10-K 1 a2041849z10-k.txt 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark one) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ ------------------------ COMMISSION FILE NUMBER: 0-22248 ULTRATECH STEPPER, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3169580 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3050 ZANKER ROAD SAN JOSE, CALIFORNIA 95134 (Address of principal executive offices) (Zip Code)
(408) 321-8835 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001 PAR VALUE PER SHARE; PREFERRED STOCK PURCHASE RIGHTS ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by non-affiliates based on the closing sale price of the Common Stock on March 20, 2001, as reported on the Nasdaq National Market was approximately $346,000,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 20, 2001, the Registrant had 22,493,876 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 7, 2001 are incorporated by reference into Part III of this Annual Report on Form 10-K. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I ITEM 1 BUSINESS This Annual Report on Form 10-K may contain, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. The Company's actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below under "Additional Risk Factors", as well as those discussed elsewhere in this Annual Report on Form 10-K. THE COMPANY Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops, manufactures and markets photolithography equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes, thin film magnetic recording devices and microsystems components. The Company supplies step-and-repeat systems based on one-to-one ("1X") and reduction optical technology to customers located throughout North America, Europe, Japan and the rest of Asia. Ultratech believes that its 1X steppers offer cost and certain performance advantages, as compared with competitors' reduction steppers, to semiconductor device manufacturers for applications involving line geometries of 0.65 microns or greater ("noncritical feature sizes") and to thin film head manufacturers. The Company's 1X steppers do not currently address applications involving line geometries of less than 0.65 microns ("critical feature sizes"). Advanced packaging for integrated circuits, specifically "bump or wafer level CSP" techniques, requires lithography steps in the fabrication process. Ultratech has developed and has commenced shipment of its Saturn Spectrum 3 stepper, with specific design modifications to address the requirements of this market segment. Additionally, the Company has developed two new "bump specific lithography tools", the Saturn Spectrum 300 and the Prisma-ghi in order to broaden its advanced packaging market base into 300mm bumping and R&D packaging activities. The Company's 1X steppers are also used as replacements for scanners in existing fabrication facilities to enable semiconductor manufacturers to extend the useful life and increase the capabilities of their facilities. In addition, the Company's steppers are used to manufacture high volume, low cost semiconductors used in a variety of applications such as telecommunications, automotive control systems, power systems and consumer electronics. Ultratech also supplies 1X photolithography systems to thin film head manufacturers and believes that its steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, the Company supplies 1X photolithography equipment to the microsystems market, where certain technical features such as high resolution at g-line wavelengths and depth of focus may offer advantages over competing tools. On June 11, 1998, the Company completed the acquisition of substantially all of the assets and the assumption of certain liabilities of Integrated Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep ultra-violet (DUV) reduction lithography systems for approximately $19.2 million in cash, $2.6 million in transaction costs and the assumption of certain liabilities. With this acquisition, the Company expanded its photolithography stepper product line to include reduction steppers. The reduction steppers complement the 1X steppers for use in the integrated circuit, thin film head and microsystems markets, as their resolution requirements go below 0.65 microns. The Company's products and markets are more fully described, below. BACKGROUND The fabrication of devices such as integrated circuits ("semiconductors" or "ICs") and thin film magnetic recording heads ("thin film heads" or "TFHs") requires a large number of complex processing steps, including deposition, photolithography and etching. Deposition is a process in which a layer of either electrically insulating or electrically conductive material is deposited on the surface of a 2 wafer. The photolithographic imaging process imprints device features on a light sensitive polymer photoresist. After development of the photoresist, etching selectively removes material from areas not covered by the imprinted pattern. Photolithography is one of the most critical and expensive steps in IC and TFH device manufacturing. According to the Semiconductor Industry Association, a significant portion of the cost of processing silicon wafers in the fabrication of ICs is related to photolithography. Photolithography exposure equipment is used to image device features on the surface of thin deposition films by selectively exposing a light sensitive polymer photoresist coated on the wafer surface, through a photomask containing the master image of a particular device layer. Exposure of each process layer imprints a different set of features on the device. These device layers must be properly aligned to previously defined layers before imaging takes place, so that structures formed on the wafers are correctly placed, one on top of the other, in order to ensure a functioning device. Since the introduction of the earliest commercial photolithography tools for IC manufacturing in the early 1960s, a number of tools have been introduced to enable manufacturers to produce increasingly complex devices that incorporate progressively finer line widths. In the late 1970s, photolithography tools known as step-and-repeat projection aligners, or steppers, were introduced. Unlike prior tools, such as contact printers which required the photomask to physically contact the wafer in order to transfer the entire pattern during a single exposure, and scanners, which transferred the device image by scanning a narrow slit of light across the entire photomask and wafer in a single, continuous motion, steppers expose only a small square or rectangular portion of the wafer in a single exposure, then move or "step" to an adjacent site to repeat the exposure. This stepping process is repeated as often as necessary until the entire wafer has been exposed. By imaging a small area, steppers are able to achieve finer resolution and better alignment between the multiple device layers and higher yield and productivity in certain devices than possible with earlier tools. Since the late 1980s, 1X steppers have become a critical tool for the fabrication of thin film heads because of their performance characteristics. Thin film heads are devices that form the small read/write component in the most advanced disk drives and have enabled disk drives to increase in speed and memory capacity and perform more efficiently. Steppers are currently the predominant lithography tools used in the manufacture of devices such as ICs and TFHs. The Company believes that manufacturers of leading-edge TFH devices are relying increasingly on reduction steppers to address the more critical feature sizes for these devices in their front-end applications. According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market research firm, the two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely used steppers, and one-to-one steppers. Reduction steppers, which typically have reduction ratios of four or five-to-one, are tools in which the photomask pattern containing the design is typically four or five times larger than the device pattern that is to be exposed on the wafer surface. Additionally, step-and-scan systems have been introduced recently in order to address device sizes of .18 micron and below. In contrast to steppers, which expose the entire field in a single exposure, step-and-scan systems scan across the field until the entire field is exposed. The principal advantage of reduction steppers and step-and-scan systems is that they may be used in manufacturing steps requiring critical feature sizes and are therefore necessary for manufacturing advanced ICs. One-to-one steppers, on the other hand, are tools in which the photomask containing the design is the same size as the device pattern that is exposed on the wafer surface. Current one-to-one steppers, unlike most current reduction steppers, are based on different technology which incorporates both reflective and refractive elements in its optical lens imaging system that, although highly sophisticated in design, is much simpler than a current reduction stepper's lens imaging system which incorporates only refractive elements. As a result, current 1X steppers are generally less expensive than current reduction steppers required for critical feature sizes. Because of their optical design, 1X steppers typically are also able to deliver greater energy to the wafer surface, which generally results in 3 higher throughput than is achievable with most reduction steppers. One-to-one steppers, however, are currently limited to use in manufacturing steps involving noncritical feature sizes. Accordingly, the Company believes that sales of these systems are highly dependent upon capacity expansions by its customers. In the past, manufacturers of ICs and similar devices purchased capital equipment based principally on technological capabilities. In view of the significant capital expenditures required to construct, equip and maintain fabrication facilities, relatively short product cycles and manufacturers' increasing concern for overall fabrication costs, the Company believes that manufacturers of ICs and thin film heads increasingly are focusing on reducing their total cost to manufacture a device. A major component of this cost is the cost of ownership of the equipment used for a particular application in a fabrication facility. Cost of ownership is measured in terms of the costs associated with the acquisition of equipment as well as factors such as throughput, yield, up-time, service, labor overhead, maintenance, and various other costs of owning and using the equipment. With increasing importance being placed upon a system's overall cost of ownership, in many cases the system with the most technologically advanced capabilities will not necessarily be the manufacturing system of choice. As part of the focus on cost reduction, the Company believes that device manufacturers are attempting to extend the useful life and enhance the production capabilities of fabrication facilities by selecting equipment that can replace existing tools while offering better performance in a cost-effective manner. PRODUCTS The Company currently offers three different series of 1X systems for use in the semiconductor fabrication process: the model 1500 Series, which addresses the markets for scanner replacement, high volume/low cost semiconductor fabrication and R&D packaging activities; the Saturn Wafer Stepper-Registered Trademark- Family, which addresses the market for mix-and-match in advanced semiconductor fabrication and bump processing for flip chips; and the Titan Wafer Stepper-Registered Trademark-, which addresses the markets for scanner replacement and high volume/low cost semiconductor fabrication. These steppers currently offer feature size capabilities ranging from 2.0 microns to 0.65 microns and typically range in price from $800,000 to $3.2 million. The model 1500 Series and the Titan Wafer Stepper offer g- and h-line illumination specifications. The Saturn Wafer Stepper Family features an i-line illumination specification that is designed to make them compatible with advanced i-line reduction steppers. In bump processing, the Company offers its Saturn Spectrum 3, Saturn Spectrum 3e, Prisma-ghi and the Saturn Spectrum 300. The Saturn Spectrum 3e was developed for high volume bump and wafer level CSP manufacturing. The Prisma-ghi was developed as a lower cost, low volume/R&D bump stepper. The Saturn Spectrum 300 is the Company's first product offering to support 300mm bump manufacturing. All of these bump steppers provide broadband (g, h and i-line) exposure, and are used in conjunction with electroplating to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. This pattern can be placed in a tight array across the entire die, as opposed to the conventional method of wire bonding which is limited to the periphery of the die. This allows manufacturers to shrink the die size. The flip chip device can then be placed in a small outline package or directly on a printed circuit board. The Saturn and Titan widefield systems have a unique D-shaped field that allows for a one-to-one field match with step-and-scan systems, or a two-to-one match with reduction steppers. The D-shaped field is designed to allow the semiconductor manufacturer to optimize overlay and throughput for its non-critical mix-and-match layers. The Company also offers a reduction stepper product line for selected semiconductor markets. These products include the XLS 200, XLS 248, XLS 193nm and XLS 157nm systems. The XLS 200 is an i-line reduction system with a minimum resolution of 0.35 microns, providing a high resolution i-line reduction stepper option for selected semiconductor markets. The XLS 248 is a DUV (248nm) reduction stepper providing a minimum resolution of 0.25 microns for selected semiconductor applications requiring sub-0.35 micron resolution. The XLS 193nm (small field) and XLS 157nm (small 4 and mid field) systems are DUV tools used for advanced research and development semiconductor materials and processes. The XLS 9800 and XLS 9900 provide i-line and DUV wavelengths capabilities and are designed to meet TFH customers' requirements for shrinking geometries on their critical layers. In addition, the Company provides a 1700 Series stepper capable of patterning features on rowbars utilizing an alternate alignment system (Machine Vision System, or "MVS"). The model 1700 Series steppers are used to expose the Air Bearing Surface (ABS) pattern on these rowbars. The Company's TFH steppers offer feature size capabilities ranging from 2.0 to 0.25 microns and typically range in price from $800,000 to $3.6 million. The Company also offers photolithography equipment for use in the microsystems market. Microsystems manufacturing combines electronics with mechanics in small devices for detection and control of a wide variety of parameters. Examples include accelerometers used to activate air bags in automobiles, and membrane pressure sensors used in industrial control systems. These micromachined devices are manufactured on silicon substrates using photolithographic techniques similar to those used for manufacturing semiconductors and thin film head devices. In 2000, the Company introduced and shipped a new product into the microsystems market based on the 1500 Series steppers, incorporating Dual Side Alignment (DSA) capability for applications requiring lithography on both sides of a wafer. The Company believes that its new 1600DSA stepper enhances the capabilities of the 1500 Series steppers by offering the first stepper with Dual Side Alignment capability, providing customers with a 1X stepper solution to this special processing requirement. Additionally, the Company believes that its 1500 Series steppers and the Saturn Wafer Stepper Family offer resolution and depth of focus advantages over alternative technologies, to the manufacturers of microsystems. The Company also sells upgrades and refurbishments to certain older product lines in its installed base. These refurbished older systems typically have a purchase price that is significantly lower than the purchase price for the Company's new systems. Features of the Company's current stepper systems are set forth below:
MINIMUM FEATURE PRODUCT LINE WAVELENGTH SIZE (NM) ------------ -------------- ---------------- SEMICONDUCTOR/MICROSYSTEMS: Model 1500 Series gh-line 0.8-1.0 1600DSA gh-line 1.0-2.0 Prisma-ghi ghi-line 4.0 Saturn Wafer Stepper i-line 0.65-1.0 Saturn Spectrum 3e ghi-line 2.0 Saturn Spectrum 300 ghi-line 2.0 Titan Wafer Stepper gh-line 0.75-1.2 Titan 300 Wafer Stepper gh-line 1.0-1.2 XLS (Reduction) Stepper Family: XLS 200 i-line 0.35 XLS 248 DUV (248 nm) 0.25 XLS 193nm DUV (193 nm) 0.16 XLS 157nm DUV (157 nm) 0.10 THIN-FILM HEAD: Model 1700 Series gh-line 1.0 Model 1900 gh-line 1.0 Reduction Steppers XLS 9800 i-line 0.35 XLS 9900 DUV (248nm) 0.25
5 RESEARCH, DEVELOPMENT AND ENGINEERING The semiconductor and microsystems (which includes thin film heads) industries are subject to rapid technological change and new product introductions and enhancements. The Company believes that continued and timely development and introduction of new and enhanced systems is essential for the Company to maintain its competitive position. The Company has made a substantial investment in the research and development of its core optical technology, which the Company believes is critical to its financial results. The Company intends to continue to develop its technology and to develop innovative products and product features to meet customer demands. Current engineering projects include: the continued research and development and process insertion for the Verdant rapid thermal annealing systems and technologies; continued development of the Company's 1X and reduction optical products, including the Company's 1X 300mm tool for bump processing and Company's XLS 157nm reduction stepper; and development of larger and more flexible optical systems. Other research and development efforts are currently focused on reliability improvement; manufacturing cost reduction; and performance enhancement and development of new features for existing systems, both for inclusion in the Company's systems and to meet specific customer order requirements. These research and development efforts are undertaken, principally, by the Company's research, development and engineering organizations and costs are generally expensed as incurred. Other operating groups within the Company support the above referenced research, development and engineering efforts, and the associated costs are charged to these organizations as incurred. The Company also has programs devoted to the development of new photolithography systems, including new generations of photolithography systems for existing and new markets, enhancements and extensions of existing photolithography systems for existing and new markets and custom engineering for specific customers. The Company works with many customers to develop technology required to manufacture advanced devices or to lower the customer's cost of ownership. The Company maintains an engineering department that supports customer design of 1X stepper photomasks for both test and production purposes and an applications engineering group, consisting of highly qualified engineers located throughout the Company's markets that assist customers in optimizing the use of the Company's systems. The Company has historically devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts in the future. As of December 31, 2000, the Company had approximately 88 full-time employees engaged in research, development, and engineering. For 2000, 1999 and 1998, total research, development, and engineering expenses were approximately $26.8 million, $27.7 million and $26.7 million, respectively, and represented 18.3%, 24.5% and 32.7% of the Company's net sales, respectively. SALES AND SERVICE The Company markets and sells its products in North America, Europe and Japan principally through its direct sales organization. The Company sells its products in the Asia/Pacific region, excluding Japan, primarily through outside sales organizations. In January 2001, the Company terminated its relationship with its Taiwanese distributor and is in the process of establishing a direct sales force in Taiwan. (See "Additional Risk Factors: International Sales; Japanese Market"). Ultratech's service personnel are based throughout the United States, Europe, Japan and the rest of Asia. The Company currently has four sales and service offices in the United States outside of California, five sales and/or service offices in the United Kingdom, Japan, Korea, Taiwan and Philippines, and personnel in Thailand, to service equipment and support customers in such locations. As part of its customer service, the Company maintains an on-line computerized network of its parts inventory in the United States, Europe and Japan. 6 The Company believes that as semiconductor and thin film head manufacturers produce increasingly complex devices, they will require an increased level of support. Reliability, performance, yield, cost, uptime and mean time between failure are increasingly important factors by which customers evaluate potential suppliers of photolithography equipment. The Company believes that the strength of its worldwide service and support organization is an important factor in its ability to sell its systems, maintain customer loyalty and reduce the maintenance costs of its systems. In addition, the Company believes that working with its suppliers and customers is necessary to ensure that the Company's systems are cost effective, technically advanced and designed to satisfy customer requirements. The Company supports its customers with field service, technical service engineers and training programs. The Company provides its customers with comprehensive support and service before, during and after delivery of its systems. To support the sales process and to enhance customer relationships, the Company works closely with prospective customers to develop hardware and software test specifications and benchmarks, and often designs customized applications to enable prospective customers to evaluate the Company's equipment for their specific needs. Prior to shipment, Ultratech's support personnel typically assist the customer in site preparation and inspection, and typically provide customers with training at the Company's facilities or at the customer's location. The Company currently offers to its customers various courses of instruction on the Company's systems, including instructions in system hardware and software tools for optimizing the Company's systems. The Company's customer training program also includes instructions in the maintenance of the Company's systems. The Company's field support personnel work with the customers' employees to install the system and demonstrate system readiness. Technical support is also available through on-site Company personnel. In general, the Company warrants its new systems against defects in design, materials and workmanship for one year. The Company offers its customers additional support after the warranty period in the form of maintenance contracts for specified time periods. Such contracts include various options such as priority response, planned preventive maintenance, scheduled one-on-one training, daily on-site support, and monthly system and performance analysis. MANUFACTURING The Company performs all of its manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 38,000 square feet. These facilities are located in California and Massachusetts. Performing manufacturing operations in California exposes the Company to a higher risk of natural disasters, including earthquake and flood. Additionally, the recent electrical power shortage exposes the Company to a higher risk of production and work stoppages as well as increased utilities costs. The Company is not insured against natural disasters and power shortages and the occurrence of such event would materially adversely impact the Company's results of operations. The Company's manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. The Company is relying increasingly on outside vendors and subcontractors to manufacture certain components and subassemblies. This strategy has enabled the Company to increase its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the characteristics of its customers' existing lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses are designed to the Company's specifications and tested by 7 the supplier. Prior to shipment of the Company's systems, the customer's engineers may perform acceptance tests at Ultratech's facility. After passing the acceptance test, the system is packaged in the clean room environment and prepared for shipment. The Company procures many of its critical systems' components, subassemblies and services from a single outside supplier or a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. 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 could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components 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. The Company maintains a company-wide quality program. The intent of the program is to provide continuous improvement in the Company's steppers and services to meet customer requirements. The Company trains all of its employees in basic quality skills and regularly participates in quality sharing meetings with other equipment manufacturers and customer quality audits of procedures and personnel. The Company's 1X operation achieved ISO 9001 certification in 1996 and ISO 14001:1996 Certification in March 2001, and has maintained these certifications uninterrupted through the date of this report. COMPETITION 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, semiconductor packaging or thin film head production line. The Company believes that once a device manufacturer or packaging subcontractor 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 Inc.'s ("SVG") Micralign products, all of which have substantially greater financial, marketing 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 Company's XLS reduction stepper product line competes directly with advanced reduction steppers offered by Canon, Nikon and ASML. With respect to the semiconductor packaging market, the Company receives intense competition from various proximity aligner companies such as Suss Microtec AG (Karl Suss). 8 Current thin film head front-end production involves manufacturing steps that require critical feature sizes. Although the reduction stepper product lines address critical feature sizes, additional development of these product lines may be necessary to fully address the unique requirements of thin film head manufacturing. Additionally, ASML has entered the low-cost lithography market. 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 compete with widefield steppers, such as the Company's Saturn and Titan steppers, for advanced mix-and-match applications. In addition, the Company believes that the high cost of developing new lithography tools has increasingly caused its competitors to collaborate with customers and other parties in various areas such as research and development, manufacturing and marketing, or to acquire other competitors, 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 in certain of the Company's markets, resulting in lower prices and margins. 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 integrated circuit manufacturers have a significant share of the worldwide market for certain types of ICs for which the Company's systems are used. 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. Although the Company has experienced recent success in its introduction of its Saturn Spectrum 3 into the Japanese marketplace, to date the Company has not established itself as a major competitor in the Japanese equipment market and there can be no assurance that the Company will be able to achieve significant sales to Japanese manufacturers in the future. (See "International Sales; Japanese Market"). INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that any success will depend more upon the innovation, technological expertise and marketing abilities of its employees. Nevertheless, the Company has a policy of seeking patents when appropriate on inventions resulting from its ongoing research and development and manufacturing activities. The Company owns various United States and foreign patents, which expire on dates ranging from March 2001 to December 2018, 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 9 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. Additionally, the Company presently has several agreements in force to license certain of its technologies. Challenges or invalidation to patents relative to those technologies would expose the Company to the risk of forfeiture of revenues and further risk of litigation. On February 29, 2000, in the U.S. District Court of Virginia, Ultratech filed patent infringement lawsuits against Nikon, Canon and ASM Lithography. In April of 2000, the Company reached settlement with Nikon Corporation. The litigation against Canon and ASM Lithography is ongoing. In conjunction with this litigation, Canon has filed a counter-claim against the Company alleging infringement of its technologies. The Company is in the process of reviewing this claim but believes that it is without merit and that it will not have a material adverse impact on the results of operations or financial condition of 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 (with the exception of the Canon counter-claim), 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 these 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 (with the exception of the Canon counter-claim), there can be no assurance that infringement claims by third parties or claims for indemnification resulting from infringement claims in the future will not be asserted, or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, the Company may seek to obtain a license under the third party's intellectual property rights. There can be no assurance, however, that a license will be available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of any litigation. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's systems. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or 10 future regulations could result in substantial fines being imposed on the Company, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities. CUSTOMERS, APPLICATIONS AND MARKETS The Company sells its systems to semiconductor, advanced packaging, microsystems and thin film head manufacturers located throughout North America, Europe, Japan and the rest of Asia. Semiconductor manufacturers have purchased the model 1500 Series steppers, the Saturn Wafer Stepper, the Saturn Spectrum 3 wafer stepper, the Titan Wafer Stepper and the XLS product family for the fabrication and packaging of microprocessors, microcontrollers, DRAMs, ASICs and other devices. Such systems are used in mix-and-match environments with other lithography tools, as replacements for scanners and contact printers, in start-up fabrication facilities, in packaging for ultrathin and flip chip applications and for high volume, low cost noncritical feature size semiconductor production. The Company's reduction stepper product line, acquired from ISI, will continue to address selected semiconductor markets. The Company believes that thin film head manufacturers have purchased the model 1700 Series steppers due to their throughput and overall cost of ownership. The XLS 9800, first introduced in 1998, is an i-line reduction stepper designed specifically for the thin film head market. The XLS 9900, a DUV reduction stepper, is also offered to manufacturers of leading-edge TFH devices. The Company believes that manufacturers of microsystems have purchased the model 1500 Series steppers and Saturn/Titan wafer stepper families because of their high throughput and flexible field size advantages along with cost-effective, submicron imaging capabilities. Historically, the Company has sold a substantial portion of its systems to a limited number of customers. In 2000, one customer accounted for approximately 10% of total net sales. In 1999, no single customer accounted for 10% or more of the Company's net sales. Sales to one customer accounted for approximately 25% of total net sales in 1998. The Company expects that sales to a 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, semiconductor packaging 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, the semiconductor and thin film head industries and the economy in general, of which there can be no assurance. (See "Additional Risk Factors: Cyclicality of Semiconductor, Semiconductor Packaging 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 in significant concentrations of accounts receivable and leases receivable. These significant and concentrated receivables expose the Company to additional risks, including the risk of default by one or more customers representing a significant portion of the Company's total receivables. If the Company were required to take additional lease and accounts receivable reserves its business, financial condition and results of operations would be materially adversely affected. 11 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. Additionally, the Company is presently receiving orders for systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers' capacity scheduling requirements. In order to maintain or exceed the Company's present level of net sales, the Company is dependent upon obtaining orders for systems that will ship and be accepted in the current period. There can be no assurance that the Company will be able to obtain those orders. For these and other reasons, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject the Company to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which the Company has little or no control. BACKLOG The Company schedules production of its systems based upon order backlog, informal customer commitments and general economic forecasts for its targeted markets. The Company includes in its backlog all customer orders for its systems for which it has accepted purchase order numbers and assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades. All orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of orders received for systems to be shipped in the same quarter in which the order is received, possible changes in system delivery schedules, cancellations of orders and potential delays in system shipments, the Company's backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2000, the Company's backlog was approximately $106.8 million, including $15.7 million of systems shipped but not yet installed and accepted. As of December 31, 1999, the Company's backlog, as restated to reflect the impact of SAB 101 (see "Changes to Financial Accounting Standard May Affect the Company's Reported Results of Operations"), was approximately $65.4 million, including $37.6 million of systems shipped but not yet installed and accepted. The Company believes that demand for semiconductors and semiconductor equipment may currently be experiencing a cyclical downturn. As a result, the Company may experience lower order booking rates in the near term, relative to those achieved in 2000, and may experience an increased incidence of order deferrals, rescheduling and cancellations. Fewer net bookings would result in lower net sales and gross margin, which would materially adversely impact the Company's business and results of operations. EMPLOYEES At December 31, 2000, the Company had approximately 516 full-time employees, including 88 engaged in research, development, and engineering, 46 in sales and marketing, 166 in customer service and support, 132 in manufacturing and 84 in general administration and finance. The Company believes any future success, should it occur, would depend, in large part, on its ability to attract and retain highly skilled employees. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its relationships with its employees to be good. ADDITIONAL RISK FACTORS CYCLICALITY OF SEMICONDUCTOR, SEMICONDUCTOR PACKAGING AND THIN FILM HEAD INDUSTRIES The Company's business depends in significant part upon capital expenditures by manufacturers of semiconductors and microsystems, including thin film head magnetic recording devices, which in turn 12 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 and semiconductor packaging will also be subject to similar fluctuations. The Company believes that demand for semiconductors and semiconductor equipment may currently be undergoing such a cyclical downturn. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current or prior level of sales. The Company attempts to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging and microsystems, as well as diversifying into new markets such as photolithography for optical networking. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, such as may be occurring in the semiconductor and thin film head markets, the Company's net sales and operating results are materially adversely affected. During 2000, 1999 and 1998, approximately 18%, 30% and 50%, respectively, of the Company's net sales were derived from sales to microsystems manufacturers, including thin film head manufacturers. The Company believes the TFH market is currently in a state of over-capacity and expects this situation to last for at least the next several quarters. This has and will continue to result in lower sales and delays or deferrals of customer orders from these industries, which will continue to materially adversely affect the Company's business, financial condition and results of operations in the near term. Additionally, the Company is experiencing increased competition in this market from Nikon, Canon and ASML. The Company's business and operating results would be materially adversely affected by continued downturns or slowdowns in TFH market or by loss of market share. DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS Currently, the Company is devoting significant resources to the development, introduction and commercialization of its Verdant laser thermal processing system and its advanced XLS 157nm reduction stepper, and to the volume production for its Saturn Spectrum 3 wafer stepper. During 2001, the Company will continue to develop these products and will continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing and general and administrative costs in order to further develop, produce 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 of demonstration systems and facilities, 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. RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The semiconductor, semiconductor packaging and microsystems 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 13 efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. 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 or 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. 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. SOLE OR LIMITED SOURCES OF SUPPLY The Company is relying increasingly on outside vendors and subcontractors to manufacture certain components and subassemblies. This strategy has enabled the Company to increase its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the characteristics of its customers' existing lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses are designed to the Company's specifications and tested by the supplier. Prior to shipment of the Company's systems, the customer's engineers may perform acceptance tests at Ultratech's facility. After passing the acceptance test, the system is packaged in the clean room environment and prepared for shipment. 14 In addition to glass, the Company procures many of its other critical systems' components, subassemblies and services from a single outside supplier or a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. 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 could result in a significant adverse impact on the Company's ability to manufacture its systems. This, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components 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. INTERNATIONAL SALES; JAPANESE MARKET International net sales accounted for approximately 54%, 53% and 47% of total net sales for the years 2000, 1999 and 1998, respectively. The Company anticipates that international sales, which typically have lower gross margins than domestic sales, principally due to increased competition and higher field service and support costs, will continue to account for a significant portion of total net sales and may increase as a percentage of total net sales in the near-term. As a result, a significant and growing portion of the Company's net sales will continue to be subject to certain risks, including dependence on outside sales representative organizations; transitions to direct sales organizations from outside sales representative organizations, such as the Company is currently undertaking in Taiwan (see "Sales and Service"); unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences. Although the Company generally transacts its international sales in U.S. dollars, international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products and may further impact the purchasing ability of its international customers. In Japan, however, the Company has commenced direct sales operations and orders are often 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 changes to 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. 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 15 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, particularly in the San Francisco Bay Area where the Company maintains its headquarters and principal operations, 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. CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED RESULTS OF OPERATIONS The Company prepares its financial statements to conform with generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on the Company's reported results and may even affect its reporting of transactions completed before a change is announced. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in Financial Statements." The Company implemented the provisions of SAB 101 effective January 1, 2000. The Company previously recognized revenue from the sales of its products generally upon shipment, which usually preceded installation and final customer acceptance, provided that final customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the contractual obligation for installation has been satisfied, or when installation is substantially complete, and customer acceptance provisions have lapsed, provided collection of the related receivable are probable. The Company believes the change in accounting principle is preferable based on guidance provided in SAB 101. The cumulative effect of this change in accounting principle, $18,883,000 (or $0.89 per share, basic and diluted) was reported as a charge to operations in the quarter ended March 31, 2000. The cumulative effect of the change in accounting principle includes system revenue, cost of sales and certain expenses, including warranty and commission expenses, which were recognized when both installation and customer acceptance provisions were satisfied, subsequent to January 1, 2000. Accounting policies affecting many other aspects of our business, including rules relating to derivatives, financial instruments, purchase and pooling-of-interests accounting for business combinations, revenue recognition, in-process research and development charges, employee stock purchase plans and stock option grants, have recently been revised or are under review. Changes to those rules or the questioning of current practices may have a material adverse effect on the Company's reported financial results or on the way it conducts business. In addition, the Company's preparation of financial statements in accordance with GAAP requires that it make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to the Company's estimates and could impact its future operating results. EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation, equity incentive plans, Shareholder Rights Plan, licensing agreements, Bylaws and Delaware law may discourage certain transactions involving a change in control of the Company. In addition to the foregoing, the Company's classified board of directors, the shareholdings of the Company's officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval 16 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, a shortfall in revenue or earnings, changes in analysts' expectations, 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, 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 and semiconductor capital equipment 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. Among other determinants, the market price of the Company's stock has a major bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining the Company's net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a material dilutive effect on the Company's net income (loss) per share (diluted). CALIFORNIA ENERGY CRISIS The Company's headquarters and principal operations are located in the San Francisco Bay Area of California. California has recently found itself in a utility crisis caused, in part, by a lack of affordable power sources and the financial instability of several of its primary providers. The San Francisco Bay Area has undergone several periods of "rolling blackouts", a technique used by the Company's power provider to conserve its resources. The Company's operations have been temporarily halted on at least one occasion as a result of these conservation measures. Additionally, the Company has recently been notified of, and is presently experiencing, significantly higher utility rates. Additional suspensions of the Company's operations or increases in utility rates could result in materially higher costs and lost revenues, either of which would materially adversely impact the Company's business, financial condition and results of operations. ITEM 2. PROPERTIES The Company maintains its headquarters and manufacturing operations in San Jose, California in three leased facilities, totaling approximately 194,000 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development, and engineering. Additionally, the company leases approximately 65,000 square feet in Wilmington, Massachusetts for its reduction lithography product lines, which contain manufacturing, research, and development, engineering and general administration. The leases for these facilities expire at various dates from February 2002 to March 2010. The Company also leases four sales and support offices in the United States in Phoenix, Arizona; Allentown, Pennsylvania; Austin, Texas; and Richardson, Texas under leases with terms expiring between one and three years. The Company also maintains offices in Taiwan, Philippines, Japan, Korea, and the United Kingdom, with terms expiring between one month and fifteen years. The Company believes that its existing facilities will be adequate to meet its currently anticipated requirements and that suitable additional or substitute space will be available as needed. 17 ITEM 3. LEGAL PROCEEDINGS The Company is presently engaged in two patent infringement lawsuits. The first involves claims by the Company that ASML and Canon infringe upon a Company owned patent relating to scanning photolithography. Discovery in this case is at an early stage and the potential for a favorable outcome is uncertain at this time. The second is a suit brought by Cannon against the Company alleging infringement of certain of Canon's patents. This case was filed after the Company's case against Canon and is also in an early stage. The Company's potential liability in this case, if any, is also uncertain at this time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT As of December 31, 2000, the executive officers of the Company, who are appointed by and serve at the discretion of the Board of Directors, were as follows:
NAME AGE POSITION WITH THE COMPANY ---- -------- ------------------------- Arthur W. Zafiropoulo 61 Chairman of the Board of Directors and Chief Executive Officer Daniel H. Berry 55 President and Chief Operating Officer Bruce R. Wright 52 Senior Vice President, Finance, Chief Financial Officer and Secretary
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of General Signal Technology Corporation ("General Signal") and, since March 1993, has served as Chief Executive Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of the Company from March 1993 to March 1996, resumed the position of President of the Company in May 1997 and served in this capacity until April 1999. Between September 1990 and March 1993, he was President of the Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President of General Signal's Semiconductor Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor equipment manufacturer, which is a unit of General Signal. Mr. Zafiropoulo is a director of SEMI (Semiconductor Equipment and Materials International), an international trade association representing the semiconductor, flat panel display equipment and materials industry; Semi/Sematech, which represents majority United States-owned and controlled suppliers of equipment, materials and services to the semiconductor manufacturing industry; Advanced Energy Industries, Inc., a leading manufacturer of power conversion and control systems; and Intelligent Reasoning Systems, Inc., a provider of optical inspection tools which utilize artificial intelligence software for Printed Wiring Assemblies (PWA) and High-Density Interconnect (HDI) markets. Mr. Berry has served as Chief Operating Officer and President of the Company since April 1999. Between June 1998 and April 1999, Mr. Berry was the Chief Operating Officer and Executive Vice President of the Company. Between March 1993 and June 1998, he served as Senior Vice President, Sales and Service of the Company. Between December 1990 and March 1993, he served as Vice President, Sales and Service of the Predecessor. From November 1989 to December 1990, Mr. Berry was director of international operations for General Signal's Semiconductor Equipment Group 18 International, a semiconductor equipment company. From July 1976 to November 1989, he held various management positions including director of marketing for optical lithography, at Perkin-Elmer Corporation, a semiconductor equipment manufacturer. Prior to Perkin-Elmer, Mr. Berry spent nine years at Bell Laboratories, Murray Hill, New Jersey, working on various optical and lithography development projects. Since December 1998, Mr. Berry has served as a director of Rudolph Technologies, Inc. Flanders, New Jersey, a manufacturer of precision film metrology instruments for semiconductor markets. Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary of the Company since June 1, 1999. Before he joined the Company, from May 1997 to May 1999, Mr. Wright served as Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation. From November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the periods indicated, the range of high and low closing sale prices of the Company's Common Stock, as reported by the National Association of Securities Dealers, Inc.'s Automated Quotation System:
FISCAL 2000--FISCAL QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------------------------- -------- -------- ------------ ----------- Market Price: (1) High........................... $18.0000 $16.5625 $19.3750 $27.2500 Low............................... $13.0000 $11.3750 $14.6875 $14.8125 FISCAL 1999--FISCAL QUARTER ENDED ------------------------------------------------- Market Price: (1) High........................... $20.6250 $15.4688 $15.0625 $19.4375 Low............................... $13.6875 $12.9375 $12.5000 $12.7500
------------------------ (1) The Company's Common Stock is traded on the Nasdaq National Market(r) system under the symbol UTEK. The market prices per share represent the highest and lowest closing prices for the Company's Common Stock on the Nasdaq National Market during each fiscal quarter. As of December 31, 2000, the Company had approximately 619 stockholders of record. The Company's fiscal quarters in 2000 ended on April 1, 2000, July 1, 2000, September 30, 2000 and December 31, 2000, and the Company's fiscal quarters in 1999 ended on April 3, 1999, July 3, 1999, October 2, 1999, and December 31, 1999, respectively. For convenience of presentation, the Company's 2000 fiscal quarters have been shown as ending on March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000, and the Company's 1999 fiscal quarters have been shown as ending on March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999. The Company has not paid cash dividends on its Common Stock since inception, and its Board of Directors presently plans to reinvest the Company's earnings in its business. Accordingly, it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future. 20 ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE DATA 2000**** 1999 1998*** 1997** 1996 1995 1994 1993* ----------------------------------- --------- --------- --------- -------- -------- -------- -------- -------- OPERATIONS: Net sales........ $ 146,655 $ 113,123 $ 81,457 $147,349 $193,508 $157,831 $ 91,344 $ 54,136 Gross profit (loss)... 57,667 44,420 (1,319) 77,678 104,893 82,288 46,037 26,683 Gross profit (loss) as a percentage of net sales... 39% 39% (2)% 53% 54% 52% 50% 49% Operating income (loss)... $(11,171) $(11,213) $(70,426) $ 18,001 $ 46,678 $ 31,782 $ 15,291 $ 6,833 Income (loss) before income taxes (benefit) and cumulative effect of a change in accounting principle...... 12,159 (4,168) (64,126) 25,094 52,707 36,170 16,445 6,689 Pre-tax income (loss) as a percentage of net sales... 8% (4)% (79)% 17% 27% 23% 18% 12% Income taxes (benefit)... $ 2,433 $ -- $ (6,182) $ 7,528 $ 17,396 $ 11,936 $ 5,426 $ 2,566 Income (loss) before cumulative effect of a change in accounting principle...... 9,726 (4,168) (57,944) 17,566 35,311 24,234 11,019 4,123 Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements"... (18,883) -- -- -- -- -- -- -- Net income (loss)... (9,157) (4,168) (57,944) 17,566 35,311 24,234 11,019 4,123 Income (loss) before cumulative effect of a change in accounting principle per share--basic... $ 0.46 $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--basic... $ (0.89) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 N/A Net income (loss) per share--basic... $ (0.43) $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A Number of shares used in per share computation--basic... 21,236 21,279 20,958 20,553 20,079 18,425 16,293 N/A Income (loss) before cumulative effect of a change in accounting principle per share--diluted... $ 0.46 $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--diluted... $ (0.89) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 N/A Net income (loss) per share--diluted... $ (0.43) $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A Number of shares used in per share computation--diluted... 21,236 21,279 20,958 21,681 21,271 20,154 16,917 N/A BALANCE SHEET: Cash, cash equivalents and short-term investments... $ 163,681 $ 143,544 $ 146,107 $164,349 $167,409 $161,356 $ 50,246 $ 26,242 Working capital... 151,434 163,601 166,417 223,226 212,684 176,174 69,368 32,977 Total assets..... 264,069 236,808 245,935 300,001 280,772 245,428 104,789 56,381 Long-term obligations, less current portion........ -- -- -- -- -- -- 400 800 Stockholders' equity... 194,257 204,214 210,151 263,632 239,947 199,658 80,027 38,091 OTHER DATA: Return on average equity... (5)% (2)% (24)% 7% 16% 17% 19% 18% Book value per common share outstanding.... $ 9.13 $ 9.55 $ 9.96 $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00 Current ratio.... 3.18 6.06 5.81 7.60 6.40 4.94 3.93 2.89 Long term debt to equity ratio... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 Capital expenditures... $ 18,815 $ 6,948 $ 9,510 $ 9,337 $ 7,849 $ 0 $ 0 $ 2,752 Income tax/benefit as percentage of pre-tax income/loss... N/C 0% 10% 30% 33% 33% 33% 38% IN THOUSANDS, EXCEPT PER SHARE DATA 1992* ----------------------------------- -------- OPERATIONS: Net sales........ $ 35,309 Gross profit (loss)... 17,548 Gross profit (loss) as a percentage of net sales... 50% Operating income (loss)... $ 2,220 Income (loss) before income taxes (benefit) and cumulative effect of a change in accounting principle...... 2,089 Pre-tax income (loss) as a percentage of net sales... 6% Income taxes (benefit)... $ 785 Income (loss) before cumulative effect of a change in accounting principle...... 1,304 Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements"... -- Net income (loss)... 1,304 Income (loss) before cumulative effect of a change in accounting principle per share--basic... N/A Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--basic... N/A Net income (loss) per share--basic... N/A Number of shares used in per share computation--basic... N/A Income (loss) before cumulative effect of a change in accounting principle per share--diluted... N/A Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--diluted... N/A Net income (loss) per share--diluted... N/A Number of shares used in per share computation--diluted... N/A BALANCE SHEET: Cash, cash equivalents and short-term investments... $ 176 Working capital... 6,307 Total assets..... 16,765 Long-term obligations, less current portion........ -- Stockholders' equity... 8,323 OTHER DATA: Return on average equity... 15% Book value per common share outstanding.... N/A Current ratio.... 1.76 Long term debt to equity ratio... 0.00 Capital expenditures... $ 972 Income tax/benefit as percentage of pre-tax income/loss... 38%
21 QUARTERLY DATA
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA 1ST 2ND 3RD 4TH ---------------------------------------------- -------- -------- -------- -------- 2000**** Net sales................................................... $ 29,900 $33,528 $42,216 $41,011 Gross profit................................................ 9,413 12,283 17,020 18,951 Operating income (loss)..................................... (4,735) (9,494) (385) 3,443 Income (loss) before income taxes and cumulative effect of a change in accounting principle............................ (3,023) (7,822) 17,504 5,500 Income taxes (benefit)...................................... -- -- 2,433 -- Income (loss) before cumulative effect of a change in accounting principle...................................... (3,023) (7,822) 15,071 5,500 Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements"...................... (18,883) -- -- -- Net income (loss)........................................... (21,906) (7,822) 15,071 5,500 Income (loss) before cumulative effect of a change in accounting principle per share--basic..................... $ (0.14) $ (0.37) $ 0.71 $ 0.26 Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--basic..... $ 0.86 $ 0.00 $ 0.00 $ 0.00 Net income (loss) per share--basic.......................... $ (1.02) $ (0.37) $ 0.71 $ 0.26 Number of shares used in per share computation--basic....... 21,442 21,178 21,093 21,233 Income (loss) before cumulative effect of a change in accounting principle per share--diluted................... $ (0.14) $ (0.37) $ 0.70 $ 0.25 Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per share--diluted... $ (0.88) $ 0.00 $ 0.00 $ 0.00 Net income (loss) per share--diluted........................ $ (1.02) $ (0.37) $ 0.70 $ 0.25 Number of shares used in per share computation--diluted..... 21,442 21,178 21,669 22,056 1999 Net sales................................................... $ 25,779 $29,284 $30,413 $27,647 Gross profit................................................ 8,721 11,295 13,088 11,316 Operating loss.............................................. (4,377) (2,725) (1,195) (2,916) Net income (loss)........................................... (2,529) (1,074) 434 (999) Net income (loss) per share--basic.......................... $ (0.12) $ (0.05) $ 0.02 $ (0.05) Number of shares used in per share computation--basic....... 21,124 21,264 21,344 21,386 Net income (loss) per share--diluted........................ $ (0.12) $ (0.05) $ 0.02 $ (0.05) Number of shares used in per share computation--diluted..... 21,124 21,264 21,740 21,386
------------------------ * ULTRATECH STEPPER, INC. (THE "COMPANY") ACQUIRED CERTAIN ASSETS AND LIABILITIES OF THE ULTRATECH STEPPER DIVISION (THE "PREDECESSOR") OF GENERAL SIGNAL TECHNOLOGY CORPORATION ("GENERAL SIGNAL") ON MARCH 8, 1993. THE AMOUNTS, AS PRESENTED ABOVE, REFLECT HISTORICAL RESULTS AND DO NOT INCLUDE PRO FORMA ADJUSTMENTS, WHICH MAY HAVE BEEN INCURRED AS AN INDEPENDENT COMPANY. NET INCOME PER SHARE FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 IS NOT PRESENTED BECAUSE OF A LACK OF COMPARABILITY BETWEEN THE CAPITAL STRUCTURE OF THE COMPANY AND THE PREDECESSOR. ** RESULTS OF OPERATIONS IN 1997 INCLUDE A CHARGE OF $3,619,000, OR $0.12 PER SHARE--BASIC AND DILUTED, TO REFLECT RESEARCH AND DEVELOPMENT COST INCURRED IN THE FIRST QUARTER OF 1997 IN CONJUNCTION WITH THE ACQUISITION OF THE ASSETS OF LEPTON INC., AND A SPECIAL CHARGE OF $3,450,000, OR $0.12 PER SHARE--BASIC, $0.11 PER SHARE--DILUTED, TO ACCOUNT FOR TERMINATION OF THE COMPANY'S JAPAN DISTRIBUTOR IN THE FOURTH QUARTER OF 1997. *** GROSS PROFIT (LOSS) IN 1998 INCLUDES SPECIAL CHARGES OF $15,231,000 AND $11,177,000 IN THE THIRD AND FOURTH QUARTERS, RESPECTIVELY, RELATING PRIMARILY TO THE WRITE-DOWN OF INVENTORIES AND PROVISIONS FOR ESTIMATED LOSSES ON PURCHASE COMMITMENTS. RESULTS OF OPERATIONS IN 1998 INCLUDE A CHARGE OF $12,566,000 IN THE SECOND QUARTER, OR $0.60 PER SHARE--BASIC AND DILUTED, TO REFLECT ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT INCURRED IN CONJUNCTION WITH THE ACQUISITION OF ISI, AND A RELATED ADJUSTMENT TO OPERATIONS OF $7,458,000 IN THE FOURTH QUARTER, OR $0.35 PER SHARE, TO REDUCE THE IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE AS A RESULT OF THE FINAL PURCHASE PRICE ALLOCATION. ADDITIONALLY, RESULTS OF OPERATIONS IN 1998 INCLUDE SPECIAL CHARGES OF $5,775,000 AND $5,400,000 IN THE THIRD AND FOURTH QUARTERS, RESPECTIVELY, REFLECTING PROVISIONS FOR DOUBTFUL ACCOUNTS AND LEASES RECEIVABLE, PROVISIONS FOR SALES RETURNS AND ALLOWANCES AND COSTS ASSOCIATED WITH A REDUCTION IN THE COMPANY'S WORKFORCE. 22 **** OPERATING INCOME (LOSS) IN 2000 INCLUDES SPECIAL CHARGES OF $7,984,000 AND $1,686,000 IN THE SECOND AND THIRD QUARTERS, RESPECTIVELY, RELATING TO THE SHUTDOWN OF THE COMPANY'S ULTRABEAM UNIT. NET INCOME (LOSS) IN 2000 INCLUDES A NON-OPERATING GAIN OF $15,983,000 IN THE THIRD QUARTER, RELATING TO THE SALE OF LAND AND INCOME TAXES OF $2,433,000 RELATING TO THE SALE OF LAND AND OTHER SPECIAL ITEMS. ADDITIONALLY, NET INCOME IN 2000 INCLUDES A CHARGE OF $18,883,000 IN THE FIRST QUARTER RELATED TO THE CUMULATIVE EFFECT ON PRIOR YEARS OF THE APPLICATION OF SAB 101 "REVENUE RECOGNITION IN FINANCIAL STATEMENTS." ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Certain of the statements contained in this report may be considered forward-looking statements under Section 21E of the Securities Exchange Act of 1934, as amended, that may involve a number of risks and uncertainties. In addition to the factors discussed herein, factors that could cause actual results to differ materially include the following: cyclicality in the Company's served markets; delays, deferrals and cancellations of orders by customers; high degree of industry competition; lengthy sales cycles, including the timing of system acceptances; manufacturing inefficiencies and the ability to volume produce systems; mix of products sold; the ability and resulting costs to attract or retain sufficient personnel to achieve the Company's targets for a particular period; inventory obsolescence; integration and development of Verdant operations; failure to develop and commercialize the Company's reduction stepper products; timing and degree of success of technologies licensed to outside parties; sole or limited sources of supply; international sales; customer concentration; rapid technological change and the importance of timely product introductions; dependence on key personnel; future acquisitions; changes to financial accounting standards; intellectual property matters; environmental regulations; effects of certain anti-takeover provisions; volatility of stock price; and the other risk factors listed in this filing and other Company filings with the SEC. The Company undertakes no obligation to update any of its disclosures to reflect such future events. 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. Ultratech develops, manufactures and markets photolithography equipment (steppers) designed to reduce the cost of manufacturing integrated circuits (ICs), including advanced packaging processes, thin film heads (TFHs) for disk drives and micromachined components. The Company supplies step-and-repeat systems based on one-to-one and reduction optical technologies to customers located throughout North America, Europe, Japan and the rest of Asia. 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. 23 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. In April 2000, the Company reached a decision to shut down its UltraBeam operations. As a result of this decision, the Company recognized a charge of $9.7 million, or $0.46 per share (diluted). In June 2000, the Company settled litigation it had initiated against Nikon Inc. ("Nikon"). In conjunction with the settlement agreement, the Company may recognize licensing revenue in future quarters consistent with the terms of settlement. The Company is presently proceeding with related actions against Canon Inc. ("Canon") and ASM Lithography, Ltd. ("ASM"). There can be no assurance that the Company will prevail in those actions. In July 2000, the Company entered into an agreement with Applied Materials, Inc. ("Applied Materials") under which Applied Materials has licensed the laser thermal processing technology of the Company's Verdant Technologies Division. Additionally, Ultratech develops, manufactures and markets its own laser thermal processing systems used in the development and future production of advanced devices. In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this property to a third party. This transaction resulted in a net gain of $16.0 million before related income taxes, or $0.75 per share (diluted). The Applied Materials and Nikon agreements and the land sale resulted in special income tax charges during the year ended December 31, 2000 of $2.4 million, or $0.11 per share (diluted). The Company previously recognized revenue from the sales of its systems generally upon shipment, which usually preceded installation and final customer acceptance, provided that final customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for system sales to recognize such revenues when the contractual obligations for installation and customer acceptance have been satisfied, provided collections of the related receivable are probable. The Company believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." In conjunction with this change in accounting method, the Company recognized a charge in the quarter ended March 31, 2000 of $18.9 million, or $0.89 per share (diluted), representing the cumulative effect on prior years of the application of SAB 101. RESULTS OF OPERATIONS The Company's operating results have fluctuated significantly in the past and most likely will continue to fluctuate significantly in the future. Factors that have caused operating results to fluctuate significantly in the past and most likely will continue to cause fluctuations in the future include those mentioned above as well as: inventory and open purchase commitment reserve positions; concentration of credit risk; lengthy development cycles for new products; market acceptance of new products and enhanced versions of the Company's existing products; delayed shipments to customers due to customer configuration changes and other factors; acquisition activities requiring issuance of additional equity or debt securities, the expenditure of cash and 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; patterns of capital spending by customers; product discounts; changes in pricing by the Company, its competitors or suppliers; shutdown of operations; sale of assets; outcome 24 of litigation; political and economic instability throughout the world, in particular the Asia/Pacific region; changes in sales or distribution agreements; natural disasters; regulatory changes; and business interruptions related to the Company's occupation of its facilities, including related to the recent energy crisis in California, where the Company's headquarters and principal operations are located. The Company's gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the mix of products sold; product discounts and competition in the Company's targeted markets; inventory and open purchase commitment reserve provisions; the rate of capacity utilization; nonlinearity of shipments during the quarter; the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and are typically discounted more than existing products until the products gain market acceptance; the 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 $2.4 million for the Company's 1X steppers, and $1.5 million to more than $6.0 million for the Company's reduction steppers. As a result of these high sale prices, the timing of recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on the Company's net sales and operating results for any particular period. The Company's backlog at the beginning of a period typically does not include all of the sales needed to achieve the Company's sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and 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 and accepted 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 and customer acceptance during a particular period. Furthermore, a substantial portion of the Company's shipments has historically been realized near the end of each quarter. Delays in installation and customer acceptance due, for example, to the inability of the Company to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below the Company's expectations, which may materially adversely affect the Company's operating results for such period. Additionally, the failure to receive anticipated orders or delays in shipments 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, have 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 Saturn Wafer Stepper-Registered Trademark-, and the Company's reduction stepper product offerings, 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. 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 operating expenses in a particular period if the Company fails to achieve its net sales goals for the period. 25 NET SALES 2000 VS. 1999 Net sales consist of revenues from system sales, spare parts sales, service and licensing of technologies. For the year ended December 31, 2000, net sales were $146.7 million, an increase of 30% as compared with net sales of $113.1 million for 1999. System sales increased 35%, to $110.2 million, as a result of a 15% increase in unit shipments, a product mix shift toward higher-priced systems and an increase in weighted-average selling prices. The year-over-year improvement in system sales was primarily attributable to improved conditions within the semiconductor industry, which have resulted in higher capital spending levels. Revenues from services declined 2.2%, to $17.3 million, primarily as a result of fewer reduction steppers under service contract. Revenues from licensing and licensing support increased to $6.0 million, from $0 in 1999, as a result of licensing agreements entered in 2000. Spare part sales declined 6%, to 13.2 million, primarily as a result of fewer system upgrades. Approximately 25% of the Company's net sales for the year ended December 31, 2000 resulted from systems shipped in 1999. At December 31, 2000, the Company had approximately $15.7 million of deferred revenue resulting from systems shipped but not yet installed and accepted, as compared with $36.7 million at December 31, 1999. All of the revenue deferred at December 31, 1999 was recognized during 2000. Total Company backlog, including systems shipped but not yet installed and accepted, was approximately $106.8 million as of December 31, 2000, as compared with $65.4 million as of December 31, 1999. The net result of shipments and acceptances during the year ended December 31, 2000 was a net reduction in deferred product and service income of approximately $14.4 million (after giving effect to the cumulative adjustment resulting from the implementation of SAB 101). During the year ended December 31, 2000, deferred license income increased by $22.4 million, as a result of proceeds from licensing and licensing support agreements entered into in 2000. Deferred income relative to the Company's products is recognized upon installation and customer acceptance of the systems. Deferred income relative to service revenue is recognized over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the longer of the estimated useful life of the licensed technologies, or the period of any technology transfer support arrangements. The Company has substantially changed its operations to implement SAB 101. The Company estimates that its sales for the year ended December 31, 2000 would have approximated $126 million under its previous method of accounting for revenue recognition. However, the Company believes that estimates of its system revenue under its prior method of accounting are not indicative of results that would have been achieved had the Company not substantially changed its operations to implement SAB 101. On a market application basis, system sales to the semiconductor industry were $96.8 million for the year ended December 31, 2000, an increase of 58% as compared with system sales of $61.1 million in 1999. Sales to the microsystems market, which includes sales to thin film head manufacturers, were $13.4 million, a decline of 33% as compared with sales of $20.2 million in 1999. The Company believes that this decline was primarily attributable to the continued excess capacity situation within the thin film head industry. The increased sales to the semiconductor industry were primarily a result of improved conditions within the industry and higher sales of the Company's Saturn Spectrum 3 Wafer Stepper, which addresses the market for advanced packaging of integrated circuits. During the year ended December 31, 2000, the Company recognized revenue for its first 300mm Saturn Spectrum 3 Wafer Stepper, for advanced packaging applications, and its first Verdant laser thermal processing system, sold for research and development applications. Additionally, during 2000, the Company recognized revenue for its first 157nm XLS reduction stepper system, sold for research and development applications. Partially offsetting this increase was a decline in unit sales of the Company's Model 1700, which serves the market for back-end thin film head production. The thin film head 26 industry is currently experiencing a period of excess capacity, and the Company presently anticipates that this trend will continue for at least the next several quarters, which will continue to materially adversely impact the Company's results of operations. For the year ended December 31, 2000, international net sales were $79.0 million, or 54% of total net sales, as compared with $60.0 million, or 53% of total net sales for 1999. The increase in international sales, in terms of absolute dollars, was primarily attributable to increased sales of the Company's Saturn Spectrum 3 to semiconductor companies in Japan and Asia, excluding Japan, partially offset by lower sales to thin film head customers in Asia, excluding Japan. The Company anticipates that an increasing percentage of its overall sales will come from semiconductor manufacturers in Japan and Asia, excluding Japan, utilizing the Company's systems in the process of advanced semiconductor packaging. 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"). Although the Company's backlog of system orders increased substantially during the year ended December 31, 2000, the anticipated timing of shipments and customer acceptances of those orders will require the Company to fill a number of production slots in the current period in order to meet its near-term sales targets. Additionally, the Company is presently experiencing an increased level of customer rescheduling of deliveries. If the Company is unsuccessful in its efforts to secure those production orders, or if existing production orders are delayed or cancelled, its results of operations will be materially adversely impacted in the near-term. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current or prior level of sales. The Company believes that demand for semiconductors and semiconductor equipment may currently be experiencing a cyclical downturn. As a result, the Company may experience lower order booking rates in the near term, relative to those achieved in 2000, and may experience an increased incidence of order deferrals, rescheduling and cancellations. Fewer net bookings would result in lower net sales and gross margin, which would materially adversely impact the Company's business and results of operations. The Company presently expects that net sales for the three-month period ending March 31, 2001 may be substantially higher than net sales in the comparable period in 2000. However, due to current production limitations, customer delivery dates and uncertainty as to customer acceptances, the Company can give no assurance that it will be able to achieve or maintain its current or prior 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 or prior level of net sales for any period in the future. Additionally, the Company believes that the market acceptance and volume production of its Saturn Spectrum 3, its XLS advanced reduction steppers and its 1000 series family 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 on thin film industry, customer acceptances, or any other reason, the Company's business, financial condition and results of operations would be materially adversely affected. 27 1999 VS. 1998 For the year ended December 31, 1999, net sales were $113.1 million, an increase of 39% as compared with net sales of $81.5 million for 1998. The increase, relative to 1998, was primarily attributable to improved conditions within the semiconductor industry, which have resulted in higher capital spending levels, partially offset by lower front-end equipment sales to the thin film head industry. For the year ended December 31, 1999, the Company's unit system shipments increased 70%, relative to 1998, while the weighted-average selling price of all systems sold declined slightly. Service revenue increased 11% for the year ended December 31, 1999, as compared to 1998, primarily as a result of the acquisition of the product lines and related service business of ISI in June of 1998. Net sales of spare parts and product upgrades declined 9% for the year ended December 31, 1999, as compared to 1998. For the year ended December 31, 1999, international net sales were $60.0 million, as compared with $38.5 million for 1998, an increase of 56%. International net sales represented 53% of total net sales for the year ended December 31, 1999, as compared with 47% for 1998. This year-over-year increase, in absolute dollars, was primarily attributed to sales to back-end thin film head manufacturers in Asia, excluding Japan. However, the Company continues to be cautious in its outlook for the Asian markets. GROSS PROFIT 2000 VS. 1999 The Company's gross profit as a percentage of net sales, or gross margin, was 39.3% for the year ended December 31, 2000, as compared with a gross margin of 39.3% for 1999. On a comparative basis, gross margins were adversely impacted by a shift in product mix toward the Company's more advanced 1X lithography systems and reduction steppers, which generally have lower gross margin percentages than the Company's more mature product lines. Additionally, comparisons with the prior year were adversely impacted by lower margins on service revenues and higher inventory reserve requirements. However, these adverse trends were offset by higher license revenues ($6.0 million in 2000, as compared with $0 in 1999), higher weighted-average system selling prices and from manufacturing efficiencies achieved as a result of higher production levels. The Company believes that gross profit as a percentage of net sales for the quarter ending March 31, 2001 may be significantly higher than levels achieved during the comparable period a year ago, primarily as a result of increased licensing income, improved product pricing and higher levels of capacity utilization. However, intense competition in the markets the Company serves may make it difficult for the Company to increase or maintain its current gross margin percentages in the near term. The Company is presently increasing inventory purchases based on current and forecasted demand for its Saturn Spectrum 3 wafer stepper, its Verdant laser thermal processing system and its 157nm advanced reduction stepper. The purchase of such additional inventories will result in a higher risk of obsolescence, which may require inventory write-offs, which would negatively impact gross margins. Additionally, new products generally have lower gross margins until there is widespread market acceptance and until production and after-sales efficiencies can be achieved. Should the Saturn Spectrum 3, Verdant laser thermal processing system or the Company's reduction stepper offerings, fail to develop or generate significant market demand, the Company's business, financial condition and results of operations would be materially adversely affected. 28 1999 VS. 1998 The Company's gross margin was 39.3% for the year ended December 31, 1999, as compared with a gross loss as a percentage of net sales of (1.6%) for 1998. In 1998, the Company recognized $26.4 million in special charges related primarily to the write-down of inventories and provisions for estimated losses associated with open purchase commitments. These charges were primarily a result of the Company's lower sales and bookings levels in 1998, revised sales demand forecasts for 1999 and delays in the production-readiness of the Company's electron beam lithography system. In addition to the special charges recognized in 1998, the increase in gross profit as a percentage of net sales in 1999 can be further attributed to significantly higher capacity utilization; favorable changes in product mix; and a lower percentage of service revenue relative to total net sales, which typically has lower standard margins than system sales; partially offset by lower weighted-average selling prices. RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES 2000 VS. 1999 The Company's research, development and engineering expenses were $26.8 million for the year ended December 31, 2000, as compared with $27.7 million for 1999. This decrease in spending was primarily attributable to the shutdown of the Company's UltraBeam operations, which occurred early in the second quarter of 2000, and lower spending on the Company's laser thermal processing technology, partially offset by higher spending on the Company's reduction stepper technologies and higher facilities and personnel costs. The Company continues to invest significant resources in the development and enhancement of its Verdant laser thermal processing systems and technologies, together with continuing expenditures for its 1X and reduction optical products and technologies. The Company presently expects that the absolute dollar amount of research, development and engineering expenses for the quarter ending March 31, 2001 may be higher than levels incurred in the comparable period in 2000, as the decline in spending relative to the UltraBeam shutdown is anticipated to be more than offset by increased investments in the Company's Verdant and photolithography technologies, together with higher facilities and personnel costs. 1999 VS. 1998 The Company's research, development and engineering expenses were $27.7 million for 1999, as compared with $26.7 million for 1998. The Company continued to invest significant resources in the development and enhancement of its UltraBeam electron beam lithography system and its Verdant rapid thermal annealing/laser doping systems and technologies, together with continued expenditures for its 1X and reduction optical products and technologies. AMORTIZATION OF GOODWILL 2000 VS. 1999 Amortization of goodwill was $2.1 million for the year ended December 31, 2000, as compared with $1.6 million for the comparable period in 1999. The additional amortization expense was directly related to intangible assets purchased in December 1999. 1999 VS. 1998 Amortization of goodwill was $1.6 million for the year ended December 31, 1999, as compared with $1.1 million for the comparable period in 1998. The additional amortization expense was directly related to a full year of goodwill amortization relative to the acquisition of ISI. ISI was acquired in June 1998. 29 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2000 VS. 1999 Selling, general and administrative expenses were $30.3 million for the year ended December 31, 2000, as compared with $26.3 million for the comparable period in 1999. As a percentage of net sales, selling, general and administrative expenses declined to 20.6% in 2000, as compared with 23.3% of net sales for 1999. The increase, in terms of absolute dollars, is primarily attributable to significant additions to the sales and marketing infrastructure within the Company and higher facilities and personnel costs, partially offset by the shutdown of the Company's UltraBeam operations. The Company presently anticipates that selling, general and administrative expenses for the three-month period ending March 31, 2001 will increase significantly, relative to the comparable period in 1999, due primarily to higher anticipated sales, service and support expenses resulting from an anticipated increase in net sales and higher facilities and personnel costs. 1999 VS. 1998 Selling, general and administrative expenses were $26.3 million for 1999, as compared with $25.1 million recorded for 1998. As a percentage of net sales, selling, general and administrative expenses decreased to 23.3% of net sales in 1999, as compared to 30.8% of net sales in 1998, primarily as a result of higher net sales and cost containment measures implemented in the second half of 1998. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 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., a privately held manufacturer of i-line and deep ultra-violet reduction lithography systems. As a result, the Company recognized a charge for acquired in-process research and development ("IPR&D") expense of $5.1 million, or $0.24 per share net of tax benefits, representing products in development stage that were not considered to have reached technological feasibility and had no alternative future use. SHUTDOWN OF OPERATIONS During the quarter ended June 30, 2000, the Company shut down the operations of its UltraBeam unit. As a direct result of this decision, the Company recognized a charge in the quarter ended June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter ended September 30, 2000, the Company recognized an additional charge of $1.7 million, or $0.08 per share (diluted), primarily attributable to revised estimates of amounts to be realized upon the sale of operating assets. Of the year-to-date total charge of $9.7 million, approximately $6.8 million related to the disposition of operating and capital assets, $0.4 million related to termination benefits associated with the termination of 14 employees, $2.3 million related to facilities and other non-employee amounts paid for shutdown and $.2 million related to accrued liabilities still outstanding as of December 31, 2000. There were no significant revisions to the original termination provisions established by the Company. SPECIAL CHARGES Due primarily to the continued downturn in the thin film head and semiconductor industries, the Company recognized significantly lower sales and bookings levels during 1998. As a result, the Company significantly reduced its production demand forecast for 1999 and implemented various cost containment measures beginning in the third quarter of 1998. During 1998, the Company recognized special charges in the amount of $26.4 million for the write-down of excess inventories and provisions for estimated losses on open purchase commitments. These charges were included in cost of sales. 30 During 1998, the Company recognized charges in the amount of $11.2 million related to collection uncertainty of certain accounts and leases receivable, provisions for sales returns and allowances and charges related to a reduction in the Company's workforce and the consolidation of certain of its facilities. These charges are included in operating expenses for 1998. GAIN ON SALE OF LAND In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this property to a third party. This transaction resulted in a net gain of $16.0 million, or $0.75 per share (diluted), before related income taxes. In conjunction with this transaction, the Company had collateralized a loan payable by the former owner to a third party with securities valued at $5.5 million. Upon completion of this transaction, the restriction on these securities was removed. INTEREST AND OTHER INCOME, NET Interest and other income, net, which consists primarily of interest income, was $7.6 million for the year ended December 31, 2000, as compared with $7.4 million for 1999 and $6.7 million for 1998. INCOME TAX EXPENSE The Company recognized income taxes of $2.4 million during the year ended December 31, 2000, or $0.11 per share (diluted). This provision for 2000 consists primarily of foreign withholding taxes, as well as state and federal minimum taxes. There was no income tax benefit recognized in 1999 on the Company's pre-tax loss due to uncertainty related to the utilization of its net operating loss carry-forward. Income taxes (benefit) represented 10% of the loss before income taxes for 1998. The difference between the rate recognized and the statutory rate is primarily a result of not recognizing a benefit for the 1998 net operating loss carry-forward and certain deferred tax asset reserves recognized during 1998. The Company presently anticipates that it will recognize income tax expense in 2001, primarily as a result of foreign income taxes and state and federal minimum taxes. However, the Company believes that the tax rate in 2001 will be substantially less than the statutory rate, primarily as a result of available federal net operating loss carry-forwards. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $17.2 million for the year ended December 31, 2000, as compared with $9.4 million provided by operating activities during 1999. Cash flow generated by operating activities was primarily attributable to non-cash charges to income of $32.9 million and a net change in operating assets and liabilities of $9.4 million, partially offset by the Company's net loss for the year ended December 31, 2000, exclusive of the non-operating gain on the sale of land, of $25.1 million. Included in both the net loss and non-cash charges to income for the year ended December 31, 2000 is an $18.9 million charge the Company took to operations, relating to the cumulative effect of the implementation of SAB 101 on prior year financial results. The Company sells certain of its accounts 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 and leases receivable in accordance with these terms. At December 31, 2000, $5.6 million of sold accounts 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 31 shipments by selling 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. In particular, the Company is increasing its purchases of inventory, long-term demonstration inventory, long-term prepaid inventory and capital equipment for its Saturn Spectrum 3 wafer stepper, Verdant laser thermal processing system and its XLS 157nm advanced reduction stepper. Higher inventory and capital asset levels may increase the risk of inventory obsolescence and asset impairment, which may adversely impact the Company's results of operations. In conjunction with its XLS 157nm system, the Company anticipates that it will be required to make advanced payments related to lens production of approximately $2.0 million during the quarter ending March 31, 2001. The Company intends to characterize this expenditure as a long-term prepayment of inventories. During the year ended December 31, 2000, net cash used in investing activities was $6.6 million, primarily attributable to capital expenditures of $18.4 million and a net increase in available-for-sale securities of $9.8 million, partially offset by the proceeds from the sale of land of $16.1 million and the release of restricted cash of $5.5 million. The capital expenditures were primarily attributable to the relocation of certain of the Company's facilities and further expansion in San Jose, California. Cash used in financing activities was $2.2 million during the year ended December 31, 2000, primarily attributable to the Company's previously announced stock buyback. As of December 31, 2000, the Company had repurchased 475,000 shares of its common stock for $6.9 million. The Company has authorized the repurchase of up to 2.0 million shares of its common stock at prevailing market prices. The Company intends to finance the repurchase of its common stock from its existing cash, cash equivalents and short term investments. During the year ended December 31, 2000 the Company raised $4.0 million from stock issued pursuant to the Company's stock option and employee stock purchase plans and raised an additional $0.7 million from borrowings under its existing line of credit pursuant to international hedging activities. At December 31, 2000, the Company had working capital of $151.4 million. The Company's principal source of liquidity at December 31, 2000 consisted of $163.7 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; and 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, 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, 32 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. If reserves on lease receivables were required in the future, the Company's business, financial condition and results of operations could 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. ADOPTION OF THE EURO The introduction of a European single currency, the Euro, was initially implemented as of January 1, 1999, and the transition period will continue through Jan 1, 2002. As of December 31, 2000, the adoption of the Euro has not had a material effect on the Company's foreign exchange and hedging activities or the Company's use of derivative instruments. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK: The Company's exposure to market risk due to potential changes in interest rates, relates primarily to the Company's investment portfolio, which consisted primarily of fixed interest rate instruments as of December 31, 2000. The Company maintains a strict investment policy, which is designed to ensure the safety and preservation of its invested funds by limiting market risk and the risk of default. 33 The following table presents the hypothetical changes in fair values in the financial instruments held by the Company at December 31, 2000, that are sensitive to changes in interest rates. These instruments are comprised of cash, cash equivalents, short-term investments and restricted long-term investments. These instruments are not leveraged and are held for purposes other than trading. The modeling techniques used measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to the Company's portfolio reflects immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS over a twelve-month time horizon. Beginning fair values represent the market principal plus accrued interest for financial reporting purposes at December 31, 2000. Ending fair values comprise the estimated market principal plus accrued interest at a twelve-month time horizon, and assumes no change in the investment principal or portfolio mix. This table estimates the fair value of the portfolio at a twelve-month time horizon:
NO VALUATION OF SECURITIES CHANGE GIVEN AN INTEREST RATE IN VALUATION OF SECURITIES DECREASE INTEREST GIVEN AN INTEREST RATE INCREASE OF X BASIS POINTS RATE OF X BASIS POINTS -------------------------------- -------- --------------------------------- SHORT-TERM INVESTMENTS, IN THOUSANDS (150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS ------------------------------------ --------- --------- -------- -------- --------- --------- --------- U.S. Treasury securities and obligations of U.S. government agencies............................. $ 28,185 $ 27,996 $ 27,806 $ 27,614 $ 27,423 $ 27,233 $ 27,046 Obligations of states and political subdivisions......................... 3,707 3,707 3,707 3,707 3,707 3,707 3,707 U.S. corporate debt securities......... 117,887 117,311 116,732 116,228 115,722 115,143 114,567 -------- -------- -------- -------- -------- -------- -------- Total short-term investments........... $149,779 $149,014 $148,245 $147,549 $146,852 $146,083 $145,320 ======== ======== ======== ======== ======== ======== ========
The table was developed based on the fact that a 50-BPS move in the Federal Funds Rate has occurred in eighteen times in the last ten years; a 100-BPS move in the Federal Funds Rate has occurred in twelve times in the last ten years; and a 150-BPS move in the Federal Funds Rate has occurred in six times in the last ten years. The Company has not materially altered its investment objectives or criteria and believes that, although the composition of the Company's portfolio has changed from the preceding year, the portfolio's sensitivity to changes in interest rates is materially the same. CREDIT RISK: The Company mitigates default risk by attempting to invest in high credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and maintains a prudent amount of diversification. To date, the Company has not experienced liquidity problems with its portfolio. FOREIGN EXCHANGE RISK: The Company's operations in foreign countries are not generally subject to significant exchange rate fluctuations, principally due to the limited scope of those operations and because sales contracts for the Company's systems are generally denominated in U.S. dollars. In Japan, however, the Company's orders are often 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 gains and losses on these contracts generated up to the point of shipment are deferred until such time as the revenue is recognized on the shipment. Gains and losses on these contracts generated after the point of shipment are recognized in current income. At 34 December 31, 2000 there were approximately $17.3 million of outstanding foreign currency forward contracts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this form 10-K. ULTRATECH STEPPER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Consolidated Financial Statements included in Item 8:
PAGE NUMBER ----------- Consolidated Balance Sheets--December 31, 2000 and 1999..... 36 Consolidated Statements of Operations--Years ended December 31, 2000, 1999, and 1998......................... 37 Consolidated Statements of Cash Flows--Years ended December 31, 2000, 1999, and 1998......................... 38 Consolidated Statements of Stockholders' Equity--Years ended December 31, 2000, 1999, and 1998......................... 39 Notes to Consolidated Financial Statements.................. 40-55 Report of Ernst & Young LLP, Independent Auditors........... 56
35 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 1999 ------------------------------------------------ ------------- ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 55,346 $ 46,978 Short-term investments.................................... 108,335 96,566 Accounts receivable, less allowance for doubtful accounts of $327 in 2000 and $2,046 in 1999...................... 23,942 19,993 Inventories............................................... 30,262 28,975 Leases receivable--current portion, less allowance for doubtful accounts of $0 in 2000 and $1,049 in 1999...... -- 1,354 Prepaid expenses and other current assets................. 3,129 2,040 -------- -------- Total current assets........................................ 221,014 195,906 Equipment and leasehold improvements, net................... 28,833 20,486 Restricted investments...................................... -- 5,479 Leases receivable, less allowance for doubtful accounts of $0 in 2000 and $3,244 in 1999............................. 121 282 Intangible assets, net...................................... 6,880 8,940 Demonstration inventory, net................................ 6,542 5,015 Other assets................................................ 679 700 -------- -------- Total assets................................................ $264,069 $236,808 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ 1,152 $ 490 Accounts payable.......................................... 12,228 7,931 Accrued expenses.......................................... 14,443 13,605 Deferred license income................................... 22,369 -- Deferred product and services income...................... 6,728 353 Advance billings.......................................... 7,470 4,845 Income taxes payable...................................... 5,190 5,081 -------- -------- Total current liabilities................................... 69,580 32,305 Other liabilities........................................... 232 289 Commitments and contingencies Stockholders' equity: Preferred Stock, $.001 par value: 2,000,000 shares authorized; none issued................................. -- -- Common Stock, $.001 par value: 40,000,000 shares authorized; issued and outstanding: 21,284,565 at December 31, 2000 and 21,392,117 at December 31, 1999... 22 21 Additional paid-in capital................................ 179,530 175,574 Treasury Stock............................................ (6,867) (1) Accumulated other comprehensive loss, net................. (299) (2,408) Retained earnings......................................... 21,871 31,028 -------- -------- Total stockholders' equity.................................. 194,257 204,214 -------- -------- Total liabilities and stockholders' equity.................. $264,069 $236,808 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 36 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 -------------------------------------- -------- -------- -------- Net sales Products................................................ $123,407 $95,473 $ 65,569 Services................................................ 17,261 17,650 15,888 Licenses................................................ 5,987 -- -- -------- ------- -------- Total net sales........................................... 146,655 113,123 81,457 Cost of sales Cost of products sold................................... 76,180 56,471 46,016 Cost of services........................................ 12,808 12,232 10,352 Write-down of inventory................................. -- -- 20,559 Provision for estimated losses on purchase commitments........................................... -- -- 5,849 -------- ------- -------- Gross profit (loss)......................................... 57,667 44,420 (1,319) Research, development, and engineering...................... 26,833 27,678 26,654 Amortization of goodwill.................................... 2,061 1,630 1,055 Selling, general, and administrative........................ 30,274 26,325 25,115 Acquired in-process research and development................ -- -- 5,108 Shutdown of operations...................................... 9,670 -- -- Special charges............................................. -- -- 11,175 -------- ------- -------- Operating loss.............................................. (11,171) (11,213) (70,426) Gain on sale of land........................................ 15,983 -- -- Interest expense............................................ (251) (374) (445) Interest and other income, net.............................. 7,598 7,419 6,745 -------- ------- -------- Income (loss) before income taxes (benefit) and cumulative effect of a change in accounting principle................ 12,159 (4,168) (64,126) Income taxes (benefit)...................................... 2,433 -- (6,182) -------- ------- -------- Income (loss) before cumulative effect of a change in accounting principle...................................... 9,726 (4,168) (57,944) Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"..... (18,883) -- -- -------- ------- -------- Net loss.................................................... $ (9,157) $(4,168) $(57,944) ======== ======= ======== Net loss per share -- basic Income (loss) before cumulative effect of a change in accounting principle.................................... $ 0.46 $ (0.20) $ (2.76) Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ -- Net loss.................................................. $ (0.43) $ (0.20) $ (2.76) Number of shares used in per share computations -- basic................................................... 21,236 21,279 20,958 Net loss per share -- diluted Income (loss) before cumulative effect of a change in accounting principle.................................... $ 0.46 $ (0.20) $ (2.76) Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ -- Net loss.................................................. $ (0.43) $ (0.20) $ (2.76) Number of shares used in per share computations -- diluted................................................. 21,236 21,279 20,958 ======== ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 37 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ IN THOUSANDS 2000 1999 1998 ------------ -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $ (9,157) $ (4,168) $(57,944) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation.............................................. 7,093 8,187 7,672 Amortization.............................................. 4,536 4,370 2,934 Loss on disposal of equipment............................. 2,403 390 1,179 Deferred income taxes..................................... -- -- 3,039 Write-off of acquired in-process research and development............................................. -- -- 5,108 Cumulative adjustment due to SAB 101...................... 18,883 -- -- Gain from sale of land.................................... (15,983) -- -- Changes in operating assets and liabilities: Accounts receivable..................................... (2,049) (8,970) 38,047 Inventories............................................. (1,287) 7,775 10,580 Prepaid expenses and other current assets............... (1,089) 3,048 677 Leases receivable -- current portion.................... 1,354 658 396 Leases receivable -- long term.......................... 161 1,254 9,818 Intangible assets....................................... -- (133) -- Demonstration Inventory................................. (3,425) (1,942) (2,825) Other assets............................................ 21 (190) 1,078 Accounts payable........................................ 4,297 (610) (6,957) Accrued expenses........................................ 838 (5,719) (5,514) Advance billings........................................ 2,625 3,151 32 Income taxes payable.................................... 109 3,451 (1,404) Deferred product and services income, net............... (14,408) (1,140) 763 Deferred license income................................. 22,369 -- -- Other liabilities....................................... (57) (56) 186 -------- -------- -------- Net cash provided by operating activities................... 17,234 9,356 6,865 -------- -------- -------- Cash flows from investing activities: Capital expenditures........................................ (18,439) (6,948) (9,510) Investments in securities................................... (369,175) (361,398) (430,079) Proceeds from sales of investments.......................... 74,489 56,047 111,106 Proceeds from maturing investments.......................... 284,831 297,823 348,407 Purchase of certain assets and liabilities of Integrated Solutions Inc., net of cash acquired...................... -- -- (21,819) Proceeds from sale of land.................................. 16,126 -- -- Purchase of licensed technology............................. -- (2,000) -- Restricted investments...................................... 5,549 (71) (159) -------- -------- -------- Net cash used in investing activities....................... (6,619) (16,547) (2,054) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayments of) notes payable............. 662 (1,391) 1,787 Proceeds from issuance of Common Stock...................... 3,957 1,418 3,646 Buy back of Common Stock.................................... (6,866) -- -- -------- -------- -------- Net cash provided by financing activities................... (2,247) 27 5,433 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 8,368 (7,164) 10,244 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 46,978 54,142 43,898 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 55,346 $ 46,978 $ 54,142 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................................ $ 251 $ 337 $ 445 Income taxes (refund), net.............................. 3,089 (7,015) 840 Other non-cash changes: Systems transferred from inventory to equipment and other assets.......................................... $ 5,543 $ 2,806 $ 4,018
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 38 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------ COMMON STOCK ADDITIONAL ACCUMULATED OTHER TOTAL ------------------- PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS' IN THOUSANDS SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) EARNINGS EQUITY ------------ -------- -------- ---------- -------- ----------------- -------- ------------- Balance at December 31, 1997....................... 20,786 $21 $170,201 $ (1) $ 271 $93,140 $263,632 Net issuance of Common Stock under stock option plans and employee stock purchase plan....................... 320 -- 3,646 -- -- -- 3,646 Income tax benefit from stock option and stock purchase plan transactions.......... -- -- 309 -- -- -- 309 Components of comprehensive loss: Net unrealized gain on available-for-sale investments.............. -- -- -- -- 508 -- 508 Net loss................... -- -- -- -- -- (57,944) (57,944) -------- Total comprehensive loss..... (57,436) ------ --- -------- ------- ------- ------- -------- Balance at December 31, 1998....................... 21,106 $21 $174,156 $ (1) $ 779 $35,196 $210,151 ====== === ======== ======= ======= ======= ======== Net issuance of Common Stock under stock option plans and employee stock purchase plan....................... 286 -- 1,418 -- -- -- 1,418 Components of comprehensive loss: Net unrealized loss on available-for-sale investments.............. -- -- -- -- (3,187) -- (3,187) Net loss................... -- -- -- -- -- (4,168) (4,168) -------- Total comprehensive loss..... (7,355) ------ --- -------- ------- ------- ------- -------- Balance at December 31, 1999....................... 21,392 $21 $175,574 $ (1) $(2,408) $31,028 $204,214 ====== === ======== ======= ======= ======= ======== Net issuance of Common Stock under stock option plans and employee stock purchase plan....................... 368 1 3,956 -- -- -- 3,957 Buyback of Common Stock...... (475) -- -- (6,866) -- -- (6,866) Components of comprehensive loss: Net unrealized loss on available-for-sale investments.............. -- -- -- -- 2,109 -- 2,109 Net loss................... -- -- -- -- -- (9,157) (9,157) -------- Total comprehensive loss..... (7,048) ------ --- -------- ------- ------- ------- -------- Balance at December 31, 2000....................... 21,285 $22 $179,530 $(6,867) $ (299) $21,871 $194,257 ====== === ======== ======= ======= ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. COMPANY AND INDUSTRY INFORMATION MAJOR CUSTOMERS In 2000, one customer accounted for 10% of the Company's net sales. In 1999, no single customer accounted for 10% or more of the Company's net sales. Sales to one customer accounted for 25% of the Company's net sales in 1998. BUSINESS SEGMENTS In evaluating its business segments, the Company gave consideration to the Chief Executive Officer's review of financial information and the organizational structure of the Company's management. Based on this review, the Company concluded that, at the present time, resources are allocated and other financial decisions are made based, primarily, on consolidated financial information. Accordingly, the Company has determined that it operates in one business segment, which is the manufacture and distribution of photolithography equipment to manufacturers of integrated circuits, thin film heads and micromachined components. ENTERPRISE-WIDE DISCLOSURES The Company's products are manufactured in the United States and are sold worldwide. The Company markets internationally through domestic and foreign-based sales and service operations and independent sales organizations. The following table presents enterprise-wide sales to external customers and long-lived assets by geographic region:
(IN THOUSANDS) 2000 1999 1998 -------------- -------- -------- -------- Net sales: United States of America.................................. $ 67,328 $ 51,293 $36,192 Germany................................................... 2,147 1,130 10,613 Japan..................................................... 29,216 13,201 11,282 Rest of world............................................. 47,964 47,499 23,370 -------- -------- ------- Total................................................... $146,655 $113,123 $81,457 ======== ======== ======= Long-lived assets: United States of America.................................. $ 41,701 $ 39,458 $42,130 Rest of world............................................. 1,354 1,444 1,949 -------- -------- ------- Total................................................... $ 43,055 $ 40,902 $44,079 ======== ======== =======
The Company's operations in foreign countries are not currently subject to significant exchange rate fluctuations, principally because sales contracts for the Company's systems are generally denominated in U.S. dollars. However, international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products. 2. CONCENTRATIONS OF RISKS Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. For this and other reasons, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. CONCENTRATIONS OF RISKS (CONTINUED) and management effort in securing a sale. Additionally, the markets for the Company's products are subject to rapid technological change, which requires the Company to respond with new products and enhanced versions of existing products. Lengthy sales cycles and rapid technological change subject the Company to a number of significant risks, including inventory obsolescence, significant after-sales support and fluctuations in operating results, which are difficult to estimate and over which the Company has little or no control. Sole-source and single-source suppliers provide critical components and services for the manufacture of the Company's products. The reliance on sole or limited groups of suppliers may subject the Company from time to time to quality, allocation and pricing constraints. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments, trade receivables and long-term customer financing. These credit risks include the potential inability of an issuer or customer to honor their obligations under the terms of the instrument. The Company places its cash equivalents, short-term investments and restricted investments with high credit-quality financial institutions. The Company invests its excess cash in commercial paper, readily marketable debt instruments and collateralized funds of U.S. and state government entities. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. A majority of the Company's trade receivables are derived from sales in various geographic areas, principally the U.S., Europe, Japan, and Asia, to large companies within the integrated circuit, thin film head and micromachining industries. The Company performs ongoing credit evaluations of its customers' financial condition and requires collateral, whenever deemed necessary. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility and a reserve for estimated returns and allowances. 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. The Company sells certain of its accounts receivable to third-party financial institutions, 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 December 31, 2000 and 1999, approximately $5.6 million of sold accounts receivable were outstanding to third-party financial institutions. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated. Reclassifications have been made to the prior years' consolidated financial statements to conform to the current year presentation. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with a maturity date at acquisition of three months or less. The carrying value of cash equivalents approximates fair value. INVESTMENTS Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the classification at each balance sheet date. At December 31, 2000 and 1999, all investments in the Company's portfolio were classified as "available for sale" and are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), as a separate component of stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest, dividends, realized gains and losses and declines in value judged to be other than temporary are included in interest and other income, net. The cost of securities sold is based on the specific identification method. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. LONG-LIVED ASSETS Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment is depreciated on a straight-line basis over the estimated useful lives (three to seven years). Leasehold improvements are amortized on a straight-line basis over the life of the related assets or the lease term, whichever is shorter. Demonstration inventory is stated at cost, less accumulated amortization. Demonstration inventory is amortized over the estimated useful life of the systems, generally four years. Intangible assets are carried at cost less accumulated amortization, which is being provided on a straight-line basis over the economic lives of the respective assets, generally five to seven years. Intangible assets are presented net of accumulated amortization of $4,390,000 and $3,354,000 as of December 31, 2000 and 1999, respectively. DERIVATIVE INSTRUMENTS AND HEDGING Off-balance-sheet transactions, consisting of forward currency contracts, have from time to time been utilized by the Company to hedge obligations denominated in foreign currencies. The Company does not enter into derivative financial instruments for trading purposes. Gains and losses related to qualified accounting hedges of firm commitments are deferred and recognized into operating income when the firm commitment is converted into income. Gains and losses related to qualified accounting hedge of recognized financial assets and liabilities are recognized in interest and other income, net. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) There were approximately $17.3 million and $10.6 million of foreign exchange forward contracts outstanding as of December 31, 2000 and 1999, respectively. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND SEC STAFF ACCOUNTING BULLETINS In September 1999, the Financial Accounting Standards Board (FASB) issued Statement no. 137 (FAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." FAS 137 amended the FASB issued Statement No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities" which was issued in September 1998 and was to be effective for all fiscal quarters of fiscal year beginning after September 16, 1999. FAS 137 deferred the effective date of FAS 133 to be effective for all fiscal quarters of all fiscal years beginning after September 15, 2000. In June 2000, the FASB issued FAS 138. "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of FAS 133. Accordingly, the Company will adopt the provisions of FAS 133, as amended by FAS 137 and FAS 138, in the first fiscal quarter of 2001 fiscal year. FAS 133 establishes accounting and reporting standards for derivative instruments and requires recognition of derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", that replaces, in its entirety, FASB Statement No. 125. Although Statement 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. As required, the Company will apply the new rules prospectively to transactions beginning in the second quarter of 2001. The Company has not completed an assessment of the potential financial statement impact of applying the new Statement. REVENUE RECOGNITION The Company previously recognized revenue from the sales of its products generally upon shipment, which usually preceded installation and final customer acceptance, provided that final customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the contractual obligation for installation has been satisfied, or when installation is substantially complete, and customer acceptance provisions have lapsed, provided collections of the related receivable are probable. The Company also sells service contracts for which revenue is recognized ratably over the contract period. The Company believes the change in accounting principle is preferable based on guidance provided in SEC staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The cumulative effect of the change in accounting principle, $18.9 million or $0.89 per share (diluted), was reported as a charge in the quarter ended March 31, 2000 in the accompanying statement of operations. The cumulative effect of this change in accounting principle includes system revenue, cost of sale and certain expenses, including warranty and commission expenses, which will be recognized when both installation and customer acceptance provisions are satisfied, subsequent to January 1, 2000. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During 2000, the Company substantially changed its operations to implement SAB 101. Approximately 25% of the Company's net sales for the year ended December 2000, or $37,600,000, resulted from systems shipped in 1999 and accepted in 2000. This reflects the Company's traditional time frame for shipment, installation and customer acceptance. The net result of shipments and acceptances during the year was a reduction of approximately $14.4 million in deferred product and service income. The Company estimates that its sales for the year ended December 31, 2000 would have approximated $126,000,000 under its previous method of accounting for revenue recognition. However, the Company believes that estimates of its system revenue under its prior method of accounting are not indicative of results that would have been achieved had the Company not substantially changed its operations to implement SAB 101. WARRANTY The Company generally warrants its products for a period of 12 months from the date of customer acceptance for material and labor to repair the product; accordingly, a provision for the estimated cost of the warranty is recorded at the time revenue is recognized. RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES The Company is actively engaged in basic technology and applied research programs designed to develop new products and product applications. In addition, substantial ongoing product and process improvement engineering and support programs relating to existing products are conducted within engineering departments and elsewhere. Research, development and engineering costs are charged to operations as incurred. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 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. As a result of this acquisition, the Company recognized a charge for acquired in-process research and development expense (IPR&D) of $5.1 million in the consolidated statement of operation for the year ended December 31, 1998. 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. SHUTDOWN OF OPERATIONS During the quarter ended June 30, 2000, the Company shutdown the operations of its UltraBeam unit. As a direct result of this decision, the Company recognized a charge in the quarter ended 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter ended September 30, 2000, the Company recognized an additional charge of $1.7 million, or $0.08 per share (diluted) primarily attributed to revised estimates of amounts to be realized upon the sale of operating assets. Of the year-to-date total charge of $9.7 million, approximately $6.8 million related to the disposition of operating and capital assets, $0.4 million related to termination benefits paid associated with the termination of 14 employees, $2.3 million related to facilities and other non-employee amounts paid for shutdown and $.2 million related to accrued liabilities still outstanding as of December 31, 2000. There were no significant revisions to the original termination provisions established by the Company. SPECIAL CHARGES Due primarily to the downturn in the thin film head and semiconductor industries in 1998, the Company recognized significantly lower sales and bookings levels during 1998. As a result, the Company significantly reduced its production demand forecast for 1999 and implemented various cost containment measures in the third quarter of 1998. During 1998, the Company recognized special non-cash charges in the amount of $26.4 million for the write-down of excess inventories and provisions for estimated losses on open purchase commitments. These charges were included in cost of sales. During 1998, the Company recognized non-cash charges in the amount of $8.6 million related to collection uncertainty of certain accounts and leases receivable and provisions for sales returns and allowances. Additionally, during 1998, the Company recognized cash charges of $2.0 million and non-cash charges of $0.6 million as a result of the reduction in the Company's workforce and the consolidation of certain of its facilities. These charges were included in operating expenses. GAIN ON SALE OF LAND In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this property to a third party. This transaction resulted in a net gain of $16.0 million before related income taxes, or $0.75 per share (diluted). In conjunction with this transaction, the Company had collateralized a loan payable by the former owner to a third party with securities valued at $5.5 million. Upon completion of this transaction, the restriction on these securities was removed. FOREIGN CURRENCY ACCOUNTING The U.S. dollar is the functional currency for all foreign operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign currency financial statements into U.S. dollars or from transactions during the period, have been immaterial and are included in interest and other income, net. STOCK-BASED COMPENSATION The Company has elected to follow the intrinsic value method in accounting for its employee stock options and stock purchase plan. Pro forma information regarding net income (loss) and net income (loss) per share are disclosed as if the Company accounted for its stock-based compensation subsequent to December 31, 1994 under the fair value method. 45 BASIC AND DILUTED NET LOSS PER SHARE The following sets forth the computation of basic and diluted net income (loss) per share:
YEARS ENDED DECEMBER 31, ------------------------------ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 -------------------------------------- -------- -------- -------- Numerator: Income (loss) before cumulative effect of a change in accounting principle.................................... $ 9,726 $(4,168) $(57,944) Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"....... (18,883) -- -- -------- ------- -------- Net loss.................................................. $ (9,157) $(4,168) $(57,944) ======== ======= ======== Denominator: Denominator for earnings per share--basic................. 21,236 21,279 20,958 Effect of dilutive Employee Stock Options................. -- -- -- -------- ------- -------- Denominator for earnings per share--diluted............... 21,236 21,279 20,958 -------- ------- -------- EARNINGS PER SHARE--BASIC Income (loss) before cumulative effect of a change in accounting principle.................................... $ 0.46 $ (0.20) $ (2.76) ======== ======= ======== Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ -- ======== ======= ======== Net loss.................................................. $ (0.43) $ (0.20) $ (2.76) ======== ======= ======== EARNINGS PER SHARE--DILUTED Income (loss) before cumulative effect of a change in accounting principle.................................... $ 0.46 $ (0.20) $ (2.76) ======== ======= ======== Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"....... $ (0.89) $ -- $ -- ======== ======= ======== Net loss.................................................. $ (0.43) $ (0.20) $ (2.76) ======== ======= ========
For the year ended December 31, 2000, options to purchase 3,864,000 shares of Common Stock at an average exercise price of $15.23 were excluded from the computation of diluted net loss per share as the effect would have been anti-dilutive. This compares to the exclusion of 3,428,000 options at an average exercise price of $16.11 for the year ended December 31, 1999, and 3,169,000 options at an average exercise price of $16.20 for the year ended December 31, 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. REPORTING COMPREHENSIVE INCOME Comprehensive income includes net income plus other comprehensive income. Other comprehensive income for the Company is comprised of changes in unrealized gains or losses on 46 available-for-sale securities, net of tax. Accumulated other comprehensive income and changes thereto at December 31 consist of:
IN THOUSANDS 2000 1999 1998 ------------ -------- -------- -------- Accumulated other comprehensive income at beginning of year Unrealized gain (loss), net of tax.......................... $(2,408) $ 779 $271 Change of accumulated other comprehensive income (loss) during the year Unrealized gain (loss) on available-for-sale securities..... 2,109 (3,187) 508 Tax effect.................................................. -- -- -- ------- ------- ---- Accumulated other comprehensive income (loss) at end of year...................................................... $ (299) $(2,408) $779 ======= ======= ====
4. INVESTMENTS The Company classified all of its investments as "available for sale" as of December 31, 2000 and 1999. Accordingly, the Company states its investments at estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. The Company deems all investments, except those restricted, to be available to meet current working capital requirements. The following is a summary of the Company's investments:
DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------------------------------- -------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED ------------------- ESTIMATED AMORTIZED ------------------- ESTIMATED SHORT-TERM INVESTMENTS, IN THOUSANDS COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE ------------------------------------ --------- -------- -------- ---------- --------- -------- -------- ---------- U.S. Treasury securities and obligations of U.S. government agencies.......................... $ 27,788 $ 12 $ 186 $ 27,614 $ 27,027 $ -- $ 803 $ 26,224 Obligations of states and political subdivisions...................... 3,707 -- -- 3,707 10,477 -- -- 10,477 U.S. corporate debt securities...... 116,451 444 667 116,228 95,645 120 1,560 94,205 -------- ---- -------- -------- -------- ---- ------ -------- $147,946 $456 $ 853 $147,549 $133,149 $120 $2,363 $130,906 ======== ==== ======== ======== ======== ==== ====== ======== RESTRICTED LONG-TERM INVESTMENTS, IN THOUSANDS ------------------------------------ U.S. Treasury securities and obligations of U.S. government agencies.......................... $ -- $ -- $ -- $ -- $ 5,466 $ -- $ 61 $ 5,405 Obligations of states and political subdivisions...................... -- -- -- -- -- -- -- -- U.S. corporate debt securities...... -- -- -- -- 74 -- -- 74 -------- ---- -------- -------- -------- ---- ------ -------- $ -- $ -- $ -- $ -- $ 5,540 $ -- $ 61 $ 5,479 -------- ---- -------- -------- -------- ---- ------ -------- $147,946 $456 $ 853 $147,549 $138,689 $120 $2,424 $136,385 ======== ==== ======== ======== ======== ==== ====== ========
The following is a reconciliation of the Company's investments to the balance sheet classifications at December 31:
IN THOUSANDS 2000 1999 ------------ -------- -------- Cash equivalents........................................ $ 39,214 $ 34,340 Short-term investments.................................. 108,335 96,566 Restricted investments.................................. -- 5,479 -------- -------- Investments, at estimated fair value.................... $147,549 $136,385 ======== ========
Gross realized gains and losses were not material for the years ended December 31, 2000, 1999 and 1998. The amortized cost and estimated fair value of the Company's investments at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities 47 4. INVESTMENTS (CONTINUED) because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
AMORTIZED FAIR IN THOUSANDS COST VALUE ------------ --------- -------- Due in one year or less................................. $ 83,139 $ 83,018 Due after one year through five years................... 64,807 64,531 -------- -------- $147,946 $147,549 ======== ========
5. BALANCE SHEET DETAILS
DECEMBER 31, ------------------- IN THOUSANDS 2000 1999 ------------ -------- -------- Inventories: Raw materials............................................. $14,309 $12,589 Work-in-process........................................... 11,088 13,484 Finished products......................................... 4,865 2,902 ------- ------- Total................................................... $30,262 $28,975 ======= ======= Equipment and leasehold improvements, net: Machinery and equipment................................... $34,682 $27,703 Leasehold improvements.................................... 5,651 3,903 Office equipment and furniture............................ 19,446 19,548 ------- ------- $59,779 $51,154 Accumulated depreciation and amortization................. (30,946) (30,668) ------- ------- Total................................................... $28,833 $20,486 ======= ======= Accrued expenses: Salaries and benefits..................................... $ 4,551 $ 3,369 Warranty reserves......................................... 3,776 3,997 Reserve for losses on purchase order commitments.......... 3,203 2,423 Provision for sales return and allowances................. -- 1,471 Other..................................................... 2,913 2,345 ------- ------- Total................................................... $14,443 $13,605 ======= =======
6. STOCK BASED COMPENSATION 1993 STOCK OPTION PLAN Under the Company's 1993 Stock Option Plan, as amended, qualified employees, nonemployee Board members and consultants may receive options to purchase shares of Common Stock at 85% to 100% of fair value at certain specified dates. These options generally vest in equal monthly installments over a period of approximately four years, with a minimum vesting period of twelve months from grant date, and generally expire ten years from date of grant. The plan will terminate on the earlier of January 6, 2003, or the date on which all shares available for issuance under the Plan have been issued. The plan included a provision to automatically increase the shares reserved for issuance by an amount equal to 1.4% of the total number of shares of Common Stock outstanding on the last trading day of 48 6. STOCK BASED COMPENSATION (CONTINUED) the immediately preceding fiscal year. This provision expired in 2000. Under the plan, approximately 603,000 options, 511,000 options and 676,000 options were available for issuance at December 31, 2000, 1999 and 1998, respectively. 1998 SUPPLEMENTAL STOCK OPTION/STOCK ISSUANCE PLAN Under the Company's 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, qualified employees may receive options to purchase shares of Common Stock at 100% or above of fair value at certain specified dates. These options generally vest in equal monthly installments over a period determined by the Company's Plan Administrator, and generally expire ten years from date of grant. The plan will terminate on the earlier of October 19, 2008, or the date on which all shares available for issuance under the Plan have been issued. Under the plan, approximately 354,000 options, 469,000 options and 57,000 options were available for issuance at December 31, 2000, 1999 and 1998, respectively. A summary of the Company's stock option activity, and related information follows:
2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- ---------------- --------- ---------------- --------- ---------------- Outstanding at January 1............. 3,427,520 $16.11 3,168,965 $16.20 2,560,252 $14.94 Granted................. 1,522,500 $13.98 871,800 $13.67 1,132,250 $19.04 Exercised............... (286,120) $ 9.88 (189,273) $ 1.17 (232,642) $ 9.01 Forfeited............... (800,081) $18.53 (423,972) $18.50 (290,895) $21.84 --------- ------ --------- ------ --------- ------ Outstanding at December 31........... 3,863,819 $15.23 3,427,520 $16.11 3,168,965 $16.20
At December 31, 2000, options outstanding were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- WEIGHTED- AVERAGE REMAINING RANGE OF EXERCISE CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE --------------------- --------- ---------------- ---------------- --------- ---------------- $ 0.0500-$11.9999 795,185 6.82 $ 7.86 292,685 $ 0.96 $12.0000-$14.8999 1,257,183 8.59 $13.94 312,504 $13.03 $14.9000-$17.4999 363,776 7.93 $16.07 170,908 $16.74 $17.5000-$19.9999 1,167,305 7.13 $18.03 754,477 $17.97 $20.0000-$33.6250 280,370 5.65 $29.12 249,686 $29.65 --------- ---- ------ --------- ------ $ 0.0500-$33.6250 3,863,819 7.51 $15.23 1,780,260 $15.83
EMPLOYEE STOCK PURCHASE PLAN Under the provisions of the Company's Employee Stock Purchase Plan, virtually all employees may purchase Common Stock through payroll deductions at 85% of the lower of the fair market value of the Common Stock on the first or last day of the offering period. The offering periods are twelve months, with one annual purchase date. In February 2001, the Company commenced a plan, which allows twenty-four month offering periods with semi-annual purchase dates. Under the Plan, approximately 503,000 shares and 584,000 shares of Common Stock were reserved and available for issuance at December 31, 2000 and 1999, respectively. 49 6. STOCK BASED COMPENSATION (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company uses the intrinsic value method in accounting for employee stock-based compensation because, as discussed below, the fair value accounting method requires use of option valuation models that were not developed for use in valuing employee stock options. Under the intrinsic value method no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and net income per share is required as if the Company had accounted for its employee stock options (including purchase rights issued under the Employee Stock Purchase Plan) granted subsequent to December 31, 1994 under the fair value method. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 1998 -------- -------- -------- Expected life (in years): stock options..................... 3.5 3.5 3.5 Expected life (in years): Employee Stock Purchase Plan...... 1.0 1.0 1.0 Risk-free interest rate..................................... 5.2% 6.3% 4.6% Volatility factor........................................... 0.57 0.54 0.56 Dividend yield.............................................. 0% 0% 0%
The weighted-average expected life of stock options is computed assuming a multiple-point approach with annual vesting periods. The weighted-average fair value per share of stock options granted during 2000, 1999 and 1998 were $6.18, $5.83, and $8.36, respectively. The weighted average fair value of purchase rights granted under the Company's Employee Stock Purchase Plan during 2000, 1999 and 1998 were $7.34, $6.23, and $7.64, respectively. For purposes of pro forma disclosures, the estimated fair value of options granted is amortized to expense over the stock options' four-year vesting period and the Employee Stock Purchase Plan's one year purchase period. Stock option grants are divided into annual vesting periods, resulting in the recognition of approximately 50% of the total compensation expense of the grant in the first year. Additionally, the potential tax benefit associated with the issuance of incentive stock options is not reflected until realized upon the disqualifying disposition of the shares. The Company's pro forma information follows:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 -------------------------------------- -------- -------- -------- Net loss as reported........................................ $ (9,157) $ (4,168) $(57,944) Pro forma net loss.......................................... $(14,117) $(10,226) $(62,174) Net loss per share--basic, as reported...................... $ (0.43) $ (0.20) $ (2.76) Pro forma net loss per share--basic......................... $ (0.68) $ (0.49) $ (3.03) Net loss per share--diluted, as reported.................... $ (0.43) $ (0.20) $ (2.76) Pro forma net loss per share--diluted....................... $ (0.68) $ (0.49) $ (3.03)
50 7. STOCKHOLDERS' EQUITY TREASURY STOCK In April 2000, the Company's Board of Directors authorized the purchase of up to 2,000,000 shares of the Company's Common Stock at prevailing market prices. To date, the Company has purchased 475,000 shares of Common Stock at a cost of $6,867,000. SHAREHOLDER RIGHTS PLAN The Company's Shareholder Rights Plan provides that Preferred Share Purchase Rights ("Rights") are attached at the rate of one Right on each outstanding share of the Company's Common Stock held by stockholders. These rights expire on February 9, 2007. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the Company's Common Stock. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of Junior Participating Preferred Stock at an exercise price of $145.00 upon certain events. The Rights are redeemable, in whole but not in part, at the option of the Board of Directors at $.01 per Right, at any time within 10 days of the date they become exercisable and in certain other circumstances and will not become exercisable in certain instances where the Company's Board of Directors approves a transaction. The Rights will not prevent a takeover of the Company, but should encourage anyone seeking to acquire the Company to negotiate with the Company's Board of Directors. Shares reserved for issuance under the Plan were 350,000 at December 31, 2000. 8. EMPLOYEE BENEFIT PLANS EMPLOYEE BONUS PLANS The Company currently sponsors a profit sharing plan and an executive incentive bonus plan that distribute employee awards based on the achievement of predetermined operating income targets. The Company has not recognized expense under these various employee bonus plans for 2000, 1999 and 1998. EMPLOYEE SAVINGS AND RETIREMENT PLAN The Company currently sponsors a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their pretax earnings. Prior to 2000, Company contributions were made only if certain predetermined operating income targets were achieved. In 2000, the Company's Board of Directors elected to provide Company matching of employee contributions up to a maximum of $2,000 per employee. The Board of Directors has made a similar election for 2001. In conjunction with this benefit plan, the Company recognized $643,000, $0, and $0 of expense for 2000, 1999 and 1998, respectively. 51 9. INCOME TAXES The domestic and foreign components of income (loss) before income taxes and cumulative adjustments are as follows:
YEARS ENDED DECEMBER 31, ------------------------------ IN THOUSANDS 2000 1999 1998 ------------ -------- -------- -------- Domestic........................................ $10,834 $(5,694) $(65,582) Foreign......................................... 1,325 1,526 1,456 ------- ------- -------- Income (loss) before income taxes............... $12,159 $(4,168) $(64,126) ======= ======= ========
Income taxes included the following:
YEARS ENDED DECEMBER 31, ------------------------------- IN THOUSANDS 2000 1999 1998 ------------ -------- --------- -------- Federal: Current............................................. $1,035 $ -- $(9,847) Deferred............................................ (859) -- 2,634 ------ --------- ------- 176 -- (7,213) State: Current............................................. 80 -- -- Deferred............................................ -- -- 263 ------ --------- ------- 80 -- 263 Foreign: Current............................................. 2,177 -- 768 Deferred............................................ -- -- -- ------ --------- ------- 2,177 -- 768 ------ --------- ------- Total income tax provision (benefit).................. $2,433 $ -- $(6,182) ====== ========= =======
The tax benefit associated with stock options and employee stock purchase plan transactions increased tax refunds receivable by $309,000 for 1998. Such benefits are credited to stockholders' equity when realized. The difference between the provision (benefit) for income taxes and the amount computed by applying the U.S. federal statutory rate (35 percent) to income before income taxes is explained below:
YEARS ENDED DECEMBER 31, ------------------------------ IN THOUSANDS 2000 1999 1998 ------------ -------- -------- -------- Tax computed at statutory rate................... $4,256 $(1,417) $(22,444) State income taxes, net of federal benefit....... 52 -- 171 Foreign taxes.................................... 1,713 -- 258 Non-taxable income............................... (6,609) Tax exempt income................................ -- -- (1,142) Credits for research and development............. -- -- (1,304) Losses not benefited............................. 2,353 1,320 19,775 Other, net....................................... 668 97 (1,496) ------ ------- -------- Income tax provision (benefit)................... $2,433 $ -- $ (6,182) ====== ======= ========
52 9. INCOME TAXES (CONTINUED) Significant components of deferred income tax assets and liabilities are as follows:
IN THOUSANDS 2000 1999 ------------ -------- -------- Deferred tax assets: Net operating loss carryforwards........................ $ 657 $ 7,848 Inventory valuation..................................... 6,881 12,676 Bad debt reserve........................................ 123 1,414 Fixed assets............................................ 1,502 1,539 Tax credit carryforwards................................ 3,633 2,196 Warranty reserves....................................... 1,298 1,109 Deferred license income................................. 9,114 -- Deferred product and services income.................... 1,675 -- Other................................................... 1,803 4,573 ------- ------- Total deferred tax assets................................. 26,686 31,355 Valuation allowance....................................... (25,827) (22,666) ------- ------- Net deferred tax assets................................... $ 859 $ 8,689 ======= ======= Deferred tax liabilities: Lease revenue........................................... $ -- $(1,698) Deferred income......................................... -- (1,372) Inventory basis difference.............................. -- (4,778) Other................................................... -- (841) ------- ------- Total deferred tax liabilities............................ $ -- $(8,689) ======= ======= Net deferred tax assets................................... $ 859 $ -- ======= =======
Based upon the weight of available evidence, which includes the Company's historical operating performance and carryback potential, the Company has determined that a valuation allowance continues to be necessary. The net valuation allowance increased by $3,161,000 and $3,103,000 during the years ended December 31, 2000 and 1999, respectively. Approximately $700,000 of the valuation allowance as of December 31, 2000 is attributable to stock options, the benefit of which will be credited to paid-in capital when realized. As of December 31, 2000, the Company had net operating loss carryforwards for federal and state tax purposes of $1,378,000 and $3,039,000, respectively. The Company also had federal research and development tax credit carryforwards of approximately $1,700,000. The federal and state net operating loss carryforwards will expire at various dates beginning in year 2002 through 2019, if not utilized. The tax credit carryforwards will expire at various dates beginning in 2009 through 2019, if not utilized. 10. COMMITMENTS AND CONTINGENCIES The Company leases its facilities, and certain equipment under operating leases expiring through December 2015. Under certain of its leasing arrangements, the Company is subject to letter of credit 53 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) requirements; escalation charges and also retains certain renewal options. As of December 31, 2000, the minimum annual rental commitments are as follows: 2001................................................... $ 4,977,000 2002................................................... 4,383,000 2003................................................... 3,795,000 2004................................................... 3,784,000 2005................................................... 2,369,000 Thereafter............................................. 9,689,000 ----------- $28,997,000
Rent expense was approximately $5,964,000, $5,037,000 and $5,147,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company is not a party to any material litigation. From time to time, however, the Company may be subject to claims and lawsuits arising in the normal course of business. 11. ACQUISITION On June 11, 1998, the Company completed the acquisition of substantially all of the assets and the assumption of certain liabilities of Integrated Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep ultra-violet reduction lithography systems. The 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 a charge for acquired in-process research and development expense of $5.1 million. The final purchase price consisted of net cash consideration of approximately $19.2 million, $2.6 million for transaction costs and $8.9 million for assumed liabilities. Based on the final purchase price allocation, the excess cost over fair value of net assets was $9.1 million, to be amortized on a straight-line basis over a period of three to seven years. As of December 31, 2000, the accumulated amortization related to the excess cost over fair value of this acquisition was $4,007,000. The results of the acquired operations are 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. 12. PRO FORMA PRESENTATION The Company previously recognized revenue from the sales of its products generally upon shipment, which usually preceded installation and final customer acceptance, provided that final customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the 54 12. PRO FORMA PRESENTATION (CONTINUED) contractual obligation for installation has been satisfied, or when installation is substantially complete, and customer acceptance provisions have lapsed, provided collections of the related receivable are probable. In conjunction with this change in accounting method, the Company recognized a charge in the first fiscal quarter of 2000 of $18,883,000, or $0.89 per share (diluted) representing the cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements." During 2000, the Company substantially changed its operations to implement SAB 101. Accordingly, the Company believes that the following pro forma presentation is not necessarily indicative of the operating results that would have been achieved in 1999 and 1998 under present revenue recognition processes. The following table reflects pro forma presentations of the Company's results of operations based on the Company's current method of revenue recognition:
YEAR ENDED DECEMBER 31, ------------------- (IN THOUSANDS) 1999 1998 -------------- -------- -------- Net sales as reported................................... $113,123 $ 81,457 Net loss after tax as reported.......................... $ (4,168) $(57,944) Net Loss after tax, including pro forma adjustment for the retroactive application of SAB 101 "Revenue Recognition in Financial Statements".................. $ (9,998) $(38,387) Net loss per share -- basic............................. $ (0.20) $ (2.76) Pro forma net loss per share -- basic................... $ (0.47) $ (1.83) Net loss per share -- diluted........................... $ (0.20) $ (2.76) Pro forma net loss per share -- diluted................. $ (0.47) $ (1.83)
55 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To The Board Of Directors and Stockholders Of Ultratech Stepper, Inc. We have audited the accompanying consolidated balance sheets of Ultratech Stepper, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultratech Stepper, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California January 19, 2001 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 56 PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its 2001 Annual Meeting of Stockholders to be held June 7, 2001 and the information included therein is incorporated herein by reference as set forth below. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference from the Item captioned "Election of Directors" in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders (the "Proxy Statement"). The information required by this Item relating to the Company's executive officers is included under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Item captioned "Executive Compensation and Related Information" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Items captioned "Election of Directors" and "Ownership of Securities" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the item captioned "Certain Transactions" in the Proxy Statement. 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on Form 10-K (1) Financial Statements The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statement Schedule (set forth in Item 8 of part II of this Form 10-K) are filed within this Annual Report on Form 10-K. (2) Financial Statement Schedules The following consolidated financial statement schedule is included herein: Page Number Schedule II Valuation and Qualifying Accounts S-1 Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. (3) Exhibits The following exhibits are referenced or included in this report:
EXHIBIT DESCRIPTION ------- ------------------------------------------------------------ 2.1(1) Asset Purchase Agreement, dated March 8, 1993, among Registrant, General Signal Corporation and General Signal Technology Corporation. 3.1(1) Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993. 3.1.1(7) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 17, 1998. 3.2(3) Bylaws of Registrant, as amended. 3.2.1(15) Amendment to Bylaws of Registrant as amended. 3.3(3) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated May 17, 1995. 4.5(1) Specimen Common Stock Certificate of Registrant. 4.6(4) Shareholder Rights Agreement between Registrant and the First National Bank of Boston dated February 11, 1997. 4.6.1(5) Shareholder Rights Agreement between Registrant and the First National Bank of Boston, filed on February 11, 1997, as amended on March 18, 1998. 4.6.2(9) Second Amendment to Shareholder Rights Agreement dated February 11, 1997 between Registrant and BankBoston, N.A. (formerly known as the First National Bank of Boston) as of October 12, 1998, and Certification of Compliance with Section 27 thereof. 10.3.2(13) 1993 Stock Option/Stock Issuance Plan (Amended and Restated as of January 3, 2000). 10.4(1) Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors. 10.5(1) Standard Industrial Lease--Single Tenant, Full Net between The Equitable Life Assurance Society of the United States, as Landlord, and Registrant, as Tenant, dated August 27, 1993. 10.6(2) Executive Incentive Plan. 10.7(2) Profit Sharing Plan. 10.11(12) 1995 Employee Stock Purchase Plan (Amended and Restated as of March 16, 1999). 10.11.1 1995 Employee Stock Purchase Plan (Amended and Restated as of October 17, 2000).
58
EXHIBIT DESCRIPTION ------- ------------------------------------------------------------ 10.12.1(14) 1998 Supplemental Stock Option/Stock Issuance Plan filed on August 17, 2000 (Amended and Restated effective June 29, 2000). 10.15(11) Employment agreement between Registrant and Mr. Bruce R. Wright, Senior Vice President, Finance and Chief Financial Officer. 11.1(6) Asset Purchase Agreement, dated May 19, 1998, by and among the Registrant, Ultratech Stepper East, Inc. (formerly known as Ultratech Acquisition Sub, Inc., formerly known as Ultratech Capital, Inc., formerly known as Ultratech Stepper Capital, Inc.), Integrated Solutions, Inc., and Integrated Acquisition Corp. 11.1.1(8) Amendment to the Asset Purchase Agreement, dated May 19, 1998, by and among the Registrant, Ultratech Stepper East, Inc. (formerly known as Ultratech Acquisition Sub, Inc., formerly known as Ultratech Capital, Inc., formerly known as Ultratech Stepper Capital, Inc.), Integrated Solutions, Inc., and Integrated Acquisition Corp. 11.2(10) Sublease between Lam Research Corporation, as Sublessor, and Registrant, as Sublessee dated September 16, 1998, regarding the leased building premises known as 16 Jonspin Road, Wilmington, Massachusetts. 11.3 Lease Agreement between Montague LLC, As Landlord, and Registrant, As Tenant dated November 22, 1999. 11.4 Lease Agreement between Judith Ann Spinelli, as lessor, and Registrant, as lessee dated December 28th, 1999, regarding the leased building premises known as 16 Jonspin Road, Wilmington, Massachusetts. 21 Subsidiaries of Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 24 Power of Attorney (contained in Signature page hereto).
------------------------ (1) Previously filed with the Company's Registration Statement on Form S-1 declared effective with the Securities and Exchange Commission on September 28, 1993. File No. 33-66522. (2) Previously filed with the Company's 1993 Annual Report on Form 10-K (Commission File No. 0-22248). (3) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (Commission File No. 0-22248). (4) Previously filed with the Company's Current Report on Form 8-K, dated February 26, 1997. (5) Previously filed with the Company's 1997 Annual Report on Form 10-K (Commission File No. 0-22248). (6) Previously filed with the Company's Current Report on Form 8-K, dated June 11, 1998. (7) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (Commission File No. 0-22248). (8) Previously filed with the Company's Current Report on Form 8-K/A, dated August 25, 1998. (9) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (Commission File No. 0-22248). (10) Previously filed with the Company's 1998 Annual Report on Form 10-K (Commission File No. 0-22248). (11) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File No. 0-22248). (12) Previously filed with the Company's Current Report on Form S-8, dated August 13, 1999. 59 (13) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (Commission File No. 0-22248). (14) Previously filed with the Company's Current Report on Form S-8, dated August 17, 2000. (15) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (Commission File No. 0-22248). (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2000. (c) Exhibits. See list of exhibits under (a)(3) above. (d) Financial Statement Schedules. See list of schedules under (a)(2) above. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunder duly authorized. ULTRATECH STEPPER, INC. By: /s/ ARTHUR W. ZAFIROPOULO Date: March 20, 2001 --------------------------------------- Arthur W. Zafiropoulo CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
The undersigned directors and officers of Ultratech Stepper, Inc. (the "Company"), a Delaware corporation, hereby constitute and appoint Arthur W. Zafiropoulo and Bruce R. Wright, and each of them with full power to act without the other, the undersigned's true and lawful attorney-in-fact, with full power of substitution and resubstitution, for the undersigned and in the undersigned's name, place and stead in the undersigned's capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned this Report and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below (and the above Powers of Attorney granted) by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ ARTHUR W. ZAFIROPOULO Chairman of the Board of Directors and --------------------------------- Chief Executive Officer (Principal March 20, 2001 Arthur W. Zafiropoulo Executive Officer) Senior Vice President, Finance, Chief /s/ BRUCE R. WRIGHT Financial Officer and Secretary --------------------------------- (Principal Financial and Accounting March 20, 2001 Bruce R. Wright Officer) /s/ KENNETH LEVY --------------------------------- Director March 20, 2001 Kenneth Levy
61
SIGNATURES TITLE DATE ---------- ----- ---- /s/ GREGORY HARRISON --------------------------------- Director March 20, 2001 Gregory Harrison /s/ RICK TIMMINS --------------------------------- Director March 20, 2001 Rick Timmins /s/ THOMAS D. GEORGE --------------------------------- Director March 20, 2001 Thomas D. George /s/ JOEL GEMUNDER --------------------------------- Director March 20, 2001 Joel Gemunder /s/ NICHOLAS KONIDARIS --------------------------------- Director March 20, 2001 Nicholas Konidaris /s/ VINCENT F. SOLLITTO --------------------------------- Director March 20, 2001 Vincent F. Sollitto
62 SCHEDULE II ULTRATECH STEPPER, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER BALANCE AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) OF PERIOD ----------- ------------ ---------- ---------- -------------- -------------- Allowance for doubtful accounts Year ended December 31, 1998 Trade accounts receivable..... $2,258 $1,907 $ 153 $(2,122) $2,196 Leases receivable............. -- 6,444 -- -- 6,444 ------ ------ ------- ------- ------ $2,258 $8,351 $ 153 $(2,122) $8,640 ====== ====== ======= ======= ====== Year ended December 31, 1999 Trade accounts receivable..... $2,196 $ 6 $ -- $ (156) $2,046 Leases receivable............. 6,444 506 529 (3,186) 4,293 ------ ------ ------- ------- ------ $8,640 $ 512 $ 529 $(3,342) $6,339 ====== ====== ======= ======= ====== Year ended December 31, 2000 Trade accounts receivable..... $2,046 $ (446) $(1,207) $ (66) $ 327 Leases receivable............. 4,293 237 673 (5,203) -- ------ ------ ------- ------- ------ $6,339 $ (209) $ (534) $(5,269) $ 327 ====== ====== ======= ======= ======
------------------------ (1) Deductions represent write-offs against reserve account balances. S-I