NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
— Ultra Clean is a developer and supplier of critical
subsystems for the semiconductor capital equipment industry, focusing on gas
delivery systems. The Company’s gas delivery systems enable the precise
delivery of specialty gases used in a majority of the key steps in the
semiconductor manufacturing process. The Company offers its customers a
complete outsourced solution for gas delivery systems, improved
design-to-delivery cycle times, component neutral design and manufacturing and
component testing capabilities. Ultra Clean’s customers are primarily original
equipment manufacturers (“OEMs”) of semiconductor capital equipment
Basis of Presentation
— The unaudited condensed consolidated financial
statements included in this quarterly report on Form 10-Q include the accounts
of the Company and its wholly-owned subsidiary and have been prepared in
accordance with generally accepted accounting principles in the United States
of America. This financial information reflects all adjustments, which are, in
the opinion of the Company, of a normal and recurring nature and necessary to
present fairly the statements of financial position, results of operations and
cash flows for the dates and periods presented. The Company’s December 31,
2003 balance sheet data was derived from audited financial statements as of
that date. All significant intercompany transactions and balances have been
eliminated.
The presentation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates and judgments on
historical experience and on various other assumptions that it believes are
reasonable under the circumstances. However, future events are subject to
change and the best estimates and judgments routinely require adjustment.
Actual amounts may differ from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial statements for
the fiscal year ended December 31, 2003 included in its Registration Statement
on Form S-1 (File No. 333-111904) filed with the Securities and Exchange
Commission (the “SEC”) on March 24, 2004. The Company’s results of operations
for the three and six months ended June 30, 2004 are not necessarily indicative
of the results to be expected for any future periods.
Concentration of Credit Risk —
Financial instruments which subject the
Company to concentrations of credit risk consist principally of cash and
accounts receivable. The Company sells its products to semiconductor capital
equipment manufacturers in the United States. The Company performs credit
evaluations of its customers’ financial condition and generally requires no
collateral. In the three and six months ended June 30, 2003 and 2004, the
Company had three customers that each accounted for 10% or more of sales:
Applied Materials, Inc., Novellus Systems, Inc. and Lam Research Corporation.
As a group these three customers accounted for 93% and 94% of Ultra Clean’s
sales for the three and six months ended June 30, 2003 respectively, and 93% of
sales for the three and six months ended June 30, 2004.
Fiscal Year
— Effective January 1, 2003, Ultra Clean adopted a 52-53 week
fiscal year ending on the Friday nearest to December 31. For presentation
purposes, the Company presents each fiscal period
as if it ended on the last day of the month. Using the 52-53 week fiscal year,
the second quarter of the 2004 fiscal year ended on June 25, 2004. All
references to quarters refer to fiscal quarters.
Stock-Based Compensation
— The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and Financial
Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, Accounting
for Certain Transactions Involving Stock Compensation. Accordingly, no
compensation is recognized for employee stock options granted with exercise
prices greater than or equal to the fair value of the underlying common stock
at the date of grant. The Company complies with the disclosure provisions of
FASB Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation — Transition and Disclosure.
The Company amortizes deferred stock-based compensation on the
straight-line method over the vesting periods of the stock options, generally
four years. Had compensation expense been determined based on the fair value at
the grant date for all employee awards, consistent with the provisions of SFAS
No. 123, the Company’s pro forma net income (loss) and net income (loss) per
share would have been as follows (in thousands, except share data):
Three months ended June 30,
Six months ended June 30,
2003
2004
2003
2004
Net income (loss) as reported
$
(155
)
$
3,089
$
(599
)
$
4,502
Add: stock-based employee
compensation included in
reported net income (loss)
18
31
70
394
Less: total stock-based
compensation determined
under the fair value based
method for all awards
(21
)
(84
)
(79
)
(489
)
Pro forma net income (loss):
$
(158
)
$
3,036
$
(608
)
$
4,407
Basic net income (loss) per share
As reported
$
(0.02
)
$
0.19
$
(0.06
)
$
0.34
Pro forma
$
(0.02
)
$
0.19
$
(0.06
)
$
0.34
Diluted net income (loss) per
share
As reported
$
(0.02
)
$
0.18
$
(0.06
)
$
0.32
Pro forma
$
(0.02
)
$
0.18
$
(0.06
)
$
0.32
These calculations were made using the minimum value method for the three
and six months ended June 30, 2003 and the Black-Scholes option pricing model
for the three and six months ended June 30, 2004. The weighted average
estimated fair value of employee stock option grants for the three months ended
June 30, 2003 and 2004 was $0.95 and $4.80, respectively. For the six months
ended June 30, 2003 and 2004, the weighted average estimated fair value of
employee stock option grants was $0.13 and $4.30, respectively. The following
assumptions were used:
The Company’s calculations are based on the single option valuation approach,
and forfeitures are recognized as they occur.
In June 2004, the Company implemented its Employee Stock Purchase Plan,
previously approved by the Board of Directors and stockholders. The Company
has reserved 555,343 shares of its common stock for issuance under the stock
purchase plan. The first purchase period began on June 14, 2004 and ends on
November 19, 2004 at which time participating employees will be able to
purchase Ultra Clean Holdings stock at a discount of 15% to the lower of the
fair market value of the Company’s common stock at the beginning of the
offering period or the purchase date, using funds deducted from the individual
employee’s salary during the purchase period.
2. Initial Public Offering
On March 24, 2004, the Company entered into an agreement with respect to
its initial public offering (“IPO”) to sell 6,000,000 shares of its common
stock at a price to the public of $7.00 per share. After deducting the
underwriting discount of $0.49 per share, the net proceeds to the Company were
approximately $39.1 million. The Company received the proceeds during the
second quarter of 2004. Of the net proceeds, approximately $31.1 million was
used to redeem the Company’s outstanding Series A Senior Notes plus accrued
interest.
On April 21, 2004, as part of the Company’s IPO, FP-Ultra Clean, LLC, the
Company’s principle stockholder sold 720,350 shares of the Company’s common
stock in connection with the exercise by the underwriters of an over-allotment
option. FP-Ultra Clean’s ownership of the Company was thereby reduced to
55.6%. The Company did not receive any of the proceeds from the exercise of
the over-allotment option.
The Company estimates expenses associated with the IPO will total
approximately $3.9 million, including a $2 million advisory fee paid to
Francisco Partners, L.P., an affiliate of FP-Ultra Clean LLC, the Company’s
majority stockholder. As of June 30, 2004 approximately $3.8 in expenses had
been paid.
In connection with its IPO, the Company filed an amended and restated
certificate of incorporation to account for a one-for-four reverse stock split
and authorize 90 million shares of common stock and 10 million shares of
undesignated preferred stock. All share and per share data has been adjusted
to give effect to the reverse stock split.
3. Inventories
Inventories consisted of the following (in thousands):
Equipment and leasehold improvements, net consist of the following (in thousands):
December 31,
June 30,
2003
2004
Computer equipment and software
$
954
$
1,282
Furniture and fixtures
165
183
Machinery and equipment
1,514
2,099
Leasehold improvements
2,599
2,635
5,232
6,199
Accumulated depreciation and amortization
(1,659
)
(2,461
)
Total
$
3,573
$
3,738
5. Notes Payable and Borrowing Arrangements
Series A Senior Notes —
The Company issued Series A Senior Notes in
aggregate principal amounts of $24,130,000, $2,730,000 and $3,733,000 on
November 15, 2002, November 26, 2002 and December 2, 2002, respectively. These
notes accrued interest at a rate of 5% per annum, were not redeemable by the
holder and could be repaid, in whole or in part, with outstanding accrued
interest at any time without penalty. All Series A Senior Notes were held by
related parties and employees of the Company.
Of the Series A Senior Notes issued on November 26, 2002, $1,342,000 was
issued to employees of the Company for $536,000 in cash and $806,000 in
deferred compensation. The deferred compensation amount vests, in equal annual
installments, over four years from the grant date. Compensation expense is
recognized and the corresponding debt amounts are accreted on a straight line
basis over four years from the grant date. In connection with the IPO, the
balance of $580,000 deferred compensation vested on March 24, 2004.
During the six months ended June 30, 2003 and 2004, approximately $34,000
and $580,000, respectively, was charged to compensation expense related to the
accretion of such debt amounts. At December 31, 2003, approximately $580,000
of deferred compensation was recorded, thereby reducing the principal amount of
debt outstanding to $30,013,000.
As of April 2, 2004, the Company had redeemed all of the outstanding
Series A Senior Notes plus accrued interest.
Bank Line of Credit —
In June 2004, Ultra Clean Technology Systems and
Service, Inc. renewed a secured line of credit arrangement which permits
borrowing of up to $10,000,000 based upon a defined borrowing base and bearing
interest, at its option, at a rate equal to 2% per annum plus LIBOR or 0.25%
per annum plus the reference rate established from time to time by the lender.
Interest is payable monthly and the line expires on September 15, 2004. The
arrangement contains financial covenants requiring the maintenance of minimum
specified working capital, no successive quarterly net losses and tangible net
worth ratios as well as a restriction on payment of any cash dividends. There
were no amounts outstanding under the line of credit at December 31, 2003 or
June 30, 2004.
Basic net income (loss) per share excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted net income (loss) per share reflects the potential
dilution that would occur if outstanding securities or other contracts to issue
common stock were exercised or converted into common stock.
A summary of the Company’s net income (loss) per share for the three and
six months ended June 30, 2003 and 2004 is as follows (in thousands, except per
share amounts):
Three months ended June 30,
Six months ended June 30,
2003
2004
2003
2004
Net income (loss)
$
(155
)
$
3,089
$
(599
)
$
4,502
Shares used in computation — basic:
Weighted average common shares
outstanding
10,245
16,310
10,245
13,319
Weighted average common shares
outstanding subject to repurchase
(269
)
(264
)
(269
)
(241
)
Shares used in computing basic net
income (loss) per share
9,976
16,046
9,976
13,078
Shares used in computation — diluted:
Weighted average common shares
outstanding
16,310
13,319
Dilutive effect of options outstanding
900
677
Shares used in computing basic net
income (loss) per share
9,976
17,210
9,976
13,996
Net income (loss) per share — basic
$
(0.02
)
$
0.19
$
(0.06
)
$
0.34
Net income (loss) per share — diluted
$
(0.02
)
$
0.18
$
(0.06
)
$
0.32
The Company had securities outstanding which could potentially dilute
basic earnings per share in the future, but the incremental shares from the
assumed exercise of these securities were excluded in the computation of
diluted net income (loss) per share, as their effect would have been
anti-dilutive. Such outstanding securities consist of the following at June
30:
Three months ended June 30,
Six months ended June 30 ,
2003
2004
2003
2004
Shares of common stock
subject to repurchase
268
—
268
63
Outstanding options
1,025
58
1,025
266
7. Stockholders’ Equity
On March 1, 2004 the Company’s board of directors granted 62,500 shares of
restricted stock to a board member. The restricted shares vest at a rate of
25% on the first four anniversaries of the grant date.
On March 2, 2004, the Company effected a one-for-four reverse stock split
of its common stock. All share and per share data of the Company included in
the accompanying condensed consolidated financial statements has been adjusted
to give effect to the reverse stock split.
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