**UNITED STATES**

**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, 2003**                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                           |   | **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 by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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 ýNo o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined by Exchange Act Rule12b-2).  Yes oNo ý

 

As of April 30, 2003,there were 13,382,004 shares of common stock outstanding.

 

 

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**AUGUST TECHNOLOGY CORPORATION**

**TABLE OF CONTENTS**

 
|           | **Description**                                                                             |
|----------------|---------------------------------------------------------------------------------------------|
|           |                                                                                        |   |
| PART I         | FINANCIAL INFORMATION                                                                       |
|           |                                                                                        |   |
| Item 1.        | Financial Statements                                                                        |
|           |                                                                                        |   |
|           |                                                                                        | Consolidated Balance Sheets  as of March 31, 2003 and  December 31, 2002 (unaudited) |
|           |                                                                                        |   |
|           |                                                                                        |   |
|           |                                                                                        | Consolidated  Statements of Operations for the three months ended  March 31, 2003 and 2002 (unaudited) |
|           |                                                                                        |   |
|           |                                                                                        |   |
|           |                                                                                        | Consolidated  Statements of Cash Flows for the three months ended  March 31, 2003 and 2002 (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 5.        | Other Information                                                                           |   |
|           |                                                                                        |   |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                           |   |
|           |                                                                                        |   |
| SIGNATURES     |
|           |                                                                                        |   |
| CERTIFICATIONS |
|           |                                                                                        |   |
| EXHIBIT INDEX  |
|                |                                                                                             |  |  |  |  |

 

2

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**PARTI         FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements**

** **

**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share amounts)**

**(Unaudited)**

 
|                                                                                                                              |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                        |   |                |   |                    |   |
|                                                                                                                              |   |                |   |                    |   |
| Current  assets:                                                                                                                  |   |                |   |                    |   |
| Cash  and cash equivalents                                                                                                        |   | $                   | 1,974  |                    | $      | 1,895 |   |
| Short-term  marketable securities                                                                                                 |   | 13,719              |   | 15,438                  |   |
| Accounts  receivable, net                                                                                                         |   | 4,928               |   | 7,054                   |   |
| Inventories                                                                                                                       |   | 9,441               |   | 8,444                   |   |
| Prepaid  expenses and other current assets                                                                                        |   | 1,082               |   | 1,091                   |   |
| Total  current assets                                                                                                             |   | 31,144              |   | 33,922                  |   |
|                                                                                                                              |   |                |   |                    |   |
| Property  and equipment, net                                                                                                      |   | 3,306               |   | 3,439                   |   |
| Long-term  marketable securities                                                                                                  |   | 3,003               |   | 1,444                   |   |
| Other  assets                                                                                                                     |   | 682                 |   | 705                     |   |
| Total  assets                                                                                                                     |   | $                   | 38,135 |                    | $      | 39,510 |   |
|                                                                                                                              |   |                |   |                    |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                    |   |                |   |                    |   |
|                                                                                                                              |   |                |   |                    |   |
| Current  liabilities:                                                                                                             |   |                |   |                    |   |
| Accounts  payable                                                                                                                 |   | $                   | 2,402  |                    | $      | 2,273 |   |
| Accrued  compensation                                                                                                             |   | 980                 |   | 554                     |   |
| Accrued  liabilities                                                                                                              |   | 329                 |   | 451                     |   |
| Customer  deposits                                                                                                                |   | 1,721               |   | 1,268                   |   |
| Total  current liabilities                                                                                                        |   | 5,432               |   | 4,546                   |   |
|                                                                                                                              |   |                |   |                    |   |
| Other  non-current liabilities                                                                                                    |   | 97                  |   | 97                      |   |
| Total  liabilities                                                                                                                |   | 5,529               |   | 4,643                   |   |
|                                                                                                                              |   |                |   |                    |   |
| Shareholders’  equity:                                                                                                       |   |                |   |                    |   |
| Common  stock, no par value, 42,000,000 shares authorized, 13,164,244 and 13,152,304  shares issued and outstanding, respectively |   | 42,171              |   | 42,158                  |   |
| Undesignated  capital stock, no par value, 3,000,000 shares authorized, no shares issued or  outstanding                          |   | —              |   | —                  |   |
| Deferred  compensation related to stock options                                                                                   |   | (87                 | )      | (105                    | )      |
| Accumulated  deficit                                                                                                              |   | (9,498              | )      | (7,229                  | )      |
| Accumulated  other comprehensive income                                                                                           |   | 20                  |   | 43                      |   |
| Total  shareholders’ equity                                                                                                  |   | 32,606              |   | 34,867                  |   |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                   | 38,135 |                    | $      | 39,510 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

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**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                         |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2003**                          |   | **2002** |   |
|                                         |   |                              |   |   |   |
| Net revenues                                 |   | $                                 | 6,563  |   | $ | 5,510 |   |
| Cost of revenues                             |   | 2,955                             |   | 2,364 |   |
| Gross profit                                 |   | 3,608                             |   | 3,146 |   |
|                                         |   |                              |   |   |   |
| Selling, general and administrative expenses |   | 3,207                             |   | 2,826 |   |
| Research and development expenses            |   | 2,768                             |   | 2,135 |   |
| Operating loss                               |   | (2,367                            | )      | (1,815 | ) |
|                                         |   |                              |   |   |   |
| Interest income                              |   | 98                                |   | 208 |   |
|                                         |   |                              |   |   |   |
| Loss before benefit from income taxes        |   | (2,269                            | )      | (1,607 | ) |
| Benefit from income taxes                    |   | —                            |   | (804 | ) |
| Net loss                                     |   | $                                 | (2,269 | ) | $ | (803 | ) |
|                                         |   |                              |   |   |   |
| Net loss per share:                          |   |                              |   |   |   |
| Basic and diluted                            |   | $                                 | (0.17  | ) | $ | (0.06 | ) |

 

See accompanying notes to consolidated financial statements.

 

4

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**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                             |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                             |   | **2003**                          |   | **2002** |   |
| Cash  flows from operating activities:                                           |   |                              |   |   |   |
| Net  loss                                                                        |   | $                                 | (2,269 | ) | $ | (803 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |   |                              |   |   |   |
| Depreciation  and amortization                                                   |   | 385                               |   | 331 |   |
| Provision  for doubtful accounts                                                 |   | 33                                |   | 8 |   |
| Amortization  of deferred compensation related to stock options                  |   | 14                                |   | 15 |   |
| Changes  in operating assets and liabilities:                                    |   |                              |   |   |   |
| Accounts  receivable                                                             |   | 2,093                             |   | (49 | ) |
| Inventories                                                                      |   | (997                              | )      | 767 |   |
| Prepaid  expenses and other current assets                                       |   | 9                                 |   | 83 |   |
| Accounts  payable                                                                |   | 129                               |   | (59 | ) |
| Accrued  compensation                                                            |   | 426                               |   | 75 |   |
| Accrued  liabilities                                                             |   | (122                              | )      | (103 | ) |
| Customer  deposits                                                               |   | 453                               |   | (77 | ) |
| Net  cash provided by operating activities                                       |   | 154                               |   | 188 |   |
|                                                                             |   |                              |   |   |   |
| Cash  flows from investing activities:                                           |   |                              |   |   |   |
| Maturities  of marketable securities                                             |   | 9,846                             |   | 11,379 |   |
| Purchases  of marketable securities                                              |   | (9,712                            | )      | (12,020 | ) |
| Purchases  of property and equipment                                             |   | (228                              | )      | (318 | ) |
| Investment  in other assets                                                      |   | —                            |   | (46 | ) |
| Net  cash used in investing activities                                           |   | (94                               | )      | (1,005 | ) |
|                                                                             |   |                              |   |   |   |
| Cash  flows from financing activities:                                           |   |                              |   |   |   |
| Net  proceeds from issuances of common stock                                     |   | 17                                |   | 326 |   |
| Net  cash provided by financing activities                                       |   | 17                                |   | 326 |   |
|                                                                             |   |                              |   |   |   |
| Effect  of exchange rates on cash and cash equivalents                           |   | 2                                 |   | — |   |
|                                                                             |   |                              |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                            |   | 79                                |   | (491 | ) |
| Cash  and cash equivalents at beginning of period                                |   | 1,895                             |   | 1,523 |   |
| Cash  and cash equivalents at end of period                                      |   | $                                 | 1,974  |   | $ | 1,032 |   |
|                                                                             |   |                              |   |   |   |
| Supplemental  cash flow information:                                             |   |                              |   |   |   |
| Cash  refunds (payments) of income taxes                                         |   | $                                 | (5     | ) | $ | 1,150 |   |

 

See accompanyingnotes to consolidated financial statements.

 

5

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**AUGUSTTECHNOLOGY CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2003**

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

**(Unaudited)**

 

**Note 1 –Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared pursuant to therules and regulations of the Securities and Exchange Commission.  Certain information and footnotedisclosures, normally included in consolidated financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, have been condensed or omitted pursuant to such rules andregulations.  In the opinion of themanagement of August Technology Corporation (collectively with itssubsidiaries, the “Company”), all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included inthe balance sheet at March 31, 2003, the operating results for the three monthsended March 31, 2003 and 2002 and the cash flows for the three months endedMarch 31, 2003 and 2002.  The results ofoperations of the interim periods are not necessarily indicative of the resultsof operations that may be expected for any other period or for the year as awhole.  These consolidated financialstatements and notes hereto should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002, filed with theSecurities and Exchange Commission on March 4, 2003.

 

The accompanyingconsolidated financial statements include the accounts of August TechnologyCorporation and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated inconsolidation.

 

**Note 2 –Accounts Receivable**

 

Accounts receivableconsisted of the following:

 
|                             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|----------------------------------|--------|---------------------|--------|-------------------------|--------|
|                             |   |                |   |                    |   |
| Billed  receivables              |   | $                   | 5,254  |                    | $      | 7,209 |   |
| Unbilled  revenue                |   | 257                 |   | 395                     |   |
|                             |   | 5,511               |   | 7,604                   |   |
| Allowance  for doubtful accounts |   | (583                | )      | (550                    | )      |
| Accounts  receivable, net        |   | $                   | 4,928  |                    | $      | 7,054 |   |

 

6

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**Note 3 –Inventories**

 

Inventories consisted ofthe following:

 
|                                          |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                          |   |                |   |                    |   |
| Raw  materials                                |   | $                   | 3,731  |                    | $      | 3,053 |   |
| Work  in process                              |   | 1,536               |   | 1,415                   |   |
| Finished  goods                               |   | 1,950               |   | 2,964                   |   |
| Inventory  at customers under purchase orders |   | 2,224               |   | 1,012                   |   |
| Inventories                                   |   | $                   | 9,441  |                    | $      | 8,444 |   |

 

 

Inventory at customersunder purchase orders represent systems that have shipped under the terms of acustomer purchase order, but have not yet qualified for revenue recognition asthe systems had not met customer specifications as of March 31, 2003 orDecember 31, 2002.

 

**Note 4 –Other Assets**

 

On May 6, 2002, theCompany invested $500 in Excelerate Technologies, Inc. (“Excelerate”) in theform of a Note Receivable (the “Note”). The Note was amended on February 13, 2003.  The Note bears interest at prime and is secured by certainassets.  The Note matures and convertsinto Excelerate preferred stock upon Excelerate raising $1,500 of additionalfinancing via a sale of Excelerate preferred stock.  The Note can be prepaid at anytime by paying the outstandingprincipal and interest, along with a prepayment fee of 7.5% on the combined outstandingprincipal and interest.

 

**Note 5 –Shareholders’ Equity**

 

Changes in shareholders’equity during the three months ended March 31, 2003 were as follows:

 
| Shareholders’  equity balance at December 31, 2002         |   | $      | 34,867 |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Net  loss                                                       |   | (2,269 | )      |
| Other  comprehensive income (loss):                             |   |   |   |
| Foreign  currency translation adjustment                        |   | 3      |   |
| Net  unrealized loss on securities                              |   | (26    | )      |
| Comprehensive  loss                                             |   | (2,292 | )      |
| Issuances  of common stock in conjunction with:                 |   |   |   |
| Exercises  of employee stock options                            |   | 17     |   |
| Amortization  of deferred compensation related to stock options |   | 14     |   |
| Shareholders’  equity balance at March 31, 2003            |   | $      | 32,606 |   |

 

7

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***Net Loss Per Share***

 

The components of basicand diluted net loss per share were as follows:

 
|                                           |   | **Three Months Ended March 31,** |   |
|------------------------------------------------|--------|----------------------------------|--------|
|                                           |   | **2003**                         |   | **2002** |   |
|                                           |   |                             |   |   |   |
| Net loss                                       |   | $                                | (2,269 | ) | $ | (803 | ) |
|                                           |   |                             |   |   |   |
| Weighted average common  shares:               |   |                             |   |   |   |
| Basic                                          |   | 13,158                           |   | 12,845 |   |
| Effect of dilutive  stock options and warrants |   | —                           |   | — |   |
| Diluted                                        |   | 13,158                           |   | 12,845 |   |
|                                           |   |                             |   |   |   |
| Net loss per share:                            |   |                             |   |   |   |
| Basic and diluted                              |   | $                                | (0.17  | ) | $ | (0.06 | ) |

 

The total weightedaverage number of stock options and warrants excluded from the calculation ofpotentially dilutive securities either due to the exercise price exceeding theaverage market price or the inclusion of such securities in a calculation ofnet loss per share would have been anti-dilutive for the three months endedMarch 31, 2003 and 2002 were 1,815 and 1,676, respectively.

 

***Stock-based Compensation***

 

The estimated per shareweighted average fair value of all stock options granted during the threemonths ended March 31, 2003 and 2002 was $2.40 and $4.93, respectively.The fair value of each option grant was estimated using the Black-Scholesoption pricing model with the following weighted average assumptions:

 
|                    |   | **Three Months Ended March 31,** |   |
|-------------------------|--------|----------------------------------|--------|
|                    |   | **2003**                         |   | **2002** |   |
|                    |   |                             |   |   |   |
| Expected life           |   | 4.0 years                        |   | 2.9 years |   |
| Risk free interest rate |   | 2.5                              | %      | 3.6 | % |
| Volatility              |   | 75.3                             | %      | 74.2 | % |
| Dividend yield          |   | —                           |   | — |   |

 

Had the Company recordedcompensation cost based on the estimated fair value on the date of grant, asdefined by SFAS 123, the Company’s pro forma net loss would have been asfollows:

 
|                                                                                               |   | **Three Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                               |   | **2003**                         |   | **2002** |   |
|                                                                                               |   |                             |   |   |   |
| Net loss, as reported                                                                              |   | $                                | (2,269 | ) | $ | (803 | ) |
| Stock-based employee  compensation expense determined under fair value based method for all awards |   | (298                             | )      | (956 | ) |
| Pro forma net loss                                                                                 |   | $                                | (2,567 | ) | $ | (1,759 | ) |
|                                                                                               |   |                             |   |   |   |
| Basic and diluted net  loss per share:                                                             |   |                             |   |   |   |
| As reported                                                                                        |   | $                                | (0.17  | ) | $ | (0.06 | ) |
| Pro forma                                                                                          |   | (0.20                            | )      | (0.14 | ) |

 

8

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**Note 6 –New Accounting Pronouncements**

 

In December 2002, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF 00-21,  “Revenue Arrangements with MultipleDeliverables”.  This Issue addressescertain aspects of the accounting by a vendor for arrangements under which itwill perform multiple revenue-generating activities.  In somearrangements, the different revenue-generating activities (deliverables) aresufficiently separable and there exists sufficient evidence of their fairvalues to separately account for some or all of the deliverables (that is,there are separate units of accounting).  In other arrangements, some orall of the deliverables are not independently functional, or there is notsufficient evidence of their fair values to account for them separately.  This Issue addresses when and, if so, how anarrangement involving multiple deliverables should be divided into separateunits of accounting.  This Issue does not change otherwise applicablerevenue recognition criteria.  The guidance in this Issue is effective forrevenue arrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of EITF 00-21 will not have a material effect on theCompany’s financial statements.

 

**Note 7 –Subsequent Event**

 

On February 26, 2003 theCompany entered into a Settlement and Purchase Agreement with SemiconductorTechnologies & Instruments, Inc. (“STI”) and its sole shareholder, ASTIHoldings, Ltd (“ASTI”) of Singapore, to purchase all of the outstanding capitalstock of STI and resolve any remaining disputes with ASTI and STI regarding theCompany’s May 23, 2002 Stock Purchase Agreement with STI and ASTI which theCompany terminated in August 2002.  OnApril 15, 2003 the Company completed the transactions contemplated by theSettlement and Purchase Agreement, as amended, by purchasing all of theoutstanding capital stock of STI for total consideration of $1,250 in cash and215 shares of the Company’s Common Stock. The parties have placed shares issued in the transaction in escrow tosecure ASTI’s performance of certain covenants including ASTI’s agreement toindemnify the Company against any damages in connection with STI’s dispute witha third party.  Although the Companybelieves such indemnification and escrow is sufficient, any protracted disputewith the third party or adverse result may adversely affect the Company’sbusiness.

 

During the year endedDecember 31, 2002 STI had revenues of $3,211, including $3,101 of revenues fromthe WAV1000 product line acquired by the Company, and a net loss of $3,812.

 

9

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

 

**CautionaryFactors That May Affect Future Results**

 

Certain statements madein this Quarterly Report on Form 10-Q, as well as oral statements made by usfrom 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.  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 our Annual Reporton Form 10-K for the year ended December 31, 2002, as filed with the Securitiesand Exchange Commission on March 4, 2003. The risks and uncertainties could cause actual results to differmaterially from those projected or anticipated.  We disclaim any obligation to subsequently revise forward-lookingstatements to reflect events or circumstances after the date of such statementsor to reflect the occurrence of anticipated or unanticipated events.

 

**Overview**

 

August Technology servesmicroelectronics device manufacturing industries with product characterizationtools that enable manufacturers to bring new products to market faster and withless cost. As a worldwide leader in the research, design, development,manufacture, marketing, sales, distribution and service of automated defectinspection and metrology systems, we make it possible for microelectronicdevice manufacturers to more effectively meet the needs of the high technologycommunication, transportation, entertainment, productivity, biomedical andsecurity markets. The flexibility of our tools has allowed us to successfullyserve the semiconductor manufacturing market, while concurrently providingeffective solutions for the related microelectronic device manufacturingmarkets such as data storage, medical devices, micro displays, optoelectronics,photonics and MEMS. Microelectronic devices processed through our systems canbe found in consumer products such as personal computers and computerperipherals, cell phones, personal digital assistants (PDAs), set-top boxes,electronic games, security systems, automobiles, medical devices and throughoutthe communications infrastructure in electrical, optical and wireless networks.

 

On April 15, 2003 wecompleted the acquisition of Semiconductor Technologies & Instruments, Inc.(“STI”).  The total consideration paidfor all of the outstanding capital stock of STI consisted of $1.25 million incash and 215,385 shares of our Common Stock. STI is a global leader in themanufacture of automated defect inspection and metrology tools for probe floorapplications.  STI’s products are integrated onto probers, providingmicroelectronics manufacturers with an automated solution for effectivelyinspecting probe marks, ink dots, and active die regions. During the yearended December 31, 2002 STI had revenues of $3.2 million, including $3.1million of revenues from the acquired WAV1000 product line, and a net loss of$3.8 million.  The acquisition of STI isexpected to increase our annual operating expenses by $1.8 - $2.0 million peryear.  We expect to add approximately$1.4 million of tangible assets from the acquisition, and only assumedliability related to product warranties.

 

Our business is subjectto the cyclical nature of the microelectronic device manufacturing markets weserve.  These cycles are caused bysignificant fluctuations in the supply and demand of

 

10

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microelectronic devicesdriven by such factors as changes in technology and global economic conditions. There has been a dramatic slowdown indemand for microelectronic devices since 2001, resulting in excess capacity anddecreased demand for microelectronic manufacturing equipment.  The decreased demand has caused ourquarterly orders and sales to fluctuate dramatically.  We are not able to predict when the microelectronic industrieswill recover.   Future quarterly andannual results will continue to be impacted by fluctuations in supply anddemand of microelectronic devices, the timing of new product announcements andreleases by us or our competitors, market acceptance of new or enhancedversions of our products, changes in the pricing of our products and the timingand level of our research and development expenditures.

 

The following discussionof our financial condition and results of operations should be read inconjunction with our audited consolidated financial statements and notesthereto included in our Annual Report on Form 10-K for the year ended December31, 2002, filed with the Securities and Exchange Commission on March 4, 2003.

 

**Resultsof Operations**

 
|                                          |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|
|                                          |   | **2003**                         |   | **2002** |   |
|                                          |   |                             |   |   |   |
| Net  revenues                                 |   | 100.0                            | %      | 100.0 | % |
| Cost  of revenues                             |   | 45.0                             |   | 42.9 |   |
| Gross  profit                                 |   | 55.0                             |   | 57.1 |   |
|                                          |   |                             |   |   |   |
| Selling,  general and administrative expenses |   | 48.9                             |   | 51.3 |   |
| Research  and development expenses            |   | 42.2                             |   | 38.7 |   |
| Operating  loss                               |   | (36.1                            | )      | (32.9 | ) |
|                                          |   |                             |   |   |   |
| Interest  income                              |   | 1.5                              |   | 3.8 |   |
|                                          |   |                             |   |   |   |
| Loss  before benefit from income taxes        |   | (34.6                            | )      | (29.1 | ) |
| Benefit  from income taxes                    |   | —                           |   | (14.6 | ) |
| Net  loss                                     |   | (34.6                            | )%     | (14.5 | )% |

 

*NetRevenues.*  Net revenues increased $1.1 million, or19.1%, to $6.6 million for the three months ended March 31, 2003, from $5.5million for the same period in 2002. The increase in net revenues was primarily due to higher sales of ourNSX and CV Series into the traditional semiconductor and advanced packagingmarkets.  The increase was partiallyoffset by lower revenues from our 3Di Series.

 

Internationalsales represented 66% and 65% of net revenues for the three months ended March31, 2003 and 2002, respectively. International net revenues were primarily the result of sales to Asia,which comprised 55% and 64% of net revenues for the three months ended March31, 2003 and 2002, respectively.

 

Duringthe three months ended March 31, 2003 we received additional orders for ourrecently introduced AXi Series.  Theseorders, along with orders for systems within the NSX Series, resulted in abook-to-bill ratio above parity during the first quarter of 2003.  We do not anticipate recognizing revenuesfrom the AXi Series until the third quarter of 2003.

 

*GrossProfit.*  Gross profit increased to $3.6 million, or55.0% of net revenues, for the three months ended March 31, 2003, from $3.1million, or 57.1% of net revenues, for the same period in 2002.  The decrease in gross margin percentage wasprimarily due to an increase in the number of

 

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NSX systems that includedsubsystem options manufactured by third parties, which have lower gross marginsthan our core inspection systems.  As aresult of purchase accounting adjustments related to the acquisition of STI,which requires the write-up of the carrying amount of finished goods on hand atthe time of the acquisition, gross margins are expected to be lower in thesecond quarter of 2003.

 

*Selling,General and Administrative Expenses.*  Selling, general andadministrative expenses consist primarily of employee salaries and relatedbenefits, travel expenses and occupancy related costs.  Selling, general and administrative expensesincreased 13% to $3.2 million, or 48.9% of net revenues, for the three monthsended March 31, 2003, from $2.8 million, or 51.3% of net revenues, for the sameperiod in 2002.  The increase in expensewas primarily due to employee severance costs discussed below in *Reduction in Workforce*, employeecompensation, variable costs associated with higher revenues and costsassociated with systems being evaluated by customers.  As a result of costs associated with the integration and ongoingoperations of STI, selling, general and administrative expense dollars in thesecond quarter of 2003 are expected to increase.  This increase will be partially offset by savings related to theworkforce reduction discussed below in *Reductionin Workforce*.

 

*Researchand Development Expenses.*  Research and developmentexpenses consist primarily of employee salaries and related benefits, andconsulting fees for individuals engaged in the research, design and developmentof new products.  Research anddevelopment expenses increased 29.6% to $2.8 million, or 42.2% of net revenues,for the three months ended March 31, 2003, from $2.1 million, or 38.7% of netrevenues, for the same period in 2002. The increase in expenses was primarily due to our decision toaccelerate the development of new and existing products in each of our productlines that was initiated during the fourth quarter of 2002.  This decision resulted in the introductionand initial shipments of our new AXi Series during the first quarter of2003.  In addition, we continued thedevelopment of the NSX 105, which was introduced in the third quarter of 2002,and 3Di product lines.  With thecompletion of certain stages of these programs during the first quarter of2003, we anticipate that research anddevelopment expenses will decrease in total dollars and as a percentage ofrevenues in future quarters.  Thisreduction is primarily the result of decreased project costs and savingsrelated to the workforce reduction discussed below in *Reduction in Workforce*.  The reduction will be partially offset byadditional expenses related to STI’s operations.

 

*Reductionin Workforce.*  During March 2003 we had a reduction inworkforce that resulted in the elimination of thirty permanent and contractemployees, approximately two-thirds from engineering and the remainder fromdepartments within our selling, general and administrative departments.  The total cost associated with thisreduction in workforce was $254,000, consisting primarily of employee severancecosts.

 

*Interest Income.* Interest income was $98,000 for the three months ended March 31, 2003,compared to $208,000 for the same period in 2002.  The decrease in interest income was due to lower overallinvestment balances in 2003, due to the use of cash to fund operations andacquire property and equipment, and lower rates of return earned on investmentbalances.

 

*IncomeTaxes.*  The benefit from income taxes for the threemonths ended March 31, 2003 was none, as compared to $804,000, or an effective rateof 50%, for the same period in 2002. There was no benefit from income taxes recorded during the three monthsended March 31, 2003 due to the recording of a full valuation allowance againstdeferred tax assets. Statement of Financial

 

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Accounting Standards No.109 “Accounting for Income Taxes,” requires the establishment of a valuationallowance to reflect the likelihood of the realization of deferred taxassets.  As a result of realized andanticipated operating losses and uncertainty as to the extent and timing ofprofitability in future periods, we have recorded a full valuation allowanceagainst our deferred tax assets since the second quarter of 2002.  As of December 31, 2002 the valuationallowance was $5.4 million, and we continue to record a full valuationallowance against deferred tax assets as of March 31, 2003.  The higher effective tax rate in 2002,compared to the federal statutory rate of 34% plus state and local taxes, wasprimarily due to the impact of federal and state general business credits.

 

**Liquidityand Capital Resources**

 

Duringthe three months ended March 31, 2003, working capital decreased to $25.7million as compared to $29.4 million at December 31, 2002.  Working capital decreased primarily due to:(i) the use of cash to fund operations and acquire property and equipment, and(ii) the reinvestment of maturities of short-term investments in long-terminvestments.

 

At March 31, 2003 ourprincipal sources of liquidity consisted of $18.7 million of cash, cashequivalents and marketable securities and our revolving credit line agreement,which expires in April 2004.  Thisagreement allows for borrowings of up to $5.0 million subject to availabilitybased on accounts receivable and inventory balances.  We have no outstandingdebt at March 31, 2003.  Our liquidityis affected by many factors, some of which are based on the normal ongoingoperations of our business, the most significant of which include the timing ofthe collection of receivables, the level of inventories and capitalexpenditures and acquisitions.

 

*Accounts Receivable.*  Ouraccounts receivable decreased $2.1 million from December 31, 2002 to March 31,2003 representing 82 days sales outstanding (“DSO”) during the first quarter of2003.  This compares to a DSO of 99 daysin the fourth quarter of 2002 and 78 days in the first quarter of 2002.  Due to the high mix of internationalrevenues during a given quarter, which generally require a longer time forcollection, we believe our DSO will be between 70 and 80 days in futurequarters.

 

*Inventories.** *Our inventoriesincreased $1.0 million from December 31, 2002 to March 31, 2003, primarily dueto an increase in inventory at customer sites under purchase orders. Thisincrease is primarily related to shipments of our AXi Series, which weanticipate will not be recognized as revenue until the third quarter of2003.  We expect inventory at customersites under purchase orders will increase as shipments of newly introducedproducts increase.

 

*Capital Expenditures.*  Ourcapital expenditures during the quarter were $228,000 and are expected to bebetween $1.0 and $1.5 million in 2003. Capital expenditures consist primarily of the capitalization of finishedgoods used to support our engineering, sales and service efforts.

 

*Acquisitions.*  In addition to the $1.25 million in cash paid as part of theconsideration for STI, we anticipate that STI will require the utilization ofadditional cash during the integration process that began immediately followingthe closing.  The amount of additionalcash is dependent upon how quickly and effectively we complete theintegration.  Unanticipated difficultiesor costs in the integration process may adversely affect our overall level ofliquidity.   As a result of theacquisition, we entered into a two year lease for 10,000 square feet of spacein Plano, Texas at an annual rental cost of approximately $106,000.

 

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Our liquidity is alsoaffected by factors related to the uncertainties of global economies and thecyclical nature of the semiconductor and microelectronic industries.

 

Althoughliquidity requirements will fluctuate based on the timing and extent of all ofthese factors, management believes that existing cash and investment balancesand our line of credit will be adequate to satisfy our existing liquidityrequirements for the next twelve months.

 

*CashFlows*

 

Net cash provided byoperating 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 the proceeds received fromissuances of common stock.

 

Net cash provided by operatingactivities for the three months ended March 31, 2002 was $188,000, whichresulted primarily from decreased inventories and the add back of depreciationand amortization, partially offset by our net loss during the period.  Net cash used in investing activities was$1.0 million, primarily due to $641,000 of net purchases of marketablesecurities and purchases of $364,000 of property and equipment and otherassets.  Net cash provided by financingactivities was $326,000 from the proceeds received from issuances of commonstock.

 

**NewAccounting Pronouncements**

 

In December 2002, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF 00-21,  “Revenue Arrangements with MultipleDeliverables”.  This Issue addressescertain aspects of the accounting by a vendor for arrangements under which itwill perform multiple revenue-generating activities.  In somearrangements, the different revenue-generating activities (deliverables) aresufficiently separable and there exists sufficient evidence of their fairvalues to separately account for some or all of the deliverables (that is,there are separate units of accounting).  In other arrangements, some orall of the deliverables are not independently functional, or there is notsufficient evidence of their fair values to account for them separately.  This Issue addresses when and, if so, how anarrangement involving multiple deliverables should be divided into separateunits of accounting.  This Issue does not change otherwise applicablerevenue recognition criteria.  The guidance in this Issue is effective forrevenue arrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of EITF 00-21 will not have a material effect on ourfinancial statements.

 

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

 

*MarketRisk*

 

We are exposed to marketrisk primarily from changes in interest rates and credit risk.  We do not have material exposure to marketrisk from fluctuations in foreign currency exchange rates because all sales aremade in U.S. dollars.

 

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*InterestRate Risk*

 

We are exposed tointerest rate risk primarily from investments in cash equivalents andshort-term and long-term marketable debt securities (the “InvestmentPortfolio”).  The entire InvestmentPortfolio classification was changed from held-to-maturity toavailable-for-sale during the second quarter of 2002 and, accordingly, isrecorded on the balance sheet at fair market value, with unrealized gains or lossesexcluded from earnings and included in “Accumulated other comprehensive income(loss)” until realized.  The entireInvestment Portfolio 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.

 

*CreditRisk*

 

Financial instrumentswhich potentially subject us to credit risk consist principally of securitiesin the Investment Portfolio and trade receivables.  We limit credit risk related to the Investment Portfolio byplacing all investments with high quality credit issuers and limit the amountof investments with any one issuer.  Asof March 31, 2003, 83% of the Investment Portfolio consisted of governmentsecurities and corporate commercial paper and bonds with maturities of one yearor less.  We limit credit riskassociated with trade receivables by performing ongoing credit evaluations andbelieve that there is no additional risk beyond amounts provided for collectionlosses to be inherent in trade receivables.

 

**Item 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

Within the ninety dayperiod prior to the date of this report, the Company conducted an evaluationunder the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-14 of the SecuritiesExchange Act of 1934.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective to ensurethat material information relating to the Company, including its consolidatedsubsidiaries, is made known to them.

 

*Changesin Internal Controls*

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date the Companycarried out its evaluation.

 

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**PARTII — OTHER INFORMATION**

 

**Item 1.                    Legal Proceedings**

 

In connection with theApril 15, 2003 closing of the transactions contemplated by the Settlement andPurchase Agreement dated February 26, 2003, as amended, by and between theCompany, STI and ASTI, the parties released each other from any and all claimsrelated to their May 23, 2002 Purchase Agreement.  All disputes relating to the May 23, 2002 Purchase Agreement aretherefore resolved.

 

**Item 5.                    Other Information**

 

On April 15, 2003, theCompany completed the purchase of all of the outstanding capital stock of STIpursuant to the Settlement and Purchase Agreement dated February 26, 2003, asamended, by and between the Company, STI and STI’s sole shareholder, ASTI, ofSingapore.  The Settlement and PurchaseAgreement also resolved any remaining disputes between the Company and STI andASTI regarding the May 23, 2002 Purchase Agreement with STI and ASTI which theCompany terminated in August 2002. Pursuant to the Settlement and Purchase Agreement, the Company purchasedall of the outstanding stock of STI for a purchase price of $1.25 million incash and 215,385 shares of the Company’s common stock.  The purchase price was determined throughnegotiation by the parties and the Company used existing cash resources to paythe cash portion of the purchase price. The parties have placed shares issued in the transaction in escrow tosecure ASTI’s performance of certain covenants including ASTI’s agreement toindemnify the Company against any damages in connection with STI’s dispute witha third party.  Although the Companybelieves such indemnification and escrow is sufficient, any protracted disputewith the third party or adverse result may adversely affect the Company’sbusiness.

 

The Company’s ability tobenefit from the acquisition will depend upon how quickly and effectively theCompany integrates STI’s operations and personnel with its business.  Unanticipated difficulties or costs in thisintegration process may adversely affect the Company’s business.   STI is now a wholly owned subsidiary of theCompany with nine full time and seven transition employees who will helpfacilitate a smooth integration.  Theseemployees are in engineering, customer applications, service and sales.  As a result of the acquisition, the Companyentered into a two year lease for 10,000 square feet of space in Plano, Texasat an annual rental cost of approximately $106,000.

 

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**Item 6.                    Exhibits and Reports on Form 8-K**

 

(a)    Exhibits:
|   |   |
|--------|--------|
|   |   | The exhibits  listed on the Exhibit Index are filed herewith. |
|   |   |

(b)    Reports on Form 8-K:
|   |   |
|--------|--------|
|   |   | Current report on Form  8-K dated and filed February 28, 2003, was filed pursuant to Item 9  (Regulation FD Disclosure) to report the press release announcing the Company’s  amended agreement with ASTI Holdings, Ltd. for the acquisition of  Semiconductor Technologies and Instruments, Inc. |

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|              |   | AUGUST TECHNOLOGY  CORPORATION                          |
|-------------------|--------|---------------------------------------------------------|
|              |   |                                                    |
|              |   |                                                    |
| Date: May 9, 2003 |   | By:                                                     | /s/ JEFF L. O’DELL |   |
|              |   | Jeff L. O’Dell                                     |
|              |   | Chief Executive Officer  (Principal Executive Officer)  |
|              |   |                                                    |
|              |   |                                                    |
| Date: May 9, 2003 |   | By:                                                     | /s/ STANLEY D. PIEKOS |   |
|              |   | Stanley D. Piekos                                       |
|              |   | Chief Financial Officer  (Principal Financial Officer)  |
|              |   |                                                    |
|              |   |                                                    |
| Date: May 9, 2003 |   | By:                                                     | /s/ SCOTT A. GABBARD |   |
|              |   | Scott A. Gabbard                                        |
|              |   | Vice President, Finance  (Principal Accounting Officer) |

 

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CERTIFICATIONS

 

I, Jeff L. O’Dell,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of August TechnologyCorporation;

 

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

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)     designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)    evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)     presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)     all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)    any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 9,  2003 | By:                     | /s/ JEFF L.  O’DELL |   |
|--------------------|-------------------------|--------------------------|--------|
|               | Jeff L. O’Dell     |
|               | Chief Executive Officer |

 

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I, Stanley D. Piekos,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of August TechnologyCorporation;

 

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

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)     designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)    evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)     presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)    any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 9,  2003 | By:                     | /s/ STANLEY D.  PIEKOS |   |
|--------------------|-------------------------|------------------------|--------|
|               | Stanley D. Piekos       |
|               | Chief Financial 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, 2003         |   |                            |

 

**AUGUSTTECHNOLOGY CORPORATION**

 
| **Exhibit  Number** |   | **Description**                                                                                                                    |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                               |
| 10.1*               |   | Executive Employment Contract between  the Company and Stanley Piekos, dated April 7, 2003                                         |
|                |   |                                                                                                                               |
| 10.2                |   | Amendment to Convertible Promissory  Note between the Company and Excelerate Technologies, Holdings, LLC, dated  February 13, 2003 |
|                |   |                                                                                                                               |
| 10.3                |   | Financing Agreement between the Company  and Excelerate Technologies, LLC, effective May 6, 2002                                   |
|                |   |                                                                                                                               |
| 99.1                |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to the Sarbanes-Oxley  Act of 2002                          |

 

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*  Management contract or compensatory plan orarrangement

 

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