**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-Q**

 

**(Mark One)**

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES**

**            EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2001**

** **

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES**

**            EXCHANGE ACT OF 1934**

 

**For thetransition period from                               to**

** **

** **

**CommissionFile Number 000-30637**

 

****

** **

**AUGUST TECHNOLOGYCORPORATION**

(Exact name ofRegistrant as specified in its charter)

 

| **Minnesota**                             |   | **41-1729485**       |
|-------------------------------------------|--------|----------------------|
| (State  or other jurisdiction of          |   | (I.R.S.  Employer    |
| incorporation  or organization)           |   | Identification  No.) |
|                                      |   |                 |
| **4900 West 78th Street**                 |   |                 |
| **Bloomington,  MN**                      |   | **55435**            |
| (Address  of principal executive offices) |   | (Zip  Code)          |

 

**(952) 820-0080**

(Registrant's telephonenumber, including area code)

 

**N/A**

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

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.     Yes ý No  o

 

As of November 5, 2001,there were 12,793,689 shares of common stock outstanding.

 

 

**AUGUST TECHNOLOGY CORPORATION**

**TABLE OF CONTENTS**

 

 
|       | Description                                                                            |                                                                                                   |
|------------|----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|       |                                                                                   |                                                                                                   |
| PART I     | FINANCIAL  INFORMATION                                                                 |                                                                                                   |
|       |                                                                                   |                                                                                                   |
| Item 1.    | Financial Statements                                                                   |                                                                                                   |
|       |                                                                                   |                                                                                                   |
|       |                                                                                   | Balance Sheets as of September 30, 2001  and December 31, 2000 (unaudited)                        |
|       |                                                                                   |                                                                                                   |
|       |                                                                                   | Statements  of Operations for the three and nine months ended September 30, 2001 and 2000  (unaudited) |
|       |                                                                                   |                                                                                                   |
|       |                                                                                   | Statements of Cash Flows for  the nine months ended September 30, 2001 and 2000 (unaudited)       |
|       |                                                                                   |                                                                                                   |
|       |                                                                                   | Notes to Financial Statements  (unaudited)                                                             |
|       |                                                                                   |                                                                                                   |
| Item  2.   | Management's  Discussion and Analysis of Financial Condition and Results of Operations |
|       |                                                                                   |                                                                                                   |
| Item  3.   | Qualitative  and Quantitative Disclosures about Market Risk                            |
|       |                                                                                   |                                                                                                   |
| PART II    | OTHER INFORMATION                                                                      |                                                                                                   |
|       |                                                                                   |                                                                                                   |
| Item 5.    | Other Information                                                                      |
|       |                                                                                   |                                                                                                   |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                      |
|       |                                                                                   |                                                                                                   |
|       |                                                                                   |                                                                                                   |
| SIGNATURES |                                                                                   |                                                                                                   |
|            |                                                                                        |                                                                                                        |  |  |

 

**PART I        FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**AUGUST TECHNOLOGY CORPORATION**

**BALANCE SHEETS**

**(In thousands, except share amounts)**

**(Unaudited)**

 
|                                                                                                                                     |   |              |       |             |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|------------------|--------|
|                                                                                                                                     |   | **September 30,** |       | **December 31,** |   |
|                                                                                                                                     |   | **2001**          | ** ** | **2000**         |   |
| **ASSETS**                                                                                                                               |   |              |       |             |   |
|                                                                                                                                     |   |              |       |             |   |
| Current  assets:                                                                                                                         |   |              |       |             |   |
| Cash and  cash equivalents                                                                                                               |   | $                 | 1,083      |             | $      | 3,103 |   |
| Short-term  investments                                                                                                                  |   | 27,090            |       | 23,604           |   |
| Accounts  receivable, net                                                                                                                |   | 3,199             |       | 6,880            |   |
| Inventories                                                                                                                              |   | 8,981             |       | 8,256            |   |
| Prepaid  expenses and other current assets                                                                                               |   | 2,815             |       | 1,081            |   |
| Total  current assets                                                                                                                    |   | 43,168            |       | 42,924           |   |
|                                                                                                                                     |   |              |       |             |   |
| Property  and equipment, net                                                                                                             |   | 3,814             |       | 2,226            |   |
| Long-term  investments                                                                                                                   |   | -                 |       | 2,486            |   |
| Other  assets                                                                                                                            |   | 175               |       | 261              |   |
| Total  assets                                                                                                                            |   | $                 | 47,157     |             | $      | 47,897 |   |
|                                                                                                                                     |   |              |       |             |   |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                 |   |              |       |             |   |   |   |
|                                                                                                                                     |   |              |       |             |   |   |   |
| Current  liabilities:                                                                                                                    |   |              |       |             |   |   |   |
| Accounts  payable                                                                                                                        |   | $                 | 1,796      |             | $      | 2,768 |   |
| Accrued  compensation                                                                                                                    |   |              | 928        |             |   | 1,240 |   |
| Accrued  liabilities                                                                                                                     |   |              | 908        |             |   | 606 |   |
| Accrued  income taxes                                                                                                                    |   |              | -          |             |   | 846 |   |
| Customer  deposits                                                                                                                       |   |              | 311        |             |   | 592 |   |
| Total  current liabilities                                                                                                               |   |              | 3,943      |             |   | 6,052 |   |
|                                                                                                                                     |   |              |       |             |   |   |   |
| Other  non-current liabilities                                                                                                           |   |              | 160        |             |   | 160 |   |
| Total  liabilities                                                                                                                       |   |              | 4,103      |             |   | 6,212 |   |
|                                                                                                                                     |   |              |       |             |   |   |   |
| Shareholders'  equity:                                                                                                                   |   |              |       |             |   |   |   |
| Common  stock, no par value, 42,000,000 shares   authorized, 12,792,766 and 12,633,058 shares issued and outstanding,  respectively |   |              | 40,831     |             |   | 39,935 |   |
| Undesignated  capital stock, 3,000,000 shares authorized,   no shares issued or outstanding                                         |   |              | -          |             |   | - |   |
| Deferred  compensation related to stock options                                                                                          |   |              | (217       | )                |   | (305 | ) |
| Retained  earnings                                                                                                                       |   |              | 2,443      |             |   | 2,055 |   |
| Accumulated  other comprehensive loss                                                                                                    |   |              | (3         | )                |   | - |   |
| Total  shareholders' equity                                                                                                              |   |              | 43,054     |             |   | 41,685 |   |
| Total  liabilities and shareholders' equity                                                                                              |   | $                 | 47,157     |             | $      | 47,897 |   |
|                                                                                                                                          |        |                   |            |                  |        |  |  |  |

 

See accompanying notes to financial statements.

 

**AUGUST TECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**(In thousands, except per share amounts)**

**(Unaudited)**

** **

** **
|                                                           |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|----------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                           |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
| Net revenues                                                   |   | $                                    | 3,253  |                                | $      | 8,990 |   | $ | 24,312 |   | $ | 21,189 |   |
| Cost of revenues                                               |   | 1,494                                |   | 3,519                               |   | 9,688 |   | 8,497 |   |
| Gross profit                                                   |   | 1,759                                |   | 5,471                               |   | 14,624 |   | 12,692 |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
| Selling, general and administrative expenses                   |   | 2,691                                |   | 2,845                               |   | 8,939 |   | 6,906 |   |
| Research and development expenses                              |   | 1,809                                |   | 1,876                               |   | 6,149 |   | 4,921 |   |
| Non-recurring expenses                                         |   | -                                    |   | -                                   |   | 432 |   | - |   |
| Operating income (loss)                                        |   | (2,741                               | )      | 750                                 |   | (896 | ) | 865 |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
| Interest income                                                |   | 330                                  |   | 527                                 |   | 1,177 |   | 591 |   |
| Interest expense                                               |   | -                                    |   | -                                   |   | - |   | (100 | ) |
| Other expense                                                  |   | -                                    |   | -                                   |   | (17 | ) | - |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
| Income (loss) before provision for (benefit from) income taxes |   | (2,411                               | )      | 1,277                               |   | 264 |   | 1,356 |   |
| Provision for (benefit from) income taxes                      |   | (1,033                               | )      | 396                                 |   | (124 | ) | 422 |   |
| Net income (loss)                                              |   | $                                    | (1,378 | )                                   | $      | 881 |   | $ | 388 |   | $ | 934 |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
|                                                           |   |                                 |   |                                |   |   |   |   |   |
| Per share amounts:                                             |   |                                 |   |                                |   |   |   |   |   |
| Basic net income (loss) per share                              |   | $                                    | (0.11  | )                                   | $      | 0.07 |   | $ | 0.03 |   | $ | 0.09 |   |
| Diluted net income (loss) per share                            |   | $                                    | (0.11  | )                                   | $      | 0.07 |   | $ | 0.03 |   | $ | 0.08 |   |

 

Seeaccompanying notes to financial statements.

 

**AUGUST TECHNOLOGY CORPORATION**

**STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **

 
|                                                                                          |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                          |   | **2001**                             |   | **2000** |   |
| Cash flows  from operating activities:                                                        |   |                                 |   |   |   |
| Net income                                                                                    |   | $                                    | 388    |   | $ | 934 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                                 |   |   |   |
| Depreciation  and amortization                                                                |   | 637                                  |   | 240 |   |
| Provision  for doubtful accounts                                                              |   | 136                                  |   | 77 |   |
| Amortization  of deferred compensation related to stock options                               |   | 70                                   |   | 75 |   |
| Loss on  disposition of assets                                                                |   | 17                                   |   | - |   |
| Issuance  of stock options to nonemployees                                                    |   | 8                                    |   | 39 |   |
| Accrued  lease obligation                                                                     |   | -                                    |   | 106 |   |
| Deferred  income taxes                                                                        |   | -                                    |   | (22 | ) |
| Changes in  operating assets and liabilities:                                                 |   |                                 |   |   |   |
| Accounts  receivable                                                                          |   | 3,545                                |   | (3,171 | ) |
| Inventories                                                                                   |   | (725                                 | )      | (5,704 | ) |
| Prepaid  expenses and other current assets                                                    |   | (1,448                               | )      | (797 | ) |
| Accounts  payable                                                                             |   | (972                                 | )      | 2,683 |   |
| Accrued  compensation                                                                         |   | (312                                 | )      | 328 |   |
| Accrued  liabilities                                                                          |   | 302                                  |   | 345 |   |
| Accrued  income taxes                                                                         |   | (591                                 | )      | 373 |   |
| Customer  deposits                                                                            |   | (281                                 | )      | 462 |   |
| Net cash  provided by (used in) operating activities                                          |   | 774                                  |   | (4,032 | ) |
|                                                                                          |   |                                 |   |   |   |
| Cash flows  from investing activities:                                                        |   |                                 |   |   |   |
| Purchases  of securities held to maturity                                                     |   | (43,966                              | )      | (38,576 | ) |
| Proceeds  from maturities of securities held to maturity                                      |   | 42,966                               |   | 16,032 |   |
| Purchases  of property and equipment                                                          |   | (2,242                               | )      | (1,318 | ) |
| Investment  in other assets                                                                   |   | -                                    |   | (106 | ) |
| Net cash  used in investing activities                                                        |   | (3,242                               | )      | (23,968 | ) |
|                                                                                          |   |                                 |   |   |   |
| Cash flows  from financing activities:                                                        |   |                                 |   |   |   |
| Net  proceeds from issuances of common stock                                                  |   | 451                                  |   | 35,970 |   |
| Net  payments of short-term debt                                                              |   | -                                    |   | (1,223 | ) |
| Checks  issued in excess of bank balance                                                      |   | -                                    |   | (255 | ) |
| Net cash  provided by financing activities                                                    |   | 451                                  |   | 34,492 |   |
|                                                                                          |   |                                 |   |   |   |
| Effect of  exchange rates on cash and cash equivalents                                        |   | (3                                   | )      | - |   |
|                                                                                          |   |                                 |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                         |   | (2,020                               | )      | 6,492 |   |
| Cash and  cash equivalents at beginning of period                                             |   | 3,103                                |   | - |   |
| Cash and  cash equivalents at end of period                                                   |   | $                                    | 1,083  |   | $ | 6,492 |   |
|                                                                                          |   |                                 |   |   |   |
| Supplemental  cash flow information:                                                          |   |                                 |   |   |   |
| Cash paid  for interest                                                                       |   | $                                    | -      |   | $ | 100 |   |
| Cash paid  for income taxes, net of refunds                                                   |   | $                                    | 2,005  |   | $ | 78 |   |

** **

**Seeaccompanying notes to financial statements.**

**AUGUST TECHNOLOGY CORPORATION**

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2001**

**(In thousands, except per share amounts)**

**(Unaudited)**

 

**Note 1 – Basis of Presentation**

 

The accompanying unaudited financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures, normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America, have been condensed oromitted pursuant to such rules and regulations.  In the opinion of the management of August Technology Corporation(the “Company”), all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included in the balancesheet at September 30, 2001, and the operating results and cash flows for thenine months ended September 30, 2001 and 2000. The results of operations of the interim periods are not necessarilyindicative of the results of operations that may be expected for any otherperiod or for the year as a whole. These financial statements and notes hereto should be read inconjunction with the audited financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2000,filed with the Securities and Exchange Commission on March 16, 2001.

 

**Note 2 – Accounts Receivable**

 

    Accountsreceivable consisted of the following:
|                             |   | **September 30,** |   | **December 31,** |   |
|----------------------------------|--------|-------------------|--------|------------------|--------|
|                             |   | **2001**          |   | **2000**         |   |
|                             |   |              |   |             |   |
| Billed  receivables              |   | $                 | 3,261  |             | $      | 6,269 |   |
| Unbilled  receivables            |   | 329               |   | 866              |   |
|                             |   | 3,590             |   | 7,135            |   |
| Allowance  for doubtful accounts |   | (391              | )      | (255             | )      |
| Accounts  receivable, net        |   | $                 | 3,199  |             | $      | 6,880 |   |

 

**Note 3– Inventories**

 

    Inventoriesconsisted of the following:
|             |   | **September 30,** |       | **December 31,** |   |
|------------------|--------|-------------------|------------|------------------|--------|
|             |   | **2001**          | ** ** | **2000**         |   |
|             |   |              |       |             |   |
| Raw  materials   |   | $                 | 3,990      |             | $      | 3,386 |   |
| Work in  process |   | 1,045             |       | 1,020            |   |
| Finished  goods  |   | 3,946             |       | 3,850            |   |
| Inventories      |   | $                 | 8,981      |             | $      | 8,256 |   |

 

**Note 4– Shareholders’ Equity**

 

Changes in shareholders’ equity duringthe nine months ended September 30, 2001 were as follows:

 
| Shareholders'  equity balance at December 31, 2000              |   | $      | 41,685 |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Issuances  of common stock in conjunction with:                 |   |   |   |
| Exercises  of employee stock options                            |   | 300    |   |
| Employee  stock purchase plan                                   |   | 151    |   |
| Tax  benefit from stock options exercised                       |   | 455    |   |
| Issuance  of stock options to a nonemployee                     |   | 8      |   |
| Amortization  of deferred compensation related to stock options |   | 70     |   |
| Comprehensive  income                                           |   | 385    |   |
| Shareholders'  equity balance at September 30, 2001             |   | $      | 43,054 |   |

 

  In connection with a review of the Company'sArticles of Incorporation and all amendments thereto, the Company concludedthat the balance sheet required a reclassification within shareholders’ equityto eliminate the concept of par value. This presentation most accurately reflects the Company’s Articles ofIncorporation, which provide a par value of $0.01 per share solely for the purposeof a statute or rule imposing a tax or fee based upon the capitalization of theCompany.

 

**Note 5 – Net Income (Loss) Per Share**

 

Thefollowing information presents the computation of basic and diluted net income(loss) per share for the periods presented in the statements of operations.

 
|                                           |   | **Three Months  Ended September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                           |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss)                             |   | $                                     | (1,378 | )                                    | $      | 881 |   | $ | 388 |   | $ | 934 |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Weighted  average common shares:               |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                          |   | 12,768                                |   | 12,591                               |   | 12,698 |   | 10,531 |   |
| Effect of  dilutive stock options and warrants |   | -                                     |   | 730                                  |   | 616 |   | 738 |   |
| Diluted                                        |   | 12,768                                |   | 13,321                               |   | 13,314 |   | 11,269 |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss) per share:                  |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                          |   | $                                     | (0.11  | )                                    | $      | 0.07 |   | $ | 0.03 |   | $ | 0.09 |   |
| Diluted                                        |   | $                                     | (0.11  | )                                    | $      | 0.07 |   | $ | 0.03 |   | $ | 0.08 |   |

 

    The total weighted average number of stockoptions excluded from the calculation of potentially dilutive securities eitherdue to the exercise price exceeding the average market price or the inclusionof such securities in a calculation of net loss per share would have beenanti-dilutive for the three months ended September 30, 2001 and 2000 were 588and 23, respectively, and for the nine months ended September 30, 2001 and 2000were 352 and 89, respectively.

**Note 6 – Comprehensive Income (Loss)**

 

    In addition to net income (loss), the onlyitem that the Company currently records as comprehensive income or loss is theforeign currency translation adjustment resulting from changes in exchangerates and the effect of those changes upon translation of the financialstatements of the Company’s foreign operations.  The following table presents information about the Company’scomprehensive income (loss):

 
|                                     |   | **Three Months  Ended September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                     |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
|                                     |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss)                       |   | $                                     | (1,378 | )                                    | $      | 881 |   | $ | 388 |   | $ | 934 |   |
| Other  comprehensive income (loss):      |   |                                  |   |                                 |   |   |   |   |   |
| Foreign  currency translation adjustment |   | 5                                     |   | -                                    |   | (3 | ) | - |   |
| Comprehensive  income (loss)             |   | $                                     | (1,373 | )                                    | $      | 881 |   | $ | 385 |   | $ | 934 |   |
|                                          |        |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |

 

**Note 7 – New Accounting Pronouncements**

 

    InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 141; *Business Combinations*,and SFAS No. 142; *Goodwill and OtherIntangible Assets*, which change the accounting for businesscombinations and goodwill.  SFAS No. 141requires that the purchase method of accounting be used for businesscombinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited.  SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach.  Amortization of goodwill, including goodwillrecorded in past business combinations, will therefore cease upon adoption ofthe Statement, which for the Company will be January 1, 2002.  The Company does not expect that SFAS No.141 and SFAS No. 142 will have a material effect on its financial statements.

 

In August 2001, the FASB issued SFAS No.144; *Accounting for the Impairment orDisposal of Long-Lived Assets*. SFAS No. 144 addresses the financial accounting and reporting for theimpairment or disposal of long-lived assets and supersedes SFAS No. 121; *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*.  However, this statement retains thefundamental provisions of SFAS No. 121 for (a) recognition and measurement ofthe impairment of long-lived assets to be held and used and (b) measurement oflong-lived assets to be disposed of by sale.

 

    SFASNo. 144 also supersedes the accounting and reporting provisions of AccountingPrinciples Board Opinion (APB) No. 30;*Reporting the Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions,* for the disposal of a segment of abusiness.  However, this Statementretains the requirement of APB No. 30 to report discontinued operationsseparately from continuing operations and extends that reporting to a componentof an entity that either has been disposed of or is classified as held forsale.  The Company plans to adopt theprovisions of SFAS No. 144 effective January 1, 2002.  The Company does not expect that SFAS No. 144 will have amaterial effect on its financial statements.

 

**Item2.  Management's Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

                August Technology Corporation(the “Company”) is a worldwide leader in the research, design, development,manufacture, marketing, sales, distribution and service of automated microdefect inspection systems used in the manufacture of semiconductor devices aswell as the emerging markets for microelectronic devices includingoptoelectronics, photonics, micro electro-mechanical structures (MEMS) or othermicro machines, micro LCD’s, printheads, data storage, disk drives and othersimilar devices.  The Company’s systemsautomate the inspection process, allowing manufacturers to inspect 100% oftheir wafers or die, while providing powerful information that manufacturerscan use to increase yield and productivity. The Company has sold these systems worldwide to major semiconductormanufacturers, as well as manufacturing companies serving the microelectronicmarkets.

 

                The following discussion of theCompany’s financial condition and results of operations should be read inconjunction with the audited financial statements of the Company and the notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2000, filed with the Securities and Exchange Commission on March16, 2001.

 

**Results of Operations**

 

***Three months ended September 30,2001 compared to the three months ended September 30, 2000***

 

*                NetRevenues.*  Net revenues for the threemonths ended September 30, 2001 decreased $5.7 million, or 63.8%, to $3.3million, from $9.0 million for the same period in 2000.  The decrease in net revenues was primarilydue to a decline in capital spending by semiconductor and microelectronicdevice manufacturers.  This decline isthe result of the continued worldwide slowdown in demand for these products.

 

*                GrossProfit*. Gross profit decreased to $1.8 million, or 54.1% of net revenues, forthe three months ended September 30, 2001, from $5.5 million, or 60.9% ofnet revenues, for the same period in 2000. The decrease in gross margin percentage was primarily the result of theCompany’s fixed and variable manufacturing expenses not decreasing at the samerate as the decline in revenue.

 

*                Selling,General and Administrative Expenses.* Selling, general and administrative expensesconsist primarily of employee salaries and related benefits, occupancy relatedcosts, travel and tradeshow expenses. Selling, general and administrative expenses decreased $154,000, or5.4%, to $2.7 million, or 82.7% of net revenues, for the three monthsended September 30, 2001, from $2.8 million, or 31.6% of net revenues, for thesame period in 2000.  The increase as apercentage of net revenues was due to the decrease in net revenues. Thedecrease in absolute dollars was primarily due to cost cutting initiatives thatfocused on reductions in discretionary and compensation expenditures (the “CostCutting Initiatives”), as well as, lower variable expenses due to the decreasein the number of shipments during the third quarter of 2001.  These reductions were partially offset bysalaries related to sales and customer service employees hired during thesecond half of 2000.

 

                *Research and Development Expenses*.  Research and development expenses consistprimarily of employee salaries and related benefits, and consulting fees forindividuals engaged in the research, design and development of newproducts.  Research and developmentexpenses decreased $67,000, or 3.6%, to $1.8 million, or 55.6% of netrevenues, for the three months ended September 30, 2001, from $1.9 million, or20.9% of net revenues, for the same period in 2000.  The increase as a percentage of net revenues was due to thedecrease in net revenues.  The decreasein absolute dollars was primarily due to the Cost Cutting Initiatives,partially offset by the hiring of additional engineers subsequent to thebeginning of the third quarter of 2000.

 

                *Interest Income.*  Interest income for the three months ended September 30, 2001 was$330,000, as compared to $527,000 for the same period in 2000.  The decrease in interest income is due tolower rates of return earned on investment balances.

 

*                IncomeTaxes.*  The benefit from income taxesfor the three months ended September 30, 2001 was $1.0 million, or an effectivetax rate of 42.9%, as compared to a provision for income taxes of $396,000, oran effective tax rate of 31.0%, for the same period in 2000.  The high effective rate during the thirdquarter of 2001, as compared to the federal statutory rate of 34% plus stateand local taxes, is due to the relative size of certain tax credits that willbe earned during 2001 in proportion to the expected level of income beforetaxes in 2001.

 

***Nine months ended September 30,2001 compared to the nine months ended September 30, 2000***

 

*                NetRevenues.*   Net revenues increased $3.1million, or 14.7%, to $24.3 million for the nine months ended September 30,2001, from $21.2 million for the same period in 2000.  The increase in net revenues was primarilydue to growth in sales of systems within the NSX series during the first halfof 2001, partially offset by lower net revenues during the third quarter of2001 as compared to the same period in 2000.

 

*                GrossProfit.*   Gross profit increased to $14.6million, or 60.2% of net revenues, for the nine months ended September 30,2001, from $12.7 million, or 59.9% of net revenues, for the same period in2000.  The increase in gross marginpercentage was due to growth in sales of NSX systems during the first half of2001 and the introduction of YieldPilot, both of which have a higher grossmargin than the Company’s other products, and a stronger mix of higher marginsystem sales within the NSX series, partially offset by the lower gross marginsin the third quarter of 2001 due to the Company’s fixed and variablemanufacturing expenses not decreasing at the same rate as the decline inrevenue during this period.

 

*                Selling,General and Administrative Expenses.*  Selling,general and administrative expenses increased $2.0 million, or 29.4%, to$8.9 million, or 36.8% of net revenues, for the nine months endedSeptember 30, 2001, from $6.9 million, or 32.6% of net revenues, for the sameperiod in 2000.  The increase wasprimarily due to the hiring of additional sales, field service and administrativepersonnel to support our domestic and international growth in 2000 and thefirst half of 2001, partially offset by the decrease in expenses realized fromthe Cost Cutting Initiatives.

 

*                Researchand Development Expenses. *Researchand development expenses increased $1.2 million, or 25.0%, to$6.1 million, or 25.3% of net revenues, for the nine months endedSeptember 30, 2001, from $4.9 million, or 23.2% of net revenues, for the sameperiod in 2000.  The increase inresearch and development expenses was primarily due to the hiring of additionalengineers during the last three quarters of 2000 and the use of outsidecontractors to advance the development of new products.  The increase in expenses was partially offsetby a decrease in costs related to recruiting and hiring new employees, due to areduction in hiring in 2001, and a reduction in expenses realized from the CostCutting Initiatives.

 

*                Non-recurringExpenses.*  Non-recurring expenses of$432,000 includes $84,000 of employee severance costs related to a reduction inwork force implemented in late April and $348,000 of expenses related to thetermination of the Company’s distributor agreement in Taiwan, as a result ofthe Company’s decision to sell directly to customers in Taiwan.

 

                *Interest Income.*  Interest income for the nine months ended September 30, 2001 was$1.2 million, as compared to $591,000 for the same period in 2000.  The interest income earned during the ninemonths ended September 30, 2001 and 2000 was the result of investing the net proceedsreceived from the Company’s initial public offering (the “IPO”) in June 2000.

 

*                IncomeTaxes.*  The benefit from income taxesfor the nine months ended September 30, 2001 was $124,000, or an effective taxrate of 47.0%, as compared to a provision for income taxes of $422,000, or aneffective tax rate of 31.1%, for the same period in 2000.  The high effective rate in 2001, as comparedto the federal statutory rate of 34% plus state and local taxes, is due to therelative size of certain tax credits that will be earned during 2001 inproportion to the expected level of income before taxes in 2001.

 

**Liquidityand Capital Resources**

 

                Asof September 30, 2001 the Company had cash and cash equivalents of $1.1million, as compared to $3.1 million at December 31, 2000.

 

Netcash provided by operating activities for the nine months ended September 30,2001 was $774,000, which resulted primarily from decreased accounts receivable,partially offset by increased prepaid expenses and other current assets andinventories, and decreased accounts payable and accrued income taxes.  Net cash used in investing activities was$3.2 million, due to $1.0 million of net purchases of investments and $2.2million of purchases of property and equipment.  Net cash provided by financing activities was $451,000 from theproceeds received from issuances of common stock.

 

                Net cash used in operatingactivities for the nine months ended September 30, 2000 was $4.0 million, whichresulted primarily from increased accounts receivable and inventories,partially offset by increased accounts payable and accrued liabilities.  Net cash used in investing activities was$24.0 million, including $22.5 million of net purchases of investments and $1.3million used for additions to property and equipment.  Net cash provided by financing activities was $34.5 million,including $35.9 million of net proceeds received from the sale of 3,300,000shares of common stock in the IPO, partially offset by the re-payment of $1.2million of debt.

 

Workingcapital increased to $39.2 million as of September 30, 2001, from $36.9 millionat December 31, 2000.  The Companybelieves that existing working capital, anticipated cash flows from operationsand its line of credit will be adequate to satisfy projected operating andcapital requirements through the foreseeable future.  However, to the extent the current slowdown in themicroelectronics industries and global economy continue for an extended periodof time or the Company grows more rapidly than expected, the Company may needadditional cash to finance its operating and investing activities.

 

**Fluctuationsin Quarterly Results of Operations**

 

TheCompany’s operating results have historically been subject to significantquarterly and annual fluctuations. The Company anticipates that factorsaffecting future operating results will include the timing of significantorders, the timing of new product announcements and releases by the Company or itscompetitors, patterns of capital spending by customers, market acceptance ofnew or enhanced versions ofproducts and pricing changes. In addition, the timing and level of theCompany’s research and development expenditures could cause quarterly resultsto fluctuate. A substantial portion of the Company’s annual revenues comes fromsales to a relatively small number of customers. The Company’s revenues andoperating results for a period may be affected by the timing of orders receivedor orders shipped during a period.

 

**Impactof Accounting Standards**

 

InJuly 2001, the FASB issued SFAS No.141; *Business Combinations*, andSFAS No. 142; *Goodwill and Other IntangibleAssets*, which change the accounting for business combinations andgoodwill.  SFAS No. 141 requires thatthe purchase method of accounting be used for business combinations initiatedafter June 30, 2001.  Use of thepooling-of-interests method is prohibited. SFAS No. 142 changes the accounting for goodwill from an amortizationmethod to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past businesscombinations, will therefore cease upon adoption of the Statement, which forthe Company will be January 1, 2002. The Company does not expect that SFAS No. 141 and SFAS No. 142 will havea material effect on its financial statements.

 

                InAugust 2001, the FASB issued SFAS No. 144; *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  SFAS No. 144 addresses the financialaccounting and reporting for the impairment or disposal of long-lived assetsand supersedes SFAS No. 121; *Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*.  However, this statement retains thefundamental provisions of SFAS No. 121 for (a) recognition and measurement ofthe impairment of long-lived assets to be held and used and (b) measurement oflong-lived assets to be disposed of by sale.

 

                SFASNo. 144 also supersedes the accounting and reporting provisions of APB No. 30; *Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions*, for the disposal ofa segment of a business.  However, thisStatement retains the requirement of APB No. 30 to report discontinuedoperations separately from continuing operations and extends that reporting toa component of an entity that either has been disposed of or is classified asheld for sale.  The Company plans toadopt the provisions of SFAS No. 144 effective January 1, 2002.  The Company does not expect that SFAS No. 144will have a material effect on its financial statements.

** **

**Cautionary Factors That May Affect Future Results**

 

                Certain statements made in this Quarterly Report onForm 10-Q, as well as oral statements made by the Company from time to time,which are prefaced with words such as “expects”, “anticipates”, “believes”,“projects”, “intends”, “plans” and similar words and other statements ofsimilar sense, are forward-looking statements. The Company’s forward-looking statements generally relate to its growth strategies,financial results, product development activities and sales efforts.  These forward-looking statements, like anyother forward-looking statements, involve risks and uncertainties known andunknown, and may be affected by inaccurate assumptions, including, amongothers, those discussed in the “Cautionary Statements” section of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000, as filed withthe Securities and Exchange Commission on March 16, 2001.  The Company’s forward-looking statements arealsosubject to potential risks of acts or threats of terrorism both domesticallyand internationally.  The terroristattack on September 11, 2001 adversely affected Company operations primarily bypreventing or delaying travel plans. Additional acts of terrorism, or military or political responses toterrorism, in the U.S. and internationally could cause further traveldisruption or political or economic instability that could materially alter oraffect sales, orders, or other financial results of the Company in the upcomingmonths.  These risks to sales, orders,and other financial results are potentially increased due to the currentconditions of the microelectronics industries and related markets.  Therisks and uncertainties described here and in the Company’s Form 10-K couldcause actual results to differ materially from those projected oranticipated.  The Company disclaims anyobligation to subsequently revise forward-looking statements to reflect eventsor circumstances after the date of such statements or to reflect the occurrenceof anticipated or unanticipated events.

**Item3.  Qualitative and QuantitativeDisclosures about Market Risk**

 

*Market Risk*

 

                TheCompany is exposed to market risk primarily from changes in interest rates andcredit risk.  The Company does not havematerial exposure to market risk from fluctuations in foreign currency exchangerates because all sales are made in U.S. dollars.

 

*Interest Rate Risk*

 

                TheCompany is exposed to interest rate risk primarily from investments in cashequivalents and short-term and long-term marketable debt securities (the“Investment Portfolio”).  The entireInvestment Portfolio is classified as held to maturity and, accordingly, is recordedon the balance sheet at cost, with the amortization of any purchase discountsor premiums recorded in interest income. The entire Investment Portfolio is denominated in U.S. dollars.  The Company does not use derivativefinancial instruments in the Investment Portfolio.

 

*Credit Risk*

 

                Financialinstruments, which potentially subject the Company to credit risk, consistprincipally of securities in the Investment Portfolio and trade receivables. The Company limits credit risk related to the Investment Portfolio byplacing all investments with high credit quality issuers and limit the amountof investment with any one issuer.  Asof September 30, 2001, 98% of the Investment Portfolio consisted of governmentsecurities and corporate commercial paper and bonds with maturities of one yearor less.  The Company limits credit riskassociated with trade receivables by performing ongoing credit evaluations andbelieves that there is no additional risk beyond amounts provided forcollection losses to be inherent in trade receivables.

 

**PART II -- OTHER INFORMATION**

 

**Item 5.                    OtherInformation**

 

                Item5 of the Company’s Form 10-Q for the quarter ended March 31, 2001 stated thatThomas Verburgt, Chief Technology Officer and a director and founder of theCompany, had adopted a trading plan under Rule 10b5-1 which provides for thesale of up to 120,000 shares over a one-year term, subject to certain pricelimits.  The March 31, 2001 Form 10-Qincorrectly reported that Mr. Verburgt’s plan provided for sales of up to 30,000shares per quarter.  The plan actuallyprovides for sales of up to 30,000 shares per month, provided certain pricerequirements are satisfied.

 

**Item 6.                    Exhibitsand Reports on Form 8-K**

 

                                (a)           Exhibits:

 

None.

 

 

                                (b)           Reports on Form 8-K:

 

None.

## SIGNATURES

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 

 
|                   |   | AUGUST TECHNOLOGY  CORPORATION |                    |
|------------------------|--------|--------------------------------|-------------------------|
|                   |   |                           |                    |
|                   |   |                           |                    |
| Date: November 6, 2001 |   | By:                            | /s/ JEFF L. O’DELL |  
 

 

Jeff  L. O’Dell

 

 

 

Chief Executive  Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: November 6, 2001

 

By:

/s/ THOMAS C. VELIN

 
 

 

Thomas  C. Velin

 

 

 

Chief Financial  Officer

 

 

 

(Principal Financial and Accounting Officer)

 

  |