**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

(Mark One)

| **ý**                                                                                                                                                                    |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |   |                                                                                           |
|                                                                                                                                                                          |   |                                                                                           |
| **For  the quarterly period ended March 31, 2004**                                                                                                                            |
|                                                                                                                                                                          |   |                                                                                           |
| **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 000-30637**                                                                                                                                          |

** **

** **

**AUGUST TECHNOLOGY CORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Minnesota**                                                                         |   | **41-1729485**                        |
|---------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                                                             |   | (I.R.S. Employer  Identification No.) |
|                                                                                  |   |                                  |
| **4900  West 78th Street  Bloomington, MN**                                           |   | **55435**                             |
| (Address of  principal executive offices)                                             |   | (Zip Code)                            |
|                                                                                  |   |                                  |
| **(952)  820-0080**                                                                   |
| (Registrant’s  telephone number, including area code)                            |
|                                                                                  |   |                                  |
| **N/A**                                                                               |
| (Former name,  former address, and former fiscal year, if changed since last report.) |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes  ý  No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined by Exchange Act Rule 12b-2).  Yes  ýNo  o

 

As of April 30, 2004,there were 17,755,802 shares of common stock outstanding.

 

 

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**AUGUSTTECHNOLOGY CORPORATION**

**TABLEOF CONTENTS**

 
|           | Description                                                                                   |   |
|----------------|-----------------------------------------------------------------------------------------------|--------|
|           |                                                                                          |   |
| PART I         | FINANCIAL INFORMATION                                                                         |   |
|           |                                                                                          |   |
| Item 1.        | Consolidated  Financial Statements                                                            |   |
|           |                                                                                          |   |
|           | Consolidated Balance Sheets  as of March 31, 2004 and December 31, 2003 (unaudited)           |   |
|           |                                                                                          |   |
|           | Consolidated  Statements of Operations for the three months ended March 31, 2004  (unaudited) |   |
|           |                                                                                          |   |
|           | Notes to  Consolidated 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                                   |   |
|           |                                                                                          |   |
| Item 4.        | Controls and Procedures                                                                       |   |
|           |                                                                                          |   |
| PART II        | OTHER INFORMATION                                                                             |   |
|           |                                                                                          |   |
| Item  1.       | Legal  Proceedings                                                                            |   |
|           |                                                                                          |   |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                             |   |
|           |                                                                                          |   |
| SIGNATURES     |                                                                                          |
|           |                                                                                          |   |
| EXHIBIT  INDEX |                                                                                          |

 

2

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**PART I****                               FINANCIALINFORMATION**

 

**Item1.  Consolidated Financial Statements**

**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share amounts)**

**(Unaudited)**

 
|                                                                                                                              |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                        |   |                |   |                    |   |
|                                                                                                                              |   |                |   |                    |   |
| Current assets:                                                                                                                   |   |                |   |                    |   |
| Cash and cash  equivalents                                                                                                        |   | $                   | 4,843  |                    | $      | 10,027 |   |
| Short-term  marketable securities                                                                                                 |   | 45,004              |   | 43,528                  |   |
| Accounts  receivable, net                                                                                                         |   | 10,692              |   | 4,094                   |   |
| Inventories                                                                                                                       |   | 15,492              |   | 11,651                  |   |
| Inventories at  customers under purchase orders                                                                                   |   | 4,584               |   | 2,293                   |   |
| Prepaid expenses  and other current assets                                                                                        |   | 2,232               |   | 1,631                   |   |
| Total current  assets                                                                                                             |   | 82,847              |   | 73,224                  |   |
|                                                                                                                              |   |                |   |                    |   |
| Property and  equipment, net                                                                                                      |   | 3,267               |   | 3,141                   |   |
| Long-term marketable  securities                                                                                                  |   | 8,220               |   | 10,295                  |   |
| Purchased  technology, net                                                                                                        |   | 1,092               |   | 1,179                   |   |
| Goodwill                                                                                                                          |   | 498                 |   | 498                     |   |
| Other assets                                                                                                                      |   | 655                 |   | 610                     |   |
| Total assets                                                                                                                      |   | $                   | 96,579 |                    | $      | 88,947 |   |
|                                                                                                                              |   |                |   |                    |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                    |   |                |   |                    |   |
|                                                                                                                              |   |                |   |                    |   |
| Current  liabilities:                                                                                                             |   |                |   |                    |   |
| Accounts payable                                                                                                                  |   | $                   | 7,387  |                    | $      | 5,409 |   |
| Accrued  compensation                                                                                                             |   | 1,649               |   | 1,146                   |   |
| Accrued  liabilities                                                                                                              |   | 1,444               |   | 1,414                   |   |
| Customer  deposits and deferred revenue                                                                                           |   | 4,398               |   | 2,436                   |   |
| Total current  liabilities                                                                                                        |   | 14,878              |   | 10,405                  |   |
|                                                                                                                              |   |                |   |                    |   |
| Other  non-current liabilities                                                                                                    |   | 159                 |   | 65                      |   |
| Total  liabilities                                                                                                                |   | 15,037              |   | 10,470                  |   |
|                                                                                                                              |   |                |   |                    |   |
| Commitments and  contingencies                                                                                                    |   | —              |   | —                  |   |
|                                                                                                                              |   |                |   |                    |   |
| Shareholders’  equity:                                                                                                       |   |                |   |                    |   |
| Common stock, no  par value, 42,000,000 shares authorized, 17,723,276 and 17,382,538 shares  issued and outstanding, respectively |   | 89,635              |   | 88,086                  |   |
| Undesignated  capital stock, no par value, 3,000,000 shares authorized, no shares issued or  outstanding                          |   | —              |   | —                  |   |
| Deferred  compensation related to stock options                                                                                   |   | (36                 | )      | (49                     | )      |
| Accumulated  deficit                                                                                                              |   | (8,132              | )      | (9,578                  | )      |
| Accumulated  other comprehensive income                                                                                           |   | 75                  |   | 18                      |   |
| Total  shareholders’ equity                                                                                                  |   | 81,542              |   | 78,477                  |   |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                   | 96,579 |                    | $      | 88,947 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 

 
|                                             |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2004**                          |   | **2003** |   |
|                                             |   |                              |   |   |   |
| Net revenues                                     |   | $                                 | 16,400 |   | $ | 6,563 |   |
| Cost of revenues                                 |   | 7,058                             |   | 2,955 |   |
| Gross profit                                     |   | 9,342                             |   | 3,608 |   |
|                                             |   |                              |   |   |   |
| Selling, general  and administrative expenses    |   | 5,189                             |   | 3,207 |   |
| Research and  development expenses               |   | 2,908                             |   | 2,768 |   |
| Operating income  (loss)                         |   | 1,245                             |   | (2,367 | ) |
|                                             |   |                              |   |   |   |
| Interest income                                  |   | 201                               |   | 98 |   |
|                                             |   |                              |   |   |   |
| Income (loss)  before provision for income taxes |   | 1,446                             |   | (2,269 | ) |
| Provision for  income taxes                      |   | —                            |   | — |   |
| Net income  (loss)                               |   | $                                 | 1,446  |   | $ | (2,269 | ) |
|                                             |   |                              |   |   |   |
| Net income  (loss) per share:                    |   |                              |   |   |   |
| Basic                                            |   | $                                 | 0.08   |   | $ | (0.17 | ) |
| Diluted                                          |   | $                                 | 0.08   |   | $ | (0.17 | ) |

 

See accompanying notes toconsolidated financial statements.

 

4

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**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                                 |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                 |   | **2004**                          |   | **2003** |   |
| Cash flows from  operating activities:                                                               |   |                              |   |   |   |
| Net income  (loss)                                                                                   |   | $                                 | 1,446  |   | $ | (2,269 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                              |   |   |   |
| Depreciation and  amortization                                                                       |   | 518                               |   | 385 |   |
| Provision for  doubtful accounts                                                                     |   | 46                                |   | 33 |   |
| Amortization of  deferred compensation related to stock options                                      |   | 14                                |   | 14 |   |
| Changes in  operating assets and liabilities:                                                        |   |                              |   |   |   |
| Accounts  receivable                                                                                 |   | (6,644                            | )      | 2,093 |   |
| Inventories                                                                                          |   | (3,835                            | )      | 215 |   |
| Inventories at  customers under purchase orders                                                      |   | (2,291                            | )      | (1,212 | ) |
| Prepaid expenses  and other current assets                                                           |   | (601                              | )      | 9 |   |
| Accounts payable                                                                                     |   | 1,978                             |   | 129 |   |
| Accrued  compensation                                                                                |   | 503                               |   | 426 |   |
| Accrued  liabilities                                                                                 |   | 125                               |   | (122 | ) |
| Customer  deposits                                                                                   |   | 1,962                             |   | 453 |   |
| Net cash  provided by (used in) operating activities                                                 |   | (6,779                            | )      | 154 |   |
|                                                                                                 |   |                              |   |   |   |
| Cash flows from  investing activities:                                                               |   |                              |   |   |   |
| Proceeds from  maturities of marketable securities                                                   |   | 53,872                            |   | 10,346 |   |
| Purchases of  marketable securities                                                                  |   | (53,218                           | )      | (10,212 | ) |
| Purchases of  property and equipment                                                                 |   | (542                              | )      | (228 | ) |
| Investment in  other assets                                                                          |   | (62                               | )      | — |   |
| Net cash  provided by (used in) investing activities                                                 |   | 50                                |   | (94 | ) |
|                                                                                                 |   |                              |   |   |   |
| Cash flows from  financing activities:                                                               |   |                              |   |   |   |
| Net proceeds  from issuances of common stock                                                         |   | 1,548                             |   | 17 |   |
| Net cash  provided by financing activities                                                           |   | 1,548                             |   | 17 |   |
|                                                                                                 |   |                              |   |   |   |
| Effect of  exchange rates on cash and cash equivalents                                               |   | (3                                | )      | 2 |   |
|                                                                                                 |   |                              |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                |   | (5,184                            | )      | 79 |   |
| Cash and cash  equivalents at beginning of period                                                    |   | 10,027                            |   | 1,895 |   |
| Cash and cash  equivalents at end of period                                                          |   | $                                 | 4,843  |   | $ | 1,974 |   |
|                                                                                                 |   |                              |   |   |   |
| Supplemental  cash flow information:                                                                 |   |                              |   |   |   |
| Cash payments of  income taxes                                                                       |   | $                                 | (18    | ) | $ | (5 | ) |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AUGUST TECHNOLOGY CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**MARCH 31, 2004(In thousands, except per share amounts)**

**(Unaudited)**

 

**Note 1 – Basis of Presentation**

** **

The accompanying unaudited consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures, normally included inconsolidated financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America, have beencondensed or omitted pursuant to such rules and regulations.  In the opinion of the management of AugustTechnology Corporation (collectively with its subsidiaries, the “Company”), alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included in the consolidated balance sheet atMarch 31, 2004, the consolidated results of operations and consolidatedstatements of cash flows for the three months ended March 31, 2004 and2003.  The results of operations of theinterim periods are not necessarily indicative of the results of operationsthat may be expected for any other period or for the year as a whole.  These consolidated financial statements andnotes hereto should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2003, filed with the Securitiesand Exchange Commission on March 1, 2004.

 

The accompanying consolidated financial statementsinclude the accounts of August Technology Corporation and its wholly ownedsubsidiaries.  All significantintercompany balances and transactions are eliminated in consolidation.

 

Certain prior year amounts have been reclassified toconform to the 2004 presentation.

 

6

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**Note 2– Marketable Securities**

** **

The amortized cost and estimated fair value ofavailable-for-sale marketable securities were as follows:

** **
|            |   | **March 31,  2004** |   |
|-----------------|--------|---------------------|--------|
|            |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Corporate bonds |   | $                   | 14,422 |   | $ | 78 |   | $ | (1 | ) | $ | 14,499 |   |
| Municipal bonds |   | 38,709              |   | 17 |   | (1 | ) | 38,725 |   |
|            |   | $                   | 53,131 |   | $ | 95 |   | $ | (2 | ) | $ | 53,224 |   |

 
|            |   | **December  31, 2003** |   |
|-----------------|--------|------------------------|--------|
|            |   | **Amortized  Cost**    |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Corporate bonds |   | $                      | 12,484 |   | $ | 35 |   | $ | (2 | ) | $ | 12,517 |   |
| Municipal bonds |   | 41,301                 |   | 7 |   | (2 | ) | 41,306 |   |
|            |   | $                      | 53,785 |   | $ | 42 |   | $ | (4 | ) | $ | 53,823 |   |

 

The maturities of available-for-sale marketablesecurities were as follows:  

 
|                                          |   | **March 31,**       |   | **December  31,** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------|--------|
|                                          |   | **2004**            |   | **2003**          |   |
|                                          |   | **Amortized  Cost** |   | **Fair  Value**   |   | **Amortized  Cost** |   | **Fair  Value** |   |
| Due within one  year                          |   | $                   | 44,986 |              | $      | 45,004 |   | $ | 43,524 |   | $ | 43,528 |   |
| Due after one  year  through three years |   | 8,145               |   | 8,220             |   | 10,261 |   | 10,295 |   |
|                                          |   | $                   | 53,131 |              | $      | 53,224 |   | $ | 53,785 |   | $ | 53,823 |   |

 

Net realized gains and losses were not material forthe three months ended March 31, 2004 and the year ended December 31, 2003.

 

**Note 3 – Accounts Receivable**

 

Accounts receivable consisted of the following:

 
|                             |   | **March 31  2004** |   | **December  31,  2003** |   |
|----------------------------------|--------|--------------------|--------|-------------------------|--------|
|                             |   |               |   |                    |   |
| Billed  receivables              |   | $                  | 9,924  |                    | $      | 3,837 |   |
| Unbilled revenue                 |   | 1,369              |   | 812                     |   |
|                             |   | 11,293             |   | 4,649                   |   |
| Allowance for  doubtful accounts |   | (601               | )      | (555                    | )      |
| Accounts  receivable, net        |   | $                  | 10,692 |                    | $      | 4,094 |   |

 

7

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**Note 4 –Inventories**

** **

Inventories consisted of the following:

 
|                     |   | **March 31,  2004** |   | **December  31,  2003** |   |
|--------------------------|--------|---------------------|--------|-------------------------|--------|
|                     |   |                |   |                    |   |
| Raw materials            |   | $                   | 6,246  |                    | $      | 4,645 |   |
| Work in process          |   | 3,645               |   | 2,305                   |   |
| Demonstration  equipment |   | 1,552               |   | 1,603                   |   |
| Finished goods           |   | 4,049               |   | 3,098                   |   |
| Inventories              |   | $                   | 15,492 |                    | $      | 11,651 |   |

 

**Note 5 – Purchased Technology**

 

As of March 31, 2004, purchased technology was $1,367and related accumulated amortization of $275. Purchased technology is amortized on a straight-line basis over anestimated useful life of four years. Amortization expense for the three months ended March 31, 2004 and 2003was $85 and none, respectively.  Assuming no change in the gross carryingvalue of purchased technology, the estimated amortization expense for thetwelve months ending December 31, 2004 is $342 and for each of the next fouryears is $342, $342, $151 and none thereafter.

 

**Note 6 – Accumulated OtherComprehensive Income**

** **

The accumulated balances for each classification of accumulated othercomprehensive income are as follows:

 
|                                          |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                          |   |                |   |                    |   |
| Currency translation adjustments              |   | $                   | (18    | )                       | $      | (20 | ) |
| Net unrealized gains on marketable securities |   | 93                  |   | 38                      |   |
| Accumulated other comprehensive income        |   | $                   | 75     |                    | $      | 18 |   |

 

**Note 7 –Shareholders’ Equity**

 

Changes in shareholders’ equity during the threemonths ended March 31, 2004 were as follows:

 

 
| Shareholders’  equity balance at December 31, 2003                   |   | $      | 78,477 |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|
| Net income                                                                |   | 1,446  |   |
| Accumulated  other comprehensive income:                                  |   |   |   |
| Currency  translation adjustments                                         |   | 2      |   |
| Net unrealized  gains on marketable securities                            |   | 55     |   |
| Comprehensive  income                                                     |   | 1,503  |   |
| Issuances of  common stock in conjunction with exercises of stock options |   | 1,548  |   |
| Amortization of  deferred compensation related to stock options           |   | 14     |   |
| Shareholders’  equity balance at March 31, 2004                      |   | $      | 81,542 |   |

 

On September 23, 2003, the Company sold 3,000 sharesof its Common Stock at a price of $13.00 per share in a follow-on publicoffering (the “Offering”).  Inconjunction with the Offering, on

 

8

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October 21, 2003, theunderwriters exercised their over-allotment option to acquire an additional 490shares of Common Stock at the same price to the public and with the sameunderwriting discount as the Offering. The net proceeds from the Offering, including the exercise of theunderwriters over-allotment, after deducting the underwriting discount and offeringexpenses, was $42,049.

 

***Net Income (Loss) Per Share***

 

The components of basic and diluted net income (loss) per share were asfollows:

 
|                                           |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------|--------|-----------------------------------|--------|
|                                           |   | **2004**                          |   | **2003** |   |
|                                           |   |                              |   |   |   |
| Net income  (loss)                             |   | $                                 | 1,446  |   | $ | (2,269 | ) |
|                                           |   |                              |   |   |   |
| Weighted average  common shares:               |   |                              |   |   |   |
| Basic                                          |   | 17,622                            |   | 13,158 |   |
| Effect of  dilutive stock options and warrants |   | 864                               |   | — |   |
| Diluted                                        |   | 18,486                            |   | 13,158 |   |
|                                           |   |                              |   |   |   |
| Net income  (loss) per share:                  |   |                              |   |   |   |
| Basic                                          |   | $                                 | 0.08   |   | $ | (0.17 | ) |
| Diluted                                        |   | $                                 | 0.08   |   | $ | (0.17 | ) |

 

The total weighted average number of stock options andwarrants excluded from the calculation of potentially dilutive securitieseither due to the exercise price exceeding the average market price or theinclusion of such securities in a calculation of net loss per share would havebeen anti-dilutive for the three months ended March 31, 2004 and 2003 were 143and 1,815, respectively.

 

***Stock-based Compensation***

 

The Company applies AccountingPrinciples Board Opinion (“APB”) No. 25, *“Accounting for Stock Issued to Employees”*,and related interpretations in accounting for stock-based compensation.  The exercise price of the Company’s stockoptions equals the market price of the underlying stock on the date of grantfor all options granted, and thus, under APB 25, no compensation expense isrecognized in the consolidated statements of operations.

 

The estimated per share weightedaverage fair value of all stock options granted during the three months endedMarch 31, 2004 and 2003 was $10.04 and $2.40, respectively.  The fair value of each option grant was estimatedusing the Black-Scholes option pricing model with the following weightedaverage assumptions:

 
|                     |   | **Three  Months Ended March 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2004**                          |   | **2003** |   |
|                     |   |                              |   |   |   |
| Expected life            |   | 3.9 years                         |   | 4.0 years |   |
| Risk free  interest rate |   | 2.5                               | %      | 2.5 | % |
| Volatility               |   | 74.3                              | %      | 75.3 | % |
| Dividend yield           |   | —                            |   | — |   |

 

9

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Had the Company recordedcompensation cost based on the estimated fair value on the date of grant, asdefined by Statement of Financial Accounting Standards (“SFAS”) No.123, *“Accountingfor Stock-Based Compensation”*, the Company’s pro forma net income(loss) would have been as follows:

 
|                                                                                |   | **Three  Months Ended March 31,** |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                |   | **2004**                          |   | **2003** |   |
|                                                                                |   |                              |   |   |   |
| Net income  (loss), as reported                                                     |   | $                                 | 1,446  |   | $ | (2,269 | ) |
| Stock-based  employee compensation expense - fair value based method for all awards |   | (1,153                            | )      | (298 | ) |
| Net income  (loss), pro forma                                                       |   | $                                 | 293    |   | $ | (2,567 | ) |
|                                                                                |   |                              |   |   |   |
| Net income  (loss) per share:                                                       |   |                              |   |   |   |
| As reported:                                                                        |   |                              |   |   |   |
| Basic                                                                               |   | $                                 | 0.08   |   | $ | (0.17 | ) |
| Diluted                                                                             |   | $                                 | 0.08   |   | $ | (0.17 | ) |
|                                                                                |   |                              |   |   |   |
| Pro forma:                                                                          |   |                              |   |   |   |
| Basic                                                                               |   | $                                 | 0.02   |   | $ | (0.20 | ) |
| Diluted                                                                             |   | $                                 | 0.02   |   | $ | (0.20 | ) |

 

**Note 8 – Commitments andContingencies**

 

***Warranties***

 

The Companyprovides warranty coverage for its systems for a period of one year, includingparts and labor necessary to repair the systems during the warrantyperiod.  The estimated warranty cost isbased on our historical experience rate of incurred expenses to correspondingsystem revenues.

 

The followingtable summarizes the activity related to the warranty liability during thethree months ended March 31, 2004 and 2003:

 
|                          |   | **Three  Months Ended March 31,** |   |
|-------------------------------|--------|-----------------------------------|--------|
|                          |   | **2004**                          |   | **2003** |   |
| Accrual at  beginning of year |   | $239                              |   | $111 |   |
| Warranties  issued            |   | 160                               |   | 39 |   |
| Costs incurred                |   | (137                              | )      | (38 | ) |
| Accrual at end  of period     |   | $262                              |   | $112 |   |

 

***Legal Proceedings***

 

From time to time,in the ordinary course of business, the Company is subject to claims, assertedor unasserted, or named as a party to lawsuits or investigations.  Except as described below, the Company isnot aware of any asserted or unasserted legal proceedings or claims thatmanagement believes would have a material adverse effect on the Company’sfinancial condition or results of operations.

 

On September 23, 2003, the Company filed a complaint in thedistrict court of Dallas County, Texas seeking a declaratory judgment that theCompany has no liability to Rudolph Technologies, Inc. or its subsidiary,ISOA, Inc. (doing business as Yield Metrology Group), with respect toclaims they have asserted against the Company and its subsidiary, STI. Inaddition, the Company is seeking a judgment against Rudolph and ISOA forrepayment of royalties previously paid by STI to ISOA and costs and attorney’sfees incurred in bringing this action. In various letters and conversationswith STI and the Company, Rudolph has asserted that STI owes Rudolphdevelopment fees and royalty payments pursuant to a December 24, 1997Development Agreement between STI and ISOA, Inc., which Rudolph lateracquired and renamed Yield Metrology Group.

 

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Rudolph has also asserted that the Company may have used ISOAtechnology in the development of one of its products and owe additionalroyalties to Rudolph as a result. The Company believes STI has no obligationsto Rudolph under the December 24, 1997 Development Agreement and that theCompany has used no ISOA technology in any of its products.

 

On September 30,2003, Rudolph and ISOA filed an answer and counterclaim, denying theallegations set forth in the Company’s complaint and claiming that ISOA isentitled to damages as a result of STI’s breach of the DevelopmentAgreement.  ISOA is also seeking adeclaratory judgment that STI and/or the Company are wrongfully using ISOA’stechnology without compensating ISOA. ISOA is also seeking a judgment for their attorney’s fees in thismatter.

 

In connection with the acquisition of STI, the Company placed 180shares of its common stock issued in the transaction in escrow to secure ASTI’sperformance of its agreement to indemnify the Company against damages up to amaximum amount of $670 in connection with STI’s dispute with Rudolph and toshare related outside legal expenses. Of these 180 shares, 110 remain as shares in escrow, while the remaining70 were sold as part of the Offering, with all of the cash proceeds minus feesreturned to the escrow.  Sharesdistributed from the escrow in payment of any indemnification claim will bevalued at the market price of the Company’s common stock on the date ofresolution of the claim. The escrow agreement provides that the escrow wouldhave terminated on October 15, 2003 if a legal proceeding regarding theseissues had not been initiated prior to that date. Because the Company initiatedthis legal proceeding, the escrow remains in effect until the resolution of theclaims subject to such legal proceeding.

 

The Company may incur significant legal fees and expenses in pursuingthis action for a declaratory judgment. In addition, there can be no assurance that the Company will prevail in suchlitigation and the Company may suffer an adverse result requiring the Companyto pay damages or royalties adversely affecting its business. Notwithstandingthe foregoing, the Company believes the indemnification escrow established inconnection with the acquisition of STI is reasonably likely to protect theCompany against any losses incurred in connection with Rudolph’s claims.

 

**Note 9 – Recently Issued AccountingPronouncements**

 

In December 2003,the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation(“FIN”) No. 46R, “*Consolidation of VariableInterest Entities”*, which addresses how a business enterprise shouldevaluate whether it has a controlling financial interest in an entity throughmeans other than voting rights and accordingly should consolidate the entity.  FIN 46R replaces FASB Interpretation No. 46,“*Consolidation of Variable InterestEntities”*, which was issued in January 2003. The Company is requiredto apply FIN 46R to variable interests in variable interest entities (“VIE”)created after December 31, 2003. For variable interests in VIEs created beforeJanuary 1, 2004, the Interpretation will be applied beginning on January 1,2005. For any VIEs that must be consolidated under FIN 46R that were createdbefore January 1, 2004, the assets, liabilities and noncontrolling interests ofthe VIE initially would be measured at their carrying amounts with anydifference between the net amount added to the balance sheet and any previouslyrecognized interest being recognized as the cumulative effect of an accountingchange. If determining the carrying amounts is not practicable, fair value atthe date FIN 46R first applies may be used to measure the assets, liabilitiesand noncontrolling interest of the VIE. The Company believes it has no variableinterest entities and, therefore, FIN 46R did not have an impact on theCompany’s consolidated financial statements.

 

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In May 2003, theFASB issued SFAS No. 150, “*Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”.* The Statement establishes standards for the classificationand measurement of certain financial instruments with characteristics of bothliabilities and equity.  The Statementalso includes required disclosures for financial instruments within itsscope.  For the Company, the Statementwas effective for instruments entered into or modified after May 31, 2003, andotherwise will be effective as of January 1, 2004, except for mandatorilyredeemable financial instruments.  Forcertain mandatorily redeemable financial instruments, the Statement will beeffective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain othertypes of mandatorily redeemable financial instruments.  The Company currently does not have anyfinancial instruments that are within the scope of the Statement.

 

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

 

**CautionaryFactors That May Affect Future Results**

 

Certain statementsmade in this Quarterly Report on Form 10-Q, as well as oral statements made byus from time to time, which are prefaced with words such as “expects,”“anticipates,” “believes,” “projects,” “intends,” “plans” and similar words andother statements of similar sense, are forward-looking statements.  Our forward-looking statements generallyrelate to our growth strategies, financial results, future financialprojections, product development activities and sales efforts.  Our actualresults could differ materially from those projected in the forward-lookingstatements as a result of a number of factors, including but not limited tomarket acceptance of our products, our ability to successfully develop newproducts, our ability to protect our intellectual property, our dependence uponinternational customers and suppliers, our dependence on a small number ofcustomers that account for a significant portion of revenues, availability ofproducts from our suppliers, cyclicality in the microelectronic manufacturingequipment and other industries, management of growth, integration of acquiredbusinesses, and the other risk factors detailed below and in our Annual Reporton Form 10-K for the year ended December 31, 2003, as filed with the SEC onMarch 1, 2004.  We disclaim anyobligation to revise forward-looking statements, or to update the reasonsactual results could differ materially from those anticipated, to reflectevents or circumstances after the date of such statements or to reflect theoccurrence of anticipated or unanticipated events. Because many factors areunforeseeable, the foregoing should not be considered an exhaustive list.

 

**Introduction**

 

Thefollowing discussion of our results of operations and financial conditionshould be read together with the other financial information and consolidatedfinancial statements and related notes included in this Form 10-Q. Thisdiscussion contains forward-looking statements that involve risks and uncertainties.Our actual results could differ materially from thoseanticipated in the forward-looking statements as a result of a variety offactors.

 

**Critical Accounting Policies**

 

The preparation ofour consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  We based these estimates and assumptions on historicalexperience and evaluate them on an on-going basis to help ensure they remainreasonable under current conditions.  Actual results could differ fromthose estimates. We discuss the development and selection of the criticalaccounting estimates with the audit committee of our board of directors on aquarterly basis, and the audit committee has reviewed the Company’s criticalaccounting policies as described in Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in our Annual Reporton Form 10-K for the year ended December 31, 2003.   For the threemonths ended March 31, 2004, there were no changes to these  criticalaccounting policies.

 

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**Overview**

 

We are aworld-class provider of automated defect detection and product characterizationsystems for microelectronic device manufacturers. Our systems providemanufacturers with information that enables process-enhancing decisions,ultimately lowering manufacturing costs and decreasing time-to-market. We sellour systems to many of the leading microelectronic device manufacturersthroughout the world for inspecting semiconductors, advanced packaging applications,optoelectronics devices, MEMS, data storage devices and micro displays.  We have traditionally provided systems toaddress the automated inspection needs of the early stages of the finalmanufacturing or back-end of the microelectronic device manufacturing process.These needs were met primarily with our NSX Series and 3Di Series ofproducts.  We recently introduced theAXi Series, E20 and B20 inspection options for advanced macro detection in thefront-end of the wafer manufacturing process. When used in conjunction with oneanother these systems allow a manufacturer to inspect the top, edge and back ofa wafer’s surface.  We believe we willbe the first to offer all surface wafer inspection.  We complement this broad inspection capability with an expandingsuite of software tools designed to enhance the speed and effectiveness of theprocess by which device manufacturers analyze defects, and make decisionsregarding their manufacturing process to reduce or eliminate such defects.  We refer to this process as the“detection-to-decision” process.

 

In addition to internal development, we look to expand throughstrategic acquisitions of complementary products and technologies. InApril 2003 we completed the acquisition of STI, adding the WAV Series forhigh speed wafer probe mark inspection and metrology. In July 2003 weacquired the assets of CSI, including the design for the VersaScope, a recentlyintroduced defect review system for advanced microscope-based imaging andanalysis.  The VersaScope provides usthe ability to serve our customers earlier in their device development processand to more quickly analyze defects and understand their manufacturing processonce they initiate high volume production.

 

Our business issubject to the highly cyclical nature of the microelectronic devicemanufacturing markets we serve. These cycles are caused by significantfluctuations in the supply and demand of microelectronic devices driven by suchfactors as changes in technology and global economic conditions. As a result ofthese fluctuations, our quarterly orders and revenues have fluctuateddramatically.

 

During the secondquarter of 2001, in response to an industry downturn, we began to implementcomponents of a series of cost management programs. The programs included, atvarious times, raw material cost reductions, reductions in temporary andcontract staffs, work force reductions, mandatory time-off, decreases indiscretionary spending and reductions in executive compensation and overtime.Although we continued to maintain various components of our cost managementprograms during 2002 and 2003, these savings were offset by our decision toinvest in developing our worldwide sales and service organization and in thecontinued development of new and existing products to better serve ourcustomers and maintain our technology leadership.  During the second half of 2003 we beganto experience signs of an industry recovery. The recovery has continued during the first quarter of 2004.  This has resulted in a significant increasein the level of orders and revenues during this period, and a record level ofbacklog at March 31, 2004.  Althoughmanagement does not believe backlog is always a meaningful or accurateindication of future revenues and performance, since only a portion of ourrevenues for any quarter represents systems in backlog, we do closely monitorthe level of orders both geographically and by product line and in relation tothe level of revenues, referred to as the book-to-bill ratio.  During the first quarter of

 

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2004 our book-to-bill ratio was above parity for the seventhconsecutive quarter.  A book-to-billratio greater than parity indicates a growing level of backlog.

 

In addition tomonitoring our level of orders and backlog, we focus on several key financialmetrics in evaluating our financial condition and operating performance, mostimportantly revenues by product family compared to prior-period revenueperformance and current-year plans, year-over-year revenue growth compared tothe overall semiconductor equipment industry, operating profit or lossperformance compared with prior-period and current-year plans and the level ofoperating cash flow.

 

In response to the current increase in activity we have added andcontinue to recruit additional staff in all functional areas and increased ourmanufacturing levels to meet the increased demand.  However, we cannot predict the sustainability of the currentrecovery, and/or the industry’s rate of growth. If we are unable to effectivelymanage our resources and production capacity during an industry cycle, therecould be a material adverse effect on our business, financial condition andresults of operations.

 

We anticipate thatfuture quarterly and annual results will continue to be impacted byfluctuations in supply and demand of microelectronic devices, the timing of newproduct announcements and releases by us or our competitors, market acceptanceof new or enhanced versions of our products, changes in the pricing of ourproducts and the timing and level of our research and development expenditures.

 

**Results ofOperations**

 

The following table sets forth, for the periods indicated, certainoperating data as a percentage of net revenues:

 

|                                             |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2004**                          |   | **2003** |   |
|                                             |   |                              |   |   |   |
| Net revenues                                     |   | 100.0                             | %      | 100.0 | % |
| Cost of revenues                                 |   | 43.0                              |   | 45.0 |   |
| Gross profit                                     |   | 57.0                              |   | 55.0 |   |
|                                             |   |                              |   |   |   |
| Selling, general  and administrative expenses    |   | 31.7                              |   | 48.9 |   |
| Research and  development expenses               |   | 17.7                              |   | 42.2 |   |
| Operating income  (loss)                         |   | 7.6                               |   | (36.1 | ) |
|                                             |   |                              |   |   |   |
| Interest income                                  |   | 1.2                               |   | 1.5 |   |
|                                             |   |                              |   |   |   |
| Income (loss)  before provision for income taxes |   | 8.8                               |   | (34.6 | ) |
| Provision for  income taxes                      |   | —                            |   | — |   |
| Net income  (loss)                               |   | 8.8                               | %      | (34.6 | )% |

 

*Threemonths ended March 31, 2004 compared to the three months ended March 31, 2003*

 

*NetRevenues.*  Net revenues increased $9.8 million, or149.9%, to $16.4 million for the three months ended March 31, 2004, from $6.6million for the same period in 2003. The increase in net revenues was primarily due to increased sales ofnewer models within the NSX Series and sales related to the AXi Series, onwhich we began to recognize revenue during the third quarter of 2003. Sales ofthese product lines increased primarily as a result of increased sales ofsystems into the

 

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front end of the wafer fabrication process and an overall increase indemand due to the industry recovery that began in the second half of 2003.

 

Net revenues from international sales represented 70% and 66% of totalnet revenues for the three months ended March 31, 2004 and 2003,respectively.  International revenuesconsist primarily of sales to customers in Asia, which comprised 68% and 55% oftotal net revenues for the three months ended March 31, 2004 and 2003,respectively.  The increase in thepercentage of net revenues from Asia was partially offset by a decrease in netrevenues from North America, which comprised 30% and 34% of total net revenuesfor the three months ended March 31, 2004 and 2003, respectively.

 

*GrossProfit.*  Gross profit increased to $9.3 million forthe three months ended March 31, 2004, from $3.6 million for the same period in2003.  Gross margin increased to 57.0%for the three months ended March 31, 2004, from 55.0% for the same period in2003.  The increase in gross marginpercentage was primarily due to an increase in the number of systemsmanufactured, which resulted in higher manufacturing utilization and decreasedlabor and overhead per system sold, and increased revenue from our Yield*Pilot*product line.

 

*Selling,General and Administrative Expenses.*  Selling, general andadministrative expenses consist primarily of employee compensation and relatedbenefits, travel expenses and occupancy related costs.  Selling, general and administrative expenseswere $5.2 million, or 31.7% of net revenues, for the three months ended March31, 2004, and $3.2 million, or 48.9% of net revenues, for the same period in2003.  The increase in expense dollarswas primarily the result of increased variable costs associated with theincreased level of revenues, employee compensation costs, including salariesrelated to the hiring of additional field service personnel to support theincreased revenues and our directs sales and service office in Korea, whichopened in February 2004, and expenses associated with the ongoing operations oftwo acquisitions completed during the second and third quarters of 2003.  The quarterly selling, general andadministrative expense dollars are expected to increase in the second quarterof 2004, as compared to the first quarter, primarily as a result of variableexpenses associated with the expected higher level of revenues, and increasedheadcount to support the increased revenues and further develop ourorganization to meet increased customer demands.  However, selling, general and administrative expenses as apercentage of revenues are expected to decrease, as revenues are expected toincrease at a higher rate than the increase in selling, general andadministrative expenses.

 

*Researchand Development Expenses.*  Research and developmentexpenses consist primarily of employee compensation and related benefits andconsulting fees for individuals engaged in the research, design and developmentof new products.  Research anddevelopment expenses were $2.9 million, or 17.7% of net revenues, for the threemonths ended March 31, 2004, and $2.8 million, or 42.2% of net revenues, forthe same period in 2003.  The increasein expenses was primarily due to employeecompensation and related benefits associated with two acquisitionscompleted during the second and third quarters of 2003, and costs related tocompleting certain stages of development of the B20 back-side inspection optionand VersaScope.  The increase waspartially offset by expenses in the prior year including costs related to thefurther development of the AXi Series and E20 edge inspection option.  We anticipate that research and development expenses, both in dollars and as a percentage ofrevenues, will increase in the second quarter of 2004, as compared to the firstquarter of 2004 due to development projects related to the continued expansionof our business in the front-end of the wafer manufacturing process andexpansion of our suite of software solutions.

 

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*Interest income.*  Interest income was $201,000 for the threemonths ended March 31, 2004, compared to $98,000 for the same period in2003.  The increase in interest incomewas due to an increase in overall investment balances, as a result of theproceeds received from the follow-on public offering of our Common Stock thatwas completed on September 23, 2003 and the underwriters’ exercise of theover-allotment option on October 21, 2003 (the “Offering”).

 

***IncomeTaxes. ***As a result ofhistorical operating losses and uncertainty as to the extent of profitabilityin future periods, we began to record a valuation allowance against ourdeferred tax assets in the second quarter of 2002 and continue to do so atMarch 31, 2004.  As a result, we did notreflect a provision for income taxes during both the three months ended March31, 2004 and March 31, 2003.   Statementof Financial Accounting Standards (“SFAS”)No. 109 “Accounting for Income Taxes,”requires the establishment of a valuation allowance to reflect the likelihoodof the realization of deferred tax assets. We do not expect to record a significant provision for income taxes in2004.  As of December 31, 2003 thevaluation allowance was $7.5 million.

 

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**Liquidity and Capital Resources**

 

During the threemonths ended March 31, 2004, working capital increased to $68.0 million ascompared to $62.8 million at December 31, 2003.  The increase was primarily due to an increase in both accountsreceivable and inventories.  At March31, 2004 our principal sources of liquidity consisted of cash, cash equivalentsand marketable securities of $58.1 million and our revolving credit lineagreement, which expired in April 2004. We have no outstanding debt at March 31, 2004.  Our liquidity is affected by many factors,some of which are based on the normal ongoing operations of our business, themost significant of which includes the timing of the collection of receivables,the level of inventories, capital expenditures and acquisitions.

 

*AccountsReceivable.*  Accounts receivable increased $6.6million from December 31, 2003 to March 31, 2004, representing 41 days salesoutstanding (“DSO”) during the three months ended March 31, 2004.  This compares to a DSO of 31 days in thefourth quarter of 2003.  The increase inDSO was primarily due to the timing of sales during the quarter.    Due to the high mix of internationalrevenues during a given quarter, which generally require a longer time forcollection, we believe our DSO could increase in future quarters.

 

*Inventories.*  Inventoriesincreased $3.8 million from December 31, 2003 to March 31, 2004, primarily dueto an increase in raw material and work in process inventory to support newproduct introductions and increased backlog.

 

*Inventories at Customers underPurchase Orders.*  Inventories at customers underpurchase orders increased $2.3 million from December 31, 2003 to March 31,2004, primarily due to shipments of newer models of our NSX Series that havenot yet qualified for revenue recognition. We anticipate that a portion of thisinventory will be recognized as revenue during the second quarter of 2004.  We anticipate that this inventory willincrease as shipments of newly introduced products increase.

 

*Capital Expenditures.*  Ourcapital expenditures during the quarter were $542,000, and our total capitalexpenditures are expected to be between $3.5 and $4.0 million in 2004.  Capital expenditures consist primarily ofthe capitalization of finished goods used to support our engineering, sales andservice efforts.

 

Our liquidity is also affected by factors beyond our control related tothe uncertainties of global economies and the cyclical nature of the semiconductorand microelectronic industries.

 

Although liquidity requirements will fluctuate based on the timing andextent of all of these factors and others, management believes that existingcash and investment balances will be adequate to satisfy our existing liquidityrequirements for at least the next twelve months.

 

*CashFlows*

 

Net cash used inoperating activities for the three months ended March 31, 2004 was $6.8million, which resulted primarily from increased accounts receivable andinventories partially offset by our net income and increased accounts payableand customer deposits.  Net cashprovided by investing activities was $50,000, primarily from net proceeds frommaturities of marketable securities, partially offset by $542,000 of purchasesof property and equipment.  Net cashprovided by

 

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financingactivities was $1.5 million from proceeds received from issuances of commonstock in conjunction with exercises of stock options.

 

Net cash providedby operating activities for the three months ended March 31, 2003 was $154,000,which resulted primarily from decreased accounts receivable and increasedcustomer deposits partially offset by our net loss and increased inventoryduring the period.  Net cash used ininvesting activities was $94,000, primarily due to $228,000 of purchases ofproperty and equipment offset by $134,000 of net proceeds from maturities ofmarketable securities.  Net cashprovided by financing activities was $17,000 from proceeds received fromissuances of common stock.

 

**New Accounting Pronouncements**

 

In December 2003,the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation(“FIN”) No. 46R, “*Consolidation of VariableInterest Entities”*, which addresses how a business enterprise shouldevaluate whether it has a controlling financial interest in an entity throughmeans other than voting rights and accordingly should consolidate theentity.  FIN 46R replaces FASB InterpretationNo. 46, “*Consolidation of Variable InterestEntities”*, which was issued in January 2003. We are required toapply FIN 46R to variable interests in variable interest entities (“VIE”)created after December 31, 2003. For variable interests in VIEs created beforeJanuary 1, 2004, the Interpretation will be applied beginning on January 1,2005. For any VIEs that must be consolidated under FIN 46R that were createdbefore January 1, 2004, the assets, liabilities and noncontrolling interests ofthe VIE initially would be measured at their carrying amounts with anydifference between the net amount added to the balance sheet and any previouslyrecognized interest being recognized as the cumulative effect of an accountingchange. If determining the carrying amounts is not practicable, fair value at thedate FIN 46R first applies may be used to measure the assets, liabilities andnoncontrolling interest of the VIE. We believe that we have no variableinterest entities and, therefore, FIN 46R did not have an impact on ourconsolidated financial statements.

 

In May 2003, theFASB issued SFAS No. 150, “*Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”.* The Statement establishes standards for the classificationand measurement of certain financial instruments with characteristics of bothliabilities and equity.  The Statementalso includes required disclosures for financial instruments within itsscope.  For us, the Statement was effectivefor instruments entered into or modified after May 31, 2003, and otherwise willbe effective as of January 1, 2004, except for mandatorily redeemable financialinstruments.  For certain mandatorilyredeemable financial instruments, the Statement will be effective for us onJanuary 1, 2005.  The effective date hasbeen deferred indefinitely for certain other types of mandatorily redeemablefinancial instruments.  We currently donot have any financial instruments that are within the scope of the Statementand, therefore, SFAS 150 did not have an effect on our consolidated financialstatements.

 

**Item 3.  Qualitative and Quantitative Disclosures about Market Risk**

 

*Market Risk*

 

We are exposed to market risk primarily from changes in interest ratesand credit risk.  We do not havematerial exposure to market risk from fluctuations in foreign currency exchangerates because all sales are made in U.S. dollars.

 

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*Interest Rate Risk*

 

We are 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, classified as available-for-sale, is recorded on thebalance sheet at fair market value with unrealized gains or losses excludedfrom earnings and included in “Accumulated other comprehensive income (loss)”until realized.  The entire InvestmentPortfolio is denominated in U.S. dollars. We do not use derivative financial instruments in the InvestmentPortfolio.  Due to the short duration ofour Investment Portfolio, an immediate 10 percent change in interest rates isnot expected to have a material adverse effect on our near-term financialcondition or results of operations.

 

*Credit Risk*

 

Financial instruments which potentially subject us to credit risk consistprincipally of securities in the Investment Portfolio and tradereceivables.  We limit credit riskrelated to the Investment Portfolio by placing all investments with highquality credit issuers and limit the amount of investments with any oneissuer.  As of March 31, 2004, 85% ofthe Investment Portfolio consisted of government securities and corporatecommercial paper and bonds with maturities of one year or less.  We limit credit risk associated with tradereceivables by performing ongoing credit evaluations and believe that there isno additional risk beyond amounts provided for collection losses to be inherentin trade receivables.

 

**Item 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

As of the end of the period covered by this report, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, regardingthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rules 13a-15(b) of the Securities ExchangeAct of 1934 (the “Exchange Act”).  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information that is required to be disclosed by the Company inreports that it files under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the rules of the Securitiesand Exchange Commission.

 

*Changes in Internal Controls*

 

There were nochanges in the Company’s internal controls over financial reporting thatoccurred during the period covered by this report that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**Item 1.            LegalProceedings**

 

On September 23, 2003, the Company filed a complaint in the districtcourt of Dallas County, Texas seeking a declaratory judgment that the Companyhas no liability to Rudolph Technologies, Inc. or its subsidiary, ISOA, Inc.(doing business as Yield Metrology Group), with respect to claims they haveasserted against the Company and its subsidiary, Semiconductor Technologies& Instruments, Inc. (“STI”).  Invarious letters and conversations with STI and the Company, Rudolph hasasserted that STI owes Rudolph development fees and royalty payments pursuantto a December 24, 1997 Development Agreement (the “Development Agreement”)between STI and ISOA, Inc., which Rudolph later acquired and renamed YieldMetrology Group.  In addition, theCompany is seeking a judgment against Rudolph and ISOA for repayment ofroyalties previously paid by STI to ISOA under the Development Agreement andcosts and attorney’s fees incurred in bringing this action.

 

On September 30, 2003, Rudolph and ISOA filed an answer andcounterclaim, denying the allegations set forth in the Company’s complaint andclaiming that ISOA is entitled to damages as a result of STI’s breach of theDevelopment Agreement.  ISOA is alsoseeking a declaratory judgment that STI and/or the Company are wrongfully usingISOA’s technology without compensating ISOA. ISOA is also seeking a judgment for their attorney’s fees in thismatter.

 

In connection withthe acquisition of STI, the Company placed 180,000 shares of its common stockissued in the transaction in escrow to secure the performance by ASTI HoldingsLimited (“ASTI”) of its agreement to indemnify the Company against damages upto a maximum amount of $670,000 in connection with STI’s dispute with Rudolphand to share related outside legal expenses. Of these 180,000 shares, 110,000 shares remain in escrow, while theremaining 70,000 shares were sold in connection with the Company’s publicoffering completed in September 2003 with the net proceeds from the salereturned to the escrow. Shares distributed from the escrow in payment of anyindemnification claim will be valued at the market price of the Company’sCommon Stock on the date of resolution of the claim.  The escrow agreement provides that the escrow would haveterminated on October 15, 2003 if a legal proceeding regarding these issues hadnot been initiated prior to that date. Because the Company has initiated this legal proceeding, the escrowremains in effect until the resolution of the claims subject to such legalproceeding.

 

The Company mayincur significant legal fees and expenses in pursuing this action for adeclaratory judgment.  In addition,there can be no assurance that the Company will prevail in such litigation andthe Company may suffer an adverse result requiring it to pay damages or royaltiesadversely affecting its business. Notwithstanding the foregoing, the Company believes the indemnificationescrow established in connection with the acquisition of STI is reasonablylikely to protect the Company against any losses incurred in connection withRudolph’s claims.

 

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

 

(a)           Exhibits:

 

The exhibitslisted on the Exhibit Index are filed herewith.

 

(b)           Reportson Form 8-K:

 

Current Report on Form 8-K dated February 11, 2004 was furnished onFebruary 11, 2004 pursuant to Item 12 (Disclosure of Results of Operations andFinancial Condition) to report a press release announcing our fourth quarter2003 financial results.

 

Current Report on Form 8-K dated February 18, 2004 filed on February20, 2004 pursuant to Item 5 (Other Events) to report the adoption of a tradingplan under Rule 10b5-1 by an officer of the Company.

 

Current Report on Form 8-K dated February 27,2004 filed on March 1, 2004 pursuant to Item 5 (Other Events) to report theadoption of trading plans under Rule 10b5-1 by an officer and a director of theCompany.

 

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## SIGNATURES

 

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

 
|               |   | AUGUST TECHNOLOGY CORPORATION                         |
|--------------------|--------|-------------------------------------------------------|
|               |   |                                                  |
| Date:  May 5, 2004 |   | By:                                                   | /s/  JEFF L. O’DELL |   |
|               |   | Jeff L. O’Dell                                   |
|               |   | Chief Executive Officer                               |
|               |   | (Principal  Executive Officer)                        |
|               |   |                                                  |
| Date:  May 5, 2004 |   | By:                                                   | /s/  STANLEY D. PIEKOS |   |
|               |   | Stanley D. Piekos                                     |
|               |   | Chief Financial Officer                               |
|               |   | (Principal  Financial Officer)                        |
|               |   |                                                  |
| Date:  May 5, 2004 |   | By:                                                   | /s/  SCOTT A. GABBARD |   |
|               |   | Scott A. Gabbard                                      |
|               |   | Chief Accounting Officer and  Vice President, Finance |
|               |   | (Principal  Accounting Officer)                       |
|                    |        |                                                       |  |  |  |  |  |

 

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**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C.  20549

 

EXHIBITINDEX TO FORM 10-Q

 
| For the quarter ended: |   | Commission File No.: 000-30637 |
|------------------------|--------|--------------------------------|
| March  31, 2004        |   |                           |

 

**AUGUSTTECHNOLOGY CORPORATION**

 
| **Exhibit Number** |   | **Description**                                                                                          |
|--------------------|--------|----------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                     |
| 31.1               |   | Certification pursuant to Exchange Act Rules  13a-14(a) of the Chief Executive Officer                   |
|               |   |                                                                                                     |
| 31.2               |   | Certification pursuant to Exchange Act Rules  13a-14(a) of the Chief Financial Officer                   |
|               |   |                                                                                                     |
| 32.1               |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to the Sarbanes-Oxley Act of 2002 |

 

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