**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

| **ý**                                            |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                  |   |                                                                                          |   |   |
| **For the quarterly period ended September 30, 2003** |
|                                                  |   |                                                                                          |   |   |
| **OR**                                                |
|                                                  |   |                                                                                          |   |   |
| **o**                                                 |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                          to                           **

 

**Commission File Number 000-30637**

 

****

 

**AUGUST TECHNOLOGY CORPORATION**

(Exact name ofRegistrant 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  ý No  o

 

As of October 29, 2003,there were 17,248,100 shares of common stock outstanding.

 

 

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**AUGUSTTECHNOLOGY CORPORATION**

**TABLEOF CONTENTS**

 
|          | **Description**       |
|---------------|-----------------------|
|          |                  |
| PART I        | FINANCIAL INFORMATION |
|          |                  |
|          | Item 1.               | Financial Statements |
|          |                  |   |   |
|          |                  |   | Consolidated Balance Sheets  as of September 30, 2003 and December 31, 2002 (unaudited) |
|          |                  |   |   |
|          |                  |   | Consolidated  Statements of Operations for the three and nine months ended September 30,  2003 and 2002 (unaudited) |
|          |                  |   |   |
|          |                  |   | Consolidated  Statements of Cash Flows for the nine months ended September 30, 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 6.               | Exhibits and Reports on Form 8-K |
|          |
| SIGNATURES    |
|          |
| EXHIBIT INDEX |

 

2

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**PARTI****      FINANCIALINFORMATION**

**Item 1.  Financial Statements**

 

**AUGUSTTECHNOLOGY CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share amounts)**

**(Unaudited)**

 
|                                                                                                                              |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                        |   |                     |   |                    |   |
|                                                                                                                              |   |                     |   |                    |   |
| Current assets:                                                                                                                   |   |                     |   |                    |   |
| Cash and cash  equivalents                                                                                                        |   | $                        | 5,097  |                    | $      | 1,895 |   |
| Short-term  marketable securities                                                                                                 |   | 48,623                   |   | 15,438                  |   |
| Accounts  receivable, net                                                                                                         |   | 5,497                    |   | 7,054                   |   |
| Inventories                                                                                                                       |   | 9,006                    |   | 7,432                   |   |
| Inventories at  customers under purchase orders                                                                                   |   | 2,727                    |   | 1,012                   |   |
| Prepaid expenses  and other current assets                                                                                        |   | 1,574                    |   | 1,091                   |   |
| Total current  assets                                                                                                             |   | 72,524                   |   | 33,922                  |   |
|                                                                                                                              |   |                     |   |                    |   |
| Property and  equipment, net                                                                                                      |   | 3,522                    |   | 3,439                   |   |
| Purchased  technology, net                                                                                                        |   | 1,248                    |   | —                  |   |
| Long-term  marketable securities                                                                                                  |   | 1,585                    |   | 1,444                   |   |
| Other assets                                                                                                                      |   | 1,096                    |   | 705                     |   |
| Total assets                                                                                                                      |   | $                        | 79,975 |                    | $      | 39,510 |   |
|                                                                                                                              |   |                     |   |                    |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                    |   |                     |   |                    |   |
|                                                                                                                              |   |                     |   |                    |   |
| Current  liabilities:                                                                                                             |   |                     |   |                    |   |
| Accounts payable                                                                                                                  |   | $                        | 3,975  |                    | $      | 2,273 |   |
| Accrued  compensation                                                                                                             |   | 1,299                    |   | 554                     |   |
| Accrued  liabilities                                                                                                              |   | 1,138                    |   | 451                     |   |
| Customer  deposits                                                                                                                |   | 3,123                    |   | 1,268                   |   |
| Total current  liabilities                                                                                                        |   | 9,535                    |   | 4,546                   |   |
|                                                                                                                              |   |                     |   |                    |   |
| Other  non-current liabilities                                                                                                    |   | 73                       |   | 97                      |   |
| Total  liabilities                                                                                                                |   | 9,608                    |   | 4,643                   |   |
|                                                                                                                              |   |                     |   |                    |   |
| Shareholders’  equity:                                                                                                       |   |                     |   |                    |   |
| Common stock, no  par value, 42,000,000 shares authorized, 16,713,989 and 13,152,304 shares  issued and outstanding, respectively |   | 81,046                   |   | 42,158                  |   |
| Undesignated  capital stock, no par value, 3,000,000 shares authorized, no shares issued or  outstanding                          |   | —                   |   | —                  |   |
| Deferred  compensation related to stock options                                                                                   |   | (62                      | )      | (105                    | )      |
| Accumulated  deficit                                                                                                              |   | (10,605                  | )      | (7,229                  | )      |
| Accumulated  other comprehensive income (loss)                                                                                    |   | (12                      | )      | 43                      |   |
| Total  shareholders’ equity                                                                                                  |   | 70,367                   |   | 34,867                  |   |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                        | 79,975 |                    | $      | 39,510 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**AUGUST TECHNOLOGY CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per shareamounts)**

**(Unaudited)**

 
|                                            |   | **Three  Months Ended September 30,** |   | **Nine Months  Ended September 30,** |   |
|-------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                            |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                            |   |                                  |   |                                 |   |   |   |   |   |
| Net revenues                                    |   | $                                     | 11,685 |                                 | $      | 6,273 |   | $ | 26,005 |   | $ | 18,763 |   |
| Cost of revenues                                |   | 5,100                                 |   | 2,819                                |   | 11,603 |   | 8,148 |   |
| Gross profit                                    |   | 6,585                                 |   | 3,454                                |   | 14,402 |   | 10,615 |   |
|                                            |   |                                  |   |                                 |   |   |   |   |   |
| Selling, general and administrative expenses    |   | 3,808                                 |   | 3,780                                |   | 10,228 |   | 10,006 |   |
| Research and development expenses               |   | 2,595                                 |   | 2,347                                |   | 7,797 |   | 7,211 |   |
| Operating income (loss)                         |   | 182                                   |   | (2,673                               | )      | (3,623 | ) | (6,602 | ) |
|                                            |   |                                  |   |                                 |   |   |   |   |   |
| Interest income                                 |   | 71                                    |   | 124                                  |   | 247 |   | 506 |   |
|                                            |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) before provision for income taxes |   | 253                                   |   | (2,549                               | )      | (3,376 | ) | (6,096 | ) |
| Provision for income taxes                      |   | —                                |   | —                               |   | — |   | 687 |   |
| Net income (loss)                               |   | $                                     | 253    |                                 | $      | (2,549 | ) | $ | (3,376 | ) | $ | (6,783 | ) |
|                                            |   |                                  |   |                                 |   |   |   |   |   |
| Net income (loss) per share:                    |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                           |   | $                                     | 0.02   |                                 | $      | (0.19 | ) | $ | (0.25 | ) | $ | (0.52 | ) |
| Diluted                                         |   | $                                     | 0.02   |                                 | $      | (0.19 | ) | $ | (0.25 | ) | $ | (0.52 | ) |

 

See accompanying notes toconsolidated financial statements.

 

4

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**AUGUST TECHNOLOGY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                       |   | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                       |   | **2003**                             |   | **2002** |   |
| Cash flows from  operating activities:                                                     |   |                                 |   |   |   |
| Net loss                                                                                   |   | $                                    | (3,376 | ) | $ | (6,783 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                                 |   |   |   |
| Depreciation and  amortization                                                             |   | 1,368                                |   | 1,042 |   |
| Provision for  doubtful accounts                                                           |   | 134                                  |   | 71 |   |
| Amortization of  deferred compensation related to stock options                            |   | 45                                   |   | 50 |   |
| Deferred income  taxes                                                                     |   | —                               |   | 896 |   |
| Changes in  operating assets and liabilities, net of  affect of acquisitions:              |   |                                 |   |   |   |
| Accounts  receivable                                                                       |   | 1,829                                |   | (1,762 | ) |
| Inventories                                                                                |   | (1,713                               | )      | 954 |   |
| Prepaid expenses  and other current assets                                                 |   | (141                                 | )      | 1,428 |   |
| Accounts payable                                                                           |   | 1,696                                |   | 309 |   |
| Accrued  compensation                                                                      |   | 745                                  |   | 308 |   |
| Accrued  liabilities                                                                       |   | 572                                  |   | (88 | ) |
| Customer  deposits                                                                         |   | 919                                  |   | (31 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 2,078                                |   | (3,606 | ) |
|                                                                                       |   |                                 |   |   |   |
| Cash flows from  investing activities:                                                     |   |                                 |   |   |   |
| Purchases of  marketable securities                                                        |   | (62,539                              | )      | (22,676 | ) |
| Maturities of  marketable securities                                                       |   | 29,161                               |   | 31,538 |   |
| Cash paid in  acquisitions                                                                 |   | (1,485                               | )      | — |   |
| Purchases of  property and equipment                                                       |   | (739                                 | )      | (1,177 | ) |
| Investment in  other assets                                                                |   | —                               |   | (559 | ) |
| Net cash  provided by (used in) investing activities                                       |   | (35,602                              | )      | 7,126 |   |
|                                                                                       |   |                                 |   |   |   |
| Cash flows from  financing activities:                                                     |   |                                 |   |   |   |
|                                                                                       |   |                                 |   |   |   |
| Net proceeds  from follow on common stock offering                                         |   | 36,122                               |   | — |   |
| Net proceeds  from issuances of common stock to employees                                  |   | 604                                  |   | 1,070 |   |
| Net cash  provided by financing activities                                                 |   | 36,726                               |   | 1,070 |   |
|                                                                                       |   |                                 |   |   |   |
| Effect of  exchange rates on cash and cash equivalents                                     |   | —                               |   | (1 | ) |
|                                                                                       |   |                                 |   |   |   |
| Net increase in  cash and cash equivalents                                                 |   | 3,202                                |   | 4,589 |   |
| Cash and cash  equivalents at beginning of period                                          |   | 1,895                                |   | 1,523 |   |
| Cash and cash  equivalents at end of period                                                |   | $                                    | 5,097  |   | $ | 6,112 |   |
|                                                                                       |   |                                 |   |   |   |
| Supplemental  cash flow information:                                                       |   |                                 |   |   |   |
| Net cash refunds  of income taxes                                                          |   | $                                    | 227    |   | $ | 1,749 |   |
| Common stock  issued for acquisitions                                                      |   | $                                    | 2,160  |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AUGUST TECHNOLOGY CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER30, 2003**

**(Inthousands, 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 accounting principlesgenerally accepted in the United States of America, have been condensed oromitted pursuant to such rules and regulations.  In the opinion of the management of August Technology Corporation(collectively with its subsidiaries, the “Company”), all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included in the balance sheet at September 30, 2003, theresults of operations for the three and nine months ended September 30, 2003and 2002, and the cash flows for the nine months ended September 30, 2003 and2002.  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, 2002, filed with the Securitiesand Exchange Commission on March 4, 2003.

 

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 2003 presentation.

 

**Note2 – Business Combinations**

 

***Semiconductor Technologies & Instruments, Inc.***

 

On April 15, 2003, the Company acquired all of theoutstanding capital stock of Semiconductor Technologies & Instruments,Inc., (“STI”).  STI manufactures automated defect inspection and metrologytools that are integrated onto probers, providing microelectronicsmanufacturers with an automated solution for inspecting probe marks, ink dots,and active die regions.  The total purchase price, including directacquisition costs, was $2,156 which consisted of $1,385 in cash and 215 sharesof the Company’s Common Stock.  The purchase price has been allocated tothe net assets acquired and liabilities assumed based upon their estimated fairmarket values.  The results of operations of STI have been included in theCompany’s consolidated financial statements since the date of acquisition.

 

6

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The allocation of the purchase price to the assetsacquired and liabilities assumed was as follows:

 
| Accounts receivable                        |   | $     | 346    |   |
|--------------------------------------------|--------|-------|--------|--------|
| Inventories                                |   | 1,527 |   |
| Prepaid expenses  and other current assets |   | 72    |   |
| Property and  equipment                    |   | 329   |   |
| Accrued  liabilities                       |   | (76   | )      |
| Deferred revenue                           |   | (330  | )      |
| Customer  deposits                         |   | (60   | )      |
| Purchased  technology                      |   | 348   |   |
|                                       |   | $     | 2,156  |   |

 

The following unaudited pro forma consolidatedfinancial information presents the combined results of operations of theCompany and STI as if the acquisition occurred at the beginning of the periodspresented, after giving effect to certain adjustments, including amortizationexpense.  The unaudited pro forma consolidated financial information doesnot necessarily reflect the results of operations that would have occurred hadthe acquisition been completed as of the dates indicated or of the results thatmay be obtained in the future.

 
|                          |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                          |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Revenues                      |   | $                                     | 11,685 |                                 | $      | 7,001 |   | $ | 26,275 |   | $ | 20,590 |   |
| Net income (loss)             |   | 253                                   |   | (3,689                               | )      | (4,177 | ) | (10,443 | ) |
|                          |   |                                  |   |                                 |   |   |   |   |   |
| Net  income (loss) per share: |   |                                  |   |                                 |   |   |   |   |   |
| Basic                         |   | $                                     | 0.02   |                                 | $      | (0.28 | ) | $ | (0.31 | ) | $ | (0.79 | ) |
| Diluted                       |   | 0.02                                  |   | (0.28                                | )      | (0.31 | ) | (0.79 | ) |

 

On September 23, 2003, theCompany filed a legal complaint seeking a declaratory judgment that the Companyhas no liability to Rudolph Technologies, Inc. or its subsidiary, ISOA, Inc.,with respect to claims they have asserted that STI owes Rudolph developmentfees and royalty payments pursuant to a December 24, 1997 Development Agreement(the “Development Agreement”).  Inaddition, the Company is seeking repayment of royalties previously paid by STIto ISOA.  Rudolph and ISOA filed an answerand counterclaim, denying the allegations set forth in the Company’s complaintand claiming that ISOA is entitled to damages as a result of STI’s breach ofthe Development Agreement.  ISOA is alsoseeking a declaratory judgment that STI and/or the Company are wrongfully usingISOA’s technology without compensating ISOA. In connection with the acquisition of STI, the Company placed 180 sharesof its Common Stock issued in the transaction in escrow as part of theCompany’s indemnification protection against damages up to a maximum amount of$670 in connection with STI’s dispute with Rudolph.  In September 2003, 105 of the escrowed shares were sold and theproceeds of such sale were deposited into the escrow.

 

***Counterpoint Solutions, Inc.***

 

On July 3, 2003, the Company purchased substantiallyall of the assets of Counterpoint Solutions, Inc. (“CSI”).  CSI develops wafer inspection, review andfailure analysis solutions.  The totalpurchase price, including direct acquisition costs, was $1,504, which consistedof 200 shares of the Company’s Common Stock and $100 in cash.  Up to an additional $100 of cash will bepaid upon the achievement of certain product sales.  The allocation of the purchase price resulted in the Companyrecording net assets of $39, $462 of goodwill and $1,003 of purchased technology.

 

7

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During the year ended December 31, 2002, CSI had revenues of $885 andnet income of $104.  The results ofoperations of CSI have been included in the Company’s consolidated financialstatements since the date of acquisition.

 

**Note 3 –Accounts Receivable**

 

Accounts receivable consisted of the following:

 
|                             |   | **September  30,  2003** |   | **December  31,  2002** |   |
|----------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                             |   |                     |   |                    |   |
| Billed  receivables              |   | $                        | 5,226  |                    | $      | 7,209 |   |
| Unbilled revenue                 |   | 930                      |   | 395                     |   |
|                             |   | 6,156                    |   | 7,604                   |   |
| Allowance for  doubtful accounts |   | (659                     | )      | (550                    | )      |
| Accounts  receivable, net        |   | $                        | 5,497  |                    | $      | 7,054 |   |

 

**Note 4 –Inventories and Inventories at Customers Under Purchase Orders**

 

Inventories consisted of the following:

 
|                     |   | **September  30,  2003** |   | **December  31,  2002** |   |
|--------------------------|--------|--------------------------|--------|-------------------------|--------|
|                     |   |                     |   |                    |   |
| Raw materials            |   | $                        | 4,081  |                    | $      | 3,053 |   |
| Work in process          |   | 1,905                    |   | 1,415                   |   |
| Demonstration  equipment |   | 1,429                    |   | 1,374                   |   |
| Finished goods           |   | 1,591                    |   | 1,590                   |   |
| Inventories              |   | $                        | 9,006  |                    | $      | 7,432 |   |

 

Inventories at customers under purchase ordersrepresent systems that have shipped under the terms of a customer purchaseorder, but have not yet qualified for revenue recognition as the systems hadnot met customer specifications.

 

**Note5 – Purchased Technology**

 

The net carrying value of purchased technologyconsisted of the following:

 
|                                 |   | **September  30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------|--------|--------------------------|--------|------------------------|--------|
|                                 |   |                     |   |                   |   |
| Purchased  technology  (note 2) |   | $                        | 1,351  |                   | $      | — |   |
| Accumulated  amortization            |   | (103                     | )      | —                 |   |
| Purchased  technology, net           |   | $                        | 1,248  |                   | $      | — |   |

 

Purchased technology is amortized on a straight-linebasis over the estimated remaining useful life.  Amortization expense for the three and nine months endedSeptember 30, 2003 was $84 and $103, respectively.  Assuming nochange in the gross carrying value of purchased technology, the estimatedamortization expense for the twelve months ending December 31, 2003 is $187 andfor each of the next four years is $338, $338, $338 and $150.

 

8

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**Note 6 –Other Assets**

 

On May 6, 2002, the Company invested $500 inExcelerate Technologies, Inc. (“Excelerate”) in the form of a Note Receivable(the “Note”).  The Note was amended onFebruary 13, 2003.  The Note bearsinterest at prime and is secured by certain assets.  The Note matures and converts into Excelerate preferred stockupon Excelerate raising $1,500 of additional financing via a sale of Exceleratepreferred stock.  The Note can beprepaid at anytime by paying the outstanding principal and interest, along witha prepayment fee of 7.5% on the combined outstanding principal and interest.

 

**Note7 – Comprehensive Income (Loss)**

 

Comprehensive income (loss)is defined as net income (loss) and other changes in shareholders’ equity fromtransactions and other events from sources other than shareholders.  The components of and changes in other comprehensiveincome (loss) are as follows:

 
|                                      |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                      |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                      |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss)                        |   | $                                     | 253    |                                 | $      | (2,549 | ) | $ | (3,376 | ) | $ | (6,783 | ) |
| Other  comprehensive income (loss):       |   |                                  |   |                                 |   |   |   |   |   |
| Foreign currency  translation adjustment  |   | (3                                    | )      | (4                                   | )      | (3 | ) | (1 | ) |
| Net unrealized  gain (loss) on securities |   | (12                                   | )      | 26                                   |   | (52 | ) | 66 |   |
| Comprehensive  income (loss)              |   | $                                     | 238    |                                 | $      | (2,527 | ) | $ | (3,431 | ) | $ | (6,718 | ) |

 

**Note 8 –Shareholders’ Equity**

 

Changes in shareholders’ equity during the nine monthsended September 30, 2003 were as follows:

 
| Shareholders’ equity  balance at December 31, 2002         |   | $      | 34,867 |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Net loss                                                        |   | (3,376 | )      |
| Other  comprehensive loss:                                      |   |   |   |
| Foreign currency  translation adjustment                        |   | (3     | )      |
| Net unrealized  loss on securities                              |   | (52    | )      |
| Comprehensive  loss                                             |   | (3,431 | )      |
| Issuances of  common stock in conjunction with:                 |   |   |   |
| Follow on public  offering, net of expenses                     |   | 36,122 |   |
| Acquisitions                                                    |   | 2,160  |   |
| Exercises of  employee stock options                            |   | 516    |   |
| Employee stock  purchase plan                                   |   | 88     |   |
| Amortization of  deferred compensation related to stock options |   | 45     |   |
| Shareholders’  equity balance at September 30, 2003        |   | $      | 70,367 |   |

 

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”).  The netproceeds from the Offering, after deducting the underwriting discount andoffering expenses, was $36,122.

 

On October 21, 2003, the underwriters exercised theirover-allotment option to acquire an additional 490 shares of Common Stock atthe same price to the public, and with the same

 

9

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underwriting discount as the Offering. The Company received $6,001 from the exercise of the over-allotmentoption, net of the underwriting discount.

 

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

 

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

 
|                                           |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                           |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss)                             |   | $                                     | 253    |                                 | $      | (2,549 | ) | $ | (3,376 | ) | $ | (6,783 | ) |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Weighted average  common shares:               |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                          |   | 13,844                                |   | 13,123                               |   | 13,451 |   | 13,000 |   |
| Effect of  dilutive stock options and warrants |   | 734                                   |   | —                               |   | — |   | — |   |
| Diluted                                        |   | 14,578                                |   | 13,123                               |   | 13,451 |   | 13,000 |   |
|                                           |   |                                  |   |                                 |   |   |   |   |   |
| Net income  (loss) per share:                  |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                          |   | $                                     | 0.02   |                                 | $      | (0.19 | ) | $ | (0.25 | ) | $ | (0.52 | ) |
| Diluted                                        |   | 0.02                                  |   | (0.19                                | )      | (0.25 | ) | (0.52 |   |

 

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 September 30, 2003 and 2002 were517 and 1,465, respectively, and for the nine months ended September 30, 2003and 2002 were 1,887 and 1,557, respectively.

 

***Stock-based Compensation***

 

The estimated per share weighted average fair value ofall stock options granted during the three months ended September 30, 2003and 2002 was $6.11 and $3.43, respectively, and for the nine months endedSeptember 30, 2003 and 2002 was $3.82 and $5.04, respectively. The fairvalue of each option grant was estimated using the Black-Scholes option pricingmodel with the following weighted average assumptions:

 
|                     |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|--------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                     |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                     |   |                                 |   |                                |   |   |   |   |   |
| Expected life            |   | 5.9 years                            |   | 5.8 years                           |   | 5.6 years |   | 4.5 years |   |
| Risk free  interest rate |   | 3.2                                  | %      | 3.9                                 | %      | 3.0 | % | 3.9 | % |
| Volatility               |   | 75.1                                 | %      | 74.2                                | %      | 75.1 | % | 74.2 | % |
| Dividend yield           |   | —                               |   | —                              |   | — |   | — |   |

 

10

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Had the Company recorded compensation cost based onthe estimated fair value on the date of grant, as defined by SFAS 123, theCompany’s pro forma net loss would have been as follows:

 
|                                                                                                |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| Net income  (loss), as reported                                                                     |   | $                                    | 253    |                                | $      | (2,549 | ) | $ | (3,376 | ) | $ | (6,783 | ) |
| Stock-based  employee compensation expense determined under fair value based method for  all awards |   | (377                                 | )      | (377                                | )      | (1,053 | ) | (1,658 | ) |
| Net loss, pro  forma                                                                                |   | $                                    | (124   | )                                   | $      | (2,926 | ) | $ | (4,429 | ) | $ | (8,441 | ) |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| Net income  (loss) per share:                                                                       |   |                                 |   |                                |   |   |   |   |   |
| As reported:                                                                                        |   |                                 |   |                                |   |   |   |   |   |
| Basic                                                                                               |   | $                                    | 0.02   |                                | $      | (0.19 | ) | $ | (0.25 | ) | $ | (0.52 | ) |
| Diluted                                                                                             |   | 0.02                                 |   | (0.19                               | )      | (0.25 | ) | (0.52 | ) |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| Pro forma:                                                                                          |   |                                 |   |                                |   |   |   |   |   |
| Basic                                                                                               |   | $                                    | (0.01  | )                                   | $      | (0.22 | ) | $ | (0.33 | ) | $ | (0.65 | ) |
| Diluted                                                                                             |   | (0.01                                | )      | (0.22                               | )      | (0.33 | ) | (0.65 | ) |

 

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

 

**Cautionary FactorsThat 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.  Our actualresults could differ materially from those projected in the forward-looking statementsas a result of a number of factors, including but not limited to marketacceptance of our products, our ability to successfully develop new products,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 filings withthe Securities and Exchange Commission, including our prospectus as filed withthe SEC on September 24, 2003 pursuant to Rule 424(b)4 of the Rules and Regulationsunder the Securities Act of 1933 and our Annual Report on Form 10-K for theyear ended December 31, 2002, as filed with the SEC on March 4, 2003.  We disclaim any obligation to reviseforward-looking statements, or to update the reasons actual results coulddiffer materially from those anticipated, to reflect events or circumstancesafter the date of such statements or to reflect the occurrence of anticipatedor unanticipated events. Because many factors are unforeseeable, the foregoingshould not be considered an exhaustive list.

 

**Introduction**

 

*The following discussion of our results of operationsand financial condition should be read together with the other financialinformation and consolidated financial statements and related notes included inthis Form 10-Q. This discussion contains forward-looking statements thatinvolve risks and uncertainties. Our*actual*results could differmaterially from those anticipated in the forward-looking statements as a resultof a variety of factors.*

 

Weare a 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, improving time-to-market and enhancingthe performance of their products. We combine our core competencies in machinevision technology, optics, lighting and precision motion control with ourproprietary software and extensive microelectronic-specific applications experienceto deliver scalable, modular systems that excel at the automated detection ofadvanced macro defects, which we define to be defects greater in size than 0.5microns. We sell our systems to many of the leading microelectronic devicemanufacturers throughout the world for inspecting semiconductors, advancedpackaging applications, optoelectronics, MEMS, data storage and micro displays.

 

Wehave traditionally provided systems to address the automated inspection needsof the final manufacturing or back-end of the microelectronic devicemanufacturing process, including test, assembly and packaging. We recently haveintroduced two new systems for advanced macro

 

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detection earlier in the front-end wafer manufacturing process. Inaddition to internal development, we look to expand through strategicacquisitions of complementary products and technologies.

 

Ourbusiness is subject to the cyclical nature of the microelectronic devicemanufacturing markets we serve.  Thesecycles are caused by significant fluctuations in the supply and demand ofmicroelectronic devices driven by such factors as changes in technology andglobal economic conditions. There has been a dramatic reduction in demand formicroelectronic device manufacturing equipment since 2000. This decreaseddemand has caused our quarterly orders and sales to fluctuate dramatically.While we have seen some improvements in market conditions, we are not able topredict when the microelectronic device manufacturers’ capital spending willrecover. Future 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.

 

**Acquisitions**

 

On April 15, 2003,we acquired all of the outstanding capital stock of Semiconductor Technologies& Instruments, Inc. (“STI”).   STImanufactures automated defect inspection and metrology tools that areintegrated onto probers, providing microelectronics manufacturers with anautomated solution for inspecting probe marks, ink dots, and active dieregions.  The total consideration, including direct acquisitioncosts, was $2.2 million and consisted of $1.4 million in cash and 215,385shares of our common stock. The parties initially had placed 215,000 sharesissued in the transaction in escrow to secure ASTI’s performance of certaincovenants including ASTI’s agreement to indemnify us against damages inconnection with STI’s dispute with a third party.  In September 2003, pursuant to an agreement between the partiesand the escrow agent, 105,385 of the escrowed shares were sold and the proceedsof such sale were deposited into the escrow.

 

On July 3, 2003, weacquired substantially all the assets of Counterpoint Solutions, Inc.(“CSI”).  CSI develops wafer inspection,review and failure analysis solutions. The transaction was structured as anasset acquisition.   The totalconsideration paid, including direct acquisition costs, was $1.5 million andconsisted of $100,000 in cash and 200,000 shares of our common stock.  Up to an additional $100,000 of cash will bepaid upon the achievement of certain product sales.

 

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, certain operating dataas a percentage of net revenues:

 
|                                             |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Net revenues                                     |   | 100.0                                | %      | 100.0                               | %      | 100.0 | % | 100.0 | % |
| Cost of revenues                                 |   | 43.6                                 |   | 44.9                                |   | 44.6 |   | 43.4 |   |
| Gross profit                                     |   | 56.4                                 |   | 55.1                                |   | 55.4 |   | 56.6 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Selling, general and  administrative expenses    |   | 32.6                                 |   | 60.3                                |   | 39.4 |   | 53.3 |   |
| Research and development  expenses               |   | 22.2                                 |   | 37.4                                |   | 30.0 |   | 38.4 |   |
| Operating income (loss)                          |   | 1.6                                  |   | (42.6                               | )      | (14.0 | ) | (35.1 | ) |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Interest income                                  |   | 0.6                                  |   | 2.0                                 |   | 1.0 |   | 2.7 |   |
|                                             |   |                                 |   |                                |   |   |   |   |   |
| Income (loss) before  provision for income taxes |   | 2.2                                  |   | (40.6                               | )      | (13.0 | ) | (32.4 | ) |
| Provision for income taxes                       |   | —                               |   | —                              |   | — |   | 3.7 |   |
| Net income (loss)                                |   | 2.2                                  | %      | (40.6                               | )%     | (13.0 | )% | (36.1% | ) |

 

*Three months ended September 30,2003 compared to the three months ended September 30, 2002*

 

*NetRevenues.*  Net revenues increased $5.4 million, or86.3%, to $11.7 million for the three months ended September 30, 2003, from$6.3 million for the same period in 2002. The increase in net revenues was primarily due to increased sales of ourNSX Series, sales related to the AXi Series, which we first recognized revenueon during the current quarter, and sales of the WAV Series, acquired inconjunction with the acquisition of STI. The increase was partially offset by lower revenues from the 3Di Series.

 

Netrevenues from international sales represented 83% and 70% of total net revenuesfor the three months ended September 30, 2003 and 2002, respectively.  The increase in international sales was primarilythe result of increased sales to Asia, which comprised 72% and 68% of netrevenues for the three months ended September 30, 2003 and 2002,respectively.  The increase in thepercentage of net revenues from Asia was partially offset by a decrease in netrevenues from North America, which comprised 17% and 30% of total net revenuesfor the three months ended September 30, 2003 and 2002, respectively.

 

Duringthe three months ended September 30, 2003, orders for systems within the NSXand AXi Series increased as compared to the prior quarter.  This increase resulted in a book-to-billratio above parity during the quarter. As a result of the increase in bookings, we expect revenues to increaseduring the fourth quarter of 2003 as compared to the third quarter of 2003.

 

*GrossProfit.*  Gross profit increased to $6.6 million forthe three months ended September 30, 2003, from $3.5 million for the sameperiod in 2002.  The gross marginincreased to 56.4% for the three months ended September 30, 2003, from 55.1%for the same period in 2002.  Theincrease in gross margin percentage was primarily due to an increase in salesof certain products within the NSX Series and WAV Series, which have highermargins than our other product lines, higher average selling prices within theNSX Series, and higher absorption of fixed manufacturing costs.  In addition,  prior year revenues included a higher mix of lower margin modelswithin the 3Di Series.

 

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*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 expenseswere $3.8 million, or 32.6% of net revenues, for the three months endedSeptember 30, 2003, and $3.8 million, or 60.3% of net revenues, for the sameperiod in 2002.  Expenses in 2003included increased variable costs, such as sales commissions and travel,associated with the increased level of revenues, employee compensation costs,expenses associated with the ongoing operations of STI and CSI, and theamortization of purchased technology. These increases were partially offset by the fact that expenses in thethird quarter of 2002 included the write-off of acquisition related costs,employee severance costs and expenses related to the modification of ourdistributor agreement with Metron Technology, B.V.(“Metron”), as a result ofour decision to sell directly to customers in Asia, except Japan and SouthKorea.  The quarterly selling, generaland administrative expense dollars are expected to increase in the last quarterof 2003, as compared to the third quarter of 2003, primarily as a result ofvariable expenses associated with the expected higher level of revenues andhigher recruiting and relocation costs. However, selling, general and administrative expenses as a percentage ofrevenues are expected to decrease, as revenues are expected to increase at ahigher rate than the increase in selling, general and administrative expenses.

 

*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 10.6% to $2.6 million, or 22.2% of net revenues,for the three months ended September 30, 2003, from $2.3 million, or 37.4% ofnet revenues, for the same period in 2002. The increase in expenses was primarily due to employee salaries and related benefits associatedwith the employees of STI and CSI, and costs related to completing certainstages of development of the BXi Series and EXi Series, as well as additionalfeatures related to the NSX Series.  Theincrease was partially offset by expenses in the prior year including costsrelated to the development of the NSX-105, which was introduced in the thirdquarter of 2002, and further development of the 3Di Series, which beganshipping in the fourth quarter of 2001. We anticipate that research anddevelopment expense dollars will increase in future quarters, as compared tothe third quarter of 2003, due to ongoing development projects.  However, research and development expenses as a percentage of revenues are expectedto decrease, as revenues are expected to increase at a higher rate than theincrease in research anddevelopment expenses.

 

*Interest Income.* Interest income was $71,000 for the three months ended September 30,2003, compared to $124,000 for the same period in 2002.  The decrease in interest income was due tolower rates of return earned on investment balances in 2003 as compared to 2002and lower overall investment balances in 2003. We expect interest income to increase in the fourth quarter of 2003 dueto an increase in overall investment balances, as a result of the proceeds fromthe follow on public offering of our Common Stock that was completed onSeptember 23, 2003 (the “Offering”).

 

*Income Taxes. *Due to the level of historicaloperating losses we have incurred, we have sufficient net operating losses tooffset the level of income taxes on our pre tax income.   As a result of historical operating lossesand uncertainty as to the extent of profitability in future periods, we continueto record a full valuation allowance against our deferred tax assets.  As a result, we did not reflect a provisionfor income taxes during the three months ended September 30, 2003.   Statement of Financial Accounting Standards(“SFAS”) No. 109 “Accounting forIncome Taxes,” requires the establishment of a valuation allowance to reflectthe likelihood of the realization of deferred tax assets.  As of December 31, 2002 the valuationallowance was $5.4 million.

 

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*Nine months ended September 30,2003 compared to the nine months ended September 30, 2002*

** **

*NetRevenues.*  Net revenues increased $7.2 million, or38.6%, to $26.0 million for the nine months ended September 30, 2003, from$18.8 million for the same period in 2002. The increase in net revenues was due primarily to increased sales of ourNSX Series, sales related to the AXi Series, and sales of the WAV Series.  The increase was partially offset by lowerrevenues from the 3Di Series.

 

Netrevenues from international sales represented 75% and 58% of total net revenuesfor the nine months ended September 30, 2003 and 2002, respectively.  The increase in international sales wereprimarily the result of sales to Asia, which comprised 64% and 50% of netrevenues for the nine months ended September 30, 2003 and 2002, respectively.

 

*GrossProfit.*  Gross profit increased to $14.4 million forthe nine months ended September 30, 2003, from $10.6 million for the sameperiod in 2002.  The gross margindecreased to 55.4% for the nine months ended September 30, 2003, from 56.6% forthe same period in 2002.  The decreasein gross margin percentage was primarily due to an increase, in the first andsecond quarters of 2003, in the number of NSX systems that included subsystemoptions manufactured by third parties, which have lower gross margins than ourcore inspection systems.  The decreasein margin was partially offset by higher average selling prices within the NSXSeries in the third quarter of 2003.

 

*Selling, Generaland Administrative Expenses.*  Selling, general andadministrative expenses increased 2.2% to $10.2 million, or 39.4% of netrevenues, for the nine months ended September 30, 2003, from $10.0 million, or53.3% of net revenues, for the same period in 2002.  The increase in expense dollars was primarily due to higheremployee compensation costs, costs associated with the integration and ongoingoperations of STI and CSI, higher variable costs associated with the higherrevenues, and costs associated with systems being evaluated by customers. Theincrease was partially offset by the fact that the prior year included thewrite-off of costs related to potential acquisitions, the modification of ourdistributor agreement with Metron and employee severance.

 

*Researchand Development Expenses.*  Research and developmentexpenses increased 8.1% to $7.8 million, or 30.0% of net revenues, for the ninemonths ended September 30, 2003, from $7.2 million, or 38.4% of net revenues,for the same period in 2002.  The increasein expenses was primarily due to costs related to completing certainstages of the development of our new BXi Series, EXi Series and AXi Series, andemployee salaries and related benefits associatedwith the employees of STI and CSI.

 

*Interest Income.* Interest income was $247,000 for the nine months ended September 30,2003, compared to $506,000 for the same period in 2002.  The decrease in interest income was due tolower rates of return earned on investment balances in 2003 as compared to 2002and lower overall investment balances in 2003.

 

*IncomeTaxes.*  Due to the recording of a full valuationallowance against deferred tax assets, we continued to reflect no benefit fromincome taxes during the nine months ended September 30, 2003.   The recording of the valuation allowance inthe second quarter of 2002 resulted in a provision for income taxes of $687,000during the nine months ended September 30, 2002.

 

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**Liquidity and CapitalResources**

 

Duringthe nine months ended September 30, 2003, working capital increased to $63.0million as compared to $29.4 million at December 31, 2002.  The increase was primarily due to anincrease in cash and marketable securities due to the sale of 3.0million shares of our Common Stock at a price of $13.00 per share in a followon public offering that was completed on September 23, 2003 (the“Offering”).  The net proceeds from theOffering, after deducting the underwriting discount and offering expenses, were$36.1 million.  On October 21, 2003, theunderwriters exercised their option to acquire an additional 490,238 shares ofCommon Stock to cover over-allotments and we received $6.0 million, net of theunderwriting discount.

 

AtSeptember 30, 2003 our principal sources of liquidity consisted of cash, cashequivalents and marketable securities of $55.3 million and our revolving creditline agreement, which expires in April 2004. The credit line agreement allows for borrowings of up to $5.0 million,subject to availability based on accounts receivable and inventorybalances.  We have no outstanding debt at September 30, 2003.  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.

 

*Accounts Receivable.*  Accountsreceivable decreased $1.6 million from December 31, 2002 to September 30, 2003,representing 42 days sales outstanding (“DSO”) during the three months endedSeptember 30, 2003.  This compares to aDSO of 99 days in the fourth quarter of 2002. The decrease in account receivable DSO was due to an increase in theamount of customer deposits received for systems we recognized revenue on inthe third quarter of 2003.  Due to thehigh mix of international revenues during a given quarter, which generallyrequire a longer time for collection, we believe our DSO could increase infuture quarters.

 

*Inventories.* Inventories increased $3.3 million from December 31, 2002to September 30, 2003, primarily due to (i) inventory acquired with STI; (ii)an increase in inventory at customer sites under purchase orders; and (iii) anincrease in raw material and work in process inventory to support new productintroductions and increased backlog. The increase in inventory at customersites under purchase orders is primarily related to shipments of our AXiSeries.  We anticipate that a portion ofthe inventory at customer sites will be recognized as revenue during the fourthquarter of 2003.  We expect inventory atcustomer sites under purchase orders will increase as shipments of newlyintroduced products increase.

 

*Capital Expenditures.*  Ourcapital expenditures during the quarter were $152,000, and our total capitalexpenditures are expected to be between $1.0 and $1.5 million in 2003.  Capital expenditures consist primarily ofthe capitalization of finished goods used to support our engineering, sales andservice efforts.

 

*Acquisitions.*  As a result of the acquisition of STI, weentered into a two year lease for 10,600 square feet of space in Plano, Texasat an annual rental cost of approximately $106,000.  As a result of the acquisition of CSI, we will lease 1,200 squarefeet in Thornwood, New York at a monthly rental cost of approximately$2,200.  The lease may be terminated atany time with a six month notice.

 

Our liquidity is alsoaffected by factors beyond our control related to the uncertainties of globaleconomies and the cyclical nature of the semiconductor and microelectronicindustries.

 

17

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Although liquidityrequirements will fluctuate based on the timing and extent of all of thesefactors and others, management believes that existing cash and investmentbalances along with our line of credit will be adequate to satisfy our existingliquidity requirements for at least the next twelve months.

 

*CashFlows*

 

Net cash provided byoperating activities for the nine months ended September 30, 2003 was $2.1million, which resulted primarily from decreased accounts receivable andincreased customer deposits and accounts payable partially offset by our netloss and increased inventory during the period.  Net cash used in investing activities was $35.6 million,primarily due to $33.4 million of net purchases of marketable securitiesresulting from the proceeds of the Offering, $1.4 million paid to acquire STIand $739,000 of purchases of property and equipment.  Net cash provided by financing activities was $36.7 million,including $36.1 million of net proceeds received from the Offering.

 

Net cash used inoperating activities for the nine months ended September 30, 2002 was $3.6million, which resulted primarily from our net loss and increase in accountsreceivable, partially offset by non-cash charges and decreased prepaid expensesand other current assets and inventories. Net cash provided by investingactivities was $7.1 million, primarily due to $8.8 million of net proceeds frommaturities of marketable securities offset by the purchases of $1.7 million ofproperty and equipment and other assets. Net cash provided by financing activities was $1.1 million from theproceeds received from issuances of common stock.

 

**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 it willperform multiple revenue-generating activities.  In some arrangements, thedifferent revenue-generating activities (deliverables) are sufficientlyseparable and there exists sufficient evidence of their fair values toseparately account for some or all of the deliverables (that is, there areseparate units of accounting).  In other arrangements, some or all of thedeliverables are not independently functional, or there is not sufficientevidence 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 did not have an effect on ourconsolidated financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging”, which amends and clarifies financial accounting and reporting forderivative instruments.  SFAS 149 becameeffective for us in July 2003.  Theadoption of SFAS 149 did not have an effect on our consolidated financialstatements.

 

On May 15, 2003, theFinancial Accounting Standards Board issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity”.  The Statement requires issuersto classify as liabilities (or assets in some circumstance) three classes offreestanding financial instruments that embody obligations for the issuer.  Generally, the Statement

 

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is effective for financial instruments entered into or modified afterMay 31, 2003 and is otherwise effective at the beginning of the first interimperiod beginning after June 15, 2003. The adoption of SFAS 150 did not have an effect on our consolidatedfinancial statements.

 

**Item3****.  Qualitative and Quantitative Disclosuresabout Market Risk**

 

*Market Risk*

 

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.

 

*Interest Rate 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, classified as available-for-sale, is recorded on the balance sheetat fair market value with unrealized gains or losses excluded from earnings andincluded in “Accumulated other comprehensive income (loss)” untilrealized.  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 100 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 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 September 30, 2003, 88% 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.

 

**Item4****. Controls andProcedures**

 

*Evaluation of Disclosure Controlsand Procedures*

 

As of the end of theperiod 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.

 

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*Changesin Internal Controls*

 

There were no changes inthe Company’s internal controls over financial reporting that occurred duringthe period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II****– OTHER INFORMATION**

 

**Item1****.****                                                           LegalProceedings**

 

On September 23, 2003, theCompany filed a complaint in the district court of Dallas County, Texas seekinga declaratory judgment that the Company has no liability to RudolphTechnologies, Inc. or its subsidiary, ISOA, Inc. (doing business as YieldMetrology Group), with respect to claims they have asserted against the Companyand its subsidiary, Semiconductor Technologies & Instruments, Inc.(“STI”).  In various letters andconversations with STI and the Company, Rudolph has asserted that STI owesRudolph development fees and royalty payments pursuant to a December 24, 1997Development Agreement (the “Development Agreement”) between STI and ISOA, Inc.,which Rudolph later acquired and renamed Yield Metrology Group.  In addition, the Company is seeking ajudgment against Rudolph and ISOA for repayment of royalties previously paid bySTI to ISOA under the Development Agreement and costs and attorney’s feesincurred in bringing this action.

 

On September 30, 2003,Rudolph and ISOA filed an answer and counterclaim, denying the allegations setforth in the Company’s complaint and claiming that ISOA is entitled to damagesas a result of STI’s breach of the Development Agreement.  ISOA is also seeking a declaratory judgmentthat STI and/or the Company are wrongfully using ISOA’s technology withoutcompensating ISOA.  ISOA is also seekinga judgment for their attorney’s fees in this matter.

 

In connection with the acquisition of STI, the Companyplaced 180,000 shares of its common stock issued in the transaction in escrowto secure the performance by ASTI Holdings Limited (“ASTI”) of its agreement toindemnify the Company against damages up to a maximum amount of $670,000 inconnection with STI’s dispute with Rudolph. Shares distributed from the escrowin payment of any indemnification claim will be valued at the market price ofthe Company’s Common Stock on the date of resolution of the claim.  In September 2003, pursuant to an agreementbetween the Company, ASTI and the escrow agent, 105,385 of the escrowed shareswere sold and the proceeds of such sale were deposited into the escrow.  The escrow agreement provides that theescrow would have terminated on October 15, 2003 if a legal proceedingregarding these issues had not been initiated prior to that date.  Because the Company has initiated this legalproceeding, the escrow remains in effect until the resolution of the claimssubject to such legal proceeding.

 

TheCompany may incur significant legal fees and expenses in pursuing this actionfor a declaratory judgment.  Inaddition, there can be no assurance that the Company will prevail in suchlitigation and the Company may suffer an adverse result requiring it to paydamages or royalties adversely affecting its business.  Notwithstanding the foregoing, the Companybelieves the indemnification escrow established in connection with theacquisition of STI is reasonably likely to protect the Company against anylosses incurred in connection with Rudolph’s claims.

 

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

 

(a)                                  Exhibits:

 

The exhibits listed onthe Exhibit Index are filed herewith.

 

(b)                                 Reportson Form 8-K:

 

Current Report on Form 8-K dated July 8, 2003 andfiled July 9, 2003, was filed pursuant to Item 9 (Regulation FD Disclosure) toreport the press release announcing the acquisition of Counterpoint SolutionsInc.

 

Current Report on Form 8-K dated July 30, 2003 andfurnished July 30, 2003, was furnished pursuant to Item 12 (Disclosure ofResults of Operations and Financial Condition) to report the press releaseannouncing the Company’s second quarter 2003 financial results.

 

Amendment to Current Report on Form 8-K dated April15, 2003 and filed August 12, 2003, was filed pursuant to Item 2 (Acquisitionor Disposition of Assets) and Item 7 (Financial Statements and Exhibits) toreport the acquisition of the stock of Semiconductor Technologies andInstruments, Inc. (“STI”) and to report the audited financial statements of STIand the pro forma condensed combined financial statements of the Company andSTI.

 

Amendment to Current Report on Form 8-K dated April 15,2003 and filed August 27, 2003, was filed pursuant to Item 7 (FinancialStatements and Exhibits) to report an exhibit of the Company and STI.

 

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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: November 3, 2003 |   | By:                                                                                   | /s/ JEFF L. O’DELL |   |
|                   |   | Jeff L. O’Dell                                                                   |
|                   |   | Chief Executive Officer  (Principal Executive Officer)                                |
|                   |   |                                                                                  |
|                   |   |                                                                                  |
| Date: November 3, 2003 |   | By:                                                                                   | /s/ STANLEY D. PIEKOS |   |
|                   |   | Stanley D. Piekos                                                                     |
|                   |   | Chief Financial Officer  (Principal Financial Officer)                                |
|                   |   |                                                                                  |
|                   |   |                                                                                  |
| Date: November 3, 2003 |   | 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

 

EXHIBIT INDEX TO FORM 10-Q

 
| For the quarter ended: | Commission File No.: 000-30637 |
|------------------------|--------------------------------|
| September 30, 2003     |                           |

 

**AUGUSTTECHNOLOGY CORPORATION**

 
| **Exhibit Number** |   | **Description**                                                                                           |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                      |
| 10.1*              |   | Executive Employment  Contract between the Company and Pam Lampert, dated September 6, 2003               |
|               |   |                                                                                                      |
| 10.2*              |   | Executive Employment  Contract between the Company and Ardelle Johnson, dated September 9, 2003           |
|               |   |                                                                                                      |
| 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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*                 Managementcontract of compensatory plan or arrangement

 

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