Ultratech, Inc.
ULTRATECH INC (Form: 10-K, Received: 03/07/2007 06:04:00)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

x                                Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                                                For the Fiscal Year Ended December 31, 2006

Or

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)

 

(408) 321-8835

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value Per Share;
Preferred Stock Purchase Rights

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

The aggregate market value of voting stock held by non-affiliates of the Registrant, as of July 1, 2006, was approximately $277,274,000 (based upon the closing price for shares of the Registrant’s Common Stock as reported by the NASDAQ Global Market on that date, the last trading date of the Registrant’s most recently completed second quarter). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 1, 2007, the Registrant had 23,243,322 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 




PART I

ITEM 1.                 BUSINESS

This Annual Report on Form 10-K contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. Such statements can generally be identified by words such as “anticipates”, “expects”, “intends”, “will”, “could”, “believes”, “estimates”, “continue”, and similar expressions. Our actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed under “Item 1A Risk Factors” and elsewhere in this Annual Report on Form 10-K.

The Company

Ultratech, Inc. (“Ultratech” or “we”) develops, manufactures and markets photolithography and laser processing equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components, thin film head magnetic recording devices (“thin film heads” or “TFHs”), optical networking devices, laser diodes and LEDs (light emitting diodes).

Lithography

We supply step-and-repeat systems based on one-to-one (“1X”) technology to customers located throughout North America, Europe, Japan and the rest of Asia. We believe that our 1X steppers utilizing the Wynne Dyson optical design offer cost and performance advantages, as compared with competitors’ contact aligners or reduction steppers, to semiconductor device manufacturers for applications involving line geometries of 0.75 microns or greater (“non-critical feature sizes”) and to nanotechnology manufacturers.

Advanced packaging for integrated circuits, specifically bump or wafer level chip scale packaging (“CSP”) techniques, require lithography steps in the device fabrication process. We continue to enhance our product offerings for bump, wafer level CSP processing and post passivation lithography (“PPL”). In addition, our steppers are used to manufacture high volume, low cost semiconductors used in a variety of applications such as telecommunications, automotive control systems, power systems and consumer electronics. We also supply 1X photolithography systems to thin film head manufacturers and believe that our steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, we supply 1X photolithography equipment to various other nanotechnology markets, where certain technical features, such as high resolution at gh-line wavelengths, depth of focus and special size substrates, may offer advantages over certain competing tools.

Laser Anneal Technology

Device scaling has been the predominant means pursued by the semiconductor industry to achieve the gains in productivity and performance quantified by Moore’s Law. In the past several years, scaled device performance has been compromised because traditional transistor materials such as silicon, silicon dioxide, and polysilicon, have been pushed to their fundamental materials limits. Continued scaling thus requires the introduction of new materials. For example, the traditional gate dielectric has been silicon dioxide and as devices are scaled below 45 nm high K material such as halfnium oxide must be considered because silicon dioxide begins to lose its effectiveness at levels below 45 nm. These new materials impose added challenges to the methods used to dope and activate silicon to produce very shallow, highly activated junctions. The main challenges regarding short channel effects include achieving maximum activation and minimal diffusion with abrupt junctions.

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By leveraging our core competencies in optics engineering and system integration and our extensive knowledge of laser processing, we introduced the LSA100 laser spike annealing system to enable thermal annealing solutions at the 65 nm technology node and below. This advanced annealing technology provides solutions to the difficult challenge of fabricating ultra-shallow junctions and highly activated source/drain contacts. Laser processing offers the flexibility to operate at near-instantaneous timeframes (microseconds to milliseconds) at temperatures below the melting point of silicon (1412° C). At these temperatures and anneal times, full activation is achieved with negligible diffusion. In addition, Ultratech’s proprietary hardware design minimizes the pattern density effect, reducing absorptivity variations.

Our products and markets are more fully described below.

General Background

The fabrication of devices such as integrated circuits (“semiconductors” or “ICs”) requires a large number of complex processing steps, including deposition, photolithography and etching. Deposition is a process in which a layer of either electrically insulating or electrically conductive material is deposited on the surface of a wafer. Typically deposition is followed by the photolithography imaging process in which the deposited layer is coated with a photosensitive layer called photoresist or resist. Exposure of the resist to an image formed by ultraviolet light followed by development, results in some of the resist being removed. A subsequent etching step selectively removes the deposited material from areas not protected by the remaining resist pattern.

Photolithography is one of the most critical and expensive steps in IC device manufacturing. Photolithography exposure equipment is used to create device features by patterning a light-sensitive polymer coating on the wafer surface using a photomask containing the master image of a particular device layer. Typically, each exposure results in the patterning of a different deposited layer and therefore, requires a different pattern on the device. Each new device layer must be properly aligned to previously defined layers before imaging takes place, so that structures formed on the wafers are correctly placed, one on top of the other, in order to ensure a functioning device.

Since the introduction of the earliest commercial photolithography tools for IC manufacturing in the early 1960s, a number of tools have been introduced to enable manufacturers to produce ever more complex devices that incorporate progressively finer line widths. In the early 1970s, photolithography tools included contact printers and proximity aligners, which required the photomask to physically contact or nearly contact the wafer in order to transfer the entire pattern during a single exposure. By the mid 1970s, there were also projection scanners, which transferred the device image through reflective optics having a very narrow annular field that spanned the width of the wafer. Exposure was achieved by scanning the entire photomask and wafer in a single, continuous motion across the annular field. Scanners were followed by steppers, which expose a rectangular area or field on the wafer containing one or more chip patterns in a single exposure, then move or “step” the wafer to an adjacent site to repeat the exposure. This stepping process is repeated as often as necessary until the entire wafer has been exposed. By imaging a small area, steppers are able to achieve finer resolution, improved image size control and better alignment between the multiple device layers resulting in higher yield and higher performance devices than was possible with earlier tools.

The two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely used steppers, and 1X steppers. Reduction steppers, which typically have reduction ratios of four or five-to-one, employ photomask patterns that are four or five times larger than the device pattern that is to be exposed on the wafer surface. In addition, there is now a fourth generation of lithography tools, known as step-and-scan systems, that address device sizes of 0.35 micron and below. In contrast to steppers, which require lenses that cover the entire field, step-and-scan optical systems have an instantaneous field just large enough to span the width of a field and employ scanning to

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stretch coverage over the entire field. Each scan is followed by re-registration of the wafer with respect to the mask, i.e. “stepping”, to create multiple fields covering the entire wafer. The smaller instantaneous field sizes of step-and-scan system projection optical systems allows them to resolve finer geometries and scanning allows them to cover larger fields.

The principal advantage of reduction steppers and step-and-scan systems is that they may be used in manufacturing steps requiring critical feature sizes and are therefore necessary for manufacturing advanced ICs. 1X steppers, on the other hand, employ photomask patterns that are the same scale as the device pattern that is exposed on the wafer surface. The optical projection system, employed in Ultratech’s 1X steppers is based on a Wynne Dyson design, which uses both a reflective mirror and refractive lens elements. This design approach leads to a very simple and versatile optical system that is less expensive than those employed in reduction steppers. Because our 1X optical design covers a much broader spectral range than reduction steppers, it delivers a greater proportion of the exposure energy from the lamp to the wafer surface. Depending on the size of the lamp used and the exposure energy required for an application, this can result in appreciably higher throughput. Resolution considerations currently limit 1X steppers to manufacturing steps involving less-critical, larger feature sizes. Accordingly, we believe that sales of these systems are highly dependent upon capacity expansions by our current 1X customers, or by customers making the transition to chips containing “bump” connections, that facilitate the use of higher data rates and a higher number of connections.

In the past, manufacturers of ICs and similar devices purchased capital equipment based principally on performance specifications. In view of the significant capital expenditures required to construct, equip and maintain advanced fabrication facilities, relatively short product cycles and manufacturers’ increasing concern for overall fabrication costs, we believe that focus is shifting to the total cost of ownership. Cost of ownership includes the costs associated with the acquisition of equipment, as well as components based on throughput, yield, up-time, service, labor overhead, maintenance, and various other costs associated with owning and using the equipment. As a result, in many cases the most technologically advanced system will not necessarily be the manufacturing system of choice.

In addition to enhancing our current lithography solutions, we have been developing new tools to serve new markets. The LSA100 tool is aimed at volume production of advanced state of the art devices. This product, based on the same platform and stage technology as our advanced lithography tools, employs a 3500 Watt CO 2  laser to activate ultra-shallow, transistor junctions. Annealing times are reduced from several seconds, typical for the current generation of Rapid Thermal Processing (RTP) equipment, to a millisecond or less. This results in more abrupt junctions with a higher dopant activation levels and leads to transistors with higher drive currents and lower leakage. While this technology is expected to be useful for multiple IC generations, we anticipate that eventually this technology will be superseded by a laser processing technology that will reduce the processing time below one microsecond, thereby achieving even higher performance characteristics with almost “zero” thermal budget. We believe these new LP technologies—for which we have been awarded 55 patents and have 63 patent applications pending—remove several critical barriers to future device scaling and will help to extend Moore’s Law well into the future.

Products

We currently offer two different series of 1X lithography systems for use in the semiconductor fabrication process: the 1000 Family, which addresses the markets for scanner replacement, high volume/low cost semiconductor fabrication and R&D packaging activities and nanotechnology applications; and the Saturn Spectrum and the AP series, which were designed to meet the requirements in the advanced packaging market. These steppers currently offer minimum feature size capabilities ranging from 2.0 microns to 0.75 microns.

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For the advanced packaging market, we offer our Saturn Spectrum Family as well as our new AP series built on the Unity Platform TM . These advanced packaging systems were developed for high volume bump and wafer level CSP manufacturing and post passivation lithography applications. They provide broadband (g, h and i-line) exposure or selective exposure (gh or i-line), and are used in conjunction with downstream processes to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. Using flip chip interconnect offers reduced signal inductance, reduced power/ground inductance, die shrink advantages and reduced package footprint.

The AP series, consisting of the AP300 & AP200, are built on our Unity Platform and feature a customer-configurable design that supports flexible manufacturing requirements as well as tool extendibility for multiple device generations. Designed to optimize productivity, the AP systems integrate the processing advantages associated with our advanced packaging lithography equipment with the productivity benefits of our new Unity Platform. We believe that these new lithography systems support a lower cost-of-ownership strategy due to significant throughput enhancements, higher reliability, and superior alignment and illumination systems.

The 1000 family is a small field system available with gh-line and i-line illumination options. In semiconductor applications, we offer the Star 100. This platform is typically used in the manufacture of power devices, ASICs, analog devices and compound semiconductors. In addition, this platform is well suited for a number of nanotechnology applications.

Nanotechnology manufacturing combines electronics with mechanics in small devices. We have defined a nanotechnology device as a device that has at least one dimension in the XYZ direction less than 0.1 microns. Examples include accelerometers used to activate air bags in automobiles and membrane pressure sensors used in industrial control systems. These micro-machined devices are manufactured on silicon substrates using photolithography techniques similar to those used for manufacturing semiconductors and thin film head devices. In addition, these systems are used in applications such as LED and laser diodes. In 2002, we introduced the NanoTech product family that consists of the NanoTech 100, NanoTech 160 and NanoTech 190. The NanoTech 160 system utilizes a platform based on the previous 1000 Series steppers, incorporating Dual Side Alignment (“DSA”) capability for applications requiring lithography on both sides of a wafer. The NanoTech 160 is an extension of the model 1600DSA stepper, and enhances the capabilities of the 1000 Series steppers by offering Dual Side Alignment capability, providing customers with a 1X stepper solution for this special processing requirement. Additionally, we believe that our NanoTech steppers offer resolution and depth of focus advantages over alternative technologies to the manufacturers of nanotechnology components.

The NanoTech 190 steppers have enhanced capabilities directed at TFH backend, or rowbar processing applications. These steppers are used to expose the Air Bearing Surface (ABS) patterns on rowbars.

We also sell upgrades to systems in our installed base and refurbished systems. These refurbished systems typically have a purchase price that is lower than the purchase price for our new systems.

We also offer an advanced laser-based thermal annealing tool, the LSA100, built on a platform that is essentially the same as our Unity Platform. Thermal annealing is used by the semiconductor industry for a variety of process steps, including activation of implanted impurities, dielectric film formation, formation of silicides and stabilization of copper grain structure. Annealing tools currently in use by manufacturers of semiconductor devices are furnaces and rapid thermal annealing, or Rapid Thermal Processing (“RTP”), systems. We believe there is a need for tools that anneal at higher temperatures for shorter periods of time and that our future laser annealing tools may ultimately provide this capability to the industry. The near-term application of our laser-based thermal annealing tools is anticipated to be in the area of source/drain dopant activation. However, we are also researching the use of these tools for other applications. In 2006 we shipped and revenued production systems for multiple customers.

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Our current systems are set forth below:

Product Line

 

 

 

Wavelength

 

Minimum
Feature Size
(microns)

 

1X Steppers:

 

 

 

 

 

 

 

 

 

1000 Series:

 

 

 

 

 

 

 

 

 

Star 100™

 

 

gh-line

 

 

 

0.8 - 1.0

 

 

NanoTech 100

 

 

gh-line

 

 

 

0.8 - 1.0

 

 

NanoTech 160

 

 

gh-line

 

 

 

1.0 - 2.0

 

 

NanoTech 190

 

 

gh-line

 

 

 

1.0 - 2.0

 

 

Prisma-ghi

 

 

ghi-line

 

 

 

4.0

 

 

Saturn Spectrum 300e 2

 

 

ghi-line

 

 

 

2.0

 

 

AP200

 

 

ghi-line

 

 

 

2.0

 

 

AP300

 

 

ghi-line

 

 

 

2.0

 

 

Laser Processing:

 

 

 

 

 

 

 

 

 

LSA100

 

 

NA

 

 

 

NA

 

 

 

Research, Development and Engineering

The semiconductor and nanotechnology industries are subject to rapid technological change and new product introductions and enhancements. We believe that continued and timely development and introduction of new and enhanced systems to serve these markets is essential for us to maintain our competitive position. We have made and continue to make substantial investments in the research and development of our core optical technology, which we believe is critical to our future financial results. We intend to continue to develop our technology and to develop innovative products and product features to meet customer demands. Current engineering projects include: continued research and development and process insertion for our laser processing technologies and continued development of our 1X stepper products. Other research and development efforts are currently focused on performance enhancement and development of new features for existing systems, both for inclusion as a standard component in our systems and to meet special customer order requirements; other efforts include reliability improvement; and manufacturing cost reductions. These research and development efforts are undertaken, principally, by our research, development and engineering organizations and costs are generally expensed as incurred. Other operating groups within Ultratech support our research, development and engineering efforts, and the associated costs are charged to those organizations and expensed as incurred.

We work with many customers to jointly develop technology required to manufacture advanced devices or to lower the customer’s cost of ownership. We also have a worldwide engineering support organization including reticle engineering, photo processing capability and applications support.

We have historically devoted a significant portion of our financial resources to research and development programs and expect to continue to allocate significant resources to these efforts in the future. As of December 31, 2006, we had approximately 84 full-time employees engaged in research, development, and engineering. For 2006, 2005 and 2004, total research, development, and engineering expenses were approximately $26.2 million, $27.0 million and $25.9 million, respectively, and represented 22%, 22% and 24% of our net sales, respectively.

Sales and Service

We market and sell our products in North America, Europe, Japan, Taiwan and the rest of Asia principally through our direct sales organization. We also have service personnel based throughout the United States, Europe, Japan and the rest of Asia.

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We believe that as semiconductor and nanotechnology device manufacturers produce increasingly complex devices, they will require an increased level of support. Global support capability as well as product reliability, performance, yield, cost, uptime and mean time between failures are increasingly important factors by which customers evaluate potential suppliers of photolithography equipment. We believe that the strength of our worldwide service and support organization is an important factor in our ability to sell our systems, maintain customer loyalty and reduce the maintenance costs of our systems. In addition, we believe that working with our suppliers and customers is necessary to ensure that our systems are cost effective, technically advanced and designed to satisfy customer requirements.

We support our customers with field service, applications, technical service engineers and training programs. We provide our customers with comprehensive support and service before, during and after delivery of our systems. To support the sales process and to enhance customer relationships, we work closely with prospective customers to develop hardware, software and applications test specifications and benchmarks, and often design customized applications to enable prospective customers to evaluate our equipment for their specific needs. Prior to shipment, our support personnel typically assist the customer in site preparation and inspection, and provide customers with training at our facilities or at the customer’s location. We currently offer our customers various courses of instruction on our systems, including instructions in system hardware, software and applications tools for optimizing our systems to fit a customer’s particular needs. Our customer training program also includes instructions in the maintenance of our systems. Our field support personnel work with the customer’s employees to install the system and demonstrate system readiness. Technical support is also available via telephone and through on-site Ultratech personnel.

In general, we warrant our new systems against defects in design, materials and workmanship for one year. We offer our customers additional support after the warranty period for a fee in the form of service contracts for specified time periods. Service contracts include various options such as priority response, planned preventive maintenance, scheduled one-on-one training, daily on-site support, and monthly system and performance analysis.

Manufacturing

We perform all of our manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 25,000 square feet located in San Jose, California. Performing manufacturing operations in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, in the past California has experienced power shortages, which have interrupted our operations. Such shortages could occur in the future and could again interrupt our operations resulting in product shipment delays, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations. We are not insured against natural disasters and power shortages and the occurrence of such an event could have a material adverse impact on our business, financial condition and 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 machine the lens elements. We then assemble and test the optical 1X lenses. We have recorded the critical parameters of each of our optical lenses sold since 1988, and believe that such information enables us to supply lenses to our customers that match the characteristics of our customers’ existing lenses.

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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 result in 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 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.

We maintain a company-wide quality program. Our operations achieved ISO 9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001. Our ISO 9001 certification was upgraded to the ISO 9001:2000 standard in January 2002. Our ISO 14001 certification was upgraded to the ISO 14001:2004 standard in June 2006. All certifications have been maintained uninterrupted through the date of this report.

Competition

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.

Advanced Packaging

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec) and projection companies such as Ushio, Inc. (Ushio) and Tamarack Scientific Co., Inc. (Tamarack). 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. We believe that to be competitive will require significant financial resources in order to continue to invest in new product development, to invest in new features and enhancements to existing products, to introduce new generation stepper systems in our served markets on a timely basis, and to maintain customer service and support centers worldwide. In marketing our products, we may also face competition from suppliers 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.

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We have obtained a leadership position in the advanced packaging market. Our primary competition in this market comes from contact aligners offered by companies such as Suss Microtec. Although contact and proximity aligners generally have lower purchase prices than 1X steppers, 1X steppers offer lower operating costs and total cost of ownership in most applications. We believe that most device manufacturers and wafer bump foundries choose 1X steppers due to the yield improvement offered by the use of non-contact lithography. Ushio, a Japanese semiconductor equipment company, has also introduced a 1X refractive stepper for the advanced packaging market. However, we believe 1X refractive steppers do not offer the same productivity and cost saving advantages as our 1X stepper based on the Wynne Dyson optical design. Tamarack has a 1X scanner for wafer bumping applications. We believe that Tamarack’s 1X scanners have higher operating costs as compared to our 1X steppers. In addition to competition from manufacturers of contact and proximity aligners, we also face competition from reduction stepper manufacturers. While reduction steppers are typically more expensive and offer less flexibility in processing thick resists, some device manufacturers may consider this technology option.

Laser Processing

With respect to our laser annealing technologies, marketed under the LSA100 product name, our 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 (RTP), which is the current 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 seriously limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. Several companies have published papers on annealing tools that incorporate flash lamp anneal (FLA) 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 suffers from pattern-related non-uniformities and could require additional, costly processes to equalize 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 timescales, while achieving high activation levels. LSA, our 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 minimal dopant diffusion.

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 and others intend to offer laser annealing tools to the semiconductor industry that will compete with our offerings. We believe that Applied Materials is working to introduce a laser based system thatwill suffer cost of ownership disadvantages.

Intellectual Property Rights

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 on inventions resulting from our ongoing research and development and manufacturing activities. We own 116 United States and foreign patents, which expire on dates ranging from April 2007 to December 2024 and have 87 United States and foreign patent applications pending. We also have various registered trademarks and copyright registrations covering mainly software programs

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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 or 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 less revenue for us.

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. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 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 awards costs. On February 13th, 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. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

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 court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

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 as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such

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event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

We have from time to time been notified of claims that we may be infringing intellectual property rights possessed by third parties. We believe that the outcome of these matters will not be material to our business, results of operations or financial condition.

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, results of operations and financial condition, regardless of the outcome of any litigation.

Environmental Regulations

We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by us to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.

Customers, Applications and Markets

We sell our systems to semiconductor, advanced packaging, thin film head, ink jet printer/accelerometer and various other nanotechnology manufacturers located throughout North America, Europe, Japan, Taiwan and the rest of Asia. Semiconductor manufacturers have purchased the 1000 Series steppers, the AP series of steppers, and the NanoTech steppers for the fabrication and/or packaging of microprocessors, microcontrollers, DRAMs, ASICs and a host of other devices. Such systems could be used in mix-and-match applications with other lithography tools, as replacements for scanners and contact proximity printers, in packaging for flip chip applications and for high volume, low cost, less critical feature size production.

In addition to the business risks associated with dependence on 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 record additional accounts receivable reserves, our business, results of operations and 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 94% of system revenue for the year ended December 31, 2006, as compared to 79% and 75% for each of the years ended December 31, 2005 and 2004, respectively. During 2006, 2005 and 2004, approximately 6%, 21% and 25%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including micro systems, thin film head and optical networking device manufacturers. Our future results of operations and financial position would be

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materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries.

International sales accounted for approximately 64%, 69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively, with Japan representing 26%, 13% and 32% of sales for those same years.

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.

Backlog

We schedule production of our systems based upon order backlog, informal customer commitments and general economic forecasts for our targeted markets. We include in our backlog all accepted customer orders for our systems with assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades, in each case, that management believes to be firm. However, all orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of changes in system delivery schedules, cancellations of orders and potential delays in system shipments, our backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2006, our backlog was approximately $82.7 million, including $0.3 million of products shipped but not yet installed. In 2005, we had backlog of $108.8 million, and all products shipped had been installed and accepted as of December 31, 2005. Cancellation, deferrals or rescheduling of orders by these customers would have a material adverse impact on our future results of operations.

Employees

At December 31, 2006, we had approximately 332 full-time employees, including 84 engaged in research, development, and engineering, 27 in sales and marketing, 110 in customer service and support, 64 in manufacturing and 47 in general administration and finance. We believe our future success depends, in large part, on our ability to attract and retain highly skilled employees. None of our employees are covered by a collective bargaining agreement. We have, however, entered into employment agreements with a limited number of our employees, including our executive officers. We consider our relationships with our employees to be good.

Information Available on Our Web-site

Our 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

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officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to this Code will also be posted on our website.

Item 1A                    Risk Factors

In addition to risks described in the foregoing discussions under “Business,” including but not limited to those under “Products,” “Research, Development and Engineering,” “Sales and Service,” “Manufacturing,” “Competition,” “Intellectual Property Rights,” “Environmental Regulations,” “Customers, Applications and Markets,” “Backlog,” and “Employees,” the following risks apply to us and our business:

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 2007, 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, 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 must 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.

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 acceptances 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

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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.

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 on inventions resulting from our ongoing research and development and manufacturing activities. We own 116 United States and foreign patents, which expire on dates ranging from April 2007 to December 2024 and have 87 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 or 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 less revenue for us.

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. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 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 awards costs. On February 13th, 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. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

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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 court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

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 as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim 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. We believe that the outcome of these matters will not be material to our business, results of operations or financial condition.

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) and projection companies such as Ushio, Inc. (Ushio). In

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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.

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 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 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 suffers from pattern-related non-uniformities and could require additional, costly processes to equalize 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 achieving high activation levels. 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 minimal dopant diffusion.

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.

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Historically, we have sold a substantial portion of our systems to a limited number of customers. In 2006, Matsushita and Intel accounted for 12% and 11%, respectively, of our net sales. In 2005, and 2004, Intel Corporation accounted for 13% and 10%, respectively, 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 94% and 79% of system revenue for the years ended 2006 and 2005, respectively. In 2006 and 2005, approximately 6% and 21%, 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 and financial condition would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries. A growing portion of our backlog of system orders is comprised of laser spike annealing tools. To date, we have limited customer 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 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 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.

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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.

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 can 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.

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

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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  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.

A substantial portion of our sales are 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 64%, 69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively. We anticipate that international sales 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.

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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. We have entered into employment agreements with only a limited number of our employees, including our Chief Executive Officer and Chief Financial Officer, and our employees are employed “at will.” 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 people. 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, and there can be no assurance that we will be successful in attracting or retaining such personnel. 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 which are completed before a change is announced.

Accounting policies affecting many other 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.

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, and 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 have increased and will continue to increase our legal and financial compliance costs, and have made some activities more difficult, such as by 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

20




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 equity incentive plans, 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,  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 our 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, and 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, 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 March 1, 2007, we had options to purchase approximately 5,685,727 shares of our Common Stock outstanding. Among other determinants, the market price of our stock has a major bearing on the number of shares subject to outstanding stock options that are included in the weighted-average shares used in determining our 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 (loss) per share. Additionally, shares subject to outstanding options are excluded from the calculation of net income (loss) 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

21




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.

If we acquire companies, products, or technologies, we may face risks associated with those acquisitions.

On July 26, 2006 we purchased certain assets of Oraxion, Inc. Oraxion produced inspection equipment for surface metrology and stress analysis for the semiconductor industry. We may not realize the anticipated benefits of any acquisition or investment. We may in the future pursue additional 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.

Our long-term expenses reduction programs may result in an increase in short-term expenses.

In the fourth quarter of 2006, we eliminated approximately 29 full-time positions, 69% in the United States and 31% internationally, and entered into a lease buyout agreement for the operating lease in the United Kingdom facility as part of our long-term expense reduction initiatives. As of December 31, 2006, we have reduced our workforce by 27 personnel in connection with this plan and recorded exit activity charges of approximately $1.9 million related to this plan. We may from time to time undertake additional expense reduction programs or actions, any of which could result in current period charges and expenses that could have a material adverse effect on that period’s operating results.

ITEM 1B.        UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.                 PROPERTIES

Ultratech maintains its headquarters and manufacturing operations in San Jose, California in two leased facilities, totaling approximately 177,000 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development, and engineering. The leases for these facilities expire at various dates from March 2010 to January 2011. We also lease sales and support offices in the United States in East Fishkill, New York and Woburn, Massachusetts under leases expiring in 2007 and 2008, respectively. We maintain offices outside the United States in Taiwan, the Philippines, Japan, Korea, France, and China, with terms expiring between seven months and five years from December 31, 2006. We believe that our existing facilities will be adequate to meet our currently anticipated requirements and that suitable additional or substitute space will be

22




available as needed. In the fourth quarter of 2006, in order to drive company-wide savings, we entered into a lease buyout agreement for the operating lease in the United Kingdom facility and we also exited a Texas facility when the lease expired.

ITEM 3.                 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. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 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 awards costs. On February 13th, 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. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

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 court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

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 as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

23




ITEM 4.                 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2006.

Executive Officers of the Registrant

As of December 31, 2006, the executive officers of Ultratech, who are appointed by and serve at the discretion of the Board of Directors, were as follows:

Name

 

 

 

Age

 

Position with the Company

Arthur W. Zafiropoulo

 

67

 

Chairman of the Board of Directors, Chief Executive Officer and President

Bruce R. Wright

 

58

 

Senior Vice President, Finance, Chief Financial Officer and Secretary

 

Mr. Zafiropoulo founded Ultratech in September 1992 to acquire certain assets and liabilities of the Ultratech Stepper Division (the “Predecessor”) of General Signal Technology Corporation (“General Signal”) and, since March 1993, has served as Chief Executive Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of Ultratech from March 1993 to March 1996, from May 1997 until April 1999 and from April 2001 to January 2004. In October 2006, he resumed the responsibilities of President and Chief Operating Officer. Between September 1990 and March 1993, he was President of the Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President of General Signal’s Semiconductor Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor equipment manufacturer, which was a unit of General Signal. From July 2001 to July 2002, Mr. Zafiropoulo served as Vice Chairman of SEMI (Semiconductor Equipment and Materials International), an international trade association representing the semiconductor, flat panel display equipment and materials industry. From July 2002 to June 2003, Mr. Zafiropoulo served as Chairman of SEMI, and Mr. Zafiropoulo has been on the Board of Directors of SEMI since July 1995.

Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary since joining Ultratech on June 1, 1999. From May 1997 to May 1999, Mr. Wright served as Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation, a radio frequency (RF) amplifier company. From November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments. Mr. Wright serves on the Board of Directors of Credence Systems Corporation, a provider of products and equipment used for the testing of semiconductor integrated circuits.

24




PART II

ITEM 5.                 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Market under the symbol UTEK. The following table sets forth, for the periods indicated, the range of high and low reported sale prices of our Common Stock

Fiscal 2006—Fiscal Quarter Ended

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

Market Price:

High

 

 

$

25.01

 

 

$

25.03

 

 

$

15.96

 

 

 

$

15.04

 

 

 

 

Low

 

 

$

15.76

 

 

$

14.65

 

 

$

12.75

 

 

 

$

10.56

 

 

 

 

Fiscal 2005—Fiscal Quarter Ended

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

Market Price:

High

 

 

$

19.12

 

 

$

21.64

 

 

$

22.93

 

 

 

$

17.87

 

 

 

Low

 

 

$

13.50

 

 

$

14.29

 

 

$

13.57

 

 

 

$

13.21

 

 

 

As of March 1, 2007, we had approximately 337 stockholders of record.

Ultratech’s fiscal quarters in 2006 ended on April 1, 2006, July 1, 2006, September 30, 2006 and December 31, 2006, and our fiscal quarters in 2005 ended on April 2, 2005, July 2, 2005, October 1, 2005 and December 31, 2005. For convenience of presentation, our fiscal quarters in each year have been shown as ending on March 31, June 30, September 30, and December 31.

We have not paid cash dividends on our Common Stock since inception, and our Board of Directors presently plans to reinvest our earnings in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future.

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.

On August 24, 2005, we issued 1,500 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 global trade organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor industry.

In August 2004, we issued 1,250 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 global trade organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor equipment industry.

We announced on September 19, 2005 that our Board of Directors authorized the repurchase of up to $30.0 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. During 2006, we repurchased 742,045 shares of our common stock at a total purchase price of $10.8 million. As of December 31, 2006, we had repurchased 1,386,580 shares of our common stock for a total of $20.0 million since the stock repurchase authorization date.

25




ITEM 6.                 SELECTED FINANCIAL DATA

In thousands, except per share data
and percentage information

 

 

 

2006(c)

 

2005

 

2004

 

2003(b)

 

2002(a)

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

119,633

 

$

122,366

 

$

109,892

 

$

100,121

 

$

68,506

 

Gross profit

 

46,024

 

52,047

 

52,693

 

46,611

 

14,850

 

Gross profit as a percentage of net sales

 

38

%

43

%

48

%

47

%

22

%

Operating income (loss)

 

$

(14,371

)

$

(4,875

)

$

(2,429

)

$

2,972

 

$

(36,506

)

Income (loss) before income taxes and cumulative effect of a change in accounting principle

 

(8,014

)

(522

)

1,069

 

6,996

 

(30,248

)

Pre-tax income (loss) as a percentage of net sales

 

(6.7)

%

(0.4)

%

1.0

%

7.0

%

(44.2)

%

Provision (benefit) for income taxes

 

$

954

 

$

699

 

$

445

 

$

(570

)

$

(4,866

)

Income (loss) before cumulative effect of a change in accounting principle

 

(8,968

)

(1,221

)

624

 

7,566

 

(25,382

)

Cumulative effect of the adoption of FIN 47

 

$

 

$

(1,122

)

$

 

$

 

$

 

Net income (loss)

 

$

(8,968

)

$

(2,343

)

$

624

 

$

7,566

 

$

(25,382

)

Income (loss) before cumulative effect of a change in accounting principle per share—basic

 

(0.38

)

(0.05

)

0.03

 

0.33

 

(1.12

)

Cumulative effect of the adoption of FIN 47 per share—basic

 

$

 

$

(0.05

)

$

 

$

 

$

 

Net income (loss) per share—basic

 

$

(0.38

)

$

(0.10

)

$

0.03

 

$

0.33

 

$

(1.12

)

Number of shares used in per share computation—basic

 

23,764

 

23,964

 

23,733

 

23,017

 

22,586

 

Income (loss) before cumulative effect of a change in accounting principle per share—diluted

 

(0.38

)

(0.05

)

0.03

 

0.31

 

(1.12

)

Cumulative effect of the adoption of FIN 47 per share—diluted

 

 

 

$

(0.05

)

$

 

$

 

$

 

Net income (loss) per share—diluted

 

$

(0.38

)

$

(0.10

)

$

0.03

 

$

0.31

 

$

(1.12

)

Number of shares used in per share computation—diluted

 

23,764

 

23,964

 

24,734

 

24,476

 

22,586

 

Balance sheet:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments (Note 8)

 

$

78,090

 

$

141,067

 

$

151,627

 

$

165,902

 

$

157,529

 

Working capital

 

104,951

 

165,181

 

169,621

 

170,501

 

152,160

 

Total assets

 

216,050

 

222,309

 

230,546

 

220,748

 

222,366

 

Stockholders’ equity

 

174,108

 

188,950

 

193,290

 

190,739

 

171,754

 

 

26




Quarterly Data

Unaudited, in thousands, except per share data

 

 

 

1st

 

2nd

 

3rd

 

4th

 

2006

 

 

 

 

 

 

 

 

 

Net sales

 

$

34,944

 

$

26,043

 

$

33,943

 

$

24,703

 

Gross profit

 

13,657

 

11,811

 

12,450

 

8,106

 

Operating income (loss)

 

207

 

(2,884

)

(3,568

)

(8,126

)

Net income (loss)

 

1,582

 

(1,176

)

(2,568

)

(6,806

)

Net income (loss) per share—basic

 

$

0.07

 

$

(0.05

)

$

(0.11

)

$

(0.29

)

Number of shares used in per share computation—basic

 

23,830

 

23,927

 

23,477

 

23,213

 

Net income (loss) per share—diluted

 

$

0.06

 

$

(0.05

)

$

(0.11

)

$

(0.29

)

Number of shares used in per share computation—diluted

 

25,127

 

23,927

 

23,477

 

23,213

 

2005

 

 

 

 

 

 

 

 

 

Net sales

 

$

27,962

 

$

28,826

 

$

30,349

 

$

35,229

 

Gross profit

 

12,278

 

11,689

 

13,014

 

15,066

 

Operating income (loss)

 

(2,855

)

(3,340

)

(214

)

1,534

 

Income before cumulative effect of change in accounting principle

 

 

 

 

2,474

 

Cumulative effect of the adoption of FIN 47

 

 

 

 

(1,122

)

Net income (loss)

 

(1,896

)

(1,994

)

195

 

1,352

 

Net income (loss) per share—basic:

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

 

$

(0.08

)

$

(0.08

)

$

0.01

 

$

0.10

 

Cumulative effect of the adoption of FIN 47

 

$

 

$

 

$

 

$

(0.04

)

Net Income (loss)

 

$

(0.08

)

$

(0.08

)

$

0.01

 

$

0.06

 

Number of shares used in per share computation—basic

 

23,877

 

23,944

 

24,129

 

23,905

 

Net income (loss) per share—diluted:

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

 

$

(0.08

)

$

(0.08

)

$

0.01

 

$

0.10

 

Cumulative effect of the adoption of FIN 47

 

$

 

$

 

$

 

$

(0.04

)

Net Income (loss)

 

$

(0.08

)

$

(0.08

)

$

0.01

 

$

0.06

 

Number of shares used in per share computation—diluted

 

23,877

 

23,944

 

25,067

 

24,323

 


(a)            Operating loss in 2002 includes a charge of: $5,305,000 related to cost of inventory write-downs; $1,425,000 related to cost of discontinued products; and $4,090,000 related to restructuring of operations.

(b)           Operating income in 2003, includes the favorable impact of selling inventory and discontinued products previously written down of $1,672,000. Operating income in 2003 also includes the favorable impact of reducing reserves established in prior years for the restructuring of operations of $728,000.

(c)            Operating loss in 2006 includes a charge of  $1,907,000 related to certain exit activities (of which $96,000 relating to the acceleration of restricted stock units and options are included in stock-based compensation expenses) and $1,957,000 of stock-based compensation expenses. Refer to Notes 5 and 11 of our consolidated financial statements herein for further disclosures related to these items.

27




ITEM 7.                 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 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; 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, Inc. 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 circuit industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, optical networking devices, laser diodes and LEDs (light emitting diodes). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

In July 2006, we completed the acquisition of certain assets of Oraxion, Inc., a manufacturer of advanced surface-metrology and stress-analysis equipment for the semiconductor and related industries. As a result of this acquisition, we plan to utilize Oraxion’s CGS-300 wafer inspection/metrology tool in conjunction with our own LSA100 laser spike anneal system used for 65nm and other next-generation devices.

28




In the fourth quarter of 2006, in order to reduce company-wide expenses, we eliminated approximately 29 full-time positions, 69% in the United States and 31% internationally, and entered into a lease buyout agreement for the operating lease in the United Kingdom facility.  In addition, we plan to take similar actions during the first quarter of 2007. We expect these activities to be substantially completed by March 31, 2007.

Beginning in fiscal 2006, we accounted for stock-based compensation in accordance with SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. As a result of adopting SFAS 123R on January 1, 2006, and excluding the expense related to restricted stock units which would have been included in our Consolidated Statements of Operations under the provisions of APB No. 25, our Consolidated Statements of Operations for the year ended December 31, 2006 changed by $0.9 million as compared to what we would have reported had we continued to account for share-based compensation under APB No. 25.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and 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 on-going basis, we evaluate our estimates, including those related to inventories, warranty obligations, purchase order commitments, bad debts, income taxes, intangible assets, restructuring liabilities, asset retirement obligations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other 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.

We believe the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these policies with our Audit Committee.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured. We derive revenue from four sources—system sales, spare parts sales, service contracts and license fees.

Provided all other criteria are met, we recognize revenues on system sales when we have received customer acceptance of the system. In the event that terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. In these instances, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.

Our transactions frequently include the sale of systems and services under multiple element arrangements. In situations with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. Consideration from multiple element arrangements is allocated among the separate accounting units based on the residual method under which the revenue is allocated to

29




undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements, provided the undelivered elements have value on a stand alone basis, there is objective and reliable evidence of fair value for the undelivered elements, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period and service contracts based on a purchased quantity of hours under which revenue is recognized as service hours are delivered. We recognize revenue from licensing and technology support agreements ratably over the contract period, or the estimated useful life of the licensed technologies, whichever is shorter.

Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.”

Costs incurred for shipping and handling are included in cost of sales.

Inventories and Purchase Order Commitments

The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory at lower of cost or market. Although we make every effort to ensure the accuracy of our forecasts of product demand, any significant unanticipated changes in demand, product mix or technological developments would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too optimistic and we determine that our inventory needs to be written down, we will be required to recognize such costs in our cost of sales at the time of such determination. For example, if the demand assumption used in our assessment at December 31, 2006 was reduced by 10%, assuming all other assumptions such as product mix are kept the same and that mitigation efforts were not possible, we would have had to write down our inventory and open purchase commitments by $0.2 million. Conversely, if we find our estimates are too pessimistic and we subsequently sell product that has previously been written down, our gross margin in that period will be favorably impacted. During 2002, we recorded a write down of inventory of $6.7 million and subsequently we realized favorable gross margin impacts of  $0.1 million and $1.0 million in 2005 and 2004, respectively, due to sales of inventory that was previously written down. In 2006, we did not sell any previously written down inventory.

Warranty Obligations

We recognize the estimated cost of our product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from our estimates, revisions to the estimated warranty liability would be required which could result in future charges or credits to our gross margins. As may occur with new product introductions, warranty costs in 2006 were higher than anticipated by approximately $1.5 million. We believe our warranty accrual, as of December 31, 2006, will be sufficient to satisfy outstanding obligations as of that date.

30




Allowance for Bad Debts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. If the financial condition of our customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The average selling price of our systems is in excess of $2.5 million. Accordingly, a single customer default could have a material adverse effect on our results of operations. Our bad debt reserve as a percentage of gross accounts receivable increased from 1.2% at December 31, 2004 to 2.9% and 2.5% at December 31, 2005 and 2006 due principally to the impact of bad debt expense associated with a customer bankruptcy filing ($0.3 million) during 2005.

Deferred Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2006, we had recorded a valuation allowance of $77.7 million against our net deferred tax assets except those in Japan and Taiwan. As of December 31, 2006, we had recorded approximately $0.4 million of net foreign deferred tax assets related to our operations in Japan and Taiwan. Based on projected future pre-tax income in Japan and Taiwan, these assets were not subject to a valuation allowance as it is more likely than not that they will be realized in the future.

Stock-Based Compensation

Beginning in fiscal 2006, we have accounted for stock-based compensation in accordance with SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. If actual results differ significantly from these estimates, stock-based compensation expense recognized in our results of operations could be materially affected. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS 123R, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.

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 $5.6 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. 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

31




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 continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting 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.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net sales

2006 vs. 2005

(in millions)

 

 

 

2006

 

2005

 

Amount of
Change

 

Percentage
Change

 

Sales of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

$

87.9

 

$

93.2

 

 

$

(5.3

)

 

 

-6

%

 

Spare parts

 

17.3

 

15.2

 

 

2.1

 

 

 

14

%

 

Services

 

14.2

 

12.5

 

 

1.7

 

 

 

13

%

 

Licenses

 

0.2

 

1.5

 

 

(1.3

)

 

 

-87

%

 

Total Net Sales

 

$

119.6

 

$

122.4

 

 

$

(2.9

)

 

 

-2

%

 

 

Net sales consist of revenues from system sales, spare parts sales, services and licensing of technologies. For the year ended December 31, 2006, systems revenue accounted for approximately 73% of total net sales, and services, licenses and spare parts accounted for the remaining 27%. System sales decreased 6% to $87.9 million on a system unit volume decrease of 18%. This decrease was partially offset by a 15% increase in the average selling price of systems sold in 2006 compared to 2005. The revenue decrease was due primarily to delivery push-outs in the fourth quarter of 2006, reflecting softer business conditions. The average selling price of systems sold increased from the prior year primarily as a result of a shift in product mix in favor of our new laser processing products and away from our legacy platform products and refurbished units. In 2006, refurbished systems accounted for approximately 9% of units sold as compared to 18% of units sold in 2005. This percentage can fluctuate from year to year and, as refurbished units generally have lower average selling prices than new units, any such fluctuation will impact the weighted average selling price of the systems sold.

On a product market application basis, system sales to the semiconductor industry were $82.7 million for the year ended December 31, 2006, an increase of 13% as compared with system sales of $73.4 million in 2005. This increase was due to a 104% increase in laser thermal processing system sales. These systems typically have significantly higher average selling prices, as compared to our nanotechnology offerings.

32




System sales to the nanotechnology market were $5.2 million for the year ended December 31, 2006, a decrease of 74% as compared with sales of $19.8 million in 2005. System sales to the nanotechnology market are highly dependent on customer capacity demand in the thin film head industry.

Sales of spare parts in 2006 increased 14%, to $17.3 million, as compared to $15.2 million in 2005. This increase was mainly due to increased spare part usage as the result of system upgrades revenue increase in 2006 as compared to 2005. Revenues from services grew 13% to $14.2 million for the year ended December 31, 2006 as compared with $12.5 million in 2005. The increase in service revenue was primarily due to an increase in service provided as the result of system upgrades and additional service contracts entered into in 2006.

Licensing and licensing support arrangements declined to $0.2 million in 2006 as compared with $1.5 million in 2005. In 2006, we recognized license revenue of $0.2 million. In 2005, we recognized $1.0 million of amortization revenue from prior-period licensing agreements and $0.5 million of revenue from licensing agreements. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing and royalty arrangements, including those, if any, resulting from litigation. We may not be successful in generating licensing revenues and do not anticipate the recognition of significant levels of licensing income in the future.

At December 31, 2006, we had approximately $3.0 million of deferred product and services income resulting from products shipped but not yet installed and accepted, as compared with $2.0 million at December 31, 2005.

For the year ended December 31, 2006, international net sales were $76.6 million, or 64% of total net sales, as compared with $84.9 million, or 69% of total net sales in 2005. We expect sales to international customers to continue to represent a significant majority of our revenues during 2007. 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. For the year ended December 31, 2006, we recorded system sales in Japan of $27.5 million, of which 25% were 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 $8.8 million of Japanese yen-denominated receivables at December 31, 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 “Risk Factors: International Sales”).

Net sales

2005 vs. 2004

(in millions)

 

 

 

2005

 

2004

 

Amount of
Change

 

Percentage
change

 

Sales of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

$

93.2

 

$

82.0

 

 

$

11.2

 

 

 

14

%

 

Spare parts

 

15.2

 

11.4

 

 

3.8

 

 

 

33

%

 

Services

 

12.5

 

12.3

 

 

0.2

 

 

 

2

%

 

Licenses

 

1.5

 

4.2

 

 

(2.7

)

 

 

-64

%

 

Total Net Sales

 

$

122.4

 

$

109.9

 

 

$

12.5

 

 

 

11

%

 

 

33




System sales increased 14%, to $93.2 million. The average selling price of systems sold increased 29% from the prior year primarily as a result of increased sales to laser thermal processing and advanced packaging customers. The number of systems sold declined by 12% as a result of decreased sales of our 1000 and 100 series products. In 2005, refurbished systems accounted for approximately 18% of units sold as compared to 30% of units sold in 2004. This percentage can fluctuate from year to year and, as refurbished units generally have lower average selling prices than new units, any such fluctuation will impact the weighted average selling price of the systems sold.

On a product market application basis, system sales to the semiconductor industry were $73.4 million for the year ended December 31, 2005, an increase of 19% as compared with system sales of $61.5 million in 2004. This increase was due to an 18% increase in sales to the advanced packaging markets and a 217% increase in laser thermal processing system sales. These systems typically have significantly higher average selling prices, as compared to our nanotechnology offerings. System sales to the nanotechnology market were $19.8 million for the year ended December 31, 2005, a decrease of 3% as compared with sales of $20.5 million in 2004.

Sales of spare parts for 2005 increased 33%, to $15.2 million, as compared to $11.4 million in 2004. This increase was mainly due to more revenue from system upgrades in 2005 as compared to 2004. Revenues from services grew 2% to $12.5 million for the year ended December 31, 2005 as compared with $12.3 million in 2004.

Revenues from licensing and licensing support arrangements declined to $1.5 million, as compared with $4.2 million in 2004, as 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 existing and future licensing and royalty arrangements, including those, if any, resulting from litigation. We may not be successful in generating licensing revenues in the future.

At December 31, 2005, we had approximately $2.0 million of deferred product and services income resulting from products shipped but not yet installed and accepted and deferred service revenue, as compared with $1.2 million at December 31, 2004.

For the year ended December 31, 2005, international net sales were $84.9 million, or 69% of total net sales, as compared with $71.7 million, or 65% of total net sales for 2004. For the year ended December 31, 2005, we recorded system sales in Japan of $12.5 million, of which 26% were denominated in Japanese yen. We had approximately $1.6 million of Japanese yen-denominated receivables at December 31, 2005.

Gross profit

2006 vs. 2005

On a comparative basis, gross margins were 38.5% and 42.5% for 2006 and 2005, respectively. The 4.0 percentage point decline in gross margin in 2006 was mainly due to higher unabsorbed manufacturing expenses (2.9 points), higher unabsorbed service expenses (1.8 points) and higher inventory writedowns (0.9 points) partially offset by higher standard margin (1.3 points) due to changes in revenue mix resulting primarily from 5 laser thermal processing systems and 16 AP200/300 systems accepted during 2006 as compared with 3 laser thermal processing systems and 7 AP200/300 systems in 2005. The remaining 0.3 points are due to other miscellaneous charges, each of which individually is insignificant.

Exclusive of licensing revenues, gross margin was 38.4% for 2006 as compared with 41.8% for 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.

34




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 mix of products sold; the introduction of new products, which typically have higher manufacturing, installation and after-sale support costs until efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the rate of capacity utilization; writedowns of inventory and open purchase commitments; technology support and licensing revenues, which have 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.

2005 vs. 2004

On a comparative basis, gross margins were 42.5% and 47.9% for 2005 and 2004, respectively. The 5.4 percentage point decline in gross margin in 2005 was due to changes in revenue mix resulting primarily from the three laser thermal processing systems accepted during the fourth quarter of 2005 (2.5 points), certain manufacturing costs (1.3 points) and installation costs (0.9 points) resulting from the production and shipment ramp of our laser thermal processing systems and unity platform lithography systems and higher manufacturing costs resulting from facilities upgrades completed in late 2004 (0.7 points).

Exclusive of licensing revenues, gross margin was 41.8% for 2005 as compared with 45.9% for 2004. 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.

Research, development and engineering expenses

2006 vs. 2005

(in millions)

 

 

 

2006

 

2005

 

Amount of
Change

 

Percentage
change

 

Research, development and engineering expenses

 

$

26.2

 

$

27.0

 

 

$

(0.8

)

 

 

-3

%

 

 

The decrease in research, development and engineering expenses in 2006, as compared to 2005, was primarily the result of lower spending associated with the development of our laser processing technologies. Given that there is an inherent delay between the time product development activities and expenditures occur and when resultant product revenue is ultimately realized, we expect current year research, development and engineering investments to contribute to revenue in future years. As a percentage of net sales, research, development and engineering expenses for each of the two years ended December 31, 2006 and 2005, respectively, were approximately 22%.

2005 vs. 2004

(in millions)

 

 

 

2005

 

2004

 

Amount of
Change

 

Percentage
change

 

Research, development and engineering expenses

 

$

27.0

 

$

25.9

 

 

$

1.1

 

 

 

4

%

 

 

The increase in research, development and engineering expenses in 2005, as compared to 2004, was primarily due to increased investments in the development of our laser processing technologies during the first half of 2005. We continued to invest significant resources in the development and enhancement of our laser processing systems and technologies and our 1X products and related technologies. In 2005, we revenued three laser thermal processing systems which was the result of our 2005 research, development and engineering effort.

35




Amortization of intangible assets

Amortization of intangible assets was $0.0 million, $0.1 million and  $0.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. Intangible assets consist of royalties received from prior-period proceeds from licensing agreements and were fully amortized during the year ended December 31, 2005.

Selling, general and administrative expenses

2006 vs. 2005

(in millions)

 

 

 

2006

 

2005

 

Amount of
Change

 

Percentage
change

 

Selling, general and administrative expenses

 

$

34.2

 

$

29.9

 

 

$

4.3

 

 

 

14

%

 

 

Selling, general and administrative expenses increased by $4.3 million, or 14%, in 2006, as compared to 2005. The increase was primarily due to increased hiring, marketing and demonstration support marketing costs associated with our laser processing product line ($4.0 million); increased expense reduction actions in the fourth quarter of 2006 ($1.3 million), increased stock based compensation expense (associated with the implementation of SFAS 123R and compensation expenses related to restricted stock units as described in Note 5 ($1.6 million); partially offset by decreased legal costs compared to 2005 ($2.6 million).

2005 vs. 2004

(in millions)

 

 

 

2005

 

2004

 

Amount of
Change

 

Percentage
change

 

Selling, general and administrative expenses

 

$

29.9

 

$

28.8

 

 

$

1.1

 

 

 

4

%

 

 

Selling, general and administrative expenses increased by $1.1 million, or 4%, in 2005, as compared to 2004. This increase was due to an increase in legal costs, primarily related to our being a plaintiff in two patent infringement lawsuits ($2.1 million), partially offset by decreased selling expenses in North America ($0.5 million) and lower sales commission expenses ($0.5 million).

Interest and other income, net

(in thousands)

 

 

 

2006

 

2005

 

2004

 

Interest income

 

$

6,273

 

$

4,752

 

$

3,624

 

Other income (expense), net

 

321

 

(19

)

(12

)

Interest and other income, net

 

$

6,594

 

$

4,733

 

$

3,612

 

 

Interest income was $6.3 million for the year ended December 31, 2006, as compared with $4.8 million for 2005. The increase in 2006 from 2005 was primarily due to higher interest rates on our investments.

Interest income was $4.8 million for the year ended December 31, 2005, as compared with $3.6 million for 2004. The increase in 2005 from 2004 was primarily due to higher interest rates on our investments.

We presently maintain an investment portfolio with a weighted-average maturity of less than two years. Consequently, changes in short-term interest rates have a significant impact on our interest income. Future changes are expected to have a similar impact.

36




Provision for income taxes

For the year ended December 31, 2006, we recorded an income tax expense of $1.0 million, comprised primarily of foreign taxes. The actual expense recorded differs from the federal tax benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that no tax benefit is recorded for U.S. losses that are not expected to be realized.

For the year ended December 31, 2005, we recorded an income tax expense of $0.7 million, comprised primarily of foreign taxes. The actual expense recorded differs from the federal tax benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that the tax benefit of U.S. losses is not recognized.

For the year ended December 31, 2004, we recorded an income tax expense of $0.4 million which included a $0.1 million benefit related to the settlement of tax audit issues in the United Kingdom. The actual expense recorded, excluding the benefit related to the settlement of tax audit issues in the United Kingdom, represents 51% of pre-tax income. This rate is higher than the U.S. federal rate of 35% because the tax benefit of U.S. losses was not recognized as domestic deferred tax assets are fully reserved.

In October 2004, the United States enacted The American Jobs Creation Act of 2004 (“the Act”). The Act provides for a three year phase-out of current extraterritorial income tax (“ETI”) benefits and replaces ETI with a phased-in nine percent domestic production activity deduction that will not be fully effective until 2010. We do not currently realize ETI tax benefits. This provision of the Act is not expected to have a material effect on our results of operations or financial position in the near future. The Act also includes a temporary deduction of 85% for certain foreign earnings that are repatriated, as defined in the Act. We did not repatriate any of our foreign earnings during the effective period of this deduction.

Income taxes can be affected by estimates of whether, 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.

Cumulative effect of the adoption of FIN 47

In December 2005 we adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. As permitted, we recognized the effect of applying FIN 47 as a cumulative effect of a change in accounting principle. Our adoption of FIN 47 in 2005 resulted in an increase in net equipment and leasehold improvements of approximately $1.0 million, recognition of an asset retirement obligation (the “ARO”) liability of $2.1 million, and a cumulative effect of adoption of $1.1 million or $0.05 per share, for the year ended December 31, 2005. The ARO liability is principally for estimable asset retirement obligations related to remediation costs, which we estimate will be incurred upon the expiration of certain operating leases. Refer to Note 17 of our consolidated financial statements herein for further disclosures related to this.

37




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 2007 will increase 5% to 10% from the level of net sales reported in 2006 of $119.6 million.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in customer acceptance, 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 and the other risks described in this report, 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 1000 series family of wafer steppers are of critical importance to our future financial results. At December 31, 2006, these critical systems represented 86% 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 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 we will achieve operating income breakeven for 2007 and that net income per share will be between $0.05 and $0.10. Cash flow for fiscal 2007 is anticipated to be positive.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $6.4 million for the year ended December 31, 2006, as compared with net cash used in operations of $4.1 million for the comparable period in 2005. Net loss of $9.0 million for the year ended December 31, 2006 included non-cash charges of $7.4 million for depreciation, amortization, and accretion expenses and $2.0 million for stock-based compensation, offset partially by $0.2 million of gains on disposal of equipment and settlement of asset retirement obligations.  Cash used in operations was further impacted by a net change in operating assets and liabilities of $6.5 million. The $6.5 million use of cash from the net change in operating assets and liabilities was primarily a result of an increase in inventories of $12.0 million mainly due to the increase in the number of laser thermal processing evaluation units at our customer sites and inventory build-up in anticipation of increasing production of our laser processing products for the 65-nanometer high performance node that did not materialize in 2006, an increase of prepaid expenses, demonstration inventory, and other assets of $1.3 million, and a decrease in accrued rent of $0.4 million. These uses were partially offset by an increase in accounts payable of $2.0 million, an increase in advanced billings of $1.9 million, an increase in accrued expenses of $1.1 million due primarily to an increase in exit and termination liabilities, a decrease in accounts receivable of $1.1 million, an increase in deferred product and services income of $1.0 million, and a decrease in other liabilities of $0.1 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 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

38




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

During the year ended December 31, 2006, net cash used in investing activities was $0.8 million , attributable to net proceeds of short and long-term investments of $2.5 million and proceeds from the sale of fixed assets of $0.1 million, offset by capital expenditures of $3.3 million. We are planning to incur capital expenditures in 2007 of approximately $3.1 million for equipment and facility improvements driven primarily by our new product introductions.

Net cash used in financing activities was $5.1 million during the year ended December 31, 2006, attributable to stock repurchases of $10.8 million, offset by net proceeds under our notes payable of $2.7 million, and $3.0 million of proceeds received from the issuance of common stock under our employee stock option plans.

At December 31, 2006, we had working capital of $105.0 million. Our principal source of liquidity at December 31, 2006 consisted of $71.1 million in cash, cash equivalents and short-term investments, net of related borrowings under our line of credit and $48.3 million of long-term investments.

In December 2004, we entered into a line of credit agreement with a brokerage firm replacing a similar arrangement that we had with a different firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 100 basis points (6.25% as of December 31, 2006). Certain of our cash, cash equivalents and short-term investments secure but do not legally restrict 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. As of December 31, 2006, $7.0 million was outstanding under this facility, with a related collateral requirement of approximately $9.3 million of our cash, cash equivalents and investments. As of December 31, 2005, $4.3 million was outstanding under the facility, with a related collateral requirement of approximately $5.7 million of our cash, cash equivalents and short-term investments.

On September 19, 2005, our Board of Directors authorized the repurchase of up to $30.0 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. At December 31, 2006, we had repurchased 1,386,580 shares of its common stock at a total purchase price of $20 million. Future repurchases of our common stock could have a significant impact on our cash position.

39




The following summarizes our contractual obligations at December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

(in millions)

 

 

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

After
5 years

 

Notes payable obligations

 

$

7.0

 

 

$

7.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cancelable operating lease obligations

 

16.9

 

 

4.6

 

 

 

12.0

 

 

 

0.3

 

 

 

 

 

 

Long-term payables

 

0.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.7

 

 

Asset retirement obligations

 

2.0

 

 

 

 

 

 

1.0

 

 

 

1.0

 

 

 

 

 

 

Open purchase order commitments

 

34.4

 

 

31.9

 

 

 

2.5

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

61.0

 

 

$

43.5

 

 

 

$

15.5

 

 

 

$

1.3

 

 

 

$

0.7

 

 

 

The amounts shown in the table above for open purchase order commitments are primarily related to the purchase of inventories, equipment and leasehold improvements. We record charges to operations for purchase order commitments we deem in excess of normal operating requirements (see “Critical Accounting Policies and Estimates”).

The development and manufacture of new lithography 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 short-term 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 additional 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.

Off-Balance Sheet Transactions

Our off-balance sheet transactions consist of certain financial guarantees, both expressed and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2006, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. (See Note 16)

40




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. We use foreign currency forward exchange contracts and natural hedge positions, to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of nine months or less.

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 December 31, 2006 and 2005. 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 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.

The following table presents the hypothetical changes in fair values in the financial instruments held by us at December 31, 2006 that are sensitive to changes in interest rates. These instruments are comprised of cash, cash equivalents and investments. These instruments are held for purposes other than trading. The modeling techniques used measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to our portfolio reflects immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS:

Cash equivalents and
Available-for-sale
Investments,

 

 

 

Valuation of securities
given an interest rate
decrease of X basis points

 

No change in
interest rate

 

Valuation of securities
given an interest rate
increase of X basis points

 

in thousands:

 

 

 

(150 BPS)

 

(100 BPS)

 

(50 BPS)

 

0 BPS

 

50 BPS

 

100 BPS

 

150 BPS

 

U.S. Treasury securities and obligations of U.S. government agencies

 

$

83,883

 

$

83,289

 

$

82,703

 

 

$

82,126

 

 

$

81,558

 

$

80,999

 

$

80,447

 

U.S. corporate debt securities

 

40,788

 

40,669

 

40,552

 

 

40,438

 

 

40,325

 

40,214

 

40,105

 

Total investments

 

$

124,672

 

$

123,958

 

$

123,255

 

 

$

122,564

 

 

$

121,883

 

$

121,213

 

$

120,553

 

 

During 2006, we did not materially alter our investment objectives or criteria and believe that, although the composition of our portfolio has changed from the preceding year, the portfolio’s sensitivity to changes in interest rates is materially the same.

Credit risk

We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and is diversified in accordance with our investment policy. To

41




date, we have not experienced significant liquidity problems with our portfolio. Our largest holding at December 31, 2006, excluding the United States government and its agencies, was $3.9 million.

Foreign exchange risk

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 cash flow and balance sheet hedging programs.

We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. (See “Derivative instruments and hedging” in Note 4 of Notes to Consolidated Financial Statements for additional disclosures.)

42




ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this Form 10-K.

ULTRATECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements included in Item 8:

 

43




CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amounts

 

 

 

December 31,
2006

 

December 31,
2005

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

23,883

 

 

 

$

36,344

 

 

Short-term investments

 

 

54,207

 

 

 

104,723

 

 

Accounts receivable, less allowance for doubtful accounts of $466 in 2006 and $577 in 2005

 

 

18,054

 

 

 

19,110

 

 

Inventories

 

 

40,988

 

 

 

28,969

 

 

Prepaid expenses and other current assets

 

 

2,181

 

 

 

1,589

 

 

Total current assets

 

 

139,313

 

 

 

190,735

 

 

Long-term investments

 

 

48,328

 

 

 

 

 

Equipment and leasehold improvements, net

 

 

20,326

 

 

 

25,117

 

 

Demonstration inventory

 

 

4,717

 

 

 

3,367

 

 

Other assets

 

 

3,366

 

 

 

3,090

 

 

Total assets

 

 

$

216,050

 

 

 

$

222,309

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Notes payable

 

 

$

6,974

 

 

 

$

4,289

 

 

Accounts payable

 

 

10,440

 

 

 

8,403

 

 

Accrued expenses

 

 

10,409

 

 

 

9,270

 

 

Deferred product and services income

 

 

2,950

 

 

 

1,970

 

 

Advance billings

 

 

2,713

 

 

 

854

 

 

Income taxes payable

 

 

876

 

 

 

768

 

 

Total current liabilities

 

 

34,362

 

 

 

25,554

 

 

Accrued rent

 

 

2,737

 

 

 

3,157

 

 

Other liabilities

 

 

4,843

 

 

 

4,648

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred Stock, $.001 par value:

 

 

 

 

 

 

 

 

 

2,000,000 shares authorized; none issued

 

 

 

 

 

 

 

Common Stock, $.001 par value:

 

 

 

 

 

 

 

 

 

40,000,000 shares authorized; issued and outstanding: 23,218,722 at December 31, 2006 and 23,749,789 at December 31, 2005

 

 

25

 

 

 

25

 

 

Additional paid-in capital

 

 

226,146

 

 

 

221,225

 

 

Treasury stock, 1,847,801 shares at December 31, 2006 and 1,107,756 shares at December 31, 2005

 

 

(26,670

)

 

 

(15,904

)

 

Accumulated other comprehensive loss, net

 

 

(915

)

 

 

(886

)

 

Accumulated deficit

 

 

(24,478

)

 

 

(15,510

)

 

Total stockholders’ equity

 

 

174,108

 

 

 

188,950

 

 

Total liabilities and stockholders’ equity

 

 

$

216,050

 

 

 

$

222,309

 

 

 

See accompanying notes to consolidated financial statements.

44




CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Years Ended December 31,

 

In thousands, except per share amounts

 

 

 

2006

 

2005

 

2004

 

Net sales

 

 

 

 

 

 

 

Products

 

$

105,277

 

$

108,377

 

$

93,392

 

Services

 

14,156

 

12,472

 

12,289

 

Licenses

 

200

 

1,517

 

4,211

 

Total net sales

 

119,633

 

122,366

 

109,892

 

Cost of sales

 

 

 

 

 

 

 

Cost of products sold

 

64,256

 

60,647

 

48,466

 

Cost of services

 

9,353

 

9,672

 

8,733

 

Gross profit

 

46,024

 

52,047

 

52,693

 

Research, development, and engineering

 

26,206

 

26,963

 

25,936

 

Amortization of intangible assets

 

 

95

 

381

 

Selling, general, and administrative

 

34,189

 

29,864

 

28,805

 

Operating loss

 

(14,371

)

(4,875

)

(2,429

)

Interest expense

 

(237

)

(380

)

(114

)

Interest and other income, net

 

6,594

 

4,733

 

3,612

 

Income (loss) before income taxes and cumulative effect of change in accounting principle

 

(8,014

)

(522

)

1,069

 

Provision for income taxes

 

954

 

699

 

445

 

Income (loss) before cumulative effect of change in accounting principle

 

$

(8,968

)

$

(1,221

)

$

624

 

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations”

 

 

(1,122

)

 

Net income (loss)

 

$

(8,968

)

$

(2,343

)

$

624

 

Net income (loss) per share—basic

 

 

 

 

 

 

 

Income (loss) before cumulative effect of change in accounting principle

 

$

(0.38

)

$

(0.05

)

$

0.03

 

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations”

 

$

 

$

(0.05

)

$

 

Net income (loss)

 

$

(0.38

)

$

(0.10

)

$

0.03

 

Number of shares used in per share computations—basic

 

23,764

 

23,964

 

23,733

 

Net income (loss) per share—diluted

 

 

 

 

 

 

 

Income (loss) before cumulative effect of change in accounting principle

 

$

(0.38

)

$

(0.05

)

$

0.03

 

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations”

 

$

 

$

(0.05

)

$

 

Net income (loss)

 

$

(0.38

)

$

(0.10

)

$

0.03

 

Number of shares used in per share computations—diluted

 

23,764

 

23,964

 

24,734

 

 

See accompanying notes to consolidated financial statements.

45




CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Years Ended December 31,

 

In thousands

 

 

 

2006

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(8,968

)

$

(2,343

)

$

624

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Cumulative effect of adoption of FIN 47

 

 

1,122

 

 

Depreciation

 

5,846

 

6,413

 

6,235

 

Amortization

 

1,344

 

1,118

 

2,306

 

Accretion of asset retirement obligations

 

179

 

 

 

(Gain)/loss on disposal of equipment and settlement of asset retirement obligations

 

(217

)

1

 

122

 

Stock-based compensation

 

1,957

 

77

 

235

 

Deferred income taxes

 

(26

)

46

 

269

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

1,056

 

797

 

(10,509

)

Inventories

 

(11,955

)

(1,127

)

(8,805

)

Prepaid expenses and other current assets

 

(593

)

574

 

25

 

Demonstration inventory

 

(486

)

191

 

(2,099

)

Other assets

 

(249

)

(439

)

(740

)

Accounts payable

 

2,037

 

(5,184

)

5,858

 

Accrued expenses

 

1,139

 

1,570

 

(183

)

Deferred license revenue

 

 

(1,041

)

(3,711

)

Deferred product and services income

 

980

 

726

 

156

 

Advance billings

 

1,859

 

439

 

(1,108

)

Income taxes payable

 

108

 

737

 

(745

)

Accrued rent

 

(420

)

(137

)

510

 

Other liabilities

 

28

 

540

 

1,101

 

Net cash provided by (used in) operating activities

 

(6,381

)

4,080

 

(10,459

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(3,317

)

(8,596

)

(9,868

)

Proceeds from sale of fixed assets

 

79

 

 

 

Investments in securities

 

(42,155

)

(95,994

)

(102,513

)

Proceeds from sales and maturities of investments

 

44,612

 

93,549

 

137,195

 

Net cash provided by (used in) investing activities

 

(781

)

(11,041

)

24,814

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from notes payable

 

62,954

 

108,929

 

37,900

 

Repayment of notes payable

 

(60,269

)

(112,541

)

(32,564

)

Proceeds from issuance of common stock

 

2,992

 

7,511

 

3,120

 

Repurchase of common stock

 

(10,794

)

(9,188

)

 

Net cash provided by (used in) financing activities

 

(5,117

)

(5,289

)

8,456

 

Net effect of exchange rate changes on cash

 

(182

)

609

 

25

 

Net increase (decrease) in cash and cash equivalents

 

(12,461

)

(11,641

)

22,836

 

Cash and cash equivalents at beginning of period

 

36,344

 

47,985

 

25,149

 

Cash and cash equivalents at end of period

 

$

23,883

 

$

36,344

 

$

47,985

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

201

 

$

312

 

$

94

 

Income taxes paid (tax refund received)

 

936

 

(154

)

668

 

Other non-cash changes:

 

 

 

 

 

 

 

Systems transferred from (to) inventory to (from) equipment and demonstration inventory

 

$

60

 

$

5,782

 

$

3,522

 

Systems transferred from (to) equipment to (from) demonstration inventory

 

 

$

952

 

$

1,097

 

Increase/(decrease) in net equipment and leasehold improvements due to adoption of FIN 47

 

$

(229

)

$

943

 

 

Increase/(decrease) in asset retirement obligations resulting from adoption of FIN 47

 

$

(82

)

$

2,064

 

 

 

See accompanying notes to consolidated financial statements.

46




CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated
Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

In thousands

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Income (Loss)

 

(Deficit)

 

Equity

 

Balance at December 31, 2003

 

 

23,582

 

 

 

$

24

 

 

 

$

210,323

 

 

 

$

(6,756

)

 

 

$

937

 

 

 

$

(13,789

)

 

 

$

190,739

 

 

Net issuance of Common Stock under stock option plans and employee stock purchase plan

 

 

272

 

 

 

 

 

 

3,102

 

 

 

18

 

 

 

 

 

 

 

 

 

3,120

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

235

 

 

 

 

 

 

 

 

 

 

 

 

235

 

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,451

)

 

 

 

 

 

(1,451

)

 

Foreign exchange contracts