x 26.7 98 92
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* Actual throughput varies depending upon customer application.
RESEARCH, DEVELOPMENT AND ENGINEERING
The semiconductor and magnetic recording head manufacturing industries are
subject to rapid technological change and new product introductions and
enhancements. The Company believes that continued and timely development and
introduction of new and enhanced systems are essential for the Company to
maintain its competitive position. The Company has made a substantial investment
in the research and development of its core optical technology, which the
Company believes is critical to its financial results. The Company intends to
continue to develop its technology and to develop innovative products and
product features to meet customer demands. Current engineering projects include
the continued development, documentation and transition to commercial
manufacturing of the UltraBeam model V2000 electron beam pattern generation
system, continued research and development of the Verdant Technologies' (a
wholly-owned subsidiary of Ultratech Stepper) system for advanced thermal
processing and creation of ultrashallow junctions (formerly referred to as the
Company's PGILD project), continued development and documentation of the Saturn
Wafer Stepper Family and model 6700 wafer stepper, and development of larger and
more flexible optical systems. Other research and development
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efforts are currently focused on reliability improvement; manufacturing cost
reduction; year 2000 compliance; and performance enhancement and development of
new features for existing systems, both for inclusion in the Company's systems
and to meet specific customer order requirements. These research and development
efforts are undertaken, principally, by the Company's research, development and
engineering organizations and costs are generally expensed as incurred. Other
operating groups within the Company support the above referenced research,
development and engineering efforts, and the associated costs are charged to
these organizations as incurred. The Company also has programs devoted to the
development of new photolithography systems, including new generations of
photolithography systems for existing and new markets, enhancements and
extensions of existing photolithography systems for existing and new markets and
custom engineering for specific customers.
The Company works with many customers to develop technology required to
manufacture advanced devices or to lower the customer's cost of ownership. The
Company maintains an engineering department that supports customer design of 1X
stepper photomasks for both test and production purposes and an applications
engineering group, consisting of highly qualified engineers located throughout
the world that assist customers in optimizing the use of the Company's systems.
The Company has historically devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts in the future. As of December
31, 1997, the Company had approximately 129 full-time employees engaged in
research, development, and engineering. For 1997, 1996 and 1995, total research,
development, and engineering expenses were approximately $26.4 million, $27.2
million and $22.7 million, respectively, and represented 17.9%, 14.1% and 14.4%
of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in the United States and Europe
principally through its direct sales organization. The Company sells its
products in the Asia/Pacific region primarily through outside sales
organizations. In December 1997, the Company terminated its relationship with
its Japanese distributor, Innotech Corporation. The Company is presently in the
process of establishing a direct sales force in Japan. This strategy is
anticipated to contribute to higher selling, general and administrative expenses
in 1998, relative to 1997, related to transitional costs as well as higher
ongoing expenses. See "Risk Factors: International Sales; Japanese Market."
Ultratech's service personnel are based throughout the United States,
Europe, Asia/Pacific and Japan. The Company currently leases four sales and
service offices in the United States outside of California, maintains
subsidiaries in the United Kingdom, Japan and Thailand and leases offices for
its branches in Korea and Taiwan to service equipment and support customers in
such locations. As part of its customer service, Ultratech maintains an on-line
computerized network of the Company's parts inventory in the United States,
Europe and Japan.
The Company believes that as semiconductor and thin film head manufacturers
produce increasingly complex devices, they will require a higher degree of
support. Reliability, performance, yield, cost, uptime and mean time between
failure are increasingly important factors by which customers evaluate potential
suppliers of photolithography equipment. The Company believes that the strength
of its worldwide service and support organization is an important factor in its
ability to sell its systems, maintain customer loyalty and reduce the
maintenance costs of its systems. In addition, the Company believes that working
with its suppliers and customers is necessary to ensure that the Company's
systems are cost effective, technically advanced and designed to satisfy
customer requirements.
The Company supports its customers with field service, technical service
engineers and training programs. The Company provides its customers with
comprehensive support and service before, during and after delivery of its
systems. To support the sales process and to enhance customer relationships, the
Company works closely with prospective customers to develop hardware and
software test specifications
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and benchmarks, and often designs customized applications to enable prospective
customers to evaluate the Company's equipment for their specific needs. Prior to
shipment, Ultratech's support personnel typically assist the customer in site
preparation and inspection, and typically provide customers with training at the
Company's facilities or at the customer's location. The Company currently offers
to its customers various courses of instruction on the Company's systems,
including instructions in system hardware and software tools for optimizing the
Company's systems. The Company's customer training program also includes
instructions in the maintenance of the Company's systems. The Company's field
support personnel work with the customer's employees to install the system and
demonstrate system readiness. Technical support is also available through
on-site Company personnel.
In general, the Company warrants its new systems against defects in design,
materials and workmanship for one year. The Company offers its customers
additional support after the warranty period in the form of maintenance
contracts for specified time periods. Such contracts include various options
such as priority response, planned preventive maintenance, scheduled one-on-one
training, daily on-site support, and monthly system and performance analysis.
MANUFACTURING
The Company performs all of its manufacturing activities (final assembly,
system testing and certain subassembly) in clean room environments totaling
approximately 40,000 square feet. These facilities are located in California and
New Jersey. Performing manufacturing operations in California exposes the
Company to a higher risk of natural disasters, particularly floods and
earthquakes.
The Company's manufacturing activities consist of assembling and testing
components and subassemblies, which are then integrated into finished systems.
The Company is relying increasingly on outside vendors and subcontractors to
manufacture certain components and subassemblies. This strategy has enabled the
Company to increase its manufacturing capacity. The Company orders one of the
most critical components of its technology, the glass for its lenses, from
suppliers on purchase orders. The Company then designs the lenses and provides
the lens specifications to other suppliers that grind the lenses. The Company
then assembles and tests the optical lenses in its metrology laboratory. The
Company has recorded the critical parameters of each of its optical lenses sold
since 1982 and believes that such information enables it to supply lenses to its
customers that match the characteristics of its customers' existing lenses.
Prior to shipment, the customer's engineers may perform acceptance tests at
Ultratech's facility. After passing the acceptance test, the system is packaged
in the clean room environment and prepared for shipment.
The Company procures certain of its critical systems' components,
subassemblies and services from a single supplier or a limited group of
suppliers in order to ensure overall quality and timeliness of delivery. To
date, the Company has been able to obtain adequate services and supplies of
components and subassemblies for its systems in a timely manner. However,
disruption or termination of certain of these sources, due to year 2000
compliance issues or other factors, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
reliance on sole or a limited group of suppliers and the Company's increasing
reliance on subcontractors involve several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over pricing, quality and timely delivery of components. Although the
timeliness, yield and quality of deliveries to date from the Company's
subcontractors have been acceptable, manufacture of certain of these components
and subassemblies is an extremely complex process, and long lead times are
required. Any inability to obtain adequate deliveries or any other circumstance
that would require the Company to seek alternative sources of supply or to
manufacture such components internally could significantly increase
manufacturing costs and could delay the Company's ability to ship its products,
which could damage relationships with current and prospective customers and
therefore would have a material adverse effect on the Company's business,
financial condition and results of operations.
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The Company maintains a company-wide quality program that it believes has a
direct effect on its results of operations. The intent of the program is to
provide continuous improvement in the Company's steppers and services to meet
customer requirements. The Company trains all of its employees in basic quality
skills and regularly participates in quality sharing meetings with other
equipment manufacturers and customer quality audits of procedures and personnel.
The Company achieved ISO 9001 certification in 1996, and has maintained this
certification uninterrupted through this report date.
COMPETITION
The capital equipment industry in which the Company competes is intensely
competitive. A substantial investment is required to install and integrate
capital equipment into a semiconductor or thin film head production line. The
Company believes that once a device manufacturer has selected a particular
vendor's capital equipment, the manufacturer generally relies upon that
equipment for the specific production line application and, to the extent
possible, subsequent generations of similar products. Accordingly, it is
difficult to achieve significant sales to a particular customer once another
vendor's capital equipment has been selected. The Company experiences intense
competition worldwide from a number of leading foreign and domestic
manufacturers, such as Nikon, Canon, ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group, Inc., all of which have substantially greater financial,
marketing, technical and other resources than the Company. Nikon supplies a 1X
stepper for use in the manufacture of liquid crystal displays and both Canon and
Nikon offer reduction steppers for thin film head fabrication. 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 and ASML has
recently introduced an i-line step-and-scan system for mix-and-match with their
DUV step-and-scan 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. 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 will also face
competition from vendors employing other technologies, such as excimer lasers
and phase-shift mask technology, which may extend the capabilities of
competitive products beyond their current limits or increase their productivity.
In addition, increased competitive pressure could lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect the Company's business, financial condition and
operating results. There can be no assurance that the Company will be able to
compete successfully in the future.
Japanese IC manufacturers have a 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
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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."
INTELLECTUAL PROPERTY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
any success will depend more upon the innovation, technological expertise and
marketing abilities of its employees. Nevertheless, the Company has a policy of
seeking patents when appropriate on inventions resulting from its ongoing
research and development and manufacturing activities. The Company owns various
United States and foreign patents, which expire on dates ranging from July 2000
to May 2016, and has various United States and foreign patent applications
pending. The Company also has various registered trademarks and copyright
registrations covering mainly software programs used in the operation of its
stepper systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be issued
or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations, regardless of the outcome of the
litigation. There can be no assurance that any patent issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. Furthermore,
there can be no assurance that others will not independently develop similar
products, duplicate the Company's products or, if patents are issued to the
Company, design around the patents issued to the Company.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, the Company has in the past been notified of
claims that it may be infringing intellectual property rights possessed by third
parties. The Company has in the past been notified in prior years by certain
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.
There can be no assurance that infringement claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future, or that such assertions will not materially adversely
affect the Company's business, financial condition and results of operations,
regardless of the outcome of any litigation. With respect to any such future
claims, the Company may seek to obtain a license under the third party's
intellectual property rights. There can be no assurance, however, that a license
will be available on reasonable terms or at all. The Company could decide, in
the alternative, to resort to litigation to challenge such claims. Such
challenges could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of any litigation.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's systems. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to
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conduct its business. Nevertheless, the failure to comply with current or future
regulations could result in substantial fines being imposed on the Company,
suspension of production, alteration of the manufacturing process or cessation
of operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
CUSTOMERS, APPLICATIONS AND MARKETS
The Company sells its systems to semiconductor, photomask, thin film head
and micromachining manufacturers located throughout the United States, Europe,
Asia/Pacific and Japan. Semiconductor manufacturers have purchased the model
1500 Series steppers, the Saturn Wafer Stepper Family, and the Titan Wafer
Stepper Family for the fabrication of microprocessors, microcontrollers, DRAMs
and ASICs. Such systems are used in mix-and-match environments with other
lithography tools, as replacements for scanners and contact printers, in
start-up fabrication facilities, in packaging for ultrathin and flip chip
applications and for high volume, low cost noncritical feature size
semiconductor production. Thin film head manufacturers have purchased the model
1700 Series steppers, the model 2700 Series steppers, the model 4700 stepper and
the model 6700 stepper because of their advantages in yield, throughput and
overall cost of ownership. Manufacturers of micromachined components have
purchased the model 1500 Series steppers and Saturn/Titan wafer stepper families
because of high throughput and flexible field size advantages along with
cost-effective, submicron imaging capabilities. Additionally, during December of
1997 the Company shipped its first UltraBeam model V2000 electron beam
lithography system to a developer and manufacturer of photomasks for the IC
industry.
Historically, Ultratech has sold a substantial portion 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. In 1995, sales to one
customer accounted for approximately 12% of the Company's net sales. The Company
expects that sales to relatively few customers will continue to account for a
high percentage of its net sales in the foreseeable future and believes that the
Company's financial results depend in significant part upon the success of these
major customers, and the Company's ability to meet their future capital
equipment needs. Although the composition of the group comprising the Company's
largest customers may vary from period to period, the loss of a significant
customer or any reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the
semiconductor or magnetic recording head industries or in the industries that
manufacture products utilizing integrated circuits or thin-film heads, may have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's ability to increase its sales in the future
will depend in part upon its ability to obtain orders from new customers as well
as the financial condition and success of its customers and the general economy,
of which there can be no assurance. See "Cyclicality of Semiconductor and
Magnetic Recording Head Industries."
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. In view of the significant investment
involved in a system purchase, the Company has experienced and may continue to
experience delays following initial qualification of the Company's systems as a
result of delays in a customer's approval process. For this and other reasons,
the Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a sale.
Lengthy sales cycles subject the Company to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which the Company has little or no control. See "Fluctuations in Operating
Results; Limited System Sales; Customer Concentration."
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During 1997, 1996 and 1995, international sales accounted for 33%, 53% and
55% of net sales, respectively. 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.
The Company's international system sales are typically denominated in United
States dollars or dollar equivalents. For financial information concerning
foreign and domestic operations and export sales, please refer to Note 13 of the
Ultratech Stepper, Inc. Consolidated Financial Statements, incorporated by
reference from page 44 of the Company's Annual Report to Stockholders. See "Risk
Factors: International Sales; Japanese Market."
BACKLOG
The Company schedules production of its systems based upon order backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog all customer orders for its
one-to-one reflective and refractive optical technology systems for which it has
accepted purchase order numbers and assigned shipment dates within six months,
all customer orders for its electron beam lithography systems for which it has
accepted purchase order numbers and assigned shipment dates within one year, as
well as all orders for service, spare parts and upgrades. All orders are subject
to cancellation or rescheduling by the customer with limited or no penalties.
Because of orders received for systems to be shipped in the same quarter in
which the order is received, possible changes in system delivery schedules,
cancellations of orders and potential delays in system shipments, the Company's
backlog at any particular date may not necessarily be representative of actual
sales for any succeeding period. As of December 31, 1997, the Company's backlog
was approximately $65.6 million, compared with approximately $81.3 million as of
December 31, 1996.
EMPLOYEES
At December 31, 1997, the Company had approximately 576 full-time employees,
including 129 engaged in research, development, and engineering, 45 in sales and
marketing, 173 in customer service and support, 164 in manufacturing and 65 in
general administration and finance. The Company believes any future success,
should it occur, would depend, in large part, on its ability to attract and
retain highly skilled employees. None of the employees of the Company is covered
by a collective bargaining agreement. The Company considers its relationships
with its employees to be good.
ADDITIONAL RISK FACTORS
FLUCTUATIONS IN OPERATING RESULTS; LIMITED SYSTEM SALES; CUSTOMER
CONCENTRATION 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 (particularly flooding and
earthquakes); 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; the
percentage of international sales, which typically have lower gross margins than
domestic sales principally due to higher field service and support costs;
increased competition in the Company's targeted markets; the introduction of new
products, which typically have
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higher manufacturing costs until manufacturing efficiencies are realized and are
typically discounted more than existing products until the products gain market
acceptance; the rate of capacity utilization; and the implementation of
subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales
of a relatively small number of systems, which typically range in price from
$800,000 to $2.1 million. Additionally, the Company's 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 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 or if orders previously
recorded by the Company are deferred or cancelled. Furthermore, a substantial
portion of the Company's net sales has historically been realized near the end
of each quarter. Accordingly, the failure to receive anticipated orders or
delays in shipments near the end of a particular quarter, due, for example, to
unanticipated shipment reschedulings, cancellations, delays or deferrals by
customers or to unexpected manufacturing difficulties or delays in deliveries by
suppliers due to their long production lead times or otherwise, may cause net
sales in a particular period to fall significantly below the Company's
expectations, which would materially adversely affect the Company's operating
results for such period. In particular, the significantly long manufacturing
cycles of the Company's linear motor-based steppers, which include the Model
4700 stepper, Model 6700 stepper, Titan Wafer Stepper and Saturn Wafer Stepper,
and the long lead time for lenses and other materials, could cause shipments of
such products to be delayed from one quarter to the next, which could materially
adversely affect the Company's financial condition and results of operations for
a particular quarter. Additionally, the Company has very limited experience in
the manufacture of its Model V2000 electron beam pattern generation system, and
the Company is in the process of documenting the manufacturing processes for
this product. The Model V2000 production process is extremely complex and the
product has a significantly long manufacturing cycle, 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.
Historically, the Company has sold a substantial portion of its systems to a
limited number of customers. See "Customers, Applications and Markets." 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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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 several quarters. Such continuation would materially adversely affect the
Company's business, financial condition and results of operations.
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 customers and there can be no
assurance that this trend will not continue in the future.
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 present market conditions in both the semiconductor and thin
film head industries, and nonlinearity of system shipments, the Company
presently expects that future quarterly comparisons, through at least the second
quarter of 1998, will indicate a period-over-comparable period decline in the
Company's net sales and net income and may also result in a sequential decline
in sales and net income, relative to levels achieved during the fourth quarter
of 1997. Additionally, declines in net sales, relative to the quarter ended
December 31, 1997, may result in net losses due to the Company's current level
of operating expenses.
During 1997, 1996 and 1995, approximately 50%, 40% and 30%, respectively, of
the Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. 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
recently 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 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 and Nikon, and may experience competition from 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.
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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 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. The Company shipped its first Model
2244i stepper during 1993, and commenced volume production in 1994. In 1995, the
Company commenced shipment and volume production of the Titan Wafer Stepper and
commenced shipment of the Saturn Wafer Stepper. As is typical with newly
introduced systems in the capital equipment industry, the Company has
experienced and may continue to experience technical or other difficulties with
its mix-and-match family of products. The Company believes that the market
acceptance and process verification combined with volume production of the
mix-and-match family of products is of critical importance to the successful
implementation of its mix-and-match strategy and its future financial results.
Recently, this market segment of the Company's business has experienced a
pronounced downturn due, in part, to the recent cyclical downturn in the
semiconductor industry. 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. See "Fluctuations in Operating Results;
Limited System Sales; Customer Concentration."
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 businesses (see "Research, Development
and Engineering"). During 1998, the Company will continue to develop these
products and will invest significant additional resources in plant and
equipment, inventory, personnel and other costs, to begin production of these
products and to provide the marketing, administration and after-sales support
required to support these new products. Accordingly, there can be no assurance
that gross profit margins
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and inventory levels will not be adversely impacted in the future by start-up
costs associated with the initial production of these new product lines. These
start-up costs include, but are not limited to, additional manufacturing
overhead, additional inventory reserve requirements and the creation of
after-sales support organizations. Additionally, there can be no assurance that
operating expenses will not increase, relative to sales, as a result of adding
additional marketing and administrative personnel, among other costs, to support
the Company's additional products. If the Company is unable to achieve
significantly increased net sales or its sales fall below expectations, the
Company's operating results will be materially adversely affected until, among
other factors, inventory levels and expenses can be reduced.
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 in absolute dollars in 1998, relative to 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.
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
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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 personnel. The
failure to attract or retain such persons would materially adversely affect the
Company's business, financial condition and results of operations.
Recently, the Company has experienced an increased level of employee
turnover. The Company believes that this increase is due to several factors,
including: the recent semiconductor industry slowdown, which resulted in a
planned reduction in the Company's workforce during the fourth fiscal quarter of
1996, and which has further resulted in an increased level of uncertainty within
the workforce; an expanding economy within the geographic area that the Company
maintains its principal business offices, making it more difficult for the
Company to retain its employees; and the declining value of stock options
granted to employees, relative to their total compensation, as a result of the
full vesting of options granted prior to the Company's initial public offering
and significant numbers of options granted at prices well in excess of the
current market value of the Company's stock. Due to these and other factors, the
Company may continue to experience high levels of employee turnover, which could
adversely impact the Company's business, financial condition and results of
operations.
INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 33%, 53% and 55% of total net sales in 1997, 1996 and 1995,
respectively. The Company anticipates that international sales, which typically
have lower gross margins than domestic sales, principally due to higher field
service and support costs, will continue to account for a 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. 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
17
<PAGE>
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."
YEAR 2000 COMPLIANCE Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than 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 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 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 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.
FUTURE ACQUISITIONS The Company may in the future pursue acquisitions of
complementary product lines, technologies or businesses. The pursuit of
acquisitions involves additional costs, which could
18
<PAGE>
materially adversely impact the company's results of operations. 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.
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 are unrelated to the Company's
performance.
ITEM 2. PROPERTIES
The Company maintains its headquarters and manufacturing operations in San
Jose, California in three leased facilities, totaling approximately 188,000
square feet, which contain general administration and finance, marketing and
sales, customer service and support, manufacturing and research, development,
and engineering. Additionally, the Company leases 19,000 square feet in New
Providence, New Jersey for its UltraBeam Lithography subsidiary, which contains
manufacturing, research, and development, engineering and general
administration. The leases for these facilities expire at various dates from
February 1999 to March 2005. The Company also leases 6.4 acres of undeveloped
land near its headquarters in San Jose. This lease expires in November 1998. As
part of this transaction, the Company presently has segregated $5.3 million of
its securities as collateral for certain obligations of the lessor pertaining to
this land. The Company also leases four sales and support offices in the United
States in Tempe, Arizona; Woburn, Massachusetts; Austin, Texas; and Richardson,
Texas under leases with terms expiring between one month to two years. The
Company also maintains branch offices in Korea and Taiwan, with terms expiring
between one month and one year; and sales, service and support subsidiaries in
Japan, the United
19
<PAGE>
Kingdom and Thailand, with terms expiring between one month and five years. The
Company believes that its existing facilities will be adequate to meet its
currently anticipated requirements and that suitable additional or substitute
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1997, the executive officers of the Company, who are
appointed by and serve at the discretion of the Board of Directors, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
Arthur W. Zafiropoulo......... 58 Chairman of the Board of Directors, Chief Executive Officer and President
Daniel H. Berry............... 52 Senior Vice President, Sales and Service
William G. Leunis, III........ 42 Senior Vice President, Finance, Chief Financial Officer, Secretary and
Treasurer
</TABLE>
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal Corporation and, since March 1993, has served as Chief Executive
Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as
President of the Company from March 1993 to March 1996, resumed the position of
President of the Company in May 1997 and presently serves in this capacity.
Between September 1990 and March 1993, he was President of the Predecessor. From
February 1989 to September 1990, Mr. Zafiropoulo was President of General
Signal's Semiconductor Equipment Group International, a semiconductor equipment
company. From August 1980 to February 1989, Mr. Zafiropoulo was President and
Chief Executive Officer of Drytek, Inc., a plasma dry-etch company that he
founded in August 1980, and which was later sold to General Signal in 1986. From
July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a
semiconductor equipment manufacturer, which is a unit of General Signal. Mr.
Zafiropoulo is a director of RF Power Products Inc., a manufacturer of advanced
power supplies. In addition, Mr. Zafiropoulo is a director of Semi/Sematech, an
association of U.S.-owned suppliers of equipment, materials and services to the
semiconductor industry and SEMI (Semiconductor and Equipment Materials
International), an international trade association.
Mr. Berry has served as Senior Vice President, Sales and Service of the
Company since March 1993. Between December 1990 and March 1993, he served as
Vice President, Sales and Service of the Predecessor. From November 1989 to
December 1990, Mr. Berry was director of international operations for General
Signal's Semiconductor Equipment Group International, a semiconductor equipment
company. From July 1976 to November 1989, he held various management positions
including director of marketing and optical lithography, at Perkin-Elmer
Corporation, a semiconductor equipment manufacturer.
Mr. Leunis has served as Senior Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer of the Company since January 1997. Between
March 1993 and December 1996, he served as Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer of the Company. Between September
1990 and March 1993, he served as Vice President, Finance of the Predecessor.
From August 1986 to August 1990, Mr. Leunis was Chief Financial Officer of the
Predecessor. From 1978 to August 1986, Mr. Leunis held various financial
positions at General Signal.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference from page
48 of the Company's 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from page
24 of the Company's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference from
pages 25-31 of the Company's 1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Ernst & Young LLP, Independent Auditors, and consolidated
financial statements required by this Item are incorporated by reference from
pages 32-48 of the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A for its 1998 Annual Meeting of
Stockholders to be held June 3, 1998 and the information included therein is
incorporated herein by reference as set forth below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference from the Item captioned "Election of Directors" in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders (the
"Proxy Statement"). The information required by this Item relating to the
Company's executive officers is included under the caption "Executive Officers
of the Registrant" in Part I, Item 4 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Item captioned "Executive Compensation and Related Information" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Items captioned "Election of Directors" and "Ownership of Securities" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
item captioned "Certain Transactions" in the Proxy Statement.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form
10-K
(1) Financial Statements
The following consolidated financial statements of Ultratech Stepper,
Inc. are set forth in the Company's 1997 Annual Report to Stockholders
and incorporated by reference in Item 8.
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
---------------
<S> <C>
Consolidated Balance Sheets--December 31, 1997 and 1996............................................ 32
Consolidated Statements of Income--Years ended December 31, 1997, 1996, and 1995................... 33
Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995................ 34
Notes to Consolidated Financial Statements......................................................... 35-46
Report of Ernst & Young LLP, Independent Auditors.................................................. 47
</TABLE>
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
<TABLE>
<CAPTION>
PAGE NUMBER
---------------
<S> <C>
Schedule II Valuation and Qualifying Accounts...................................................... S-1
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Asset Purchase Agreement, dated March 8, 1993, among Registrant, General Signal Corporation and
General Signal Technology Corporation.
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.
3.2(6) Bylaws of Registrant, as amended.
3.3(6) Certified Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the
Company dated May 17, 1995.
4.5(1) Specimen Common Stock Certificate of Registrant.
4.6(7) Shareholder Rights Agreement between Registrant and the First National Bank of Boston dated February
11, 1997.
4.6.1 Shareholder Rights Agreement between Registrant and the First National Bank of Boston, filed on
February 26, 1997, as amended on March 18, 1998.
10.1(1)(2) Distributor Agreement dated June 22, 1993 between the Company and Innotech Corporation.
10.2(1)(5) 1993 Stock Option/Stock Issuance Plan and form of Nonstatutory Stock Option Agreement with respect
to the automatic option grant program, as amended.
10.3(8) 1993 Stock Option/Stock Issuance Plan (Amended and Restated on August 8, 1997).
10.4(1) Form of Indemnification Agreement entered into between the Registrant and each of its officers and
directors.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
10.5(1) Standard Industrial Lease--Single Tenant, Full Net between The Equitable Life Assurance Society of
the United States, as Landlord, and Registrant, as Tenant, dated August 27, 1993.
10.6(3) Executive Incentive Plan.
10.7(3) Profit Sharing Plan.
10.8(4) Standard Industrial Lease Mutual Tenant, Full Net between Orchard Investment Company Number 701, As
Landlord, and Registrant, As Tenant dated May 17, 1994 and as amended, October 18, 1994.
10.8.1 Second Amendment to Lease and Agreement to Release between the Receiver of the Estate of Orchard
Investment Company Number 701, As Original Landlord, Orchard Properties, and Registrant, As Tenant
dated May 25, 1995
10.8.2 Third Amendment to Lease between Orchard Investment Company Number 701, As Landlord, and Registrant,
As Tenant dated November 16, 1995
10.8.3 Fourth Amendment to Lease between San Jose Acquisition Co., L.L.C. (successor of Orchard Investment
Company Number 701), As Landlord, and Registrant, As Tenant dated February 6, 1996
10.8.4 Fifth Amendment to Lease between Silicon Valley Properties, L.L.C. (successor of San Jose
Acquisition Co., L.L.C., and Orchard Investment Company Number 701), As Landlord and Registrant,
As Tenant dated December 1, 1997
10.11(5) 1995 Employee Stock Purchase Plan
13 Annual Report to Stockholders for the Year Ended December 31, 1997.
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (included on signature page).
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
- ------------------------
(1) Previously filed with the Company's Registration Statement on Form S-1
declared effective with the Securities and Exchange Commission on September
28, 1993. File No. 33-66522.
(2) Confidential Treatment has been granted for the deleted portions of this
document.
(3) Previously filed with the Company's 1993 Annual Report on Form 10-K
(Commission File No. 0-22248).
(4) Previously filed with the Company's 1994 Annual Report on Form 10-K
(Commission File No. 0-22248).
(5) Previously filed with the Company's 1995 Annual Report on Form 10-K
(Commission File No. 0-22248).
(6) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Commission File No. 0-22248)
(7) Previously filed with the Company's Current Report on Form 8-K, dated
February 26, 1997.
(8) Previously filed with the Company's Current Report on Form S-8, dated August
8, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1997.
(c) Exhibits. See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules. See list of schedules under (a)(2)
above.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunder duly authorized.
ULTRATECH STEPPER, INC.
By: /s/ ARTHUR W. ZAFIROPOULO
-----------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Arthur W. Zafiropoulo and William G. Leunis, III,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
/s/ ARTHUR W. ZAFIROPOULO Directors, Chief
- ------------------------------ Executive Officer March 18, 1998
Arthur W. Zafiropoulo (Principal Executive
Officer) and President
Senior Vice President,
Finance, Chief Financial
/s/ WILLIAM G. LEUNIS, III Officer, Secretary and
- ------------------------------ Treasurer (Principal March 18, 1998
William G. Leunis, III Financial and Accounting
Officer)
/s/ KENNETH A. LEVY
- ------------------------------ Director March 18, 1998
Kenneth A. Levy
/s/ GREGORY HARRISON
- ------------------------------ Director March 18, 1998
Gregory Harrison
/s/ LARRY R. CARTER
- ------------------------------ Director March 18, 1998
Larry R. Carter
/s/ THOMAS D. GEORGE
- ------------------------------ Director March 18, 1998
Thomas D. George
/s/ JOEL GEMUNDER
- ------------------------------ Director March 18, 1998
Joel Gemunder
</TABLE>
25
<PAGE>
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS (1) END OF PERIOD
- ---------------------------------------------- ----------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts............. $ 242 $ 371 $ -- $ -- $ 613
Year ended December 31, 1996:
Allowance for doubtful accounts............. $ 613 $ 1,225 $ -- $ (687) $ 1,151
Year ended December 31, 1997:
Allowance for doubtful accounts............. $ 1,151 $ 2,205 $ -- $ (1,098) $ 2,258
</TABLE>
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1
<PAGE>
- ------------------------------------------------------------------------------
ULTRATECH STEPPER, INC.
and
THE FIRST NATIONAL BANK OF BOSTON
Rights Agent
Amended Rights Agreement
Dated as of February 11, 1997, as
amended March 18, 1998
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . 6
Section 3. Issue of Right Certificates . . . . . . . . . . . . . . . . . 6
Section 4. Form of Right Certificates. . . . . . . . . . . . . . . . . . 7
Section 5. Countersignature and Registration . . . . . . . . . . . . . . 8
Section 6. Transfer, Split-Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or
Stolen Right Certificates . . . . . . . . . . . . . . . . . . 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 8. Cancellation and Destruction of Right Certificates. . . . . .10
Section 9. Availability of Preferred Shares. . . . . . . . . . . . . . .11
Section 10. Preferred Shares Record Date. . . . . . . . . . . . . . . . .12
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. . . . . . . . . . . . . . . . . . . . . . .13
Section 12. Certificate of Adjusted Purchase Price or Number of Shares. .20
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power . . . . . . . . . . . . . . . . . . .21
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . .23
Section 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . .24
Section 16. Agreement of Right Holders. . . . . . . . . . . . . . . . . .24
Section 17. Right Certificate Holder Not Deemed a Stockholder . . . . . .25
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . .25
Section 19. Merger or Consolidation or Change of Name of Rights Agent . .26
Section 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . .27
Section 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . .29
Section 22. Issuance of New Right Certificates. . . . . . . . . . . . . .30
Section 23. Redemption. . . . . . . . . . . . . . . . . . . . . . . . . .30
i
<PAGE>
Section 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . .31
Section 25. Notice of Certain Events. . . . . . . . . . . . . . . . . . .33
Section 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Section 27. Supplements and Amendments. . . . . . . . . . . . . . . . . .35
Section 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . .35
Section 29. Determinations and Actions by the Board of Directors. . . . .35
Section 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . .36
Section 31. Severability. . . . . . . . . . . . . . . . . . . . . . . . .36
Section 32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . .36
Section 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .36
Section 34. Descriptive Headings. . . . . . . . . . . . . . . . . . . . .37
Exhibit A - Form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Ultratech Stepper, Inc.
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
ii
<PAGE>
RIGHTS AGREEMENT
Rights Agreement, dated as of February 11, 1997 (as amended March
18, 1998), between Ultratech Stepper, Inc., a Delaware corporation (the
"Company"), and The First National Bank of Boston, a national banking
association (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common
Share (as hereinafter defined) of the Company outstanding as of the Close of
Business (as hereinafter defined) on February 24, 1997 (the "Record Date"),
each Right representing the right to purchase one one-hundredth (1/100th) of
a Preferred Share (as hereinafter defined) upon the terms and subject to the
conditions herein set forth, and has further authorized and directed the
issuance of one Right with respect to each Common Share that shall become
outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date or the Final Expiration Date (as such terms are
hereinafter defined).
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
1
<PAGE>
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and
Associates (as such terms are hereinafter defined) of such Person, shall be
the Beneficial Owner (as such term is hereinafter defined) of 15% or more of
the Common Shares of the Company then outstanding, but shall not include the
Company, any Subsidiary (as such term is hereinafter defined) of the Company,
any employee benefit plan of the Company or any Subsidiary of the Company, or
any entity holding Common Shares for or pursuant to the terms of any such
plan. Notwithstanding the foregoing:
(i) no Person shall become an "Acquiring Person" as the result
of an acquisition of Common Shares by the Company which, by reducing the
number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 15% or more of the Common
Shares of the Company then outstanding; PROVIDED, HOWEVER, that if a
Person shall become the Beneficial Owner of 15% or more of the Common
Shares of the Company then outstanding by reason of share purchases by
the Company and shall, after such share purchases by the Company, become
the Beneficial Owner of any additional Common Shares of the Company,
then such Person shall be deemed to be an "Acquiring Person";
(ii) if the Board of Directors of the Company determines (upon
approval by a majority of the Continuing Directors (as such term is
hereinafter defined)) in good faith that a Person who would otherwise
be an Acquiring Person, as defined pursuant to the foregoing provisions
of this paragraph (a), is eligible to file and did file a Schedule 13G,
and such Person divests as promptly as practicable a sufficient number
of Common Shares so that such Person would no longer be an Acquiring
Person, as defined pursuant to the foregoing provisions of this
paragraph (a), then such Person shall not be deemed to be an "Acquiring
Person" for any purpose of this Agreement; and
(iii) no Person shall become an "Acquiring Person" if the
transaction or series of related transactions in which such Person
(together with all Affiliates or Associates of such Person) became
the Beneficial Owner of 15% or more of the Common Shares of the Company
then outstanding had received prior approval of a majority of the
Continuing Directors; PROVIDED, that in the event a Person is not an
Acquiring Person by reason of this clause (iii) of this Section 1(a), such
Person shall become an Acquiring Person, in the event such Person
thereafter acquires Beneficial Ownership of any additional Common Shares
unless such acquisition of such additional Common Shares would not result
in such Person becoming an Acquiring Person by reason by any provision of
this Agreement, including, without limitation, this clause (iii) of this
Section 1(a).
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act (as such term is hereinafter defined).
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates
or Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon
the exercise of conversion rights, exchange rights, rights (other than
these Rights), warrants or options, or otherwise; PROVIDED, HOWEVER that a
Person shall not be deemed the Beneficial Owner of, or to beneficially own,
(1) securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for purchase or exchange or
(2) securities which a Person or any Person's Affiliates or Associates may
be deemed to have the right to acquire pursuant to any merger or other
acquisition agreement between the Company and such Person (or one or more
of such Person's Affiliates or Associates) if such agreement has been
approved by the Board of Directors of the Company, upon the affirmative
vote of a majority of the Continuing Directors, prior to there being an
Acquiring Person; or (B) the right to vote pursuant to any agreement,
arrangement or understanding; PROVIDED, HOWEVER, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any security if the
agreement, arrangement or understanding to vote such security (1) arises
solely from a revocable proxy or consent
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given to such Person in response to a public proxy or consent solicitation
made pursuant to, and in accordance with, the applicable rules and
regulations promulgated under the Exchange Act and (2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated
by the proviso to Section 1(c)(ii)(B)) or disposing of any securities of
the Company.
Notwithstanding anything in this definition of Beneficial Ownership
to the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the
number of such securities not then actually issued and outstanding which such
Person would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of California or
the state in which the principal office of the Rights Agent is located are
authorized or obligated by law or executive order to close.
(e) "Company" shall have the meaning set forth in the first
paragraph at the beginning of this Agreement.
(f) "Close of Business" on any given date shall mean 5:00 P.M.,
Eastern time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 P.M., Eastern time, on the next succeeding
Business Day.
(g) "Common Shares" when used with reference to the Company shall
mean the shares of common stock of the Company. "Common Shares" when used
with reference to any Person other than the Company shall mean the capital
stock (or other equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person
or Persons which ultimately control such first-mentioned Person.
(h) "common stock equivalents" shall have the meaning set forth in
Section 11(a)(iv) hereof.
(i) "Continuing Director" shall mean (i) any person who is a member
of the Board of Directors of the Company, while such person is a member of
the Board of Directors, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or a representative or agent of an
Acquiring Person or of any such Affiliate or Associate, and who was a member
of the Board of Directors prior to the date of this Agreement, or (ii) any
person who subsequently becomes a member of the Board of Directors and who,
while such person is a member of the Board of Directors, is not an Acquiring
Person or an Affiliate or Associate of an Acquiring Person, or a
representative or agent of an Acquiring Person or of any such Affiliate or
Associate, if such Person's nomination for election or such Person's election
to the Board of Directors is recommended or approved by a majority of the
Continuing Directors then on the Board of Directors.
(j) "current per share market price" shall have the meaning set
forth in Section 11(d)(i) hereof.
(k) "Current Value" shall have the respective meanings set forth in
Section 11(a)(iv) hereof and Section 24 hereof.
(l) "Distribution Date" shall have the meaning set forth in
Section 3 hereof.
(m) "equivalent preferred shares" shall have the meaning set forth
in Section 11(b) hereof.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, as in effect on the date of this Agreement.
(o) "Exchange ratio" shall have the meaning set forth in Section 24
hereof.
(p) "Final Expiration Date" shall have the meaning set forth in
Section 7 hereof.
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(q) "issuer" shall have the meaning set forth in Section 13 hereof.
(r) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such
entity.
(s) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Shares, par value .001, of the Company having the
rights and preferences set forth in the Form of Certificate of Designations
attached to this Agreement as Exhibit A.
(t) "Purchase Price" shall have the meaning set forth in Section 4
hereof.
(u) "Record Date" shall have the meaning set forth in the second
paragraph at the beginning of this Agreement.
(v) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(w) "Redemption Price" shall have the meaning set forth in Section
23 hereof.
(x) "Right" shall have the meaning set forth in the second
paragraph at the beginning of this Agreement.
(y) "Right Certificate" shall have the meaning set forth in Section
3 hereof.
(z) "Rights Agent" shall have the meaning set forth in the first
paragraph at the beginning of this Agreement.
(aa) "Securities Act" shall have the meaning set forth in Section 9
hereof.
(bb) "Security" shall have the meaning set forth in Section 11(d)(i)
hereof.
(cc) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
(dd) "Spread" shall have the meaning set forth in Section 11(a)(iv)
hereof.
(ee) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such
Person.
(ff) "Substitution Period" shall have the meaning set forth in
Section 11(a)(iv) hereof.
(gg) "Summary of Rights" shall have the meaning set forth in Section
3 hereof.
(hh) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment.
The Company may from time to time appoint such co-Rights Agents as it may
deem necessary or desirable upon ten (10) days prior written notice to the
Rights Agent. The Rights Agent shall have no duty to supervise and shall in
no event be liable for the acts or omissions of any such co-Rights Agent.
Section 3. ISSUE OF RIGHT CERTIFICATES. Until the earlier of (i)
the tenth day after the Shares Acquisition Date or (ii) the tenth business
day (or such later date as may be determined by action of the Board of
Directors (upon approval by a majority of the Continuing Directors) prior to
such time as any Person becomes an Acquiring Person) after the date of the
commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity
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holding Common Shares for or pursuant to the terms of any such plan) of, or
of the first public announcement of the intention of any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding Common
Shares for or pursuant to the terms of any such plan) to commence, a tender
or exchange offer the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 15% or more of the
then outstanding Common Shares (including any such date which is after the
date of this Agreement and prior to the issuance of the Rights; the earlier
of such dates being herein referred to as the "Distribution Date"), (x) the
Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right Certificates)
and not by separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer of
Common Shares. As soon as practicable after the Distribution Date, the
Company will notify the Rights Agent thereof and the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or
cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, to each record holder of Common
Shares as of the Close of Business on the Distribution Date, at the address
of such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B hereto (a "Right Certificate"),
evidencing one Right for each Common Share so held. As of the Distribution
Date, the Rights will be evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares,
in substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Record Date, at the address of such holder
shown on the records of the Company. With respect to certificates for Common
Shares outstanding as of the Record Date, until the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached
thereto. Until the Distribution Date (or the earlier of the Redemption Date
or the Final Expiration Date), the surrender for transfer of any certificate
for Common Shares outstanding on the Record Date, with or without a copy of
the Summary of Rights attached thereto, shall also constitute the transfer of
the Rights associated with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the
last sentence of this paragraph (c)) after the Record Date but prior to the
earliest of the Distribution Date, the Redemption Date or the Final
Expiration Date shall have impressed on, printed on, written on or otherwise
affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Ultratech
Stepper, Inc. and The First National Bank of Boston, dated as of
February 11, 1997 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Ultratech Stepper, Inc. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer
be evidenced by this certificate. Ultratech Stepper, Inc. will mail
to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances, as set forth in the Rights Agreement, Rights
issued to any Person who becomes an Acquiring Person (as defined in
the Rights Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and
the forms of election to purchase Preferred Shares and of assignment to be
printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any applicable law or with
any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange or transaction reporting system on which the Rights may
from time to time be listed, or to conform to usage. Subject to the
provisions of Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share
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as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of
such one one-hundredths of a Preferred Share and the Purchase Price shall be
subject to adjustment as provided herein.
Section 5. COUNTERSIGNATURE AND REGISTRATION. The Right
Certificates shall be executed on behalf of the Company by its Chairman of
the Board, its President, any of its Vice Presidents, or its Treasurer or
Chief Financial Officer, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose
unless countersigned. In case any officer of the Company who shall have
signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery
by the Company, such Right Certificates, nevertheless, may be countersigned
by the Rights Agent and issued and delivered by the Company with the same
force and effect as though the person who signed such Right Certificates had
not ceased to be such officer of the Company; and any Right Certificate may
be signed on behalf of the Company by any person who, at the actual date of
the execution of such Right Certificate, shall be a proper officer of the
Company to sign such Right Certificate, although at the date of the execution
of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated for such purpose, books for
registration and transfer of the Right Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the
Right Certificates, the number of Rights evidenced on its face by each of the
Right Certificates and the date of each of the Right Certificates.
Section 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
Subject to the provisions of Section 14 hereof, at any time after the Close
of Business on the Distribution Date, and at or prior to the Close of
Business on the earlier of the Redemption Date or the Final Expiration Date,
any Right Certificate or Right Certificates (other than Right Certificates
representing Rights that have become void pursuant to Section 11(a)(ii)
hereof or that have been exchanged pursuant to Section 24 hereof) may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number
of one one-hundredths of a Preferred Share (or other securities or property)
as the Right Certificate or Right Certificates surrendered then entitled such
holder to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Right Certificate or Right Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender
the Right Certificate or Right Certificates to be transferred, split up,
combined or exchanged at the office of the Rights Agent designated for such
purpose. Thereupon the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the
case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Right
Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Right Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Right Certificate if mutilated, the Company will make and
deliver a new Right Certificate of like tenor to the Rights Agent for
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS. (a) Except as provided in Section 23(c), the registered holder of any
Right Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated
for such purpose, together with payment of the Purchase Price for each one
one-hundredth of a Preferred Share as to which the Rights are exercised, at
or prior to the earliest of (i) the Close of Business on February 9, 2007,
(the "Final Expiration Date"), (ii) the time at which the Rights are redeemed
as provided in Section 23 hereof (the "Redemption Date"), (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof, or (iv) the
consummation of any merger or other acquisition involving the Company
pursuant to an agreement described in Section 1(c)(ii)(A)(2) hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred
Share pursuant to the exercise of a Right shall initially be $145.00, shall
be subject to adjustment from time to time as provided in Sections 11 and 13
hereof and shall be payable in lawful money of the United States of America
in accordance with paragraph (c) below.
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(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of
such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company,
the Rights Agent shall thereupon promptly (i) (A) requisition from any
transfer agent of the Preferred Shares (if such transfer agent is an entity
other than the Rights Agent) certificates for the number of Preferred Shares
to be purchased and the Company hereby irrevocably authorizes such transfer
agent to comply with all such requests, or (B) requisition from a depositary
agent properly appointed by the Company depositary receipts representing such
number of one one-hundredths of a Preferred Share as are to be purchased (in
which case certificates for the Preferred Shares represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Company hereby directs the depositary agent to comply with such request, (ii)
when appropriate, requisition from the Company the amount of cash to be paid
in lieu of issuance of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the registered holder
of such Right Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt, deliver
such cash to or upon the order of the registered holder of such Right
Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder of such Right Certificate
or to his duly authorized assigns, subject to the provisions of Section 14
hereof.
(e) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred
Shares or any Preferred Shares held in its treasury, the number of Preferred
Shares that will be sufficient to permit the exercise in full of all
outstanding Rights in accordance with this Section 7.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any
purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All
Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and
no Right Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired by the Company otherwise than upon the exercise
thereof. The Rights Agent shall deliver all cancelled Right Certificates to
the Company, or shall, at the written request of the Company, destroy such
cancelled Right Certificates, and in such case shall deliver a certificate of
destruction thereof to the Company.
Section 9. AVAILABILITY OF PREFERRED SHARES. (a) The company
covenants and agrees that it will use its best efforts to cause to be
reserved and kept available out of and to the extent of its authorized and
unissued shares of Preferred Stock not reserved for another purpose (and,
following the occurrence of an event described in Section 11(a)(ii) or
Section 13(a), out of its authorized and unissued shares of Common Stock
and/or other securities), the number of Preferred Shares (and, following the
occurrence of any such event, Common Stock and/or other securities) that will
be sufficient to permit the exercise in full of all outstanding Rights.
(b) If the Preferred Shares (or, following the occurrence of an
event described in Section 11(a)(ii) or Section 13(a), the Common Shares
and/or other securities) are at any time listed on a national securities
exchange or included for quotation on any transaction reporting system, then
so long as the Preferred Shares (and, following the occurrence of any such
event, Common Shares and/or other securities) issuable and deliverable upon
exercise of the Rights may be listed on such exchange or included for
quotation on any such transaction reporting system, the Company shall use its
best efforts to cause, from and after such time as the Rights become
exercisable (but only to the extent that it is reasonably likely that the
Rights will be exercised), all shares reserved for such issuance to be listed
on such exchange or included for quotation on any such transaction reporting
system upon official notice of issuance upon such exercise.
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(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of an
event described in Section 11(a)(ii) in which the consideration to be
delivered by the Company upon exercise of the Rights has been determined in
accordance with Section 11(a)(iv) hereof, or as soon as is required by law
following the Distribution Date, as the case may be, a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective
as soon as practicable after such filing and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities or (B) the
date of expiration of the Rights. The Company may temporarily suspend, for a
period not to exceed ninety (90) days after the date set forth in clause (i)
of the first sentence of this Section 9(c), the exercisability of the Rights
in order to prepare and file such registration statement and permit it to
become effective. Upon any such suspension, the Company shall issue a public
announcement stating, and notify the Rights Agent, that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement
and notification to the Rights Agent at such time as the suspension is no
longer in effect. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the
Rights. Notwithstanding any provision of this Agreement to the contrary, the
Rights shall not be exercisable in any jurisdiction, unless the requisite
qualification in such jurisdiction shall have been obtained, or an exemption
therefrom shall be available and until a registration statement has been
declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares delivered upon
exercise of Rights shall, at the time of delivery of the certificates for
such Preferred Shares (subject to payment of the Purchase Price), be duly and
validly authorized and issued and fully paid and nonassessable shares.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Right
Certificates or of any Preferred Shares upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Right Certificates to a
person other than, or the issuance or delivery of certificates or depositary
receipts for the Preferred Shares in a name other than that of, the
registered holder of the Right Certificate evidencing Rights surrendered for
exercise or to issue or to deliver any certificates or depositary receipts
for Preferred Shares upon the exercise of any Rights until any such tax shall
have been paid (any such tax being payable by the holder of such Right
Certificate at the time of surrender) or until it has been established to the
Company's reasonable satisfaction that no such tax is due.
Section 10. PREFERRED SHARES RECORD DATE. Each person in whose name
any certificate for Preferred Shares is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares represented thereby on, and such certificate shall be dated,
the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and
payment is a date upon which the Preferred Shares transfer books of the
Company are closed, such person shall be deemed to have become the record
holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Right Certificate shall not be entitled to any rights of a holder
of Preferred Shares for which the Rights shall be exercisable, including,
without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled
to receive any notice of any proceedings of the Company, except as provided
herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number of Preferred Shares covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date
of this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the
Preferred Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), except as otherwise provided in this Section 11(a), the
Purchase Price in effect at the time of the record date for such dividend or
of the effective date of such subdivision, combination or reclassification,
and the number and kind of shares of capital stock issuable on such date,
shall be
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proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately prior to
such date and at a time when the Preferred Shares transfer books of the
Company were open, such holder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification; PROVIDED, HOWEVER, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par
value of the shares of capital stock of the Company issuable upon exercise of
one Right. If an event occurs which would require an adjustment under both
Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this
Section 11(a)(i) shall be in addition to, and shall be made prior to any
adjustment required pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event that
any Person becomes an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a price equal to
the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of the Company as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of
one one-hundredths of a Preferred Share for which a Right is then exercisable
and dividing that product by (y) 50% of the then current per share market
price of the Company's Common Shares (determined pursuant to Section 11(d)
hereof) on the date of the occurrence of such event. Except as provided in
Section 23(C), in the event that any Person shall become an Acquiring Person
and the Rights shall then be outstanding, the Company shall not take any
action which would eliminate or diminish the benefits intended to be afforded
by the Rights.
Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of an event in which any Person shall become
an Acquiring Person, any Rights beneficially owned by (A) an Acquiring Person
or an Associate or Affiliate of an Acquiring Person, (B) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (C) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such
and receives such Rights pursuant to either (1) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests
in such Acquiring Person or to any Person with whom the Acquiring Person has
any continuing agreement, arrangement or understanding regarding the
transferred Rights or (2) a transfer which the Board of Directors, upon
approval by a majority of the Continuing Directors, has determined is part of
a plan, arrangement or understanding which has as a primary purpose or effect
the avoidance of this Section 11(a)(ii), shall become null and void without
any further action and no holder of such Rights shall have any rights
whatsoever with respect to such Rights, whether under any provision of this
Agreement or otherwise. No Right Certificate shall be issued pursuant to
Section 3 that represents Rights beneficially owned by an Acquiring Person
whose Rights would be void pursuant to the preceding sentence or any
Associate or Affiliate thereof; no Right Certificate shall be issued at any
time upon the transfer of any Rights to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence or any Associate or
Affiliate thereof or to any nominee of such Acquiring Person, Associate or
Affiliate; and any Right Certificate delivered to the Rights Agent for
transfer to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence shall be cancelled. The Company shall use all reasonable
efforts to ensure that the provisions of this Section 11(a)(ii) are complied
with, but shall have no liability to any holder of Right Certificates or
other Person as a result of its failure to make any determinations with
respect to an Acquiring person or its Affiliates, Associates or transferees
hereunder.
(iii) The right to buy Common Shares of the Company pursuant to
subparagraph (ii) of this paragraph (a) shall not arise if the event causing
such Person to become an Acquiring Person (A) is a consolidation, merger,
sale, transfer or similar transaction subject to Section 13 hereof, or (B) is
an acquisition of shares of Common Stock pursuant to a tender offer or an
exchange offer for all outstanding Common Shares at a price and on terms
determined by at least a majority of the Continuing Directors, and after
receiving advice from one or more investment banking firms, to be (1) at a
price which is fair to stockholders (taking into account all factors which
such members of the Board of Directors deem relevant including, without
limitation, prices which could reasonably be achieved if the Company or its
assets were sold in an orderly basis designed to realize maximum value) and
(2) otherwise in the best interests of the Company and its stockholders.
(iv) In lieu of issuing Common Shares in accordance with
Section 11(a)(ii) hereof, the Company may, if the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors, determines
that such action is necessary or appropriate and not contrary to the interest
of holders of Rights (and, in the event that the number of Common Shares
which are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights,
or if any necessary regulatory approval for such issuance has not been
obtained by the Company), the Company shall: (A) determine the excess of (1)
the value of the Common Shares issuable upon the exercise of a Right (the
"Current Value")
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over (2) the Purchase Price (such excess being referred to as the "Spread")
and (B) with respect to each Right, make adequate provision to substitute for
such Common Shares, upon exercise of the Rights, (1) cash, (2) a reduction in
the Purchase Price, (3) other equity securities of the Company (including,
without limitation, shares or units of shares of any series of preferred
stock which the Board of Directors of the Company, upon approval by a
majority of the Continuing Directors, has deemed to have the same value as
Common Shares (such shares or units of shares of preferred stock are herein
called "common stock equivalents")), except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, (4)
debt securities of the Company, except to the extent that the Company has not
obtained any necessary regulatory approval for such issuance, (5) other
assets or (6) any combination of the foregoing, having an aggregate value
equal to the Current Value, where such aggregate value has been determined by
the Board of Directors of the Company, upon approval by a majority of the
Continuing Directors, based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors of the Company,
upon approval by a majority of the Continuing Directors; PROVIDED, HOWEVER,
if the Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty (30) days following the occurrence
of an event described in Section 11(a)(ii), then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, Common Shares (to the extent
available), except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the Spread.
If the Board of Directors, upon approval by a majority of the Continuing
Directors, shall determine in good faith that it is likely that sufficient
additional Common Shares could be authorized for issuance upon exercise in
full of the Rights or that any necessary regulatory approval for such
issuance will be obtained, the thirty (30) day period set forth above may be
extended to the extent necessary, but not more than ninety (90) days after
the occurrence of an event described in Section 11(a)(ii), in order that the
Company may seek stockholder approval for the authorization of such
additional shares or take action to obtain such regulatory approval (such
period, as it may be extended, the "Substitution Period"). To the extent
that the Company determines that some action need be taken pursuant to the
first and/or second sentences of this Section 11(a)(iv), the Company (x)
shall provide that such action shall apply uniformly to all outstanding
Rights held by holders entitled to receive Common Shares or other securities
or property upon exercise of such Rights and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period
in order to seek any authorization of additional shares, to take any action
to obtain any required regulatory approval and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement
at such time as the suspension is no longer in effect and shall promptly
notify the Rights Agent of such suspension. For purposes of this Section
11(a)(iv), the value of the Common Shares shall be the current per share
market price (as determined pursuant to Section 11(d) hereof) of the Common
Shares at the Close of Business on the date of the occurrence of one of the
events described in Section 11(a)(ii) and the value of any "common stock
equivalent" shall be deemed to have the same value as the Common Shares on
such date.
(b) In the event that the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Preferred Shares (or shares having
the same rights, privileges and preferences as the Preferred Shares
("equivalent preferred shares")) or securities convertible into Preferred
Shares or equivalent preferred shares at a price per Preferred Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares)
less than the then current per share market price of the Preferred Shares (as
defined in Section 11(d)) on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred shares so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered
for subscription or purchase (or into which the convertible securities so to
be offered are initially convertible). In case such subscription price may
be paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the Board of Directors of the Company, upon approval by a majority of the
Continuing Directors, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Preferred Shares owned by or held for the account of
the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a
record date is fixed; and in the event that such rights, options or warrants
are not so issued, the Purchase Price shall be adjusted to be the Purchase
Price which would then be in effect if such record date had not been fixed.
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<PAGE>
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to
be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the then current per share market price of
the Preferred Shares on such record date, less the fair market value (as
determined in good faith by the Board of Directors of the Company, upon
approval by a majority of the Continuing Directors, whose determination shall
be described in a statement filed with the Rights Agent) of the portion of
the assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one Preferred Share and the
denominator of which shall be such current per share market price of the
Preferred Shares. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the thirty (30) consecutive
Trading Days (as such term is hereinafter defined) immediately prior to such
date; PROVIDED, HOWEVER, that in the event that the current per share market
price of the Security is determined during a period following the
announcement by the issuer of such Security of (A) a dividend or distribution
on such Security payable in shares of such Security or securities convertible
into such shares, or (B) any subdivision, combination or reclassification of
such Security and prior to the expiration of thirty (30) Trading Days after
the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security.) The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed
or admitted to trading on the Nasdaq National Market ("Nasdaq") or, if the
Security is not listed or admitted to trading on the Nasdaq, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Security is listed or admitted to trading or, if the Security is not listed
or admitted to trading on any national securities exchange, the last quoted
price or, if not so quoted, the average of the high bid and low asked prices
in the over-the-counter market, as reported by the Nasdaq or such other
system then in use, or, if on any such date the Security is not quoted by any
such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Security
selected by the Board of Directors of the Company, upon approval by a
majority of the Continuing Directors. If on any such date no market maker is
making a market in the Security, the "current per share market price" of such
Security on such date as determined in good faith by the Board of Directors
of the Company as provided for above shall be used. The term "Trading Day"
shall mean a day on which the principal national securities exchange on which
the Security is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per share
market price of the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one hundred. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value
per share as determined in good faith by the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors, whose
determination shall be described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one
one-millionth of a Preferred Share or one ten-thousandth of any other share
or security as the case may be. Notwithstanding the first sentence of this
Section 11(e), any adjustment required by this Section 11 shall be made no
later than the earlier of (i) three years from the date of the transaction
which requires such adjustment or (ii) the date of the expiration of the
right to exercise any Rights.
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(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to
the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of
a Preferred Share purchasable from time to time hereunder upon exercise of
the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall
thereafter evidence the right to purchase, at the adjusted Purchase Price,
that number of one one-hundredths of a Preferred Share (calculated to the
nearest one one-millionth of a Preferred Share) obtained by (i) multiplying
(x) the number of one one-hundredths of a share covered by a Right
immediately prior to this adjustment by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after
such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding
after such adjustment of the number of Rights shall be exercisable for the
number of one one-hundredths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one ten-thousandth) obtained by dividing
the Purchase Price in effect immediately prior to adjustment of the Purchase
Price by the Purchase Price in effect immediately after adjustment of the
Purchase Price. The Company shall make a public announcement of its election
to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be
made. This record date may be the date on which the Purchase Price is
adjusted or any day thereafter, but, if the Right Certificates have been
issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment
of the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of
Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Right Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed
shall be issued, executed and countersigned in the manner provided for herein
and shall be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price
or the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-hundredths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
of the Preferred Shares and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the Preferred Shares and
other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such
adjustment; PROVIDED, HOWEVER that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring
such adjustment.
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(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price,
in addition to those adjustments expressly required by this Section 11, as
and to the extent that it in its sole discretion shall determine to be
advisable in order that any consolidation or subdivision of the Preferred
Shares, issuance wholly for cash of any Preferred Shares at less than the
current market price, issuance wholly for cash of Preferred Shares or
securities which by their terms are convertible into or exchangeable for
Preferred Shares, dividends on Preferred Shares payable in Preferred Shares
or issuance of rights, options or warrants referred to hereinabove in Section
11(b), hereafter made by the Company to holders of its Preferred Shares shall
not be taxable to such stockholders.
(n) In the event that at any time after the date of this Agreement
and prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A)
the number of one one-hundredths of a Preferred Share purchasable after such
event upon proper exercise of each Right shall be determined by multiplying
the number of one one-hundredths of a Preferred Share so purchasable
immediately prior to such event by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (B) each Common Share outstanding immediately after
such event shall have issued with respect to it that number of Rights which
each Common Share outstanding immediately prior to such event had issued with
respect to it. The adjustments provided for in this Section 11(n) shall be
made successively whenever such a dividend is declared or paid or such a
subdivision, combination or consolidation is effected.
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in Sections 11 and 13
hereof, the Company shall promptly (a) prepare a certificate setting forth
such adjustment, and a brief statement of the facts accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for
the Common Shares or the Preferred Shares (if such transfer agent is an
entity other than the Rights Agent) a copy of such certificate and (c) mail a
brief summary thereof to each holder of a Right Certificate in accordance
with Section 25 hereof. Notwithstanding the foregoing sentence, the failure
by the Company to make such certification or give such notice shall not
affect the validity of or the force or effect of the requirement for such
adjustment. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment contained therein and shall not be deemed
to have knowledge of such adjustment unless and until it shall have received
such certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER. (a) After the Rights become exercisable, except as provided in
Section 13(b) hereof, in the event, directly or indirectly, (1) the Company
shall consolidate with, or merge with and into, any other Person, (2) any
Person shall consolidate with the Company, or merge with and into the Company
and the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the Common Shares shall be changed into or exchanged for stock
or other securities of any other Person (or the Company) or cash or any other
property, or (3) the Company shall sell or otherwise transfer (or one or more
of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, directly or indirectly, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person other than the Company or one or more
of its wholly-owned Subsidiaries, then, and in each such case, proper
provision shall be made so that (i) each holder of a Right (except as
otherwise provided herein) shall thereafter have the right to receive, upon
the exercise thereof at a price equal to the then current Purchase Price
multiplied by the number of one one-hundredths of a Preferred Share for which
a Right is then exercisable, in accordance with the terms of this Agreement
and in lieu of Preferred Shares, such number of Common Shares of such other
Person (including the Company as successor thereto or as the surviving
corporation) as shall equal the result obtained by (A) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable and dividing that product by (B)
50% of the then current per share market price of the Common Shares of such
other Person (determined pursuant to Section 11(d) hereof) on the date of
consummation of such consolidation, merger, sale or transfer; (ii) the issuer
of such Common Shares shall thereafter be liable for, and shall assume, by
virtue of such consolidation, merger, sale or transfer, all the obligations
and duties of the Company pursuant to this Agreement; (iii) the term
"Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation
of a sufficient number of its Common Shares in accordance with Section 9
hereof) in connection with such consummation as may be necessary to assure
that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to the Common Shares thereafter deliverable
upon the exercise of the Rights. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such issuer shall have executed and delivered to the Rights Agent a
supplemental agreement so providing. The
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Company shall not enter into any transaction of the kind referred to in this
Section 13 if at the time of such transaction there are any rights, warrants,
instruments or securities outstanding or any agreements or arrangements
which, as a result of the consummation of such transaction, would eliminate
or substantially diminish the benefits intended to be afforded by the Rights.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
The supplemental agreement referred to above in this Section 13(a)
to be entered into by the Company and the Rights Agent shall also provide
that, as soon as practicable after the date of any of the events described in
this Section 13(a), such issuer shall:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, use its best efforts to cause
such registration statement to become effective as soon as practicable after
such filing and use its best efforts to cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the Final Expiration Date, and similarly comply
with applicable state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the Rights on a
national securities exchange or to meet the eligibility requirements for
quotation on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such issuer which comply in all respects with the requirements
for registration on Form 10 (or any successor form) under the Exchange Act.
(b) In the event of any merger or other acquisition transaction
involving the Company pursuant to an agreement described in Section
1(c)(ii)(A)(2), the provisions of Section 13(a) hereof shall not be
applicable to such transaction and this Rights Agreement and the rights of
holders of Rights hereunder shall be terminated in accordance with Section
7(a) hereof.
(c) The term "issuer," for purposes of this Section 13, shall refer
to the Person (or Affiliate or Associate) referred to in Section 13(a);
PROVIDED, HOWEVER, that (i) if such Person (or Affiliate or Associate) is a
direct or indirect Subsidiary of another Person, the term "issuer" shall
refer to such other Person, and (ii) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the term "issuer" shall
refer to whichever of such Persons is the issuer of such Common Shares having
the greatest aggregate value.
(d) If, for any reason, the Rights cannot be exercised for Common
Shares of such issuer as provided in Section 13(a), then each holder of
Rights shall have the right to exchange its Rights for cash from such issuer
in an amount equal to the number of Common Shares that it would otherwise be
entitled to purchase multiplied by 50% of the current per share market price,
as determined pursuant to Section 11(d) hereof, of such Common Shares of such
issuer. If, for any reason, the foregoing provision cannot be applied to
determine the cash amount into which the Rights are exchangeable, then the
Board of Directors of the Company, upon approval by a majority of the
Continuing Directors, based upon the advice of one or more nationally
recognized investment banking firms, shall determine such amount reasonably
and with good faith due to the holders of Rights. Any such determination
shall be final and binding on the Rights Agent and the holders of Rights.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The
Company shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for
the Trading Day immediately prior to the date on which such fractional Rights
would have been otherwise issuable. The closing price for any day shall be
the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the Nasdaq
or, if the Rights are not listed or admitted to trading on the Nasdaq, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by Nasdaq or such other
system then in use or, if on any such date the Rights are not quoted by any
such organization, the average of the closing bid and asked prices as
furnished by a professional market
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maker making a market in the Rights selected by the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors. If on any
such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company, upon approval by a majority of the Continuing
Directors, shall be used. If the Rights are not publicly traded, the current
market value of a whole Right shall equal the difference between the closing
price of a Common Share (as determined pursuant to the second sentence of
Section 11(d)(i) hereof) less the current Purchase Price, multiplied by 100.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other
than fractions which are integral multiples of one one-hundredth of a
Preferred Share). Fractions of Preferred Shares in integral multiples of one
one-hundredth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement
between the Company and a depositary selected by it; PROVIDED, that such
agreement shall provide that the holders of such depositary receipts shall
have all the rights, privileges and preferences to which they are entitled as
beneficial owners of the Preferred Shares represented by such depositary
receipts. In lieu of fractional Preferred Shares that are not integral
multiples of one one-hundredth of a Preferred Share, the Company shall pay to
the registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of
the current market value of one Preferred Share. For the purposes of this
Section 14(b), the current market value of a Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise. If the Preferred Shares are not publicly traded,
the current market value shall be determined in accordance with Section
11(d)(ii) hereof.
(c) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares
upon exercise of a Right (except as provided above).
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of
the Right Certificates (and, prior to the Distribution Date, the registered
holders of the Common Shares); and any registered holder of any Right
Certificate (or, prior to the Distribution Date, of the Common Shares),
without the consent of the Rights Agent or of the holder of any other Right
Certificate (or, prior to the Distribution Date, of the Common Shares), may,
in such holder's own behalf and for such holder's own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company
to enforce, or otherwise act in respect of, such holder's right to exercise
the Rights evidenced by such Right Certificate in the manner provided in such
Right Certificate and in this Agreement. Without limiting the foregoing or
any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at
law for any breach of this Agreement and will be entitled to specific
PERFORMANCE OF THE OBLIGATIONS HEREUNDER, AND INJUNCTIVE RELIEF AGAINST
ACTUAL OR THREATENED VIOLATIONS OF THE OBLIGATIONS OF ANY PERSON SUBJECT TO
THIS AGREEMENT.
Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer; and
(c) subject to Sections 6 and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Right
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on
the Right Certificates or the associated Common Shares certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary.
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any
holder of a Right or other Person as a result of its inability to perform any
of its
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obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; PROVIDED, HOWEVER, the Company
must use its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or
any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained
herein or in any Right Certificate be construed to confer upon the holder of
any Right Certificate, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or
to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Right Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its
reasonable expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Company also agrees to indemnify
the Rights Agent for, and to hold it harmless against, any loss, liability,
or expense, incurred without gross negligence, bad faith or willful
misconduct on the part of the Rights Agent, for any action taken, suffered or
omitted by the Rights Agent in connection with the execution, acceptance and
administration of this Agreement and the exercise and performance hereunder
of its duties, including the costs and expenses of defending against and
appealing any claim of liability in the premises. The indemnity provided
herein shall survive the termination of this Agreement and the expiration of
the Rights.
The Rights Agent shall be protected and shall incur no liability
for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement and the exercise and
performance of its duties hereunder in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the
proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT. Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on
the part of any of the parties hereto, provided that such corporation would
be eligible for appointment as a successor Rights Agent under the provisions
of Section 21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement any of the Right Certificates
shall have been countersigned but not delivered, any such successor Rights
Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Right Certificates so countersigned; and in case at
that time any of the Right Certificates shall not have been countersigned,
the Rights Agent may countersign such Right Certificates either in its prior
name or in its changed name; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
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(a) The Rights Agent may consult with legal counsel of its choice
(who may be legal counsel for the Company), and the advice or opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken, suffered or omitted by it in good faith and in
accordance with such advice or opinion.
(b) Whenever in the administration, exercise and performance of its
duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company
prior to taking, suffering or omitting any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and
any other Person only for its own gross negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed
to have been made by the Company only.
(e) The Rights Agent shall not be under any liability or
responsibility in respect of the legality, validity or enforceability of this
Agreement or the execution and delivery hereof (except the due execution
hereof by the Rights Agent) or in respect of the legality, validity or
enforceability or the execution of any Right Certificate (except its
countersignature thereof); nor shall it be liable or responsible for any
breach by the Company of any covenant or condition contained in this
Agreement or in any Right Certificate; nor shall it be responsible for any
change in the exercisability of the Rights (including the Rights becoming
void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of
the Rights (including the manner, method or amount thereof) provided for in
Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts
that would require any such change or adjustment (except with respect to the
exercise of Rights evidenced by Right Certificates after receipt of the
certificate described in Section 12 hereof); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may reasonably
be required by the Rights Agent for the carrying out or performing by the
Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the administration, exercise and performance of
its duties hereunder from any one of the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Secretary or the
Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be responsible
or liable for any action taken, suffered or omitted by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. Any application by the Rights Agent
for written instructions from the Company may, at the option of the Rights
Agent, set forth in writing any action proposed to be taken or omitted by the
Rights Agent under this Rights Agreement and the date on and/or after which
such action shall be taken or such omission shall be effective. The Rights
Agent shall not be liable for any action taken by, or omission of, the Rights
Agent in accordance with a proposal included in any such application on or
after the date specified in such application (which date shall not be less
than five (5) Business Days after the date any officer of the Company
actually received such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such
action (or the effective date in the case of an omission), the Rights Agent
shall have received written instructions in response to such application
specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as
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though it were not Rights Agent under this Agreement. Nothing herein shall
preclude the Rights Agent from acting in any other capacity for the Company
or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any
such act, default, neglect or misconduct, provided reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its
rights if the Rights Agent in good faith believes that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise, transfer, split up, combination or exchange, the
certification on the form of assignment or form of election to purchase, as
the case may be, that the Rights evidenced by the Right Certificate are not
owned by an Acquiring Person, or an Affiliate or Associate thereof, has
either not been completed or in any manner indicates any other response
thereto, the Rights Agent shall not take any further action with respect to
such requested exercise, transfer, split up, combination or exchange, without
first consulting with the Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under
this Agreement upon thirty (30) days' notice in writing mailed to the Company
and to each other transfer agent of the Common Shares or Preferred Shares (if
any) (as to which the Rights Agent has received prior written notice) by
registered or certified mail, and the Company shall mail notice thereof to
the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon thirty (30) days'
notice in writing, mailed to the Rights Agent or successor Rights Agent, as
the case may be, and to each other transfer agent of the Common Shares or
Preferred Shares (if any) (as to which the Rights Agent has received prior
written notice) by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. If the Rights Agent shall resign or
be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make
such appointment within a period of thirty (30) days after giving notice of
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of
a Right Certificate (who shall, with such notice, submit such holder's Right
Certificate for inspection by the Company), then the registered holder of any
Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of any state of the
United States, in good standing, authorized under such laws to exercise
corporate trust or stock transfer powers, and subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose.
Not later than the effective date of any such appointment the Company shall
file notice thereof in writing with the predecessor Rights Agent and each
other transfer agent of the Common Shares or Preferred Shares (if any), and
mail a notice thereof in writing to the registered holders of the Right
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors, upon approval by a
majority of the Continuing Directors, to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date
and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to Common Shares so issued or sold pursuant to the
exercise of stock options or under any employee benefit plan or arrangement
or upon the exercise, conversion or exchange of securities of the Company
currently outstanding or issued at any time in the future by the Company and
(b) may, in any other case, if deemed necessary
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or appropriate by the Board of Directors of the Company, upon approval by a
majority of the Continuing Directors, issue Right Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
PROVIDED, HOWEVER, that (i) no such Right Certificate shall be issued and
this sentence shall be null and void AB INITIO if, and to the extent that,
such issuance or this sentence would create a significant risk of or result
in material adverse tax consequences to the Company or the Person to whom
such Right Certificate would be issued or would create a significant risk of
or result in such options' or employee plans' or arrangements' failing to
qualify for otherwise available special tax treatment and (ii) no such Right
Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. REDEMPTION. (a) The Company may, at its option, upon
approval by a majority of the Continuing Directors, at any time prior to the
earlier of (i) the tenth business day following the Shares Acquisition Date,
or (ii) such date or dates on or after the tenth business day following the
Shares Acquisition Date to which such option may be extended by a majority of
the Continuing Directors (for one or more successive 10 day periods) by
vote(s) first taken or written consent(s) first given prior to the tenth
business day following the Shares Acquisition Date and, thereafter, prior to
the completion of any such 10 day extension or extensions (or, if the Shares
Acquisition Date shall have occurred prior to the Record Date, prior to (A)
the tenth business day following the Record Date or (B) such date or dates on
or after the tenth business day after the Record Date to which such option
may be extended by a majority of the Continuing Directors (for one or more
successive 10 day periods) by vote(s) first taken or written consent(s) first
given prior to the tenth business day following the Record Date and,
thereafter, prior to the completion of any such 10 day extension or
extensions), redeem all but not less than all the then outstanding Rights at
a redemption price of $.01 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the
"Redemption Price"), and the Company may, at its option, pay the Redemption
Price either in cash, Common Shares (based on the current per share market
price thereof (as determined pursuant to Section 11(d) hereof) at the time of
redemption), or any other form of consideration deemed appropriate by the
Board of Directors. The redemption of the Rights by the Board of Directors
may be made effective at such time on such basis and with such conditions as
the Board of Directors in its sole discretion may establish, upon approval by
a majority of the Continuing Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of
this Section 23, and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of
the holders of Rights shall be to receive the Redemption Price. The Company
shall promptly give public notice of any such redemption; PROVIDED, HOWEVER,
that the failure to give, or any defect in, any such notice shall not affect
the validity of such redemption. Within 10 days after such action of the
Board of Directors ordering the redemption of the Rights, the Company shall
give notice of such redemption to the Rights Agent and shall mail a notice of
redemption to all the holders of the then outstanding Rights at their last
addresses as they appear upon the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent
for the Common Shares. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made. Neither the Company nor any of
its Affiliates or Associates may redeem, acquire or purchase for value any
Rights at any time in any manner other than that specifically set forth in
this Section 23 or in Section 24 hereof, and other than in connection with
the purchase of Common Shares prior to the Distribution Date.
(c) Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any
time when the Rights are redeemable hereunder.
Section 24. EXCHANGE. (a) The Company, at its option, upon approval
by a majority of the Continuing Directors, at any time after any Person
becomes an Acquiring Person, may exchange all or part of the then outstanding
and exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 11(a)(ii) hereof) for Common Shares at
an exchange ratio of one Common Share per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring
after the date hereof (such exchange ratio being hereinafter referred to as
the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors
shall not be empowered to effect such exchange at any time after any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50%
or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the
right to exercise
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such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of Common Shares equal to the number
of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; PROVIDED,
HOWEVER that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a
notice of any such exchange to all of the holders of such Rights at their
last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number
of Rights which will be exchanged. Any partial exchange shall be effected
pro rata based on the number of Rights (other than Rights which have become
void pursuant to the provisions of Section 11(a)(ii) hereof) held by each
holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at
its option, may substitute Preferred Shares (or equivalent preferred shares,
as such term is defined in Section 11(b) hereof) for Common Shares
exchangeable for Rights, at the initial rate of one one-hundredth of a
Preferred Share (or equivalent preferred share) for each Common Share, as
appropriately adjusted to reflect adjustments in the voting rights of the
Preferred Shares pursuant to the terms thereof, so that the fraction of a
Preferred Share delivered in lieu of each Common Share shall have the same
voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares
or Preferred Shares issued but not outstanding or authorized but unissued to
permit any exchange of Rights as contemplated in accordance with Section
24(a), the Company shall either take such action as may be necessary to
authorize additional Common Shares or Preferred Shares for issuance upon
exchange of the Rights or alternatively, at the option of the Board of
Directors, upon approval by a majority of the Continuing Directors, with
respect to each Right (i) pay cash in an amount equal to the Purchase Price,
in lieu of issuing Common Shares or Preferred Shares in exchange therefor, or
(ii) issue debt or equity securities, or a combination thereof, having a
value equal to the Current Value (as hereinafter defined) of the Common
Shares or Preferred Shares exchangeable for each such Right, where the value
of such securities shall be determined by a nationally recognized investment
banking firm selected by the Board of Directors, upon approval by a majority
of the Continuing Directors, or (iii) deliver any combination of cash,
property, Common Shares, Preferred Shares and/or other securities having a
value equal to the Current Value in exchange for each Right. The term
"Current Value," for the purposes of this Section 24, shall mean the product
of the current per share market price of Common Shares (determined pursuant
to Section 11(d) on the date of the occurrence of the event described above
in subparagraph (a)) multiplied by the number of Common Shares for which the
Right otherwise would be exchangeable if there were sufficient shares
available. To the extent that the Company determines that some action need
be taken pursuant to clauses (i), (ii) or (iii) of this Section 24(d), the
Board of Directors, upon approval by a majority of the Continuing Directors,
may temporarily suspend the exercisability of the Rights for a period of up
to sixty (60) days following the date on which the event described in Section
24(a) shall have occurred, in order to seek any authorization of additional
Common Shares or Preferred Shares and/or to decide the appropriate form of
distribution to be made pursuant to the above provision and to determine the
value thereof. In the event of any such suspension, the Company shall issue
a public announcement stating that the exercisability of the Rights has been
temporarily suspended.
(e) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares.
In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal
to the same fraction of the current market value of a whole Common Share.
For the purposes of this paragraph (e), the current market value of a whole
Common Share shall be the closing price of a Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading
Day immediately prior to the date of exchange pursuant to this Section 24.
Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall
propose (i) to pay any dividend payable in stock of any class to the holders
of its Preferred Shares or to make any other distribution to the holders of
its Preferred Shares (other than a regular quarterly cash dividend), (ii) to
offer to the holders of its Preferred Shares rights or warrants to subscribe
for or to purchase any additional Preferred Shares or shares of stock of any
class or any other securities, rights or options, (iii) to effect any
reclassification of its Preferred Shares (other than a reclassification
involving only the subdivision of outstanding Preferred Shares), (iv) to
effect any consolidation or merger into or with, or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one or more transactions, of 50% or more of the
assets or earning power of the Company and its Subsidiaries (taken as a
whole) to, any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the
Common Shares payable in Common Shares or to effect a subdivision,
combination or consolidation of the Common Shares (by
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reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any
such date is to be fixed, and such notice shall be so given in the case of
any action covered by clause (i) or (ii) above at least ten (10) days prior
to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least
ten (10) days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the Common Shares and/or
Preferred Shares, whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such
event and the consequences of such event to holders of Rights under Section
11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the
Company will promptly notify the Rights Agent thereof.
Section 26. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any
Right Certificate to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Rights Agent) as follows:
Ultratech Stepper, Inc.
3050 Zanker Road
San Jose, CA 95134
Attention: Arthur W. Zafiropoulo
Chairman and Chief Executive Officer
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
The First National Bank of Boston
c/o Boston EquiServe Limited Partnership
150 Royall Street, Mail Stop 45-02-62
Canton, MA 02021
Attention: Shareholder Services Division
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date, the Company may supplement or amend this Agreement in any respect,
without the approval of any holders of Rights, by action of its Board of
Directors upon approval by a majority of the Continuing Directors, and the
Rights Agent shall, if the Company so directs, execute such supplement or
amendment. From and after the Distribution Date, the Company may from time to
time supplement or amend this Agreement without the approval of any holders
of Rights, by action of its Board of Directors, upon approval by a majority
of the Continuing Directors, in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, or to make any other
provisions with respect to the Rights which the Company may deem necessary or
desirable and which shall be consistent with, and for the purpose of
fulfilling, the objectives of the Board of Directors in adopting this
Agreement, including, without limitation, to change the Purchase Price, the
Redemption Price, any time periods herein specified, and any other term
hereof, any such supplement or amendment to be evidenced by a writing signed
by the Company and the Rights Agent; PROVIDED, HOWEVER, that from and after
such time as any Person becomes an Acquiring Person, this Agreement shall not
be amended in any manner which would adversely affect the interests of the
holders of Rights. Upon receipt of a certificate from an appropriate officer
of the Company that the proposed supplement or amendment is consistent with
this Section 27 and, after such time as any Person has become an Acquiring
Person, that the proposed supplement or amendment does not adversely affect
the interests of the
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holders of Rights, the Rights Agent shall execute such supplement or
amendment. Without limiting the foregoing, the Company may at any time prior
to such time as any Person becomes an Acquiring Person, by action of its
Board of Directors, upon approval by a majority of the Continuing Directors,
amend this Agreement to lower the thresholds set forth in Sections 1(a) and
3(a) to not less than the greater of (i) any percentage greater than the
largest percentage of the outstanding Common Shares then known by the Company
to be beneficially owned by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, or any entity holding Common Shares for or
pursuant to the terms of any such plan) and (ii) 10%.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding Common Shares of
which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company (and, where
specifically provided for herein, only upon approval by a majority of the
Continuing Directors) shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board, or the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the
right and power to (i) interpret the provisions of this Agreement and (ii)
make all determinations deemed necessary or advisable for the administration
of this Agreement (including a determination to redeem or not redeem the
Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y)
below, all omissions with respect to the foregoing), which are done or made
by the Board (or, where specifically provided for herein, upon approval by a
majority of the Continuing Directors) in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Right Certificates and all other parties and (y) not subject the Board or the
Continuing Directors to any liability to the holders of the Rights.
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares) any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior
to the Distribution Date, the Common Shares).
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated; PROVIDED, HOWEVER, that notwithstanding anything in this
Agreement to the contrary, if any such term, provision, covenant or
restriction is held by such court or authority to be invalid, void or
unenforceable and the Board of Directors of the Company, upon approval by a
majority of the Continuing Directors, determines in its good faith judgment
that severing the invalid language from this Agreement would adversely affect
the purpose or effect of this Agreement, the right of redemption set forth in
Section 23 hereof shall be reinstated and shall not expire until the tenth
business day following the date of such determination by the Board of
Directors of the Company.
Section 32. GOVERNING LAW. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
to be made and performed entirely within such State.
Section 33. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
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Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the
several Sections of this Agreement are inserted or convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and attested, all as of the day and year first above
written.
ATTEST: ULTRATECH STEPPER, INC.
By /s/ William G. Leunis, III By /s/ Arthur W. Zafiropoulo
-------------------------------- --------------------------------
Name: William G. Leunis, III Name: Arthur W. Zafiropoulo
Title: Chief Financial Officer Title: Chairman and Chief
and Secretary Executive Officer
ATTEST: THE FIRST NATIONAL BANK OF
BOSTON, as Rights Agent
By /s/ Angela R. Dray By /s/ Katherine S. Anderson
-------------------------------- --------------------------------
Name: Angela R. Dray Name: Katherine S. Anderson
Title: Account Manager Title: Administration Manager
23
<PAGE>
EXHIBIT 10.8.1
SECOND AMENDMENT TO LEASE
AND AGREEMENT AND RELEASE
This Second Amendment To Lease and Agreement and Release (the
"Amendment") is dated as of May 25, 1995, for reference purposes only, and is
made between Susan L. Uecker, in her capacity as receiver of the estate of
Orchard Investment Company Number 701, a California general partnership as
per appointment by the Santa Clara County Superior Court in case no. CV746085
on December 23, 1994 ("Receiver"), Orchard Investment Company Number 701, a
California general partnership ("Original Landlord"), Orchard Properties, a
California corporation ("Orchard"), and Ultratech Stepper, Inc., a Delaware
corporation ("Tenant") with reference to the following facts and
circumstances, which are conclusively agreed between the parties:
A. Original Landlord and Tenant are parties to a lease dated for
reference purposes as of May 17, 1994, together with a First Amendment
to Lease dated as of October 18, 1994 (collectively referred to as the
"Lease"). All capitalized words having an assigned meaning in the Lease
shall continue to have such meaning in this Amendment unless explicitly
modified.
B. Pursuant to the Lease, Tenant has leased from Receiver 53,393
rentable square feet of space (the "Premises"), comprised of 14,532 rentable
square feet at 2855 Zanker Road, San Jose, California (the "Original
Premises") and 38,861 rentable square feet of space at 2815-2835 Zanker Road,
San Jose, California (the "Expansion Space").
C. Tenant is currently occupying a portion of the Expansion Space (the
"Occupied Premises") at 2825 Zanker Road and has undertaken tenant
improvements to that portion of the Expansion Space located at 2815 Zanker
Road (the "Construction Premises").
D. In the course of constructing tenant improvements to the
Construction Premises, Tenant discovered asbestos containing materials
("ACM") in the mastic that had been used on the underside of certain non-
asbestos containing floor tiles.
Second Amendment to Lease Page 2 of 11
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E. Tenant has had an asbestos investigation of the Premises conducted
by ProTech Consulting and Engineering, a written report of which is dated
March 17, 1995 (the "Report"), The Report identifies an area of the
Construction Premises where ACM mastic was used under non-asbestos
containing tile (the "Construction Premises ACM Area"). The Report further
identifies an area of the Occupied Premises where ACM mastic was used under
non-asbestos containing tile (the "Occupied Premises ACM Area"). The ACM in
both said Areas is referred to collectively as the "Identified ACM."
F. Tenant's improvement plans for the Construction Premises require the
current removal of the ACM in the Construction Premises ACM Area.
G. Upon discovery of the ACM, Tenant requested that Original Landlord
assume the responsibility for removing ACM from the entire Expansion Space,
wherever located, including, without limitation, ACM in any mastic on the
underside of any floor tiles located in the Expansion Space, and further
requested rent abatement and reimbursement of certain out-of-pocket expenses
incurred by Tenant in storage of equipment, relocation of business
operations, delay in construction, and otherwise resulting from Tenant's
decision not to move forward with construction of its tenant improvements
in the Construction Space.
H. Original Landlord disputed Tenant's claims.
I. Original Landlord and Tenant have agreed to resolve their
dispute as provided herein.
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J. Receiver is prepared to contribute certain funds from the
receivership estate towards resolution of Tenant's claims and is otherwise
prepared to consent to and approve the terms of this Amendment.
Second Amendment to Lease Page 3 of 11
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Now, therefore, in consideration of all of the foregoing facts and
circumstances, and for good and valuable consideration, the receipt of which
is acknowledged by each party, Original Landlord, Receiver and Tenant agree
to and do amend the Lease as follows and Orchard and Original Landlord agree
to perform as follows:
1. REMOVAL OF ACM FROM THE CONSTRUCTION PREMISES
Upon full execution of this Amendment, Receiver will immediately direct
its property manager, Orchard to cause its licensed contractors under the
supervision and control of Orchard to remove the ACM from the Construction
Premises ACM Area (pursuant to the provisions of Paragraph 4 hereof).
Orchard shall cause this work to be performed in a good and workmanlike
manner, in compliance with all applicable law, and within seven (7) business
days of the date this Agreement is fully executed. Tenant shall not be
required to bear any of the cost thereof, and such cost shall not be billed
to Tenant as a part of the Common Operating Expenses of the Building. Upon
submission of Orchard's billing for such work, Receiver will reimburse
Orchard, solely from the proceeds of the Receivership Estate for such work to
a maximum of $7,500.00, and any expenses in excess of such sum shall be the
responsibility of Original Landlord and Orchard.
2. LIABILITY FOR OBLIGATIONS
Except as expressly provided in this Amendment to the contrary, the
obligations of Original Landlord and Orchard under this Amendment are the
personal obligations of the Original Landlord and Orchard, and not of the
receiver or any successor in interest to the interest of landlord under the
Lease, other than Original Landlord. Tenant agrees to look solely to the
personal assets of Original Landlord and Orchard, and not to the assets of
Receiver, the receivership estate of Receiver or any successor landlord under
the Lease, other than Original Landlord, for satisfaction of the obligations
of Original Landlord and Orchard under this Amendment. As used in this
Amendment, the term "Landlord" shall mean the Original Landlord and any
successor in interest to the interest of landlord under the Lease including,
without limitation, Receiver and any successor in interest to Receiver
following termination of the receivership
Second Amendment to Lease Page 4 of 11
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estate. Original Landlord and Orchard agree to indemnify, defend and hold
harmless (a) the Receiver and any successor landlord under the Lease with
regard to any claims made by Tenant arising from or relating to this
Amendment, including reasonable attorneys' fees and costs, provided that such
claims arise from obligations assumed by Original Landlord and Orchard
hereunder, and (b) Tenant against any third party claims (including claims
made by any government agency) arising from or relating to breach of the
obligations of Orchard and/or Original Landlord arising under this Amendment.
3. REMOVAL OF ACM FROM THE OCCUPIED PREMISES
Tenant agrees that any tenant improvements to be constructed in the
Occupied Premises by Tenant which will require removal or disturbance of ACM
will require Landlord's permission given under the provisions of the Lease.
Landlord will approve or disapprove such proposed construction based on its
ordinary standards and will not make the removal of ACM a criteria for such
decisions.
If Tenant's designs for tenant improvements in the Occupied Premises
require the removal or disturbance of ACM in the Occupied Premises, Tenant
will notify Landlord in writing at the time Tenant submits its plans and
specifications to Landlord for approval.
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If plans and specifications are submitted calling for the disturbance or
removal of the ACM in the Occupied Premises, Original Landlord agrees to
undertake (in a good and workmanlike manner, and in compliance with all laws)
and pay for the removal of the Identified ACM from the Occupied Premises
(pursuant to the provisions of Paragraph 4 hereof), moving with reasonable
diligence to retain contractors hired by Original Landlord to perform such
services and to obtain permits for the construction if necessary. The cost
of such activities shall be allocated as follows:
a. As to plans for construction of tenant improvements in the Occupied
Space submitted on or before December 31, 1995, Original Landlord will pay
the cost of removal of the Identified ACM from the Occupied Premises ACM
Area, without charge to
Second Amendment to Lease Page 5 of 11
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Tenant. If plans and specifications are submitted for such construction on or
after January 1, 1996 and on or before December 31, 1996, then Original
Landlord will pay the cost of such removal, but if Original Landlord's cost
(including the amount paid to consultants, contractors, and subcontractors,
inspection fees, permit fees, and other amounts paid to governmental
entities or otherwise reasonably expended in accomplishing the task, but not
including Original Landlord's internal costs of construction management)
exceeds $7,500.00, Original Landlord will notify Tenant of the amount of the
excess, and Tenant will pay to Original Landlord an amount equal to the
excess, which shall be due from Tenant to Original Landlord within
thirty (30) days thereafter (and will be subject to the late fee provided for
in the Lease for Additional Rent, without further notice, if the sum is not
paid within such period). Under these circumstances, the costs of the
removal paid by Original Landlord shall not be billed to Tenant as part of
the Building's Common Operating Expenses. Original Landlord represents that
it has received an acceptable bid for the performance of this work at a cost
(as defined above) equal to or less than $7,500.00, which bid is good until
December 31, 1995.
b. If the plans and specifications are submitted on or after January 1,
1997, then Original Landlord will perform the removal (in a good and
workmanlike manner, and in compliance with all laws) and directly pay the
cost thereof. Upon completion of the removal, Original Landlord will notify
Tenant of the cost (which shall include the amount paid to consultants,
contractors, and subcontractors, inspection fees, permit fees, and other
amounts paid to governmental entities or otherwise reasonably expended in
accomplishing the task, and Original Landlord's customary and reasonable fee
of 4% of all construction costs). Tenant will pay to Original Landlord an
amount equal to the amount of Original Landlord's cost as above defined,
which shall be due from Tenant to Original Landlord within thirty (30) days
thereafter (and will be subject to the late fee provided for in the Lease
for Additional Rent, without further notice, if the sum is not paid within
such period).
Second Amendment to Lease Page 6 of 11
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Without regard to when ACM is removed from the Occupied Premises, Tenant
shall have no claims against any Landlord, the Receiver, future owners, nor
Orchard, Original Landlord, or its partners, nor against any officer,
director, partner, or employee thereof, for rent abatement, temporary
unavailability of space, delay in other construction, losses from interrupted
business operations, or other damages resulting from the presence or removal
of the ACM, and Tenant waives any and all such claims, provided, that Tenant
does not give up any such claims against Original Landlord resulting from
Original Landlord's or Orchard's failure to accomplish the work in a timely
manner as provided herein, and in a good and workmanlike manner, and in
compliance with all laws.
Notwithstanding anything in this Paragraph 3 to the contrary, if the
receivership estate of the Receiver is terminated and the landlord's interest
under the Lease is transferred to a party other than Original Landlord, the
foregoing provisions of this Paragraph 3, other than and excepting the first
two paragraphs hereof, shall be null and void and of no further force and
effect as against Receiver and its successor(s) in ownership of the Premises.
Tenant shall make no claims of default under the Lease or breach of this
Amendment against Receiver or any successor owner of the Premises other than
Original Landlord, in regard to any failure of Original Landlord to carry out
its obligations hereunder.
4. SCOPE OF REMOVAL DUTIES
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This Agreement shall not be deemed to require Orchard or Original Landlord to
provide or pay for any other construction services other than the removal of
the Identified ACM and the tile under which the mastic lies. Tenant will
remove carpet covering the Identified ACM, and will provide the area where
the Identified ACM must be removed with all future and fixtures removed,
ready for work to be performed. Orchard and Original Landlord shall not be
required to remove carpeting over tile which is attached by an ACM mastic,
nor to prepare the surface after removal, nor to replace tile or carpet, nor
to prepare the space for work. Tenant will cooperate to make the space
available for safe removal of asbestos, including vacating the space as
required by the asbestos removal subcontractor, controlling HVAC systems and
ventilation, and in all other ways reasonably requested of Tenant.
Second Amendment to Lease Page 7 of 11
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5. RELEASE
Tenant agrees that the foregoing obligations and promises, as well as the
performance of the removal of the Construction Premises ACM required by
Paragraph I hereof, are in complete satisfaction of all obligations of
Landlord, Original Landlord and its partners, and Orchard relating to the
Identified ACM, and that in return for the promises and obligations which are
contained herein and such performance, Tenant releases Landlord, Original
Landlord, Orchard, and their respective officers, directors, agents,
servants, employees, attorneys, shareholders, partners, joint venturers, and
all other persons associated with any of them, from any and all claims,
liabilities, obligations, demands, actions, causes of action, and/or lawsuits
arising out of the presence of the Identified ACM on the Premises. Tenant
specifically releases all claims for delay in construction or occupancy,
storage of furniture and fixtures, interruption or delay of business, and
rent abatement. Upon execution hereof, Tenant shall pay all Rent currently
due, and upon receipt of same, Receiver will waive any claim to late charges
in regards to the Rent paid.
The claims released include all claims of Tenant of whatever nature
against any Landlord or Original Landlord arising from the presence of the
Identified ACM on the Premises, whether now known or unknown, whether
suspected or unsuspected, whether latent or patent, whether such claims are
or could be anticipated by Tenant, and whether such claims have arisen now,
or arise in the future (if they relate to acts or omissions of the party
which have taken place as of the date of this release). This Amendment shall
survive the execution of this release, and nothing herein shall be deemed to
waive any rights of any party against the others for fraud, wilful
wrongdoing, or violation of law which occurs after the effective date hereof.
Tenant enters into this release with the knowledge that there may be
unknown, unanticipated, or unsuspected claims arising from the Identified ACM
which are released and waived by executing this release, and that there is a
risk that Tenant will incur or suffer losses, damages, or injuries which are
released hereby or which would, but for this release, be the legal
responsibility of one or more of the party(s) released hereby. Tenant agrees
to accept the above-described risks with the understanding that THIS RELEASE
APPLIES TO ALL
Second Amendment to Lease Page 8 of 11
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UNKNOWN OR UNANTICIPATED RESULTS OF THE PRESENCE OF THE IDENTIFIED ACM
DESCRIBED ABOVE, AS WELL AS THOSE KNOWN AND ANTICIPATED, and Tenant agrees to
accept and bear full responsibility for any losses, injuries, or damages
which are suffered or incurred by Tenant as a result of unknown,
unanticipated, or unsuspected claims, losses, damages, or injuries.
Tenant waives and gives up all rights or benefits which might otherwise
accrue to Tenant, now or in the future, under the terms of California Civil
Code Section 1542, which reads as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of execution of
the release, which if known by him must have materially affected his
settlement with the debtor."
All parties acknowledge that this Amendment reflects a settlement of
conflicting views on responsibility for ACM in the Expansion Space, and that
each party enters into the Amendment and accepts the obligations set forth
herein as a compromise and settlement of such disputes. It shall not be
construed as an admission of liability or responsibility by any party hereto.
The covenants, terms, and conditions of this Amendment shall survive
execution hereof, and nothing
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contained herein shall be deemed a release of any claim, liability, or cause
of action against a party which is obligated to perform acts hereunder
arising out of that party's failure to so perform. No default or failure to
perform of Orchard or Original Landlord shall be deemed to be a default under
the Lease.
6. ACCEPTANCE OF PREMISES
Tenant has had a complete opportunity to inspect and investigate the Premises in
the course of its preparations for construction and its investigation of ACM on
the Premises. Original Landlord represents, without undertaking any
investigation, that it has disclosed to Tenant any actual knowledge possessed by
Original Landlord in regard to ACM in the Expansion Space. Except for the
presence of Hazardous Materials, Tenant accepts the Premises "AS-IS" and
Second Amendment to Lease Page 9 of 11
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relieves any Landlord, including without limitation Original Landlord, of any
further disclosure obligations relating to the Premises and the Building,
their construction, the materials used in construction, the type, nature, and
quality of tenant improvements installed therein, and otherwise relating to
the Premises and the Building. Tenant acknowledges that, except for
Hazardous Materials as defined in the Lease, the risk of latent, unknown,
unforeseen, concealed, hidden, undiscovered, or undiscoverable matters
relating to the Premises and the Building, (including but not limited to
defects and dangerous conditions) has entirely shifted to Tenant,
notwithstanding any Landlord's constructive, or inquiry knowledge of such
matters, and notwithstanding any duty on Receiver's part to inspect or
investigate the Premises and the Building and disclose matters which are or
should reasonably have been discovered, and Tenant accepts such risk.
Nothing in this Paragraph 6 shall be deemed to change, expand, or contract
the express obligations of the parties as set forth in the Lease in regard to
maintenance or repair of the Building. Tenant's liability for any and all
Hazardous Materials other than the Identified ACM on the Premises shall
continue to be governed solely by the provisions of the Lease relating to
Hazardous Materials.
Nothing contained in this Amendment shall be deemed to diminish, waive,
or restrict rights which Tenant otherwise might have, if any, to seek
indemnity from Original Landlord for any third party claims or liabilities
(including claims by governmental entities) with respect to the Identified
ACM.
7. FIRST REFUSAL SPACE
The Lease grants Tenant a right of first refusal on certain space identified as
the First Refusal Space. Original Landlord and Tenant currently believe it is
possible that there is further ACM in the First Refusal Space. At such time as
the First Refusal Space is offered for lease, if Landlord proposes to lease the
First Refusal Space to a third party on agreed business terms, and if such terms
do not include a provision whereby Landlord is obligated to remove the ACM from
the First Refusal Space at Landlord's own expense, then Landlord will accept
Tenant's exercise of its right of first refusal with the condition that, upon
request of Tenant in connection with the exercise of its right of first refusal,
Landlord will perform the removal of such ACM, at the sole cost and expense of
Tenant,
Second Amendment to Lease Page 10 of 11
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(which shall include the amount paid to consultants, contractors, and
subcontractors, inspection fees, permit fees, and other amounts paid to
governmental entities or otherwise reasonably expended in accomplishing the
task, and a customary and reasonable fee of 4% of all construction costs).
Unless otherwise agreed in advance by Landlord in writing, Tenant shall pay
for such cost and expenses prior to and as a condition of Landlord's
commencement of any asbestos removal activities.
8. CONTINUING OBLIGATION
Except as expressly set forth in this Amendment, all terms and conditions of the
Lease remain in full force and effect, and all terms and conditions of the Lease
are incorporated herein as though set forth at length.
9. EFFECT OF AMENDMENT
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This Amendment modifies the Lease. In the event of any conflict or
discrepancy between the Lease and/or any other previous documents between the
parties and the provisions of this Amendment, then the provisions of this
Amendment shall control. Except as modified herein, the Lease shall remain
in full force and effect. All capitalized terms used herein have the meaning
assigned to such terms in the Lease.
10. AUTHORITY
Each individual executing this Amendment on behalf of Tenant represents and
warrants that he or she is duly authorized to and does execute and deliver
this Amendment pursuant to express authority from Tenant pursuant to and in
accordance with the By-Laws and organizational document.
11. ENTIRE AGREEMENT
This is the entire agreement between the parties relating to the subject matter
addressed herein, and all previous discussions and negotiations are merged into
this Amendment. No modification hereof shall be valid unless in writing, signed
by the party to be charged.
6
<PAGE>
Second Amendment to Lease Page 11 of 11
- ------------------------- -------------
12. COSTS AND ATTORNEY'S FEES
Tenant shall bear its own attorney's fees and costs attendant upon the
resolution of this dispute AND the negotiation and execution of this Amendment,
and Tenant shall not be responsible for such attorneys' fees and costs of any
other party to this Amendment.
Dated: May 25, 1995 ORCHARD INVESTMENT COMPANY NUMBER 701,
A CALIFORNIA GENERAL PARTNERSHIP
BY: NELO, A CALIFORNIA GENERAL
PARTNERSHIP
By: /s/David J. Brown
------------------------------------
DAVID J. BROWN, ITS GENERAL PARTNER
ORCHARD PROPERTIES, A CALIFORNIA
CORPORATION
By: /s/David J. Brown
------------------------------------
DAVID J. BROWN, PRESIDENT AND CHAIRMAN
Dated: May 25, 1995
ULTRATECH STEPPER, INC., A DELAWARE
CORPORATION
/s/Dave Holmes
---------------------------------------
By: Dave Holmes Vice President Corporate
Services
-----------------------------------
[Print Name and Title]
SUSAN L. UECKER, in her capacity as
Receiver of the Estate of Orchard
Investment Company Number 701, a
California general partnership as per
appointment by the Santa Clara County
Superior Court in case no. CV746085 on
12/23/94.
/s/ Susan L. Uecker
---------------------------------------
Susan Uecker, RECEIVER
7
<PAGE>
EXHIBIT 10.8.2
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE is dated for reference purposes
only as October 26, 1995 and is part of that Lease dated May 17, 1994
together with the Summary of Basic Lease terms, the First Addendum to
Lease, the Acceptance Agreement, the First Amendment to Lease dated
October 18, 1994, and the Second Amendment to Lease dated May 25, 1995
thereto (collectively, the "Lease") by and between ORCHARD INVESTMENT
COMPANY NUMBER 701, a California general partnership ("Landlord"), and
ULTRATECH STEPPER, INC., a Delaware corporation ("TENANT"), and is
made with reference to the following facts:
A. The Premises currently leased by Tenant pursuant to the Lease
consists of 53,393 rentable square feet comprised of 14,532 rentable
square feet at 2855 Zanker Road, and 38,861 rentable square feet at
2815-2825 Zanker Road, city of San Jose, California.
B. The Lease Term for said Premises currently expires on December 31,
1997.
C. Tenant and Landlord have agreed to expand the square footage of said
Premises by 16,864 rentable square feet as shown on "Exhibit A"
attached hereto and incorporated herein by reference as the "Second
Expansion Space".
D. Tenant and Landlord have agreed that the Term of the Lease for the
Second Expansion Space shall expire at a later date than specified
pursuant to the original terms of the Lease.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Summary of
Basic Lease Terms is amended as follows as of the Commencement Date:
1. PREMISES: As of the November 16, 1995, or the date the Second
Expansion Space is actually delivered to Tenant, if later, Section D shall be
amended to provide for the Second Expansion Space of 16,864 rentable square
feet at 2865 Zanker Road ("2865 Zanker"), plus Tenant's original spaces
consisting of 14,532 rentable square feet at 2855 Zanker Road ("2855
Zanker"), and 38,861 rentable square feet at 2815-2835 Zanker Road ("2815
Zanker"), for a total of 70,257 rentable square feet.
2. BUILDING: Section F shall be amended to read that the Building at
2855-2865 Zanker Road containing the 2855 Zanker and 2865 Zanker portions of
the Premises consists of a total of 31,396 rentable square feet, and the
Building at 2815-2835 containing the 2815 Zanker portion of the Premises
consists of a total of 28,860 rentable square feet.
3. TENANTS SHARE: [As of the date the Second Expansion space is actually
delivered to Tenant on November 16, 1995, if later. ] Section G shall be amended
to mean fifty-three and 71/100 percent (53.71%) for the 2865 Zanker portion of
the Premises, and forty-six and 29/100 percent (46.29%) for 2855 Zanker portion
of the Premises, and sixty-six and 02/100 percent (66.02%)
4. TENANTS ALLOCATED PARKING STALLS: [As of the date the Second Expansion
space is actually delivered to Tenant on November 16, 1995, if later.]
Section H shall be amended to mean 184 stalls for the 2815 Zanker and 2855
Zanker portion of the Premises, plus 58 stalls for the 2865 Zanker portion of
the Premises.
5. LEASE TERMS: Section 1 shall be amended to provided that the Lease Term
for the 2815 Zanker and 2855 Zanker portion of the Premises shall expire
December 31, 1997 and the Lease Term for the 2865 Zanker portion of the
Premises shall expire February 28, 1999.
6. BASE MONTHLY RENT: As of the November 16, 1995, or the date the Second
Expansion Space is actually delivered to Tenant, if later. Section K shall
be amended to provide for the Base Monthly Rent as follows:
A. For the 2815 Zanker and 2855 Zanker portion of the Premises:
From the Commencement
<PAGE>
Date through December 31, 1997: $34,705.45 per month
B. For the 2865 Zanker portion of the Premises:
From the Commencement
Date through February 28, 1999: $13,491.20 per month
7. COMMENCEMENT DATE: The Commencement Date shall be February 16, 1996, or
any later date that is three (3) months from the date the Second Expansion Space
is actually delivered to Tenant by Landlord.
8. SECURITY DEPOSIT: Section M is hereby amended to provided for an increase
in the Security Deposit of $13,491.00 which Tenant has provided Landlord upon
signature hereon, for a total of $48,196.44
9. EARLY OCCUPANCY:
A. As consideration for Tenant's performance of all obligations to be
performed by Tenant under the Lease and upon receipt of the increased
Security Deposit of $13,491.00 Landlord shall permit Tenant to enter and
use the Second Expansion Space starting November 16, 1995 until the
Commencement Date (the "Early Occupancy Period"). Such occupancy during
the Early Occupancy Period shall be subject to all of the terms,
covenants and conditions of the Lease provided, however, that the rent
and operating expenses payable during the Early Occupancy Period shall
be waived.
B. In the event either party shall bring any action or legal proceeding for
damages for alleged breach of any provision of this agreement, to recover
rent, to terminate tenancy of the Second Expansion Space, or to enforce,
protect to establish any term or covenant of this agreement or the Lease
or right of remedy of either party, the prevailing party shall be
entitled to recover as a part of such action or proceeding, reasonable
attorney's fees and court costs as may be fixed by the court or jury.
C. In consideration of executing this Early Occupancy Agreement, Tenant
agrees to indemnify and save Landlord harmless of and from any and all
liability, damage, expense, cause of action, suits or claims judgements
resulting from injury to person or property arising from the use of the
Second Expansion Space by Tenant during the Early Occupancy Period,
including loss or damage to Tenant, its equipment, materials or supplies.
D. During the Early Occupancy Period, Tenant shall arrange to have all
utility services including but not limited to gas, electric, water and
trash billed directly to Tenant for payment.
10. WARRANTY OF EXISTING CONDITIONS: Landlord shall provide the Second
Expansion Space to Tenants on November 16, 1996 with all electrical, plumbing,
HVAC, and roof systems in good working conditions as of the delivery and
acceptance dates as provided for in Paragraph 12 herein.
11. INTERIOR IMPROVEMENTS: Tenant acknowledges that it has had the
opportunity to inspect the Second Expansion Space prior to the date of delivery
and acceptance as provided for in Paragraph 13 herein, and agrees that the
Second Expansion Space is to be leased and accepted by Tenant in its existing
condition, "as-is", without implied or express warranty or representation,
except as provided for herein, and with all patent and latent defects. However,
Landlord shall be responsible for the cost of removal of any asbestos containing
floor tiles or related tile mastics within Second Expansion Space.
12. DELIVERY AND ACCEPTANCE OF THE SECOND EXPANSION SPACE: Except as provided
for herein, delivery and acceptance of the Premises as provided for in
Paragraph 1 above shall be November 16, 1995.
13. FULL FORCE AND EFFECT: Except as expressly set forth in this Amendment,
all terms and conditions of the Lease remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Third
Amendment to be effective as of the date first set forth above.
LANDLORD: TENANT:
ORCHARD INVESTMENT COMPANY ULTRATECH STEPPER, INC.
NUMBER 701
a Delaware Corporation
a California general partnership
<PAGE>
By: NELO, a California general partnership By:__________________________
By: New England Mutual Life Insurance
Company
a Massachusetts corporation _____________________________
(print Name and Title)
a general partner
By: Copley Real Estate Advisors, Inc.
Asset manager and advisor hereunto duly
authorized
By:__________________________
Date:________________________ Date:______________________________
<PAGE>
EXHIBIT 10.8.3
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE is dated for reference purposes only
as February 6, 1996, and is part of that Lease dated May 17, 1994
together with the Summary of Basic Lease Terms; the First Addendum To
Lease; the Acceptance Agreement; the First Amendment To Lease dated
October 18, 1994; the Second Amendment To Lease dated May 25, 1995;
and the Third Amendment To Lease dated October 30, 1995 thereto
(collectively, the "Lease") by and between ORCHARD INVESTMENT COMPANY
NUMBER 701, a California general partnership ("Landlord"), and ULTRATECH
STEPPER, INC., a Delaware corporation ("Tenant"), and is made with
reference to the following facts:
A. Landlord is the successor in interest to Orchard Investment
Company No. 701, a California general partnership as owner of the
Premises and Landlord under the Lease,
B. The Premises currently leased by Tenant pursuant to the Lease
consists of 70,257 rentable square feet comprised of 14,532 rentable
square feet at 2855 Zanker Road, 38,861 rentable square feet at 2815-2825
Zanker Road, and 16,864 rentable square feet at 2865 Zanker Road, City of
San Jose, California.
C. The Lease Term for the 2815-2825 Zanker and 2855 Zanker portion
of the Premises currently expires on December 31, 1997, and February 28,
1999 for the 2865 Zanker portion of the Premises.
D. Tenant and Landlord have agreed to expand the square footage of
said Premises by 19,999 rentable square feet as shown on "Exhibit A"
attached hereto and incorporated herein by reference as the "Third
Expansion Space".
E. Tenant and Landlord have agreed that the Term of the Lease for
the Third Expansion Space shall expire at a later date than specified
pursuant to the original terms of the Lease.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Summary of
Basic Lease Terms is amended as follows as of the Commencement Date:
1. PREMISES: As of April 1, 1996, or the date the Third Expansion
Space is actually delivered to Tenant (the "Expansion Date"), if later,
Section D shall be amended to consist of the Third Expansion Space of
19,999 rentable square feet at 2835 Zanker Road ("2835 Zanker"), plus
Tenant's original spaces consisting of 14,532 rentable, square feet at
2855 Zank6r Road ("2855 Zanker"), 38,861 rentable square feet at
2815-2825 Zanker Road ("2815-2825 Zanker"), and 16,864 rentable square
feet at 2865 Zanker Road ("2865 Zanker") for a total of 90,256 rentable
square feet.
2. BUILDING: As of the Expansion Date, Section F of the Lease
shall be amended to read that the Building at 2855-2865 Zanker Road
("Building B") containing the 2855 Zanker and 2865 Zanker portions of
the Premises consists of a total of 31,396 rentable square feet, and the
Building at 2815-2835 Zanker Road ("Building C") containing the 2815-2825
Zanker, and 2835 Zanker portions of the Premises consists of a total of
58,860 rentable square feet.
3. TENANTS SHARE: As of the Expansion Date Section G of the Lease
shall be amended to mean fifty-three and 71/100 percent (53.71%) for the
2865 Zanker portion of the Premises, and forty-six and 29/100 percent
(46.29%) for the 2855 Zanker portion of the Premises, sixty-six and
02/100 percent (66.02%) for the 2815-2825 Zanker portion of the Premises,
and thirty-three and 98/100 percent (33.98%) for the 2835 Zanker portion
of the Premises.
Page Two
4. TENANT'S ALLOCATED PARKING STALLS: As of the Expansion Date
Section 11 of the Lease shall be amended to mean 184 stalls for the
2815-2825 Zanker and 2855 Zanker portion of the Premises, plus 58 stalls
for the 2865 Zanker portion of the Premises, plus 72 stalls for the 2835
Zanker portion of the Premises, for a total of 314 stalls.
5. LEASE TERM: As of the Expansion Date Section J of the Lease
shall be amended to provide that the Lease Term for the 2815-2825 Zanker
and 2855 Zanker portion of the Premises shall expire December 31, 1997,
the
4
<PAGE>
Lease Term for the 2865 Zanker portion of the Premises shall expire
February 28, 1999, and the Lease Term for the 2835 Zanker portion of the
Premises shall expire March 31, 1999.
6. BASE MONTHLY RENT: As of the Expansion Date Section K of the
Lease shall be amended to provide for the Base Monthly Rent as follows:
A. For the 2815-2825 Zanker and 2855 Zanker portion of the Premises:
From the Commencement Date,
through December 31, 1997: $34,705.45 per month.
B. For the 2865 Zanker portion of the Premises:
From the Commencement Date
through February 28, 1999: $13,491.20 per month.
C. For the 2835 Zanker portion of the Premises:
From the Commencement Date
through March 31, 1999: $16,399.18 per month.
7. SECURITY DEPOSIT: Section M is hereby amended to provide for an
increase in the Security Deposit of $16,399.00 which Tenant has provided
Landlord upon signature hereon, for a total of $64,595.00.
8. WARRANTY OF EXISTING CONDITIONS: Landlord shall provide
the Third Expansion Space to Tenant with all electrical, plumbing, HVAC,
and roof systems in good working condition as of the delivery and
acceptance dates as provided for in Paragraph 10 herein.
9. INTERIOR IMPROVEMENTS: Tenant acknowledges that it has
had the opportunity to inspect the Third Expansion Space prior to the
Commencement Date, and agrees that the Third Expansion Space is to be
leased and accepted by Tenant in its existing condition, "as-is",
without implied or express warranty or representation, except as provided
for herein, and with all patent and latent defects. However, Landlord
shall be responsible, at Landlord's sole expense, for (i) the cost of
removal of any asbestos containing floor tiles or tile mastic
within the Third Expansion Space, and (ii) the clean-up and repair of
any damage to the Third Expansion Space caused by Landlord or Landlord's
existing tenant therein during the time period subsequent to the date of
this Amendment but prior to the Expansion Date, all of which shall be
completed prior to the Expansion Date.
10. UTILITIES, SERVICES, AND METERING: Paragraph 12 of the First
Amendment to Lease is hereby deleted. Tenant shall contract directly
with the utility companies for metered services for electric and gas, and
Tenant shall maintain such HVAC and related equipment as provided for
in Article 6 of the Lease.
Page Three
11. FULL FORCE AND EFFECT: Except as expressly set forth in
this Amendment, all terms and conditions of the Lease remain in full
force and effect.
5
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth
Amendment to be effective as of the date first set forth above.
LANDLORD: TENANT:
SAN JOSE ACQUISITION CO., L.L.C., ULTRATECH STEPPER, INC.
a Delaware limited liability company a Delaware corporation
By: ARGO PARTNERSHIP, L.P., BY: /S/WILLIAM G. LEUNIS III
its General Partner William G. Leunis III
Vice President, Finance, CFO
By: ARGO MANAGEMENT COMPANY, L.P.,
its General Partner
By: O'CONNOR CAPITAL PARTNERS, L.P.,
its General Partner
By: O'CONNOR CAPITAL INCORPORATED,
its General partner
BY: /S/K.J. ARTINGSTALL
---------------------
Name: K.J. ARTINGSTALL
---------------------
Title: VP
---------------------
Date: 2/21/96 Date: 2/13/96
--------------------- ------------
By: ARGO PARTNERSHIP II, L.P.,
its Manager
By: ARGO II MANAGEMENT COMPANY, L.P.,
its General Partner
By: O'CONNOR CAPITAL PARTNERS II, L.P.,
its General Partner
By: O'CONNOR CAPITAL II INCORPORATED
its General Partner
By: /S/K.J. ARTINGSTALL
---------------------
Name: K.J. Artingstall
---------------------
Title: VP
---------------------
Date: 2/21/96
---------------------
Exhibit A - Site Plan
SITE PLAN
EXHIBIT A
6
<PAGE>
EXHIBIT 10.8.4
FIFTH AMENDMENT TO LEASE
This FIFTH AMENDMENT TO LEASE (this "Amendment") is entered into as of
December 1, 1997, by and between ULTRATECH STEPPER, INC., a Delaware
corporation ("Tenant"), and SILICON VALLEY PROPERTIES, LLC, a Delaware
limited liability company ("Landlord"), with reference to the following facts:
A. Landlord, as successor to Orchard Investment Company Number 701,
and Tenant are the current parties to that certain Lease, dated May 17, 1994,
as amended by that certain First Amendment to Lease, dated October 18, 1994,
that certain Second Amendment to Lease and Agreement and Release dated as of
May 25, 1995, that certain Third Amendment to Lease dated May 17, 1994, and
that Fourth Amendment to Lease dated February 6, 1996 (said Lease, as amended
thereby, collectively shall be referred to as the "Lease"), for the lease by
Tenant of (i) approximately 38,861 square feet of space in a building at
2815-2825 Zanker Road (the "2815 Zanker Space"), (ii) approximately 19,999
square feet of space in a building at 2835 Zanker Road (the "2835 Zanker
Space"), (iii) 14,532 square feet of space in a building at 2855 Zanker Road
(the "2855 Zanker Space"), and (iv) approximately 16,864 square feet of space
in a building at 2865 Zanker Road (the "2865 Zanker Space"), all in San Jose,
California and as more particularly described in the Lease (the "Leased
Premises"). All capitalized terms referred to in this Amendment shall have
the same meaning defined in the Lease, except where expressly defined to the
contrary in this Amendment.
B. The Lease Term for the 2815 Zanker Space and 2855 Zanker Space,
which together contains approximately 53,393 square feet, was scheduled to
expire on December 31, 1997, and Tenant exercised its option to extend for
three years, upon the following terms and conditions.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants hereinafter contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. EXTENSION. Pursuant to section 1 of First Addendum to Lease,
Tenant has exercised its option to extend Lease Term for the portion of the
Premises defined above as the 2815 Zanker Space and 2855 Zanker Space with
the Lease Term for such portion of the Premises now expiring on December 31,
2000. The Lease Term for the remaining portion of the Premises (i.e., 2835
Zanker Space and 2865 Zanker Space) remains unaffected by this Amendment
(i.e., the Lease Term for 2835 Zanker Space expires March 31, 1999 and for
2865 Zanker Space expires February 28, 1999). As a result of this Amendment,
Tenant has fully exercised all of its options or rights to extend the Lease
Term for the portion of the Premises defined as the 2815 Zanker Space and
2855 Zanker Space.
2. BASE MONTHLY RENT DURING TERM. Commencing on January 1, 1998 and
continuing through December 31, 2000, the Base Monthly Rent for the 2815
Zanker Space and the 2855 Zanker Space shall be as follow:
<TABLE>
<CAPTION>
SPACE TIME PERIOD BASE MONTHLY RENT
<S> <C> <C>
2815 Zanker Space 1/ 1/98 through 12/31/98 $58,291.50
1/1/99 through 12/31/99 $60,234.55
1/1/2000 through 12/31/2000 $62,177.60
2855 Zanker Space 1/1/98 through 12/31/98 $21,798.00
1/1/99 through 12/31/99 $22,524.60
1/1/2000 through 12/31/2000 $23,251.20
</TABLE>
The foregoing rental rates were established by the appraisal procedure
described in section 1 of Addendum No. 1 comprising a part of the Lease and
are applicable without the construction of any improvement or the granting of
any allowance or concession by Landlord.
3. GENERAL PROVISIONS
7
<PAGE>
3.1 CONFIRMATION. Tenant acknowledges and agrees that: (a) Tenant is
in sole possession of the Premises demised under the Lease; (b) all work,
improvements and furnishings required by Landlord under the Lease have been
completed and accepted by Tenant; (c) all free rent and any other concession
required under the Lease have been granted, used and otherwise satisfied; and
(d) it has no offset, claim, recoupment or defense against the payment of
rent and other sums and the performance of all obligations of Tenant under
the Lease.
3.2 FURTHER ASSURANCES. Landlord and Tenant each agree to execute any
and all documents and agreements reasonably requested by the other party to
further evidence or effectuate this Amendment.
3.3 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns.
3.4 REAFFIRMATION. As amended hereby, the Lease shall remain in full
force and effect.
3.5 CONFLICTS. In case of any conflict between any term or provision
of this Amendment and the Lease, the term or provision of this Amendment
shall govern.
3.6 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
when taken together shall constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first set forth above.
LANDLORD: SILICON VALLEY PROPERTIES, L.L.C.
a Delaware limited liability company
By: Divco SVP Group, LLC,
a Delaware limited liability company
Its Manager
By: /s/Scott Smithers
-----------------------------
Name: Scott Smithers
Its: President
Dated: December 8, 1997
TENANT: ULTRATECH STEPPER, INC.,
a Delaware corporation
By: /s/ William G. Leunis III
------------------------------
Name: William G Leunis III
Its: Vice President of Finance
Dated: December 2nd, 1997
8
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
In thousands, except per share data 1997** 1996 1995 1994 1993* 1992*
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net sales $147,349 $193,508 $157,831 $ 91,344 $ 54,136 $ 35,309
Gross profit 77,678 104,893 82,288 46,037 26,683 17,548
Gross profit as a percentage of sales 53% 54% 52% 50% 49% 50%
Operating income $ 18,001 $ 46,678 $ 31,782 $ 15,291 $ 6,833 $ 2,220
Income before income taxes 25,094 52,707 36,170 16,445 6,689 2,089
Pre-tax income as percentage of sales 17% 27% 23% 18% 12% 6%
Net income $ 17,566 $ 35,311 $ 24,234 $ 11,019 $ 4,123 $ 1,304
Net income per share-basic $0.85 $1.76 $1.32 $0.68 N/A N/A
Number of shares used in
per share computation-basic 20,553 20,079 18,425 16,293 N/A N/A
Net income per share-diluted $0.81 $1.66 $1.20 $0.65 N/A N/A
Number of shares used in
per share computation-diluted 21,681 21,271 20,154 16,917 N/A N/A
Dividends per share - - - - - -
Balance sheet:
Cash, cash equivalents and
short-term investments $164,349 $167,409 $161,356 $ 50,246 $ 26,242 $ 176
Working capital 223,226 212,684 176,174 69,368 32,977 6,307
Total assets 300,001 280,772 245,428 104,789 56,381 16,765
Long-term obligations,
less current portion - - - 400 800 -
Stockholders' equity 263,632 239,947 199,658 80,027 38,091 8,323
Other data:
Return on average equity 7% 16% 17% 19% 18% 15%
Book value per common share
outstanding $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00 N/A
Current ratio 7.60 6.40 4.94 3.93 2.89 1.76
Long-term debt to equity ratio 0.00 0.00 0.00 0.00 0.02 0.00
Capital expenditures $ 9,337 $ 7,849 $ 9,760 $ 7,759 $ 2,752 $ 972
Income tax as percentage of
pre-tax income 30% 33% 33% 33% 38% 38%
Quarterly Data
Unaudited, in thousands, except per share data 1st 2nd 3rd 4th
1997**
Net sales $ 38,733 $ 38,054 $ 36,752 $ 33,810
Gross profit 21,033 19,979 19,228 17,438
Operating income 4,916 6,543 5,648 894
Net income 4,533 5,727 5,405 1,901
Net income per share-basic $ 0.22 $ 0.28 $ 0.26 $ 0.09
Number of shares used in per share
computation-basic 20,371 20,451 20,626 20,765
Net income per share-diluted $ 0.21 $ 0.27 $ 0.25 $ 0.09
Number of shares used in per share
computation-diluted 21,526 21,442 21,851 21,862
1996
Net sales $ 51,713 $ 51,793 $ 46,502 $ 43,500
Gross profit 27,654 28,102 25,343 23,794
Operating income 11,527 12,531 11,622 10,998
Net income 8,641 9,276 8,835 8,559
Net income per share-basic $ 0.43 $ 0.46 $ 0.44 $ 0.42
Number of shares used in per share
computation-basic 19,866 20,026 20,168 20,256
Net income per share-diluted $ 0.41 $ 0.44 $ 0.42 $ 0.40
Number of shares used in per share
computation-diluted 21,225 21,278 21,174 21,357
</TABLE>
*Ultratech Stepper, Inc. (the "Company") acquired certain assets and
liabilities of the Ultratech Stepper Division (the "Predecessor") of General
Signal Corporation on March 8, 1993. The amounts, as presented above, reflect
historical results and do not include pro forma adjustments, which may have
been incurred as an independent company. Net income per share for each of the
two years in the period ended December 31, 1993 is not presented because of a
lack of comparability between the capital structure of the Company and the
Predecessor.
**Results of operations in 1997 include special charges of $3,619,000, or
$0.12 per share-basic and diluted, to reflect acquired in-process research
and development in the first quarter of 1997, and $3,450,000, or $0.12 per
share-basic, $0.11 per share-diluted, to account for termination of the
Company's Japan distributor in the fourth quarter of 1997.
- ------------------------------------------------------------------------------
Page 24 Ultratech Stepper, Inc.
<PAGE>
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 consolidated
financial statements, and notes thereto, included elsewhere herein. For a
further discussion of the Company's business, please refer to the Company's
1997 Annual Report on Form 10-K, which is included as an integral component
of the Annual Report to Stockholders.
Results of Operations
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future depending upon a
variety of factors, including cyclicality in the Company's target markets;
the 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; the percentage of international sales, which typically have lower gross
margins than domestic sales principally due to higher field service and
support costs; increased competition in the Company's targeted markets;
nonlinearity of shipments during the quarter; the introduction of new
products, which typically have higher manufacturing costs until manufacturing
efficiencies are realized and are typically discounted more than existing
products until the products gain market acceptance; the rate of capacity
utilization; and the implementation of subcontracting arrangements.
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 Company's expectations, which would materially adversely affect
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 25
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 family and Saturn Wafer Stepper 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 several quarters. Such
continuation would materially adversely affect the Company's business,
financial condition and results of operations.
Certain of the statements contained in this Annual Report are forward-looking
statements that involve a number of risks and uncertainties. In addition to the
factors discussed herein, among other factors that could cause actual results to
differ materially include the following: 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; 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.
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
1997 VS. 1996 Net sales consist of revenue from system sales, spare parts
sales, and service. For the year ended December 31, 1997, net sales were $147.3
million, a decrease of 24% as compared with net sales of $193.5 million for
1996. The decline, relative to 1996, was primarily attributed to significantly
lower unit sales of the Company's Model 1500 Series steppers, which address the
markets for scanner replacement and high-volume/low-cost semiconductor
fabrication, and lower unit sales of the Company's Model 1700 Series steppers
with machine vision system (MVS), which address the market for back-end
processing of thin film heads, partially offset by the shipment of the Company's
first UltraBeam Model V2000 electron beam lithography system, which addresses
the market for the development and production of photomasks for the
semiconductor industry. For the year ended December 31, 1997, the Company's
system shipments decreased 34%, relative to 1996, while the weighted-average
selling price of all systems sold was essentially unchanged. Net sales from
spare parts and service increased 10% for the year ended December 31, 1997, as
compared to 1996.
The Company believes that its sales have been and continue to be adversely
impacted by reduced capital capacity spending levels within the semiconductor
industry, particularly in the Japanese and other Asian 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
- ------------------------------------------------------------------------------
Page 26 Ultratech Stepper, Inc.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 recently announced lower than expected earnings, layoffs and
restructuring or other 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 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 future quarterly comparisons,
through at least the second quarter of 1998, will indicate a
period-over-comparable-period decline in the Company's net sales and net
income and may result in a sequential decline in net sales and net income,
relative to the quarter ended December 31, 1997. Additionally, declines in
net sales, relative to the quarter ended December 31, 1997, may result in net
losses due to the Company's current level of operating expenses.
For the year ended December 31, 1997, international net sales were $48.4
million, as compared with $102.1 million for 1996, a decline of 53%.
International net sales represented 33% of total net sales for the year ended
December 31, 1997, as compared with 53% for 1996. This year-over-year
decline, both in absolute dollars and as a percentage of total sales, was
primarily attributed to decreased system sales to the Asian, European and
Japanese markets. The Company believes that the severe currency and equity
market fluctuations that have been experienced recently by many of the Asian
markets has resulted, and may continue to result, in delays, deferrals and
cancellations of 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. The Company's
operations in foreign countries are not currently subject to significant
exchange rate fluctuations, principally because sales contracts for the
Company's systems are generally denominated in U.S. dollars. However,
international sales expose the Company to a number of additional risk
factors, including fluctuations in the value of local currencies relative to
the U.S. dollar, which, in turn, impact the relative cost of ownership of the
Company's products.
[GRAPH]
Revenue by Geographical Region
(Dollars in Millions)
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.
1996 VS. 1995 Net sales for 1996 were $193.5 million, an increase of 23% over
net sales of $157.8 million for 1995. This increase was primarily due to a
three-fold unit shipment increase in the Company's Model 1700 MVS Series
steppers; higher unit sales of the Company's Titan Wafer Stepper, which
addresses the market for photosensitive polyimide applications as well as the
markets for scanner replacement and high-volume/low-cost semiconductor
fabrication; and a shift by thin film head manufacturers from the Model 2700
stepper to the Company's more advanced Model 4700 stepper. These factors were
partially offset by lower unit sales of the Company's Model 2244i stepper, which
addresses the market for mix-and-match in advanced IC fabrication. Overall, the
Company's system shipments increased 11% and the weighted-average selling price
of all systems sold increased by 9%. Net sales from spare parts and service in
1996 increased 22% over 1995 levels, resulting primarily from an increased
number of system upgrades and higher service and spare parts sales resulting
from a larger installed base of the Company's systems in
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 27
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
1996, as compared with 1995. Strength in the Company's international markets
also contributed to the year-over-year dollar increase in net sales.
International sales for 1996 were $102.1 million, an increase of 17% over
international sales of $87.2 million in 1995. This increase was primarily due
to increased sales of the Company's Model 1700 MVS Series steppers to thin
film head manufacturers in Southeast Asia. During 1996, international sales
represented 53% of total sales, as compared to 55% in 1995.
Gross Profit
1997 VS. 1996 The Company's gross profit as a percentage of sales was 52.7%
for 1997, as compared with 54.2% for 1996. This decline in gross margin as a
percentage of net sales can be primarily attributed to the shift away from
the Company's more mature product lines, which typically have higher margins
due to manufacturing efficiencies and lower required after-sales support,
toward the Company's newer and more advanced systems; manufacturing
inefficiencies caused by underutilization of manufacturing capacity; changes
in the Company's shipment schedule and an unusually high degree of
nonlinearity of shipments during the 1997 periods; partially offset by lower
required inventory reserves due to improved inventory management; lower
international sales relative to total sales for the Company; improved margins
from spare parts and service; and increased after-sales support efficiencies.
[GRAPH]
Gross Profit As A Percentage Of Net Sales
The Company believes that increased competition from Canon Inc., Nikon Inc.
and ASM Lithography, Ltd., among others, together with generally weak
conditions in the markets the Company serves, will make it difficult for the
Company to maintain recent gross margin percentages. Additionally, the
Company is proceeding with capacity additions for the anticipated volume
production of several new products that are outside of the Company's core
technologies. Commencement of production of these new products has resulted
and will continue to result in the purchase of significant levels of
inventory to support manufacturing requirements, hiring of additional
production and manufacturing support personnel, purchase of significant
levels of plant and equipment and the incurrence of other related
manufacturing overhead costs. The purchase of additional inventories will
result in a significantly higher risk of obsolescence, which may require
additional inventory reserves and would negatively impact gross margins.
Additionally, new products generally have lower gross margins until
production and after-sales efficiencies can be achieved. Should these new
products fail to develop or generate significant market demand, the Company's
business, financial condition and results of operations would be materially
adversely impacted. 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.
1996 VS. 1995 The Company's gross profit as a percentage of sales was 54.2%
for 1996 as compared with 52.1% for 1995. This increase in gross profit
percentage was primarily attributed to a favorable product mix, higher
weighted-average selling prices for the Company's systems, fewer system
shipments to the Japanese market, increased after-sales efficiencies and
lower required provisions for the Company's profit sharing and executive
incentive plans, partially offset by the impact of manufacturing
inefficiencies caused by changes in the Company's shipment schedule,
underutilization of manufacturing capacity and an unusually high degree of
nonlinearity of shipments during the Company's 1996 fiscal quarters, relative
to its 1995 fiscal quarters.
Research, Development and Engineering
1997 VS. 1996 The Company's research, development and engineering expenses,
net of third-party funding, were $26.4 million for 1997, a decrease of 3%
over the $27.2 million recorded for 1996. This decrease was primarily
attributed to decreased spending in absolute dollars for the development,
enhancement, manufacturing support and sales demonstration support of the
Company's Model 2244i stepper, Model 4700 stepper, Titan Wafer Stepper family
and Saturn Wafer Stepper family, partially offset by increased spending for
the Company's Model 1800 MVS Series steppers, development of its electron
beam lithography system and development of its rapid thermal annealing/laser
doping technologies and systems.
- ------------------------------------------------------------------------------
Page 28 Ultratech Stepper, Inc.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company intends to continue to invest significant resources in the
development of new products, such as the Company's 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 1998 to increase substantially, relative to 1997.
[GRAPH]
R.D. & E. Expenses
(Dollars in Millions)
1996 VS. 1995 The Company's research, development and engineering expenses,
net of third-party funding, were $27.2 million for 1996, an increase of 20% over
the $22.7 million recorded for 1995. This increase was primarily attributed to
the continued development, enhancement, manufacturing support and sales
demonstration support of the Company's Model 2244i stepper, Model 4700 stepper,
Titan Wafer Stepper and Saturn Wafer Stepper; expenditures related to the
enhancement of features and functionality of the Company's Model 1500 and Model
1700 Series steppers; and certain advanced research projects. These factors were
partially offset by lower required provisions for the Company's profit sharing
and executive incentive plans.
Selling, General and Administrative
1997 VS. 1996 Selling, general and administrative expenses were $26.2 million,
a decrease of 16% over the $31.0 million recorded for 1996. As a percentage of
net sales, selling, general and administrative expenses increased to 17.8% of
net sales in 1997, as compared to 16.0% of net sales in 1996. The dollar
decrease for the year ended 1997, relative to 1996, reflects in large part the
Company's decrease in sales, service and support expenses typically associated
with a decrease in sales; cost containment measures implemented during late
1996; significantly lower required provisions for the Company's profit sharing
and executive incentive plans; and lower commission expense resulting from lower
sales and higher direct sales relative to total net sales for the period.
[GRAPH]
Operation Income As A Percentage Of Sales
(Excludes Special Charges)
The Company expects the absolute dollar amount of selling, general and
administrative expenses for 1998 to increase substantially relative to 1997.
This increase is anticipated, in part, due to increased sales, service and
support expenses associated with the anticipated future volume production and
commercialization of the Company's electron beam lithography system and the
anticipated future introduction of its rapid thermal annealing/laser doping
system; higher operating costs in Japan as a result of the Company's decision
to establish a direct sales force; and to potentially higher anticipated
provisions for the Company's profit sharing and executive incentive plans,
which are dependent upon the Company achieving certain operating income
targets.
1996 VS. 1995 Selling, general and administrative expenses were $31.0
million for 1996, an increase of 11% over the $27.9 million recorded for
1995. As a percentage of net sales, selling, general and administrative
expenses declined to 16.0% of net sales in 1996, as compared to 17.6% of net
sales in 1995. The significant reduction in selling, general and
administrative expenses, as a percentage of net sales, can be primarily
attributed to cost containment measures implemented during the year, lower
required provisions for the Company's profit sharing and executive incentive
plans and lower commission expense resulting from higher direct sales
relative to total net sales for the year. The significant dollar increase in
1996 reflects the Company's increases in sales, service and support expenses
typically associated with an increase in sales, partially offset by the
Company's cost containment measures, lower required provisions for the
Company's profit sharing and executive incentive plans and lower commission
expense resulting from higher direct sales relative to total net sales.
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.
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 29
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Charge Relating to Termination of Japan Distributor
In December 1997, the Company terminated its relationship with its Japan
distributor, Innotech Corporation. This resulted in a special charge of $3.5
million, or $0.11 per share, in the quarter ended December 31, 1997, net of
related income tax benefits, primarily related to termination fees negotiated
between the Company and Innotech. The Company is presently in the process of
establishing a direct sales force in Japan. This is anticipated to contribute
to higher selling, general and administrative expenses in 1998, relative to
1997.
Other Income, Net
Other income, net, which consists primarily of interest income, was $7.3
million for 1997 as compared with $6.3 million for 1996 and $4.6 million for
1995. The increases in 1997 and 1996 were attributed to interest earned on
increased levels of cash equivalents, short-term investments and leases
receivable.
Income Taxes
Income taxes represented 30%, 33% and 33% of income before income taxes for
1997, 1996 and 1995, respectively. The decrease in the tax rate for 1997,
relative to 1996 and 1995, is primarily a result of tax benefits associated
with the Company's research and development efforts together with higher
tax-exempt income, relative to total income before income taxes. The Company
presently anticipates that its effective tax rate in 1998 will remain at 30%;
however, tax legislation and other factors may impact this rate further. The
Company's effective tax rate currently differs from the U.S. statutory rate
as a result of state income taxes and benefits associated with the Company's
foreign sales corporation, tax-exempt income and credits for research and
development, net of other individually immaterial items.
Liquidity and Capital Resources
Cash flows provided by operating activities were $5.6 million for the year
ended December 31, 1997, as compared with $12.6 million provided by operating
activities during the comparable period in 1996. Positive cash flows from
operating activities during 1997 were primarily attributed to net income of
$17.6 million and net non-cash charges to income of $15.5 million, which
include a $3.6 million pre-tax charge for the write-off of in-process
research and development associated with the Company's purchase of the assets
of Lepton Inc., partially offset by a net cash requirement of $27.4 million
as a result of changes in operating assets and liabilities. The negative net
effect from changes in operating assets and liabilities was primarily
attributed to an increase of $13.1 million in leases receivable, a $6.1
million increase in accounts receivable, a $1.8 million increase in
inventories and a decrease in accrued liabilities of $6.4 million, partially
offset by a $2.9 million increase in accounts payable. The Company
anticipates that the current trend of nonlinearity of shipments and extended
customer payment terms will continue to keep accounts receivable levels at
unusually high levels for at least the next several quarters. Such trends,
should they continue, would expose the Company to numerous risks, which could
materially adversely affect the Company's business, financial condition and
results of operations.
[GRAPH]
Capital Expenditure
(Dollars in Millions)
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 investments, the Company will be subject to increased risk of
inventory obsolescence, impairment of long-lived assets and other factors, which
could materially adversely affect the Company's business, financial condition
and results of operations.
- ------------------------------------------------------------------------------
Page 30 Ultratech Stepper, Inc.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
At December 31, 1997, the Company had working capital of $223.2 million. The
Company's principal sources of liquidity at December 31, 1997 consisted of
$164.3 million in cash, cash equivalents and short-term investments and $4
million in various unsecured lines of credit. As of December 31, 1997, there
was $0.1 million outstanding under such facilities.
For the year ended December 31, 1997, cash provided by financing activities
was $3.9 million, principally as a result of the issuance of Common Stock
pursuant to the exercise of employee stock options and the issuance of stock
under the Company's employee stock purchase plan.
[GRAPH]
Working Capital
(Dollars in millions)
During the year ended December 31, 1997, the Company used $13.4 million of
cash in its investing activities, including $9.3 million for capital
expenditures, $3.1 million for the purchase of the assets of Lepton Inc. and
$0.8 million for the net investment of cash in short-term investments. The
Company intends to continue to make significant capital expenditures during
1998 related to the expansion of its manufacturing facilities, the
manufacture of its systems for sales demonstration and engineering
development purposes and additional capital expenditures related to research,
development and engineering, sales and service and management information
systems. As a result of these capital expenditures, the Company's
depreciation and amortization costs are anticipated to increase significantly
and may negatively impact the Company's results of operations in the event of
a further downturn in the Company's business cycles.
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 twenty-first century dates from twentieth 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
and software contained in the products it sells, a year 2000 date conversion
project to address necessary code changes, testing and implementation.
Significant uncertainty exists concerning the potential effects associated
with such compliance. 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. There can be no
assurance, however, that the Company and/or its vendors will be able to
modify timely and successfully such products, services and systems to comply
with year 2000 requirements, which could have a material adverse effect on
the Company's business, financial condition and results of operations,
including costs associated with related litigation.
The development and manufacture of new lithography systems and enhancements
are highly capital intensive. In order to remain competitive, the Company
must continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities; investments in systems,
procedures and controls; expansion of operations and research and
development, among many items. The Company expects that cash flow from
operations, its cash, cash equivalents and short-term investments and funds
available under its lines of credit will be sufficient to meet the Company's
cash requirements for the next twelve months. Beyond the next twelve months,
the Company may require additional equity or debt financing to address its
working capital or capital equipment needs. Additionally, the Company may in
the future pursue acquisitions of complementary product lines, technologies
or businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies; the diversion of management's attention from other
business concerns; risks of entering markets in which the Company has no or
limited direct prior experience; and the potential loss of key employees of
the acquired company. In the event that such an acquisition does occur, there
can be no assurance as to the effect thereof on the Company's business or
operating results. Additionally, the Company is experiencing increased
interest in its equipment leasing program. Continued success of this strategy
may result in the further formation of significant long-term receivables and
would require the use of substantial amounts of working capital. 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.
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 31
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
In thousands, except share amounts 1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 43,898 $ 47,771
Short-term investments 120,451 119,638
Accounts receivable, less allowance for doubtful accounts
of $2,258 in 1997 and $1,151 in 1996 45,947 39,845
Inventories 37,337 35,524
Leases receivable--current portion 2,408 193
Prepaid expenses and other current assets 1,840 655
Deferred income taxes 5,142 8,439
----------------------------------
Total current assets 257,023 252,065
Equipment and leasehold improvements, net 22,285 19,242
Restricted investments 5,325 5,129
Leases receivable 11,354 425
Other assets 4,014 3,911
----------------------------------
Total assets $300,001 $280,772
==================================
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 94 $ -
Accounts payable 12,295 9,400
Accrued expenses 17,502 23,929
Advance billings 872 646
Income taxes payable 3,034 5,406
----------------------------------
Total current liabilities 33,797 39,381
Deferred income taxes 2,103 732
Other liabilities 469 712
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value:
2,000,000 shares authorized; none issued - -
Common Stock, $.001 par value:
30,000,000 shares authorized;
issued and outstanding--20,786,288 at December 31, 1997
and 20,310,443 at December 31, 1996 21 20
Additional paid-in capital 170,200 164,288
Net unrealized gains on investments 271 65
Retained earnings 93,140 75,574
----------------------------------
Total stockholders' equity 263,632 239,947
----------------------------------
Total liabilities and stockholders' equity $300,001 $280,772
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------
Page 32 Ultratech Stepper, Inc.
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
In thousands, except per share amounts 1997 1996 1995
<S> <C> <C> <C>
Net sales $147,349 $193,508 $157,831
Cost of sales 69,671 88,615 75,543
---------------------------------
Gross profit 77,678 104,893 82,288
Research, development and engineering 26,431 27,220 22,655
Selling, general and administrative 26,177 30,995 27,851
Acquired in-process research and development 3,619 - -
Special charge relating to termination of
Japan distributor 3,450 - -
---------------------------------
Operating income 18,001 46,678 31,782
Interest expense (165) (236) (206)
Other income, net 7,258 6,265 4,594
---------------------------------
Income before income taxes 25,094 52,707 36,170
Income taxes 7,528 17,396 11,936
---------------------------------
Net income $ 17,566 $ 35,311 $ 24,234
---------------------------------
Net income per share-basic $ 0.85 $ 1.76 $ 1.32
Number of shares used in per share
computations-basic 20,553 20,079 18,425
Net income per share-diluted $ 0.81 $ 1.66 $ 1.20
Number of shares used in per share
computations-diluted 21,681 21,271 20,154
---------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 33
<PAGE>
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
In thousands 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,566 $ 35,311 $ 24,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,234 6,060 3,848
Loss on disposal of equipment 93 43 261
Deferred income taxes 4,566 (898) (2,369)
Write-off of acquired in-process
research and development 3,619 - -
Changes in operating assets and liabilities:
Accounts receivable (6,102) (15,928) (7,794)
Inventories (1,813) (8,137) (5,570)
Prepaid expenses and other current assets (1,185) 677 (911)
Leases receivable-current portion (2,215) (193) -
Leases receivable-long-term (10,929) (425) -
Other assets (874) (1,184) (1,961)
Accounts payable 2,895 (3,525) 7,428
Accrued expenses (6,427) 712 9,782
Advance billings 226 (3,425) 2,399
Income taxes payable (251) 3,738 5,917
Other liabilities (761) (186) 320
---------------------------------------
Net cash provided by operating activities 5,642 12,640 35,584
Cash flows from investing activities:
Capital expenditures (9,337) (7,849) (9,760)
Investments in securities (681,316) (593,545) (896,010)
Proceeds from sales of investments 165,192 266,593 396,993
Proceeds from maturing investments 515,342 337,442 404,273
Purchase of certain assets of Lepton Inc. (3,101) - -
Segregation of restricted investments (175) (170) (4,996)
---------------------------------------
Net cash provided by (used in) investing activities (13,395) 2,471 (109,500)
Cash flows from financing activities:
Repayment of promisory note - (400) (400)
Proceeds from issuance of short-term debt 99 7,500 3,000
Repayment of short-term debt (5) (7,500) (3,000)
Proceeds from issuance of Common Stock 3,786 2,699 90,222
---------------------------------------
Net cash provided by financing activities 3,880 2,299 89,822
---------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,873) 17,410 15,906
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,771 30,361 14,455
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,898 $ 47,771 $ 30,361
---------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 185 $ 238 $ 187
Income taxes 3,254 14,500 8,517
Other non-cash changes
Systems transferred from inventory to equipment
and other assets $ 4,208 $ 2,384 $ 3,570
---------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------
Page 34 Ultratech Stepper, Inc.
<PAGE>
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS
Ultratech Stepper, Inc. (the "Company") and its subsidiaries develop, market and
manufacture photolithography equipment for use in the integrated circuit
fabrication process; in the development and fabrication of photomasks for the
production of integrated circuits; in the fabrication of thin film heads for
high-capacity disk drives; and in the manufacture of micromachined components
that are used extensively in telecommunications, automotive and medical
applications. Principal markets for the Company's products include the U.S.,
Europe and Asia.
2. CONCENTRATION OF RISKS
Sales of the Company's systems depend, in significant part, upon the decision
of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically
involves a significant commitment of capital. For this and other reasons, the
Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a
sale. Additionally, the markets for the Company's products are subject to
rapid technological change, which requires the Company to respond with new
products and enhanced versions of existing products. Lengthy sales cycles and
rapid technological change subject the Company to a number of significant
risks, including inventory obsolescence, significant after-sales support and
fluctuations in operating results, which are difficult to estimate and over
which the Company has little or no control. Sole-source and single-source
suppliers provide critical components and services for the manufacture of the
Company's products. The reliance on sole or limited groups of suppliers may
subject the Company from time to time to quality, allocation and pricing
constraints. For a further discussion of the Company's business and risk
factors, please refer to the Company's Annual Report on Form 10-K.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term
investments, trade receivables and long-term customer financing. The Company
places its cash equivalents, short-term investments and restricted
investments with high credit-quality financial institutions. The Company
invests its excess cash in commercial paper, readily marketable debt
instruments and collateralized funds of U.S. and state government entities.
The Company has established guidelines relative to credit ratings,
diversification and maturities that seek to maintain safety and liquidity. A
majority of the Company's trade receivables and lease receivables are derived
from sales in various geographic areas, principally the U.S., Europe, Japan,
South Korea, Taiwan and Southeast Asia, to large companies within the
integrated circuit, thin film head, photomask and micromachining industries.
The Company performs ongoing credit evaluations of its customers' financial
condition and requires collateral, such as letters of credit and security
agreements, whenever deemed necessary. The Company maintains an allowance for
uncollectible accounts receivable based upon expected collectibility of all
accounts receivable and leases receivable. 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned.
Intercompany balances and transactions have been eliminated.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with
a maturity date at acquisition of three months or less. The carrying value of
cash equivalents approximates fair value.
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 35
<PAGE>
Notes to Consolidated Financial Statements
INVESTMENTS Management determines the appropriate classification of its
investments at the time of purchase and re-evaluates the classification at
each balance sheet date. All investments in the Company's portfolio are
classified as "available for sale," in accordance with the provisions of the
Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are stated at fair value, with the unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization, as well
as interest, dividends, realized gains and losses and declines in value
judged to be other than temporary are included in other income, net. The cost
of securities sold is based on the specific identification method.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Demonstration units,
included in other assets, are stated at cost, less accumulated depreciation,
and are depreciated over 36 months.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization. Equipment
is depreciated on a straight-line basis over the estimated useful lives
(three to seven years). Leasehold improvements are amortized on a
straight-line basis over the life of the related assets or the lease term,
whichever is shorter.
DERIVATIVE FINANCIAL INSTRUMENTS Off-balance-sheet transactions, consisting
of forward currency contracts, have from time to time been utilized by the
Company to hedge obligations denominated in foreign currencies. To date,
these transactions have been immaterial to the consolidated operations of the
Company.
REVENUE RECOGNITION Sales of the Company's products are generally recorded
upon shipment, which usually precedes final customer acceptance, provided
that collection of the related receivable is probable. The Company also sells
service contracts for which revenue is deferred and recognized ratably over
the contract period.
From time to time, the Company leases its products to customers, typically as
sales-type leases. These leases generally have a five-year term.
WARRANTY The Company generally warrants its products for a period of up to 12
months from the date of customer acceptance for material and labor to repair the
product; accordingly, a provision for the estimated cost of the warranty is
recorded at the time revenue is recognized.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES The Company is actively
engaged in basic technology and applied research programs designed to develop
new products and product applications. In addition, substantial ongoing
product and process improvement engineering and support programs relating to
existing products are conducted within engineering departments and elsewhere.
Research, development and engineering costs are charged to operations as
incurred.
The Company has entered into various research and development arrangements
with certain third parties to jointly develop new products and technology.
Under such programs, the Company generally receives funding from the third
parties over an extended period based on achieving certain milestones or
based on a cost-sharing arrangement. Such funds are not anticipated to cover
all the costs of the programs and are recorded as reductions to research,
development and engineering expense based on the percentage of completion of
each project. For the years ended 1997, 1996 and 1995, the Company recognized
approximately $580,000, $2,688,000 and $1,590,000, respectively, in related
funding. As of December 31, 1997, there were no amounts remaining to be
funded on these contracts.
- ------------------------------------------------------------------------------
Page 36 Ultratech Stepper, Inc.
<PAGE>
Notes to Consolidated Financial Statements
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.
SPECIAL CHARGE RELATING TO TERMINATION OF JAPAN DISTRIBUTOR In December
1997, the Company terminated its relationship with its Japan distributor,
Innotech Corporation. This resulted in a special charge of $3.5 million in
the quarter ended December 31, 1997, related primarily to termination fees
negotiated between the Company and Innotech.
FOREIGN CURRENCY ACCOUNTING The U.S. dollar is the functional currency for
all foreign operations. Foreign exchange gains and losses, which result from
the process of remeasuring foreign currency financial statements into U.S.
dollars or from transactions during the period, have been immaterial and are
included in other income, net.
STOCK-BASED COMPENSATION The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), and related Interpretations in accounting for its employee stock
options and stock purchase plan. Pro forma information regarding net income
and net income per share is disclosed as required by the FASB's Statement No.
123, "Accounting for Stock-Based Compensation" (FAS 123), which also requires
that the information be determined as if the Company accounted for its
stock-based compensation subsequent to December 31, 1994 under the fair value
method of that Statement.
BASIC AND DILUTED NET INCOME PER SHARE In February 1997, the FASB issued
Statement No. 128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted net income per share with basic and
diluted net income per share. Unlike primary net income per share, basic net
income per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted net income per share is very similar to the
previously reported fully diluted net income per share. All net income per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
The following sets forth the computation of basic and diluted net income per
share:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
In thousands, except per share amounts 1997 1996 1995
<S> <C> <C> <C>
Numerator:
Net income $ 17,566 $ 35,311 $ 24,234
Denominator:
Denominator for basic net income per share 20,553 20,079 18,425
Effect of dilutive employee stock options 1,128 1,192 1,729
--------------------------------------
Denominator for diluted net income per share 21,681 21,271 20,154
--------------------------------------
Net income per share--basic $ 0.85 $ 1.76 $ 1.32
--------------------------------------
Net income per share--diluted $ 0.81 $ 1.66 $ 1.20
--------------------------------------
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements, and
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for a
company's business segments and related disclosures about it's products,
services, geographic areas and major customers. Both Statements No. 130 and
No. 131 are effective for fiscal years beginning after December 15, 1997. The
Company has not assessed the effect that these new standards will have on its
consolidated financial statements and/or disclosures.
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 37
<PAGE>
4. INVESTMENTS
The Company classifies all of its investments as "available for sale," in
accordance with the provisions of FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, the Company
states its investments at estimated fair value. Fair values are estimated based
on quoted market prices or pricing models using current market rates. The
Company deems all investments, except those restricted, to be available to meet
current working capital requirements.
The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------- -------------------------------------
Amortized Gross Estimated Amortized Gross Estimated
Unrealized Unrealized
---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments, in thousands Cost Gains Losses Fair Value Cost Gains Losses Fair Value
U.S. Treasury securities
and obligations of
U.S. government agencies $ 16,744 $ 9 $ 22 $ 16,731 $ 9,559 $ 11 $ 28 $ 9,542
Obligations of states and
political subdivisions 106,459 311 16 106,754 107,208 221 83 107,346
U.S. corporate debt securities 29,943 93 9 30,027 36,273 12 30 36,255
--------------------------------------------------------------------------------
$153,146 $413 $47 $153,512 $153,040 $244 $141 $153,143
--------------------------------------------------------------------------------
Restricted investments
U.S. Treasury securities
and obligations of
U.S. government agencies $ 3,606 $ 7 $ - $ 3,613 $ 5,131 $ - $ 5 $ 5,126
Obligations of states and
political subdivisions - - - - 3 - - 3
U.S. corporate debt securities 1,712 - - 1,712 - - - -
--------------------------------------------------------------------------------
$ 5,318 $ 7 $ - $ 5,325 $ 5,134 $ - $ 5 $ 5,129
--------------------------------------------------------------------------------
$158,464 $420 $47 $158,837 $158,174 $244 $146 $158,272
--------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the Company's investments to the balance
sheet classifications at December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996
<S> <C> <C>
Cash equivalents $ 33,061 $ 33,505
Short-term investments 120,451 119,638
Restricted investments 5,325 5,129
-------------------------
Investments, at estimated fair value $158,837 $158,272
-------------------------
</TABLE>
Gross realized gains and losses were not material for the years ended
December 31, 1997 and 1996. The adjustments to net unrealized gains and
(losses) on investments are included as a separate component of stockholders'
equity and totaled $206,000 and ($156,000), net of related taxes, for the
years ended December 31, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
Page 36 Ultratech Stepper, Inc.
<PAGE>
The amortized cost and estimated fair value of the Company's investments at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
In thousands Cost Value
<S> <C> <C>
Due in one year or less $105,894 $105,992
Due after one year through five years 52,570 52,845
------------------------------
$158,464 $158,837
------------------------------
</TABLE>
5. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996
<S> <C> <C>
Raw materials $ 20,297 $ 17,625
Work-in-process 9,739 11,971
Finished products 7,301 5,928
-----------------------------
$ 37,337 $ 35,524
-----------------------------
</TABLE>
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996
<S> <C> <C>
Machinery and equipment $ 18,739 $ 14,660
Leasehold improvements 2,877 1,701
Office furniture and equipment 15,457 12,441
---------------------------
37,073 28,802
Accumulated depreciation and amortization (14,788) (9,560)
---------------------------
$ 22,285 $ 19,242
---------------------------
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996
<S> <C> <C>
Salaries and benefits $ 5,018 $ 7,132
Warranty reserves 5,871 9,424
Settlement/Japan distributor 3,051 -
Other 3,562 7,373
----------------------------
$ 17,502 $ 23,929
----------------------------
</TABLE>
- ------------------------------------------------------------------------------
Ultratech Stepper, Inc. Page 39
<PAGE>
Notes to Consolidated Financial Statements
8. CREDIT FACILITIES
The Company has credit facilities for borrowings in various currencies up to
$4,000,000 on an unsecured basis with various banks. These agreements include
facility fees, allow for borrowings at rates including the banks' prime
reference rate, require compliance with certain financial covenants and
restrict the Company's ability to pay cash dividends. A $3,000,000 credit
facility expires in May 1998 and the remaining $1,000,000 credit facility
expires in September 1998. At December 31, 1997 and 1996, there were $0.1
million and $0 outstanding under these credit facilities, respectively.
9. STOCK-BASED COMPENSATION
1993 STOCK OPTION PLAN Under the Company's 1993 Stock Option Plan, as
amended, qualified employees, nonemployee Board members and consultants may
receive options to purchase shares of Common Stock at 85% to 100% of fair
value at certain specified dates. These options generally vest in equal
monthly installments over a period of approximately four years, with a
minimum vesting period of twelve months from grant date, and generally expire
ten years from date of grant. The plan will terminate on the earlier of
January 6, 2003, or the date on which all shares available for issuance under
the Plan have been issued. The plan includes a provision to automatically
increase the shares reserved for issuance by an amount equal to 1.4% of the
total number of shares of Common Stock outstanding on the last trading day of
the immediately preceding fiscal year, through the year 2000. Under the plan,
approximately 883,000 and 739,000 options were available for issuance at
December 31, 1997 and 1996, respectively.
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 2,350,208 $12.34 2,295,735 $ 9.95 2,367,408 $ 4.40
Granted 1,017,300 $20.37 787,349 $17.92 475,900 $30.23
Exercised (379,730) $ 6.09 (421,329) $ 3.45 (493,263) $ 2.94
Forfeited (427,526) $21.49 (311,547) $20.86 (54,310) $ 9.20
----------------------------------------------------------------------------------------------
Outstanding at December 31 2,560,252 $14.94 2,350,208 $12.34 2,295,735 $ 9.95
----------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, options outstanding were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted-Average
Range of Remaining Contractual Weighted-Average Weighted-Average
Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.050-$14.499 817,717 5.41 $ 2.50 755,796 $ 1.75
$14.500-$20.749 1,244,038 8.80 $17.45 220,468 $17.56
$20.750-$33.625 498,497 8.38 $29.04 177,108 $30.09
- --------------------------------------------------------------------------------------------------------------------------
$ 0.050-$33.625 2,560,252 7.64 $14.94 1,153,371 $ 9.12
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN In August 1995, the Company established an
Employee Stock Purchase Plan. The plan permits virtually all employees to
purchase Common Stock through payroll deductions at 85% of the lower of the
fair market value of the Common Stock on the first or last day of the
offering period. The offering periods are twelve months. Under the Plan,
approximately 268,000 shares and 114,000 shares of Common Stock were reserved
and available for issuance at December 31, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
Page 40 Ultratech Stepper, Inc.
<PAGE>
Notes to Consolidated Financial Statements
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to follow APB
25 and related interpretations in accounting for employee stock-based
compensation because, as discussed below, the alternative fair value accounting
provided for under FAS 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and net income per share is required
by FAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Expected life (in years) 3.5 3.5
Risk-free interest rate 5.6% 6.1%
Volatility factor 0.62 0.50
Dividend yield 0.0% 0.0%
</TABLE>
The weighted-average expected life of the option is computed assuming a
multiple-point approach with annual vesting periods. The weighted-average
fair value per share of all options granted during 1997 and 1996 was $9.74
and $7.32, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of options
granted is amortized to expense over the options' four-year vesting period.
Option grants are divided into annual vesting periods, resulting in the
recognition of approximately 50% of the total compensation expense of the
grant in the first year. Additionally, the potential tax benefit associated
with the issuance of incentive stock options is not reflected until realized
upon the disqualifying disposition of the shares. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
In thousands, except per share amounts 1997 1996 1995
<S> <C> <C> <C>
Pro forma net income $14,453 $31,985 $22,886
Pro forma net income per share-diluted $ 0.67 $ 1.52 $ 1.14
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
_____________________________________________________________________________
Ultratech Stepper, Inc. Page 41
<PAGE>
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY
The following table summarizes stockholders' equity activity:
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------------------------------------------------------------------
Common Stock Additional Net Unrealized Total
--------------- Paid-in Gains (Losses) Retained Stockholders'
In thousands Shares Amount Capital on Investments Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 16,550 $17 $ 64,416 $(435) $ 16,029 $ 80,027
Sale of Common Stock pursuant to
offering, net of offering expense
of $5,056 2,760 3 88,770 - - 88,773
Net issuance of Common Stock
under stock option plan 492 - 1,449 - - 1,449
Income tax benefit from stock option
transactions - - 4,506 - - 4,506
Net unrealized gain on investments,
net of tax effect - - - 656 - 656
Amortization of deferred compensation - - 13 - - 13
Net income - - - - 24,234 24,234
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 19,802 $20 $159,154 $221 $ 40,263 $199,658
-----------------------------------------------------------------------------------------
Net issuance of Common Stock under
stock option plan and employee
stock purchase plan 508 - 2,700 - - 2,700
Income tax benefit from stock option
and stock purchase plan transactions - - 2,420 - - 2,420
Net unrealized loss on investments,
net of tax effect - - - (156) - (156)
Amortization of deferred compensation - - 14 - - 14
Net income - - - - 35,311 35,311
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 20,310 $20 $164,288 $ 65 $ 75,574 $239,947
-----------------------------------------------------------------------------------------
Net issuance of Common Stock under
stock option plan and employee stock
purchase plan 476 1 3,785 - - 3,786
Income tax benefit from stock option
and stock purchase plan transactions - - 2,121 - - 2,121
Net unrealized gain on investments,
net of tax effect - - - 206 - 206
Amortization of deferred compensation - - 6 - - 6
Net income - - - - 17,566 17,566
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 20,786 $21 $170,200 $271 $ 93,140 $263,632
-----------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER RIGHTS PLAN In January 1997, the Board approved the adoption of
a Shareholder Rights Plan ("Rights Plan"). Among other things, the Rights
Plan provides that each Right will be distributed as a dividend at the rate
of one Preferred Share Purchase Right on each outstanding share of the
Company's Common Stock held by stockholders of record as of the close of
business on February 24, 1997. The rights expire on February 9, 2007.
The Rights will be exercisable only if a person or group acquires 15% or more
of the Company's Common Stock or announces a tender offer the consummation of
which would result in ownership by a person or group of 15% or more of the
Company's Common Stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of Junior Participating Preferred
Stock at an exercise price of $145.00 upon certain events.
The Rights are redeemable, in whole but not in part, at the option of the
Board of Directors at $.01 per Right, at any time within 10 days of the date
they become exercisable and in certain other circumstances and will not
become exercisable in certain instances where a transaction is approved by
the Company's Board of Directors. The Rights will not prevent a takeover of
the Company, but should encourage anyone seeking to acquire the Company to
negotiate with the Company's Board of Directors.
Shares reserved for issuance under the Plan were 350,000 at December 31, 1997.
_______________________________________________________________________________
Page 42 Ultratech Stepper, Inc.
<PAGE>
Notes to Consolidated Financial Statements
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLANS The Company currently sponsors a profit sharing plan
and an executive incentive bonus plan that distribute employee awards based
on the achievement of predetermined operating income targets. Employee awards
under these various employee bonus plans, including awards deferred from
prior years, were $447,000, $1,497,000 and $2,087,000 for 1997, 1996 and
1995, respectively.
EMPLOYEE SAVINGS AND RETIREMENT PLAN The Company currently sponsors a
401(k) employee salary deferral plan that allows voluntary contributions by
all full-time employees of from 1% to 20% of their pretax earnings. Company
contributions will be made only if certain predetermined operating income
targets are achieved. The Company has recognized expense of $0, $797,000 and
$898,000 relating to this benefit plan for 1997, 1996 and 1995, respectively.
12. INCOME TAXES
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
In thousands 1997 1996 1995
<S> <C> <C> <C>
Domestic $ 23,326 $ 48,058 $ 31,546
Foreign 1,768 4,649 4,624
--------------------------------------
Income before income taxes $ 25,094 $ 52,707 $ 36,170
--------------------------------------
</TABLE>
Income taxes included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
In thousands 1997 1996 1995
<S> <C> <C> <C>
Federal:
Current $ 2,142 $ 14,513 $ 11,136
Deferred 3,925 (847) (2,355)
---------------------------------------
6,067 13,666 8,781
State:
Current 365 2,301 1,764
Deferred 644 (31) (172)
---------------------------------------
1,009 2,270 1,592
Foreign:
Current 455 1,480 1,542
Deferred (3) (20) 21
---------------------------------------
452 1,460 1,563
---------------------------------------
Total income tax provision $ 7,528 $ 17,396 $ 11,936
---------------------------------------
</TABLE>
The tax benefit associated with stock option and employee stock purchase plan
transactions reduced taxes currently payable by $2,121,000, $2,420,000 and
$4,506,000 for 1997, 1996 and 1995, respectively. Such benefits are credited
to stockholders' equity when realized.
_____________________________________________________________________________
Ultratech Stepper, Inc. Page 43
<PAGE>
Notes to Consolidated Financial Statements
Income taxes reconcile to the amount computed by applying the U.S. statutory
rate to income before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
In thousands 1997 1996 1995
<S> <C> <C> <C>
Tax computed at statutory rate $ 8,783 $ 18,447 $ 12,660
State income taxes (net of federal benefit) 656 1,476 1,035
Foreign sales corporation (90) (1,179) (671)
Tax-exempt income (1,747) (1,640) (1,095)
Credits for research and development (612) (693) (328)
Other, net 538 985 335
----------------------------------------
Income tax provision $ 7,528 $ 17,396 $ 11,936
----------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
In thousands 1997 1996
<S> <C> <C>
Deferred tax assets:
State taxes $ 325 $ 1,071
Warranty reserves 2,141 3,317
Accrued vacation 590 615
Inventory valuation 3,869 6,251
Other 2,136 1,432
Deferred tax liabilities:
Deferred income (3,919) (4,247)
Lease revenue (1,489) -
Other (614) (732)
-------------------------------
Net deferred tax assets $ 3,039 $ 7,707
-------------------------------
</TABLE>
13. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through domestic and
foreign-based sales and service operations and independent sales
organizations. The Company operates in one business segment, which is the
manufacture and distribution of photolithography equipment to manufacturers
of integrated circuits, photomasks for the production of integrated circuits,
thin film heads and micromachined components.
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 17% and 12% of the
Company's net sales. In 1995, sales to one customer accounted for 12% of the
Company's net sales.
_______________________________________________________________________________
Page 44 Ultratech Stepper, Inc.
<PAGE>
Notes to Consolidated Financial Statements
The following table summarizes the Company's operations by geographic region.
<TABLE>
<CAPTION>
Adjustment
and
In thousands United States Asia Europe Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
1997
Sales to unaffiliated domestic customers $ 98,966 $ - $ - $ - $ 98,966
Sales to unaffiliated foreign customers 33,938 1,200 13,245 - 48,383
Transfers between geographic locations 9,558 5,961 256 (15,775) -
---------------------------------------------------------------------
Total net sales $142,462 $7,161 $13,501 $(15,775) $147,349
---------------------------------------------------------------------
Operating income $ 16,171 $ 319 $ 1,632 $ (121) $ 18,001
---------------------------------------------------------------------
Identifiable assets $291,854 $2,292 $ 5,855 $ - $300,001
---------------------------------------------------------------------
1996
Sales to unaffiliated domestic customers $ 91,370 $ - $ - $ - $ 91,370
Sales to unaffiliated foreign customers 76,242 1,593 24,303 - 102,138
Transfers between geographic locations 19,191 5,711 857 (25,759) -
---------------------------------------------------------------------
Total net sales $186,803 $7,304 $25,160 $ (25,759) $193,508
---------------------------------------------------------------------
Operating income $ 41,865 $ 297 $ 4,396 $ 120 $ 46,678
---------------------------------------------------------------------
Identifiable assets $269,088 $1,995 $ 9,689 $ - $280,772
---------------------------------------------------------------------
1995
Sales to unaffiliated domestic customers $ 70,617 $ - $ - $ - $ 70,617
Sales to unaffiliated foreign customers 57,333 1,014 28,867 - 87,214
Transfers between geographic locations 22,479 4,575 301 (27,355) -
---------------------------------------------------------------------
Total net sales $150,429 $ 5,589 $29,168 $ (27,355) $157,831
---------------------------------------------------------------------
Operating income $ 27,451 $ 254 $ 4,319 $ (242) $ 31,782
---------------------------------------------------------------------
Identifiable assets $233,030 $ 1,858 $10,540 $ - $245,428
---------------------------------------------------------------------
</TABLE>
Sales and transfers between geographic areas are made at transfer prices that
approximate arms-length distributor pricing between the domestic and
international operations.
The Company believes that the severe currency and equity market fluctuations
that have been experienced recently by many of the Asian markets has
resulted, and may continue to result, in delays, deferrals and cancellations
of 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. The Company's operations in foreign
countries are not currently subject to significant exchange rate
fluctuations, principally because sales contracts for the Company's systems
are generally denominated in U.S. dollars. However, international sales
expose the Company to a number of additional risk factors, including
fluctuations in the value of local currencies relative to the U.S. dollar,
which, in turn, impact the relative cost of ownership of the Company's
products.
_____________________________________________________________________________
Ultratech Stepper, Inc. Page 45
<PAGE>
Notes to Consolidated Financial Statements
14. Commitments
The Company leases its facilities, undeveloped land and certain equipment
under operating leases. Under certain of its leasing arrangements, the
Company is subject to escalation charges and also retains certain renewal and
purchase options. As of December 31, 1997, the minimum annual rental
commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 3,942,000
1999 3,352,000
2000 2,772,000
2001 1,370,000
2002 1,213,000
Thereafter 2,353,000
-----------
$15,002,000
===========
</TABLE>
Rent expense was approximately $3,401,000, $2,841,000 and $2,721,000, for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company presently leases 6.4 acres of land located in San Jose,
California. This lease expires in November 1998. As part of this transaction,
the Company has segregated $5.3 million of its securities as collateral for
certain obligations of the lessor pertaining to this land. These securities
are restricted as to withdrawal, and are managed, subject to certain
limitations, by the Company under its investment policy.
_______________________________________________________________________________
Page 46 Ultratech Stepper, Inc.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ULTRATECH STEPPER, INC.
We have audited the accompanying consolidated balance sheets of Ultratech
Stepper, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ultratech Stepper, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
----------------------------
San Jose, California
January 23, 1998
_____________________________________________________________________________
Ultratech Stepper, Inc. Page 47
<PAGE>
Investor Information
Investor Information
Exchange: Nasdaq National Market
Symbol: UTEK
Closing price (12/31/97): $19.875
Dividend yield: Nil
Market capitalization (millions) at 12/31/97: $413
Industry: Semiconductor capital equipment
Market segments: integrated circuits, photomasks, thin film heads and
micromachined components
As of March 10, 1998, the Company had approximately 36,300 beneficial
stockholders, including 793 stockholders of record.
Price Range of Common Stock
The following table sets forth, for periods indicated, the range of high and
low sale prices of the stock as reported by the National Association of
Securities Dealers, Inc.:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------
Fiscal Quarter High Low High Low
<S> <C> <C> <C> <C>
First Quarter $30.625 $20.500 $31.750 $15.875
Second Quarter 25.375 17.000 28.250 16.625
Third Quarter 34.375 22.500 21.500 14.000
Fourth Quarter 34.500 18.500 27.750 16.125
</TABLE>
The following graph sets forth, for periods indicated, the range of stock
price/earnings ratios, based on high, low and closing stock prices:
<TABLE>
<CAPTION>
[Graph]
Price/Earnings Performance
Quarter High Low Close
- ------- ---- --- -----
<S> <C> <C> <C>
Q1/96 27 13 15
Q2/96 20 12 14
Q3/96 14 9 12
Q4/96 17 10 17
Q1/97 18 12 15
Q2/97 17 12 16
Q3/97 26 17 25
Q4/97 31 16 18
</TABLE>
Dividend Information
The Company has not paid cash dividends on its Common Stock since inception,
and its Board of Directors presently plans to reinvest the Company's earnings
in its business. Accordingly, it is anticipated that no cash dividends will
be paid to holders of Common Stock in the foreseeable future.
Inquiries Concerning the Company
Ultratech Stepper welcomes inquiries from its stockholders and other
interested investors. For additional copies of this report, the Form 10-K or
other information, please contact:
Ultratech Stepper, Inc.
Investor Relations
3050 Zanker Road
San Jose, CA 95134
Phone: (408) 321-8835
Background on the Company and its products, financial information and our
online annual report, as well as other useful information, which may be of
interest to investors, can be found at the Company's home page on the world
wide web at www.ultratech.com.
Transfer Agent and Registrar:
Questions regarding misplaced stock certificates, change of address or the
consideration of accounts should be addressed to the Company's transfer agent:
The First National Bank of Boston
c/o Boston EquiServe LP
P.O. Box 644
Boston, MA 02102
Annual Meeting
The Ultratech Stepper, Inc. annual meeting of stockholders will be held at
10:00 a.m. on Wednesday, June 3, 1998, at the Beverly Heritage Hotel,
Milpitas, California.
Independent Auditors
Ernst & Young LLP
San Jose, California
General Counsel
Brobeck, Phleger & Harrison LLP
Palo Alto, California
_______________________________________________________________________________
Page 48 Ultratech Stepper, Inc.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ULTRATECH STEPPER, INC.
The following is a list of Ultratech Stepper Inc.'s subsidiaries including their
states of incorporation as of March 10, 1998:
SUBSIDIARIES STATE AND COUNTRY OF INCORPORATION
Ultratech Stepper International, Inc. State of Delaware, USA
Ultratech Stepper UK Limited United Kingdom
Ultratech Stepper Foreign Sales Corp. Barbados
Ultratech Kabushiki Kaisha Japan
Ultratech Capital, Inc. State of Delaware, USA
UltraBeam Lithography, Inc. State of Delaware, USA
Ultratech Stepper (Thailand) Co. LTD. Thailand
Verdant Technologies, Inc. State of Delaware, USA
U.S. Advanced Lithography LLC State of Delaware, USA
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Ultratech Stepper, Inc. of our report dated January 23, 1998, included
in the 1997 Annual Report to Stockholders of Ultratech Stepper, Inc.
Our audits included the financial statement schedule of Ultratech Stepper,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-92572) pertaining to the 1993 Stock Option/Stock
Issuance Plan and the 1995 Employee Purchase Plan of Ultratech Stepper, Inc. of
our report dated January 23, 1998, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Ultratech Stepper, Inc.
/s/ ERNST & YOUNG LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,898
<SECURITIES> 120,451
<RECEIVABLES> 48,205
<ALLOWANCES> 2,258
<INVENTORY> 37,337
<CURRENT-ASSETS> 257,023
<PP&E> 37,073
<DEPRECIATION> 14,788
<TOTAL-ASSETS> 300,001
<CURRENT-LIABILITIES> 33,797
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 263,611
<TOTAL-LIABILITY-AND-EQUITY> 300,001
<SALES> 136,677
<TOTAL-REVENUES> 147,349
<CGS> 62,995
<TOTAL-COSTS> 69,671
<OTHER-EXPENSES> 30,050
<LOSS-PROVISION> 2,205
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 25,094
<INCOME-TAX> 7,528
<INCOME-CONTINUING> 17,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,566
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.81
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 30,156 48,294 35,625
<SECURITIES> 136,080 121,838 128,703
<RECEIVABLES> 42,770 42,553 43,412
<ALLOWANCES> 1,176 1,706 1,706
<INVENTORY> 32,580 30,757 32,014
<CURRENT-ASSETS> 251,939 255,174 253,293
<PP&E> 28,828 30,460 32,982
<DEPRECIATION> 10,769 11,878 13,369
<TOTAL-ASSETS> 282,605 290,168 296,332
<CURRENT-LIABILITIES> 36,569 37,542 34,519
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 20 20 20
<OTHER-SE> 244,789 251,487 260,736
<TOTAL-LIABILITY-AND-EQUITY> 282,605 290,168 296,332
<SALES> 36,251 35,617 33,827
<TOTAL-REVENUES> 38,733 38,054 36,752
<CGS> 16,008 16,507 15,850
<TOTAL-COSTS> 17,700 18,075 17,524
<OTHER-EXPENSES> 9,839 6,793 7,092
<LOSS-PROVISION> 25 980 0
<INTEREST-EXPENSE> 42 43 58
<INCOME-PRETAX> 6,570 8,299 7,510
<INCOME-TAX> 2,037 2,572 2,105
<INCOME-CONTINUING> 4,533 5,727 5,405
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,533 5,727 5,405
<EPS-PRIMARY> 0.22 0.28 0.26
<EPS-DILUTED> 0.21 0.27 0.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR
YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1995
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1996
JAN-01-1995
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
DEC-31-1995
<CASH> 21,867 28,185 40,508 47,771
30,361
<SECURITIES> 138,757 124,125 117,509 119,638
130,995
<RECEIVABLES> 34,340 45,501 48,891 40,996
24,530
<ALLOWANCES> 859 1,137 1,224 1,151
613
<INVENTORY> 31,665 34,994 35,708 35,524
27,387
<CURRENT-ASSETS> 235,131 241,930 252,962 252,065
220,875
<PP&E> 23,948 26,975 27,527 28,802
21,231
<DEPRECIATION> 5,904 7,077 8,330 9,560
4,879
<TOTAL-ASSETS> 261,486 271,093 281,795 280,772
245,428
<CURRENT-LIABILITIES> 51,724 50,914 51,175 39,381
44,701
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 20 20 20 20
20
<OTHER-SE> 208,818 219,310 229,723 239,927
199,638
<TOTAL-LIABILITY-AND-EQUITY> 261,486 271,093 281,795 280,772
245,428
<SALES> 49,568 49,639 44,462 185,058
151,124
<TOTAL-REVENUES> 51,713 51,793 46,502 193,508
157,831
<CGS> 22,552 22,297 19,463 82,425
70,668
<TOTAL-COSTS> 24,059 23,691 21,159 88,615
75,543
<OTHER-EXPENSES> 7,393 7,307 6,421 27,220
22,655
<LOSS-PROVISION> 247 278 87 1,225
371
<INTEREST-EXPENSE> 64 67 61 236
206
<INCOME-PRETAX> 13,093 14,054 13,082 52,707
36,170
<INCOME-TAX> 4,452 4,778 4,247 17,396
11,936
<INCOME-CONTINUING> 8,641 9,276 8,835 35,311
24,234
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 8,641 9,276 8,835 35,311
24,234
<EPS-PRIMARY> 0.43 0.46 0.44 1.76
1.32
<EPS-DILUTED> 0.41 0.44 0.42 1.66
1.20
</TABLE>
