Ultratech, Inc.
ULTRATECH INC (Form: 10-Q, Received: 11/06/2006 06:09:52)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended         September 30, 2006

 

 

o

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, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

 

94-3169580

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3050 Zanker Road, San Jose, California

 

95134

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code       (408) 321-8835

 

 

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     x       No     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o

Accelerated filer   x

Non-accelerated filer   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     o       No     x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Class

 

Outstanding as of October 27, 2006

common stock, $.001 par value

 

23,191,472

 

 




ULTRATECH, INC.

INDEX

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and October 1, 2005

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and October 1, 2005

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4.

Controls and Procedures

20

 

 

 

PART II.

OTHER INFORMATION

21

 

 

 

Item 1.

Legal Proceedings

21

 

 

 

Item 1A.

Risk Factors

21

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults upon Senior Securities

28

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

28

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

29

 

 

 

SIGNATURES

30

 

2




PART I.   FINANCIAL INFORMATION

Item 1.    Financial Statements

ULTRATECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005*

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash, cash equivalents, and short-term investments

 

$

90,522

 

$

141,067

 

Accounts receivable, net

 

16,877

 

19,110

 

Inventories

 

38,003

 

28,969

 

Prepaid expenses and other current assets

 

2,504

 

1,589

 

Total current assets

 

147,906

 

190,735

 

 

 

 

 

 

 

Long-term investments

 

48,060

 

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

21,465

 

25,117

 

 

 

 

 

 

 

Demonstration inventories

 

5,177

 

3,367

 

 

 

 

 

 

 

Other assets

 

3,141

 

3,090

 

 

 

 

 

 

 

Total assets

 

$

225,749

 

$

222,309

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable

 

$

9,840

 

$

4,289

 

Accounts payable

 

11,156

 

8,403

 

Deferred product and services income

 

4,933

 

1,970

 

Other current liabilities

 

12,286

 

10,892

 

Total current liabilities

 

38,215

 

25,554

 

 

 

 

 

 

 

Other liabilities

 

7,273

 

7,805

 

 

 

 

 

 

 

Stockholders’ equity

 

180,261

 

188,950

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

225,749

 

$

222,309

 

 


*                     The Balance Sheet as of December 31, 2005 has been derived from the audited financial statements at that date.

See accompanying notes to unaudited condensed consolidated financial statements

3




ULTRATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

(In thousands, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

Net sales:

 

 

 

 

 

 

 

 

 

Products

 

$

30,017

 

$

26,782

 

$

83,788

 

$

76,216

 

Services

 

3,826

 

3,567

 

10,942

 

9,504

 

Licenses

 

100

 

 

200

 

1,417

 

Total net sales

 

33,943

 

30,349

 

94,930

 

87,137

 

 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Cost of products sold

 

18,713

 

15,083

 

49,650

 

43,227

 

Cost of services

 

2,780

 

2,252

 

7,362

 

6,929

 

Total cost of sales

 

21,493

 

17,335

 

57,012

 

50,156

 

Gross profit

 

12,450

 

13,014

 

37,918

 

36,981

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research, development, and engineering

 

7,146

 

5,956

 

19,649

 

20,292

 

Selling, general, and administrative

 

8,872

 

7,272

 

24,514

 

23,003

 

Amortization of intangible assets

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(3,568

)

(214

)

(6,245

)

(6,409

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(95

)

(117

)

(139

)

(307

)

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

1,545

 

1,364

 

4,774

 

3,427

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax

 

(2,118

)

1,033

 

(1,610

)

(3,289

)

Provision for income taxes

 

450

 

838

 

552

 

406

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,568

)

$

195

 

$

(2,162

)

$

(3,695

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.11

)

$

0.01

 

$

(0.09

)

$

(0.15

)

Number of shares used in per share computations - basic

 

23,477

 

24,129

 

23,747

 

23,985

 

Net income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.11

)

$

0.01

 

$

(0.09

)

$

(0.15

)

Number of shares used in per share computations - diluted

 

23,477

 

25,067

 

23,747

 

23,985

 

 

See accompanying notes to unaudited condensed consolidated financial statements

4




ULTRATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

(In thousands)

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(2,162

)

$

(3,695

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

4,498

 

4,949

 

Amortization

 

892

 

916

 

Gain on disposal of equipment

 

(5

)

(7

)

Loss on sale of short-term investments

 

 

8

 

Stock-based compensation

 

1,431

 

68

 

Deferred income taxes

 

172

 

52

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,233

 

7,644

 

Inventories

 

(9,826

)

(5,502

)

Taxes receibable

 

 

476

 

Prepaid expenses and other current assets

 

(961

)

(362

)

Demonstration inventory

 

(208

)

221

 

Other assets

 

(162

)

(389

)

Accounts payable

 

2,753

 

(356

)

Deferred product and services income

 

2,963

 

185

 

Deferred license revenue

 

 

(1,041

)

Other current liabilities

 

1,394

 

2,032

 

Other liabilities

 

(532

)

303

 

Net cash provided by operating activities

 

2,480

 

5,502

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(2,538

)

(5,024

)

Proceeds from sale of fixed assets

 

79

 

 

Purchase of investments

 

(33,355

)

(89,338

)

Proceeds from sales and maturities of investments

 

37,438

 

78,990

 

Net cash provided by (used in) investing activities

 

1,624

 

(15,372

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from notes payable

 

52,865

 

79,119

 

Repayment of notes payable

 

(47,314

)

(83,158

)

Proceeds from issuance of common stock

 

2,639

 

4,848

 

Repurchase of common stock

 

(10,766

)

 

Net cash provided by (used in) financing activities

 

(2,576

)

809

 

 

 

 

 

 

 

Net effect of exchange rate changes on cash and cash equivalents

 

(100

)

448

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,428

 

(8,613

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

36,344

 

47,985

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

37,772

 

$

39,372

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Other non-cash activities

 

$

797

 

$

1,777

 

Systems transferred from (to) inventory to (from) equipment and other assets

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

5




Ultratech, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2006

(1)  Description of Business

Ultratech, Inc. (referred to as “Ultratech,” the “Company” and “we”) develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and LEDs (light emitting diodes). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

In evaluating the Company’s business segments, we gave consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made based on our consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology components.

(2)  Basis of Presentation

We have prepared the unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments considered necessary for fair presentation, have been included.

Operating results for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006, or any future period.

USE OF ESTIMATES — The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, management evaluates its estimates, including those related to inventories, warranty obligations, purchase order commitments, asset retirement obligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes, intangible assets, contingencies and litigation. Management bases its estimates on historical experience and on various other analyses and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS — In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 156, Accounting for Servicing of Financial Assets, which permits an entity to choose either the amortization method or the fair value method for each class of separately recognized servicing assets and servicing liabilities. This statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier adoption permitted. The Company does not anticipate that the adoption of SFAS No. 156 will have a material impact on its results of operations or statement of financial position.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments , which permits fair value re-measurement for any hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS No. 155 will have a material impact on its results of operations or statement of financial position.

6




In July 2006, the FASB issued Financial Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48) as an interpretation of SFAS No. 109, Accounting for Income Taxes . This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are still evaluating what impact, if any, the adoption of this standard will have on our financial position or results of operations.

(3)  Stock-Based Compensation

The Company has adopted stock plans that provide for the grant to employees of stock-based awards, including stock options and restricted stock units. In addition, these plans permit the grant of non-statutory stock-based awards to be paid to consultants and outside directors.

Prior to January 1, 2006, the Company accounted for its stock plans under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25 as permitted by SFAS No. 123, Accounting for Stock-Based Compensation . No stock-based employee compensation was recognized in the Condensed Consolidated Statement of Operations under SFAS No. 123 as all options granted under the Company’s stock plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), effective January 1, 2006 using the modified prospective transition method. Under that transition method, stock-based compensation expense recognized during the nine months ended September 30, 2006 includes: (a) stock options granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) stock options and restricted stock units granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Under the modified prospective transition method, results for prior periods are not restated.

As a result of adopting SFAS No. 123R on January 1, 2006, and excluding the expense related to restricted stock units which would have been included in the Company’s Condensed Consolidated Statements of Operations under the provisions of APB No. 25, the Company’s Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2006 changed by the following amounts compared to what the Company would have reported had it continued to account for share-based compensation under APB No. 25:

 

Impact of adoption of SFAS No. 123R

 

(In thousands, except per share amounts)

 

Three Months
Ended Sept. 30,
2006

 

Nine Months Ended
Sept. 30, 2006

 

Loss before income taxes

 

$

(208

)

$

(637

)

Net loss

 

$

(208

)

$

(637

)

Net loss per share - basic

 

$

(0.01

)

$

(0.03

)

Net loss per share - diluted

 

$

(0.01

)

$

(0.03

)

 

The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using a single grant approach on a ratable basis for awards granted after the adoption of SFAS No. 123R and using a multiple grant approach on a straight-line basis for awards granted prior to the adoption of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS No.123R requires cash flows resulting from tax benefits resulting from deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. During the three and nine-month periods ended September 30, 2006, the excess tax benefit classified as finance cash inflow that would have been classified as operating cash inflow if the Company had not adopted SFAS No. 123R is immaterial.

The modified prospective transition method of SFAS No. 123R requires the presentation of pro forma information for periods presented prior to the adoption of SFAS No. 123R regarding net income (loss) and net income (loss) per share as if the Company had accounted for its stock plans under the fair value method of SFAS No. 123R. For pro forma purposes, fair value of stock options was estimated using the Black-Scholes option valuation model and amortized using a multiple grant approach on a straight-line basis. The

7




fair value of all of the Company’s stock-based awards was estimated assuming no expected dividends and using estimates of expected life, volatility and risk-free interest rate at the time of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had accounted for its stock plans under the fair value method of accounting under SFAS No. 123R:

(In thousands, except per share amounts)

 

Three Months
Ended Oct. 1,
2005

 

Nine Months
Ended Oct. 1,
2005

 

Net income (loss) as reported

 

$

195

 

$

(3,695

)

Add: Compensation expense recorded under APB No. 25, net of tax

 

 

68

 

Deduct: SFAS No. 123R compensation expense, net of tax

 

(2,941

)

(6,128

)

Pro forma net loss

 

$

(2,746

)

$

(9,755

)

 

 

 

 

 

 

Net income (loss) per share - basic, as reported

 

$

0.01

 

$

(0.15

)

Pro forma net loss per share - basic

 

$

(0.11

)

$

(0.41

)

 

 

 

 

 

 

Net income (loss) per share - diluted, as reported

 

$

0.01

 

$

(0.15

)

Pro forma net loss per share - diluted

 

$

(0.11

)

$

(0.41

)

 

The Company recognized stock-based compensation expense of $0.5 and $1.4 million, respectively, during the three and nine-month periods ended September 30, 2006 including expenses related to restricted stock units which would have been included in the Company’s Condensed Consolidated Statements of Operations under the provisions of APB No. 25. Compensation cost capitalized as part of inventory was immaterial during the three and nine-month periods ended September 30, 2006. The total income tax benefit recognized in the Company’s Condensed Consolidated Statements of Operations during the three and nine-month periods ended September 30, 2006 related to all stock-based compensation was immaterial.

Stock Options and Restricted Stock Units

Ultratech’s 1993 Stock Option Plan/Stock Issuance Plan, as amended, and its 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, provide for the grant of qualified and non-qualified stock-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. The Company believes that such awards better align the interests of its employees with those of its shareholders. As of September 30, 2006, there were a total of 1,014 thousand shares reserved for future awards under these Plans.

The Company analyzed its stock-based compensation strategies prior to the adoption of SFAS No. 123R and made the decision to grant a combination of stock options and restricted stock units rather than only stock options during the three and nine-month periods ended September 30, 2006. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of grant, expire ten years from the date of grant and currently generally vest over approximately four years from the date of grant. Restricted stock unit awards generally vest over approximately three years from the date of grant. Certain stock options and restricted stock units provide for accelerated vesting if there is a change in control (as defined in the respective Plan). The Company has a policy of settling employee stock option exercises and employee stock issuances with newly issued shares of common stock.

The fair value of the Company’s stock options was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award. The fair value of these stock options was estimated utilizing estimates of dividend yield, expected life, expected volatility and risk-free interest rate at the time of grant. The Company has assumed expected dividends of zero over the expected life of the grants. The Company uses historical exercise and post-vesting forfeiture data, vesting characteristics, and the contractual term of the grant to estimate expected life. The Company uses historical volatility of the Company’s stock and implied market volatility from traded options on the Company’s stock as a basis for calculating expected volatility. As the remaining maturity for the traded options analyzed was between six and twelve months, the Company determined that it should not rely solely on implied market volatility for calculating expected volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

8




The fair value of the Company’s stock options granted during the three and nine-month periods ended September 30, 2006 and October 1, 2005 was estimated using the following weighted-average assumptions:

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Expected life (in years): stock options

 

4.7

 

3.9

 

4.7

 

3.7

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

5.06

%

3.92

%

5.02

%

3.67

%

 

 

 

 

 

 

 

 

 

 

Volatility factor

 

0.56

 

0.45

 

0.55

 

0.48

 

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

 

 

 

 

A summary of stock option activity under the Plans as of September 30, 2006 and changes during the nine months then ended is presented below:

Options

 

Shares (in
thousands)

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term (years)

 

Aggregate
Intrinsic
Value (in
thousands)

 

Outstanding at December 31, 2005

 

6,444

 

$

17.71

 

 

 

Granted

 

105

 

$

15.26

 

 

 

Exercised

 

(178

)

$

14.82

 

 

 

Forfeited or expired

 

(158

)

$

21.81

 

 

 

Outstanding at September 30, 2006

 

6,213

 

$

17.65

 

6.3

 

$

1,469

 

 

 

 

 

 

 

 

 

 

 

Vested or expected to vest at September 30, 2006

 

6,205

 

$

17.65

 

6.3

 

$

1,469

 

Exercisable at September 30, 2006

 

5,967

 

$

17.87

 

6.3

 

$

1,107

 

 

The weighted-average grant date fair value of options granted during the three and nine-month periods ended September 30, 2006 was $7.04 and $7.87, respectively. The total intrinsic value of options exercised during the three and nine-month periods ended September 30, 2006 was $0.0 and $1.2 million, respectively. The fair value of restricted stock units is based upon the closing trading price of the Company’s shares on the date of grant. The total fair value of restricted stock units that vested during the nine-month period ended September 30, 2006 was $0.1 million.

A summary of the status of the Company’s restricted stock units as of September 30, 2006, and changes during the nine months then ended is presented below:

Nonvested Restricted Stock Units

 

Shares (in
thousands)

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested at December 31, 2005

 

 

N/A

 

Granted

 

168

 

$

19.20

 

Vested

 

(5

)

$

19.20

 

Forfeited

 

(6

)

$

19.20

 

Nonvested at September 30, 2006

 

157

 

$

19.20

 

 

As of September 30, 2006, there were $2.8 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of 1.2 years.

Cash received from stock option exercises was $0.0 and $2.6 million, respectively, during the three and nine-month periods ended September 30, 2006. The income tax benefit realized from stock option exercises during the three and nine-month periods ended September 30, 2006 was immaterial.

9




 (4)  Net Income (Loss) Per Share

The following sets forth the computation of basic and diluted net income (loss) per share:

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

(In thousands, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,568

)

$

195

 

$

(2,162

)

$

(3,695

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic net income per share

 

23,477

 

24,129

 

23,747

 

23,985

 

Effect of dilutive employee stock options

 

 

938

 

 

 

Denominator for diluted net income per share

 

23,477

 

25,067

 

23,747

 

23,985

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.11

)

$

0.01

 

$

(0.09

)

$

(0.15

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.11

)

$

0.01

 

$

(0.09

)

$

(0.15

)

 

For the three and nine-month periods ended September 30, 2006, options to purchase 6,213,456 shares of common stock at an average exercise price of $17.65 were excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive. For the three and nine-month periods ended October 1, 2005, options to purchase 2,494,092 shares and 6,390,646 shares of common stock at an average exercise price of $24.22 and $17.96 were excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive. Options are anti-dilutive when we have a net loss or when the exercise price of the stock option is greater than the average market price of our common stock during the period.

(5)  Inventories

Inventories consist of the following:

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005

 

Raw materials

 

$

15,534

 

$

10,873

 

Work-in-process

 

14,209

 

8,322

 

Finished products

 

8,260

 

9,774

 

 

 

$

38,003

 

$

28,969

 

 

(6)  Other Assets

Other assets consist of the following:

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005

 

Deferred compensation plan assets

 

$

1,988

 

$

1,972

 

Deferred income taxes

 

148

 

274

 

Other

 

1,005

 

844

 

 

 

$

3,141

 

$

3,090

 

 

10




(7)  Line of Credit

We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 100 basis points (approximately 6.25% as of September 30, 2006). Certain of our cash, cash equivalents and investments secure borrowings outstanding under this facility. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement. As of September 30, 2006, $9.8 million was outstanding under this facility, with a related collateral requirement of approximately $13.1 million of our cash, cash equivalents and investments.

(8)  Other Current Liabilities

Other current liabilities consist of the following:

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005

 

Salaries and benefits

 

$

5,597

 

$

3,723

 

Warranty accrual

 

2,742

 

2,397

 

Advance billings

 

528

 

854

 

Income taxes payable

 

422

 

768

 

Reserve for losses on purchase order commitments

 

399

 

406

 

Accrued taxes-other

 

1,670

 

1,542

 

Other

 

928

 

1,202

 

 

 

$

12,286

 

$

10,892

 

 

Warranty Accrual

We generally warrant our products for a period of 12 months for new products, or 3 months for refurbished products, from the date of customer acceptance for material and labor to repair the product; accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts. Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. In 2005, the Company commenced volume shipments of its unity-based lithography systems and commenced warranty coverage on several of its laser annealing systems. As may occur with new product introductions, warranty costs were higher than anticipated. The Company believes its warranty accrual, as of September 30, 2006, will be sufficient to satisfy outstanding obligations as of that date.

Changes in our warranty accrual are as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Balance, beginning of the period

 

$

2,198

 

$

1,911

 

$

2,397

 

$

2,013

 

Warranties issued during the period

 

1,535

 

473

 

2,848

 

2,168

 

Settlements made during the period

 

(1,529

)

(827

)

(3,799

)

(2,905

)

Changes in liability for pre-existing warranties

 

538

 

79

 

1,296

 

360

 

Balance, end of the period

 

$

2,742

 

$

1,636

 

$

2,742

 

$

1,636

 

 

Deferred Services Revenue

Deferred services revenue is included in the deferred product and services income line on the condensed consolidated balance sheets. We sell service contracts for which revenue is deferred and recognized ratably over the contract period, for time based service contracts, or as service hours are delivered, for contracts based on a purchased quantity of hours.

Changes in our deferred service revenue are as follows:

11




 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Balance, beginning of the period

 

$

2,709

 

$

1,560

 

$

1,970

 

$

1,332

 

Service contracts sold during the period

 

2,288

 

2,162

 

8,367

 

6,278

 

Service contract revenue recognized during the period

 

(2,448

)

(2,293

)

(7,788

)

(6,181

)

Balance, end of the period

 

$

2,549

 

$

1,429

 

$

2,549

 

$

1,429

 

 

(9)  Other Liabilities

Other liabilities consist of the following:

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005

 

Deferred rent

 

$

2,849

 

$

3,157

 

Deferred compensation plan liability

 

1,951

 

1,932

 

Asset retirement obligations

 

1,946

 

2,064

 

Other

 

527

 

652

 

 

 

$

7,273

 

$

7,805

 

 

(10)  Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Oct. 1,

 

Sept. 30,

 

Oct. 1,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Net income (loss)

 

$

(2,568

)

$

195

 

$

(2,162

)

$

(3,695

)

Accumulated other comprehensive income loss:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

898

 

(609

)

269

 

(769

)

Unrealized gain (loss) on foreign exchange forward contracts

 

123

 

81

 

(100

)

448

 

Comprehensive loss

 

$

(1,547

)

$

(333

)

$

(1,993

)

$

(4,016

)

 

Accumulated other comprehensive income (loss) included in the condensed consolidated balance sheets is comprised of unrealized gains or losses on available-for-sale securities and the effect of exchange rate changes on foreign exchange forward contracts, net of tax.

 

Sept. 30,

 

Dec. 31,

 

(In thousands)

 

2006

 

2005

 

Unrealized gains (losses) on:

 

 

 

 

 

Available-for-sale investments

 

$

(931

)

$

(1,200

)

Foreign exchange contracts

 

214

 

314

 

Accumulated other comprehensive loss at end of period

 

$

(717

)

$

(886

)

 

(11)  Stock Repurchase Program

On September 19, 2005, the Company’s Board of Directors authorized (stock repurchase authorization date) the repurchase of up to $30 million of its common stock in the open market at the then prevailing market prices during the period commencing September 19, 2005 through September 30, 2007. Through September 30, 2006, the Company had repurchased 1,386,580 shares of its common stock at a total purchase price of $20 million since the stock repurchase authorization date. The Company repurchased 742,045 shares at a total purchase price of $10.8 million during the quarter ended September 30, 2006.

12




(12)  Employee Benefit Plans

Employee bonus plans

We currently sponsor an executive incentive bonus plan that distributes employee awards based on the achievement of predetermined targets. We have recorded ($0.1) million and $0.5 million of expenses under this bonus plan for the three and nine-month periods ended September 30, 2006. There was no executive incentive bonus plan expense recognized during the three and nine-month periods ended September 30, 2005.

Employee savings and retirement plans

Ultratech sponsors a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their pretax earnings. Company contributions made to this plan were $0.1 million and $0.3 million for the three and nine-month periods ended September 30, 2006, respectively. The comparable contributions in 2005 were $0.1 million and $0.3 million, respectively. These Company contributions, limited to a maximum of $2,000 per year per employee, generally become 20 percent vested at the end of an employee’s first year of service from the date of hire with the Company, and vest 20 percent per year of service thereafter until they become fully vested at the end of five years of service. The Company also sponsors an executive non-qualified deferred compensation plan that allows qualifying executives to defer current cash compensation.

(13)  Contingencies

Legal Proceedings 

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. The case against ASML was later transferred to the U.S. District Court for the Northern District of California and tried before a jury in June and July of 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court award costs. On February 13, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. ASML has filed a notice of cross-appeal. ASML’s opening appellate brief is due on November 22, 2006.

 

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the district court found the subject patent to be invalid. We appealed that decision, but, in March 2006, the Federal Circuit upheld the district court’s ruling.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss. In such event, we intend to appeal and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

Item 2.                           Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates”, “expects”, “intends”, “will”, “could”, “believes”, “estimates”, “continue”, and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as risks related to our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; delays, deferrals and cancellations of orders by customers; cyclicality in the semiconductor and nanotechnology industries; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; expiration of licensing arrangements, and the resulting adverse impact on our licensing revenues; changes to financial accounting standards; changes in pricing by us, our competitors or suppliers; customer

13




 

concentration; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; ability and resulting costs to attract or retain sufficient personnel to achieve our targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon us achieving and maintaining profitability and the market price of our stock; mix of products sold; rapid technological change and the importance of timely product introductions; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; effects of certain anti-takeover provisions; announced and future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan, North Korea and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

Ultratech develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and LEDs (light emitting diodes). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.2 million to $5.0 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our 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 to the customer. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our 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 that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and customer acceptance due, for example, to our inability 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 our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, 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 in the future cause net sales in a particular period to fall significantly below our expectations, which could materially adversely affect our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

14




 

Net sales

Third Quarter

 

Three Months Ended

 

 

 

 

 

 

 

Sept. 30,

 

Oct. 1,

 

Amount of

 

Percentage

 

(In millions)

 

2006

 

2005

 

Change

 

Change

 

Sales of:

 

 

 

 

 

 

 

 

 

Products

 

$

30.0

 

$

26.8

 

$

3.2

 

12

%

Services

 

3.8

 

3.6

 

0.3

 

7

%

Licenses

 

0.1

 

 

0.1

 

100

%

Total net sales

 

$

33.9

 

$

30.3

 

$

3.6

 

12

%

 

Net sales consist of revenues from products (system sales, spare parts sales and upgrades), services and licensing of technologies. Product sales increased 12% to $30.0 million on a system unit volume decrease of 10% in the third quarter of 2006, compared to the third quarter of 2005. The average selling prices of systems sold increased 22% compared to the comparable year-ago period, resulting from a shift in product mix in favor of our new laser processing products and away from our legacy platform products.

On a product market application basis, system sales to the semiconductor industry, primarily for advanced packaging and laser  processing applications, were $25.6 million for the quarter ended September 30, 2006, an increase of 19% when compared with system sales to this market in the third quarter of 2005. This increase was due to a $12.8 million increase in sales to the laser processing markets offset by a decrease of $9.9 million to the advanced packaging markets.

System sales to the nanotechnology market were $0.1 million for the quarter ended September 30, 2006, a decrease of 95% compared with sales of $1.9 million in the third quarter of 2005. System sales to the nanotechnology market are highly dependent on customer capacity demand in the thin film head industry.

Revenues from services for the third quarter of 2006 were $3.8 million, an increase of 7% over last year’s third quarter, primarily as a result of an increase in service contracts.

Revenues from licenses were $0.1 million in the quarter ended September 30, 2006 compared with $0.0 million in the comparable period a year ago. This increase was a result of recognizing licensing revenue from one customer during the quarter ended September 30, 2006 comparing to the completion of the amortization period of prior-period proceeds from licensing agreements during the third quarter of 2005. Future revenues from licensing activities, if any, will be contingent upon the outcome of current litigation (see “Legal Proceedings”), and upon existing and future licensing and royalty arrangements. The Company may not be successful in generating licensing revenues in the future and does not anticipate the recognition of significant levels of licensing income during the remainder of 2006.

At September 30, 2006, we had approximately $4.9 million of deferred product and services income compared to $2.0 million at December 31, 2005. Deferred income related to our products is recognized upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred service revenue is recognized ratably over the contract period or as purchased services are rendered.

For the quarter ended September 30, 2006, international net sales were $24.0 million, or 71% of total net sales compared with $20.4 million, or 67% of total net sales for the third quarter of 2005. We expect sales to international customers to represent a significant majority of our revenues during the remainder of 2006. Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are often denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as foreign currency forward exchange contracts and natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately $4.6 million of Japanese yen denominated receivables at September 30, 2006. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See “Item 1A Risk Factors: International Sales”).

15




 

Year-To-Date:

 

Nine Months Ended

 

 

 

 

 

 

 

Sept. 30,

 

Oct. 1,

 

Amount of

 

Percentage

 

(In millions)

 

2006

 

2005

 

Change

 

Change

 

Sales of:

 

 

 

 

 

 

 

 

 

Products

 

$

83.8

 

$

76.2

 

$

7.6

 

10

%

Services

 

10.9

 

9.5

 

1.4

 

15

%

Licenses

 

0.2

 

1.4

 

(1.2

)

-86

%

Total net sales

 

$

94.9

 

$

87.1

 

$

7.8

 

9

%

 

Product sales increased 10% to $83.8 million for the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was primarily a result of a 28% increase in the average selling prices of systems sold, which was partially offset by a system unit volume decrease of 15%. The increase in average selling prices was primarily the result of a shift in product mix in favor of our new laser processing products and away from our legacy product platforms. On a market segment basis, the year-over-year increase in systems sales was primarily due to higher sales to the laser processing market ($15.9 million) offset by a decline in sales to the nanotechnology market ($10.1 million).

Revenues from services increased 15% from 2005 levels, primarily as a result of increases in service contracts. Revenues from licenses decreased by $1.2 million in the first three quarters of 2006, as compared to the same period of 2005. This decrease was a result of the completion of the amortization period of prior-period proceeds from licensing agreements. Future revenues from licensing activities, if any, will be contingent upon the outcome of current litigation (see “Legal Proceedings”), and upon existing and future licensing and royalty arrangements. The Company may not be successful in generating licensing revenues in the future and does not anticipate the recognition of significant levels of licensing income during the remainder of 2006.

For the first three quarters of 2006, international net sales were $63.0 million, or 67% of total net sales, as compared with $63.3 million, or 73% of total net sales for the comparable period of 2005. For the first three quarters of 2006, as compared to the same period of 2005, sales to Europe declined $13.1 million, sales to Japan increased $8.5 million, sales to Taiwan increased $2.8 million and sales to the “rest of Asia” declined $1.0 million.

Gross profit

Third Quarter

On a comparative basis, gross margins were 36.7% and 42.9% for the third quarters of 2006 and 2005, respectively. The 6.2 percentage point decrease in gross margin was primarily due to less favorable mix of products sold (5.8. percentage points) and declined manufacturing and after-sales efficiencies (0.4 percentage points).

Exclusive of licensing revenues, gross margins were 36.5% for the quarter ended September 30, 2006 as compared with 42.9% for the same period in 2005. We believe disclosure of gross margins without reference to licensing revenues provides additional appropriate disclosure to allow comparison of our product and service gross margins over time because there is little, if any, cost of sales associated with our licensing revenues. Future revenues from licensing activities, if any, will be contingent upon the outcome of current litigation (see “Legal Proceedings”), and upon existing and future licensing and royalty arrangements. The Company may not be successful in generating licensing revenues in the future and does not anticipate the recognition of significant levels of licensing income during the remainder of 2006. Gross margins have been, and will continue to be, negatively impacted by the discontinuance of license revenue.

Our 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 introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; writedown of inventory and open purchase commitments; technology support and licensing revenues, which have little or no associated cost of sales; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs; and start-up costs and inefficiencies associated with the implementation of subcontracting arrangements.

16




 

Year-To-Date:

Gross margins were 39.9% and 42.4% for the nine-month periods ended September 30, 2006 and October 1, 2005, respectively. The 2.5 percentage point decline in gross margin was due to a less favorable mix of products sold (1.3 percentage points) and a decline in licensing revenues (1.7 percentage points), partially offset by improved manufacturing efficiencies (0.5 percentage point).

Operating expenses

Third Quarter

Research, development and engineering expenses for the third quarter of 2006 were $7.1 million, as compared to $6.0 million for the same period in 2005. The increase was primarily the result of higher spending associated with the development of our laser processing technologies in the current quarter.

Selling, general, and administrative expenses were $8.9 million for the third quarter of 2006, as compared with $7.3 million for the same quarter of 2005. As a percentage of net sales, selling, general, and administrative expenses increased to 26.2% in the quarter ended September 30, 2006, compared to 24.0% in the third quarter of 2005. This increase, in dollar terms, was primarily due to increased hiring, marketing and demonstration support costs associated with our laser processing product line ($1.1 million) and stock compensation expense (associated with the implementation of SFAS No. 123R and compensation expenses related to the restricted stock units— $0.4 million).

Year-To-Date:

Research, development and engineering expenses for the first three quarters of 2006 were $19.6 million, as compared to $20.3 million for the same period in 2005. The year-to-date decrease was primarily the result of lower spending associated with the development of our laser processing technologies during the first nine months of 2006 as compared to the comparable period ended October 1, 2005.

Selling, general, and administrative expenses were $24.5 million for the first three quarters of 2006, as compared with $23.0 million for the same period in 2005. As a percentage of net sales, selling, general, and administrative expenses decreased to 25.9% in the nine months ended September 30, 2006, as compared to 26.4% for the same period in 2005. This increase, in dollar terms, was primarily due to increased hiring, marketing and demonstration support costs associated with our laser processing product line ($3.3 million); increased stock compensation expense (associated with the implementation of SFAS No. 123R and compensation expenses related to the restricted stock units — $1.2 million); higher management incentive plan expense ($0.4 million); partially offset by decreased legal costs related to our being a plaintiff in two patent infringement lawsuits in the first half of 2005 ($2.5 million); lower commission expense ($0.5 million); and lower bad debt expenses ($0.3 million).

Interest and other income, net

Interest and other income, net, which consists primarily of interest income, was $1.5 million and $4.8 million for the third quarter and first nine months of 2006, respectively, as compared with $1.4 million and $3.4 million for the comparable periods of 2005. This increase was primarily attributable to higher interest rates on our investments. We presently maintain an investment portfolio with a weighted-average maturity of approximately 1.25 years. As a result, changes in short-term interest rates have had, and will continue to have, a significant impact on our interest income.

Provision (benefit) for income taxes

For the three and nine-month periods ended September 30, 2006, we recorded an income tax provision of $0.5 million and $0.6 million, respectively, as compared to an income tax expense of $0.8 million and $0.4 million for the comparable periods in 2005. The tax expense recognized for the nine months ended September 30, 2006, primarily resulted from the foreign income taxes applicable to our forecast of foreign pre-tax income expected for the year. Since the Company is currently operating at a loss on a consolidated basis, there are no U.S. federal or state taxes anticipated for the year. The year-ago tax expense resulted from our then-forecasted foreign income taxes and certain federal and state taxes for the year ended December 31, 2005.

Income tax estimates can be affected by whether or not, and within which jurisdictions, future earnings will occur and how and when cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolutions.

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Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis of all available evidence, we concluded that it is more likely than not that our net deferred tax assets will not be realized, with the exception of the Japanese deferred tax asset which we do expect to realize and has been recorded in the accounts. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan. We closely monitor all available evidence, and may release some or all of the valuation allowance in future periods.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires us to fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect that net sales for the quarter ending December 31, 2006 may be in a range from 8% to 10% decrease, sequentially, from the third quarter of 2006.

Because our net sales are subject to a number of risks, including risks associated with the introduction of our new laser processing product line, delays in customer acceptances, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry, we may not exceed or maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems and our nanotechnology systems are of critical importance to our future financial results. At September 30, 2006, these critical systems represented approximately 89% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing and customer acceptance cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, or any other reason, our business, financial condition and results of operations would be materially adversely affected.

We believe that gross margin for the fourth quarter of 2006 will be in a range of 38% to 39%. The final gross margin achieved will depend heavily upon sales volumes and the resulting product mix. Should our sales not reach the level expected, we may incur a higher risk of inventory obsolescence and excess purchase commitments and lower utilization of our manufacturing infrastructure, which would materially adversely impact our results of operations. New products generally have lower gross margins until there is widespread market acceptance and until production and after-sales efficiencies can be achieved. Should significant market demand fail to develop for our laser processing systems and our new advanced packaging offerings, our business, financial condition and results of operations would be materially adversely affected. In addition, higher costs associated with extended manufacturing and customer acceptance periods on shipments of our new laser processing products have had, and will continue to have, an adverse impact on our gross margins. We believe that operating margin for the fourth quarter of 2006 may be in a range of (11%) to (15%) and that net income (loss) per share may be in the range of ($0.10) to ($0.15) for the fourth quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $2.5 million for the first nine months ended September 30, 2006, compared with net cash provided by operating activities of $5.5 million for the comparable period in 2005. Net cash provided by operating activities during the first nine months of 2006 was primarily attributable to non-cash charges to net loss, principally for depreciation, amortization, and stock-based compensation of $7.0 million; an increase in deferred product and services income of $3.0 million; an increase in accounts payable of $2.8 million; a decrease in accounts receivable of $2.2 million; and an increase in other current liabilities of $1.4 million; offset by a net loss of $2.2 million; an increase in inventories of $9.8 million; an increase in prepaid expenses and other current assets of $1.0 million  a decrease in other liabilities of $0.5 million; and an increase in demonstration inventories and other assets of $0.4 million.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant and growing portion of working capital. Currently, we are devoting significant resources to the development, introduction and commercialization of our laser processing system and to the development of our next generation 1X lithography technologies. We currently intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the initial production of the laser processing system and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities 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 technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced.

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Our failure to achieve our sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either or both of which could materially adversely impact our results of operations.

During the first nine months of 2006, net cash provided by investing activities was $1.6 million, attributable to net proceeds of short and long-term investments of $4.1 million and proceeds from the sale of fixed assets of $0.1 million, offset by capital expenditures of $2.6 million.

Net cash used in financing activities was $2.6 million during the first nine months of 2006, attributable to repurchase of common stock of $10.8 million, offset by net proceeds under our notes payable of $5.6 million, and $2.6 million of proceeds received from the issuance of common stock under our employee stock option plans.

At September 30, 2006, we had working capital of $109.7 million and long-term investments of $48.1 million. Our principal sources of liquidity at September 30, 2006 consisted of $80.7 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit, and $48.1 million of long-term investments. As of September 30, 2006, based upon recent operating results and expectations of future operating income, the Company classified certain investment securities with remaining maturities of one year or more as long-term investments. We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 100 basis points (approximately 6.25% as of September 30, 2006). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility. Funds are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a collateral requirement. As of September 30, 2006, $9.8 million was outstanding under this facility, with a related collateral requirement of approximately $13.1 million of our cash, cash equivalents and investments.

On September 19, 2005, our Board of Directors authorized the repurchase of up to $30 million of our common stock in the open market at then prevailing market prices during the period commencing September 19, 2005 through September 30, 2007. Through September 30, 2006, we had repurchased 1,386,580 shares of our common stock at a total purchase price of $20 million. We repurchased 742,045 shares at a total purchase price of $10.8 million during the quarter ended September 30, 2006.   Any future repurchase of stock could have a significant impact on our cash position.

The development and manufacture of new lithography and laser-based systems and enhancements are highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

We may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our 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 our business or operating results.

Foreign Currency

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers, for actual or forecasted sales of equipment after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. After recording revenue, we use various mechanisms, such as foreign currency forward exchange contracts and natural hedges, to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. At September 30, 2006, we had taken action to hedge approximately 100% of these Japanese yen denominated exposures. In addition to natural hedges resulting from having both assets and liabilities denominated in Japanese yen, we enter into foreign currency forward contracts that generally have maturities of nine months or less. We often close foreign currency forward contracts by entering into an offsetting contract. At September 30, 2006, we had contracts for the sale and purchase of $18.1 million and $0.3 million, respectively, of foreign currencies at fixed rates of exchange.

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Information Available on Company Web-site

Ultratech’s web-site is located at www.ultratech.com . We make available, free of charge through our web-site, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports), as soon as reasonably practicable after such reports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our web-site. Any future amendments to this Code will also be posted on our web-site.

Item 3.                           Quantitative and Qualitative Disclosures about Market Risk

Reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2005 and to the subheading “Derivative Instruments and Hedging” in Item 8, “Financial Statements and Supplementary Data”, under the heading “Notes to Consolidated Financial Statements” of our Annual Report on Form 10-K for the year ended December 31, 2005.

Interest Rate Risk

Our exposure to market risk due to potential changes in interest rates relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of September 30, 2006. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

Certain of our cash, cash equivalents and short and long-term investments serve as collateral for a line of credit we maintain with a brokerage firm. The line of credit is used for liquidity purposes, mitigating the need to liquidate investments in order to meet our current operating cash requirements.

Foreign Currency Risk Management

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have established transaction and balance sheet hedging programs. We use foreign currency forward contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales of equipment after receipt of customer orders may be adversely affected by changes in foreign currency exchange rates. After recording revenue, we use various mechanisms, such as foreign currency forward exchange contracts and natural hedges, to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. At September 30, 2006, we had taken action to hedge approximately 100% of these Japanese yen denominated exposures. In addition to natural hedges resulting from having both assets and liabilities denominated in Japanese yen, we enter into foreign currency forward contracts that generally have maturities of nine months or less. We often close foreign currency forward contracts by entering into an offsetting contract. At September 30, 2006, we had contracts for the sale and purchase of $18.1 million and $0.3 million, respectively, of Japanese yen at fixed rates of exchange. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements.

Item 4.                           Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective and ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.                OTHER INFORMATION

Item 1.                           Legal Proceedings

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. The case against ASML was later transferred to the U.S. District Court for the Northern District of California and tried before a jury in June and July of 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court award costs. On February 13, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. ASML has filed a notice of cross-appeal. ASML’s opening appellate brief is due on November 22, 2006.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the district court found the subject patent to be invalid. We appealed that decision, but, in March 2006, the Federal Circuit upheld the district court’s ruling.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss. In such event, we intend to appeal and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

Item 1A.                  Risk Factors

In addition to risks described in the foregoing discussions, the following risks apply to our business and us :

We currently spend, and expect to continue to spend, significant resources to develop, introduce and commercialize our laser processing systems and AP wafer stepper products, and we may not be successful in achieving or increasing sales of these products.

Currently, we are devoting significant resources to the development, introduction and commercialization of our laser products as well as our lithography wafer steppers. We intend to continue to develop these products and technologies during 2006, 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 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 our laser processing systems and by future generations of our 1X-lithography systems. Introduction of new products generally involves higher installation costs and product performance uncertainties that could delay customer acceptance of our systems, resulting in a delay in recognizing revenue associated with those systems and a reduction in gross margins. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-offs, costs of demonstration systems and facilities, and costs associated with the establishment of additional after-sales support organizations. Additionally, operating expenses may increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our operating results will be materially adversely affected.

Our ability to commercialize our laser processing technologies depends on our ability to demonstrate a manufacturing-worthy tool. We do not presently have in-house capability to fabricate devices. As a result, we rely on partnering with semiconductor companies to develop the anneal process. The development of new process technologies is largely dependent upon our ability to interest potential customers in working on joint process development. Our ability to deliver timely solutions is also limited by wafer turnaround at the potential customer’s fabrication facility.

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Our sales cycle is typically lengthy and involves a significant commitment of capital by our customers, which has subjected us, and is likely to continue to subject us, to delays in customer acceptance of our products and other risks, any of which could adversely impact our results of operations by, among other things, delaying recognition of revenue with respect to those orders and resulting in increased installation, qualification and similar costs.

Sales of our 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. Many of our customers in the past have cancelled the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, we have experienced and may continue to experience delays following initial qualification of our systems as a result of delays in a customer’s approval process. Additionally, we are 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. For these and other reasons, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able to obtain those orders.

The semiconductor industry historically has been highly cyclical and has experienced periods of oversupply, which has in turn affected the market for semiconductor equipment such as ours and which could adversely affect our results of operations during such periods.

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors and nanotechnology components, including thin film head magnetic recording devices, which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and 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 us. We believe that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. Our business and operating results would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, and nanotechnology sectors, as well as diversifying into new markets such as laser-based annealing for implant activation and other applications. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, our net sales and operating results are materially adversely affected.

We may not be successful in protecting our intellectual property rights or we could be found to have infringed the intellectual property rights of others, either of which could weaken our competitive position and adversely affect our results of operations.

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate for inventions resulting from our ongoing research and development and manufacturing activities. We own 109 United States and foreign patents, which expire on dates ranging from November 2006 to December 2024 and have 97 United States and foreign patent applications pending. In addition, we have various registered trademarks and copyright registrations covering mainly software programs used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued and U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies could allow our competitors to more effectively compete against us, which could result in decreased revenue for us.

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On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. The case against ASML was later transferred to the U.S. District Court for the Northern District of California and tried before a jury in June and July of 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court award costs. On February 13, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. ASML has filed a notice of cross-appeal. ASML’s opening appellate brief is due on November 22, 2006.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the district court found the subject patent to be invalid. We appealed that decision, but, in March 2006, the Federal Circuit upheld the district court’s ruling.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss. In such event, we intend to appeal and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

We believe that the outcome of these matters will not be material to our business financial condition or results of operations.

We have from time to time been notified of claims that we may be infringing intellectual property rights possessed by third parties.

Infringement claims by third parties or claims for indemnification resulting from infringement claims may be asserted in the future and such assertions could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, we may seek to obtain a license under the third party’s intellectual property rights. However, a license may not be available on reasonable terms or at all. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation.

We operate in a highly competitive industry in which customers are required to invest substantial resources in each product, which makes it difficult to achieve significant sales to a particular customer once another vendor’s equipment has been purchased by that customer.

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. We believe that once a device manufacturer or packaging subcontractor has selected a particular supplier’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 supplier’s capital equipment has been selected.

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec), projection companies such as Ushio, Inc. (Ushio), and reduction stepper companies such as Nikon Precision, Canon, and ASML. While we believe that the use of reduction steppers is not easily adapted for thick resists utilized in the advanced packaging market, some device manufactures may consider this technology option. In addition, front end lithography companies could develop a lithography solution specifically targeted for the advanced packaging market, which could potentially affect Ultratech’s market share. In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other stepper manufacturers who have developed or are developing tools specifically designed for nanotechnology applications. We expect our competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

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With respect to our laser annealing technologies, marketed under the LSA100 product name, the primary competition comes from companies such as Applied Materials, Inc. and Dainippon Screen Manufacturing Co., LTD. Many of these companies offer products utilizing rapid thermal processing, or RTP, which is the current prevailing manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe our annealing technology results in faster transistors for a given size. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. In July 2000, we licensed certain rights to our then existing laser processing technology, with reservations, to a competing manufacturer of semiconductor equipment. We presently anticipate that this company will offer laser-annealing tools to the semiconductor industry that will compete with our offerings.

Another potential advanced annealing solution utilizes flash lamp annealing technology, or FLA. Several companies have published papers on annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase anneal temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the 65nm node. This technique, which employs xenon flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA will suffer from pattern-related non-uniformities and could require additional, costly processes to reduce the reflectivity of different areas within the chip or wafer. Our proprietary laser processing solution has been specifically developed to provide junction annealing on near-instantaneous time-scales, while maintaining low sheet resistance. Laser spike annealing, the first implementation of laser processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range, are required to achieve full activation, and dopant diffusion is minimal.

Additionally, competition to our laser processing products may come from other laser annealing tools, including those presently being used by the flat panel display industry to re-crystallize silicon. Manufacturers of these tools may try to extend the use of their technologies to semiconductor device applications.

We believe that in order to be competitive, we will need to continue to invest significant financial resources in new product development, new features and enhancements to existing products, the introduction of new stepper systems in our served markets on a timely basis, and maintaining customer service and support centers worldwide. In marketing our products, we may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

We sell our products primarily to a limited number of customers and to customers in a limited number of industries, which subjects us to increased risks related to the business performance of our customers, and therefore their need for our products, and the business cycles of the markets into which we sell.

Historically, we have sold a substantial portion of our systems to a limited number of customers. In the third quarter and first nine months of 2006, our top five customers accounted for 81.4% and 41.7% of our total system sales, respectively. In 2005, Intel Corporation accounted for 13% of our net sales. We expect that sales to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

In addition to the business risks associated with dependence on a few major customers, these significant customer concentrations have in the past resulted in significant concentrations of accounts receivable. These significant and concentrated receivables expose us to additional risks, including the risk of default by one or more customers representing a significant portion of our total receivables. If we were required to take additional accounts receivable reserves, our business, financial condition and results of operations would be materially adversely affected.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications, accounted for approximately 93% and 76% of system revenue for the first three quarters of 2006 and 2005, respectively. During the first three quarters of 2006 and 2005, approximately 7% and 24%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including micro systems, thin film head and optical device manufacturers. Our future operating results

24




 

and financial condition would be materially adversely impacted by a downturn in any of these market segments, or by loss of market share in any of these segments. A growing portion of our backlog of system orders is comprised of laser spike annealing tools. To date, we have limited experience with this technology. Should significant demand not materialize, due to technical, production, market, or other factors, our business, financial position and results of operations would be materially adversely impacted.

We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies, and on single or a limited group of outside suppliers for certain materials for our products, which could result in our 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 and materials, any of which could adversely affect our results of operations.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who then grind and polish the lens elements. We then assemble and test the optical 1X lenses.

We procure some of our other critical systems’ components, subassemblies and services from single outside suppliers 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, we have been able to obtain adequate services and supplies of components and subassemblies for our systems in a timely manner. However, disruption or termination of certain of these sources could have a significant adverse impact on our ability to manufacture our systems. This, in turn, would have a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole supplier or a limited group of suppliers and our 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 our 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 us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our products, which could damage relationships with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.

Our industry is subject to rapid technological change and product innovation, which could result in our technologies and products being replaced by those of our competitors, which would adversely affect our business and results of operations.

The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our 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. We will also be required to enhance the performance of our existing systems and related software tools. Our success in developing new and enhanced systems and related software tools depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. 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 meet that demand. We may not be successful in selecting, developing, manufacturing or marketing new products and related software tools or enhancing our existing products and related software tools. Any such failure would materially adversely affect our business, financial condition and results of operations.

Because of the large number of components in our systems, significant delays can occur between a system’s introduction and our commencement of volume production of such systems. We have experienced delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of our systems and enhancements and related software features and options, and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements and related software features and options.

We may encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume production of systems or enhancements. Our inability to complete the development or meet the technical specifications of any of our systems or enhancements and related software tools, or our 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 nanotechnology devices would materially adversely affect our business, financial condition and results of operations. In addition, we may incur substantial unanticipated costs to ensure the functionality and reliability of our products early in the products’ life cycles. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in customer acceptance, revenue recognition and collecting accounts receivable and additional service and warranty expenses may result. Any of such events may materially adversely affect our business, financial condition and results of operations.

25




 

A substantial portion of our sales is outside of the United States, which subjects us to risks related to customer service, installation, foreign economic and political stability, uncertain regulatory and tax rules, and foreign exchange rate fluctuations, all of which make it more difficult to operate our business.

International sales accounted for approximately 67% and 73% of total net sales for the first three quarters of 2006 and 2005, respectively. International net sales accounted for approximately 69% and 65% of total net sales for the years 2005 and 2004, respectively. We anticipate 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. As a result, a significant portion of our net sales will continue to be subject to certain risks, including unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

Although we generally transact our international sales in U.S. dollars, international sales expose us 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 our products and may further impact the purchasing ability of our international customers. However, in Japan, we have direct sales operations and orders are often denominated in Japanese yen. This may subject us to a higher degree of risk from currency fluctuations. We attempt to mitigate this exposure through the use of foreign currency forward exchange contracts. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductors and nanotechnology products. We cannot predict whether the United States or any other country will implement changes to quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products. These factors, or the adoption of restrictive policies, may have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our key personnel, especially Mr. Zafiropoulo, our Chief Executive Officer, and our business and results of operations would be adversely affected if we were to lose our key employees.

Our future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. Most of our employees are employed “at will.” We have entered into employment agreements with only a limited number of our employees, including our Chief Executive Officer, Chief Financial Officer and Senior Vice President World-wide Sales and Customer Operations. Some of these agreements contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or have a disability. We do not maintain any life insurance on any of our key employees. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our 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 us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area where we maintain our headquarters and principal operations. We may not be successful in attracting or retaining such personnel in the future. The failure to attract or retain such persons would materially adversely affect our business, financial condition and results of operations.

Changes in financial accounting standards or policies in the past have affected, and in the future may affect, our reported results of operations.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States, or U.S. GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), the Securities and Exchange Commission (SEC) and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.

Accounting policies affecting many aspects of our business, including rules relating to revenue recognition, off-balance sheet transactions, employee stock options, restructurings, asset disposals and asset retirement obligations, intangible assets, derivative and other financial instruments, and in-process research and development charges, have recently been revised or are under review. Changes to those rules or the questioning of how we interpret or implement those rules may have a material adverse effect on our reported financial results or on the way we conduct business. In addition, our preparation of financial statements in accordance with U.S. GAAP requires that we 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 our estimates and could impact our future operating results.

26




 

Changes in securities laws and listing standards, in particular those that have resulted from the passage of the Sarbanes-Oxley Act of 2002 and related rules and regulations, have increased our legal and financial costs. We expect to continue to spend significant resources to comply with these requirements.

The Sarbanes-Oxley Act of 2002 required changes in our corporate governance, public disclosure and compliance practices. The number of rules and regulations applicable to us has increased, and will continue to increase, our legal and financial compliance costs and has made some activities more difficult, such as requiring stockholder approval of new option plans. In addition, we have incurred, and expect to continue to incur, significant costs in connection with compliance with Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting. We incurred significant costs to achieve initial compliance with Section 404, and we expect ongoing annual costs to maintain compliance to also be substantial. We also expect these developments to make it more difficult and more expensive to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. In addition, in connection with our Section 404 certification process, we may identify from time to time deficiencies in our internal controls. Any material weakness or deficiency in our internal controls over financial reporting could materially and negatively impact our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness or deficiency in internal controls over financial reporting could have a negative impact on our reputation, business and stock price.

Our shareholder rights plan, equity incentive plans, licensing agreements, certain provisions of our Certificate of Incorporation and Bylaws, and Delaware law may discourage third parties from pursuing a change of control transaction with us.

Certain provisions of our 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 our company. In addition to the foregoing, our classified board of directors, the shareholdings of Ultratech’s officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue “blank check” preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing us from experiencing a change in control and may adversely affect the voting and other rights of holders of our common stock.

Our stock price has experienced significant volatility in the past and we expect this to continue in the future as a result of many factors, some of which could be unrelated to our operating performance. Such volatility can have a major impact on the number of shares subject to outstanding stock options that are included in calculating our earnings per share.

We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, a shortfall in revenue or earnings, changes in analysts’ expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the marketplace, changes in the regulatory environment, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our relationships with our customers and suppliers could cause the price of our common stock to fluctuate, perhaps substantially. The market price of our common stock has fluctuated significantly in the past and we expect it to continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of September 30, 2006, we had issued and outstanding options to purchase approximately 6.2 million shares of our common stock. Among other determinants, the market price of our stock has a major bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining our diluted net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income per share. Additionally, options are excluded from the calculation of earnings per share when we have a net loss or when the exercise price of the stock option is greater than the average market price of our common stock, as the impact of the stock options would be anti-dilutive.

Our results of operations and business could be adversely affected by wars and other military action, as well as terrorist attacks and threats and government responses thereto, especially if any such actions were directed at us or our facilities or customers.

Terrorist attacks in the United States and elsewhere, government responses thereto, and military actions in Iraq, Afghanistan and elsewhere, may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, any of these events could increase volatility in the United States and world financial markets, which may depress the price of our common stock and may limit the capital resources available to us or our customers or suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Additionally, terrorist attacks directly upon us may significantly disrupt our ability to conduct our business. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our common stock.

27




 

Item 2.                           Unregistered Sales of Equity Securities and Use of Proceeds.

On August 15, 2006, we issued 2,000 shares of our common stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor industry.

The following table sets forth our repurchases of our securities during the fiscal quarter ended September 30, 2006:

Period

 

Total number of
shares purchased

 

Average price
paid per share

 

Total number of shares
purchased as part of
publicly announced
program (1)

 

Maximum
dollar value of
shares that may
yet be
purchased
under the
program

 

 

 

 

 

 

 

 

 

(in thousands)

 

7/2/06 - 7/29/06

 

260,670

 

14.19

 

260,670

 

$

17,114

 

7/30/06 - 8/26/06

 

481,375

 

14.74

 

481,375

 

$

10,017

 

8/27/06 - 9/30/06

 

 

 

 

$

10,017

 

Total

 

742,045

 

14.55

 

742,045

 

 

 

 


(1) We announced on September 19, 2005 that our Board of Directors authorized the repurchase of up to $30 million of our common stock in the open market during the period commencing September 19, 2005 through September 30, 2007.

Item 3.                           Defaults Upon Senior Securities.

None.

Item 4.                           Submission of Matters to a Vote of Security Holders.

The following proposals were voted upon by the Company’s stockholders at the Company’s Annual Stockholders’ Meeting held on July 18, 2006.

 

1.                                        The following persons were elected as directors of the Company to serve for a term ending upon the Annual Stockholders’ Meeting indicated beside their respective names and until their successors are elected and qualified:

 

 

Terms Ending Upon the
Annual Stockholders’
Meeting

 

Votes for

 

Votes withheld

 

 

 

 

 

 

 

 

 

Arthur W. Zafiropoulo

 

2008

 

20,941,300

 

943,240

 

Joel F. Gemunder

 

2008

 

20,481,523

 

1,403,017

 

Nicholas Konidaris

 

2008

 

21,029,940

 

854,600

 

Rick Timmins

 

2008

 

21,048,140

 

836,400

 

 

2.                                        A proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006 was approved by the vote of 21,868,218 shares for; 8,318 shares against; and 8,003 shares abstained.

 

The proposals above are described in detail in the Company’s definitive proxy statement filed with the SEC on April 28, 2006 for the Annual Stockholders’ Meeting held on July 18, 2006.

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Item 5.                           Other Information.

As previously disclosed, we proactively established a special committee of our Board of Directors comprised solely of independent directors to conduct a voluntary, Company-initiated review of our historical stock option grants from our initial public offering in 1993 to the present. The special committee retained independent counsel to assist it with this review. The special committee has completed its review and concluded there were no material accounting issues or backdating or other inappropriate manipulation regarding the issuance and pricing of stock options. Based on these findings, we have determined that no adjustments to previously filed financial statements are required.

 

Item 6.                           Exhibits

31.1

Certification of Chief Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

29




 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

ULTRATECH, INC.

 

 

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

Date:

 

November 2, 2006

 

 

 

By:

 

/s/Bruce R. Wright

 

 

 

 

 

 

 

 

Bruce R. Wright

 

 

 

 

 

 

 

 

Senior Vice President, Finance and Chief Financial

 

 

 

 

 

 

 

 

Officer (Duly Authorized Officer and Principal

 

 

 

 

 

 

 

 

Financial and Accounting Officer)

 

30




EXHIBIT INDEX

31.1

 

Certification of Chief Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 




Exhibit 31.1

I, Arthur Zafiropoulo, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Ultratech, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 2, 2006

 

/s/ ARTHUR ZAFIROPOULO

 

 

 

Arthur Zafiropoulo

 

 

Chief Executive Officer

 




Exhibit 31.2

I, Bruce Wright, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Ultratech, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 2, 2006

 

/s/ BRUCE WRIGHT

 

 

 

Bruce Wright

 

 

Chief Financial Officer

 




Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur Zafiropoulo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

·                   the Quarterly Report of Ultratech, Inc. on Form 10-Q for the period ended September 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

·                   the information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Ultratech, Inc.

By:

/s/ ARTHUR ZAFIROPOULO

 

Date: November 2, 2006

Name:

Arthur Zafiropoulo

 

 

Title:

Chief Executive Officer

 

 

 

I, Bruce Wright, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

·                   the Quarterly Report of Ultratech, Inc. on Form 10-Q for the period ended September 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

·                   the information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Ultratech, Inc.

By:

/s/ BRUCE WRIGHT

 

Date: November 2, 2006

Name:

Bruce Wright

 

 

Title:

Chief Financial Officer

 

 

 


*                     A signed original of this written statement required by Section 906 has been provided to Ultratech, Inc. and will be retained by Ultratech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.