<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(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, 1999
-------------------
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-3169580
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3050 Zanker Road, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
------------------
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(Former name, former address and former fiscal year,
if changed since last report.)
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 9, 1999
- ------------------------------------ --------------------------------------
common stock, $.001 par value 21,367,955
<PAGE>
ULTRATECH STEPPER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31,1998................................................................... 3
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998 and the six months ended June 30, 1999
and 1998........................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998............................................................. 5
Notes to Condensed Consolidated Financial Statements............................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................... 26
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................. 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 27
ITEM 5. OTHER INFORMATION.................................................................. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 27
SIGNATURES.......................................................................................... 28
</TABLE>
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) 1999 1998*
- ---------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments $ 146,884 $ 146,107
Accounts receivable, net 19,133 11,899
Inventories 27,576 36,750
Current portion of leases receivable 1,520 2,012
Prepaid expenses and other
current assets 2,895 5,088
- ---------------------------------------------------------------------------------------
Total current assets 198,008 201,856
Equipment and leasehold
improvements, net 21,425 23,319
Restricted long-term investments 5,500 5,510
Leases receivable, net 949 1,536
Intangible assets, net 7,621 8,438
Other assets 4,989 5,276
- ---------------------------------------------------------------------------------------
Total assets $ 238,492 $ 245,935
=======================================================================================
- ---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,655 $ 1,881
Accounts payable 6,901 8,541
Other current liabilities 25,072 25,017
- ---------------------------------------------------------------------------------------
Total current liabilities 33,628 35,439
Other liabilities 317 345
Stockholders' equity:
Common stock 21 21
Additional paid-in capital 174,256 174,155
Accumulated other comprehensive
income (loss), net (1,321) 779
Retained earnings 31,591 35,196
- ---------------------------------------------------------------------------------------
Total stockholders' equity 204,547 210,151
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 238,492 $ 245,935
=======================================================================================
</TABLE>
* The Balance Sheet as of December 31, 1998 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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------- --------------------
JUNE 30, June 30, JUNE 30, June 30,
(In thousands, except per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Products $24,431 $19,020 $46,071 $43,794
Services 4,853 3,375 8,992 6,383
- -----------------------------------------------------------------------------------------------
Total net sales 29,284 22,395 55,063 50,177
Cost of sales:
Cost of products sold 15,111 13,940 29,060 28,039
Cost of services 2,878 2,208 5,987 4,027
- -----------------------------------------------------------------------------------------------
Total cost of sales 17,989 16,148 35,047 32,066
- -----------------------------------------------------------------------------------------------
Gross profit 11,295 6,247 20,016 18,111
OPERATING EXPENSES:
Research, development, and
engineering 6,765 6,841 13,302 14,014
Amortization of goodwill 430 34 737 72
Selling, general, and
administrative 6,825 6,258 13,079 12,696
Acquired in-process research
and development -- 12,566 -- 12,566
- -----------------------------------------------------------------------------------------------
Operating loss (2,725) (19,452) (7,102) (21,237)
Interest expense (120) (82) (241) (109)
Interest and other income, net 1,771 1,592 3,740 3,295
- -----------------------------------------------------------------------------------------------
Loss before tax benefit (1,074) (17,942) (3,603) (18,051)
Tax benefit -- (2,578) -- (3,048)
- -----------------------------------------------------------------------------------------------
Net loss (1,074) (15,364) (3,603) (15,003)
===============================================================================================
- -----------------------------------------------------------------------------------------------
Net loss per share--basic ($0.05) ($0.74) ($0.17) ($0.72)
Number of shares used in
per share computations--basic 21,264 20,895 21,194 20,864
Net loss per share--diluted ($0.05) ($0.74) ($0.17) ($0.72)
Number of shares used in
per share computations--diluted 21,264 20,895 21,194 20,864
===============================================================================================
</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) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,603) ($15,003)
Charges to income not affecting cash 6,293 17,844
Net effect of changes in operating assets
and liabilities 3,102 7,867
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,792 10,708
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,210) (8,281)
Net reduction in available-for-sale securities 3,342 31,227
Purchase of certain assets and liabilities of Integrated
Solutions, Inc., net of cash acquired -- (19,429)
Segregation of restricted long-term investments (46) (117)
- -----------------------------------------------------------------------------------------------
Net cash provided by investing activities 86 3,400
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable -- 1,437
Repayment of note payable (226) --
Net proceeds from issuance of common stock
pursuant to employee stock plans 101 1,300
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (125) 2,737
Net increase in cash and cash equivalents 5,753 16,845
Cash and cash equivalents at beginning
of period 54,142 43,898
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $59,895 $60,743
===============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation have
been included.
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.
RECLASSIFICATIONS - Certain condensed consolidated financial statement
amounts have been reclassified for consistent presentation.
The Company's second fiscal quarter in 1999 and 1998 ended on July 3, 1999
and July 4, 1998, respectively. For convenience of presentation, the
Company's financial statements have been shown as having ended on June 30,
1999 and June 30, 1998.
Operating results for the three-month and six-month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999, or any future period.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Raw materials.............................. $ 12,073 $ 19,677
Work-in-process............................ 9,381 8,799
Finished products.......................... 6,122 8,274
------------- -------------
$ 27,576 $ 36,750
============= =============
</TABLE>
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Salaries and benefits...................... $ 4,678 $ 3,865
Warranty reserves.......................... 3,982 4,207
Advance billings........................... 1,340 1,694
Income taxes payable....................... 5,904 1,630
Sales returns and allowances............... 2,000 2,000
Reserve for losses on purchase order
commitments.............................. 2,972 5,849
Other...................................... 4,196 5,772
------------- -------------
$ 25,072 $ 25,017
============= =============
</TABLE>
6
<PAGE>
(4) COMPUTATION OF NET LOSS PER SHARE
The following sets forth the computation of basic and diluted net 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) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss ($1,074) ($15,364) ($3,603) ($15,003)
Denominator:
Denominator for basic net loss per share 21,264 20,895 21,194 20,864
Effect of dilutive employee stock options -- -- -- --
------- -------- ------- --------
Denominator for diluted net loss per share 21,264 20,895 21,194 20,864
------- -------- ------- --------
Net loss per share--basic ($0.05) ($0.74) ($0.17) ($0.72)
======= ======== ======= ========
Net loss per share--diluted ($0.05) ($0.74) ($0.17) ($0.72)
======= ======== ======= ========
</TABLE>
For the three-month and six-month periods ended June 30, 1999, options to
purchase 3,668,000 shares of Common Stock at an average exercise price of
$16.27 were excluded from the computation of diluted net loss per share as
the effect would have been antidilutive. This compares to the exclusion of
2,719,000 options at an average exercise price of $15.68 for the three-month
and six-month periods ended June 30, 1998. Options are anti-dilutive when the
Company has a net loss or when the exercise price of the stock option is
greater than the average market price of the Company's Common Stock.
(5) ACQUISITIONS
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. The Company accounted for this
acquisition based on the purchase method of accounting and allocated the
purchase price based on fair values of assets acquired as of the acquisition
date. As a result of this acquisition, the Company recognized an initial
charge for acquired in-process research and development (IPR&D) in the second
quarter of 1998 of $12.6 million. Based on the final purchase price, which
consisted of net cash consideration of approximately $19.2 million, $2.6
million for transaction costs and $8.9 million for assumed liabilities, the
Company adjusted the charge for acquired in-process research and development
in the fourth quarter of 1998, to a net $5.1 million. Based on the final
purchase price allocation, the excess cost over fair value of net assets was
$9.1 million, currently being amortized on a straight-line basis over a
period of three to seven years. The results of the acquired operations were
included from the date of acquisition.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine
its state of development and related fair value. The Company's review
indicated that the IPR&D had not reached a state of technological feasibility
and the underlying technology had no alternative future use to the Company in
other research and development projects or otherwise. In the case of IPR&D,
fair values of the corresponding technologies were determined using an income
approach which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the
in-process project, discounted to net present value, taking into account the
uncertainty surrounding the successful development of the purchased IPR&D.
(6) COMPREHENSIVE LOSS
7
<PAGE>
The Company adopted the Statement of Financial Accounting Standards No. 130 (FAS
130) "Reporting Comprehensive Income" in the first fiscal quarter of 1998. FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. However it does not affect net income or total stockholders'
equity. The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
(Unaudited, in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss......................................... (1,074) (15,364) (3,603) (15,003)
Accumulated other comprehensive income (loss)....
Unrealized holding gain (loss) on
available-for-sale securities.......... (1,083) (66) (2,100) 68
Tax effect............................... -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Comprehensive loss............................... ($2,157) ($15,430) ($5,703) ($14,935)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Accumulated other comprehensive income (loss) presented in the accompanying
condensed consolidated balance sheets consists entirely of accumulated
unrealized holding gain (loss) on available-for-sale securities. The
unrealized holding gain (loss) on available-for-sale securities is not
currently adjusted for income taxes as a result of the Company's operating
losses.
(7) COMPANY AND INDUSTRY INFORMATION
The Company adopted the Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," on December 31, 1998. The new rule established standards for
public companies relating to the reporting of financial information about
operating segments. The Company operates in one business segment, which is
the manufacture and distribution of photolithography equipment to
manufacturers of integrated circuits, photomasks for the production of
integrated circuits, thin film heads and micromachined components.
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,
thin film heads 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 manufactures and markets the UltraBeam "V" Model
electron beam pattern generation system based on vector-scan technology for
use in the development and production of photomasks for the integrated
circuits ("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 reduction lithography systems (the "Acquisition") for
approximately $19.2 million in cash, $2.6 million in transaction costs and
the assumption of certain liabilities.
The following discussion should be read in conjunction with the Company's
1998 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. Such variability
depends 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; inventory and open purchase commitment reserve positions;
concentration of credit risk; the mix of products sold; lengthy development
cycles for new products; market acceptance of new products and enhanced
versions of 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; lengthy
manufacturing cycles for the Company's products; the timing of new product
announcements and releases by the Company or its competitors; 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 inventory and open
purchase commitment reserve provisions; the rate of capacity utilization; the
mix of products sold; nonlinearity of shipments during the quarter; increased
competition in the Company's targeted markets; the introduction of new
products, which typically have higher manufacturing costs until manufacturing
efficiencies are realized and are typically discounted more than existing
products until the products gain market acceptance; the 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 newly manufactured systems, which typically
range in price from $800,000 to $2.1 million for the Company's 1X steppers,
and $1.5 million to $4.0 million for the Company's reduction steppers.
Additionally, the Company's UltraBeam electron beam lithography system is
anticipated to sell in a 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
9
<PAGE>
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 will continue to be
dependent upon the Company obtaining orders for systems to be shipped in the
same period in which the order is received. The Company's business and
financial results for a particular period could be materially adversely
affected if an anticipated order for even one system is not received in time
to permit shipment during the particular period. Furthermore, a substantial
portion of the Company's net sales has historically been realized near the
end of each quarter. Accordingly, the failure to receive anticipated orders
or delays in shipments near the end of a particular quarter, due, for
example, to reschedulings, delays, deferrals or cancellations by customers,
additional customer configuration requirements, or to unexpected
manufacturing difficulties or delays in deliveries by suppliers due to their
long production lead times or otherwise, has caused and may continue to cause
net sales in a particular period to fall significantly below the Company's
expectations, which has and could continue to materially adversely affect the
Company's operating results for such period. In particular, the long
manufacturing cycles of the Company's Titan Wafer Stepper-Registered
Trademark- and Saturn Wafer Stepper-Registered Trademark-, 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 electron beam pattern generation systems.
The UltraBeam systems are 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 " Additional Risk Factors: 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 head
industries. In addition, the need for continued expenditures for research and
development, capital equipment, ongoing training and worldwide customer
service and support, 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 continues to operate at less than optimal capacity
utilization, resulting in manufacturing inefficiencies that adversely affect
the Company's gross margins and results of operations. The Company presently
anticipates that this trend will continue for at least the next few quarters.
The Company presently expects that net sales for the three-month period
ending September 30, 1999 may be higher than net sales in the comparable
period in 1998. However, due to lack of order visibility, the Company can
give no assurance that it will be able to achieve or maintain its current
sales levels. The Company presently expects to recognize an operating loss
for the quarter ending September 30, 1999, and may recognize a net loss.
These losses may extend to future quarters due, in part, to the significant
level of planned research, development and engineering spending, relative to
anticipated sales; the current low rate of capacity utilization; and the
current backlog and order levels for the Company's products.
Certain of the statements contained in this report may be considered
forward-looking statements that may involve a number of risks and
uncertainties. In addition to the factors discussed herein, among other
factors that could cause actual results to differ materially include the
following: highly
10
<PAGE>
competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; importance of the
Company's mix-and-match strategy; year 2000 compliance; future acquisitions;
expansion of the Company's product lines; dependence on key personnel; sole
or limited sources of supply; intellectual property matters; environmental
regulations; effects of certain anti-takeover provisions; volatility of stock
price; and the other risk factors listed from time to time in the Company's
SEC reports.
Due to these and additional factors, certain statements, historical results
and percentage relationships discussed below will not necessarily be
indicative of the results of operations for any future period.
NET SALES
Net sales consist of revenue from system sales, spare parts sales, and
service. For the quarter ended June 30, 1999, net sales were $29.3 million,
an increase of 31% as compared with net sales of $22.4 million for the
comparable period in 1998. For the six-month period ended June 30, 1999, net
sales were $55.1 million, an increase of 10% as compared with net sales of
$50.2 million for the comparable period in 1998. Both the current quarter and
year-to-date increases, relative to the comparable periods in 1998, were
primarily attributed to improving conditions within the semiconductor
industry, which has resulted in higher capital spending levels, partially
offset by lower front-end equipment sales to the thin film head industry.
Overall, unit shipments for the three and six-month periods ended June 30,
1999 increased 54% and 17%, respectively, from the comparable periods in
1998, and the weighted-average selling price of all units sold also increased
in the respective 1999 periods, relative to the comparable periods in 1998.
Service revenue for the three and six-month periods ended June 30, 1999
increased 44% and 41%, respectively, primarily as a result of the acquisition
of ISI.
For the quarter ended June 30, 1999, international net sales were $19.7
million, as compared with $8.6 million for the comparable period in 1998. For
the six months ended June 30, 1999, international net sales were $31.3
million, as compared with $22.2 million for the comparable period in 1998.
International net sales represented 67% and 57% of total net sales for the
three and six-month periods ended June 30, 1999, respectively. This compares
to 38% and 44% for the comparable periods in 1998. The Company continues to
be cautious in its outlook for the Asian markets. The Company believes that
the severe currency and equity market fluctuations that have been experienced
recently by many of the Asian markets have resulted, and may continue to
result, in delays, deferrals and cancellations of orders of the Company's
products, particularly in the short-term, which may have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's operations in foreign countries are not 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, 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; however, there can be no assurance of the
success of any such efforts. International sales expose the Company to a
number of additional risks, 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").
The Company believes that its sales have been and may continue to be
adversely impacted by reduced capital capacity spending levels within the
semiconductor and thin film head industries. During 1997 and 1998, the
Company experienced a significant level of shipment delays and purchase order
restructuring by several of its customers, and 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.
Additionally, the thin film head industry is presently in the process of
transitioning from the production of magneto-resistive heads to giant
magneto-resistive heads. This transition could disrupt the flow of orders for
new equipment from the thin film head industry until, among other factors,
customer requirements are more fully
11
<PAGE>
defined. The Company presently expects that net sales for the three-month
period ending September 30, 1999 may be higher than net sales in the
comparable period in 1998. However, due to lack of order visibility, the
Company can give no assurance that it will be able to achieve or maintain its
current sales levels.
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 electron beam lithography
system, XLS advanced reduction stepper (acquired from ISI), and its Titan,
Saturn and 1000 series families of wafer steppers, are of critical importance
to its future financial results. To the extent that these products do not
achieve significant sales due to difficulties involving manufacturing or
engineering, the inability to reduce the current long manufacturing cycles
for such products, competition, excess capacity in the semiconductor
industry, or any other reason, the Company's business, financial condition
and results of operations would be materially adversely affected.
GROSS PROFIT
The Company's gross profit as a percentage of net sales ("gross margin") was
38.6% for the quarter ended June 30, 1999, as compared with gross margin of
27.9% for the comparable period in 1998. On a comparative basis, gross margin
for the quarter ended June 30, 1999 was favorably impacted by higher weighted
average selling prices, the mix of products sold, higher rates of capacity
utilization and improved margins on service revenues. For the six-month
period ended June 30, 1999, gross margin was 36.4% of net sales, as compared
with 36.1% for the comparable period in 1998. This increase, as compared with
the comparable period in 1998, was primarily a result of higher
weighted-average selling prices.
The Company believes that gross margins for the second half of 1999 will
fluctuate. Intense competition in the markets the Company serves, and
continued low levels of capacity utilization may make it difficult for the
Company to increase or maintain its current gross margin percentages in the
near term. In 1998, the Company added capacity for the anticipated volume
production of several new products that are outside the Company's core
reflective and refractive optical technologies. In addition to the purchase
of significant levels of plant and equipment for these new products, the
commencement of production of the UltraBeam electron beam lithography system
has resulted and will continue to result in the purchase and retention of
significant levels of inventory to support manufacturing requirements, hiring
of additional production and manufacturing support personnel and the
incurrence of other related manufacturing overhead costs. (See "Additional
Risk Factors: Development of New Product Lines; Expansion of Operations;
Assimilation of Acquired Product Lines"). The purchase of additional
inventories will continue to result in a significantly higher risk of
obsolescence, which has required and may continue to require additional
inventory write-offs, which 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,
including products recently acquired in the Acquisition, fail to develop or
generate significant market demand, the Company's business, financial
condition and results of operations would be materially adversely affected.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
The Company's research, development and engineering expenses were $6.8
million for the quarter ended June 30, 1999, as compared with $6.8 million
for the comparable period in 1998. For the six months ended June 30, 1999,
research, development, and engineering expenses were $13.3 million, as
compared with $14.0 million for the comparable period in 1998. The
year-to-date decline, as compared to the comparable period in 1998, was
primarily related to cost containment measures implemented during the second
half of 1998, partially offset by higher spending on the Company's newly
acquired reduction stepper family of products.
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The Company continues to invest significant resources in the development and
enhancement of its UltraBeam lithography system and in the development of its
Verdant rapid thermal annealing/laser doping systems and technologies,
together with continuing expenditures for its 1X and reduction optical
products and technologies. The Company presently expects the absolute dollar
amount of research, development and engineering expenses for the quarter
ending September 30, 1999 may be flat to higher than the comparable period a
year ago. (See "Additional Risk Factors: Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines").
AMORTIZATION OF GOODWILL
Amortization of goodwill was $430,000 for the quarter ended June 30, 1999, as
compared with $34,000 for the comparable period in 1998. On a year-to-date
basis, amortization of goodwill was $737,000 for the six-month period ended
June 30, 1999, as compared with $72,000 for the comparable period in 1998.
The additional amortization expense was directly related to intangible assets
resulting from the Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $6.8 million for the
quarter ended June 30, 1999, as compared with $6.3 million for the comparable
period in 1998. As a percentage of net sales, selling, general and
administrative expenses declined to 23.3% for the quarter ended June 30,
1999, as compared to 27.9% of net sales for the comparable period in 1998.
For the six months ended June 30, 1999, selling, general, and administrative
expenses were $13.1 million, as compared with $12.7 million for the
comparable period in 1998. As a percentage of net sales, selling, general,
and administrative expenses decreased to 23.8% for the six months ended June
30, 1999, as compared with 25.3% for the comparable period in 1998. Both the
current quarter and year-to-date increases in absolute dollars, as compared
with the comparable periods in 1998, were primarily due to higher sales,
service and support expenses typically associated with an increase in sales;
expenses associated with the reduction stepper operations acquired in June of
1998; and higher expenses in Japan, as a result of the establishment of a
direct sales force and demonstration facility. The Company presently
anticipates that selling, general and administrative expenses for the
remainder of 1999 may increase significantly, relative to pre-charge levels
for the comparable periods in 1998, due primarily to higher anticipated sales
and marketing expenses.
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 the assumption of certain liabilities
of ISI, a privately held manufacturer of i-line and deep ultra-violet (DUV)
reduction lithography systems. As a result of this Acquisition, the Company
recognized a charge in the quarter ended June 30, 1998 for acquired
in-process research and development expense of $12.6 million, or $0.60 per
share, net of tax benefits.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, which consists primarily of interest income,
was $1.8 million for the quarter ended June 30, 1999, as compared with $1.6
million for the comparable period in 1998. For the six months ended June 30,
1999, interest and other income, net, was $3.7 million, as compared with $3.3
million for the comparable period in 1998. Both the current quarter and
year-to-date increases, as compared with the comparable periods in 1998, were
primarily attributed to higher rates of interest as a direct result of
converting the Company's investment portfolio from municipal to fully taxable
securities.
TAX BENEFIT
The Company did not recognize an income tax benefit on its pre-tax loss for
the three and six-month periods ended June 30, 1999, due to uncertainty
related to the utilization of its net operating loss carryforward. During the
three and six month periods ended June 30, 1998, the Company recognized a tax
benefit of $2.6 million, and $3.0 million, respectively, primarily as a
result of the carry back of certain tax benefits.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $5.8 million for the six
months ended June 30, 1999, as compared with $10.7 million during the
comparable period in 1998. Positive cash flows from operating activities
during the six-month period ended June 30, 1999 were primarily attributed to
a reduction in inventories of $9.2 million, a tax refund of $7.7 million and
non-cash charges to income of $6.3 million, partially offset by an increase
in accounts receivable of $7.2 million, a reduction in accrued liabilities of
$4.2 million, a net loss of $3.6 million and a reduction in accounts payable
of $1.6 million.
The increase in accounts receivable, as compared with December 31, 1998, was
primarily attributed to a combination of higher sales levels and lower levels
of accounts receivable sales to third parties, partially offset by improved
collections. The Company sells certain of its accounts and leases receivable
in order to mitigate its credit risk and to enhance cash flow. Sales of
accounts receivable typically precede final customer acceptance of the
system. Among other terms and conditions, the agreements include provisions
that require the Company to repurchase receivables if certain conditions are
present including, but not limited to, disputes with the customer regarding
suitability of the product, and from time-to-time the Company has repurchased
certain accounts receivable in accordance with these terms. At June 30, 1999,
$5.3 million of sold accounts receivable and approximately $9.9 million of
sold leases receivable were outstanding to third-party financial
institutions. The Company may continue to attempt to mitigate the impact of
extended payment terms and non-linear shipments by selling up to a
substantial portion of its accounts receivable in the future. There can be no
assurance that this financing will be available on reasonable terms, or at
all.
The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working
capital. Additionally, as of June 30, 1999, the Company had approximately
$4.7 million of net inventories and $7.0 million of net long-lived assets
related to several new product lines. As such, these assets may be subject to
a greater risk of impairment, which could materially adversely affect the
Company's operating results and financial condition.
During the six months ended June 30, 1999, the Company generated $0.1 million
of cash from its investing activities, as cash generated from a net reduction
in "available-for-sale" securities of $3.3 million was partially offset by a
cash investment of $3.2 million for capital expenditures.
Cash used in financing activities was $0.1 million during the six-month
period ended June 30, 1999, primarily a result of the repayment of a note
payable.
At June 30, 1999, the Company had working capital of $164.4 million. The
Company's principal source of liquidity at June 30, 1999 consisted of $146.9
million in cash, cash equivalents and short-term investments.
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 flows from operations and its cash, cash equivalents and short-term
investments 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,
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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 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 may
experience renewed interest in its equipment leasing program and this may
result in the further formation of significant long-term receivables, which,
in turn, 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. During the three-month periods ended
September 30, 1998 and December 31, 1998, the Company took significant
reserves against certain leases receivable, which are currently
non-performing. If additional defaults on lease receivables were to occur,
the Company's business, financial condition and results of operations would
be materially adversely affected. To the extent that the Company's financial
resources are insufficient to fund the Company's activities, additional funds
will be required. There can be no assurance that additional financing will be
available on reasonable terms, or at all.
YEAR 2000 READINESS DISCLOSURE:
Many currently installed computer systems and software products are coded to
accept only two digit entries in the attached date code field. Beginning in
the year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in
less than six months, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" (Y2K) requirements.
The Company has provided an assessment, below, of the state of readiness of
its information and non-information technology systems, together with a
summary of the status of related testing, remediation and implementation. The
Company presently estimates that the total cost for the entire Y2K project
will approximate $1.0 million and that the remaining project cost is
approximately $100,000. The Company plans to fund these remaining costs from
cash generated by operations or from cash and short-term investments on hand.
However additional requirements may be identified and unscheduled costs may
be incurred as the project proceeds. Accordingly, there can be no assurance
that the Company, or its vendors, will be able to timely and cost-effectively
update its products to avoid Y2K date errors, and this may result in material
costs to the Company, including costs associated with detecting and fixing
such errors and costs incurred in litigation due to any such errors.
Many commentators have predicted that a significant amount of litigation will
arise out of year 2000 compliance issues and the Company is aware of several
such suits that are currently pending. Because of the unprecedented nature of
such litigation and the highly technical nature of the Company's products,
there can be no assurance that the Company will not be materially adversely
affected by claims related to Y2K compliance. Although the Company presently
believes that it has made required changes to the software in its products,
it believes that the most likely worst case scenario is from unknown impacts
to its customers' manufacturing processes, which could potentially adversely
impact product yields and throughput. In addition to possible litigation, the
Company could incur substantially higher product returns and warranty related
expenses, either of which could materially adversely affect the Company's
business, financial condition and results of operations. Additionally, the
Company's customers may be required to devote substantial financial resources
to their own internal Y2K audit and compliance. This may result in fewer
financial resources available to purchase the Company's products, fewer
system sales by the Company, and could have a material adverse affect on the
Company's business, financial condition and results of operations. The
Company believes that its own Y2K efforts
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have resulted, and will continue to result in, a diversion of management and
financial resources, which has further resulted in the delay or deferral of
various information technology and engineering projects.
INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its information systems, a Y2K
conversion project to address necessary code changes, testing, and
implementation and contingency plans. The Company has completed testing and
verification of its primary business/information system and has identified
the significant potential risks associated with Y2K. The Company believes it
has remedied these potential errors and has completed the related compliance
testing. The Company has also provided for contingency plans to further
minimize risks to its business system associated with Y2K.
Although the Company is not aware of any remaining material operational
issues or costs associated with preparing its internal systems for Y2K, there
can be no assurance that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by
undetected errors or defects in technology used in its internal operating
systems, which are composed primarily of third party software and hardware
technology. Additionally, although the Company has made inquiries of its key
information technology vendors, and is in the process of collecting and
reviewing survey responses, the Company believes it will not be able to
obtain adequate assurances from all its key vendors. Even where assurances
are received from third parties, there remains a risk that failure of systems
and products of other companies on which the Company relies could have a
material adverse affect on the Company. Accordingly the Company continues to
assess the degree of risk to the Company and is preparing contingency plans.
The Company is presently working to minimize risk from vendors through
understanding and implementing necessary remediation and/or contingency
plans. There can be no assurance that such contingency plans will be adequate
and that the Company will not incur significant additional costs or business
interruptions in connection with such transition, either of which could have
a material adverse affect on the Company's business, financial condition and
results of operations.
NON-INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its key vendors, physical plant and
software contained in the products it sells, a Y2K conversion project to
address necessary remediation, testing, implementation and contingency plans.
The Company believes it has identified and implemented the required changes
for its products' hardware and software components to attain Y2K readiness
and is currently working with customers to assist in understanding these
requirements. The Company has obligations to provide these modifications to
customers with systems under warranty or currently under service contract.
The Company has commenced the process of installing and testing these
upgrades at customer sites and presently expects this process to be completed
on a timely basis. In addressing customer inquiries regarding the Company's
Y2K readiness and in making inquiries of the Company's vendors, the Company
has adopted the Sematech process for investigating and responding to the Y2K
subject. This process includes a survey form, a readiness matrix and a
testing scenario.
Although the Company has made inquiries of its key physical plant and
materials vendors in order to assess their state of readiness, and is in the
process of collecting and reviewing survey responses, the Company believes it
will not be able to obtain adequate assurances from all its key vendors. Even
where assurances are received from third parties, there remains a risk that
failure of systems and products of other companies on which the Company
relies could have a material adverse affect on the Company. Accordingly the
Company continues to assess the degree of risk to the Company and is
preparing contingency plans. These contingency plans may result, among other
things, in the development of alternative suppliers and the purchase of
additional inventories. The Company is presently working to minimize risk
from vendors through understanding and implementing necessary remediation
and/or contingency plans. There can be no assurance that such contingency
plans will be adequate and that the Company will not incur significant
additional costs or business interruptions in connection with such
transition, either of which could have a material adverse affect on the
Company's business, financial condition and results of operations.
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The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all
relevant computer codes, the nature and amount of programming required to
upgrade or replace each of the affected programs, the rate and magnitude of
related labor and consulting costs and the success of the Company's external
customers and vendors in addressing the Y2K issue. The Company's evaluation
is ongoing and it expects that new and different information will become
available to it as that evaluation continues. Consequently, there is no
guarantee that all material elements will be Y2K ready in time.
ADOPTION OF THE EURO
The Company does not presently expect that introduction and use of the Euro
will materially affect the Company's foreign exchange and hedging activities
or the Company's use of derivative instruments. Management does not expect
that the introduction of the Euro will result in any material increase in
costs to the Company and all costs, if any, associated with the introduction
of the Euro will be expensed to operations as incurred. While the Company
will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that
the introduction of the Euro currency will have a material adverse impact on
the Company's financial condition or overall trends in results of operations.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR AND THIN FILM 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. 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. Additionally, in 1997 and 1998 the Company experienced
cancellation of purchase orders, shipment delays and purchase order
restructuring 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 thin film 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, the Company's net sales and
operating results would be materially adversely affected. The Company
presently expects that net sales for the three-month period ending September
30, 1999 may be higher than net sales in the comparable period in 1998.
However, due to lack of order visibility, the Company can give no assurance
that it will be able to achieve or maintain its current sales levels. The
Company presently expects to recognize an operating loss for the quarter
ending September 30, 1999, and may recognize a net loss. These losses may
extend to future quarters due, in part, to the significant level of planned
research, development and engineering spending relative to anticipated sales;
the current low rate of capacity utilization; and the current backlog and
order levels for the Company's products.
During 1998 and 1997, approximately 50% of the Company's net sales were
derived from sales to thin film head manufacturers and micromachining
customers. The thin film head industry is highly cyclical, which has
historically resulted in recurring periods of oversupply. The Company's
business and
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operating results would be materially adversely affected by a further
downturn or slowdown 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 Inc.
("Nikon"), Canon Inc. ("Canon"), ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group ("SVG"), 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 Canon, Nikon and ASML offer reduction steppers
for thin film head fabrication. Additionally, the XLS reduction stepper
product line acquired by the Company from ISI competes directly with advanced
reduction steppers offered by Canon, Nikon and ASML. The Company believes
that future thin film head production will 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. ASML has recently announced its intent to
compete in the low-cost lithography market. In addition, ASML and Nikon have
each introduced an i-line step-and-scan system as a lower cost alternative to
the deep ultra-violet ("DUV") step-and-scan system for use on the less
critical layers. These systems are expected to compete with widefield
steppers, such as the Saturn and Titan families, for advanced mix-and-match
applications. The Company's UltraBeam "V" model electron beam pattern
generation system competes against systems produced by ETEC Systems, Inc.;
Hitachi, Ltd.; Leica Camera AG; and JEOL, Ltd. ("Japan Electron Optical
Laboratory"). In addition, the Company believes that the high cost of
developing new lithography tools has caused its competitors to collaborate
with customers and other parties in various areas such as research and
development, manufacturing and marketing, thereby resulting in a combined
competitive threat with significantly enhanced financial, technical and other
resources. The Company expects its competitors to continue to improve the
performance of their current products. These competitors have stated that
they will introduce new products with improved price and performance
characteristics that will compete directly with the Company's products. This
could cause a decline in sales or loss of market acceptance of the Company's
steppers, and thereby materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
enhancements to, or future generations of, competing products will not be
developed that offer superior cost of ownership and technical performance
features. The Company believes that to be competitive, it will require
significant financial resources in order to continue to invest in new product
development, features and enhancements, to introduce next generation stepper
systems on a timely basis, and to maintain customer service and support
centers worldwide. In marketing its products, the Company may also face
competition from vendors employing other technologies. In addition, increased
competitive pressure has led to intensified price-based competition,
resulting in lower prices and margins. This pressure has been caused, in
part, from the relative weakness of the Japanese yen versus the U.S. dollar.
Should these competitive trends continue, the Company's business, financial
condition and operating results would continue to be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully in the future.
Foreign 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 equipment market
and there can be no assurance
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that the Company will be able to achieve significant sales to Japanese
manufacturers in the future. (See "International Sales; Japanese Market").
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 the Company's historical core
businesses. During the remainder of 1999, the Company will continue to
develop these products and will continue to incur significant operating
expenses in the areas of research, development and engineering and general
and administrative costs 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 costs associated with the initial
production of these new product lines. These costs include, but are not
limited to, additional manufacturing overhead, additional inventory
write-offs, costs associated with managing multiple sites and the
establishment of additional 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, costs 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 DUV reduction lithography systems (the
"Acquisition"). Acquisitions involve numerous risks, including difficulties
in the assimilation of the operations, technologies and products of the
acquired companies; diversion of management's attention from other business
concerns; risks of entering markets in which the Company has no or limited
direct experience; and the potential loss of key employees of the acquired
company. In the event the Company acquires product lines, technologies or
businesses which do not complement the Company's business, or which otherwise
do not enhance the Company's sales or operating results, the Company may
incur substantial write-offs and higher recurring operating costs, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, there can be no assurance
as to the effect of the Acquisition on the Company's business, financial
condition or operating results. In conjunction with the Acquisition,
significant intangible assets were acquired. The creation of additional
intangible assets has the impact of increasing amortization expense, which
may continue to have a material adverse affect on the Company's results of
operations should significant sales for these newly acquired product lines
not materialize.
The Company has purchased significant levels of inventory and plant and
equipment for the anticipated volume production of the UltraBeam "V" Model
electron beam lithography system. To date, the Company has shipped one
UltraBeam system to a customer. The Company believes that any future success
of this product line is dependent, in large part, on the Company's ability to
further develop this system and the customers' ability to integrate this
highly technical product into their existing processes.
In December 1997, the Company terminated its distributor relationship with
Innotech, its Japan distributor. The Company expanded its operations in Japan
during 1998, by establishing a direct sales force, leasing additional
facilities and by making 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.
LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to restructure current manufacturing facilities, either of which
typically involves a significant commitment of capital. In view of the
significant investment involved in a system purchase, the Company has
experienced and may continue to experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. For this and other reasons, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management
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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
portion of its systems to a limited number of customers. Sales to one
customer accounted for approximately 25% and 14% of the Company's net sales
in 1998 and 1997, respectively. Additionally, in 1997, a second customer
accounted for approximately 10% of the Company's net sales. For the six
months ended June 30, 1999, sales to one customer accounted for approximately
18% of the Company's total 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 Thin Film 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 leases receivable. The formation of significant and
concentrated long-term receivables exposes the Company to additional risks,
including the risk of default by one or more customers representing a
significant portion of the Company's total receivables. During the three
month periods ended September 30 and December 31, 1998, the Company recorded
significant reserves against its trade accounts receivable and leases
receivable. If additional lease and accounts receivable reserves were to be
required, 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 has been 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 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.
20
<PAGE>
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 prior
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 primarily on technology buys, and not capacity additions.
This places the Company at a disadvantage, since its one-to-one optical
stepper product line address non-critical geometries. To the extent that the
mix-and-match family of products does not achieve or maintain significant
sales due to a continued cyclical downturn in the semiconductor industry;
technical, manufacturing or other difficulties associated with these
products; lack of customer acceptance; an inability to reduce the
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 and i-line
step-and-scan systems from Nikon, Canon, and ASML, 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
21
<PAGE>
Company has very little experience in manufacturing its UltraBeam 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 have resulted and will continue to
result from time to time. Due to the high selling price of this system,
delays in shipments from one quarter to the next would have a material
adverse effect on the results of operations for that quarter. Additionally,
the Company is in the process of assimilating the operations acquired in the
Acquisition and developing related marketing and product development plans.
This has resulted and could continue to result in a delay of any eventual
volume production of the products acquired. (See "Development of New Product
Lines; Expansion of Operations; Assimilation of Acquired Product Lines").
There can be no assurance that the Company will not encounter additional
technical, manufacturing or other difficulties that could further delay
future introductions or volume production of systems or enhancements. The
Company's inability to complete the development or meet the technical
specifications of any of its systems or enhancements and related software
tools, or its inability to manufacture and ship these systems or enhancements
and related software tools in volume and in time to meet the requirements for
manufacturing the future generation of semiconductor or thin film head
devices would materially adversely affect the Company's business, financial
condition and results of operations. In addition, the Company may incur
substantial unanticipated costs to ensure the functionality and reliability
of its products early in the products' life cycles. If new products have
reliability or quality problems, reduced orders or higher manufacturing
costs, delays in collecting accounts receivable and additional service and
warranty expenses may result. Any of such events may materially adversely
affect the Company's business, financial condition and results of operations.
INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 47% and 33% of total net sales for the years 1998 and 1997,
respectively. During the six-month period ended June 30, 1999, international
sales accounted for approximately 57% of total net sales, as compared to 44%
for the comparable period in 1998. 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 continue to 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's 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 resulted in the past, and may continue to result, in
delays, deferrals and cancellations of orders of the Company's products,
particularly in the short-term, which will have a material adverse effect on
the Company's business, financial condition and results of operations.
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
22
<PAGE>
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 expanded its operations in Japan during 1998 by establishing a
direct sales force and creating sales and applications support organizations.
(See "Additional Risk Factors: Development of New Product Lines; Expansion of
Operations; Assimilation of Acquired Product Lines").
INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its
intellectual property rights through patents, copyrights, trade secrets and
other measures, it believes that any success will depend more upon the
innovation, technological expertise and marketing abilities of its employees.
Nevertheless, the Company has a policy of seeking patents when appropriate on
inventions resulting from its ongoing research and development and
manufacturing activities. The Company owns various United States and foreign
patents, which expire on dates ranging from July 2000 to December 2017, and
has various United States and foreign patent applications pending. The
Company also has various registered trademarks and copyright registrations
covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be
issued or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. There can be no assurance that any patent issued
to the Company will not be challenged, invalidated or circumvented or that
the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or,
if patents are issued to the Company, design around the patents issued to the
Company.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patent or any other
intellectual property right, the Company has from time to time been notified
of claims that it may be infringing intellectual property rights possessed by
third parties. Certain of the Company's customers have received notices of
infringement from Technivision Corporation and the Lemelson Medical,
Education and Research Foundation, Limited Partnership alleging that the
manufacture of certain semiconductor products and/or the equipment used to
manufacture those semiconductor products infringes certain issued patents.
The Company has been notified by certain of such customers that the Company
may be obligated to defend or settle claims that the Company's products
infringe any of such patents and, in the event it is subsequently determined
that the customer infringes any of such patents, they intend to seek
reimbursement from the Company for damages and other expenses resulting from
this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims in the future will not be asserted, or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations, regardless
of the outcome
23
<PAGE>
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.
SOLE OR LIMITED SOURCES OF SUPPLY The Company procures certain of its
critical systems' components, subassemblies and services from a single
supplier or a limited group of suppliers in order to ensure overall quality
and timeliness of delivery. To date, the Company has been able to obtain
adequate services and supplies of components and subassemblies for its
systems in a timely manner. However, disruption or termination of certain of
these sources, due to year 2000 compliance issues or other factors, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is relying increasingly on outside
vendors to manufacture certain components of its products. The Company's
reliance on sole or a limited group of suppliers and the Company's increasing
reliance on subcontractors involve several risks, including a potential
inability to obtain an adequate supply of required components due to the
suppliers' failure or inability to provide such components in a timely
manner, or at all, and reduced control over pricing and timely delivery of
components. Although the timeliness, yield and quality of deliveries to date
from the Company's subcontractors have been acceptable, manufacture of
certain of these components and subassemblies is an extremely complex
process, and long lead-times are required. Any inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and therefore would have
a material adverse effect on the Company's business, financial condition and
results of operations. (See "Year 2000 Readiness Disclosure").
DEPENDENCE ON KEY PERSONNEL The Company's future operating results
depend, in significant part, upon the continued contributions of key
personnel, many of whom would be difficult to replace. None of such persons
has an employment or noncompetition agreement with the Company. The Company
does not maintain any life insurance on any of its key persons. The loss of
key personnel could 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 prior semiconductor industry slowdown,
which resulted in planned reductions in the Company's workforce during the
fourth fiscal quarter of 1996 and the third fiscal quarter of 1998; 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. Additionally, the Company had
recently implemented various cost-saving measures, including additional
scheduled plant shutdowns and required time-off for its employees. Due to
these and other factors, the Company may continue to experience high levels
of employee turnover, which could adversely affect the Company's business,
financial condition and results of operations.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, Bylaws and Delaware law
24
<PAGE>
may discourage certain transactions involving a change in control of the
Company. In addition to the foregoing, the Company's classified board of
directors, the shareholdings of the Company's officers, directors and persons
or entities that may be deemed affiliates and the ability of the Board of
Directors to issue "blank check" preferred stock without further stockholder
approval could have the effect of delaying, deferring or preventing a change
in control of the Company and may adversely affect the voting and other
rights of holders of Common Stock.
VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations
in the Company's operating results, sales of securities of the Company into
the marketplace, general conditions in the semiconductor and magnetic
recording head industries or the worldwide or regional economies, an outbreak
of hostilities, a shortfall in revenue or earnings from, or changes, in
analysts' expectations, announcements of technological innovations or new
products or enhancements by the Company or its competitors, developments in
patents or other intellectual property rights and developments in the
Company's relationships with its customers and suppliers could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, including the Company's,
have experienced extreme price fluctuations, which have often been unrelated
to the operating performance of affected companies. There can be no assurance
that the market price of the Company's Common Stock will not continue to
experience significant fluctuations in the future, including fluctuations
that may be unrelated to the Company's performance.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and to the subheading "Derivative
instruments and hedging" in Item 8, "Financial Statements and Supplementary
Data", under the heading "Notes to Consolidated Financial Statement" of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
26
<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, 1999.
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>
Terms Ending Upon the Annual
Stockholders' Meeting Votes for Votes Withheld
------------------------------------ ---------------------- --------------------
<S> <C> <C> <C>
Tommy D. George 2001 20,082,215 321,661
Gregory Harrison 2001 20,077,448 326,428
Kenneth Levy 2001 20,082,959 320,917
</TABLE>
2. A proposal to approve the amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares of Common Stock
authorized for issuance over the term of the Purchase Plan by an
additional 500,000 shares was approved by the vote of 18,541,614
shares for, vote of 1,704,844 shares against, and 157,418 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,
1999 was approved by the vote of 20,243,524 shares for; 87,085 shares
voted against the proposal and 73,267 shares abstained.
ITEM 5. OTHER INFORMATION.
On June 1, 1999, Mr. Bruce Wright joined the Company as Senior
Vice President, Finance and Chief Financial Officer (CFO). Mr.
Wright is responsible for all aspects of finance, legal and
information services. Before he joined the Company, Mr. Wright
served as Executive Vice President, Finance and CFO of
Spectrian Corporation. From 1991 through 1997, Mr. Wright was
CFO of Tencor Instruments until its acquisition by KLA
Instruments Corporation in 1997, which formed KLA-Tencor
Corporation. Mr. Wright holds an MBA degree in Finance and
Operations Management from the Massachusetts Institute of
Technology, a BS degree in Mechanical Engineering from the
California Institute of Technology, and a BA degree in Physics
from Pomona College.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.3.1 1993 Stock option/Stock Issuance
Plan (Amended and Restated as of January
4, 1999).
Exhibit 10.15 Employment agreement between Registrant
and Mr. Bruce R. Wright, Senior Vice
President, Finance and Chief Financial
Officer.
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
three months ended June 30, 1999.
27
<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 12, 1999 By: /s/Bruce R. Wright
----------------------- -----------------------------------------
Bruce R. Wright
Senior Vice President, Finance and
Chief Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
28
<PAGE>
EXHIBIT 10.15
April 20, 1999
Mr. Bruce R. Wright
47 Red Birch Court
Danville, CA 94506
Dear Bruce:
It is my pleasure to offer you a position with Ultratech Stepper, Inc., based on
the following:
TITLE: Senior Vice President and Chief Financial Officer
SALARY: $225,000 per year
HIRE-ON BONUS: $25,000.00 payable in our first normal pay period
PAID-TIME OFF: 11 HOLIDAYS PER YEAR (See Schedule), plus
vacation accrued at the rate of 2.30 hours per week
for the 1st year. Ultratech Stepper also observes
mandatory unpaid shutdowns (See attached
Holiday/Shutdown Schedule).
STOCK OPTIONS: 100,000 SHARES. As part of your terms of
employment, you would be eligible to receive
Ultratech Stepper, Inc. stock options as granted
to all employees. The price of your options will
be the closing price on the day your options are
approved by the Compensation Committee.
50,000 SHARES AT THE COMPLETION OF ONE YEAR OF
SERVICE. You will receive this grant of Ultratech
Stepper, Inc. stock options at the completion of
your first year of service. The price of your
options will be the closing price of our stock on
the first day of your second year of service.
EXECUTIVE COMP: In the event of an involuntary termination
within your first year of employment you will
receive your base salary paid bi-weekly for six
months from the date you are separated. In addition
your stock options will continue to vest for three
hundred sixty-six (366) days from your start date.
START DATE: 6/1/99
REPORT TO: Arthur W. Zafiropoulo
This offer of employment is contingent upon your completion of a background
check and a pre-employment physical/drug screen test, which will be scheduled.
Please understand that this offer does not constitute a GUARANTEE of continued
employment for any particular period, and that your relationship with Ultratech
Stepper, Inc., is an "at will" relationship and is subject to termination by
either party at any time, for any reason, without cause or notice.
Only the Chief Executive Officer of Ultratech Stepper, Inc., has the authority
to alter the "at will" nature of your employment status, and any such change in
status may be effected only by an expressed written employment contract signed
by the Chief Executive Officer of Ultratech Stepper, Inc.
<PAGE>
Your acceptance of this employment offer with Ultratech Stepper, Inc., is
contingent upon your agreement that any future disputes with Ultratech Stepper,
Inc., regarding termination of your employment will be resolved solely and
exclusively in accordance with the enclosed Employment Agreement. By accepting
this offer of employment, you further agree that any decision issued by an
arbitrator pursuant to the referenced procedure will be final and binding upon
Ultratech Stepper, Inc., and you.
Finally, your employment with Ultratech Stepper, Inc is contingent upon your
execution of the enclosed Employment Agreement. Please complete this form and
return it to Human Resources with your signed acceptance of this letter. The
Human Resources Department will contact you to arrange your orientation. During
orientation, UTS' comprehensive benefits will be explained to you.
The following forms should be filled out and signed:
- - Ultratech Stepper, Inc., Employment Application (avoid "See Resume")
- - W-4 Tax Withholding Form
- - Employment Eligibility Verification (Form I-9). Fill out and sign Section
1. Bring with you to the orientation the appropriate documents shown in
Section 2 - either one document from List A OR one document from List B
AND one document from List C.
- - Employment Agreement
- - Release Authorization
- - Emergency Contact Form
Providing Ultratech Stepper, Inc., with these forms and the appropriate
documents at orientation is a condition of employment with Ultratech Stepper,
Inc. We must receive the original documents and make copies for our files in
order to comply with the Immigration Reform and Control Act, which was signed
into law on November 6, 1986. This law requires employers to verify that all new
employees hired are authorized for employment in the U.S.
If you have any questions, please call Carmine Renzulli at (408) 577-3006. If
you agree with the terms of this offer and wish to become part of Ultratech
Stepper, Inc. and our exciting future, please indicate your acceptance by
signing below and returning the original to the Human Resources Department.
Ultratech Stepper, Inc. is an exciting and rewarding environment in which to
work. We look forward to welcoming you to our organization.
/s/ ARTHUR W. ZAFIROPOULO /s/ BRUCE R. WRIGHT
- ------------------------------------ -----------------------------------
Presented by: Accepted by:
Arthur W. Zafiropoulo Bruce R. Wright
President & CEO
Date: 4/20/99 Date: 20 APR 99
------- ---------
<PAGE>
EXHIBIT 10.3.1
ULTRATECH STEPPER, INC.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
(Amended and Restated as of January 4, 1999)
ARTICLE ONE
GENERAL
I. PURPOSE OF THE PLAN
This 1993 Stock Option/Stock Issuance Plan ("Plan") is intended to
promote the interests of Ultratech Stepper, Inc., a Delaware corporation (the
"Corporation"), by providing (i) key employees (including officers) of the
Corporation (or its parent or subsidiary corporations) who are responsible for
the management, growth and financial success of the Corporation (or its parent
or subsidiary corporations), (ii) the non-employee members of the Corporation's
Board of Directors and (iii) independent consultants and other advisors who
provide valuable services to the Corporation (or its parent or subsidiary
corporations) with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation (or its parent or
subsidiary corporations).
A. The Plan became effective on September 29, 1993, the date on
which the shares of the Corporation's Common Stock were registered under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Such
date is hereby designated as the Effective Date for the Plan.
B. This Plan shall serve as the successor to the Corporation's
existing 1993 Stock Option and 1993 Stock Issuance Plans (the "Predecessor
Plans"), and no further option grants or share issuances shall be made under the
Predecessor Plans from and after the Effective Date of this Plan. All
outstanding stock options and unvested share issuances under the Predecessor
Plans on the Effective Date are hereby incorporated into this Plan and shall
accordingly be treated as outstanding stock options and unvested share issuances
under this Plan. However, each outstanding option grant and unvested share
issuance so incorporated shall continue to be governed solely by the express
terms and conditions of the instrument evidencing such grant or issuance, and no
provision of this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock thereunder. All unvested shares of Common
Stock outstanding under the Predecessor Plans on the Effective Date shall
continue to be governed solely by the express terms and conditions of the
instruments evidencing such issuances, and no provision of this Plan shall be
deemed to affect or modify the rights or obligations of the holders of such
unvested shares.
II. DEFINITIONS
A. For purposes of the Plan, the following definitions shall be
in effect:
BOARD: the Corporation's Board of Directors.
CODE: the Internal Revenue Code of 1986, as amended.
COMMITTEE: the committee of two (2) or more non-employee Board members
appointed by the Board to administer the Plan.
COMMON STOCK: shares of the Corporation's common stock.
CHANGE IN CONTROL: a change in ownership or control of the Corporation
effected through either of the following transactions:
a. any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation) directly or
indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's stockholders;
or
b. there is a change in the composition of the
Board over a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more proxy contests
for the election of Board members, to be comprised of individuals who either (A)
have been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as
<PAGE>
Board members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time such election or
nomination was approved by the Board.
CORPORATE TRANSACTION: any of the following stockholder-approved
transactions to which the Corporation is a party:
a. a merger or consolidation in which the
Corporation is not the surviving entity, except for a transaction the principal
purpose of which is to change the State in which the Corporation is
incorporated,
b. the sale, transfer or other disposition of
all or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
c. any reverse merger in which the Corporation
is the surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to person or persons different from the
persons holding those securities immediately prior to such merger.
EMPLOYEE: an individual who performs services while in the employ of
the Corporation or one or more parent or subsidiary corporations, subject to the
control and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
FAIR MARKET VALUE: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:
a. If the Common Stock is not at the time
listed or admitted to trading on any national stock exchange but is traded on
the Nasdaq National Market, the Fair Market Value shall be the closing selling
price per share on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no reported closing selling price for the Common
Stock on the date in question, then the closing selling price on the last
preceding date for which such quotation exists shall be determinative of Fair
Market Value.
b. If the Common Stock is at the time listed or
admitted to trading on any national stock exchange, then the Fair Market Value
shall be the closing selling price per share on the date in question on the
exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Common Stock on
such exchange on the date in question, then the Fair Market Value shall be the
closing selling price on the exchange on the last preceding date for which such
quotation exists.
HOSTILE TAKE-OVER: the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3
of the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept.
OPTIONEE: any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program in effect under the
Plan.
PARTICIPANT: any person who receives a direct issuance of Common Stock
under the Stock Issuance Program in effect under the Plan.
PLAN ADMINISTRATOR: the Committee in its capacity as the administrator
of the Plan.
PERMANENT DISABILITY or PERMANENTLY DISABLED: the inability of the
Optionee or the Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
SERVICE: the performance of services on a periodic basis to the
Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non--employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option or stock issuance agreement.
TAKE-OVER PRICE: the GREATER of (a) the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation in
connection with a Hostile Take-Over or (b) the highest reported price
<PAGE>
per share of Common Stock paid by the tender offeror in effecting such Hostile
Take-Over. However, if the surrendered option is an Incentive Option, the
Take-Over Price shall not exceed the clause (a) price per share.
B. The following provisions shall be applicable in determining
the parent and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation shall be considered to be a PARENT of
the Corporation, provided each such corporation in the unbroken chain (other
than the Corporation) owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
Each corporation (other than the Corporation) in an unbroken chain of
corporations which begins with the Corporation shall be considered to be a
SUBSIDIARY of the Corporation, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
III. STRUCTURE OF THE PLAN
A. STOCK PROGRAMS. The Plan shall be divided into three separate
components: the Discretionary Option Grant Program specified in Article Two, the
Automatic Option Grant Program specified in Article Three and the Stock Issuance
Program specified in Article Four. Under the Discretionary Option Grant Program,
eligible individuals may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock in accordance with the
provisions of Article Two. Under the Automatic Option Grant Program,
non-employee Board members will receive a series of automatic option grants over
their period of continued Board service to purchase shares of Common Stock in
accordance with the provisions of Article Three. Under the Stock Issuance
Program, eligible individuals may be issued shares of Common Stock directly,
either through the immediate purchase of such shares at Fair Market Value at the
time of issuance or as a bonus tied to the performance of services or the
Corporation's attainment of financial objectives, without any cash payment
required of the recipient.
B. GENERAL PROVISIONS. Unless the context clearly indicates
otherwise, the provisions of Articles One and Five shall apply to the
Discretionary Option Grant Program, the Automatic Option Grant Program and the
Stock Issuance Program and shall accordingly govern the interests of all
individuals under the Plan.
IV. ADMINISTRATION OF THE PLAN
A. Both the Discretionary Option Grant Program and the Stock
Issuance Program shall be administered by a committee ("Committee") of two or
more non-employee Board members. Members of the Committee shall serve for such
period of time as the Board may determine and shall be subject to removal by the
Board at any time.
B. The Committee as Plan Administrator shall have full power and
authority (subject to the express provisions of the Plan) to establish rules and
regulations for the proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding option
grants or stock issuances thereunder as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties
who have an interest in the Discretionary Option Grant or Stock Issuance Program
or any outstanding option or share issuance thereunder.
C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and the Committee as Plan Administrator shall exercise no discretionary
functions with respect to option grants made pursuant to that program.
<PAGE>
V. OPTION GRANTS AND STOCK ISSUANCES
A. The persons eligible to participate in the Discretionary
Option Grant Program under Article Two or the Stock Issuance Program under
Article Four shall be limited to the following:
1. officers and other key employees of the Corporation (or its
parent or subsidiary corporations) who render services which contribute to the
management, growth and financial success of the Corporation (or its parent or
subsidiary corporations);
2. non-employee members of the Board; and
3. those independent consultants or other advisors who provide
valuable services to the Corporation (or its parent or subsidiary corporations).
B. The Plan Administrator shall have full authority to determine,
(I) with respect to the option grants made under the Discretionary Option Grant
Program, which eligible individuals are to receive option grants, the time or
time when such grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an incentive stock option
("Incentive Option") which satisfies the requirements of Section 422 of the Code
or a non-statutory option not intended to meet such requirements, the time or
times at which each granted option is to become exercisable and the maximum term
for which the option may remain outstanding and (II), with respect to stock
issuances under the Stock Issuance Program, the number of shares to be issued to
each Participant, the vesting schedule (if any) to be applicable to the issued
shares, and the consideration to be paid by the individual for such shares.
VI. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under
the Plan and shall be drawn from either the Corporation's authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Corporation on the open market. The maximum
number of shares of Common Stock reserved for issuance over the term of the Plan
shall be limited to 5,826,739 shares(1). Such share reserve includes (i) the
initial number of shares incorporated into this Plan from the Predecessor Plans
on the Effective Date, (ii) an additional 600,000-share increase authorized by
the Board on March 21, 1996 and approved by the stockholders at the 1996 Annual
Stockholders Meeting, (iii) an additional 277,239 shares attributable to the
automatic annual share increase for fiscal 1996 which was effected on January 2,
1996, (iv) an additional 284,346 shares attributable to the automatic annual
share increase for fiscal 1997 which was effected on January 2, 1997, (v) an
additional 450,000 shares authorized by the Board on March 18, 1997 and approved
by the stockholders at the 1997 Annual Meeting, (vi) an additional 291,008
shares attributable to the automatic annual share increase for fiscal 1998 which
was effected on January 2, 1998 and (vii) an additional 295,480 shares
attributable to the automatic annual share increase for fiscal 1999 which was
effected on January 4, 1999. Such share reserve shall automatically increase on
the first trading day in fiscal year 2000 by an amount equal to 1.4% of the
total number of shares of Common Stock outstanding on the last trading day of
December in the immediately preceding fiscal year. The share reserve in effect
from time to time under the Plan shall be subject to periodic adjustment in
accordance with the provisions of this Section VI. To the extent one or more
outstanding options under the Predecessor Plans which have been incorporated
into this Plan are subsequently exercised, the number of shares issued with
respect to each such option shall reduce, on a share-for-share basis, the number
of shares available for issuance under this Plan.
B. In no event may the aggregate number of shares of Common Stock
for which any one individual participating in the Plan may be granted stock
options, separately-exercisable stock appreciation rights and direct stock
issuances exceed 400,000 shares per fiscal year, beginning with the 1995 fiscal
year. However, for the fiscal year in which an individual receives his or her
initial stock option grant or direct stock issuance under the Plan, the limit
shall be increased to 600,000 shares. Such limitations shall be subject to
adjustment from time to time in accordance with the provisions of this Section
VI.
C. Should one or more outstanding options under this Plan
(including outstanding options under the Predecessor Plans incorporated into
this Plan) expire or terminate for any reason prior to exercise in full
(including
- --------
1 All figures have been adjusted to reflect the 2:1 stock split the
Corporation effected May 10, 1995.
<PAGE>
any option cancelled in accordance with the cancellation-regrant provisions of
Section IV of Article Two of the Plan), then the shares subject to the portion
of each option not so exercised shall be available for subsequent issuance
under the Plan. Unvested shares issued under the Plan and subsequently
repurchased by the Corporation, at the original exercise or issue price paid
per share, pursuant to the Corporation's repurchase rights under the Plan
shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under
the Plan. Shares subject to any option or portion thereof surrendered or
cancelled in accordance with Section V of Article Two shall reduce on a
share-for-share basis the number of shares of Common Stock available for
subsequent issuance under the Plan. In addition, should the exercise price
of an outstanding option under the Plan (including any option incorporated from
the Predecessor Plans) be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation
in satisfaction of the withholding taxes incurred in connection with the
exercise of an outstanding option under the Plan or the vesting of a direct
share issuance made under the Plan, then the number of shares of Common Stock
available for issuance under the Plan shall be reduced by the gross number of
shares for which the option is exercised or which vest under the share
issuance, and not by the net number of shares of Common Stock actually issued
to the holder of such option or share issuance.
D. Should any change be made to the Common Stock issuable under
the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
stock options, separately exercisable stock appreciations rights and direct
stock issuances under this Plan per calendar year, (iii) the number and/or
class of securities for which automatic option grants are to be subsequently
made per eligible non-employee Board member under the Automatic Option Grant
Program, (iv) the number and/or class of securities and price per share in
effect under each option outstanding under either the Discretionary Option
Grant or Automatic Option Grant Program and (v) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plans. Such adjustments to
the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments deter-mined by the Plan Administrator shall be final, binding
and conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant Program
shall be authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted non-statutory options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. OPTION PRICE.
1. The option price per share shall be fixed by the Plan
Administrator and shall in no event be less than one hundred percent (100%) of
the fair market value of such Common Stock on the grant date.
2. The option price shall become immediately due upon
exercise of the option and, subject to the provisions of Section I of Article
Four and the instrument evidencing the grant, shall be payable in one of the
following alternative forms specified below:
- full payment in cash or check drawn to the
Corporation's order; or
- full payment in shares of Common Stock held
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date (as such term is defined below);
or
- full payment in a combination of shares of
Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes
<PAGE>
and valued at Fair Market Value on the Exercise Date and cash or check
drawn to the Corporation's order; or
- full payment through a broker-dealer sale
and remittance procedure pursuant to which the Optionee (I) shall
provide irrevocable written instructions to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate option price
payable for the purchased shares plus all applicable Federal and State
income and employment taxes required to be withheld by the Corporation
in connection with such purchase and (II) shall provide written
directives to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale transaction.
For purposes of this subparagraph (2), the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure is utilized
in connection with the exercise of the option, payment of the option price for
the purchased shares must accompany such notice.
B. TERM AND EXERCISE OF OPTIONS. Each option granted under this
Discretionary Option Grant Program shall be exercisable at such time or times
and during such period as is determined by the Plan Administrator and set forth
in the instrument evidencing the grant. No such option, however, shall have a
maximum term in excess of ten (10) years from the grant date.
C. LIMITED TRANSFERABILITY. During the lifetime of the Optionee,
Incentive Options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, non-statutory options may,
in connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
D. TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise period
applicable to any outstanding options held by the Optionee at the time of
cessation of Service or death.
- Should an Optionee cease Service for any reason
(including death or Permanent Disability) while holding one or more
outstanding options under this Article Two, then none of those options
shall (except to the extent otherwise provided pursuant to subparagraph D.(3)
below) remain exercisable for more than a thirty-six (36)-month period (or
such shorter period determined by the Plan Administrator and set forth in
the instrument evidencing the grant) measured from the date of such
cessation of Service.
- Any option held by the Optionee under this Article Two
and exercisable in whole or in part on the date of his or her death may be
subsequently exercised by the personal representative of the Optionee's estate
or by the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution.
Such exercise, however, must occur prior to the earlier of (i) the first
anniversary of the date of the Optionee's death or (ii) the specified
expiration date of the option term. Upon the occurrence of the earlier event,
the option shall terminate.
- Under no circumstances shall any such option be
exercisable after the specified expiration date of the option term.
- During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
shares (if any) in which the Optionee is vested at the time of his or her
cessation of Service. Upon the expiration of the limited post-Service exercise
period or (if earlier) upon the specified expiration date of the option
term, each such option shall terminate and cease to be outstanding with respect
to any vested shares for which the option has not otherwise been exercised.
However, each outstanding option shall, immediately upon the Optionee's
cessation of Service for any reason, terminate and cease to be outstanding
with respect to any shares for which the option is not otherwise at that time
exercisable or in which the Optionee is not otherwise at that time vested.
- Should (i) the Optionee's Service be terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (ii) the Optionee make any unauthorized
use or disclosure of confidential information or trade secrets of the
Corporation or its parent or
<PAGE>
subsidiary corporations, then in any such event all
outstanding options held by the Optionee under this Article Two shall terminate
immediately and cease to be outstanding.
2. The Plan Administrator shall have complete
discretion, exercisable either at the time the option is granted or at any time
while the option remains outstanding, to permit one or more options held by the
Optionee under this Article Two to be exercised, during the limited post-Service
exercise period applicable under subparagraph (1) above, not only with respect
to the number of vested shares of Common Stock for which each such option is
exercisable at the time of the Optionee's cessation of Service but also with
respect to one or more subsequent installments of the option shares in which the
Optionee would have otherwise vested had such cessation of Service not occurred.
3. The Plan Administrator shall also have full power and
authority to extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service or death from the
limited period in effect under subparagraph (1) above to such greater period of
time as the Plan Administrator shall deem appropriate. In no event, however,
shall such option be exercisable after the specified expiration date of the
option term.
E. STOCKHOLDER RIGHTS.
An Optionee shall have no stockholder rights with respect to any shares
covered by the option until such individual shall have exercised the option and
paid the option price for the purchased shares.
F. REPURCHASE RIGHTS.
The shares of Common Stock acquired upon the exercise of any Article
Two option grant may be subject to repurchase by the Corporation in accordance
with the following provisions:
(a) The Plan Administrator shall have the discretion to
authorize the issuance of unvested shares of Common Stock under this Article
Two. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase any or all of those unvested
shares at the option price paid per share. The terms and conditions upon which
such repurchase right shall be exercisable (including the period and procedure
for exercise and the appropriate vesting schedule for the purchased shares)
shall be established by the Plan Administrator and set forth in the instrument
evidencing such repurchase right.
(b) All of the Corporation's outstanding repurchase
rights under this Article Two shall automatically terminate, and all shares
subject to such terminated rights shall immediately vest in full, upon the
occurrence of a Corporate Transaction, except to the extent: (i) any such
repurchase right is expressly assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed by the Plan Administrator at
the time the repurchase right is issued.
(c) The Plan Administrator shall have the discretionary
authority, exercisable either before or after the Optionee's cessation of
Service, to cancel the Corporation's outstanding repurchase rights with respect
to one or more shares purchased or purchasable by the Optionee under this Option
Grant Program and thereby accelerate the vesting of such shares in whole or in
part at any time.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees of the Corporation. Options which are
specifically designated as "non-statutory" options when issued under the Plan
shall not be subject to such terms and conditions.
<PAGE>
A. DOLLAR LIMITATION. The aggregate fair market value (determined
as of the respective date or dates of grant) of the Common Stock for which one
or more options granted to any Employee after December 31, 1986 under this Plan
(or any other option plan of the Corporation or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as incentive stock options under the Federal tax laws shall be
applied on the basis of the order in which such options are granted. Should the
number of shares of Common Stock for which any Incentive Option first becomes
exercisable in any calendar year exceed the applicable One Hundred Thousand
Dollar ($100,000) limitation, then that option may nevertheless be exercised in
that calendar year for the excess number of shares as a non-statutory option
under the Federal tax laws.
B. 10% STOCKHOLDER. If any individual to whom an Incentive Option
is granted is the owner of stock (as determined under Section 424(d) of the
Code) possessing ten percent (10%) or more of the total combined voting power of
all classes of stock of the Corporation or any one of its parent or subsidiary
corporations, then the option price per share shall not be less than one hundred
and ten percent (110%) of the fair market value per share of Common Stock on the
grant date, and the option term shall not exceed five (5) years, measured from
the grant date.
Except as modified by the preceding provisions of this Section II, the
provisions of Articles One, Two and Five of the Plan shall apply to all
Incentive Options granted hereunder.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any Corporate Transaction, each option which
is at the time outstanding under this Article Two shall automatically accelerate
so that each such option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares as fully-vested shares.
However, an outstanding option under this Article Two shall not so accelerate if
and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
or to be replaced with a comparable option to purchase shares of the capital
stock of the successor corporation or parent thereof, (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option, or (iii) the acceleration of such option is subject
to other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options under this Article Two shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation or its parent company.
C. Each outstanding option under this Article Two which is
assumed in connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issued to the option holder, in consummation of such Corporate
Transaction, had such person exercised the option immediately prior to such
Corporate Transaction. Appropriate adjustments shall also be made to the option
price payable per share, PROVIDED the aggregate option price payable for such
securities shall remain the same. In addition, appropriate adjustments to
reflect the Corporate Transaction shall be made to (i) the class and number of
securities available for issuance over the remaining term of the Plan, (ii) the
maximum number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under this Plan per calendar year and (iii) the maximum
number and/or class of securities which may be issued pursuant to Incentive
Options granted under the Plan.
D. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide (upon such terms as it may deem appropriate) for the
automatic acceleration of one or more outstanding options which are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time, in the event the Optionee's Service should subsequently terminate within a
designated period following the effective date of such Corporate Transaction.
E. The grant of options under this Article Two shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
F. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under this Article Two (and the termination of one or
more of the Corporation's
<PAGE>
outstanding repurchase rights under this Article Two) upon the occurrence of
any Change in Control. The Plan Administrator shall also have full power and
authority to condition any such option acceleration (and the termination of
any outstanding repurchase rights) upon the subsequent termination of the
Optionee's Service within a specified period following the Change in Control.
G. Any options accelerated in connection with the Change in
Control shall remain fully exercisable until the expiration or sooner
termination of the option term.
H. The exercisability as incentive stock options under the
Federal tax laws of any options accelerated under this Section III in connection
with a Corporate Transaction or Change in Control shall remain subject to the
dollar limitation of Section II of this Article Two. To the extent such dollar
limitation is exceeded, the accelerated option shall be exercisable as a
non-statutory option under the Federal tax laws.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, the
cancellation of any or all outstanding options under this Article Two (including
outstanding options under the Predecessor Plans incorporated into this Plan) and
to grant in substitution new options under the Plan covering the same or
different numbers of shares of Common Stock but with an option price per share
not less than the Fair Market Value of the Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. Provided and only if the Plan Administrator determines in its
discretion to implement the stock appreciation right provisions of this Section
V, one or more Optionees may be granted the right, exercisable upon such terms
and conditions as the Plan Administrator may establish, to surrender all or part
of an unexercised option under this Article Two in exchange for a distribution
from the Corporation in an amount equal to the excess of (i) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (ii) the aggregate option price payable for such vested
shares.
B. No surrender of an option shall be effective hereunder unless
it is approved by the Plan Administrator. If the surrender is so approved, then
the distribution to which the Optionee shall accordingly become entitled under
this Section V may be made in shares of Common Stock valued at Fair Market Value
on the option surrender date, in cash, or partly in shares and partly in cash,
as the Plan Administrator shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
(i) five (5) business days after the receipt of the rejection notice or (ii) the
last day on which the option is otherwise exercisable in accordance with the
terms of the instrument evidencing such option, but in no event may such rights
be exercised more than ten (10) years after the date of the option grant.
D. One or more officers of the Corporation subject to the
short-swing profit restrictions of the Federal securities laws may, in the Plan
Administrator's sole discretion, be granted limited stock appreciation rights in
tandem with their outstanding options under the Plan. Upon the occurrence of a
Hostile Take-Over effected at any time when the Corporation's outstanding Common
Stock is registered under Section 12(g) of the 1934 Act, the officer shall have
a thirty (30)-day period in which he or she may surrender any outstanding option
with such a limited stock appreciation right to the Corporation, to the extent
such option is at the time exercisable for fully-vested shares of Common Stock.
The officer shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
vested shares of Common Stock at the time subject to each surrendered option (or
surrendered portion of such option) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such option
surrender shall be made within five (5) days following the consummation of the
Hostile Take-Over. The Plan Administrator shall pre-approve, at the time the
limited stock appreciation right is granted, the subsequent exercise of that
right in accordance with the terms of the grant and the provisions of this
Section V.D. No additional approval of the Plan Administrator or the Board shall
be required at the time of the actual option surrender and distribution. Any
unsurrendered portion of the option shall continue to remain outstanding and
become exercisable in accordance with the terms of the instrument evidencing
such grant.
E. The shares of Common Stock subject to any option surrendered
for an appreciation distribution pursuant to this Section V shall not be
available for subsequent issuance under the Plan.
<PAGE>
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
The provisions of the Automatic Option Grant Program were revised,
effective March 1, 1996, to eliminate the special one-time option grant for
28,800 shares of Common Stock to each newly-elected or newly-appointed
non-employee Board member and to implement a new program of periodic option
grants to all eligible non-employee Board members. Under the revised Automatic
Option Grant Program, the following individuals shall be eligible to receive
automatic option grants over their period of Board service: (i) those
individuals who were serving as non-employee Board members on the date of the
1996 Annual Stockholders Meeting but who first joined the Board after September
29, 1993, (ii) those individuals who first join the Board as non-employee Board
members after the date of the 1996 Annual Stockholders Meeting and (iii) those
individuals who first joined the Board prior to September 30, 1993 and continue
to serve as non-employee Board members through one or more Annual Stockholders
Meetings, beginning with the 1996 Annual Meeting. However, a non-employee Board
member who has previously been in the employ of the Corporation (or any Parent
or Subsidiary) shall not be eligible to receive a 12,000-share option grant at
the time of his or her initial election or appointment to the Board, but such
individual shall be eligible to receive one or more 4,000-share annual option
grants over his or her period of continued Board service. Each non-employee
Board member eligible to participate in the Automatic Option Grant Program
pursuant to the foregoing criteria shall be designated an Eligible Director for
purposes of the Plan.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. GRANT DATE.
1. Each individual serving as a non-employee Board
member on the date of the 1996 Annual Stockholders Meeting shall be granted on
that date a non-statutory stock option to purchase 12,000 shares of Common Stock
upon the terms and conditions of this Article Three, provided such individual
(i) has not previously been in the employ of the Corporation (or any Parent or
Subsidiary) and (ii) did not join the Board prior to September 30, 1993. If any
such individual previously received an automatic option grant for 28,800 shares
of Common Stock at the time of his or her initial election or appointment to the
Board, then that option was automatically cancelled upon stockholder approval of
the revised Automatic Option Grant Program at the 1996 Annual Meeting.
2. Each individual who is first elected or appointed as
a non-employee Board member after the date of the 1996 Annual Stockholders
Meeting shall automatically be granted, on the date of such initial election or
appointment, a non-statutory stock option to purchase 12,000 shares of Common
Stock upon the terms and conditions of this Article Three, provided such
individual has not previously been in the employ of the Corporation (or any
Parent or Subsidiary).
3. On the date of each Annual Stockholders Meeting,
beginning with the 1996 Annual Stockholders Meeting, each individual who is to
continue to serve as a non-employee Board member, whether or not he or she is
standing for re-election to the Board at that particular Annual Meeting, shall
automatically be granted a Non-Statutory Option to purchase 4,000 shares of
Common Stock, provided such individual did not receive any other option grants
under this Automatic Option Grant Program within the preceding six (6) months.
There shall be no limit on the number of such 4,000-share option grants any one
Eligible Director may receive over his or her period of Board service, and
individuals who have previously been in the employ of the Corporation (or any
Parent or Subsidiary) shall be eligible to receive such annual option grants
over their period of continued Board service.
B. EXERCISE PRICE. The exercise price per share of Common Stock
subject to each automatic option grant made under this Article Three shall be
equal to one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the automatic grant date.
C. PAYMENT. The exercise price shall be payable in one of the
alternative forms specified below:
<PAGE>
(i) full payment in cash or check made payable
to the Corporation's order; or
(ii) full payment in shares of Common Stock held
for the requisite period necessary to avoid a charge to the Corporation's
reported earnings and valued at Fair Market Value on the Exercise Date (as such
term is defined below); or
(iii) full payment in a combination of shares of
Common Stock held for the requisite period necessary to avoid a charge to the
Corporation's reported earnings and valued at Fair Market Value on the Exercise
Date and cash or check payable to the Corporation's order; or
(iv) to the extent the option is exercised for
vested shares, full payment through a sale and remittance procedure pursuant to
which the non-employee Board member (I) shall provide irrevocable written
instructions to a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares and shall (II)
concurrently provide written directives to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale transaction.
For purposes of this subparagraph C, the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure specified
above is utilized in connection with the exercise of the option for vested
shares, payment of the option price for the purchased shares must accompany the
exercise notice. However, if the option is exercised for any unvested shares,
then the optionee must also execute and deliver to the Corporation a stock
purchase agreement for those unvested shares which provides the Corporation with
the right to repurchase, at the exercise price paid per share, any unvested
shares held by the optionee at the time of cessation of Board service and which
precludes the sale, transfer or other disposition of any shares purchased under
the option, to the extent those shares are subject to the Corporation's
repurchase right.
D. OPTION TERM. Each automatic grant under this Article Three
shall have a maximum term of ten (10) years measured from the automatic grant
date.
E. EXERCISABILITY/VESTING. Each automatic grant shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each
12,000-share initial automatic option grant shall vest as follows: (i) fifty
percent (50%) of the shares shall vest upon the optionee's completion of one (1)
year of Board service measured from the grant date, and (ii) the remaining
shares shall vest in three (3) successive equal annual installments upon the
optionee's completion of each of the next three (3) years of Board service
thereafter. The shares subject to each 4,000-share annual automatic option grant
shall vest upon the optionee's completion of one (1) year of Board service
measured from the grant date. Vesting of the option shares shall be subject to
acceleration as provided in Section II.G and Section III of this Article Three.
F. LIMITED TRANSFERABILITY. Each option granted under this
Automatic Option Grant Program prior to the 1997 Annual Stockholders Meeting
shall, during the lifetime of the optionee, be exercisable only by the optionee
and shall not be assignable or transferable by the optionee otherwise than by
will or the by the laws of descent and distribution following the optionee's
death. However, each option granted under this Automatic Option Grant Program on
or after the 1997 Annual Stockholders Meeting shall be assignable in whole or in
part by the optionee during his or her lifetime, but only to the extent such
assignment is made in connection with the optionee's estate plan to one or more
members of the optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
G. EFFECT OF TERMINATION OF BOARD SERVICE.
1. Should the Optionee cease to serve as a Board member
for any reason (other than death or Permanent Disability) while holding an
automatic option grant under this Article Three, then such individual shall have
a six (6)--month period following the date of such cessation of Board service in
which to exercise such option for any or all of the option shares in which the
Optionee is vested at the time of such cessation of Board service. The option
shall immediately terminate and cease to be outstanding, at the time of such
cessation of Board service, with respect to any option shares in which the
Optionee is not otherwise at that time vested.
2. Should the Optionee die within six (6) months after
cessation of Board service, then any automatic option grant held by the Optionee
at the time of death may subsequently be exercised, for any or all of the option
shares in which the Optionee is vested at the time of his or her cessation of
Board service (less any vested option shares subsequently purchased by the
Optionee prior to death), by the personal representative
<PAGE>
of the Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution. Any such exercise must occur within twelve (12)
months after the date of the Optionee's death.
3. Should the Optionee die or become Permanent Disabled
while serving as a Board member, then the shares of Common Stock at the time
subject to each automatic option grant held by such Optionee under this Article
Three shall immediately vest in full, and the Optionee (or the representative of
the Optionee's estate or the person or persons to whom the option is transferred
upon the Optionee's death) shall have a twelve (12)-month period following the
date of the Optionee's cessation of Board service in which to exercise such
option for any or all of those vested shares of Common Stock.
4. In no event shall any automatic grant under this
Article Three remain exercisable after the expiration date of the ten (10)-year
option term. Upon the expiration of the applicable post-service exercise period
under subparagraph 1, 2 or 3 above or (if earlier) upon the expiration of the
ten (10)--year option term, the automatic grant shall terminate and cease to be
outstanding for any option shares in which the Optionee was vested at the time
of his or her cessation of Board service but which were not otherwise purchased
thereunder.
H. STOCKHOLDER RIGHTS. The holder of an automatic option grant
under this Article Three shall have none of the rights of a stockholder with
respect to any shares subject to such option until such individual shall have
exercised the option and paid the exercise price for the purchased shares.
I. REMAINING TERMS. The remaining terms and conditions of each
automatic option grant shall be as set forth in the form Non-statutory Stock
Option Agreement attached as Exhibit A.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option under this Article
Three but not otherwise vested shall automatically vest in full so that each
such option shall, immediately prior to the specified effective date for the
Corporate Transaction, become fully exercisable for all of the shares of Common
Stock at the time subject to that option and may be exercised for all or any
portion of such shares as fully-vested shares of Common Stock. Immediately
following the consummation of the Corporate Transaction, all automatic option
grants under this Article Three shall terminate and cease to be outstanding,
unless assumed by the successor corporation or its parent company.
B. In connection with any Change in Control of the Corporation,
the shares of Common Stock at the time subject to each outstanding option under
this Article Three but not otherwise vested shall automatically vest in full so
that each such option shall, immediately prior to the specified effective date
for the Change in Control, become fully exercisable for all of the shares of
Common Stock at the time subject to that option and may be exercised for all or
any portion of such shares as fully-vested shares of Common Stock. Each such
option shall remain fully exercisable for the option shares which vest in
connection with the Change in Control until the expiration or sooner termination
of the option term.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender each option held by him or
her under this Article Three to the Corporation. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the consummation of the Hostile Take-Over. Stockholder approval of
this March 1997 restatement of the Plan shall constitute pre-approval of each
option subsequently granted with a surrender provision and the subsequent
surrender of that option in accordance with the terms and provisions of this
Section III.C. No additional approval of the Plan Administrator or the Board
shall be required at the time of the actual option cancellation and cash
distribution.
D. The shares of Common Stock subject to each option surrendered
in connection with the Hostile Take-Over shall not be available for subsequent
issuance under this Plan.
E. The automatic option grants outstanding under this Article
Three shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares may be issued under the Stock Issuance Program through direct
and immediate purchases without any intervening stock option grants. The issued
shares shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement")
that complies with the terms and conditions of this Article Four.
A. CONSIDERATION.
1. Shares of Common Stock drawn from the Corporation's
authorized but unissued shares of Common Stock ("Newly Issued Shares") shall be
issued under the Stock Issuance Program for one or more of the following items
of consideration which the Plan Administrator may deem appropriate in each
individual instance:
(i) cash or cash equivalents (such as a personal
check or bank draft) paid the Corporation;
(ii) a promissory note payable to the
Corporation's order in one or more installments, which may be subject to
cancellation in whole or in part upon terms and conditions established by the
Plan Administrator; or
(iii) past services rendered to the Corporation or
any parent or subsidiary corporation.
2. The consideration for any Newly Issued Shares issued
under this Stock Issuance Program shall have a value determined by the Plan
Administrator to be not less than one-hundred percent (100%) of the Fair Market
Value of those shares at the time of issuance.
3. Shares of Common Stock reacquired by the Corporation
and held as treasury shares ("Treasury Shares") may be issued under the Stock
Issuance Program for such consideration (including one or more of the items of
consideration specified in subparagraph 1. above) as the Plan Administrator may
deem appropriate, whether such consideration is in an amount less than, equal
to, or greater than the Fair Market Value of the Treasury Shares at the time of
issuance. Treasury Shares may, in lieu of any cash consideration, be issued
subject to such vesting requirements tied to the Participant's period of future
Service or the Corporation's attainment of specified performance objectives as
the Plan Administrator may establish at the time of issuance.
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the absolute discretion of the Plan Administrator, be
fully and immediately vested upon issuance or may vest in one or more
installments over the Participant's period of Service. The elements of the
vesting schedule applicable to any unvested shares of Common Stock issued under
the Stock Issuance Program, namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be achieved by the Corporation,
(ii) the number of installments in which the
shares are to vest,
(iii) the interval or intervals (if any) which are
to lapse between installments, and
(iv) the effect which death, Permanent Disability
or other event designated by the Plan Administrator is to have upon the vesting
schedule, shall be determined by the Plan Administrator and incorporated into
the Issuance Agreement executed by the Corporation and the Participant at the
time such unvested shares are issued.
2. The Participant shall have full stockholder rights
with respect to any shares of Common Stock issued to him or her under the Plan,
whether or not his or her interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares. Any new, additional or different shares of
stock or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
his or her unvested shares by reason of any stock dividend, stock split,
reclassification of Common Stock or other similar change in the Corporation's
capital structure or by reason of any Corporate Transaction shall be issued,
subject to (i) the same vesting requirements applicable to his or her unvested
shares and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock under the Plan, then
those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further stockholder rights with
respect to those shares. To the
<PAGE>
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money promissory note), the Corporation shall repay to the Participant
the cash consideration paid for the surrendered shares and shall cancel the
unpaid principal balance of any outstanding purchase-money note of the
Participant attributable to such surrendered shares. The surrendered shares
may, at the Plan Administrator's discretion, be retained by the Corporation
as Treasury Shares or may be retired to authorized but unissued share status.
4. The Plan Administrator may in its discretion elect to
waive the surrender and cancellation of one or more unvested shares of Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. CORPORATE TRANSACTIONS/CHANGE IN CONTROL
A. Upon the occurrence of any Corporate Transaction, all unvested
shares of Common Stock at the time outstanding under the Stock Issuance Program
shall immediately vest in full, except to the extent the Plan Administrator
imposes limitations in the Issuance Agreement which preclude such accelerated
vesting in whole or in part.
B. The Plan Administrator shall have the discretionary authority,
exercisable either in advance of any actually-anticipated Change in Control or
at the time of an actual Change in Control, to provide for the immediate and
automatic vesting of one or more unvested shares outstanding under the Stock
Issuance Program at the time of such Change in Control. The Plan Administrator
shall also have full power and authority to condition any such accelerated
vesting upon the subsequent termination of the Participant's Service within a
specified period following the Change in Control.
III. TRANSFER RESTRICTIONS/SHARE ESCROW
A. Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing such unvested shares. To the extent an
escrow arrangement is utilized, the unvested shares and any securities or other
assets issued with respect to such shares (other than regular cash dividends)
shall be delivered in escrow to the Corporation to be held until the
Participant's interest in such shares (or other securities or assets) vests.
Alternatively, if the unvested shares are issued directly to the Participant,
the restrictive legend on the certificates for such shares shall read
substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND ARE
ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER RESTRICTIONS AND (II)
CANCELLATION OR REPURCHASE IN THE EVENT THE REGISTERED HOLDER (OR
HIS/HER PREDECESSOR IN INTEREST) CEASES TO REMAIN IN THE CORPORATION'S
SERVICE. SUCH TRANSFER RESTRICTIONS AND THE TERMS AND CONDITIONS OF
SUCH CANCELLATION OR REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE
AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER
PREDECESSOR IN INTEREST) DATED _____________, 199__, A COPY OF WHICH IS
ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."
B. The Participant shall have no right to transfer any unvested
shares of Common Stock issued to him or her under the Stock Issuance Program.
For purposes of this restriction, the term "transfer" shall include (without
limitation) any sale, pledge, assignment, encumbrance, gift, or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled, and
neither the Participant nor the proposed transferee shall have any rights with
respect to those shares. However, the Participant shall have the right to make a
gift of unvested shares acquired under the Stock Issuance Program to his or her
spouse or issue, including adopted children, or to a trust established for such
spouse or issue, provided the donee of such shares delivers to the Corporation a
written agreement to be bound by all the provisions of the Stock Issuance
Program and the Issuance Agreement applicable to the gifted shares.
<PAGE>
ARTICLE FIVE
MISCELLANEOUS
I. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may, in its discretion, assist any
Optionee or Participant (including an Optionee or Participant who is an officer
of the Corporation) in the exercise of one or more options granted to such
Optionee under the Discretionary Option Grant Program or the purchase of one or
more shares issued to such Participant under the Stock Issuance Program,
including the satisfaction of any Federal and State income and employment tax
obligations arising therefrom, by (i) authorizing the extension of a loan from
the Corporation to such Optionee or Participant or (ii) permitting the Optionee
or Participant to pay the option price or purchase price for the purchased
Common Stock in installments over a period of years. The terms of any loan or
installment method of payment (including the interest rate and terms of
repayment) shall be upon such terms as the Plan Administrator specifies in the
applicable option or issuance agreement or otherwise deems appropriate under the
circumstances. Loans or installment payments may be authorized with or without
security or collateral. However, the maximum credit available to the Optionee or
Participant may not exceed the option or purchase price of the acquired shares
(less the par value of such shares) plus any Federal and State income and
employment tax liability incurred by the Optionee or Participant in connection
with the acquisition of such shares.
B. The Plan Administrator may, in its absolute discretion,
determine that one or more loans extended under this financial assistance
program shall be subject to forgiveness by the Corporation in whole or in part
upon such terms and conditions as the Plan Administrator may deem appropriate.
II. AMENDMENT OF THE PLAN AND AWARDS
A. The Board has complete and exclusive power and authority to
amend or modify the Plan (or any component thereof) in any or all respects
whatsoever. However, no such amendment or modification shall adversely affect
rights and obligations with respect to options at the time outstanding under the
Plan, nor adversely affect the rights of any Participant with respect to Common
Stock issued under the Stock Issuance Program prior to such action, unless the
Optionee or Participant consents to such amendment. In addition, certain
amendments may require stockholder approval pursuant to applicable laws or
regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and (ii) shares of Common Stock may
be issued under the Stock Issuance Program, which are in both instances in
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under the Discretionary Option Grant
Program or the Stock Issuance Program are held in escrow until stockholder
approval is obtained for a sufficient increase in the number of shares available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess option grants or excess
share issuances are made, then (I) any unexercised excess options shall
terminate and cease to be exercisable and (II) the Corporation shall promptly
refund the purchase price paid for any excess shares actually issued under the
Plan and held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow.
III. TAX WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of stock options for such shares or the vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
State and local income tax and employment tax withholding requirements.
The Plan Administrator may, in its discretion and in accordance with
the provisions of this Section III of Article Five and such supplemental rules
as the Plan Administrator may from time to time adopt (including the applicable
safe-harbor provisions of SEC Rule 16b-3), provide any or all holders of
non-statutory options (other than the automatic grants made pursuant to Article
Three of the Plan) or unvested shares under the Plan with the right to use
shares of Common Stock in satisfaction of all or part of the Federal, State and
local income and employment withholding taxes to which such holders may become
subject in connection with the exercise of their options or the vesting of
their shares (the "Withholding Taxes"). Such right may be provided to any such
holder in either or both of the following formats:
(a) STOCK WITHHOLDING: The holder of the non-statutory
option or unvested shares may be provided with the election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such non-statutory option or the vesting of such shares, a
portion of those shares with an
<PAGE>
aggregate Fair Market Value equal to the percentage of the applicable
Withholding Taxes (not to exceed one hundred percent (100%)) designated
by the holder.
(b) STOCK DELIVERY: The Plan Administrator may, in its
discretion, provide the holder of the non-statutory option or the unvested
shares with the election to deliver to the Corporation, at the time the
non-statutory option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in connection
with the option exercise or share vesting triggering the Withholding Taxes)
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes incurred in connection with such option exercise or share vesting (not
to exceed one hundred percent (100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was adopted by the Board on July 23, 1993, and was
approved by the stockholders on the same date. The Plan became effective on
September 29, 1993, the date on which the shares of the Corporation's Common
Stock were first registered under the 1934 Act. No further option grants or
stock issuances shall be made under the Predecessor Plans from and after the
Effective Date.
B. Each stock option grant outstanding under the Predecessor
Plans immediately prior to the Effective Date of the Discretionary Option Grant
Program shall be incorporated into this Plan and treated as an outstanding
option under this Plan, but each such option shall continue to be governed
solely by the terms and conditions of the instrument evidencing such grant, and
nothing in this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such options with respect to their acquisition
of shares of Common Stock thereunder. Each unvested share of Common Stock
outstanding under the Predecessor Plans on the Effective Date of the Stock
Issuance Program shall continue to be governed solely by the terms and
conditions of the instrument evidencing such share issuance, and nothing in
this Plan shall be deemed to affect or otherwise modify the rights or
obligations of the holder of such unvested shares.
C. The option/vesting acceleration provisions of Section III of
Article Two and Section II of Article Four relating to Corporate Transactions
and Changes in Control may, in the Plan Administrator's discretion, be extended
to one or more stock options or unvested share issuances which are outstanding
under the Predecessor Plans on the Effective Date of the Discretionary Option
Grant and Stock Issuance Programs but which do not otherwise provide for such
acceleration.
D. On March 16, 1995, the Board adopted an amendment to the Plan
which (i) increased the number of shares of Common Stock available for issuance
under the Plan by an additional 600,000 shares (as adjusted for the May 1995
stock split), (ii) provided for an automatic annual increase to the existing
share reserve on the first trading day in each of the next five (5) fiscal
years, beginning with the 1996 fiscal year and continuing through fiscal year
2000, equal to 1.4% of the total number of shares of Common Stock outstanding
on the last trading day of the fiscal year immediately preceding the fiscal
year of each such share increase and (iii) imposed certain limitations required
under applicable Federal tax laws with respect to Incentive Option grants. The
amendment was approved by the stockholders at the 1995 Annual Meeting on May
17, 1995.
E. On March 21, 1996, the Board adopted an amendment to the Plan
which (i) increased the number of shares of Common Stock available for issuance
under the Plan by an additional 600,000 shares, (ii) increased the limit on the
maximum number of shares of Common Stock issuable under the 1993 Plan prior to
the required cessation of further Incentive Option grants to 3,780,000 shares
plus an additional increase of 277,000 shares per fiscal year over each of the
next four (4) fiscal years, beginning with the 1997 fiscal year, (iii) revised
the Automatic Option Grant Program to eliminate the special one-time option
grant for 28,800 shares of Common Stock to each newly-elected or newly-
appointed non-employee Board member and implement a new option grant program
pursuant to which all eligible non-employee Board members will receive a
series of automatic option grants over their period of continued Board service.
The amendment was approved by the stockholders at the 1996 Annual Meeting.
F. On March 18, 1997, the Board adopted a series of amendments
to the Plan which (i) increased the number of shares of Common Stock reserved
for issuance over the term of the Plan by an additional 450,000 shares, (ii)
rendered all non-employee Board members eligible to receive option grants and
direct stock issuances under the Discretionary Option Grant and Stock Issuance
Programs, (iii) allowed unvested shares issued under the Plan and subsequently
repurchased by the Corporation at the option exercise price or direct issue
price paid per share to be reissued under the Plan, (iv) eliminated the plan
limitation which precluded the grant of additional Incentive Options once the
number of shares of Common Stock issued under the Plan, whether as vested or
unvested shares, exceeded a certain level, (v) removed certain restrictions on
the eligibility of non-employee Board members to serve as Plan Administrator,
and (vi) effected a series of additional changes to the provisions of the Plan
(including the stockholder approval requirements) in order to take advantage
of the recent amendments to Rule 16b-3 of the 1934 Act which exempts certain
officer and director transactions under the Plan from the short-
<PAGE>
swing liability provisions of the federal securities laws. The March 18, 1997
amendments were approved by the stockholders at the 1997 Annual Meeting.
G. The Plan shall terminate upon the EARLIER of (i) June 30,
2003 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued as vested shares or cancelled pursuant to the exercise
of stock appreciation or other cash-out rights granted under the Plan. If the
date of the plan termination is determined under clause (i) above, then all
option grants and unvested share issuances outstanding on such date shall
thereafter continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants or issuances.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to option grants or share issuances under the Plan shall be used for
general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option
under the Plan, the issuance of any shares under the Stock Issuance Program,
and the issuance of Common Stock upon the exercise or surrender of the option
grants made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued
or delivered under this Plan unless and until there shall have been
compliance with all applicable requirements of Federal and State securities
laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any securities exchange (or the Nasdaq
National Market, if applicable) on which shares of the Common Stock are then
listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the Plan, nor
any action taken by the Plan Administrator hereunder, nor any provision of the
Plan shall be construed so as to grant any individual the right to remain in
the employ or service of the Corporation (or any parent or subsidiary
corporation) for any period of specific duration, and the Corporation (or any
parent or subsidiary corporation retaining the services of such individual)
may terminate such individual's employment or service at any time and for
any reason, with or without cause.
VIII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any Optionee
or Participant.
B. The provisions of the Plan relating to the exercise of
options and the vesting of shares shall be governed by the laws of the State of
California, as such laws are applied to contracts entered into and performed in
such State.
C. The provisions of the Plan shall inure to the benefit of, and
be binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Participants and Optionees and the
legal representatives, heirs or legatees of their respective estates.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 59,895
<SECURITIES> 86,989
<RECEIVABLES> 21,390
<ALLOWANCES> 2,257
<INVENTORY> 27,576
<CURRENT-ASSETS> 198,008
<PP&E> 47,953
<DEPRECIATION> 26,528
<TOTAL-ASSETS> 238,492
<CURRENT-LIABILITIES> 33,628
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 204,526
<TOTAL-LIABILITY-AND-EQUITY> 238,492
<SALES> 46,071
<TOTAL-REVENUES> 55,063
<CGS> 29,060
<TOTAL-COSTS> 35,047
<OTHER-EXPENSES> 13,302
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> (3,603)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,603)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
