**UNITEDSTATESSECURITIES 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 June 30, 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 TECHNOLOGYCORPORATION**

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Exchange ActRule 12b-2).  Yes  ý  No  o

 

As of July 31, 2003, there were 13,625,966 sharesof common stock outstanding.

 

 

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**AUGUST TECHNOLOGYCORPORATION**

**TABLE OFCONTENTS**

** **
|           | **Description**                                                                                                   |
|----------------|-------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                              |
| PART I         | FINANCIAL INFORMATION                                                                                             |
|           |                                                                                                              |
| Item  1.       | Financial Statements                                                                                              |
|           |                                                                                                              |
|           | Consolidated Balance Sheets  as of June 30, 2003 and December 31, 2002 (unaudited)                      |
|           |                                                                                                              |
|           | Consolidated  Statements of Operations for the three and six months ended June 30,  2003 and 2002(unaudited) |
|           |                                                                                                              |
|           | Consolidated  Statements of Cash Flows for the six months ended June 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  2.       | Changes  in Securities and Use of Proceeds                                                                        |
|           |                                                                                                              |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                              |
|           |                                                                                                              |
| Item 5.        | Other  Information                                                                                                |
|           |                                                                                                              |
| Item  6.       | Exhibits and Reports on Form 8-K                                                                                  |
|           |                                                                                                              |
| SIGNATURES     |                                                                                                              |
|           |                                                                                                              |
| EXHIBIT  INDEX |                                                                                                              |
|                |                                                                                                                   |  |

 

2

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**PART I****      FINANCIALINFORMATION**

 

**Item 1****.  Financial Statements**

 

**AUGUST TECHNOLOGY CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                              |   | **June 30,  2003** |   | **December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|------------|
| **ASSETS**                                                                                                                        |   |                    |   |                        |       |
|                                                                                                                              |   |                    |   |                        |       |
| Current assets:                                                                                                                   |   |                    |   |                        |       |
| Cash and cash  equivalents                                                                                                        |   | $                       | 1,512  |                        | $          | 1,895 |   |
| Short-term marketable  securities                                                                                                 |   | 18,694                  |   | 15,438                      |       |
| Accounts receivable,  net                                                                                                         |   | 5,199                   |   | 7,054                       |       |
| Inventories                                                                                                                       |   | 7,861                   |   | 7,432                       |       |
| Inventories at  customers under purchase orders                                                                                   |   | 3,395                   |   | 1,012                       |       |
| Prepaid expenses and  other current assets                                                                                        |   | 1,277                   |   | 1,091                       |       |
| Total current assets                                                                                                              |   | 37,938                  |   | 33,922                      |       |
|                                                                                                                              |   |                    |   |                        |       |
| Property and equipment,  net                                                                                                      |   | 3,605                   |   | 3,439                       |       |
| Purchased technology,  net                                                                                                        |   | 330                     |   | —                      |       |
| Long-term marketable  securities                                                                                                  |   | —                  |   | 1,444                       |       |
| Other assets                                                                                                                      |   | 658                     |   | 705                         |       |
| Total assets                                                                                                                      |   | $                       | 42,531 |                        | $          | 39,510 |   |
|                                                                                                                              |   |                    |   |                        |       |
|                                                                                                                              |   |                    |   |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                    |   |                    |   |                        |       |
|                                                                                                                              |   |                    |   |                        |       |
| Current liabilities:                                                                                                              |   |                    |   |                        |       |
| Accounts payable                                                                                                                  |   | $                       | 3,651  |                        | $          | 2,273 |   |
| Accrued compensation                                                                                                              |   | 710                     |   | 554                         |       |
| Accrued liabilities                                                                                                               |   | 665                     |   | 451                         |       |
| Customer deposits                                                                                                                 |   | 5,263                   |   | 1,268                       |       |
| Total current  liabilities                                                                                                        |   | 10,289                  |   | 4,546                       |       |
|                                                                                                                              |   |                    |   |                        |       |
| Other non-current  liabilities                                                                                                    |   | 85                      |   | 97                          |       |
| Total liabilities                                                                                                                 |   | 10,374                  |   | 4,643                       |       |
|                                                                                                                              |   |                    |   |                        |       |
| Shareholders’ equity:                                                                                                        |   |                    |   |                        |       |
| Common stock, no par  value, 42,000,000 shares authorized, 13,418,815 and 13,152,304 shares issued  and outstanding, respectively |   | 43,087                  |   | 42,158                      |       |
| Undesignated capital  stock, no par value, 3,000,000 shares authorized, no shares issued or  outstanding                          |   | —                  |   | —                      |       |
| Deferred compensation  related to stock options                                                                                   |   | (75                     | )      | (105                        | )          |
| Accumulated deficit                                                                                                               |   | (10,858                 | )      | (7,229                      | )          |
| Accumulated other  comprehensive income                                                                                           |   | 3                       |   | 43                          |       |
| Total shareholders’  equity                                                                                                  |   | 32,157                  |   | 34,867                      |       |
| Total liabilities and  shareholders’ equity                                                                                  |   | $                       | 42,531 |                        | $          | 39,510 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**AUGUST TECHNOLOGYCORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                          |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                          |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                          |   |                                  |       |                                |       |   |   |   |   |
| Net  revenues                                 |   | $                                     | 7,757      |                                | $          | 6,980 |   | $ | 14,320 |   | $ | 12,490 |   |
| Cost  of revenues                             |   | 3,548                                 |       | 2,965                               |       | 6,503 |   | 5,329 |   |
| Gross  profit                                 |   | 4,209                                 |       | 4,015                               |       | 7,817 |   | 7,161 |   |
|                                          |   |                                  |       |                                |       |   |   |   |   |
| Selling,  general and administrative expenses |   | 3,213                                 |       | 3,400                               |       | 6,420 |   | 6,226 |   |
| Research  and development expenses            |   | 2,434                                 |       | 2,729                               |       | 5,202 |   | 4,864 |   |
| Operating  loss                               |   | (1,438                                | )          | (2,114                              | )          | (3,805 | ) | (3,929 | ) |
|                                          |   |                                  |       |                                |       |   |   |   |   |
| Interest  income                              |   | 78                                    |       | 174                                 |       | 176 |   | 382 |   |
|                                          |   |                                  |       |                                |       |   |   |   |   |
| Loss  before provision for income taxes       |   | (1,360                                | )          | (1,940                              | )          | (3,629 | ) | (3,547 | ) |
| Provision  for income taxes                   |   | —                                |       | 1,491                               |       | — |   | 687 |   |
| Net  loss                                     |   | $                                     | (1,360     | )                                   | $          | (3,431 | ) | $ | (3,629 | ) | $ | (4,234 | ) |
|                                          |   |                                  |       |                                |       |   |   |   |   |
| Net  loss per share:                          |   |                                  |       |                                |       |   |   |   |   |
| Basic  and diluted                            |   | $                                     | (0.10      | )                                   | $          | (0.26 | ) | $ | (0.27 | ) | $ | (0.33 | ) |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**AUGUST TECHNOLOGY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                       |   | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                       |   | **2003**                            |       | **2002** | ** ** |
| Cash flows from  operating activities:                                                     |   |                                |       |   |   |
| Net loss                                                                                   |   | $                                   | (3,629     | ) | $ | (4,234 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                                |       |   |   |
| Depreciation and  amortization                                                             |   | 816                                 |       | 681 |   |
| Provision for doubtful  accounts                                                           |   | 81                                  |       | 26 |   |
| Amortization of  deferred compensation related to stock options                            |   | 27                                  |       | 31 |   |
| Deferred income taxes                                                                      |   | —                              |       | 896 |   |
| Changes in operating  assets and liabilities, net of affects of acquisition:               |   |                                |       |   |   |
| Accounts receivable                                                                        |   | 2,120                               |       | 73 |   |
| Inventories                                                                                |   | (1,285                              | )          | 721 |   |
| Prepaid expenses and  other current assets                                                 |   | (114                                | )          | 1,129 |   |
| Accounts payable                                                                           |   | 1,378                               |       | 336 |   |
| Accrued compensation                                                                       |   | 156                                 |       | 57 |   |
| Accrued liabilities                                                                        |   | 94                                  |       | (86 | ) |
| Customer deposits                                                                          |   | 3,605                               |       | (783 | ) |
| Net cash provided by  (used in) operating activities                                       |   | 3,249                               |       | (1,153 | ) |
|                                                                                       |   |                                |       |   |   |
| Cash flows from  investing activities:                                                     |   |                                |       |   |   |
| Purchases of marketable  securities                                                        |   | (18,097                             | )          | (16,487 | ) |
| Maturities of  marketable securities                                                       |   | 16,245                              |       | 19,823 |   |
| Cash paid in  acquisition                                                                  |   | (1,370                              | )          | — |   |
| Purchases of property  and equipment                                                       |   | (588                                | )          | (797 | ) |
| Investment in other  assets                                                                |   | —                              |       | (546 | ) |
| Net cash provided by  (used in) investing activities                                       |   | (3,810                              | )          | 1,993 |   |
|                                                                                       |   |                                |       |   |   |
| Cash flows from  financing activities:                                                     |   |                                |       |   |   |
| Net proceeds from  issuances of common stock                                               |   | 176                                 |       | 1,043 |   |
| Net cash provided by  financing activities                                                 |   | 176                                 |       | 1,043 |   |
|                                                                                       |   |                                |       |   |   |
| Effect of exchange  rates on cash and cash equivalents                                     |   | 2                                   |       | — |   |
| Net increase (decrease)  in cash and cash equivalents                                      |   | (383                                | )          | 1,883 |   |
| Cash and cash  equivalents at beginning of period                                          |   | 1,895                               |       | 1,523 |   |
| Cash and cash  equivalents at end of period                                                |   | $                                   | 1,512      |   | $ | 3,406 |   |
|                                                                                       |   |                                |       |   |   |
| Supplemental cash flow  information:                                                       |   |                                |       |   |   |
| Net cash refunds of income  taxes                                                          |   | $                                   | 250        |   | $ | 1,749 |   |
| Common stock issued for  acquisition                                                       |   | $                                   | 756        |   | $ | — |   |

 

See accompanying notes to consolidated financialstatements.

** **

**5**

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** **

**AUGUST TECHNOLOGYCORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2003**

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

**(Unaudited)**

** **

**Note 1 – Basisof Presentation**

 

The accompanying unaudited consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures, normally included inconsolidated financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America, have beencondensed or omitted pursuant to such rules and regulations.  In the opinion of the management ofAugust Technology Corporation (collectively with its subsidiaries, the“Company”), all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included in the balancesheet at June 30, 2003, the results of operations for the three and sixmonths ended June 30, 2003 and 2002, and the cash flows for the six monthsended June 30, 2003 and 2002.  Theresults of operations of the interim periods are not necessarily indicative ofthe results of operations that may be expected for any other period or for theyear as a whole.  These consolidatedfinancial statements and notes hereto should be read in conjunction with theaudited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002,filed with the Securities and 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**

**** ****

On April 15, 2003, the Company acquired all ofthe outstanding capital stock of Semiconductor Technologies & Instruments,Inc., a Delaware corporation (“STI”).  STI manufactures automated defectinspection and metrology tools for probe floor applications.  STI’sproducts are integrated onto probers, providing microelectronics manufacturerswith an automated solution for inspecting probe marks, ink dots, and active dieregions.  The results of operations of STI have been included in theCompany’s consolidated financial statements since the date of acquisition.

 

The total consideration paid for STI, including directacquisition costs, was $1,370 in cash and 215 shares of the Company’s CommonStock for a total purchase price of $2,156.  The purchase price has beenallocated to the net assets acquired and liabilities assumed based upon theirestimated fair market values.

 

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 June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                |   |                                  |       |                                |       |   |   |   |   |
| Revenues            |   | $                                     | 7,757      |                                | $          | 7,468 |   | $ | 14,590 |   | $ | 13,589 |   |
| Net loss            |   | $                                     | (1,412     | )                                   | $          | (4,640 | ) | $ | (4,430 | ) | $ | (6,754 | ) |
| Net loss per share: |   |                                  |       |                                |       |   |   |   |   |
| Basic and diluted   |   | $                                     | (0.10      | )                                   | $          | (0.35 | ) | $ | (0.33 | ) | $ | (0.51 | ) |

 

**Note3 – Identifiable IntangibleAssets**

 

The net carrying value of identifiable intangibleassets, as of June 30, 2003, consisted of the following:

 
|                           |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
|--------------------------------|--------|-----------------------------|--------|-------------------------------|------------|-----------------|------------|
|                           |   |                        |   |                          |       |            |       |
| Purchased technology  (note 2) |   | $                           | 348    |                          | $          | (18             | )          | $ | 330 |   |
|                                |        |                             |        |                               |            |                 |            |  |  |  |

 

The Company is amortizing the purchased technology ona straight-line basis over the estimated remaining useful life of fouryears.  Amortization expense for thethree and six months ended June 30, 2003 and 2002 was $18 and none,respectively.  Assuming no change in the gross carrying value of identifiableintangible assets, the estimated amortization expense for the twelve monthsending December 31, 2003 and for each of the next three years is $62 and$87, respectively.

 

7

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**Note 4 – Accounts Receivable**

 

Accounts receivable consisted of the following:

 
|                             |   | **June 30,  2003** |       | **December 31,  2002** | ** ** |
|----------------------------------|--------|-------------------------|------------|-----------------------------|------------|
|                             |   |                    | ** ** |                        | ** ** |
| Billed receivables               |   | $                       | 4,861      |                        | $          | 7,209 |   |
| Unbilled revenue                 |   | 969                     |       | 395                         |       |
|                             |   | 5,830                   |       | 7,604                       |       |
| Allowance for doubtful  accounts |   | (631                    | )          | (550                        | )          |
| Accounts receivable,  net        |   | $                       | 5,199      |                        | $          | 7,054 |   |

 

**Note 5 –Inventories**

 

Inventories consisted of the following:

 
|                    |   | **June 30,  2003** |   | **December 31,  2002** | ** ** |
|-------------------------|--------|-------------------------|--------|-----------------------------|------------|
|                    |   |                    |   |                        |       |
| Raw materials           |   | $                       | 3,706  |                        | $          | 3,053 |   |
| Work in process         |   | 960                     |   | 1,415                       |       |
| Demonstration equipment |   | 1,420                   |   | 1,374                       |       |
| Finished goods          |   | 1,775                   |   | 1,590                       |       |
| Inventories             |   | $                       | 7,861  |                        | $          | 7,432 |   |

 

Inventories 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.

 

**Note 6 –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 issecured by certain assets.  The Notematures and converts into Excelerate preferred stock upon Excelerate raising$1,500 of additional financing via a sale of Excelerate preferred stock.  The Note can be prepaid at anytime by payingthe outstanding principal and interest, along with a prepayment fee of 7.5% onthe combined outstanding principal and interest.

 

8

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**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 othercomprehensive income (loss) are as follows:

 
|                                       |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                       |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                       |   |                                  |       |                                |       |   |   |   |   |
| Net loss                                   |   | $                                     | (1,360     | )                                   | $          | (3,431 | ) | $ | (3,629 | ) | $ | (4,234 | ) |
| Other comprehensive  income (loss):        |   |                                  |       |                                |       |   |   |   |   |
| Foreign currency  translation adjustment   |   | (3                                    | )          | 3                                   |       | — |   | 3 |   |
| Net unrealized gain  (loss) on investments |   | (14                                   | )          | 40                                  |       | (40 | ) | 40 |   |
| Comprehensive loss                         |   | $                                     | (1,377     | )                                   | $          | (3,388 | ) | $ | (3,667 | ) | $ | (4,191 | ) |

 

**Note 8 – Shareholders’ Equity**

 

Changes in shareholders’ equity during the six monthsended June 30, 2003 were as follows:

 
| Shareholders’ equity  balance at December 31, 2002    |   | $      | 34,867 |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Net loss                                                        |   | (3,629 | )      |
| Other comprehensive  loss:                                      |   |   |   |
| Net unrealized loss on  securities                              |   | (40    | )      |
| Comprehensive loss                                              |   | (3,669 | )      |
| Issuances of common  stock in conjunction with:                 |   |   |   |
| Exercises of employee  stock options                            |   | 88     |   |
| Employee stock purchase  plan                                   |   | 88     |   |
| Acquisition of  subsidiary                                      |   | 756    |   |
| Amortization of  deferred compensation related to stock options |   | 27     |   |
| Shareholders’ equity  balance at June 30, 2003        |   | $      | 32,157 |   |

 

***Net Loss Per Share***

*** ***

The components of basic and diluted net loss per sharewere as follows:

 
|                                           |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                           |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |   |                                  |       |                                |       |   |   |   |   |
| Net loss                                       |   | $                                     | (1,360     | )                                   | $          | (3,431 | ) | $ | (3,629 | ) | $ | (4,234 | ) |
|                                           |   |                                  |       |                                |       |   |   |   |   |
| Weighted average common  shares:               |   |                                  |       |                                |       |   |   |   |   |
| Basic                                          |   | 13,352                                |       | 13,033                              |       | 13,255 |   | 12,939 |   |
| Effect of dilutive  stock options and warrants |   | —                                |       | —                              |       | — |   | — |   |
| Diluted                                        |   | 13,352                                |       | 13,033                              |       | 13,255 |   | 12,939 |   |
|                                           |   |                                  |       |                                |       |   |   |   |   |
| Net loss per share:                            |   |                                  |       |                                |       |   |   |   |   |
| Basic and diluted                              |   | $                                     | (0.10      | )                                   | $          | (0.26 | ) | $ | (0.27 | ) | $ | (0.33 | ) |

 

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

 

9

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for the three months ended June 30, 2003 and 2002were 1,886 and 1,533, respectively, and for the six months ended June 30,2003 and 2002 were 1,851 and 1,604, respectively.

 

***Stock-based Compensation***

*** ***

The estimated per share weighted average fair value ofall stock options granted during the three months ended June 30, 2003 and2002 was $2.79 and $9.61, respectively, and for the six months endedJune 30, 2003 and 2002 was $2.72 and $6.07, respectively. The fair valueof each option grant was estimated using the Black-Scholes option pricing modelwith the following weighted average assumptions:

 
|                    |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                    |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                    |   |                                  |       |                                |       |   |   |   |   |
| Expected life           |   | 5.8 years                             |       | 5.9 years                           |       | 5.5 years |   | 3.7 years |   |
| Risk free interest rate |   | 3.0                                   | %          | 4.8                                 | %          | 2.9 | % | 3.9 | % |
| Volatility              |   | 75.1                                  | %          | 74.2                                | %          | 75.2 | % | 74.2 | % |
| Dividend yield          |   | —                                |       | —                              |       | — |   | — |   |

 

Had the Companyrecorded compensation cost based on the estimated fair value on the date ofgrant, as defined by SFAS 123, the Company’s pro forma net loss would havebeen as follows:

 
|                                                                                               |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                                                                               |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss, as reported                                                                              |   | $                                     | (1,360     | )                                   | $          | (3,431 | ) | $ | (3,629 | ) | $ | (4,234 | ) |
| Stock-based employee  compensation expense determined under fair value based method for all awards |   | (377                                  | )          | (325                                | )          | (675 | ) | (1,281 | ) |
| Net loss, pro forma                                                                                |   | $                                     | (1,737     | )                                   | $          | (3,756 | ) | $ | (4,304 | ) | $ | (5,515 | ) |
|                                                                                               |   |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net  loss per share:                                                             |   |                                  |       |                                |       |   |   |   |   |
| As reported                                                                                        |   | $                                     | (0.10      | )                                   | $          | (0.26 | ) | $ | (0.27 | ) | $ | (0.33 | ) |
| Pro forma                                                                                          |   | (0.13                                 | )          | (0.29                               | )          | (0.32 | ) | (0.43 | ) |

 

**Note 9 –Subsequent Event**

 

On July 3, 2003, theCompany purchased substantially all of the assets of Counterpoint Solutions,Inc. of New York (“CSI”).  The estimatedtotal consideration of approximately $1,550, consisted of 200 shares of theCompany’s Common Stock, $57 of cash paid at closing, and up to an additional$100 of cash to be paid upon the achievement of certain product sales.

 

During the year endedDecember 31, 2002, CSI had revenues of $885 and net income of $104.

 

10

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

 

**Cautionary Factors That May Affect Future Results**

 

Certain statements made in this Quarterly Report onForm 10-Q, as well as oral statements made by us from time to time, which areprefaced with words such as “expects”, “anticipates”, “believes”, “projects”,“intends”, “plans” and similar words and other statements of similar sense, areforward-looking statements.  Ourforward-looking statements generally relate to our growth strategies, financialresults, future financial projections, product development activities and salesefforts.  Our actual results coulddiffer materially from those projected in the forward-looking statements as aresult of a number of factors, including but not limited to market acceptance ofour products, our ability to successfully develop new products, our ability toprotect our intellectual property, our dependence upon international customersand suppliers, our dependence on a small number of customers that account for asignificant portion of revenues, availability of products from our suppliers,cyclicality in the microelectronic manufacturing equipment and otherindustries, management of growth, integration of acquired businesses, and theother risk factors detailed below and in our filings with the Securities andExchange Commission, including our Annual Report on Form 10-K for the yearended 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 unforseeable, the foregoingshould not be considered an exhaustive list.

 

**Overview**

 

August Technology serves microelectronics devicemanufacturing industries with product characterization tools that enablemanufacturers to bring new products to market faster and with less cost. As a worldwide leader in the research, design,development, manufacture, marketing, sales, distribution and service ofautomated defect inspection and metrology systems, we make it possible for microelectronic device manufacturers to moreeffectively meet the needs of the high technology communication,transportation, entertainment, productivity, biomedical and security markets.The flexibility of our tools has allowed us to successfully serve thesemiconductor manufacturing market, while concurrently providing effectivesolutions for the related microelectronic device manufacturing markets such asdata storage, medical devices, micro displays, optoelectronics, photonics andMEMS. Microelectronic devices processed through our systems can be foundin consumer products such as personal computers and computer peripherals, cellphones, personal digital assistants (PDAs), set-top boxes, electronic games,security systems, automobiles, medical devices and throughout thecommunications infrastructure in electrical, optical and wireless networks.

 

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 microelectronic devicesdriven by such factors as changes in technology and global economicconditions.  There has been a dramaticslowdown in demand for microelectronic devices since 2001, resulting in excesscapacity and decreased demand for microelectronic manufacturing equipment.  The decreased demand has caused ourquarterly orders and sales to fluctuate dramatically.  While we have seen some improvements in market conditions, we arenot able to predict when the microelectronic industries will completelyrecover.   Future quarterly and annualresults will continue to be impacted by fluctuations in supply and demand ofmicroelectronic devices, the timing of new product announcements and releasesby us or our competitors, market acceptance of new or enhanced versions of ourproducts, changes in the pricing of our products and the timing and level ofour research and development expenditures.

 

11

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On April 15, 2003, we acquired all of the outstandingcapital stock of Semiconductor Technologies & Instruments, Inc., a Delawarecorporation (“STI”).  STI manufactures automated defect inspection andmetrology tools for probe floor applications.  The results of operationsof STI have been included in our consolidated financial statements since thedate of acquisition.  The total considerationpaid for STI, including direct acquisition costs, was $1.4 million in cash and215,385 shares of our Common Stock for a total purchase price of approximately$2.2 million.  During the year ended December 31, 2002, STI had revenuesof $3.2 million, including $3.1 million from the acquired WAV product line anda net loss of $3.8 million.

 

On July 3, 2003, we purchased substantially all of theassets of Counterpoint Solutions, Inc. of New York (“CSI”).  CSI is a developer of wafer inspection,review and failure analysis solutions. The results of operations of CSIwill be included in our consolidated financial statements beginning on the dateof acquisition.  The estimated totalconsideration of approximately $1.6 million, consisted of 200,000 shares of ourCommon Stock, $57,000 of cash paid at closing, and up to an additional $100,000of cash to be paid upon the achievement of certain product sales.  During the year ended December 31, 2002, CSIhad revenues of $885,000 and net income of $104,000.

 

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.

** **

**Results of Operations**

** **
|                                          |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                          |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Net  revenues                                 |   | 100.0                           | %      | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost  of revenues                             |   | 45.7                            |   | 42.5                          |   | 45.4 |   | 42.7 |   |
| Gross  profit                                 |   | 54.3                            |   | 57.5                          |   | 54.6 |   | 57.3 |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Selling,  general and administrative expenses |   | 41.4                            |   | 48.7                          |   | 44.9 |   | 49.8 |   |
| Research  and development expenses            |   | 31.4                            |   | 39.1                          |   | 36.3 |   | 38.9 |   |
| Operating  loss                               |   | (18.5                           | )      | (30.3                         | )      | (26.6 | ) | (31.4 | ) |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Interest  income                              |   | 1.0                             |   | 2.5                           |   | 1.2 |   | 3.0 |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Loss  before provision for income taxes       |   | (17.5                           | )      | (27.8                         | )      | (25.4 | ) | (28.4 | ) |
| Provision  for income taxes                   |   | —                          |   | 21.4                          |   | — |   | 5.5 |   |
| Net  loss                                     |   | (17.5                           | )%     | (49.2                         | )%     | (25.4 | )% | (33.9 | )% |

 

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

 

*NetRevenues.*  Net revenues increased $777,000, or 11.1%,to $7.8 million for the three months ended June 30, 2003, from $7.0 million forthe same period in 2002.  The increasein net revenues was primarily due to sales related to the WAV Series, acquiredin conjunction with the acquisition of STI, and increased sales of the NSXSeries into the traditional semiconductor and advanced packaging markets.  The increase was partially offset by lowerrevenues from the 3Di Series, primarily due to the timing of customeracceptance on systems at customer sites under purchase orders.

 

12

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Internationalsales represented 69% and 42% of net revenues for the three months ended June30, 2003 and 2002, respectively.  Theincrease in international revenues in 2003 was primarily the result ofincreased sales to Asia, which comprised 58% and 22% of total net revenues forthe three months ended June 30, 2003 and 2002, respectively.  The increase in sales to Asia was partiallyoffset by a decrease in sales to Europe, which comprised 11% and 20% of totalnet revenues for the three months ended June 30, 2003 and 2002, respectively.

 

During the three monthsended June 30, 2003, orders for systems within the NSX and 3Di Series increasedas compared to the prior quarter.  Thisincrease resulted in a book-to-bill ratio above parity during the quarter.  As a result of the increase in bookings ofthe NSX, 3Di and WAV Series, and anticipated revenues from our recentlyintroduced AXi Series, we expect revenues to increase during the third quarterof 2003 as compared to the second quarter of 2003.

 

*GrossProfit.*  Gross profit increased to $4.2 million forthe three months ended June 30, 2003, from $4.0 million for the same period in2002.  The gross margin decreased to54.3% for the three months ended June 30, 2003, from 57.5% for the same periodin 2002.  The decrease in gross marginpercentage was primarily due to: (i) lower than normal gross margins on the WAVSeries revenues due to purchase accounting adjustments related to theacquisition of STI, which requires the write-up of the carrying amount offinished goods on hand at the time of the acquisition to fair value; and (ii)an increase in the number of NSX systems that included subsystem optionsmanufactured by third parties, which have lower gross margins than our coreinspection systems.   As a result of thecontinuing effect of purchase accounting adjustments noted previously, grossmargins are expected to be between 54% and 56% during the second half of 2003.

 

*Selling,General and Administrative Expenses.*  Selling, general andadministrative expenses consist primarily of employee salaries and related benefits,travel expenses and occupancy related costs. Selling, general and administrative expenses decreased 5.5% to$3.2 million, or 41.4% of net revenues, for the three months ended June30, 2003, from $3.4 million, or 48.7% of net revenues, for the same period in2002.  The decrease in expense wasprimarily due to costs incurred in the prior year for the modification of ourdistributor agreement with Metron Technology B.V., to focus Metron’s activitiesentirely on South Korea, as well as employee severance.  This decrease was partially offset byexpenses related to the integration and ongoing operations of STI.  The quarterly selling, general andadministrative expense dollars are expected to increase in the second half of2003, as compared to the second quarter of 2003, as a result of expensesassociated with the integration and ongoing operations of CSI, amortization ofintangible assets resulting from the CSI acquisition and increased variableexpenses associated with higher revenues. 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 decreased 10.8% to $2.4 million, or 31.4% of net revenues,for the three months ended June 30, 2003, from $2.7 million, or 39.1% of netrevenues, for the same period in 2002. The decrease in expenses was primarily due to expenses in theprior year including costs related to the development of the NSX-105, which wasintroduced in the third quarter of 2002, and further development of the 3DiSeries, which began shipping in the fourth quarter of 2001.  In addition, expenses during the secondquarter decreased as a result of savings associated with a reduction inworkforce in March 2003.  The decreasewas partially offset by expenses related to the ongoing operations of STI andcosts associated with the development of the EXi Series, which was introducedin July 2003.  We anticipate that research and development expense dollars willincrease slightly in future quarters, as compared to the second quarter of2003, due to costs associated with the acquisition of CSI 

 

13

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and ongoing development projects. However, research and development expenses as a percentage of revenuesare expected to decrease, as revenues are expected to increase at a higher ratethan the increase in research and development expenses.

 

*Interest Income.* Interest income was $78,000 for the three months ended June 30, 2003,compared to $174,000 for the same period in 2002.  The decrease in interest income was due to lower rates of returnearned on investment balances in 2003 as compared to 2002 and lower overallinvestment balances in 2003.  Eventhough our cash and marketable securities increased during the six months endedJune 30, 2003, we had a net use of cash, subsequent to the second quarter of2002, to fund operations and acquire property and equipment.

 

***Income Taxes. ***Due to the recording of a full valuation allowanceagainst deferred tax assets, we continued to reflect no benefit from incometaxes during the three months ended June 30, 2003.   Statement of Financial Accounting Standards (“SFAS”)No. 109 “Accounting for Income Taxes,” requires theestablishment of a valuation allowance to reflect the likelihood of therealization of deferred tax assets.  Asa result of realized and anticipated operating losses and uncertainty as to theextent and timing of profitability in future periods, we have continued torecord a full valuation allowance against our deferred tax assets since thesecond quarter of 2002. The recording of the valuation allowance in the secondquarter of 2002 resulted in a provision for income taxes of $1.5 million,rather than the recording of a tax benefit on the pre-tax loss during theperiod.  As of December 31, 2002 thevaluation allowance was $5.4 million. We expect to continue to record a full valuation allowance againstdeferred tax assets during the second half of 2003.

** **

*Six months ended June 30, 2003compared to the six months ended June 30, 2002*

** **

*NetRevenues.*  Net revenues increased $1.8 million, or14.7%, to $14.3 million for the six months ended June 30, 2003, from $12.5million 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, and sales of the WAV Series. The increase was partially offset by lower revenues from our 3Di Series,primarily due to the timing of customer acceptance on systems at customer sitesunder purchase orders.

 

Internationalsales represented 68% and 52% of net revenues for the six months ended June 30,2003 and 2002, respectively. International net revenues were primarily the result of sales to Asia,which comprised 57% and 41% of total net revenues for the six months ended June30, 2003 and 2002, respectively.

 

*GrossProfit.*  Gross profit increased to $7.8 million forthe six months ended June 30, 2003, from $7.2 million for the same period in2002.  The gross margin decreased to54.6% for the six months ended June 30, 2003, from 57.3% for the same period in2002.  The decrease in gross marginpercentage was primarily due to (i) lower than normal gross margins on the WAVSeries revenues due to purchase accounting adjustments related to theacquisition of STI, which requires the write-up of the carrying amount offinished goods on hand at the time of the acquisition to fair value; and (ii)an increase in the number of NSX systems that included subsystem optionsmanufactured by third parties, which have lower gross margins than our coreinspection systems.

 

*Selling,General and Administrative Expenses.*  Selling, general andadministrative expenses increased 3.1% to $6.4 million, or 44.8% of netrevenues, for the six months ended June 30, 2003,

 

14

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from $6.2 million, or 49.8% of net revenues, for the same period in2002.  The increase in expense dollarswas primarily due to costs associated with the integration and ongoingoperations of STI, higher variable costs associated with the higher revenues,and costs associated with systems being evaluated by customers. The increasewas partially offset by the fact that the prior year included costs related tothe modification of our distributor agreement with Metron Technology B.V.

 

*Researchand Development Expenses.*  Research and developmentexpenses increased 6.9% to $5.2 million, or 36.3% of net revenues, for the sixmonths ended June 30, 2003, from $4.9 million, or 38.9% of net revenues, forthe same period in 2002.  The increasein expenses was primarily due to costs incurred during the first quarterof 2003 related to completing certain stages of the development of our new AXiand EXi Series, and costs associated with the ongoing operations of STI.

 

*Interest Income.* Interest income was $176,000 for the six months ended June 30, 2003,compared to $382,000 for the same period in 2002.  The decrease in interest income was due to lower rates of returnearned on investment balances in 2003 as compared to 2002 and lower overallinvestment balances in 2003.  Eventhough our cash and marketable securities increased during the six months endedJune 30, 2003, we had a net use of cash, subsequent to the second quarter of2002, to fund operations and acquire property and equipment.

 

*IncomeTaxes.*  Due to the recording of a full valuationallowance against deferred tax assets, we continued to reflect no benefit fromincome taxes during the six months ended June 30, 2003.   The recording of the valuation allowance inthe second quarter of 2002 resulted in a provision for income taxes of $687,000during the six months ended June 30, 2002, rather than the recording of a taxbenefit on the pre-tax loss during the period.

** **

**Liquidity and Capital Resources**

 

Duringthe six months ended June 30, 2003, working capital decreased to $27.6 millionas compared to $29.4 million at December 31, 2002.  The decrease was primarily due to an increase in accounts payableand customer deposits and the use of cash to acquire STI and property andequipment, partially offset by the reinvestment of maturities of long-termmarketable securities into short-term marketable securities.

 

At June 30, 2003 our principal sources of liquidityconsisted of $20.2 million of cash, cash equivalents and marketable securitiesand our revolving credit line agreement, which expires in April 2004.  The credit line agreement allows forborrowings of up to $5.0 million, subject to availability based on accountsreceivable and inventory balances.  We have no outstanding debt at June 30,2003.  Our liquidity is affected by manyfactors, some of which are based on the normal ongoing operations of ourbusiness, the most significant of which include the timing of the collection ofreceivables, the level of inventories and capital expenditures andacquisitions.

 

*Accounts Receivable.*  Ouraccounts receivable decreased $1.9 million from December 31, 2002 to June 30,2003, representing 59 days sales outstanding (“DSO”) during the three monthsended June 30, 2003, respectively.  Thiscompares to a DSO of 99 days in the fourth 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.

 

15

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*Inventories.** *Ourinventories increased $2.8 million from December 31, 2002 to June 30, 2003, primarilydue to inventory acquired with STI and an increase in inventory at customersites under purchase orders. The increase in inventory at customer sites underpurchase orders is primarily related to shipments of our AXi Series.  We anticipate that a portion of theinventory at customer sites will be recognized as revenue during the thirdquarter 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 $360,000, 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.*  In addition to the cash paid for theacquisitions of STI and CSI, we anticipate using additional cash to integratethese operations.  The amount ofadditional cash is dependent upon how quickly and effectively we complete theintegrations.  Unanticipated integrationproblems or costs may adversely affect our overall level of liquidity.  As a result of the acquisition of STI, weentered into a two year lease for 10,000 square feet of space in Plano, Texas atan annual rental cost of approximately $106,000.  As a result of the acquisitionof CSI, we will lease 1,200 square feet in Thornwood, New York at a monthlyrental cost of approximately $2,200. The lease may be terminated at any 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.

 

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 by operating activities for the sixmonths ended June 30, 2003 was $3.3 million, which resulted primarily fromdecreased accounts receivable and increased customer deposits and accountspayable partially offset by our net loss and increased inventory during theperiod.  Net cash used in investingactivities was $3.8 million, primarily due to $1.8 million of net purchases ofmarketable securities, $1.4 million of cash paid to acquire STI and $588,000 ofpurchases of property and equipment. Net cash provided by financing activities was $176,000 from the proceedsreceived from issuances of common stock.

 

Net cash used in operating activities for the sixmonths ended June 30, 2002 was $1.2 million, resulting primarily from our netloss, which was partially offset by non-cash charges and decreased prepaidexpenses and other current assets.  Netcash provided by investing activities was $2.0 million, primarily due to $3.3million of net proceeds from maturities of marketable securities offset by thepurchases of $1.3 million of property and equipment and other assets.  Net cash provided by financing activitieswas $1.0 million from the proceeds received from issuances of common stock.

 

16

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**New Accounting Pronouncements**

 

InDecember 2002, the Emerging Issues Task Force (“EITF”) reached a consensus onEITF 00-21,  “Revenue Arrangements withMultiple Deliverables”.  This Issueaddresses certain aspects of the accounting by a vendor for arrangements underwhich it will 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 ourconsolidated financial statements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging”, which amends and clarifies financialaccounting and reporting for derivative instruments.  SFAS 149 will be effective for us in July 2003.  We do not expect that the adoption of SFAS149 will have an effect on our consolidated financial statements.

 

On May15, 2003, the Financial Accounting Standards Board issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity”.  The Statementrequires issuers to classify as liabilities (or assets in some circumstance)three classes of freestanding financial instruments that embody obligations forthe issuer.  Generally, the Statement iseffective for financial instruments entered into or modified after May 31, 2003and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003.  We willadopt the provisions of the Statement on July 1, 2003.  We did not enter into any financialinstruments within the scope of the Statement during June 2003. We do notexpect that the adoption of SFAS 150 will have an effect on our consolidatedfinancial statements.

 

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

 

*Market Risk*

 

We are exposed to market riskprimarily 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 RateRisk*

 

We are exposed to interest raterisk primarily from investments in cash equivalents and short-term andlong-term marketable debt securities (the “Investment Portfolio”).  The entire Investment Portfolio, classifiedas available-for-sale, is recorded on the balance sheet at fair market valuewith unrealized gains or losses excluded from earnings and included in“Accumulated other comprehensive income (loss)” until realized.  The entire Investment Portfolio isdenominated in U.S. dollars.  We do notuse derivative financial instruments in the Investment Portfolio.  Due to the short duration of our

 

17

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Investment Portfolio, an immediate 100 percent change in interest ratesis not expected to have a material adverse effect on our near-term financialcondition or results of operations.

 

*Credit Risk*

 

Financial instruments whichpotentially subject us to credit risk consist principally of securities in theInvestment Portfolio and trade receivables. We limit credit risk related to the Investment Portfolio by placing allinvestments with high quality credit issuers and limit the amount ofinvestments with any one issuer.  As ofJune 30, 2003, 100% 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**

 

*Evaluation of Disclosure Controlsand Procedures*

 

As of the end of the periodcovered 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.

 

*Changesin Internal Controls*

 

There were no changes in the Company’s internalcontrols over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

18

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**PART II — OTHER INFORMATION**

 

**Item 2.            Changesin Securities and Use of Proceeds**

 

# **On April 15, 2003, the Company issued 215,385 sharesof its common stock to ASTI Holdings Limited (“ASTI”) as partial considerationfor the acquisition of all of the outstanding capital stock of SemiconductorTechnologies & Instruments, Inc. (“STI”), a wholly-owned subsidiary ofASTI.  The shares were issued inreliance on an exemption from registration provided in Section 4(2) of theSecurities Act of 1933, as amended.**

# ** **

# **Item 4.            Submission of Matters to a Vote ofSecurity Holders**

 

The Company held its AnnualMeeting of Shareholders on April 30, 2003 at the Company’s world headquartersat 4900 West 78th Street, Bloomington, Minnesota.  Of the 13,163,592 shares of Common Stockoutstanding as of March 6, 2003 (the record date), 11,895,366 shares (90%) werepresent or represented by proxy at the meeting.

 

1.               The shareholders approved the Board of Director’srecommendation for setting the number of directors at five.  This proposal received 10,020,043 votes forand 1,874,623 votes against, with 700 votes abstaining.

 

2.               The shareholders elected James A. Bernards andRoger E. Gower as Class III Directors, pursuant to the following votes:

 

|              |   | **Votes For** |   | **Votes  Withheld** |   |
|-------------------|--------|---------------|--------|---------------------|--------|
| James A. Bernards |   | 11,370,338    |   | 525,028             |   |
| Roger E. Gower    |   | 11,370,338    |   | 525,028             |   |

 

Theterms of Jeff L. O’Dell and Michael W. Wright as Class I directors, and LindaWhitman, as a Class II director of the Company, were not subject to reelectionat this meeting and thus their terms continued after the meeting.

 

3.               The shareholders approved an amendment to theCompany’s 1997 Stock Option Plan to increase the number of shares of CommonStock reserved for issuance thereunder from 2,650,000 to 3,050,000 shares.  This proposal received 7,083,224 votes forand 4,729,892 votes against, with 82,250 votes abstaining.

 

4.               The shareholders ratified the appointment of KPMGLLP as the Company’s independent auditors for the 2003 fiscal year.  This proposal received 11,316,525 votes forand 126,083 votes against, with 452,758 votes abstaining.

 

**Item 5.            Other Information**

 

OnJuly 3, 2003, the Company purchased substantially all of the assets ofCounterpoint Solutions, Inc. of New York (“CSI”).  The estimated total consideration of approximately $1.6 million,consisted of 200,000 shares of the Company’s Common Stock, $57,000 of cash paidat closing, and up to an additional $100,000 of cash to be paid upon theachievement of certain product sales.

 

19

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TheCompany’s ability to benefit from the acquisition will depend upon how quicklyand effectively the Company integrates CSI’s operations and personnel with itsbusiness.  Unanticipated difficulties orcosts in this integration process may adversely affect the Company’sbusiness.  CSI had 5 engineeringemployees.  As a result of the acquisition of CSI, we will lease 1,200 square feetin Thornwood, New York at a monthly rental cost of approximately $2,200.  The lease may be terminated at any time witha six month notice.

 
| **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 April 9, 2003 and filed April 10, 2003, was filed pursuant to Item  9 (Regulation FD Disclosure) to report the press release announcing the  hiring of Stanley D. Piekos as the Company’s Chief Financial Officer. |
|        |                                 |   |   |   |   |
|        |                                 |   |   |   | Current Report on Form  8-K dated April 16, 2003 and filed April 17, 2003, was filed pursuant to Item  9 (Regulation FD Disclosure) to report the press release announcing the  acquisition of Semiconductor Technologies and Instruments, Inc. |
|        |                                 |   |   |   |   |
|        |                                 |   |   |   | Current Report on Form  8-K dated April 24, 2003 and furnished April 25, 2003, was furnished pursuant  to Item 9 (Regulation FD Disclosure) in satisfaction of Item 12 (Disclosure  of Results of Operations and Financial Condition) to report the press release  announcing the Company’s first quarter 2003 financial results. |
|        |                                 |   |   |   |   |
|        |                                 |   |   |   | Current Report on Form  8-K dated April 15, 2003 and filed April 30, 2003, was filed pursuant to Item  2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and  Exhibits) to report the acquisition of the stock of Semiconductor  Technologies and Instruments, Inc. |
|        |                                 |   |   |   |   |
|        |                                 |   |   |   | Amendment to Current  Report on Form 8-K dated April 15, 2003 and filed June 25, 2003, was filed  pursuant to Item 7 (Financial Statements and Exhibits) to report the audited  financial statements of Semiconductor Technologies and Instruments, Inc.  (“STI”) and the pro forma condensed combined financial statements of the  Company and STI. |
|             |                                      |  |  |  |  |  |  |  |

 

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## SIGNATURES

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                   |   | AUGUST TECHNOLOGY CORPORATION   |
|------------------------|--------|---------------------------------|
|                   |   |                            |
|                   |   |                            |
| Date:  August 11, 2003 |   | By:                             | /s/  JEFF L. O’DELL |   |
|                   |   | Jeff L. O’Dell             |
|                   |   | Chief Executive Officer         |
|                   |   | (Principal  Executive Officer)  |
|                   |   |                            |
|                   |   |                            |
| Date:  August 11, 2003 |   | By:                             | /s/  STANLEY D. PIEKOS |   |
|                   |   | Stanley D. Piekos               |
|                   |   | Chief Financial Officer         |
|                   |   | (Principal  Financial Officer)  |
|                   |   |                            |
|                   |   |                            |
| Date:  August 11, 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

 

EXHIBITINDEX TO FORM 10-Q

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

 

 

**AUGUST TECHNOLOGYCORPORATION**

 
| **Exhibit  Number** |   | **Description**                                                                                                               |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                          |
| 10.1                |   | 1997 Stock Option Plan,  as amended and restated through July 29, 2003                                                        |
|                |   |                                                                                                                          |
| 10.2                |   | 1998 Board of Directors  Compensation Plan, adopted by the Board of Directors, amended and restated as  of July 29, 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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