<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
---------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-22248
---------------
ULTRATECH STEPPER, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3050 Zanker Road, San Jose, California 95134
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares of the issuer's class of common stock, as of
the latest practical date:
Class Outstanding as of August 6, 1998
- ------------------------------------- --------------------------------------
Common Stock, $.001 par value 21,031,754
1
<PAGE>
ULTRATECH STEPPER, INC.
INDEX
Page No.
--------
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended June 30, 1998 and 1997 and
the six months ended June 30, 1998 and 1997 . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1998 and 1997 and the six months ended
June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 9
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 22
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, Dec. 31,
(In thousands) 1998 1997*
- -----------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments $150,116 $164,349
Accounts receivable, net 27,506 45,947
Inventories 53,931 37,337
Current portion of leases receivable,
prepaid expenses and other current assets 10,458 4,248
Deferred income taxes 5,139 5,142
- -----------------------------------------------------------------------------
Total current assets 247,150 257,023
Equipment and leasehold
improvements, net 27,977 22,285
Restricted investments 5,445 5,325
Leases receivable 9,062 11,354
Other assets 8,353 4,014
- -----------------------------------------------------------------------------
Total assets $297,987 $300,001
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,531 $ 94
Accounts payable 14,223 12,295
Other current liabilities 29,419 21,408
- -----------------------------------------------------------------------------
Total current liabilities 45,173 33,797
Other liabilities 2,507 2,572
Stockholders' equity 250,307 263,632
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $297,987 $300,001
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
*The Balance Sheet as of December 31, 1997 has been derived from the audited
financial statements at that date.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
JUNE 30, June 30, JUNE 30, June 30,
(In thousands, except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 22,395 $38,054 $ 50,177 $76,787
Cost of sales 16,148 18,075 32,066 35,775
- -------------------------------------------------------------------------------------------------------------
Gross profit 6,247 19,979 18,111 41,012
OPERATING EXPENSES:
Research, development, and engineering 6,841 6,793 14,014 13,013
Selling, general, and administrative 6,292 6,643 12,768 12,921
Acquired in-process research and development 12,566 0 12,566 3,619
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) (19,452) 6,543 (21,237) 11,459
Interest expense (82) (43) (109) (85)
Other income, net 1,592 1,799 3,295 3,495
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (17,942) 8,299 (18,051) 14,869
Income taxes (benefit) (2,578) 2,572 (3,048) 4,609
- -------------------------------------------------------------------------------------------------------------
Net income (loss) (15,364) 5,727 (15,003) 10,260
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense), net of tax:
Unrealized gain (loss) on available-for-sale securities (66) 340 68 20
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(15,430) $ 6,067 $(14,935) $10,280
- -------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic $ (0.74) $ 0.28 $ (0.72) $ 0.50
Number of shares used in per share computations - basic 20,895 20,451 20,864 20,411
Net income (loss) per share - diluted $ (0.74) $ 0.27 $ (0.72) $ 0.48
Number of shares used in per share computations - diluted 20,895 21,442 20,864 21,511
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
---------------------
JUNE 30, June 30,
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(15,003) $10,260
Charges to income not affecting cash 17,844 6,625
Net effect of changes in operating assets and liabilities 7,867 (8,191)
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 10,708 8,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,281) (3,108)
Net reduction (investment) in available-for-sale securities 31,227 (2,327)
Purchase of certain assets of Lepton Inc. - (3,101)
Purchase of certain assets and liabilities of Integrated
Solutions, Inc., net of cash acquired (19,429) -
Segregation of restricted investments (117) (151)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,400 (8,687)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,437 99
Repayment of note payable - (99)
Net proceeds from issuance of common stock
pursuant to employee stock plans 1,300 516
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 2,737 516
Net increase in cash and cash equivalents 16,845 523
Cash and cash equivalents at beginning of period 43,898 47,771
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 60,743 $48,294
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included.
USE OF ESTIMATES - The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
The Company's second fiscal quarter in 1998 and 1997 ended on July 4, 1998
and July 5, 1997, respectively. For convenience of presentation, the
Company's financial statements have been shown as ending on June 30, 1998 and
June 30, 1997.
Operating results for the three-month and six-month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998, or any future period.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Raw materials . . . . . . . . . . . . $31,754 $20,297
Work-in-process . . . . . . . . . . . 11,812 9,739
Finished products . . . . . . . . . . 10,365 7,301
------- -------
$53,931 $37,337
------- -------
------- -------
</TABLE>
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Salaries and benefits $ 9,327 $ 5,018
Warranty reserves 7,849 5,871
Advance billings 2,978 872
Income taxes payable 0 3,034
Settlement/Japan distributor 0 3,051
Other 9,265 3,562
------- -------
$29,419 $21,408
------- -------
------- -------
</TABLE>
(4) COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards Board
Statement No. 128 (FAS 128), "Earnings Per Share" in the fourth fiscal quarter
of 1997. Under the provision of FAS 128, primary net income per share has
been replaced by basic net income per share, which does not include the
dilutive effect of stock options in its calculation. In addition, fully
diluted net income per share has been replaced by diluted net income per
share. All prior period net income per share amounts have been replaced by
basic and diluted net income per share. Net income has not been adjusted for
any period presented for purposes of computing basic and diluted earnings per
share.
6
<PAGE>
The following sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(15,364) $ 5,727 $(15,003) $10,260
Denominator:
Denominator for basic net income (loss) per share 20,895 20,451 20,864 20,411
Effect of dilutive employee stock options 0 991 0 1,100
-------- ------- -------- -------
Denominator for diluted net income (loss) per share 20,895 21,442 20,864 21,511
-------- ------- -------- -------
Net income (loss) per share - basic $ (0.74) $ 0.28 $ (0.72) $ 0.50
-------- ------- -------- -------
-------- ------- -------- -------
Net income (loss) per share - diluted $ (0.74) $ 0.27 $ (0.72) $ 0.48
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
For the three-month and six-month periods ended June 30, 1998, options to
purchase 2,719,000 shares of common stock at an average exercise price of
$15.68 were excluded from the computation of diluted net loss per share as
the effect would have been antidilutive. This compares to the exclusion of
407,000 options at an average exercise price of $30.20 and 400,000 options at
an average exercise price of $30.43 for the three-month and six-month
periods ended June 30, 1998, respectively. Options are antidilutive when the
Company has a net loss or when the exercise price of the stock option is
greater than the average market price of the Company's common stock.
(5) ACQUISITION
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. The purchase price consisted of
net cash consideration of approximately $19.4 million, and $13.7 million for
transaction expenses and assumed liabilities. As a result of this acquisition,
the Company recognized a charge in the quarter ended June 30, 1998 for
acquired in-process research and development expense of $12.6 million, or
$0.60 per share, representing products in development stage that were not
considered to have reached technological feasibility and had no alternative
future use. Based on the preliminary purchase price allocation, the Company
recorded $2.7 million in excess cost over fair value of net assets to be
amortized on a straight-line basis over a five year period.
The Company accounted for this acquisition based on the purchase method of
accounting. The results of ISI are included from the date of acquisition and
were not material to the Company's results of operations.
The following unaudited pro forma net sales, net income (loss) and net income
(loss) per share combine the historical net sales, net income (loss) and net
income (loss) per share of the Company and ISI for the six months ended June
30, 1998 and June 30, 1997, as if the acquisition had occurred at the
beginning of the earliest period presented. These balances do not reflect
the charge for acquired in-process research and development of $12.6 million,
or $0.60 per share, due to its non-recurring nature.
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
June 30, June 30,
(in thousands, except per share data) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Net sales............................... $ 62,389 $97,841
Net income (loss)....................... (25,274) 8,957
Net income (loss) per share - basic..... (1.21) 0.44
Net income (loss) per share - diluted... (1.21) 0.42
</TABLE>
7
<PAGE>
During the first quarter of 1997, the Company completed the acquisition of
certain assets of Lepton Inc., a developer of electron beam lithography
systems. As a result of this acquisition, the Company recognized a one-time
pre-tax charge in the quarter ended March 31, 1997 for acquired in-process
research and development expense of $3.6 million, or $0.12 per share, net of
related income tax benefits.
6) SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 (FAS 131), "Disclosures about Segments of an Enterprise and Related
Information", which is required to be applied for years beginning after
December 15, 1997. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. FAS 131 is effective for annual
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
The Company anticipates that the adoption of this statement will not have a
significant effect on the presentation of the Company's financial statements.
(7) REPORTING COMPREHENSIVE INCOME.
Statement of Financial Accounting Standards No. 130 (FAS 130) "Reporting
Comprehensive Income" is effective beginning with the Company's first fiscal
quarter of 1998. FAS 130 requires, for all periods presented, comprehensive
income be reported with the same prominence as other financial statements. As
such, the Company has included these amounts on the face of the income
statement.
Comprehensive income includes net income plus other comprehensive income.
Other comprehensive income for the Company is comprised of changes in
unrealized gains or losses on available-for-sale securities, net of tax.
Accumulated other comprehensive income and changes thereto in 1998 consist of:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, 1998 June 30, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated other comprehensive income at December 31, 1997:
Unrealized gain on available-for-sale securities, net of tax . . . . . $271
Accumulated other comprehensive income at March 31, 1998:
Unrealized gain on available-for-sale securities, net of tax . . . . . $405
Change for the six months ended June 30, 1998:
Unrealized gain on available-for-sale securities, net of tax . . . . . 68
Change for the three months ended June 30, 1998:
Unrealized loss on available-for-sale securities, net of tax . . . . . (66)
---- ----
Accumulated other comprehensive income at June 30, 1998: . . . . . . . . $339 $339
---- ----
---- ----
</TABLE>
(8) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities", which is required to be adopted in years beginning after June
15, 1999. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
Given the complexity of the new Standard and that the impact hinges on market
values at the date of adoption, it is extremely difficult to estimate the
impact of adoption unless adoption is imminent.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits
(ICs), thin film heads (TFHs) for disk drives and micromachined components.
The Company supplies step-and-repeat systems based on one-to-one and
reduction optical technologies to customers located throughout the United
States, Europe, Asia/Pacific and Japan. These products range from low-cost
systems for high-volume manufacturing to advanced systems for cost-effective
production of leading-edge devices and for research and development
applications. Additionally, the Company recently 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.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet (DUV) reduction lithography systems (the "Acquisition") for
approximately $19.4 million in cash and the assumption of certain liabilities
and expenses.
The following discussion should be read in conjunction with the Company's
1997 Annual Report on Form 10-K, which is available upon request.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future depending upon a
variety of factors, including substantial cyclicality in the Company's target
markets; various competitive factors including price-based competition and
competition from vendors employing other technologies; the timing and terms
of significant orders; lengthy sales cycles for the Company's products;
delayed shipments to customers due to customer configuration changes and
other factors; acquisition activities requiring the devotion of substantial
management resources; the mix of products sold; lengthy manufacturing cycles
for the Company's products; lengthy product development cycles for new
products; the timing of new product announcements and releases by the Company
or its competitors; market acceptance of new products and enhanced versions
of the Company's products; manufacturing inefficiencies associated with the
startup of new product introductions; customer concentration; ability to
volume produce systems and meet customer requirements; patterns of capital
spending by customers; product discounts; changes in pricing by the Company,
its competitors or suppliers; political and economic instability throughout
the world, in particular the Asia/Pacific region; natural disasters;
regulatory changes; and business interruptions related to the Company's
occupation of its facilities. The Company's gross profit as a percentage of
sales has been and will continue to be significantly affected by a variety of
factors, including the mix of products sold; nonlinearity of shipments during
the quarter; increased competition in the Company's targeted markets; the
rate of capacity utilization; the introduction of new products, which
typically have higher manufacturing costs until manufacturing efficiencies
are realized and are typically discounted more than existing products until
the products gain market acceptance; the percentage of international sales,
which typically have lower gross margins than domestic sales principally due
to higher field service and support costs; and the implementation of
subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales
of a relatively small number of new systems, which typically range in price
from $800,000 to $4.0 million. Additionally, the Company's UltraBeam Model
V2000 electron beam lithography system has an approximate price range of $6.0
million to $9.0 million. As a result of these high sale prices, the timing of
recognition of revenue from a single transaction has had and will continue to
have a significant impact on the Company's net sales and operating results.
The Company's backlog at the beginning of a period typically does not include
all of the sales needed to achieve the Company's objectives for that period.
In addition, orders in backlog are subject to cancellation, delay, deferral
or rescheduling by a customer with limited or no penalties. Consequently, the
Company's net sales and operating results for a period have been and continue
to depend upon the Company obtaining orders for systems to be shipped in the
same period in which the order is received. The Company's business and
financial results for a particular period could be materially adversely
affected if an anticipated order for even one system is not received in time
to permit shipment during the particular period. Furthermore, a substantial
portion of the Company's net sales has historically been realized near the
end of each quarter. Accordingly, the failure to receive anticipated orders
or delays in shipments near the end of a particular quarter, due, for
example, to reschedulings, delays, deferrals or cancellations by customers,
additional customer configuration requirements, or to unexpected
manufacturing
9
<PAGE>
difficulties or delays in deliveries by suppliers due to their long
production lead times or otherwise, has caused and may continue to cause net
sales in a particular period to fall significantly below the Company's
expectations, which has and could continue to materially adversely affect the
Company's operating results for such period. In particular, the significantly
long manufacturing cycles of the Company's Titan-TM- and Saturn-TM- steppers,
and the Company's newly acquired XLS advanced reduction stepper and 193nm
small-field research and development reduction stepper (both product lines
were acquired through the acquisition of certain assets and liabilities of
ISI), and the long lead time for lenses and other materials, could cause
shipments of such products to be delayed from one quarter to the next, which
could materially adversely affect the Company's financial condition and
results of operations for a particular quarter. Additionally, the Company has
very limited experience in the manufacture of its UltraBeam Model V2000
electron beam pattern generation system, and the Company is in the process of
documenting the manufacturing processes for this product. The UltraBeam Model
V2000 production process is extremely complex and the product has
significantly long manufacturing and sales cycles, which greatly increases
the likelihood of delays in shipments from one quarter to the next. Due to
the high list price for these systems, shipment delays would materially
adversely affect the Company's financial condition and results of operations
for a particular quarter if the shipment were delayed to the following
quarter. Additionally, the Company may experience difficulties in
assimilating the operations acquired in the Acquisition. (See "Development of
New Product Lines; Expansion of Operations; Assimilation of Acquired Product
Lines"). The impact of these and other factors on the Company's sales and
operating results in any future period cannot be forecast with certainty.
The Company's business has in prior years been subject to seasonality,
although the Company believes such seasonality has been masked in recent
years by cyclical trends within the semiconductor and thin film industries.
In addition, the need for continued expenditures for research and
development, capital equipment purchases and ongoing training and customer
service and support worldwide, among other factors, will make it difficult
for the Company to reduce its significant operating expenses in a particular
period if the Company fails to achieve its net sales goals for the period.
Additionally, the Company has recently experienced manufacturing
inefficiencies associated with shifts in product demand and underutilization
of manufacturing capacity and the Company presently anticipates that these
trends will continue for at least the next few quarters. Such continuation
would materially adversely affect the Company's business, financial condition
and results of operations.
Based on current market conditions in both the semiconductor and thin film
head industries and nonlinearity of system shipments, the Company presently
expects that net sales for the quarter ending September 30, 1998 will be
flat, compared to net sales for the quarter ended June 30, 1998. However, due
to lack of order visibility and the current trend of order delays, deferrals
and cancellations, the Company can give no assurance that it will be able to
achieve or maintain its current sales levels. Accordingly, the Company
presently expects to recognize an operating and net loss for the quarter
ending September 30, 1998, exclusive of any charges the Company may take
during the period. Should current market conditions continue to deteriorate,
the Company may incur operating and net losses in subsequent periods.
Additionally, management continues to evaluate market conditions in both the
semiconductor and thin film head industries, in order to assess the need to
take further action to more closely align its cost structure with anticipated
revenues. Any subsequent actions by the Company would result in restructuring
charges, inventory write-downs and provisions for the impairment of
long-lived assets, which would materially adversely impact the Company's
business, financial condition and results of operations.
Certain of the statements contained in this Report on Form 10-Q are
forward-looking statements that involve a number of risks and uncertainties.
In addition to the factors discussed herein, among other factors that could
cause actual results to differ materially include the following: highly
competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; importance of the
Company's mix-and-match strategy; year 2000 compliance; future acquisitions;
difficulties in disposing of non-essential operations recently acquired;
expansion of the Company's product lines; dependence on key personnel; sole
or limited sources of supply; intellectual property matters; environmental
regulations; effects of certain anti-takeover provisions; volatility of stock
price; and the other risk factors listed from time to time in the Company's
SEC reports, including but not limited to the Company's 1997 Annual Report on
Form 10-K and this Quarterly Report on Form 10-Q.
Due to these and additional factors, historical results and percentage
relationships discussed below will not necessarily be indicative of the
results of operations for any future period.
NET SALES
Net sales consist of revenue from system sales, spare parts sales, and
service. Net sales for the quarter ended June 30, 1998 were $22.4 million, a
decrease of 41% as compared with net sales of $38.1 million for the
comparable
10
<PAGE>
period in 1997. For the six months ended June 30, 1998, net sales were $50.2
million, a decrease of 35% as compared with net sales of $76.8 million for
the comparable period in 1997. Both the current quarter and year-to-date
declines, relative to the comparable periods in 1997, were primarily
attributed to lower unit sales across all market segments the Company serves,
particularly the markets for the production of thin film heads and
semiconductor mix-and-match applications. Overall, unit shipments for the
three and six-month periods ended June 30, 1998 declined approximately 45%
from 1997 levels, while the weighted-average selling price of all units sold
decreased modestly. Spare parts and service revenue for the quarter ended
June 30, 1998 declined by 7% over 1997 levels. However, on a year-to-date
basis, spare parts and service revenue increased 36%, primarily due to
technology upgrades.
The decline in thin film head system shipments occurred in both the market
for front-end systems, currently served by the Company's model 4700 and 6700
steppers; and the market for back-end systems for the processing of inductive
and magneto-resistive thin film heads, a market served by the Company's model
1700 and 1800 series steppers with machine vision system.
The decline in system sales to the semiconductor industry was primarily
attributed to lower unit sales of the Company's Titan and Saturn family of
steppers for use by semiconductor manufacturers in mix-and-match
applications, partially offset by sales of the Company's Model 193 reduction
stepper product line, acquired from ISI.
The Company believes that its sales have been and continue to be materially
adversely impacted by reduced capital capacity spending levels within the
semiconductor industry, particularly in the Japanese and other Asian
marketplaces. The Company continues to experience shipment delays and
purchase order restructurings by several of its customers, and has also
experienced purchase order cancellations. There can be no assurance that this
trend will not continue in the future. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current or prior
level of sales. The Company believes that the current strength of the U.S.
dollar, particularly in relation to the Japanese yen, places the Company at a
competitive disadvantage. Additionally, the Company has recently experienced
a significant downturn in orders from customers in the thin film head
industry. Several companies within the thin film head and disk drive
industries have announced significantly lower than expected earnings, layoffs
and restructuring or other charges. The Company believes these events
indicate that, as the Company has recently experienced, the thin film head
and disk drive industries have excess capacity in the near-term. This will
continue to result in lower sales as a result of cancellations, delays and
deferrals of customer orders from these industries, which will materially
adversely affect the Company's business, financial condition and results of
operations in the near-term. Based on current market conditions in both the
semiconductor and thin film head industries and nonlinearity of system
shipments, the Company presently expects that sales for the quarter ending
September 30, 1998 will be flat, compared to net sales for the quarter ended
June 30, 1998. However, due to lack of order visibility and the current trend
of order delays, deferrals and cancellations, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels.
International net sales for the quarter ended June 30, 1998 were $8.6
million, as compared with $11.1 million for the comparable period in 1997.
For the six months ended June 30, 1998, international net sales were $22.2
million, as compared with $27.8 million for the comparable period in 1997.
International net sales represented 38% and 44% of total net sales for the
three-month and six-month periods ended June 30, 1998, respectively. This
compares to 29% and 36% in the comparable periods in 1997. The year-to-date
decline, in absolute dollars, was primarily a result of lower system sales to
thin film head manufacturers in Southeast Asia, partially offset by higher
sales to Japan and Europe. The Company's operations in foreign countries are
not generally subject to significant exchange rate fluctuations, principally
because sales contracts for the Company's systems are generally denominated
in U.S. dollars. In Japan, however, the Company has recently commenced direct
sales operations and orders are typically denominated in Japanese yen. This
may subject the Company to a higher degree of risk from currency
fluctuations. The Company attempts to mitigate this exposure through the use
of foreign exchange contracts. International sales expose the Company to a
number of additional risk factors, including fluctuations in the value of
local currencies relative to the U.S. dollar, which, in turn, impact the
relative cost of ownership of the Company's products. (See "Additional Risk
Factors: International Sales; Japanese Market").
Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and
market acceptance of the Company's products, there can be no assurance that
the Company will exceed or maintain its current level of net sales for any
period in the future. Additionally, the Company believes that the market
acceptance and volume production of its UltraBeam Model V2000 electron beam
lithography system, XLS advanced reduction stepper (acquired from ISI), and
its Titan and Saturn families
11
<PAGE>
of wafer steppers, are of critical importance to its future financial
results. To the extent that these products do not achieve significant sales
due to difficulties involving manufacturing or engineering, an inability to
reduce the current long manufacturing cycles for such products, direct
competition, or any other reason, the Company's business, financial condition
and results of operations would be materially adversely affected.
Additionally, the Company is presently transitioning from its Model 1700 MVS
Series steppers, which address the market for back-end processing of
inductive thin film heads, to the Model 1800 MVS Series steppers, which
address the market for back-end processing of magneto-resistive (MR) thin
film heads. To the extent that the Model 1800 Series steppers do not achieve
significant sales due to competition from alternative technologies, excess
capacity in the thin film industry or any other reason, the Company's
business, financial condition and results of operations would be materially
adversely affected.
GROSS PROFIT
Gross margin for the quarter ended June 30, 1998 was 27.9% of net sales, as
compared with 52.5% for the comparable period in 1997. For the six months
ended June 30, 1998, gross margin was 36.1% of net sales, as compared with
53.4% for the comparable period in 1997. Both the current quarter and
year-to-date declines in gross margin as a percentage of net sales, as
compared with the comparable periods in 1997, were primarily attributed to
manufacturing and after-sales inefficiencies caused by significant
under-utilization of capacity, non-linearity of shipments during the period
and significantly higher inventory reserve requirements. During the quarter
ended June 30, 1998, gross margins were also negatively impacted by
acquisition-related issues, which resulted in a stepped-up basis for purposes
of determining cost of sales of product lines acquired from ISI.
Additionally, despite higher standard costs, weighted-average selling prices
declined during the 1998 periods due to the highly competitive environment
the Company is operating in, further pressuring gross margins.
The Company believes that increased competition from Canon Inc., Nikon Inc.,
and ASM Lithography, Ltd. ("ASML"), among others, together with generally
weak conditions in the markets the Company serves, will make it difficult for
the Company to increase gross margin percentages in the near term.
Additionally, the Company is nearing completion of capacity additions for the
anticipated volume production of several new products that are outside of the
Company's core reflective and refractive optical technologies. Commencement
of production of these new products has resulted and will continue to result
in the purchase and retention of significant levels of inventory to support
manufacturing requirements, hiring of additional production and manufacturing
support personnel, purchase of significant levels of plant and equipment and
the incurrence of other related manufacturing overhead costs. The purchase of
additional inventories will result in a significantly higher risk of
obsolescence, which may require additional inventory reserves and would
negatively impact gross margins. Additionally, new products generally have
lower gross margins until production and after-sales efficiencies can be
achieved. Should these new products fail to develop or generate significant
market demand, the Company's business, financial condition and results of
operations would be materially adversely affected. As a result of these and
other factors, the Company presently expects that gross profit as a
percentage of sales will be significantly lower for the remainder of 1998,
relative to levels achieved in the comparable periods in 1997, exclusive of
special charges the Company may take in the remaining 1998 periods.
RESEARCH, DEVELOPMENT, AND ENGINEERING
The Company's research, development, and engineering expenses, net of third
party funding, were $6.8 million for the quarter ended June 30, 1998, as
compared with $6.8 million for the comparable period in 1997. As a percentage
of net sales, research, development and engineering expenses for the quarter
increased to 30.6%, as compared to 17.8% in the same period a year ago. For
the six months ended June 30, 1998, research, development, and engineering
expenses, net of third party funding, were $14.0 million, or 28.0% of net
sales, as compared with $13.0 million, or 17.0% of net sales for the
comparable period in 1997. Despite lower net sales, the Company continues to
invest significant resources in the development and enhancement of its
UltraBeam electron beam lithography system and the development of its Verdant
rapid thermal annealing/laser doping systems and technologies, together with
continuing expenditures for its 1X and reduction optical products and
technologies. Based on current sales levels, the Company presently expects
the absolute dollar amount of research, development and engineering expenses
for the quarter ending September 30, to remain flat or increase relative to
the quarter ended June 30, 1998, exclusive of any special charges the Company
may take. The Company presently anticipates that research, development and
engineering expenses may decline during the quarter ending December 31, 1998,
relative to the quarter ending September 30, 1998. (See "Additional Risk
Factors: Development of New Product Lines; Expansion of Operations;
Assimilation of Acquired Businesses").
12
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE
The Company's selling, general, and administrative expenses were $6.3 million
for the quarter ended June 30, 1998, a decrease of 5% as compared with $6.6
million for the comparable period in 1997. As a percentage of net sales,
selling, general, and administrative expenses increased to 28.1% for the
quarter ended June 30, 1998, as compared with 17.5% for the comparable period
in 1997. For the six months ended June 30, 1998, selling, general, and
administrative expenses were $12.8 million, a decrease of 1% as compared with
$12.9 million for the comparable period in 1997. As a percentage of net
sales, selling, general, and administrative expenses increased to 25.4% for
the six months ended June 30, 1998, as compared with 16.8% for the comparable
period in 1997. The dollar decrease in the current quarter, relative to the
comparable period in 1997, was primarily attributed to lower sales, service
and support expenses typically associated with a reduction in sales; lower
required provisions for the Company's profit sharing and executive incentive
plans, which are dependent upon the Company achieving certain operating
income targets; and lower commission expense due to lower commissions on
international sales; partially offset by increased expenses associated with
the Company's UltraBeam subsidiary, which is presently developing, marketing
and manufacturing its electron beam lithography system; and higher expenses
associated with the Company's Verdant Technologies subsidiary, which is
presently developing its rapid thermal annealing/laser doping technologies
and systems. Based on current sales levels, the Company presently expects the
absolute dollar amount of these expenses for the quarter ending September 30,
1998, exclusive of any special charges the Company may take, to increase
relative to the quarter ended June 30, 1998 due to seasonal and other
factors. The Company presently anticipates that selling, general and
administrative expenses may decline during the quarter ending December 31,
1998, relative to the quarter ending September 30, 1998, due primarily to
current business conditions and various seasonal factors. (See "Additional
Risk Factors: Development of New Product Lines; Expansion of Operations;
Assimilation of Acquired Businesses").
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During the quarter ended June 30, 1998, the Company completed the acquisition
of substantially all of the assets and certain liabilities of ISI, a
privately held manufacturer of i-line and deep ultra violet (DUV) reduction
lithography systems. As a result of this acquisition, the Company recognized
a charge in the quarter ended June 30, 1998 for acquired in-process research
and development expense of $12.6 million, or $0.60 per share.
During the first quarter of 1997, the Company completed the acquisition of
certain assets of Lepton Inc., a developer of electron beam lithography
systems. As a result of this acquisition, the Company recognized a pre-tax
charge in the quarter ended March 31, 1997 for acquired in-process research
and development expense of $3.6 million, or $0.12 per share, net of related
income tax benefits.
OTHER INCOME, NET
Other income, net, which consists primarily of interest income, was $1.6
million for the quarter ended June 30, 1998, as compared with $1.8 million
for the comparable period in 1997. For the six months ended June 30, 1998,
other income, net, was $3.3 million, as compared with $3.5 million for the
comparable period in 1997.
INCOME TAXES (BENEFIT)
The Company recognized a benefit from income taxes of $2.6 million and $3.0
million for the quarter and six months ended June 30, 1998, respectively.
This benefit was primarily attributed to the pre-tax loss incurred during the
quarter before one time charges, together with the anticipated carry-back of
certain other tax benefits. This compares with an effective tax rate of 31%
for the quarter and six months ended June 30, 1997. The Company's effective
tax rate differs from the U.S. statutory rate as a result of state income
taxes and benefits associated with the Company's foreign sales corporation,
tax-exempt income and credits for research and development, net of other
individually immaterial benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $10.7 million for the six
month period ended June 30, 1998, as compared with $8.7 million provided by
operating activities during the comparable period in 1997. Positive cash
flows from operating activities during the first six months of 1998 were
attributed to non-cash charges to income of $17.8 million and a positive net
effect from changes in operating assets and liabilities of $7.9 million,
partially offset by the Company's year-to-date net loss of $15.0 million.
Non-cash charges for the six months ended June 30, 1998 include a $12.6
million charge for the write-off of in-process research and development
expense associated with the Company's purchase of certain assets and
liabilities of ISI. The positive net effect from changes in operating assets
and liabilities, net of the impact of the acquired assets and liabilities
from ISI, was
13
<PAGE>
primarily due to a decrease in accounts receivable of $21.5 million and a
decrease in the long-term portion of leases receivable of $2.3 million,
partially offset by a decrease in accrued liabilities of $5.4 million, an
increase in inventories of $5.6 million, an increase of $2.2 million in other
current assets, an increase of $1.5 million in other non-current assets and a
decrease in accounts payable of $1.2 million. The significant dollar decrease
in accounts receivable was partially the result of the factoring of
approximately $9.4 million of accounts receivable to Wells Fargo HSBC Trade
Bank N.A. The Company presently anticipates that the current trend of
non-linear shipments and extended customer payment cycles will continue for
some time. Accordingly, the Company expects that accounts receivable will
remain at unusually high levels throughout the remainder of 1998. Such
trends, should they continue, would expose the Company to numerous risks,
which could materially adversely affect the Company's business, financial
condition and results of operations. The Company may attempt to mitigate the
impact of extended payment terms by factoring up to a substantial portion of
its accounts receivable in the future. There can be no assurance that this
financing will be available on reasonable terms, or at all.
In addition to inventories acquired in the acquisition of certain assets and
liabilities from ISI, the significant dollar increase in inventories during
the six months ended June 30, 1998 were attributed to higher inventories for
the Company's UltraBeam subsidiary. Additionally, lower-than-anticipated net
sales for the six months ended June 30, 1998 contributed to the higher
inventory levels. The Company believes that because of the relatively long
manufacturing cycle of certain of its systems, particularly newer products,
the Company's investment in inventories will continue to represent a
significant portion of working capital. Additionally, the Company has
incurred significant additional levels of inventory, plant and equipment as a
result of the anticipated volume production of its electron beam lithography
system and anticipated introduction of its rapid thermal annealing/laser
doping system. As a result of such investment in inventories, plant and
equipment, the Company may be subject to an increased risk of inventory
obsolescence, impairment of long-lived assets and other factors which could
materially adversely affect the Company's operating results.
At June 30, 1998, the Company had working capital of $202.0 million. The
Company's principal sources of liquidity at June 30, 1998 consisted of $150.1
million in cash, cash equivalents and short-term investments and $4.0 million
in various unsecured lines of credit. As of June 30, 1998, $1.5 million was
outstanding under such lines of credit.
For the six month period ended June 30, 1998, cash provided by financing
activities was $2.7 million, principally as a result of borrowings on the
Company's lines of credit of $1.4 million and the proceeds of $1.3 million
from the issuance of Common Stock pursuant to the exercise of employee stock
options.
For the six month period ended June 30, 1998, cash provided by investment
activities was $3.4 million. Cash generated by a net reduction of $31.2
million in available-for-sale securities was partially offset by the net cash
expenditure of $19.4 million for the purchase of certain assets and
liabilities of ISI and $8.3 million for capital expenditures. The significant
level of capital expenditures during the quarter was primarily attributed to
facilities expansions for the manufacture and sales demonstration support of
the Company's electron beam lithography and rapid thermal annealing/laser
doping systems, together with fixed assets acquired from ISI. As a result of
these capital expenditures, the Company's depreciation and amortization costs
are anticipated to increase significantly and may negatively impact the
Company's results of operations in the event of a further downturn in the
Company's business cycles.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has commenced, for all of its information systems, key vendors and software
contained in the products it sells, a year 2000 conversion project to address
necessary code changes, testing and implementation. The Company expects such
modifications will be made on a timely basis and does not believe that the
cost of such modifications will have a material effect on the Company's
operating results. However, there can be no assurance that the Company, or
its vendors, will be able to timely and cost-effectively cure its products'
errors and defects associated with year 2000 date functions, and this may
result in material costs to the Company, including costs 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
14
<PAGE>
the Company's products, which would result in fewer system sales by the
Company. This, in turn, could have a material adverse impact on the Company's
business, financial condition and results of operations. Although the Company
is not aware of any material operational issues or costs associated with
preparing its internal systems for the year 2000, there can be no assurance
that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
technology used in its internal operating systems, which are composed
primarily of third party software and hardware technology.
The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities; investments in systems,
procedures and controls; expansion of operations and research and
development, among many other items. The Company expects that anticipated
cash flow from operations, its cash, cash equivalents and short-term
investments and funds available under its lines of credit will be sufficient
to meet the Company's cash requirements for the next twelve months. Beyond
the next twelve months, the Company may require additional equity or debt
financing to address its working capital or capital equipment needs.
Additionally, the Company may in the future pursue additional acquisitions of
complementary product lines, technologies or businesses. Future acquisitions
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect any Company profitability. In addition,
acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies; the diversion of management's attention from other business
concerns; risks of entering markets in which the Company has no or limited
direct prior experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines,
technologies or businesses which do not complement the Company's business, or
which otherwise do not enhance the Company's sales or operating results, the
Company may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that any such
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business or operating results. Additionally, the Company is
experiencing continued interest in its equipment leasing program. Continued
success of this strategy may result in the further formation of significant
long-term receivables and would require the use of substantial amounts of
working capital. The formation of significant long-term receivables and the
granting of extended customer payment terms exposes the Company to additional
risks, including potentially higher customer concentration and higher
potential operating expenses relating to customer defaults. To the extent
that the Company's financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms, or at all.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES The
Company's business depends in significant part upon capital expenditures by
manufacturers of semiconductors, photomasks and thin film head magnetic
recording devices, which in turn depend upon the current and anticipated
market demand for such devices and products utilizing such devices. The
semiconductor industry is highly cyclical and historically has experienced
recurring periods of oversupply, as evidenced by the current downturn in the
semiconductor capital equipment industry. This has, from time to time,
resulted in significantly reduced demand for capital equipment including the
systems manufactured and marketed by the Company. The Company believes that
markets for new generations of semiconductors will also be subject to similar
fluctuations. In the past, the semiconductor industry has experienced
significant growth, which, in turn, has caused significant growth in the
capital equipment industry. However, the semiconductor industry has more
recently experienced a substantial and lengthy cyclical downturn, which has
resulted in a significant reduction in capital spending. Additionally, the
Company has recently experienced cancellation of purchase orders, shipment
delays and purchase order restructurings by several of its customers and
there can be no assurance that this trend will not continue in the future.
Accordingly, the Company can give no assurance that it will be able to
achieve or maintain its current level of sales.
The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and magnetic recording head markets, as well as
diversifying into new markets such as photolithography for micromachining and
the development of photomasks. Despite such efforts, when one or more of such
markets experiences a downturn or slowdown, such as is currently occurring in
the semiconductor and thin film head markets, the Company's net sales and
operating results are materially adversely affected, and 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
15
<PAGE>
its current level of sales. Based on current market conditions in both the
semiconductor and thin film head industries and nonlinearity of system
shipments, the Company presently expects that sales for the quarter ending
September 30, 1998 will be flat, compared to net sales for the quarter ended
June 30, 1998. However, due to lack of order visibility and the current trend
of order delays, deferrals and cancellations, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels. Accordingly, the Company presently expects to recognize an operating
and net loss for the quarter ending September 30, 1998, exclusive of any
special charges the Company may take during the period. Should current market
conditions continue to deteriorate, the Company may incur operating and net
losses in subsequent periods. Additionally, management continues to evaluate
market conditions in both the semiconductor and thin film head industries, in
order to assess the need to take further action to more closely align its
cost structure with anticipated revenues. Any subsequent actions by the
Company would result in restructuring charges, inventory write-downs and
provisions for the impairment of long-lived assets, which would materially
adversely affect the Company's business, financial condition and results of
operations.
During 1997 and 1996, approximately 50% and 40%, respectively, of the
Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. During the six month period ended June 30,
1998, sales to thin film head manufacturers and micromachining customers
represented approximately 60% of the Company's net sales, as compared with
65% during the comparable period a year ago. The Company has recently
experienced a significant decline in orders from customers in the thin film
head market. Additionally, several companies within the thin film head and
disk drive industries have announced significantly lower than expected
earnings and have announced restructuring or other non-recurring charges. The
Company believes these events indicate that the thin film head and disk drive
industries have excess capacity in the near-term. This will result in lower
sales and delays or deferrals of customer orders from these industries, which
will continue to materially adversely affect the Company's business,
financial condition and results of operations in the near term. Additionally,
the Company is experiencing increased competition in this market from Canon,
Nikon and ASML. The Company's business and operating results would be
materially adversely affected by downturns or slowdowns in the thin film head
market or by loss of market share.
HIGHLY COMPETITIVE INDUSTRY The capital equipment industry in which the
Company operates is intensely competitive. A substantial investment is
required to install and integrate capital equipment into a semiconductor or
thin film head production line. The Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and, to the extent possible, subsequent generations of
similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number
of leading foreign and domestic stepper manufacturers, such as Nikon, Canon,
ASML and Silicon Valley Group, Inc.'s Micralign products, all of which have
substantially greater financial, marketing, technical and other resources
than the Company. Nikon supplies a 1X stepper for use in the manufacture of
liquid crystal displays and both Canon and Nikon offer reduction steppers for
thin film head fabrication. Additionally, the XLS reduction stepper product
line acquired from ISI competes directly with advanced reduction steppers
offered by Canon, Nikon and ASML. The Company believes that future thin film
head production may involve manufacturing steps that require critical feature
sizes. Although the reduction stepper product lines acquired from ISI address
critical feature sizes, additional development of these product lines may be
necessary to fully address the unique requirements of thin film head
manufacturing. Additionally, in the market for mix-and-match semiconductor
applications, Nikon and Canon are shipping their own widefield mix-and-match
lithography systems. (See: "Additional Risk Factors: Importance of
Mix-and-Match Strategy"). Additionally, ASML has recently announced its
intent to compete in the low-cost lithography market. The Company's UltraBeam
model V2000 electron beam pattern generation system competes against systems
produced by ETEC Systems, Inc.; Hitachi, Ltd.; Leica Camera AG; and JEOL,
Ltd. ("Japan Electron Optical Laboratory"). In addition, the Company believes
that the high cost of developing new lithography tools has caused its
competitors to collaborate with customers and other parties in various areas
such as research and development, manufacturing and marketing, thereby
resulting in a combined competitive threat with significantly enhanced
financial, technical and other resources. The Company expects its competitors
to continue to improve the performance of their current products. These
competitors have stated that they will introduce new products with improved
price and performance characteristics that will compete directly with the
Company's products. This could cause a decline in sales or loss of market
acceptance of the Company's steppers, and thereby materially adversely affect
the Company's business, financial condition and results of operations. There
can be no assurance that enhancements to, or future generations of, competing
products will not be developed that offer superior cost of ownership and
technical performance features. The Company believes that to be competitive,
it will require significant financial resources in order to continue to
invest in new product development, features and enhancements, to introduce
next generation stepper systems on a timely basis, and to maintain customer
service
16
<PAGE>
and support centers worldwide. In marketing its products, the Company may
also face competition from vendors employing other technologies. In addition,
increased competitive pressure has led to intensified price-based
competition, resulting in lower prices and margins. This pressure has been
caused, in part, from the weakening of the Japanese yen vs. the U.S. dollar
and the current cyclical downturn in both the semiconductor and thin film
head industries. Should these competitive trends continue, the Company's
business, financial condition and operating results would continue to be
materially adversely impacted. There can be no assurance that the Company
will be able to compete successfully in the future.
Japanese IC manufacturers have a significant share of the worldwide market
for certain types of ICs for which the Company's systems are used. However,
the Japanese stepper manufacturers are well established in the Japanese
stepper market, and it is extremely difficult for non-Japanese lithography
equipment companies to penetrate the Japanese stepper market. To date, the
Company has not established itself as a major competitor in the Japanese IC
equipment market and there can be no assurance that the Company will be able
to achieve significant sales to Japanese IC manufacturers in the future. (See
"International Sales; Japanese Market").
LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to restructure current manufacturing facilities, both of which
typically involve a significant commitment of capital. In view of the
significant investment involved in a system purchase, the Company has
experienced and may continue to experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. For this and other reasons, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management effort in securing a sale. Lengthy sales cycles subject
the Company to a number of significant risks, including inventory
obsolescence and fluctuations in operating results, over which the Company
has little or no control.
CUSTOMER CONCENTRATION Historically, the Company has sold a substantial
number of its systems to a limited number of customers. In 1997, sales to two
customers accounted for 14%, and 10% of the Company's net sales. In 1996,
sales to two customers accounted for approximately 17% and 12% of the
Company's net sales. For the six-month period ended June 30, 1998, one
customer accounted for approximately 27% of the Company's net sales. The
Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that the Company's financial results depend in significant part upon
the success of these major customers, and the Company's ability to meet their
future capital equipment needs. Although the composition of the group
comprising the Company's largest customers may vary from period to period,
the loss of a significant customer or any reduction in orders by any
significant customer, including reductions due to market, economic or
competitive conditions in the semiconductor or magnetic recording head
industries or in the industries that manufacture products utilizing
integrated circuits or thin film heads, may have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's ability to maintain or increase its sales in the future will
depend, in part, upon its ability to obtain orders from new customers as well
as the financial condition and success of its customers and the general
economy, of which there can be no assurance. (See "Cyclicality of
Semiconductor and Magnetic Recording Head Industries").
In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted, and currently result in significant concentrations of accounts
receivable and leases receivable. In particular, sales to a relatively few
customers in the thin film head industry currently make up a significant
portion of the Company's receivables. Recently, the Company has increased its
level of customer leasing activity and has granted extended payment terms to
many of its customers. The formation of significant and concentrated
long-term receivables and the granting of extended payment terms exposes the
Company to additional risks, including the risk of default by one or more
customers representing a significant portion of the Company's total
receivables. If such default were to occur, the Company's business, financial
condition and results of operations would be materially adversely affected.
DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF
ACQUIRED PRODUCT LINES Currently, the Company is devoting significant
resources to the development, introduction and commercialization of new
products and technologies that are outside of the Company's core reflective
and refractive optical businesses (see "Research, Development and
Engineering"). During 1998, the Company has continued to develop these
products and will continue to incur significant operating expenses in the
areas of research, development and engineering and general and administrative
in order to further develop and support these new products. Additionally,
gross profit margins and inventory levels may be further adversely impacted
in the future by start-up costs associated with the initial production of
these new product lines. These start-up costs include, but are not limited
to, additional manufacturing overhead, additional inventory reserve
requirements and the establishment of
17
<PAGE>
after-sales support organizations. Additionally, there can be no assurance
that operating expenses will not increase, relative to sales, as a result of
adding additional marketing and administrative personnel, among other costs,
to support the Company's new products. If the Company is unable to achieve
significantly increased net sales or its sales fall below expectations, the
Company's operating results will be materially adversely affected until,
among other factors, inventory levels and expenses can be reduced.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of ISI, a privately
held manufacturer of i-line and deep ultra-violet (DUV) reduction lithography
systems (the "Acquisition"). Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies; 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. Accordingly, there can be no
assurance as to the effect of the Acquisition on the Company's business,
financial condition or operating results. Among other factors that may affect
future operations, the Company is in the process of disposing of certain
non-stepper related product lines acquired from ISI, and there can be no
assurance that such businesses can be sold on favorable terms, or at all.
Additionally, ISI had recently completed several significant restructurings
of its businesses and organization and had incurred substantial operating
losses prior to the Acquisition, and the Company is presently in the process
of consolidating certain acquired facilities and evaluating the requirements
for additional restructuring.
In December 1997, the Company terminated its distributor relationship with
Innotech, its Japan distributor. The Company has recently expanded its
operations in Japan by establishing a direct sales force and has leased
additional facilities and has made significant capital expenditures for sales
and applications support. Should additional gross profit on sales to the
Japan marketplace not be sufficient to fund these expanded operations, the
Company's business, financial condition and results of operations would be
materially adversely affected.
IMPORTANCE OF MIX-AND-MATCH STRATEGY A principal element of the Company's
strategy is to sell its 1X lithography systems to advanced semiconductor
fabrication facilities for mix-and-match applications. This strategy depends,
in significant part, upon the recognition by semiconductor manufacturers that
costs can be reduced by using the Company's systems to perform exposure on
semiconductor process layers requiring feature sizes of 0.65 microns or
greater and the willingness of such manufacturers to implement processes to
lower manufacturing costs. Many semiconductor fabrication facilities have
limited or no experience with integrating lithography tools in the manner
necessary for full implementation and acceptance of a mix-and-match
manufacturing strategy, and there can be no assurance that semiconductor
manufacturers will adopt such a strategy. The Company has designed certain of
its systems to operate in a compatible manner with its newly acquired i-line
and DUV reduction steppers and its competitors' reduction steppers and
step-and-scan systems, which are used to process layers with feature sizes
below 0.65 microns. The successful implementation of the Company's strategy,
however, will result in a loss of sales by manufacturers of reduction
steppers and will cause these competitors to respond with lower prices,
productivity improvements or new technical designs for their systems that may
eliminate the need for the Company's steppers or make it difficult for the
Company's systems to attain compatibility with such systems. Also, certain of
the Company's competitors, which also manufacture widefield systems,
including Nikon and Canon, are shipping their own widefield mix-and-match
lithography systems. The introduction, development and sales of such
competitive systems could materially adversely affect the Company's business,
financial condition and results of operations.
To facilitate its mix-and-match strategy, the Company has developed and is
continuing to develop a family of products. In 1995, the Company commenced
shipment and volume production of the Titan Wafer Stepper and commenced
shipment of the Saturn Wafer Stepper. Additionally, during 1997 the Company
added multiple versions of its Titan and Saturn wafer steppers in order to
more fully address the needs of the mix-and-match market. As is typical with
newly introduced systems in the capital equipment industry, the Company has
experienced and may continue to experience technical or other difficulties
with its mix-and-match family of products. The Company believes that the
market acceptance and process verification combined with volume production of
the mix-and-match family of products is of critical importance to the
successful implementation of its mix-and-match strategy and its future
financial results. Recently, this market segment of the Company's business
has experienced a pronounced downturn due, in part, to the recent cyclical
downturn in the semiconductor industry and the strength of the U.S. dollar in
relationship to the Japanese yen. Additionally, the Company believes that
existing capital budgets of semiconductor manufacturers are currently
focusing on technology buys, and not capacity additions. This places the
Company at a disadvantage, since its steppers address
18
<PAGE>
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 has led and could continue to
lead, among other things, to an increase in inventory obsolescence and an
increase in expenses without corresponding sales, both of which have and
could continue to have a material adverse affect on the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor and magnetic recording head manufacturing industries are
subject to rapid technological change and new product introductions and
enhancements. The Company's ability to be competitive in these and other
markets will depend, in part, upon its ability to develop new and enhanced
systems and related software tools, and to introduce these systems and
related software tools at competitive prices and on a timely and
cost-effective basis to enable customers to integrate them into their
operations either prior to or as they begin volume product manufacturing. The
Company will also be required to enhance the performance of its existing
systems and related software tools. Any success of the Company in developing
new and enhanced systems and related software tools depends upon a variety of
factors, including product selection, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes, product performance in the field and effective sales and
marketing. In particular, the Company has not yet fully defined the markets
and applications for the Titan Wafer Stepper Family and the Saturn Wafer
Stepper Family and is in the process of assimilating the product lines
acquired from ISI. Because new product development commitments must be made
well in advance of sales, new product decisions must anticipate both future
demand and the technology that will be available to supply that demand. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products and related software
tools or enhancing its existing products and related software tools. Any such
failure would materially adversely affect the Company's business, financial
condition and results of operations.
Because of the large number of components in the Company's systems,
significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such systems. The Company
has experienced delays from time to time in the introduction of, and
technical and manufacturing difficulties with, certain of its systems and
enhancements and related software tools and may experience delays and
technical and manufacturing difficulties in future introductions or volume
production of new systems or enhancements and related software tools. In
particular, the Company has very little experience in manufacturing its
UltraBeam V2000 electron beam lithography system. Due to the significant
manufacturing cycle time required for the production of this system, its
lengthy sales cycle, lack of adequate documentation for the product and the
complex nature of this system, delays in production and/or shipment will
result from time to time. This system presently has an approximate price
range of $6 million to $9 million. Due to the high selling price of this
system, delays in shipments from one quarter to the next would have a
material adverse effect on the results of operations for that quarter.
Additionally, the Company is in the process of assimilating the operations
acquired in the Acquisition. (See "Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines").
There can be no assurance that the Company will not encounter technical,
manufacturing or other difficulties that could delay future introductions or
volume production of systems or enhancements. The Company's inability to
complete the development or meet the technical specifications of any of its
systems or enhancements and related software tools, or its inability to
manufacture and ship these systems or enhancements and related software tools
in volume and in time to meet the requirements for manufacturing the future
generation of semiconductor or thin film head devices would materially
adversely affect the Company's business, financial condition and results of
operations. In addition, the Company may incur substantial unanticipated
costs to ensure the functionality and reliability of its products early in
the products' life cycles. If new products have reliability or quality
problems, reduced orders or higher manufacturing costs, delays in collecting
accounts receivable and additional service and warranty expenses may result.
Any of such events may materially adversely affect the Company's business,
financial condition and results of operations.
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
19
<PAGE>
does not maintain any life insurance on any of its key persons. The loss of
key personnel would have a material adverse effect on the business, financial
condition and results of operations of the Company. In addition, the
Company's future operating results depend in significant part upon its
ability to attract and retain other qualified management, manufacturing, and
technical, sales and support personnel for its operations. There are only a
limited number of persons with the requisite skills to serve in these
positions and it may become increasingly difficult for the Company to hire
such personnel over time. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons
would materially adversely affect the Company's business, financial condition
and results of operations.
During the last several years, the Company has experienced an increased level
of employee turnover. The Company believes that this increase has been due to
several factors, including: the recent semiconductor industry slowdown, which
resulted in 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% and 53% of total net sales for the years 1997 and 1996,
respectively. For the first six months of 1998, international sales accounted
for 44% of total net sales, as compared with 36% during the comparable period
a year ago. The Company anticipates that international sales, which typically
have lower gross margins than domestic sales, principally due to higher field
service and support costs, will continue to account for a significant portion
of total net sales. As a result, a significant portion of the Company's sales
will be subject to certain risks, including unexpected changes in regulatory
requirements, difficulty in satisfying existing regulatory requirements,
exchange rate fluctuations, tariffs and other barriers, political and
economic instability, difficulties in accounts receivable collections,
natural disasters, difficulties in staffing and managing foreign subsidiary
and branch operations and potentially adverse tax consequences. Although the
Company generally transacts its international sales in U.S. dollars,
international sales expose the Company to a number of additional risk
factors, including fluctuations in the value of local currencies relative to
the U.S. dollar, which, in turn, impact the relative cost of ownership of the
Company's products and may further impact the purchasing ability of its
international customers. In Japan, however, the Company has recently
commenced direct sales operations and orders are typically denominated in
Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating
to the import or export of semiconductors and magnetic recording head
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States, Japan or
any other country upon the importation or exportation of the Company's
products in the future. There can be no assurance that any of these factors
or the adoption of restrictive policies will not have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, the Company believes that the severe currency and
equity market fluctuations that have been experienced recently by many of the
Asian markets have caused and may continue to cause a further reduction in
orders of the Company's products, particularly in the short-term, which will
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its
systems to Japanese semiconductor manufacturers. The Japanese semiconductor
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies
to penetrate. The Company is at a competitive disadvantage with respect to
Japanese semiconductor capital equipment suppliers that have been engaged for
some time in collaborative efforts with Japanese semiconductor manufacturers,
and currently dominate the Japanese stepper market. The Company believes that
increased penetration of the Japanese market is critical to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective. As part of its strategy to penetrate the
Japanese market, in 1993, the Company entered into a distribution agreement
with Innotech Corporation, a local distributor of products. This agreement
was terminated in December 1997, and the Company has recently expanded its
operations in Japan by establishing a direct sales force and creating sales
and
20
<PAGE>
applications support organizations. (See "Additional Risk Factors:
Development of New Product Lines; Expansion of Operations; Assimilation of
Acquired Product Lines").
INTELLECTUAL PROPERTY RIGHTS Although there are no pending lawsuits
against the Company regarding infringement claims with respect to any
existing patent or any other intellectual property right, the Company has at
times been notified of claims that it may be infringing intellectual property
rights possessed by third parties. Certain of the Company's customers,
including customers of ISI, have received notices of infringement from
Technivision Corporation and the Lemelson Medical, Education and Research
Foundation, Limited Partnership alleging that the manufacture of certain
semiconductor products and/or the equipment used to manufacture those
semiconductor products infringes certain issued patents. The Company has been
notified by certain of such customers that the Company may be obligated to
defend or settle claims that the Company's products infringe any of such
patents, and, in the event it is subsequently determined that the customer
infringes any of such patents, they intend to seek reimbursement from the
Company for damages and other expenses resulting from this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims in the future will not be asserted, or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations, regardless
of the outcome of any litigation. With respect to any such future claims, the
Company may seek to obtain a license under the third party's intellectual
property rights. There can be no assurance, however, that a license will be
available on reasonable terms or at all. The Company could decide, in the
alternative, to resort to litigation to challenge such claims. Such
challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of any litigation.
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.
21
<PAGE>
PART 2: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following proposals were voted upon by the Company's stockholders at the
Annual Stockholders' Meeting held on June 3, 1998.
1. The following persons were elected as directors of the Company to serve
for a term ending upon the Annual Stockholders' Meeting indicated beside
their respective names and until their successors are elected and qualified:
<TABLE>
<CAPTION>
For All Nominees Instructed Withheld From All
---------------- ---------- -----------------
<S> <C> <C>
19,629,745 12,753 113,556
</TABLE>
Schedule of votes cast for each director:
<TABLE>
<CAPTION>
Term Ending Upon the Annual
Stockholders' Meeting Votes for Votes Withheld
-------------------------------------------------------------
<S> <C> <C> <C>
Arthur W. Zafiropoulo 2000 19,642,498 113,556
Larry R. Carter 2000 19,639,905 116,149
Joel F. Gemunder 2000 19,629,745 126,309
Tommy D. George 1999 19,635,845 120,209
</TABLE>
2. A proposal to approve and amend the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock thereunder from 30,000,000 shares to 40,000,000 shares was
approved by the vote of 18,706,830 shares for; 936,325 shares withheld or
voted against the proposal and 112,899 shares abstained.
3. A proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 1998
was approved by the vote of 19,629,936 shares for; 55,185 shares withheld
or voted against the proposal and 70,931 shares abstained.
ITEM 5. OTHER INFORMATION.
On June 9, 1998, Mr. Daniel H. Berry was promoted to the position of
Executive Vice President and Chief Operating Officer. Mr. Berry joined the
Company in 1990, and was promoted to Senior Vice President responsible for
all sales, service, marketing and technical support in March 1993. His
extensive experience includes thirteen years with the Perkin-Elmer
Corporation's optical lithography operations, and nine years with Bell Labs,
where he was involved in the development of the Company's advanced
photolithography systems. Prior to joining the Company, he was Director of
International Operations for General Signal Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.1.1 Amended and Restated Certificate of Incorporation of
the Registrant, filed June 17, 1998
22
<PAGE>
Exhibit 11.1(1) Asset Purchase Agreement, dated May 19, 1998, by and
among the Registrant, Ultratech Stepper East, Inc.
(formerly known as Ultratech Acquisition Sub, Inc.,
formerly known as Ultratech Capital, Inc.), Integrated
Solutions, Inc., and Integrated Acquisition Corp.
Exhibit 21.1 Subsidiaries of Registrant
Exhibit 27 Financial Data Schedule
-----------------------------------------------------------------------
(1) previously filed with the Company's Current Report on Form 8-K
dated June 11, 1998 (Commission File No. 0-22248).
(b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the quarter ended
June 30, 1998. The report was filed on June 26, 1998 and reported
the June 1998 acquisition of certain of the assets and liabilities
of Integrated Solutions, Inc.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRATECH STEPPER, INC.
- --------------------------------------------------------------------------------
(Registrant)
Date: August 13, 1998 By: /s/William G. Leunis, III
----------------------- -------------------------------------
William G. Leunis, III
Senior Vice President Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial and Accounting Officer)
24
<PAGE>
EXHIBIT 3.1.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE REGISTRANT,
FILED JUNE 17, 1998
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DQ HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "ULTRATECH STEPPER,
INC.", FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF JUNE, A.D.
1998, AT 9 O'CLOCK, A.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
/s/Edward J. Freel
[SEAL OF SECRETARY OFFICE] -----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2310125 8100 AUTHENTICATION: 9147894
981236690 DATE: 06-18-98
<PAGE>
CERTIFICATE OF AMENDMENT OF THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
ULTRATECH STEPPER, INC.
Ultratech Stepper, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation") does hereby
certify:
FIRST: That the Board of Directors of the Corporation duly adopted a
resolution setting forth a proposed amendment to the Amended and Restated
Certificate of Incorporation of the Corporation and declaring said amendment
advisable and directing that said amendment be submitted to the stockholders of
said Corporation entitled to vote in respect thereof for their approval. The
resolution setting forth said amendment is as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation
of the Corporation be amended by changing Article IV thereof so that, as
amended, said provision shall be and read in its entirety as follows:
ARTICLE IV
This corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock'). The number of shares of Common Stock authorized to be issued is Forty
Million (40,000,000), par value $0.001 per share, and the number of shares of
Preferred Stock authorized to be issued is Two Million (2,000,000), par value
$0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is
hereby authorized, in the resolution or resolutions adopted by the Board of
Directors providing for the issue of any wholly unissued series of Preferred
Stock, within the limitations and restrictions stated in this Amended and
Restated Certificate of Incorporation, to fix or alter the divided rights,
dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and
the designation thereof, or any of them, and to increase or decrease the
number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares
<PAGE>
of such series then outstanding. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
SECOND: That thereafter said amendment was duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, this Certificate of Amendment of the Amended
and Restated Certificate of Incorporation has been signed by the President
and the Secretary of the Corporation this 16th day of June, 1998.
ULTRATECH STEPPER, INC.
By: /s/Arthur W. Zafiropoulo
------------------------------------
Arthur W. Zafiropoulo
President
ATTEST:
By: /s/William G. Leunis, III
-------------------------
William G. Leunis, III
Secretary
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ULTRATECH STEPPER, INC.
The following is a list of Ultratech Stepper Inc.'s subsidiaries including their
state and country of incorporation as of June 30, 1998:
<TABLE>
<CAPTION>
SUBSIDIARIES STATE AND COUNTRY OF INCORPORATION
-------------- ----------------------------------
<S> <C>
Ultratech Stepper International, Inc. State of Delaware, USA
Ultratech Stepper UK Limited United Kingdom
Ultratech Stepper Foreign Sales Corporation Barbados
Ultratech Kabushiki Kaisha Japan
Ultratech Stepper East, Inc. State of Delaware, USA
(formerly Ultratech Capital, Inc.)
UltraBeam Lithography, Inc. State of Delaware, USA
Ultratech Stepper (Thailand) Co., LTD. Thailand
Verdant Technologies Inc. State of Delaware, USA
</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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 60,743
<SECURITIES> 89,373
<RECEIVABLES> 29,779
<ALLOWANCES> 2,273
<INVENTORY> 53,931
<CURRENT-ASSETS> 247,150
<PP&E> 46,799
<DEPRECIATION> 18,822
<TOTAL-ASSETS> 297,987
<CURRENT-LIABILITIES> 45,173
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 250,286
<TOTAL-LIABILITY-AND-EQUITY> 297,987
<SALES> 19,020
<TOTAL-REVENUES> 22,395
<CGS> 13,940
<TOTAL-COSTS> 16,148
<OTHER-EXPENSES> 19,407
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> (17,942)
<INCOME-TAX> (2,578)
<INCOME-CONTINUING> (15,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,364)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
