** **

**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

 

| **(Mark One)** |   |                                                                                               |
|----------------|--------|----------------------------------------------------------------------------------------------------|
| **ý**     |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
|           |   |                                                                                               |
|           |   | **For  the quarterly period ended   July 3, 2004**                                  |
|           |   |                                                                                               |
| **o**          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom                to        **

** **

**CommissionFile Number   0-22248**

 

**ULTRATECH,INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                                                                   |   | **94-3169580**                       |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation  or organization)                                               |   | (I.R.S. Employer Identification No.) |
|                                                                                                           |   |                                 |
| **3050 Zanker Road, San Jose, California**                                                                     |   | **95134**                            |
| (Address of principal executive offices)                                                                       |   | (Zip Code)                           |
|                                                                                                           |   |                                 |
| Registrant’s telephone number, including  area code      **(408) 321-8835** |
|                                                                                                           |   |                                 |
|                                                                                                           |   |                                 |
| (Former name, former address and former  fiscal year, if changed since last report.)                           |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

 
| Yes | ý |   | No | o |
|-----|--------|--------|----|---|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
| Yes | ý |   | No | o |
|-----|--------|--------|----|---|

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practical date:

 
| **Class**                     |   | **Outstanding  as of July 30, 2004** |
|-------------------------------|--------|-------------------------------------------|
| common stock, $.001 par value |   | 23,780,394                                |

 

 

----

 

**ULTRATECH,INC.**

 

**INDEX**

 
| **PART 1.**                        |   | **FINANCIAL INFORMATION**                                                                                                     |   |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|                               |   |                                                                                                                          |   |
| **Item 1.**                        |   | **Condensed Consolidated Financial Statements**                                                                               |   |
|                               |   |                                                                                                                          |   |
|                               |   | Condensed Consolidated Balance Sheets as of  July 3, 2004 and December 31, 2003                                     |   |
|                               |   |                                                                                                                          |   |
|                               |   | Condensed Consolidated Statements of  Operations for the three and six months ended July 3, 2004 and  June 28, 2003 |   |
|                               |   |                                                                                                                          |   |
|                               |   | Condensed Consolidated Statements of Cash  Flows for the six months ended July 3, 2004 and June 28, 2003                 |   |
|                               |   |                                                                                                                          |   |
|                               |   | Notes to Condensed Consolidated Financial Statements                                                                          |   |
|                               |   |                                                                                                                          |   |
| **Item 2.**                        |   | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                               |   |
|                               |   |                                                                                                                          |   |
| **Item 3.**                        |   | **Quantitative and Qualitative Disclosures  About Market Risk**                                                               |   |
|                               |   |                                                                                                                          |   |
| **Item 4.**                        |   | **Controls and Procedures**                                                                                                   |   |
|                               |   |                                                                                                                          |   |
| **PART 2.**                        |   | **OTHER INFORMATION**                                                                                                         |   |
|                               |   |                                                                                                                          |   |
| **Item 1.**                        |   | **Legal Proceedings**                                                                                                         |   |
|                               |   |                                                                                                                          |   |
| **Item 2.**                        |   | **Changes in Securities and Use of Proceeds**                                                                                 |   |
|                               |   |                                                                                                                          |   |
| **Item 3.**                        |   | **Defaults upon Senior Securities**                                                                                           |   |
|                               |   |                                                                                                                          |   |
| **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 AND  CERTIFICATIONS** |   |

 

2

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**PART 1.                FINANCIALINFORMATION**

 

**Item 1.   CondensedConsolidated Financial Statements (Unaudited)**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| **(In thousands)**                                 |   | **July 3, 2004** |        | **Dec. 31,  2003*** |   |
|----------------------------------------------------|--------|------------------|-------------|---------------------|--------|
|                                               |   | **(Unaudited)**  |        |                |   |
| ***ASSETS***                                       |   |             |        |                |   |
| Current assets:                                    |   |             |        |                |   |
| Cash, cash equivalents and short-term  investments |   | **$**            | **160,526** | ** **          | $      | 165,902 |   |
| Accounts receivable, net                           |   | **14,911**       | ** **  | 9,398               |   |
| Inventories                                        |   | **23,626**       | ** **  | 19,037              |   |
| Income taxes receivable                            |   | **—**       | ** **  | 349                 |   |
| Prepaid expenses and other current assets          |   | **1,968**        | ** **  | 2,099               |   |
| Total current assets                               |   | **201,031**      | ** **  | 196,785             |   |
|                                               |   |             | ** **  |                |   |
| Equipment and leasehold improvements, net          |   | **17,833**       | ** **  | 18,481              |   |
|                                               |   |             | ** **  |                |   |
| Demonstration inventories, net                     |   | **3,606**        | ** **  | 3,071               |   |
|                                               |   |             | ** **  |                |   |
| Intangible assets, net                             |   | **286**          | ** **  | 476                 |   |
|                                               |   |             | ** **  |                |   |
| Other assets                                       |   | **2,388**        | ** **  | 1,935               |   |
| Total assets                                       |   | **$**            | **225,144** | ** **          | $      | 220,748 |   |
|                                               |   |             | ** **  |                |   |
| ***LIABILITIES AND  STOCKHOLDERS’ EQUITY***   |   |             | ** **  |                |   |
|                                               |   |             | ** **  |                |   |
| Current liabilities:                               |   |             | ** **  |                |   |
| Notes payable                                      |   | **$**            | **5,300**   | ** **          | $      | 2,564 |   |
| Accounts payable                                   |   | **10,296**       | ** **  | 7,729               |   |
| Deferred product and service income                |   | **3,541**        | ** **  | 1,088               |   |
| Deferred license income                            |   | **2,896**        | ** **  | 4,752               |   |
| Other current liabilities                          |   | **8,664**        | ** **  | 10,151              |   |
| Total current liabilities                          |   | **30,697**       | ** **  | 26,284              |   |
|                                               |   |             | ** **  |                |   |
| Other liabilities                                  |   | **4,488**        | ** **  | 3,725               |   |
|                                               |   |             | ** **  |                |   |
| Total stockholders’ equity                    |   | **189,959**      | ** **  | 190,739             |   |
| Total liabilities and stockholders’ equity    |   | **$**            | **225,144** | ** **          | $      | 220,748 |   |

 

----

* The Balance Sheet as ofDecember 31, 2003 has been derived from the audited financial statements atthat date.

 

*See accompanying notes tounaudited condensed consolidated financial statements*

 

3

----

 

**ULTRATECH,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                       |   | **Three  Months Ended** |       | **Six Months  Ended** |       |
|------------------------------------------------------------|--------|-------------------------|------------|-----------------------|------------|
| **(In thousands, except per share  amounts)**              |   | **July 3,  2004**       |       | **June 28,  2003**    |       | **July 3,  2004** |   | **June 28,  2003** |   |
| Net sales:                                                 |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Products                                                   |   | **$**                   | **18,690** | ** **            | $          | 21,206 | ** ** | **$** | **41,480** | ** ** | $ | 39,842 |   |
| Services                                                   |   | **2,879**               | ** ** | 2,630                 | ** ** | **5,772** | ** ** | 5,066 |   |
| Licenses                                                   |   | **928**                 | ** ** | 928                   | ** ** | **1,856** | ** ** | 1,856 |   |
| Total net sales                                            |   | **22,497**              | ** ** | 24,764                | ** ** | **49,108** | ** ** | 46,764 |   |
|                                                       |   |                    |       |                  |       |   |   |   |   |
| Cost of sales:                                             |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Cost of products sold                                      |   | **10,151**              | ** ** | 11,161                | ** ** | **21,844** | ** ** | 23,441 |   |
| Cost of services                                           |   | **2,173**               | ** ** | 1,779                 | ** ** | **4,031** | ** ** | 3,365 |   |
| Total cost of sales                                        |   | **12,324**              | ** ** | 12,940                | ** ** | **25,875** | ** ** | 26,806 |   |
| Gross profit                                               |   | **10,173**              | ** ** | 11,824                | ** ** | **23,233** | ** ** | 19,958 |   |
|                                                       |   |                    |       |                  |       |   |   |   |   |
| Operating expenses:                                        |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Research, development, and engineering                     |   | **6,248**               | ** ** | 5,583                 | ** ** | **12,458** | ** ** | 10,174 |   |
| Selling, general, and administrative                       |   | **7,160**               | ** ** | 5,160                 | ** ** | **14,247** | ** ** | 10,266 |   |
| Amortization of intangible assets                          |   | **95**                  | ** ** | 95                    | ** ** | **190** | ** ** | 190 |   |
| Restucture of operations                                   |   | **—**              | ** ** | (114                  | **)**      | **—** | ** ** | (114 | ) |
| Operating income (loss)                                    |   | **(3,330**              | **)**      | 1,100                 | ** ** | **(3,662** | **)** | (558 | ) |
|                                                       |   |                    |       |                  |       |   |   |   |   |
| Interest expense                                           |   | **(20**                 | **)**      | (57                   | **)**      | **(55** | **)** | (123 | ) |
|                                                       |   |                    |       |                  |       |   |   |   |   |
| Interest and other income, net                             |   | **857**                 | ** ** | 1,121                 | ** ** | **1,816** | ** ** | 2,172 |   |
|                                                       |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Income (loss) before tax                                   |   | **(2,493**              | **)**      | 2,164                 | ** ** | **(1,901** | **)** | 1,491 |   |
| Income tax provision (benefit)                             |   | **(227**                | **)**      | 135                   | ** ** | **(162** | **)** | 445 |   |
|                                                       |   |                    |       |                  |       |   |   |   |   |
| Net income (loss)                                          |   | **$**                   | **(2,266** | **)**                 | $          | 2,029 | ** ** | **$** | **(1,739** | **)** | $ | 1,046 |   |
|                                                       |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Earnings (loss) per share - basic:                         |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Net income (loss)                                          |   | **$**                   | **(0.10**  | **)**                 | $          | 0.09 | ** ** | **$** | **(0.07** | **)** | $ | 0.05 |   |
| Number of shares used in per share  computations - basic   |   | **23,705**              | ** ** | 22,783                | ** ** | **23,675** | ** ** | 22,743 |   |
| Earnings (loss) per share - diluted:                       |   |                    | ** ** |                  |       |   | ** ** |   |   |
| Net income (loss)                                          |   | **$**                   | **(0.10**  | **)**                 | $          | 0.09 | ** ** | **$** | **(0.07** | **)** | $ | 0.05 |   |
| Number of shares used in per share  computations - diluted |   | **23,705**              | ** ** | 23,381                | ** ** | **23,675** | ** ** | 23,030 |   |

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements*

 

4

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**ULTRATECH, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                       |   | **Six Months  Ended** |       |
|------------------------------------------------------------|--------|-----------------------|------------|
| **(In thousands)**                                         |   | **July 3,  2004**     |       | **June 28,  2003** |   |
|                                                       |   |                  | ** ** |   |   |
| **Cash flows from operating activities:**                  |   |                  | ** ** |   |   |
| Net income (loss)                                          |   | **$**                 | **(1,739** | **)** | $ | 1,046 |   |
| Charges to income not affecting cash                       |   | **4,341**             | ** ** | 4,846 |   |
| Net effect of changes in operating assets  and liabilities |   | **(8,377**            | **)**      | 544 |   |
| Net cash generated by (used in) operating  activities      |   | **(5,775**            | **)**      | 6,436 |   |
|                                                       |   |                  | ** ** |   |   |
| **Cash flows from investing activities:**                  |   |                  | ** ** |   |   |
| Capital expenditures                                       |   | **(2,577**            | **)**      | (2,220 | ) |
| Investments in securities                                  |   | **(69,073**           | **)**      | (81,361 | ) |
| Proceeds from sales and maturities of  investments         |   | **71,587**            | ** ** | 83,707 |   |
| Net cash generated by (used in) investing  activities      |   | **(63**               | **)**      | 126 |   |
|                                                       |   |                  | ** ** |   |   |
| **Cash flows from financing activities:**                  |   |                  | ** ** |   |   |
| Net repayment of notes payable                             |   | **2,736**             | ** ** | (2,945 | ) |
| Proceeds from issuance of common stock                     |   | **1,469**             | ** ** | 971 |   |
| Net cash provided by (used in) financing  activities       |   | **4,205**             | ** ** | (1,974 | ) |
|                                                       |   |                  | ** ** |   |   |
| Net effect of exchange rate changes on cash                |   | **312**               | ** ** | 19 |   |
|                                                       |   |                  | ** ** |   |   |
| Net increase (decrease) in cash and cash  equivalents      |   | **(1,321**            | **)**      | 4,607 |   |
|                                                       |   |                  | ** ** |   |   |
| Cash and cash equivalents at beginning of  period          |   | **25,149**            | ** ** | 18,178 |   |
|                                                       |   |                  | ** ** |   |   |
| Cash and cash equivalents at end of period                 |   | **$**                 | **23,828** | ** ** | $ | 22,785 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

 

5

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**Ultratech,Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

**July 3,2004**

 

**(1)  Description of Business**

 

Ultratech, Inc. (referredto as “Ultratech” and “we”) develops, manufactures and markets photolithographyand laser thermal processing equipment for manufacturers of semiconductor andnanotechnology components located throughout North America, Europe, Japan andthe rest of Asia.

 

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within thesemiconductor industry, we target the market for advanced packagingapplications.  Within the nanotechnologyindustry, our target markets include thin film head magnetic recording devices,optical networking devices, laser diodes and LEDs (light emitting diodes).  Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

 

In evaluating our businesssegments, Ultratech gave consideration to the Chief Executive Officer’s reviewof financial information and the organizational structure of our management.Based on this review, we concluded that, at the present time, resources areallocated and other financial decisions are made based, primarily, onconsolidated financial information. Accordingly, we have determined that weoperate in one business segment, which is the manufacture and distribution ofcapital equipment to manufacturers of integrated circuits and nanotechnologycomponents.

 

**(2) Basis of Presentation**

 

We have prepared the unauditedcondensed consolidated financial statements in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments, consisting of only normal recurringadjustments, considered necessary for fair presentation have been included.

 

Operating results for the threeand six month periods ended July 3, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004, orany future period.

 

USE OF ESTIMATES – Thepreparation of the financial statements and related disclosures, in conformitywith accounting principles generally accepted in the United States, requiresmanagement to make estimates and judgments that affect the reported amounts inthe financial statements and accompanying notes. On an ongoing basis,management evaluates its estimates, including those related to inventories,warranty obligations, purchase order commitments, bad debts, income taxes,intangible assets, contingencies and litigation. Management bases its estimateson historical experience and on various other assumptions that are believed tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates.

 

**(3) Stock BasedCompensation**

 

We account for compensation expense related to our stock-based employeecompensation plans under the intrinsic value method. Accordingly, nostock-based employee compensation cost is recorded in the condensedconsolidated statements of operations, as all options granted under these planshad an exercise price equal to the market value of the underlying common stockon the date of grant.

 

6

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The following table illustrates the effect on net income (loss) andearnings (loss) per share if we had applied the fair value recognition methodto account for stock-based employee compensation.

 
|                                                                                                                                   |   | **Three  months ended** |    | **Six months  ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
| **In thousands, except per share  amounts**                                                                                            |   | **July 3,  2004**       |    | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
| Net income (loss) as reported                                                                                                          |   | $                       | (2,266  | )                     | $      | 2,029 |   | $ | (1,739 | ) | $ | 1,046 |   |
| Total stock-based employee compensation  expense, determined under fair value based method for all awards, net of  related tax effects |   | (16,974                 | )       | (2,054                | )      | (19,913 | ) | (4,231 | ) |
| Pro forma net income (loss)                                                                                                            |   | $                       | (19,240 | )                     | $      | (25 | ) | $ | (21,652 | ) | $ | (3,185 | ) |
|                                                                                                                                   |   |                    |    |                  |   |   |   |   |   |
| Net income (loss) per share - basic, as  reported                                                                                      |   | $                       | (0.10   | )                     | $      | 0.09 |   | $ | (0.07 | ) | $ | 0.05 |   |
| Pro forma net income (loss) per share -  basic                                                                                         |   | $                       | (0.84   | )                     | $      | (0.00 | ) | $ | (0.93 | ) | $ | (0.14 | ) |
|                                                                                                                                   |   |                    |    |                  |   |   |   |   |   |
| Net income (loss) per share - diluted, as  reported                                                                                    |   | $                       | (0.10   | )                     | $      | 0.09 |   | $ | (0.07 | ) | $ | 0.05 |   |
| Pro forma net income (loss)  per share - diluted                                                                                  |   | $                       | (0.84   | )                     | $      | (0.00 | ) | $ | (0.93 | ) | $ | (0.14 | ) |

 

Included in the FAS 123stock-based employee compensation expense above for the three and six monthperiods ending July 3, 2004, was $14.5 million resulting from the accelerationof vesting of approximately 1.6 million stock options for all optionees, exceptfor non-employee members of the Board of Directors, whose exercise price, whichranges from $16.70 to $31.38 per share, exceeded the market price of our stockon the date of acceleration, June 25, 2004. We have never repriced stockoptions, thus, the exercise prices for the stock options accelerated wereunchanged.  Only the vesting was changedand now all of the affected stock options are fully vested. As all of the stockoptions affected were “underwater”, there is no impact, under APB 25, on our consolidatedstatement of operations.

 

The table above used the following weighted-average assumptions toestimate the fair value of stock options at the date of grant using theBlack-Scholes option-pricing model.

 

 
|                                                    |   | **Three  months ended** |   | **Six months  ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                    |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
|                                                    |   |                    |   |                  |   |   |   |   |   |
| Expected life (in years): stock options                 |   | 2.0                     |   | 3.5                   |   | 2.3 |   | 3.5 |   |
|                                                    |   |                    |   |                  |   |   |   |   |   |
| Expected life (in years): Employee Stock  Purchase Plan |   | 1.25                    |   | 1.25                  |   | 1.25 |   | 1.25 |   |
|                                                    |   |                    |   |                  |   |   |   |   |   |
| Risk-free interest rate                                 |   | 2.68                    | %      | 1.97                  | %      | 2.64 | % | 2.47 | % |
|                                                    |   |                    |   |                  |   |   |   |   |   |
| Volatility factor                                       |   | 0.62                    |   | 0.71                  |   | 0.63 |   | 0.71 |   |
|                                                    |   |                    |   |                  |   |   |   |   |   |
| Dividend yield                                          |   | 0.00                    | %      | 0.00                  | %      | 0.00 | % | 0.00 | % |

 

7

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**(4) Earnings (Loss) Per Share**

 

The following sets forth thecomputation of basic and diluted net income (loss) per share:

 
|                                                     |   | **Three  months ended** |   | **Six Months  Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Unaudited, in thousands, except  per share amounts)** |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Numerator:                                               |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | (2,266 | )                     | $      | 2,029 |   | $ | (1,739 | ) | $ | 1,046 |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Denominator:                                             |   |                    |   |                  |   |   |   |   |   |
| Denominator for basic net income (loss) per  share       |   | 23,705                  |   | 22,783                |   | 23,675 |   | 22,743 |   |
| Effect of dilutive employee stock options                |   | —                  |   | 598                   |   | — |   | 287 |   |
| Denominator for diluted net income (loss)  per share     |   | 23,705                  |   | 23,381                |   | 23,675 |   | 23,030 |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Earnings (loss) per share - basic:                       |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | (0.10  | )                     | $      | 0.09 |   | $ | (0.07 | ) | $ | 0.05 |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Earnings (loss) per share - diluted:                     |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | (0.10  | )                     | $      | 0.09 |   | $ | (0.07 | ) | $ | 0.05 |   |

 

For the three and six monthperiods ended July 3, 2004, options to purchase 5,832,000 and 5,677,000shares of common stock at an average exercise price of $18.35 and $18.14,respectively, were excluded from the computation of diluted net income pershare, as the effect would have been anti-dilutive. For the three and six monthperiods ended June 28, 2003, options to purchase 1,518,000 and 3,833,000shares of common stock at an average exercise price of $22.22 and $17.29,respectively, were excluded from the computation of diluted net loss per share,as the effect would have been anti-dilutive. Options are anti-dilutive when wehave a net loss or when the exercise price of the stock option is greater thanthe average market price of our common stock.

 

**(5) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** |   | **July 3,  2004** |   | **Dec. 31,  2003** |   |
|--------------------|--------|-------------------|--------|--------------------|--------|
|               |   | **(Unaudited)**   |   |               |   |
|               |   |              |   |               |   |
| Raw materials      |   | $                 | 10,654 |               | $      | 8,647 |   |
| Work-in-process    |   | 9,608             |   | 9,286              |   |
| Finished products  |   | 3,364             |   | 1,104              |   |
|               |   | $                 | 23,626 |               | $      | 19,037 |   |

 

**(6) Line of Credit**

 

We have a line of creditagreement with a brokerage firm. Under the terms of this agreement, we mayborrow funds at a cost equal to the current Federal funds rate plus 100 basispoints (2.25% as of July 3, 2004). Certain of our cash, cash equivalentsand short-term investments secure borrowings outstanding under this facility.Funds are advanced to us under this facility based on pre-determined advancerates on the cash and securities held by us in this brokerage account. Thisagreement has no set expiration date and there are no loan covenants. As ofJuly 3, 2004, $5.3 million was outstanding under this facility, with arelated collateral requirement of approximately $7.6 million of our cash, cashequivalents and short-term investments.

 

8

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**(7) Other CurrentLiabilities**

 

Other current liabilities consist of the following:

 
| **(In thousands)**                                |   | **July 3,  2004** |   | **Dec. 31,  2003** |   |
|---------------------------------------------------|--------|-------------------|--------|--------------------|--------|
|                                              |   | **(Unaudited)**   |   |               |   |
|                                              |   |              |   |               |   |
| Salaries and benefits                             |   | $                 | 3,353  |               | $      | 2,841 |   |
| Warranty reserves                                 |   | 1,498             |   | 1,257              |   |
| Advance billings                                  |   | 946               |   | 1,523              |   |
| Income taxes payable (receivable)                 |   | (175              | )      | 745                |   |
| Reserve for losses on purchase order  commitments |   | 1,015             |   | 841                |   |
| Other                                             |   | 2,027             |   | 2,944              |   |
|                                              |   | $                 | 8,664  |               | $      | 10,151 |   |

 

**WarrantyAccrual**

 

We generally warrant ourproducts for a period of 12 months for new products, or 3 months forrefurbished products, from the date of customer acceptance for material andlabor to repair the product. We estimate the costs that may be incurred underour basic limited warranty and record a liability in the amount of such costsat the time the product is shipped. Recognition of the related warranty cost isdeferred until product revenue is recognized. Extended warranty terms, ifgranted, result in deferral of revenue approximating the fair value for similarservice contracts. Factors that affect our warranty liability include thenumber of installed units, historical and anticipated rates of warranty claims,and cost per claim. We periodically assess the adequacy of our recordedwarranty liabilities and adjust the amounts as necessary.

 

Changes in our productliability are as follows:

 

 
|                                |   | **Three  months ended** |   | **Six months  ended** |   |
|-------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **In thousands**                    |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
| Balance, beginning of the period    |   | $                       | 1,596  |                  | $      | 1,689 |   | $ | 1,257 |   | $ | 1,462 |   |
| Warranties issued during the period |   | 744                     |   | 853                   |   | 1,971 |   | 1,843 |   |
| Amortization during the period      |   | (842                    | )      | (927                  | )      | (1,730 | ) | (1,690 | ) |
| Balance, end of the period          |   | $                       | 1,498  |                  | $      | 1,615 |   | $ | 1,498 |   | $ | 1,615 |   |

 

**Deferred ServiceIncome**

 

We sell service contracts for which revenue is deferred and recognizedratably over the contract period, for time based service contracts, or asservice hours are delivered, for contracts based on a purchased quantity ofhours. Changes in our deferred service contract revenue are as follows:

 
|                                                   |   | **Three  months ended** |   | **Six months  ended** |   |
|--------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **In thousands**                                       |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
| Balance, beginning of the period                       |   | $                       | 867    |                  | $      | 884 |   | $ | 821 |   | $ | 815 |   |
| Service contracts sold during the period               |   | 1,952                   |   | 1,495                 |   | 3,944 |   | 3,376 |   |
| Service contract revenue recognized during  the period |   | (1,842                  | )      | (1,696                | )      | (3,788 | ) | (3,508 | ) |
| Balance, end of the period                             |   | $                       | 977    |                  | $      | 683 |   | $ | 977 |   | $ | 683 |   |

 

9

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**(8) ComprehensiveIncome (Loss)**

 

The components of comprehensive income (loss) are as follows:

 
|                                                          |   | **Three  months ended** |   | **Six Months  Ended** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Unaudited, in thousands)**                                 |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
| Net income (loss)                                             |   | $                       | (2,266 | )                     | $      | 2,029 |   | $ | (1,739 | ) | $ | 1,046 |   |
| Accumulated other comprehensive income  (loss)                |   |                    |   |                  |   |   |   |   |   |
| Unrealized gain (loss) on  available-for-sale securities      |   | (866                    | )      | 111                   |   | (971 | ) | (69 | ) |
| Unrealized gain (loss) on foreign exchange  forward contracts |   | 151                     |   | 24                    |   | 312 |   | 19 |   |
| Comprehensive income (loss)                                   |   | $                       | (2,981 | )                     | $      | 2,164 |   | $ | (2,398 | ) | $ | 996 |   |

 

Accumulated other comprehensive income presented in the condensedconsolidated balance sheets is comprised of changes in unrealized gains orlosses on available-for-sale securities and the effect of exchange rate changeson foreign exchange forward contracts, net of tax. Accumulated othercomprehensive income consists of the following:

 

 
| **In thousands:**                                        |   | **July 3,  2004** |   | **Dec. 31,  2003** |   |
|----------------------------------------------------------|--------|-------------------|--------|--------------------|--------|
| Unrealized gains (losses) on:                            |   |              |   |               |   |
| Available-for-sale investments                           |   | $                 | 286    |               | $      | 1,257 |   |
| Foreign exchange contracts                               |   | (8                | )      | (320               | )      |
| Accumulated other comprehensive income at  end of period |   | $                 | 278    |               | $      | 937 |   |

 

**(9) Contingencies**

 

**Legal Proceedings**

 

On February 29, 2000, we filed lawsuits asserting patentinfringement and related claims against Nikon, Canon, and ASML in the U.S.District Court for the Eastern District of Virginia. In April 2000, wereached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C., and oral arguments were heard inFebruary 2004.  The Court ofAppeals for the Federal Circuit in Washington, D.C. reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court for further proceedings. ASML petitioned the Courtof Appeals for the Federal Circuit in Washington, D.C. for reconsideration oftheir decision. On June 1, 2004, the Court of Appeals for the Federal Circuitin Washington, D.C. denied ASML’s petition.

 

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**Item 2.****                                                           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Certain of the statementscontained herein, which can be identified by words such as “anticipates”,“expects”, “intends”, “will”, “could”, “believes”, “estimates”, “continue”, andsimilar expressions, may be considered forward-looking statements underSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, thatinvolve risks and uncertainties, such as delays, deferrals and cancellations oforders by customers; lengthy sales cycles, including the timing of systeminstallations and acceptances; lengthy and costly development cycles foradvanced lithography and laser-processing technologies and applications;dependence on new product introductions and commercial success of any newproducts; integration, development and associated expenses of the laserprocessing operation; intellectual property matters; cyclicality in thesemiconductor and nanotechnology industries; expiration of licensingarrangements, and the resulting adverse impact on our licensing revenues; highdegree of industry competition; pricing pressures and product discounts;changes in pricing by us, our competitors or suppliers; customer concentration;market acceptance of new products and enhanced versions of our existingproducts; international sales; changes to financial accounting standards;timing of new product announcements and releases by us or our competitors;ability to volume produce systems and meet customer requirements; mix ofproducts sold; rapid technological change and the importance of timely productintroductions; outcome of litigation; sole or limited sources of supply;manufacturing variances and production levels; timing and degree of success oftechnologies licensed to outside parties; product concentration and lack ofproduct revenue diversification; inventory obsolescence; asset impairment;ability and resulting costs to attract or retain sufficient personnel toachieve our targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon usachieving and maintaining profitability and the market price of our stock;effects of certain anti-takeover provisions; future acquisitions; volatility ofstock price; business interruptions due to natural disasters or utilityfailures; environmental regulations; and any adverse effects of terroristattacks in the United States or elsewhere, or government responses thereto, ormilitary actions in Iraq, Afghanistan and elsewhere, on the economy, ingeneral, or on our business in particular. Due to these and additional factors,certain statements, historical results and percentage relationships discussedbelow are not necessarily indicative of the results of operations for anyfuture period.  These forward-lookingstatements are based on management’s current beliefs and expectations, some orall of which may prove to be inaccurate, and which may change.  We undertake no obligation to revise orupdate any forward-looking statements to reflect any event or circumstance thatmay arise after the date of this report.

 

**OVERVIEW**

 

Ultratech, Inc. (referredto as “Ultratech” and “we”) develops, manufactures and markets photolithographyand laser thermal processing equipment for manufacturers of semiconductor andnanotechnology components located throughout North America, Europe, Japan andthe rest of Asia.

 

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within thesemiconductor industry, we target the market for advanced packagingapplications.  Within the nanotechnologyindustry, our target markets include thin film head magnetic recording devices,optical networking devices, laser diodes and LEDs (light emitting diodes).  Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

 

**RESULTS OF OPERATIONS**

 

We derive a substantial portion of our total net sales from sales of arelatively small number of newly manufactured systems, which typically range inprice from $1.0 million to $3.6 million. As a result of these high sale prices,the timing and recognition of revenue from a single transaction has had andmost likely will continue to have a significant impact on our net sales andoperating results for any particular period.

 

Our backlog at the beginning of a period typically does not include allof the sales needed to achieve our sales objectives for that period. Inaddition, orders in backlog are subject to cancellation, shipment or customeracceptance delays, and deferral or rescheduling by a customer with limited orno penalties. Consequently, our net sales and operating results for a periodhave been and will continue to be dependent upon our obtaining orders forsystems to be shipped and accepted in the same period in which the order isreceived. Our business and financial results for a particular period could bematerially adversely affected if an anticipated order for one system is notreceived in time to permit shipment and customer acceptance during that period.Furthermore, a substantial portion of our shipments have historically been madenear the end of each quarter. Delays in installation and customer acceptancedue, for example, to our inability to successfully demonstrate the agreed-uponspecifications or criteria at the customer’s facility, or to the failure of thecustomer to permit installation of the system at the agreed upon time, hascaused and may in the future cause net sales in a particular period to fallsignificantly below our expectations, which would materially adversely affectour operating results for that period. This risk is especially applicable

 

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in connection with the introduction and initial sales of a new productline. Additionally, the failure to receive anticipated orders or delays inshipments due, for example, to rescheduling, delays, deferrals or cancellationsby customers, additional customer configuration requirements, or to unexpectedmanufacturing difficulties or delays in deliveries by suppliers due to theirlong production lead times, have caused and may in the future cause net salesin a particular period to fall significantly below our expectations, materiallyadversely affecting our operating results for that period. In particular, thelong manufacturing cycles of our Saturn Spectrum family of wafer steppers,laser thermal processing systems and the long lead time for lenses and othermaterials, could cause shipments of these products to be delayed from onequarter to the next, which could materially adversely affect our financialcondition and results of operations for a particular quarter.

 

Additionally, the need for continued expenditures for research anddevelopment, capital equipment, ongoing training and worldwide customer serviceand support, among other factors, will make it difficult for us to reduce ouroperating expenses in a particular period if we fail to achieve our net salesgoals for the period.

 

**Net sales**

** **

**Second Quarter:**

 
|              |   | **Three  Months Ended** |       |               |       |                  |       |
|-------------------|--------|-------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)** |   | **July 3,  2004**       |       | **June 28,  2003** |       | **Amount of  Change** |       | **Percentage  Change** |   |
| Sales of:         |   |                    | ** ** |               | ** ** |                  | ** ** |   | ** ** |
| Systems           |   | $                       | 16.0       |               | $          | 18.9                  |       | $ | (2.9 | ) | -15 | % |
| Spare parts       |   | 2.7                     |       | 2.3                |       | 0.4                   |       | 17 | % |
| Services          |   | 2.9                     |       | 2.6                |       | 0.3                   |       | 12 | % |
| Licenses          |   | 0.9                     |       | 0.9                |       | 0.0                   |       | 0 | % |
| Total net sales   |   | $                       | 22.5       |               | $          | 24.8                  |       | $ | (2.3 | ) | -9 | % |

 

Net sales consist of revenues from system sales, spare parts sales,services and licensing of technologies. System sales decreased 15%, to $16.0million, on a unit volume decrease of 15% in the second quarter of 2004 ascompared to the second quarter of 2003. The weighted-average selling prices ofsystems sold during the second quarter of both 2004 and 2003 were thesame.  In the second quarter of 2004 and2003, refurbished systems accounted for approximately 36% and 31%,respectively, of units sold. This percentage can fluctuate from quarter toquarter and, as refurbished units generally have lower average selling pricesthan new units, any such fluctuation impacts the weighted average selling priceof the systems sold.

 

On a product market application basis, system sales to thesemiconductor industry, primarily for advanced packaging applications, were$11.2 million for the quarter ended July 3, 2004, a decrease of 14% whencompared with system sales to this market in the second quarter of 2003. Thedecrease was due to recognizing revenue on the sales of fewer units to bumpprocessing customers.  During theremainder of 2004, we believe that the semiconductor industry will strengthenresulting in increased equipment purchases and that we are positioned to growas the utilization of advanced packaging in the semiconductor industryincreases. System sales to the nanotechnology market were $4.8 million for thequarter ended July 3, 2004, a decrease of 18% as compared with systemsales to this market in the second quarter of 2003, primarily as a result oflower average selling prices. The lower average selling prices were due to anincrease in the number of refurbished systems shipped during the currentquarter as compared to the same quarter in 2003.  During the remainder of 2004, we believe that revenue from thenanotechnology market will increase from the revenue levels reported in 2003.However, revenue from the nanotechnology market is subject to significant andsudden fluctuations, particularly in the thin film head market. Therefore,expected revenue levels from this market may not be realized.

 

Spare parts sales for the second quarter of 2004 increased 17%, to $2.7million, as compared to the second quarter of 2003.  This increase was the result of increased sales of tool kits soldwith new systems and a system computer upgrade in the second quarter of 2004 ascompared to the same period in 2003. Revenues from services increased 12%, to$2.9 million for the second quarter of 2004, primarily as a result of anincrease in system relocations by customers in Asia.

 

At July 3, 2004, we had approximately $5.3 million of deferredrevenue resulting from products shipped, but not yet installed and accepted,and deferred services revenue, as compared with $6.2 million at April 3, 2004.The decrease was due to one less system shipped but not yet recognized asrevenue at July 3, 2004. Deferred revenue related to our products isrecognized upon satisfying the contractual obligations for installation and/orcustomer acceptance. During the second quarter of 2004, deferred license incomedecreased by $0.9 million, to $2.9 million, as a result of amortization ofproceeds received in prior

 

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periods. Amortization of deferred license income results in currentperiod license revenue.

 

For the quarter ended July 3, 2004, international net sales were$13.6 million, or 60% of total net sales, as compared with $15.9 million, or64% of total net sales for the second quarter of 2003. We expect sales tointernational customers to represent a significant majority of our revenuesduring the remainder of 2004 as indicated by industry estimates that seven ofthe industry’s ten largest forecasted purchasers of semiconductor equipment areinternational companies. Our revenue derived from sales in foreign countries isnot generally subject to significant exchange rate fluctuations, principallybecause sales contracts for our systems are generally denominated in U.S.dollars. In Japan, however, orders are often denominated in Japanese yen. Forthe quarter ended July 3, 2004, we recorded system sales in Japan of $4.8million of which 60% were denominated in Japanese yen. This subjects us to therisk of currency fluctuations. We attempt to mitigate this risk by enteringinto foreign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue. After recording revenue,we use various mechanisms, such as foreign currency forward exchange contractsand natural hedges, to offset substantial portions of the gains or lossesassociated with our Japanese yen denominated receivables due to exchange ratefluctuations. We had approximately $3.9 million of Japanese yen denominatedreceivables at July 3, 2004. International sales expose us to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which, in turn, impact the relative cost ofownership of our products. (See “Additional Risk Factors: InternationalSales”).

 

**Year-To-Date:**

** **

 
|              |   | **Six Months  Ended** |       |               |       |                  |       |
|-------------------|--------|-----------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)** |   | **July 3,  2004**     |       | **June 28,  2003** |       | **Amount of  Change** |       | **Percentage  Change** |   |
| Sales of:         |   |                  | ** ** |               | ** ** |                  | ** ** |   | ** ** |
| Systems           |   | $                     | 36.4       |               | $          | 34.8                  |       | $ | 1.6 |   | 5 | % |
| Spare parts       |   | 5.1                   |       | 5.1                |       | 0.0                   |       | 0 | % |
| Services          |   | 5.8                   |       | 5.1                |       | 0.7                   |       | 14 | % |
| Licenses          |   | 1.9                   |       | 1.9                |       | 0.0                   |       | 0 | % |
| Total net sales   |   | $                     | 49.1       |               | $          | 46.8                  |       | $ | 2.3 |   | 5 | % |

 

System sales increased 5%, to $36.4 million, on a unit volume increaseof 9%. The volume increase was partially offset by a decrease in theweighted-average selling prices of systems sold during the first half of 2004of 4%. This decrease was the result of a shift in product mix from our300-millimeter product to our 1000 series product.  In the first half of 2004 and 2003, refurbished systems accountedfor approximately 29% and 27%, respectively, of units sold.  On a product market application basis,system sales to the semiconductor industry, primarily for advanced packagingapplications, were $23.0 million for the first half of 2004, a decrease of 9%when compared with system sales to this market in the first half of 2003. Thedecrease was due to recognizing revenue on the sale of fewer units to bumpprocessing customers.  System sales tothe nanotechnology market were $13.4 million for the first half of 2004, anincrease of 42% as compared with system sales to this market in the first halfof 2003, primarily as a result of growth in the thin film head market.

 

Spare parts sales for the first half of 2004 were unchanged from thefirst half of 2003. Revenues from services increased 14%, to $5.8 million forthe first half of 2004, primarily as a result of an increase in systemrelocations and general business activity by customers in Asia. Revenues fromlicensing and licensing support arrangements were unchanged at $1.9 million.

 

For the first half of 2004, international net sales were $34.0 million,or 69% of total net sales, as compared with $28.4 million, or 61% of total netsales for the first half of 2003.

 

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**Gross profit (loss)**

 
|                                    |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **Expressed as a% of total net  sales** |   | **July 3,  2004**       |   | **June 28,  2003**    |   | **July 3,  2004** |   | **June 28,  2003** |   |
|                                    |   |                    |   |                  |   |   |   |   |   |
| Total net sales                         |   | 100.0                   | %      | 100.0                 | %      | 100.0 | % | 100.0 | % |
|                                    |   |                    |   |                  |   |   |   |   |   |
| Cost of products and services sold      |   | 55.1                    | %      | 55.2                  | %      | 53.5 | % | 58.9 | % |
| Recovery of inventory writedown         |   | -0.4                    | %      | -3.0                  | %      | -0.9 | % | -1.6 | % |
| Gross margin                            |   | 45.2                    | %      | 47.7                  | %      | 47.3 | % | 42.7 | % |

 

During the second quarter of 2004 and 2003, we reported a benefit fromthe recovery of $0.1 million and $0.7 million, respectively, from the sale ofinventory previously written down. In the first half of 2004 and 2003, wesimilarly reported benefits of $0.4 million and $0.7 million,respectively.  We presently recordwrite-downs to reflect the reduction in carrying value for inventories andpurchase order commitments in excess of 12 months of production demand (18months for certain long lead-time items). Based on our current expectations with respect to market demand for ourproducts, gross margin may be favorably impacted by similar recoveries duringthe remainder of 2004. Exclusive of licensing revenues, gross margin was 42.9%for the quarter ended July 3, 2004 as compared with 45.7% for the sameperiod in 2003, inclusive of the aforementioned recovery. Similarly, for thefirst half of 2004, gross margin, exclusive of licensing revenues, was 45.2% ascompared with 40.3% for the same period in 2003.  We believe disclosure of gross margins without reference tolicensing revenues provides additional appropriate disclosure to allowcomparison of our product and service gross margins over time because there islittle, if any, cost of sales associated with our licensing revenues.

 

On a comparative basis, gross margins, exclusive of the aforementionedrecoveries were 44.9% and 44.7% for the second quarters of 2004 and 2003,respectively. We believe disclosure of gross margins exclusive of theserecoveries provides additional appropriate disclosure to allow comparison ofour gross margins over time. For the first half of 2004 and 2003, grossmargins, exclusive of the aforementioned recoveries were 46.4% and 41.1%,respectively.  The 5.3 percentage pointimprovement in gross margin in the first half of 2004 as compared to the firsthalf of 2003 was due primarily to increased production and service activitylevels (5.1 percentage points).

 

Our gross profit as a percentage of sales has been and most likely willcontinue to be significantly affected by a variety of factors, including themix of products sold; the introduction of new products, which typically havehigher manufacturing costs until manufacturing efficiencies are realized andwhich are typically discounted more than existing products until the productsgain market acceptance; the rate of capacity utilization; writedowns ofinventory and open purchase commitments; technology support and licensingrevenues, which have no associated cost of sales; product discounts, pricingand competition in our targeted markets; non-linearity of shipments during thequarter which can result in manufacturing inefficiencies; the percentage ofinternational sales, which typically have lower gross margins than domesticsales principally due to higher field service and support costs; and start-upcosts and inefficiencies associated with the implementation of subcontractingarrangements.

 

**Operating Expenses**

 

Research, development and engineering expenses for the second quarterand the first half of 2004 were $6.2 million and $12.5 million, respectively,an increase of $0.7 million and $2.3 million, respectively, from the amountsreported for the comparable periods of 2003. As a percentage of net sales, research, development and engineeringexpenses increased to 27.8% and 25.4% for the second quarter and first half of2004, respectively, as compared to 22.5% and 21.8% in the comparable year-agoperiods. These increases were due to increased investments in our laserprocessing technologies and our next generation 1X stepper products.

 

Selling, general, and administrativeexpenses were $7.2 million and $14.2 million for the second quarter and firsthalf of 2004, respectively, an increase of $2.0 million and $4.0 million,respectively, as compared with the comparable periods in 2003. As a percentageof net sales, selling, general, and administrative expenses increased to 31.8%and 29.0% in the second quarter and first half of 2004, respectively, ascompared with 20.8% and 22.0% in the second quarter and first half of 2003,respectively. The increase in expenses in the second quarter of 2004 ascompared to the second quarter of 2003 was due to increased marketing and salesactivity primarily driven by our efforts in laser processing ($0.8 million),increased legal costs

 

14

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primarily related to our beinga plaintiff in a patent infringement lawsuit ($0.7 million), increased costsassociated with our compliance with the Sarbanes-Oxley Act of 2002 and relatedSEC and Nasdaq rules ($0.2 million), and other items which in total increased$0.3 million.  The increase inyear-to-date expenses was due to increased marketing and sales activityprimarily driven by our efforts in laser processing ($1.9 million), increasedlegal costs primarily related to our being a plaintiff in a patent infringementlawsuit ($0.9 million), increased costs associated with our compliance with theSarbanes-Oxley Act of 2002 and related SEC and Nasdaq rules ($0.5 million), andother items which in total increased $0.6 million.

 

**Interest and other income, net**

 

Interest and other income, net, which consists primarily of interestincome, was $0.9 million and $1.8 million for the second quarter and first halfof 2004, respectively, as compared with $1.1 million and $2.2 million for thecomparable periods of 2003. The decreases noted in 2004 from 2003 wereprimarily attributable to lower interest rates on our investments. We presentlymaintain an investment portfolio with a weighted-average maturity of less thanone year. Consequently, changes in short-term interest rates have had a majorimpact on our interest income. Future changes in interest rates are expected tohave a similar impact.

 

**Income tax expense**

 

For the three and six months ended July 3, 2004, we recorded anincome tax benefit of $0.2 million and $0.2 million, respectively, as comparedto income tax provisions of $0.1 million and $0.4 million for the comparableperiods in 2003.  The recording of anincome tax benefit for the three and six months ended July 3, 2004 was due tolosses recorded during both periods, as compared to income reported in bothcomparable periods of 2003. We presently anticipate that we will recognizeincome tax expense in 2004 of approximately 8.5% of pre-tax income, primarilyas a result of foreign income taxes and federal alternative minimum tax. Webelieve that the tax rate in 2004 will be substantially less than the statutoryrate because of available federal net operating loss carry-forwards.

 

Income taxes can be affected by estimates ofwhether, and within which jurisdictions, future earnings will occur and how andwhen cash is repatriated to the United States, combined with other aspects ofan overall income tax strategy. Additionally, taxing jurisdictions couldretroactively disagree with our tax treatment of certain items, and somehistorical transactions have income tax effects going forward. Accountingrules require these future effects to be evaluated using current laws,rules and regulations, each of which can change at any time and in anunpredictable manner. We believe we have adequately provided for any reasonablyforeseeable outcome related to these matters, and do not anticipate anymaterial earnings impact from their ultimate resolutions.

 

**Outlook**

 

Although we believe that our served markets have generally strengthenedduring the last twelve months, the anticipated timing of orders, shipments andcustomer acceptances usually requires us to fill a number of production slotsin any given quarter in order to meet our sales targets. If we are unsuccessfulin our efforts to secure those production orders, or if existing productionorders are delayed or cancelled, our results of operations will be materiallyadversely impacted. Accordingly, we may not be able to achieve or maintain ourcurrent or prior level of sales.  Wepresently expect that net sales for the quarter ending October 2, 2004 willincrease between 40% to 60% from the level of net sales reported for the secondquarter of 2004 of $22.5 million.

 

Because our net sales are subject to a number of risks, including risksassociated with the introduction of our new laser processing product lineincluding delays in customer acceptance, intense competition in the capitalequipment industry, uncertainty relating to the timing and market acceptance ofour products and the condition of the macro-economy and the semiconductorindustry, we may not exceed or maintain our current or prior level of net salesfor any period in the future. Additionally, we believe that the marketacceptance and volume production of our Saturn Spectrum 3e, our300mm offerings, our laser processing systems and our 1000 series family ofwafer steppers, are of critical importance to our future financial results. AtJuly 3, 2004, these critical systems represented 84% of our backlog. Tothe extent that these products do not achieve or maintain significant sales dueto difficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing cycles for these products, competition, excesscapacity in the semiconductor or nanotechnology device industries, customeracceptances, or any other reason, our business, financial condition and resultsof operations would be materially adversely affected.

 

We believe that gross margin for the quarter ending October 2,2004, will be between 50% and 52%, as compared to gross margin of 45% for thesecond quarter of 2004. Should our sales decline or not increase to the levelexpected, we may incur a higher risk of inventory obsolescence and excesspurchase commitments, which would materially adversely impact our

 

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results of operations. Additionally, increased price-based competitioncould contribute to erosion of gross margin. New products generally have lower gross margins until there iswidespread market acceptance and until production and after-sales efficienciescan be achieved. Should significant market demand fail to develop for our laserprocessing systems, our business, financial condition and results of operationsmay be materially adversely affected. In addition, higher installation costs associated with early sales ofour new laser processing products could negatively affect our gross margins.

 

We continue to invest significant resources in the development andenhancement of our laser processing systems and technologies and our 1Xproducts and related technologies. Further, we expect that selling, general and administrative expenseswill continue to be impacted by the factors noted above in the explanation ofcurrent period variances as well as costs associated with a major annualtradeshow to be held during the third quarter. As a result, for the three-month period ending October 2, 2004, wecurrently expect an operating margin of 5% to 10% and earnings per share ofbetween $0.10 and $0.15.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Net cash used in operating activities was $5.8 million for the sixmonths ended July 3, 2004, as compared with net cash generated byoperating activities of $6.4 million for the comparable period in 2003. Netcash used in operating activities during the first half of 2004 wasattributable to the net loss of $1.7 million and the use of cash resulting froma net change in operating assets and liabilities of $8.4 million offsetpartially by non-cash charges to income of $4.3 million. The $8.4 million useof cash from the net change in operating assets and liabilities was primarily aresult of an increase in accounts receivable of $5.5 million resulting fromhigher shipments in the second quarter of 2004 as compared to the fourthquarter of 2003 and an increase in inventories of $4.2 million due to anincrease in production in anticipation of increased sales in the third quarterof 2004. Additionally, deferred license income declined by $1.9 million asresult of our normal amortization schedule and we increased our investment indemonstration inventory by $1.0 million. These increases were partially offset by an increase in accounts payableof $2.6 million as a result of the increases in inventory and an increase indeferred product and services income of $2.4 million due to shipments made butnot yet recognized as revenue during the second quarter of 2004. There were nosimilar product revenue deferrals at December 31, 2003. We expect that accountsreceivable and deferred product and services income will continue to increaseduring the remainder of 2004 as business levels increase.

 

We believe that because of the relatively long manufacturing cycle ofcertain of our systems, particularly newer products, our inventories willcontinue to represent a significant portion of working capital. Currently, weare devoting significant resources to the development, introduction andcommercialization of our laser processing system and to the development of ournext generation 1X lithography technologies. We currently intend to continue toincur significant operating expenses in the areas of research, development andengineering, manufacturing and selling, general and administrative costs inorder to further develop, produce and support these new products. Additionally,gross profit margins, inventory and capital equipment levels may be adverselyimpacted in the future by costs associated with the initial production of ourlaser processing system and by future generations of our 1X wafer steppers.These costs include, but are not limited to, additional manufacturing overhead,costs of demonstration systems and facilities and the establishment ofadditional after-sales support organizations. Additionally, our operatingexpenses may increase, relative to sales, as a result of adding additionalmarketing and administrative personnel, among other costs, to support our newproducts. If we are unable to achieve significantly increased net sales or ifour sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced. Failure to achieve our sales targets for these new productscould result in additional inventory write-offs and asset impairment charges,either of which could materially adversely impact our results of operations.

 

During the first half of 2004, net cash used in investing activitieswas $0.1 million, attributable to capital expenditures of $2.6 million and anet decrease in available-for-sale securities of $2.5 million. We are planningto incur capital expenditures during the remainder of 2004 of between $3million and $4 million for equipment and facility improvements driven primarilyby our new product introductions.

 

Net cash provided by financing activities was $4.2 million during thefirst half of 2004, attributable to proceeds received from the issuance ofcommon stock under our employee stock option and stock purchase plans of $1.5million and borrowings under our credit facility.

 

At July 3, 2004, we had working capital of $170.3 million. Ourprincipal source of liquidity at July 3, 2004 consisted of $160.5 millionin cash, cash equivalents and short-term investments.

 

In September 2002, we entered into a line of credit agreement witha brokerage firm. Under the terms of this agreement, we may borrow funds at acost equal to the current Federal funds rate plus 100 basis points (2.25% as ofJuly 3, 2004). Certain of

 

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our cash, cash equivalents and short-term investments secure borrowingsoutstanding under this facility. Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants. As of July 3, 2004, $5.3 million was outstanding underthis facility, with a related collateral requirement of approximately $7.6million of our cash, cash equivalents and short-term investments.

 

The development and manufacture of new lithography systems andenhancements is highly capital-intensive. In order to be competitive, webelieve we must continue to make significant expenditures for capitalequipment; sales, service, training and support capabilities; systems,procedures and controls; expansion of operations; and research and development,among many other items. We expect that cash generated from operations and ourcash, cash equivalents and short-term investments will be sufficient to meetour cash requirements for at least the next twelve months. However, in thenear-term, we may continue to utilize existing and future lines of credit, andother sources of financing, in order to maintain our present levels of cash,cash equivalents and short-term investments. Beyond the next twelve months, wemay require additional equity or debt financing to address our working capitalor capital equipment needs. In addition, we may seek to raise equity or debtcapital at any time that we deem market conditions to be favorable. Additionalfinancing, if needed, may not be available on reasonable terms, or at all.

 

We may in the future pursue acquisitions of complementary productlines, technologies or businesses. Future acquisitions by us may result inpotentially dilutive issuances of equity securities, the incurrence of debt andcontingent liabilities and amortization expenses and impairment charges relatedto goodwill and other intangible assets, which could materially adverselyaffect our financial condition and results of operations. In addition,acquisitions involve numerous risks, including difficulties in the assimilationof the operations, technologies, personnel and products of the acquiredcompanies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which we have limited or no directexperience; and the potential loss of key employees of the acquired company. Inthe event we acquire product lines, technologies or businesses which do not complementour business, or which otherwise do not enhance our sales or operating results,we may incur substantial write-offs and higher recurring operating costs, whichcould have a material adverse effect on our business, financial condition andresults of operations. In the event that any such acquisition does occur, therecan be no assurance as to the effect thereof on our business or operatingresults.

 

**Foreign currency**

 

As part of our overall strategy to manage the level of exposure to therisk of foreign currency exchange rate fluctuations, we attempt to hedge mostof our Japanese yen denominated foreign currency exposures. We use foreigncurrency forward contracts to hedge the risk that unremitted Japanese yendenominated receipts from customers for actual or forecasted sales of equipmentafter receipt of customer orders may be adversely affected by changes inforeign currency exchange rates. After recording revenue, we use variousmechanisms, such as foreign currency forward exchange contracts and naturalhedges, to offset substantial portions of the potential gains or lossesassociated with our Japanese yen denominated receivables and liabilities due toexchange rate fluctuations. At July 3, 2004, we had taken action to hedgeapproximately all of these Japanese yen denominated exposures. With theexception of natural hedges resulting from having both assets and liabilitiesdenominated in Japanese yen, we hedge our exposures by entering into foreigncurrency forward contracts that generally have maturities of nine months orless. We often close foreign currency forward contracts by entering intooffsetting contracts. At July 3, 2004, we had contracts for the sale andpurchase of $5.6 and $1.6 million, respectively, of foreign currencies at fixedrates of exchange.

 

**ADDITIONAL RISKFACTORS**

 

*In addition to risks described in theforegoing discussions, the following risks apply to us and our business:*

 

**Lengthy SalesCycles **Salesof our systems depend, in significant part, upon the decision of a prospectivecustomer to increase manufacturing capacity or to restructure currentmanufacturing facilities, either of which typically involves a significantcommitment of capital. Many of our customers in the past have cancelled thedevelopment of new manufacturing facilities and have substantially reducedtheir capital equipment budgets. In view of the significant investment involvedin a system purchase, we have experienced and may continue to experience delaysfollowing initial qualification of our systems as a result of delays in acustomer’s approval process. Additionally, we are presently receiving ordersfor systems that have lengthy delivery schedules, which may be due to longerproduction lead times or a result of customers’ capacity schedulingrequirements. For these and other reasons, our systems typically have a lengthysales cycle during which we may expend substantial funds and management effortin securing a sale. Lengthy sales cycles subject us to a number of significantrisks, including inventory obsolescence and fluctuations in operating results,over which we have little or no control. In order to maintain or exceed ourpresent level of net sales, we are dependent upon obtaining orders for systemsthat will ship and be

 

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accepted in the current period.

 

**Development ofNew Product Lines; Expansion of Operations **Currently, we are devoting significantresources to the development, introduction and commercialization of our laserprocessing systems and to enhancements of our Saturn Spectrum 3e andSaturn Spectrum 300e2 wafer steppers and next generation relatedplatforms. We intend to continue to develop these products and technologiesduring 2004, and to incur significant operating expenses in the areas of research,development and engineering, manufacturing and general and administrative costsin order to further develop, produce and support these new products.Additionally, gross profit margins and inventory levels may be furtheradversely impacted in the future by costs associated with the initialproduction of our laser processing systems and by future generations of our 1Xlithography systems. Introduction of new products generally involves higherinstallation costs and product performance uncertainties that could delaycustomer acceptance of our systems, resulting in a delay in recognizing revenueassociated with those systems and a reduction in gross margins. These costsinclude, but are not limited to, additional manufacturing overhead, additionalinventory write-offs, costs of demonstration systems and facilities, and costsassociated with the establishment of additional after-sales supportorganizations. Additionally, operating expenses may increase, relative tosales, as a result of adding additional marketing and administrative personnel,among other costs, to support our new products. If our new products do notresult in significantly increased net sales or if our sales fall belowexpectations, our operating results will be materially adversely affected.

 

Our ability to commercialize our laser processing technologies dependson our ability to demonstrate a manufacturing-worthy tool. We do not presentlyhave in-house capability to fabricate semiconductor devices. As a result, wemust partner with semiconductor companies to develop the anneal process. Thedevelopment of new process technologies is largely dependent upon our abilityto interest potential customers in working on joint process development. Ourability to deliver timely solutions is also limited by wafer turnaround at thepotential customer’s fabrication facility.

 

**Intellectual PropertyRights **Althoughwe attempt to protect our intellectual property rights through patents,copyrights, trade secrets and other measures, we believe that our success willdepend more upon the innovation, technological expertise and marketingabilities of our employees. Nevertheless, we have a policy of seeking patentswhen appropriate on inventions resulting from our ongoing research anddevelopment and manufacturing activities. We own 84 U. S. and foreign patents,which expire on dates ranging from June 2006 to November 2021 and have 57 U. S.and foreign patent applications pending. We also have various registeredtrademarks and copyright registrations covering mainly software programs usedin the operation of our systems. In addition, we rely upon trade secretprotection for our confidential and proprietary information. We may not be ableto protect our technology adequately and competitors may be able to develop similartechnology independently. Our pending patent applications may not result in apatent being issued and U.S. or foreign intellectual property laws may notprotect our intellectual property rights. In addition, litigation may benecessary to enforce our patents, copyrights or other intellectual propertyrights, to protect our trade secrets, to determine the validity and scope ofthe proprietary rights of others or to defend against claims of infringement.Such litigation has resulted in, and in the future could result in, substantialcosts and diversion of resources and could have a material adverse effect onour business, financial condition and results of operations, regardless of theoutcome of the litigation. Patents issued to us may be challenged, invalidatedor circumvented and the rights granted thereunder may not provide competitiveadvantages to us. Furthermore, others may independently develop similartechnology or products or design around our patents. Challenges to, orinvalidation of, patents related to our technologies would expose us to therisk of forfeiture of revenues and further risk of damage claims.

 

On February 29, 2000, we filed lawsuits asserting patentinfringement and related claims against Nikon, Canon, and ASML in the U.S.District Court for the Eastern District of Virginia. In April 2000, wereached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C., and oral arguments were heard in February 2004.  The Court of Appeals for the Federal Circuitin Washington, D.C. reversed the preliminary determination of the DistrictCourt, ruling in our favor, and remanded the case back to the District Courtfor further proceedings. ASML petitioned the Court of Appeals for the FederalCircuit in Washington, D.C. for reconsideration of their decision. On June 1,2004, the Court of Appeals for the Federal Circuit in Washington, D.C. deniedASML’s petition.

 

We are involved in other lawsuits and legal actions regardinginfringement claims that we believe not to be material to our business orfinancial condition. Additionally, we have from time to time been notified ofclaims that we may be infringing intellectual property rights possessed bythird parties.

 

Infringement claims by third parties or claims for indemnificationresulting from infringement claims may be asserted in the future and suchassertions, if proven to be true, may materially adversely affect our business,financial condition and results of operations, regardless of the outcome of anylitigation. With respect to any such future claims, we may seek to obtain a

 

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license under the third party’s intellectual property rights. However,a license may not be available to us on reasonable terms or at all. We coulddecide, in the alternative, to resort to litigation to challenge such claims.Such challenges could be expensive and time consuming and could materiallyadversely affect our business, financial condition and results of operations,regardless of the outcome of any litigation.

 

**Cyclicality ofSemiconductor, Semiconductor Packaging and Nanotechnology Industries** Our business depends in significant part uponcapital expenditures by******manufacturers of semiconductors, bumped semiconductorsand nanotechnology components, including thin film head magnetic recordingdevices, which in turn depend upon the current and anticipated market demandfor such devices and products utilizing such devices. The semiconductor industryhistorically has been highly cyclical and has experienced recurring periods ofoversupply. This has, from time to time, resulted in significantly reduceddemand for capital equipment including the systems manufactured and marketed byus. We believe that markets for new generations of semiconductors andsemiconductor packaging will also be subject to similar fluctuations. Ourbusiness and operating results would be materially adversely affected bydownturns or slowdowns in the semiconductor, semiconductor packaging ornanotechnology markets or by loss of market share. Accordingly, we may not beable to achieve or maintain our current or prior level of sales.

 

We attempt to mitigate the risk of cyclicality by offering products inmultiple markets including semiconductor, semiconductor packaging, thin filmhead and other nanotechnology sectors, as well as diversifying into new marketssuch as photolithography for optical networking (a nanotechnology application)and laser-based annealing for implant activation and other applications.Despite such efforts, when one or more of such markets experiences a downturnor a situation of excess capacity, our net sales and operating results arematerially adversely affected.

 

**Highly CompetitiveIndustry** The capital equipment industry in which weoperate is intensely competitive. A substantial investment is required toinstall and integrate capital equipment into a semiconductor, semiconductorpackaging or nanotechnology device production line. We believe that once a devicemanufacturer or packaging subcontractor has selected a particular vendor’scapital equipment, the manufacturer generally relies upon that equipment forthe specific production line application and, to the extent possible,subsequent generations of similar products. Accordingly, it is difficult toachieve significant sales to a particular customer once another vendor’scapital equipment has been selected.

 

We experience competition in advanced packaging from various proximityaligner companies such as Suss Microtec AG (Suss Microtec) and projectioncompanies such as Ushio, Inc. (Ushio) and Tamarack ScientificCo., Inc. (Tamarack). In nanotechnology, we experience competition fromproximity aligner companies, such as Suss Microtec, as well as other steppermanufacturers who have developed or are developing tools specifically designedfor nanotechnology applications. We expect our competitors to continue toimprove the performance of their current products and to introduce new productswith improved price and performance characteristics. This could cause a declinein sales or loss of market share in our served markets, and thereby materiallyadversely affect our business, financial condition and results of operations.Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features.

 

With respect to our laser annealing technologies, marketed under theLSA100 product name, our primary competition comes from companies that offerproducts utilizing rapid thermal processing (RTP), which currently is theprevailing manufacturing technology. Another potential advanced annealingsolution utilizes flash lamp annealing technology (FLA). Several companies havepublished papers on annealing tools that incorporate flash lamp technology inorder to reduce annealing times and increase anneal temperatures. Developers offlash lamp annealing (FLA) technology claim to have overcome annealingdifficulties at the 65nm node. Additionally, competition to our laserprocessing products may come from other laser annealing tools, including thosepresently being used by the flat panel display industry to re-crystallizesilicon. Manufacturers of these tools may try to extend the use of theirtechnologies to semiconductor device applications.  We believe customers will choose between these technologyalternatives based on their assessment of a combination of price andperformance benefits for their specific applications.

 

In July 2000, we licensed certain rights to our then existinglaser processing technology, with reservations, to a competing manufacturer ofsemiconductor equipment. We presently anticipate this company will offer laserannealing tools to the semiconductor industry that will compete with ourofferings.

 

We believe that to be competitive, we will require significantfinancial resources in order to continue to invest in new product development,in new features and enhancements to existing products, to introduce newgeneration stepper systems in our served markets on a timely basis, and tomaintain customer service and support centers worldwide. In marketing ourproducts, we may also face competition from vendors employing othertechnologies. In addition, increased competitive pressure has led tointensified price-based competition in certain of our markets, resulting inlower prices and margins.

 

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Should these competitive trends continue, our business, financialcondition and operating results may be materially adversely affected. We maynot be able to compete successfully in the future.

 

**Customer and MarketConcentrations **Historically,we have sold a substantial portion of our systems to a limited number ofcustomers. In the second quarter and first half of 2004, five customersrepresented approximately 63% and 43% of our system revenue, respectively.  In 2003, Intel Corporation accounted for 26%of our net sales. At July 3, 2004, three customers accounted for 30% ofour system backlog. Cancellation, deferrals or rescheduling of orders by any ofthese customers would have a material adverse impact on our future results ofoperations.

 

We expect that sales to a relatively few customers will continue toaccount for a high percentage of our net sales in the foreseeable future andbelieve that our financial results depend in significant part upon the successof these major customers and our ability to meet their future capital equipmentneeds. Although the composition of the group comprising our largest customersmay vary from period to period, the loss of a significant customer or anyreduction in orders by a significant customer, including reductions due tomarket, economic or competitive conditions in the semiconductor, semiconductorpackaging or nanotechnology industries or in the industries that manufactureproducts utilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business,financial condition and results of operations. Our ability to maintain orincrease our sales in the future depends, in part, on our ability to obtainorders from new customers as well as the financial condition and success of ourexisting customers, the semiconductor and nanotechnology industries and theeconomy in general.

 

In addition to the business risks associated with dependence on a smallnumber of major customers, these significant customer concentrations have inthe past resulted in significant concentrations of accounts receivable. Thesesignificant and concentrated receivables expose us to additional risks,including the risk of default by one or more customers representing asignificant portion of our total receivables. If any of our major customerswere unable or unwilling to pay or if we were required to take additionalaccounts receivable reserves, our business, financial condition and results ofoperations would be materially adversely affected.

 

On a market application basis, sales to the semiconductor industry,primarily for advanced packaging applications, accounted for approximately 63%and 75% of system revenue for the first half of 2004 and the year endedDecember 31, 2003, respectively. During the first half of 2004 and for thefull year 2003, approximately 37% and 25%, respectively, of our systems revenuewas derived from sales to nanotechnology manufacturers, including microsystems, thin film head and optical networking device manufacturers. Our futureresults of operations and financial condition would be materially adverselyimpacted by a downturn in any of these market segments, or by loss of marketshare in any of these segments.

 

**InternationalSales **Internationalnet sales accounted for approximately 69% and 61% of total net sales for thefirst half of 2004 and the year ended December 31, 2003, respectively. Weanticipate that international sales, which typically have lower gross marginsthan domestic sales, principally due to increased competition and higher fieldservice and support costs, will continue to account for a significant majorityof total net sales. As a result, a significant portion of our net sales willcontinue to be subject to certain risks, including unexpected changes inregulatory requirements; difficulty in satisfying existing regulatory requirements;exchange rate fluctuations; tariffs and other barriers; political and economicinstability; difficulties in accounts receivable collections; naturaldisasters; some dependence on outside sales representative organizations;difficulties in staffing and managing foreign subsidiary and branch operations;and potentially adverse tax consequences.

 

Although we generally transact our international sales in U.S. dollars,international sales expose us to a number of additional risks, includingfluctuations in the value of local currencies relative to the U.S. dollar,which, in turn, impact the relative cost of ownership of our products and mayfurther impact the purchasing ability of our international customers. However,in Japan, we have a direct sales operation and orders are often denominated inJapanese yen. This may subject us to a higher degree of risk from currencyexchange rate fluctuations. We attempt to mitigate this exposure through theuse of foreign exchange forward contracts. We are also subject to the risksassociated with the imposition of legislation and regulations relating to theimport or export of semiconductors and nanotechnology products. We cannotpredict whether the United States, Japan or any other country will implementchanges to quotas, duties, taxes or other charges or restrictions upon theimportation or exportation of our products. These factors, or the adoption ofrestrictive policies, may have a material adverse effect on our business,financial condition and results of operations.

 

**Changes toFinancial Accounting Standards May****Affect theCompany’s Reported Results of Operations **We prepare our financial statements in conformity withaccounting principles generally accepted in the United States, or U.S. GAAP.These principles are subject to interpretation by the American Institute ofCertified Public Accountants, the SEC and various bodies formed to interpretand create appropriate accounting policies. A change in those policies can havea significant effect on our reported results and may affect our reporting oftransactions completed before a change is announced.

 

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Accounting policies affecting many other aspects of our business,including rules relating to revenue recognition, off-balance sheettransactions, employee stock options, restructurings, asset disposals,intangible assets, derivative and other financial instruments, and in-processresearch and development charges, have recently been revised or are underreview. Changes to those rules or the questioning of how we interpret orimplement those rules may have a material adverse effect on our reportedfinancial results or on the way we conduct business. In addition, ourpreparation of financial statements in accordance with U.S. GAAP requires thatwe make estimates and assumptions that affect the recorded amounts of assetsand liabilities, disclosure of those assets and liabilities at the date of thefinancial statements and the recorded amounts of expenses during the reporting period.A change in the facts and circumstances surrounding those estimates couldresult in a change to our estimates and could impact our future operatingresults.

 

**RapidTechnological Change; Importance of Timely Product Introduction **Thesemiconductor and nanotechnology manufacturing industries are subject to rapidtechnological change and new product introductions and enhancements. Ourability to be competitive in these and other markets will depend, in part, uponour ability to develop new and enhanced systems and related software tools, andto introduce these systems and related software tools at competitive prices andon a timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.We will also be required to enhance the performance of our existing systems andrelated software tools. Any success we may have in developing new and enhancedsystems and related software tools depends upon a variety of factors, includingproduct selection, timely and efficient completion of product design, timelyand efficient implementation of manufacturing and assembly processes, productperformance in the field and effective sales and marketing. Because new productdevelopment commitments must be made well in advance of sales, new productdecisions must anticipate both future demand and the technology that will beavailable to supply that demand. There can be no assurance that we will besuccessful in selecting, developing, manufacturing or marketing new productsand related software tools or enhancing our existing products and relatedsoftware tools. Any such failure would materially adversely affect ourbusiness, financial condition and results of operations.

 

Because of the large number of components in our systems, significantdelays can occur between a system’s introduction and when we commence volumeproduction of such systems. We have experienced delays from time to time in theintroduction of, and technical and manufacturing difficulties with, certain ofour systems and enhancements and related software features and options, and mayexperience delays and technical and manufacturing difficulties in futureintroductions or volume production of new systems or enhancements and relatedsoftware features and options.

 

We may encounter additional technical, manufacturing or otherdifficulties that could further delay future introductions or volume productionof systems or enhancements. Our inability to complete the development or meetthe technical specifications of any of our systems or enhancements and relatedsoftware tools, or our inability to manufacture and ship these systems orenhancements and related software tools in volume and in time to meet therequirements for manufacturing the future generation of semiconductor ornanotechnology devices would materially adversely affect our business,financial condition and results of operations. In addition, we may incursubstantial unanticipated costs to ensure the functionality and reliability ofour products early in the products’ life cycles. If new products havereliability or quality problems, reduced orders or higher manufacturing costs,delays in customer acceptance, recognition of revenue and collecting accountsreceivable and additional service and warranty expenses may result. Any of suchevents may materially adversely affect our business, financial condition andresults of operations.

 

**Sole or LimitedSources of Supply **Ourmanufacturing activities consist of assembling and testing components andsubassemblies, which are then integrated into finished systems. We rely on alimited number of outside suppliers and subcontractors to manufacture certaincomponents and subassemblies. We order one of the most critical components of ourtechnology, the glass for our 1X lenses, from external suppliers. We design the1X lenses and provide the lens specifications and the glass to other suppliers,who then manufacture the lens elements. We then assemble the lens elements andtest the completed optical 1X lenses.

 

We procure some of our other critical systems’ components,subassemblies and services from single outside suppliers or a limited group ofoutside suppliers in order to ensure overall quality and timeliness ofdelivery. Many of these components and subassemblies have significantproduction lead times. To date, we have been able to obtain adequate servicesand supplies of components and subassemblies for our systems in a timelymanner. However, disruption or termination of certain of these sources couldresult in a significant adverse impact on our ability to manufacture oursystems. This, in turn, would have a material adverse effect on our business,financial condition and results of operations. Our reliance on a sole or alimited group of suppliers and our reliance on subcontractors involve severalrisks, including a potential inability to obtain an adequate supply of requiredcomponents due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing andtimely delivery of components. Although the timeliness, yield and

 

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quality of deliveries to date from our subcontractors have beenacceptable, manufacture of certain of these components and subassemblies is anextremely complex process, and long lead-times are required. Any inability toobtain adequate deliveries or any other circumstance that would require us toseek alternative sources of supply or to manufacture such components internallycould delay our ability to ship our products, which could damage relationshipswith current and prospective customers and have a material adverse effect onour business, financial condition and results of operations.

 

**Dependence onKey Personnel **Ourfuture operating results depend, in significant part, upon the continuedcontributions of key personnel, many of whom would be difficult to replace. Wehave entered into employment agreements with only a limited number of ouremployees, including our Chief Executive Officer, President and Chief OperatingOfficer, and Chief Financial Officer, and our employees are employed “at will.”These employment agreements contain vesting acceleration and severance paymentprovisions that could result in significant costs or charges to us should theemployee be terminated without cause, die or have a disability. We do notmaintain any life insurance on any of our key people. The loss of key personnelcould have a material adverse effect on our business, financial condition andresults of operations. In addition, our future operating results depend insignificant part upon our ability to attract and retain other qualifiedmanagement, manufacturing, technical, sales and support personnel for our operations.There are only a limited number of people with the requisite skills to serve inthese positions and it may become increasingly difficult for us to hire suchpersonnel over time. At times, competition for such personnel has been intense,particularly in the San Francisco Bay Area where we maintain our headquartersand principal operations, and there can be no assurance that we will besuccessful in attracting or retaining such personnel. The failure to attract orretain such persons would materially adversely affect our business, financialcondition and results of operations.

 

**Volatility ofStock Price and Dilutive Impact of Employee Stock Options **We believethat factors such as announcements of developments related to our business,fluctuations in our operating results, a shortfall in revenue or earnings,changes in analysts’ expectations, general conditions in the semiconductor andnanotechnology industries or the worldwide or regional economies, sales of oursecurities into the marketplace, an outbreak or escalation of hostilities,announcements of technological innovations or new products or enhancements byus or our competitors, developments in patents or other intellectual propertyrights and developments in our relationships with our customers and supplierscould cause the price of our common stock to fluctuate, perhaps substantially.The market price of our common stock may continue to experience significantfluctuations in the future, including fluctuations that may be unrelated to ourperformance.

 

As of August 1, 2004, we had approximately 6.0 million stockoptions outstanding. Among other determinants, the market price of our stockhas a major bearing on the number of stock options outstanding that areincluded in the weighted-average shares used in determining our net income(loss) per share. During periods of extreme volatility, the impact of higherstock prices can have a materially dilutive effect on our net income (loss) pershare (diluted).****Additionally, options are excluded from the calculation ofnet income (loss) per share when we have a net loss or when the exercise priceof the stock option is greater than the average market price of our commonstock, as the impact of the stock options would be anti-dilutive.

 

**Effects ofCertain Anti-Takeover Provisions **Certainprovisions of our Certificate of Incorporation, equity incentive plans,Shareholder Rights Plan, licensing agreements, Bylaws and Delaware law maydiscourage certain transactions involving a change in control of our company. Inaddition to the foregoing, our classified board of directors, the shareholdingsof our officers, directors and persons or entities that may be deemedaffiliates and the ability of the Board of Directors to issue “blank check”preferred stock without further stockholder approval could have the effect ofdelaying, deferring or preventing a change in control of the Company and mayadversely affect the voting and other rights of holders of Common Stock.

 

**CaliforniaManufacturing Location **Weperform all of our manufacturing activities (final assembly, system testing andcertain subassembly) in clean room environments totaling approximately 26,000square feet located in San Jose, California. Performing manufacturingoperations in California exposes us to a higher risk of natural disasters,including earthquakes. In addition, in the past California has experiencedpower shortages, which have interrupted our operations.  Such shortages could occur in the future andcould again interrupt our operations resulting in product shipment delays,increased costs and other problems, any of which could have a material adverseeffect on our business, customer relationships and results or operations. Weare not insured against natural disasters and power shortages and the occurrenceof such an event could materially adversely impact our results of operations.

 

**EnvironmentalRegulations **Weare subject to a variety of governmental regulations relating to the use,storage, discharge, handling, emission, generation, manufacture and disposal oftoxic or other hazardous substances used to manufacture our systems. We believethat we are currently in compliance in all material respects with suchregulations and that we have obtained all necessary environmental permits toconduct our business. Nevertheless, the failure to comply with current orfuture regulations could result in substantial fines being imposed on us,suspension of production, alteration of the manufacturing process or cessationof operations. Such regulations could require us to acquire expensiveremediation

 

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equipment or to incur substantial expenses to comply with environmentalregulations. Any failure by us to control the use, disposal or storage of, oradequately restrict the discharge of, hazardous or toxic substances couldsubject us to significant liabilities.

 

**TerroristAttacks and Threats, and Government Responses Thereto, May****NegativelyImpact Our Operations, Revenues, Costs and Stock Price. **Terrorist attacks in the UnitedStates and elsewhere, government responses thereto, and military actions inIraq, Afghanistan and elsewhere, may disrupt our operations or those of ourcustomers and suppliers and may affect the availability of materials needed tomanufacture our products or the means to transport those materials tomanufacturing facilities and finished products to customers. In addition, anyof these events could increase volatility in the United States and worldfinancial markets which may depress the price of our common stock and may limitthe capital resources available to us or our customers or suppliers, whichcould result in decreased orders from customers, less favorable financing termsfrom suppliers, and scarcity or increased costs of materials and components ofour products. Additionally, terrorist attacks directly on Ultratech or ourcustomers or suppliers may significantly disrupt our ability to conduct ourbusiness. Any of these occurrences could have a significant impact on ouroperating results, revenues and costs and may result in increased volatility ofthe market price of our common stock.

 

**Information Available on Company Web-site**

 

Our web-site is located atwww.ultratech.com. We make available, free of charge, through our web-site, ourannual report on Form 10-K, quarterly reports on Form 10-Q, Form 3, 4 and 5filings and current reports on Form 8-K (and amendments to those reports), assoon as reasonably practicable after such reports are filed with the SEC.

 

**Item3.****                                   Quantitativeand Qualitative Disclosures about Market Risk**

 

Reference is made to Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” in our Annual Report on Form 10-K for the yearended December 31, 2003 and to the subheading “Derivative Instruments and Hedging”in Item 8, “Financial Statements and Supplementary Data”, under the heading“Notes to Consolidated Financial Statements” of our Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

**Interest rate risk**

 

Our exposure to market risk due to potential changes in interest ratesrelates primarily to our investment portfolio, which consisted primarily offixed interest rate instruments as of July 3, 2004. These instruments areheld for purposes other than trading. We maintain an investment policy designedto ensure the safety and preservation of our invested funds by limiting marketrisk and the risk of default.

 

**Foreign Currency RiskManagement**

 

The majority of our revenue, expense and capital purchasing activitiesare transacted in U.S. dollars. However, we do enter into these transactions inother currencies, primarily Japanese Yen. To protect against reductions invalue and the volatility of future cash flows caused by changes in currencyexchange rates we have established transaction and balance sheet hedgingprograms. We use foreign currency forward contracts to hedge the risk thatunremitted Japanese yen denominated receipts from customers for actual orforecasted sales of equipment after receipt of customer orders may be adverselyaffected by changes in foreign currency exchange rates. At July 3, 2004,we had taken action to hedge approximately all of these Japanese yendenominated exposures. To hedge this exposure, we enter into foreign currencyforward contracts that generally have maturities of nine months or less. Weoften close foreign currency forward contracts by entering into offsettingcontracts. At July 3, 2004, we had contracts for the sale and purchase of$5.6 and $1.6 million, respectively, of foreign currencies at fixed rates ofexchange. Our hedging programs reduce, but do not always entirely eliminate,the impact of currency movements.

 

**Item4.****                                   Controlsand Procedures**

 

We conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls and procedures,as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), as of the end of the period coveredby this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principalfinancial officer concluded as of the Evaluation Date that our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

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Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is accumulated and communicated to managementto allow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.Management is further required to apply judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

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**PART 2:               OTHERINFORMATION**

 

**Item 1.                   LegalProceedings**.

 

On February 29, 2000, we filed lawsuitsasserting patent infringement and related claims against Nikon, Canon, and ASMLin the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. The patent litigationagainst ASML is ongoing after having been transferred to the Northern Districtof California. After the District Court made a preliminary determination thatASML did not infringe the patent, we appealed the decision to the Court ofAppeals for the Federal Circuit in Washington, D.C., and oral arguments wereheard in February 2004.  The Courtof Appeals for the Federal Circuit in Washington, D.C. reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court for further proceedings. ASML petitioned the Courtof Appeals for the Federal Circuit in Washington, D.C. for reconsideration oftheir decision. On June 1, 2004, the Court of Appeals for the Federal Circuitin Washington, D.C. denied ASML’s petition.

 

We are involved in other lawsuits and legalactions that we believe are not material to our business or financialcondition.

 
| **Item 2.** |   | **Changes in Securities and Use of Proceeds.**               |   | None.  |
|-------------|--------|--------------------------------------------------------------|--------|--------|
|        |   |                                                         |   |   |
| **Item 3.** |   | **Defaults upon Senior Securities.**                         |   | None.  |
|        |   |                                                         |   |   |
| **Item 4.** |   | **Submission of Matters to a Vote****of  Security Holders.** |   |   |

** **

The followingproposals were voted upon by the Company’s stockholders at the Company’s AnnualStockholders’ Meeting held on June 3, 2004.

 

1.               Thefollowing persons were elected as directors of the Company to serve for a termending upon the Annual Stockholders’ Meeting indicated beside their respectivenames and until their successors are elected and qualified:

 
|                  |   | **Terms  Ending Upon  the Annual  Stockholders’ Meeting** |   | **Votes for** |   | **Votes  withheld** |   |
|-----------------------|--------|----------------------------------------------------------------|--------|---------------|--------|---------------------|--------|
| Arthur W. Zafiropoulo |   | 2006                                                           |   | 21,733,511    |   | 745,155             |   |
| Joel F. Gemunder      |   | 2006                                                           |   | 20,668,547    |   | 1,810,119           |   |
| Nicholas Konidaris    |   | 2006                                                           |   | 20,662,557    |   | 1,816,109           |   |
| Rick Timmins          |   | 2006                                                           |   | 21,655,284    |   | 823,382             |   |

 

2.               Aproposal to ratify the appointment of Ernst & Young LLP as the Company’sindependent auditors for the fiscal year ending December 31, 2004 was approvedby the vote of 21,697,861 shares for; 776,179 shares against; and 4,626 sharesabstained.

** **

**Item 5.                   OtherInformation.**

 

Effective June 5, 2004, Kenneth Levy resignedas a Director of Ultratech, Inc.

 

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**Item 6.                   Exhibits and Reports on Form8-K**

 

**(a)Exhibits**

 
| 31.1   |   | Certification of Chief Executive Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification of Chief Financial Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |
|   |   |                                                                                                                                                           |
| 32.1   |   | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

**(b)Reports on Form 8-K**

** **

None

 

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**SIGNATURES**

 

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

 

 
|         | **ULTRATECH, INC.**                                                                |   |
|--------------|------------------------------------------------------------------------------------|--------|
| (Registrant) |
|         |
|         |
| Date:        | August 6, 2004                                                                     |   | By: |  /s/Bruce R. Wright |   |
|         | Bruce R. Wright                                                                    |
|         | Senior Vice President, Finance and Chief Financial                                 |
|         | Officer (Duly Authorized Officer and  Principal  Financial and Accounting Officer) |
|              |                                                                                    |        |  |  |  |  |  |

 

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**EXHIBITINDEX**

 
| 31.1   |   | Certification of Chief Executive Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification of Chief Financial Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |
|   |   |                                                                                                                                                           |
| 32.1   |   | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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