**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM  10-Q**

 

**(Mark One)**

** **

| **ý**                         |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                       |
|------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                               |
|                               |   | **For the Quarterly period ended  March 29, 2003**                                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                                                               |
| **o**                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                      |
|                               |   |                                                                                                                                                                                                                                                                                                               |
|                               |   | **For the transition period from                          to                        ** |
|                               |   |                                                                                                                                                                                                                                                                                                               |
| **Commission File Number 0-22248** |

 

**ULTRATECH STEPPER, INC.**

(Exact name of registrant asspecified in its charter)

 

| **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 Act of1934 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 May 1, 2003** |
|-------------------------------|--------|-----------------------------------|
| common stock, $.001 par value |   | 22,761,944                        |

 

 

----

 

**ULTRATECHSTEPPER, INC.**

 

**INDEX**

 
| **PART 1.**                       | **FINANCIAL INFORMATION**                                                                                     |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                          |
| **Item 1.**                       | **Condensed Consolidated Financial Statements**                                                               |
|                              |                                                                                                          |
|                              | Condensed Consolidated Balance Sheets as of  March 29, 2003 and December 31, 2002                             |
|                              |                                                                                                          |
|                              | Condensed Consolidated Statements of  Operations for the three months ended March 29, 2003 and March 30, 2002 |
|                              |                                                                                                          |
|                              | Condensed Consolidated Statements of Cash  Flows for the three months ended March 29, 2003 and March 30, 2002 |
|                              |                                                                                                          |
|                              | 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

----

 

**PART 1.****                                                 FINANCIAL  INFORMATION**

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

** **

**ULTRATECHSTEPPER, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| **(In thousands)**                                |   | **Mar.  29,  2003** |        | **Dec. 31,  2002*** |   |
|---------------------------------------------------|--------|--------------------------|-------------|---------------------|--------|
|                                              |   | **(Unaudited)**          |        |                |   |
| ***ASSETS***                                      |   |                     |        |                |   |
|                                              |   |                     |        |                |   |
| Current assets:                                   |   |                     | ** **  |                |   |
| Cash, cash equivalents and short-term investments |   | **$**                    | **157,888** | ** **          | $      | 157,529 |   |
| Accounts receivable, net                          |   | **11,888**               | ** **  | 12,870              |   |
| Inventories                                       |   | **20,941**               | ** **  | 25,182              |   |
| Income taxes receivable                           |   | **—**               | ** **  | 1,179               |   |
| Prepaid expenses and other current assets         |   | **939**                  | ** **  | 1,627               |   |
| Total current assets                              |   | **191,656**              | ** **  | 198,387             |   |
|                                              |   |                     | ** **  |                |   |
| Equipment and leasehold improvements, net         |   | **18,061**               | ** **  | 19,090              |   |
|                                              |   |                     | ** **  |                |   |
| Restricted cash                                   |   | **2,000**                | ** **  | —              |   |
|                                              |   |                     | ** **  |                |   |
| Demonstration inventories, net                    |   | **4,006**                | ** **  | 2,208               |   |
|                                              |   |                     | ** **  |                |   |
| Intangible assets, net                            |   | **762**                  | ** **  | 858                 |   |
|                                              |   |                     | ** **  |                |   |
| Other assets                                      |   | **1,633**                | ** **  | 1,823               |   |
| Total  assets                                |   | **$**                    | **218,118** | ** **          | $      | 222,366 |   |
|                                              |   |                     | ** **  |                |   |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***  |   |                     | ** **  |                |   |
|                                              |   |                     | ** **  |                |   |
| Current liabilities:                              |   |                     | ** **  |                |   |
| Notes payable                                     |   | **$**                    | **9,456**   | ** **          | $      | 9,769 |   |
| Accounts payable                                  |   | **6,278**                | ** **  | 6,719               |   |
| Deferred product and service income               |   | **5,899**                | ** **  | 6,293               |   |
| Deferred license income                           |   | **7,535**                | ** **  | 8,463               |   |
| Other current liabilities                         |   | **13,773**               | ** **  | 14,983              |   |
| Total current liabilities                         |   | **42,941**               | ** **  | 46,227              |   |
|                                              |   |                     | ** **  |                |   |
| Other liabilities                                 |   | **3,992**                | ** **  | 4,385               |   |
|                                              |   |                     | ** **  |                |   |
| Stockholders’ equity:                        |   |                     | ** **  |                |   |
| Common Stock                                      |   | **23**                   | ** **  | 23                  |   |
| Additional paid-in capital                        |   | **198,668**              | ** **  | 198,069             |   |
| Accumulated other comprehensive income, net       |   | **1,699**                | ** **  | 1,884               |   |
| Treasury Stock                                    |   | **(6,867**               | **)**       | (6,867              | )      |
| Accumulated deficit                               |   | **(22,338**              | **)**       | (21,355             | )      |
| Total stockholders’ equity                   |   | **171,185**              | ** **  | 171,754             |   |
| Total liabilities and stockholders’ equity   |   | **$**                    | **218,118** | ** **          | $      | 222,366 |   |

 

----

* The Balance Sheet as of December 31, 2002 has been derived from theaudited financial statements at that date.

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

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**ULTRATECHSTEPPER, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                       |   | **Three  Months Ended** |       |
|------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands, except per share amounts)**               |   | **Mar. 29,  2003**      |       | **Mar. 30,  2002** |   |
| Net sales:                                                 |   |                    |       |   |   |
| Products                                                   |   | **$**                   | **18,636** | ** ** | $ | 14,879 |   |
| Services                                                   |   | **2,436**               | ** ** | 2,445 |   |
| Licenses                                                   |   | **928**                 | ** ** | 2,461 |   |
| Total net sales                                            |   | **22,000**              | ** ** | 19,785 |   |
| Cost of sales:                                             |   |                    | ** ** |   |   |
| Cost of products sold                                      |   | **12,325**              | ** ** | 10,048 |   |
| Cost of services                                           |   | **1,541**               | ** ** | 1,805 |   |
| Total cost of sales                                        |   | **13,866**              | ** ** | 11,853 |   |
| Gross profit                                               |   | **8,134**               | ** ** | 7,932 |   |
|                                                       |   |                    |       |   |   |
| Operating expenses:                                        |   |                    | ** ** |   |   |
| Research, development, and engineering                     |   | **4,591**               | ** ** | 5,828 |   |
| Amortization of intangible assets                          |   | **95**                  | ** ** | 95 |   |
| Selling, general, and administrative                       |   | **5,106**               | ** ** | 6,081 |   |
|                                                       |   |                    | ** ** |   |   |
| Operating loss                                             |   | **(1,658**              | **)**      | (4,072 | ) |
| Interest expense                                           |   | **(66**                 | **)**      | (3 | ) |
| Interest and other income, net                             |   | **1,051**               | ** ** | 1,653 |   |
|                                                       |   |                    | ** ** |   |   |
| Loss before tax                                            |   | **(673**                | **)**      | (2,422 | ) |
| Income taxes                                               |   | **310**                 | ** ** | — |   |
|                                                       |   |                    | ** ** |   |   |
| Net loss                                                   |   | **$**                   | **(983**   | **)** | $ | (2,422 | ) |
|                                                       |   |                    | ** ** |   |   |
| Earnings per share - basic:                                |   |                    | ** ** |   |   |
| Net loss                                                   |   | **$**                   | **(0.04**  | **)** | $ | (0.11 | ) |
| Number of shares used in per share computations -  basic   |   | **22,680**              | ** ** | 22,485 |   |
| Earnings per share - diluted:                              |   |                    | ** ** |   |   |
| Net loss                                                   |   | **$**                   | **(0.04**  | **)** | $ | (0.11 | ) |
| Number of shares used in per share computations -  diluted |   | **22,680**              | ** ** | 22,485 |   |
|                                                            |        |                         |            |  |  |  |  |  |  |

 

*See accompanying notes to condensed consolidated financialstatements*

 

4

----

* *

**ULTRATECHSTEPPER, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                       |   | **Three  Months Ended** |       |
|------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands)**                                         |   | **Mar. 29,  2003**      |       | **Mar. 30,  2002** |   |
|                                                       |   |                    |       |   |   |
| **Cash flows from operating  activities:**                 |   |                    |       |   |   |
| Net loss                                                   |   | **$**                   | **(983**   | **)** | $ | (2,422 | ) |
| Charges to income not affecting cash                       |   | **2,473**               | ** ** | 2,460 |   |
| Net effect of changes in operating assets and  liabilities |   | **1,959**               | ** ** | (6,152 | ) |
| Net cash generated by (used in) operating  activities      |   | **3,449**               | ** ** | (6,114 | ) |
|                                                       |   |                    | ** ** |   |   |
| **Cash flows from investing  activities:**                 |   |                    | ** ** |   |   |
| Capital expenditures                                       |   | **(904**                | **)**      | (550 | ) |
| Net decrease (increase) in available-for-sale  securities  |   | **2,270**               | ** ** | (4,769 | ) |
| Net increase in restricted cash                            |   | **(2,000**              | **)**      | — |   |
| Net cash used in investing activities                      |   | **(634**                | **)**      | (5,319 | ) |
|                                                       |   |                    | ** ** |   |   |
| **Cash flows from financing  activities:**                 |   |                    | ** ** |   |   |
| Net repayment of notes payable                             |   | **(348**                | **)**      | — |   |
| Proceeds from issuance of Common Stock                     |   | **585**                 | ** ** | 1,381 |   |
| Net cash provided by financing activities                  |   | **237**                 | ** ** | 1,381 |   |
|                                                       |   |                    | ** ** |   |   |
| Net effect of exchange rate changes on cash                |   | **(5**                  | **)**      | (66 | ) |
|                                                       |   |                    | ** ** |   |   |
| Net increase (decrease) in cash and cash  equivalents      |   | **3,047**               | ** ** | (10,118 | ) |
|                                                       |   |                    | ** ** |   |   |
| Cash and cash equivalents at beginning of period           |   | **18,178**              | ** ** | 62,729 |   |
|                                                       |   |                    | ** ** |   |   |
| Cash and cash equivalents at end of period                 |   | **$**                   | **21,225** | ** ** | $ | 52,611 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

5

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**UltratechStepper, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

**March 29, 2003**

** **

**(1)  Description of Business**

 

UltratechStepper, Inc. develops, manufactures and markets photolithographyequipment designed to reduce the cost of ownership for manufacturers ofintegrated circuits, including advanced packaging processes and variousnanotechnology components, including thin film head magnetic recording devices.The Company supplies step-and-repeat systems based on one-to-one imagingtechnology to customers located throughout North America, Europe, Japan and therest of Asia.

 

In evaluating its businesssegments, the Company gave consideration to the Chief Executive Officer’sreview of financial information and the organizational structure of theCompany’s management. Based on this review, the Company concluded that, at thepresent time, resources are allocated and other financial decisions are madebased, primarily, on consolidated financial information. Accordingly, theCompany has determined that it operates in one business segment, which is themanufacture and distribution of photolithography equipment to manufacturers ofintegrated circuits and nanotechnology components.

** **

**(2) Summary of Significant Accounting Policies**

 

BASIS OF PRESENTATION -The unaudited condensed consolidated financial statements have been prepared bythe Company in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for fair presentation havebeen included.

 

Operating results for thethree-month period ended March 29, 2003 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2003, or anyfuture 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, restructuring and contingencies and litigation. Managementbases its estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

REVENUE RECOGNITION – TheCompany recognizes revenues on system sales when the contractual obligation forinstallation (if any) has been satisfied, or installation is substantiallycomplete, and/or customer acceptance provisions have lapsed, providedcollections of the related receivable are probable. In the event of a delay inthe installation of our products caused by the customer, we may seek acceptanceof the system and warranty commencement after shipment and transfer of title,but prior to completion of installation. Revenue recorded as a result of thesecustomer acceptances is reduced by an amount representing the fair-value ofinstallation services. In these instances, revenue is recorded only if theproduct has met product specifications prior to shipment and management deemsthat no significant uncertainties as to product performance exist. The Companygenerally recognizes revenue from spare parts sales upon shipment. The Companysells service contracts for which revenue is recognized ratably over thecontract period. The Company recognizes revenue from licensing and technologysupport agreements ratably over the contract period, or the estimated usefullife of the licensed technologies, whichever is shorter.

 

BASIC AND DILUTED NET LOSS PER SHARE - The following sets forth thecomputation of basic and diluted net loss per share:

 

6

----

 
|                                                    |   | **Three  Months Ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|
| **(Unaudited, in thousands, except per share amounts)** |   | **Mar. 29,  2003**      |   | **Mar. 30,  2002** |   |
|                                                    |   |                    |   |   |   |
| Numerator:                                              |   |                    |   |   |   |
| Net loss                                                |   | $                       | (983   | ) | $ | (2,422 | ) |
|                                                    |   |                    |   |   |   |
| Denominator:                                            |   |                    |   |   |   |
| Denominator for basic net loss per share                |   | 22,680                  |   | 22,485 |   |
| Effect of dilutive employee stock options               |   | —                  |   | — |   |
| Denominator for diluted net loss per share              |   | 22,680                  |   | 22,485 |   |
|                                                    |   |                    |   |   |   |
| Earnings per share - basic:                             |   |                    |   |   |   |
| Net loss                                                |   | $                       | (0.04  | ) | $ | (0.11 | ) |
|                                                    |   |                    |   |   |   |
| Earnings per share - diluted:                           |   |                    |   |   |   |
| Net loss                                                |   | $                       | (0.04  | ) | $ | (0.11 | ) |

 

For the three-monthperiod ended March 29, 2003, options to purchase 5,080,000 shares of CommonStock at an average exercise price of $15.84 were excluded from the computationof diluted net loss per share, as the effect would have been anti-dilutive.This compares to the exclusion of 4,673,000 options at an average exercise priceof $16.55 per share for the three-month period ended March 30, 2002. Optionsare anti-dilutive when the Company has a net loss or when the exercise price ofthe stock option is greater than the average market price of the Company’sCommon Stock.

 

STOCK-BASED COMPENSATION- On December 31, 2002, the FASB issued Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure*”*(SFAS 148).  SFAS 148 amendsFASB Statement No. 123, “Accounting for Stock-Based Compensation”, to providealternative methods of transition to the fair value method of accounting forstock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure provisions of Statement 123 to requiredisclosure in the summary of significant accounting policies of the effects ofan entity’s accounting policy with respect to stock-based employee compensationon reported net income and earnings per share in annual and interim financialstatements.  SFAS 148 is effective forfiscal years ending after December 15, 2002, with earlier applicationpermitted.

 

At March 29, 2003, the Company had several stock-based employeecompensation plans, including stock option plans and an employee stock purchaseplan. The Company accounts for these plans under the intrinsic value method. Nostock-based employee compensation cost is reflected in net income (loss), asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. The following tableillustrates the effect on net loss and earnings per share if the Company hadapplied the fair value recognition method.

 
|                                                                                                                                   |   | **Three months ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
| **In thousands, except per share  amounts**                                                                                            |   | **Mar. 29  2003**      |   | **Mar. 30,  2002** |   |
| Net loss as reported                                                                                                                   |   | $                      | (983   | ) | $ | (2,422 | ) |
| Total stock-based  employee compensation expense, determined under fair value based method for  all awards, net of related tax effects |   | $                      | (2,177 | ) | $ | (2,496 | ) |
| Pro forma net loss                                                                                                                     |   | $                      | (3,160 | ) | $ | (4,918 | ) |
|                                                                                                                                   |   |                   |   |   |   |
| Net loss per share -  basic, as reported                                                                                               |   | $                      | (0.04  | ) | $ | (0.11 | ) |
| Pro forma net loss per  share - basic                                                                                                  |   | $                      | (0.14  | ) | $ | (0.23 | ) |
|                                                                                                                                   |   |                   |   |   |   |
| Net loss per share -  diluted, as reported                                                                                             |   | $                      | (0.04  | ) | $ | (0.11 | ) |
| Pro forma net loss per  share - diluted                                                                                                |   | $                      | (0.14  | ) | $ | (0.23 | ) |

 

7

----

 

**(3) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** |   | **Mar. 29,  2003** |   | **Dec. 31,  2002** |   |
|--------------------|--------|--------------------|--------|--------------------|--------|
|               |   | **(Unaudited)**    |   |               |   |
| Raw materials      |   | $                  | 12,375 |               | $      | 12,094 |   |
| Work-in-process    |   | 7,403              |   | 10,289             |   |
| Finished products  |   | 1,163              |   | 2,799              |   |
|               |   | $                  | 20,941 |               | $      | 25,182 |   |

 

**(4) Notes Payable andLetter of Credit**

 

The Company has a line ofcredit agreement with a brokerage firm. Under the terms of this agreement, theCompany may borrow funds at a cost equal to the current Federal funds rate plus100 basis points (2.25% as of March 29, 2003). Certain of the Company’s cash,cash equivalents and short-term investments secure borrowings outstanding underthis facility. Funds are advanced to the Company under this facility based onpre-determined advance rates on the cash and securities held by the Company inthis brokerage account. This agreement has no set expiration date and there areno loan covenants. As of March 29, 2003, $9.0 million was outstanding underthis facility, with a related collateral requirement of approximately $12.9million of the Company’s cash, cash equivalents and short-term investments.Additionally, the Company had short-term borrowings of $0.5 million outstandingunder other credit facilities.

 

Under terms of certain ofthe Company’s leases, the Company has provided a $2.0 million bank letter ofcredit as security to the landlord. In January, in conjunction with this letterof credit, the Company granted a security interest in $2.0 million of theCompany’s cash and cash equivalents. The Company’s use of these funds isrestricted, and they have been segregated on the Company’s balance sheet atMarch 29, 2003.

** **

**(5) Other CurrentLiabilities**

 

Other current liabilities consist of the following:

 
| **(In thousands)**                               |   | **Mar. 29,  2003** |   | **Dec. 31,  2002** |   |
|--------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                             |   | **(Unaudited)**    |   |               |   |
| Salaries and benefits                            |   | $                  | 2,260  |               | $      | 3,247 |   |
| Warranty reserves                                |   | 1,689              |   | 1,462              |   |
| Advance billings                                 |   | 758                |   | 1,024              |   |
| Income taxes payable                             |   | 772                |   | 440                |   |
| Accrued restructuring cost                       |   | 2,179              |   | 2,558              |   |
| Reserve for losses on purchase order commitments |   | 2,116              |   | 2,120              |   |
| Other                                            |   | 3,999              |   | 4,132              |   |
|                                             |   | $                  | 13,773 |               | $      | 14,983 |   |

 

***Warranty reserves***

 

The Company generallywarrants its products for a period of 12 months from the date of customeracceptance for material and labor to repair the product; accordingly, aprovision for the estimated cost of the warranty is recorded at the timerevenue is recognized. Extended warranty terms, if granted, result in deferralof revenue approximating the Company’s standard pricing for similar servicecontracts. The Company estimates the costs that may be incurred under its basiclimited warranty and records a liability in the amount of such costs at thetime the product is shipped. Recognition of the related warranty cost isdeferred until product revenue is recognized. Factors that affect the Company’swarranty liability include

 

8

----

 

the number of installedunits, historical and anticipated rates of warranty claims, and cost per claim.The Company periodically assesses the adequacy of its recorded warrantyliabilities and adjusts the amounts as necessary.

 

Changes in the Company’sproduct liability are as follows:

 
|                                |   | **Three  months ended** |   |
|-------------------------------------|--------|-------------------------|--------|
| **In thousands**                    |   | **Mar. 29,  2003**      |   | **Mar. 30,  2002** |   |
| Balance, beginning of the period    |   | $                       | 1,462  |   | $ | 1,895 |   |
| Warranties issued during the period |   | 911                     |   | 636 |   |
| Settlements made during the period  |   | (684                    | )      | (850 | ) |
| Balance, end of the period          |   | $                       | 1,689  |   | $ | 1,681 |   |

 

**(6) Deferred Rent**

 

In 2002, in conjunctionwith a $3.2 million sale/leaseback transaction, the Company recorded a deferredrent credit equal to the excess of the sale proceeds over the adjusted basis inthe equipment sold. During the three-year term of this agreement, the deferredrent credit will be amortized as an offset to rental expense. At March 29,2003, credits of $0.7 million and $0.8 million representing the short-term andlong-term portions of deferred rent, respectively, were carried as liabilitieson the Company’s condensed consolidated balance sheets.

 

For the three month period ended December 31, 2002, as part of theCompany’s review of its lease commitments, certain matters were identifiedrelated to prior financial reporting periods that necessitated the recording ofadditional expenses. Such matters were related to (i) the extension of theCompany’s lease of its headquarters building in November 1999 and (ii) thelease of an additional building in March 2000. The Company does not believethese amounts are material to the periods in which they should have beenrecorded. Had this adjustment been recorded in the proper periods, the impactfor the three-month period ended March 30, 2002 would be an increase to the netloss of $0.1 million ($0.01 per share).

** **

**(7)****ReportingComprehensive Loss**

 

The components of comprehensive loss are as follows:

 
|                                                    |   | **Three  Months Ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|
| **(Unaudited, in thousands, except per share amounts)** |   | **Mar. 29,  2003**      |   | **Mar. 30,  2002** |   |
|                                                    |   |                    |   |   |   |
| Numerator:                                              |   |                    |   |   |   |
| Net loss                                                |   | $                       | (983   | ) | $ | (2,422 | ) |
|                                                    |   |                    |   |   |   |
| Denominator:                                            |   |                    |   |   |   |
| Denominator for basic net loss per share                |   | 22,680                  |   | 22,485 |   |
| Effect of dilutive employee stock options               |   | —                  |   | — |   |
| Denominator for diluted net loss per share              |   | 22,680                  |   | 22,485 |   |
|                                                    |   |                    |   |   |   |
| Earnings per share - basic:                             |   |                    |   |   |   |
| Net loss                                                |   | $                       | (0.04  | ) | $ | (0.11 | ) |
|                                                    |   |                    |   |   |   |
| Earnings per share - diluted:                           |   |                    |   |   |   |
| Net loss                                                |   | $                       | (0.04  | ) | $ | (0.11 | ) |

 

9

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Accumulated other comprehensive income presented in the accompanyingcondensed consolidated balance sheets consists entirely of accumulatedunrealized gains or losses on available-for-sale securities and the effect ofexchange rate changes on foreign exchange forward contracts. The unrealizedgain on available-for-sale securities is not currently adjusted for incometaxes, as a result of the Company’s operating loss carry forward.

 

Accumulated other comprehensive income consists of the following:

 
| **In thousands:**                                               |   | **Mar. 29,  2003** |   | **Dec. 31,  2002** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| Unrealized gains (losses) on:                                   |   |               |   |               |   |
| Available-for-sale investments                                  |   | $                  | 1,723  |               | $      | 1,903 |   |
| Foreign exchange contracts                                      |   | (24                | )      | (19                | )      |
| Accumulated other comprehensive income (loss) at  end of period |   | $                  | 1,699  |               | $      | 1,884 |   |

 

**(8) Restructure ofOperations**

 

In September 2002, inresponse to worsening conditions in the semiconductor industry in particular,and the general economy as a whole, the Company decided to reduce its workforceby approximately 15% and to cease or suspend activities related to certainengineering and administrative initiatives. As a result of this decision, theCompany recognized a restructuring charge of $4.3 million, or $0.19 per share forthe three-month period ended September 30, 2002. The Company reduced thischarge by $0.2 million during the three-month period ended December 31, 2002,primarily as a result of canceling its plans to exit a certain building and anadjustment of its international severance costs. Of the total net charge forthe year ended December 31, 2002 of $4.1 million, the cash component includedemployee severance costs of $0.9 million, contract termination fees of $0.2million and facility closure costs of $0.1 million. The non-cash component ofthis charge included $2.5 million of impairment to the carrying value ofequipment and leasehold improvements and $0.3 million of impairment to prepaidexpenses and other current assets.

 

As of March 29, 2003, theaccrued but unpaid amount of these restructuring costs was $0.2 million. Cashcomponents of accrued restructuring costs as of March 29, 2003, and amountscharged against the plan for the three-month period then ended, relative to theSeptember 2002 restructure of operations, were as follows:

 
| **(in millions)**        |   | **Balance at  Dec. 31,  2002** |   | **Expenditures** |   | **Balance at  Mar. 29,  2003** |   |
|--------------------------|--------|--------------------------------|--------|------------------|--------|--------------------------------|--------|
|                     |   |                           |   |             |   |                           |   |
| Facility closure costs   |   | $                              | 0.1    |             | $      | (0.1                           | )      | $ | — |   |
| Employee severance costs |   | 0.1                            |   | (0.1             | )      | —                         |   |
| Other costs              |   | 0.2                            |   | —           |   | 0.2                            |   |
| Total                    |   | $                              | 0.4    |             | $      | (0.2                           | )      | $ | 0.2 |   |

 

In September 2001, theCompany reached a decision to consolidate its manufacturing operations andeliminate approximately 20% of its workforce. As a result of this decision, theCompany recognized a restructuring charge of $12.0 million, or $0.54 per share(diluted) in the quarter ended September 30, 2001. Additionally, the Companyrecognized restructuring charges of $0.3 million, or $0.01 per share (diluted)in the quarter ended December 31, 2001, primarily related to employee severancecosts of $0.6 million (from additional personnel actions) and higher fixedasset disposal costs of $0.4 million, partially offset by revised facilityclosure and other cost estimates of $0.7 million. Of the full-year charge of$12.3 million, non-cash components included a $4.1 million impairment chargefor intangible assets related to the Company’s XLS reduction product platformacquired in 1998 and a $1.5 million impairment charge for fixed assets disposedof in conjunction with the consolidation of manufacturing facilities. The cashcomponents of this charge included $4.0 million for estimated expendituresrelated to the closure of facilities, $2.5 million for

 

10

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employee severance costsand $0.1 million of other restructuring costs. As of March 29, 2003, the amountof restructuring costs accrued but unpaid was $2.0 million.

 

Cash components ofaccrued restructuring costs as of March 29, 2003, and amounts charged againstthe plan for the three-month period then ended, relative to the September 2001restructure of operations, were as follows:

 
| **(in millions)**        |   | **Balance at  Dec. 31,  2002** |   | **Expenditures** |   | **Balance at  Mar. 29,  2003** |   |
|--------------------------|--------|--------------------------------|--------|------------------|--------|--------------------------------|--------|
|                     |   |                           |   |             |   |                           |   |
| Employee severance costs |   | $                              | — |             | $      | —                         |   | $ | — |   |
| Facility closure costs   |   | 2.2                            |   | (0.2             | )      | 2.0                            |   |
| Other costs              |   | —                         |   | —           |   | —                         |   |
| Total                    |   | $                              | 2.2    |             | $      | (0.2                           | )      | $ | 2.0 |   |

 

**(9) Recent AccountingPronouncements**

 

In November 2002, the Emerging Task Force issued EITF 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21addresses how to account for arrangements that may involve delivery orperformance of multiple products, services and/or rights to use assets, andwhen and, if so, how an arrangement involving multiple deliverables should bedivided into separate units of accounting. It does not change otherwise applicable revenue recognition criteria. Itapplies to arrangements entered into in fiscal periods beginning after June 15,2003, with early adoption permitted. The Company has not yet determined theimpact of the adoption of EITF 00-21 on its results of operations or financialposition.

 

11

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| **Item 2.** |   | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations** |
|-------------|--------|-------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

 

Certain of the statementscontained herein may be considered forward-looking statements under Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, that involve a number of risks anduncertainties, such as cyclicality in the Company’s served markets, includingthe current severe downturn in the semiconductor industry; delays, deferralsand cancellations of orders by customers; expiration of technology support andlicensing arrangements, and the resulting adverse impact on the Company’slicensing revenues; timing and degree of success of technologies licensed tooutside parties; product concentration and lack of product revenuediversification; high degree of industry competition; lengthy developmentcycles for advanced lithography technologies and applications; mix of productssold; lengthy sales cycles, including the timing of system acceptances;inventory obsolescence; asset impairment; manufacturing inefficiencies and theability to volume produce systems; integration and development of laser thermalprocessing operations; the ability and resulting costs to attract or retainsufficient personnel to achieve the Company’s targets for a particular period;sole or limited sources of supply; international sales; customer concentration,rapid technological change and the importance of timely product introductions;future acquisitions; changes to financial accounting standards; intellectualproperty matters; environmental regulations; effects of certain anti-takeoverprovisions; volatility of stock price; 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. Such risks and uncertainties aredescribed in the Company’s filings with the SEC, including the company’s AnnualReport on Form 10-K for the year ended December 31, 2002.  In addition, the recent outbreak of SevereAcute Respiratory Syndrome (SARS) may have an adverse affect on businessactivities, particularly in Asia, which could adversely affect the company’sbusiness.

 

Due to these andadditional factors, certain statements, historical results and percentagerelationships discussed below are not necessarily indicative of the results ofoperations for any future period.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The Company’s discussionand analysis of its financial condition and results of operations are basedupon the Company’s consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these consolidated financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements. By their nature, these estimates and judgments are subject to aninherent degree of uncertainty. On an on-going basis, the Company evaluates itsestimates, including those related to inventories, warranty obligations,purchase order commitments, bad debts, income taxes, intangible assets,restructuring and contingencies and litigation. Management bases its estimatesand judgments on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.The Company has reviewed these policies with its Audit Committee.

** **

**Revenue Recognition**

 

The Company recognizesproduct revenue when the contractual obligation for installation (if any) hasbeen satisfied, or installation is substantially complete, and/or customeracceptance provisions have lapsed, provided collections of the relatedreceivable are probable. In the event of a delay in the installation of ourproducts caused by the customer, we may seek acceptance of the system andwarranty commencement after

 

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shipment and transfer oftitle, but prior to completion of installation. Revenue recorded as a result ofthese customer acceptances is reduced by an amount representing the fair-valueof installation services. In these instances, revenue is recorded only if theproduct has met product specifications prior to shipment and management deemsthat no significant uncertainties as to product performance exist. Costsincurred for shipping and handling are included in cost of sales.

 

Revenue from spare partssales is generally recognized upon shipment. Deferred income related to servicerevenue is recognized ratably over the life of the related service contract.Deferred income relative to the Company’s licensing activities is recognizedover the estimated useful life of the licensed technologies, or the contractperiod of any technology transfer support arrangements.

** **

**Inventories and Purchase Order Commitments**

 

The Company estimates andreserves for the effects on inventory and purchase order commitments ofobsolescence and unrealizable carrying values based upon estimates of futuredemand for its products and market conditions. With the exception of certainlong lead-time items, principally optical components, the Company presentlyrecords reserves for inventories and purchase order commitments in excess of 18months of production demand. Due to the cyclical nature of the Company’sbusiness, during periods of peak demand, the Company has shortened thisproduction outlook to 12 months of production demand. Had the Company used a12-month production demand horizon as of March 29, 2003, additional inventoryand purchase order commitment reserves of $0.1 million would be required.Should actual production demand differ from management’s estimates, revisionsto inventory write-downs and purchase order commitment reserves would berequired.

** **

**Warranty Obligations**

 

The Company provides forthe estimated cost of its product warranties at the time revenue is recognized.The Company’s warranty obligation is affected by product failure rates,material usage rates and the efficiency by which the product failure iscorrected. Should actual product failure rates, material usage rates and laborefficiencies differ from the Company’s estimates, revisions to the estimatedwarranty liability would be required.

** **

**Bad Debt**

 

The Company maintains anallowance for estimated losses resulting from the inability of its customers tomake required payments. If the financial condition of the Company’s customerswere to deteriorate, or even a single customer was otherwise unable to makepayments, additional allowances may be required. The average selling price ofthe Company’s systems is in excess of $1.5 million. Accordingly, a singlecustomer default could have a material adverse effect on the Company’s resultsof operations.

** **

**Deferred Taxes**

 

The Company records avaluation allowance to reduce its deferred tax assets to the amount that ismore likely than not to be realized. Based on the uncertainty of future pre-taxincome, the Company has presently fully reserved its deferred tax assets. Inthe event the Company was to determine that it would be able to realize itsdeferred tax assets in the future, an adjustment to the deferred tax assetvaluation reserve would increase income in the period such determination wasmade.

 

The following discussionshould be read in conjunction with the Company’s 2002 Annual Report on Form10-K, which is available from the Company upon request.

** **

**RESULTS OF OPERATIONS**

 

Factors that have causedresults to fluctuate significantly in the past and most likely will continue tosignificantly impact results in the future, and could cause actual results todiffer materially, include the following: cyclicality in the Company’s servedmarkets, including the current severe downturn in the semiconductor andnanotechnology industries; delays, deferrals and cancellations of orders bycustomers; customer concentration; high degree of industry competition; marketacceptance of new products and enhanced versions of the Company’s existingproducts; lengthy and costly development cycles for lithography and laserthermal processing technologies and applications; integration and developmentof Verdant operations; mix of products sold; timing of new productannouncements and releases by the Company or its competitors; expiration oftechnology support and licensing arrangements, and the resulting

 

 

13

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adverse impact on theCompany’s licensing revenues; product discounts; changes in pricing by theCompany, its competitors or suppliers; timing and degree of success oftechnologies licensed to outside parties; product concentration and lack ofproduct revenue diversification; outcome of litigation; lengthy sales andmanufacturing cycles and the pattern of capital spending by customers,including the timing of system acceptances; inventory obsolescence; manufacturinginefficiencies and the ability to volume produce systems; the ability andresulting costs to attract or retain sufficient personnel to achieve theCompany’s targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon theCompany attaining profitability and the market price of the Company’s stock;sole or limited sources of supply; international sales; rapid technologicalchange and the importance of timely product introductions; future acquisitions;changes to financial accounting standards; intellectual property matters;environmental regulations; any adverse effects of worldwide terrorist attackson the economy in general or on our business in particular; political andeconomic instability throughout the world; business interruptions due tonatural disasters or utility failures; and regulatory changes; and the otherrisk factors listed in this filing and other Company filings with the SEC. Inaddition, the recent outbreak of SARS may have an adverse affect on businessactivities, particularly in Asia, which could adversely affect the Company’sbusiness. The Company undertakes no obligation to update any of its disclosuresto reflect such future events.

 

The Company derives asubstantial portion of its total net sales from sales of a relatively smallnumber of newly manufactured systems, which typically range in price from$900,000 to $3.6 million for the Company’s 1X steppers. As a result of thesehigh sale prices, the timing and recognition of revenue from a singletransaction has had and most likely will continue to have a significant impacton the Company’s net sales and operating results for any particular period.

 

The Company’s backlog atthe beginning of a period typically does not include all of the sales needed toachieve the Company’s sales objectives for that period. In addition, orders inbacklog are subject to cancellation, shipment or customer acceptance delays,and deferral or rescheduling by a customer with limited or no penalties.Consequently, the Company’s net sales and operating results for a period havebeen and will continue to be dependent upon the Company obtaining orders forsystems to be shipped and accepted in the same period in which the order isreceived. The Company’s business and financial results for a particular periodcould be materially adversely affected if an anticipated order for even onesystem is not received in time to permit shipment and customer acceptanceduring that period. Furthermore, a substantial portion of the Company’sshipments has historically been realized near the end of each quarter. Delaysin installation and customer acceptance due, for example, to the inability ofthe Company to successfully demonstrate the agreed-upon specifications orcriteria at the customer’s facility, or to the failure of the customer topermit installation of the system in the agreed upon time, may cause net salesin a particular period to fall significantly below the Company’s expectations,which may materially adversely affect the Company’s operating results for thatperiod. 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 or otherwise, have caused and may continue to causenet sales in a particular period to fall significantly below the Company’sexpectations, materially adversely affecting the Company’s operating resultsfor that period. In particular, the long manufacturing cycles of the Company’sSaturn Spectrum family of wafer steppers, laser thermal processing systems and thelong lead time for lenses and other materials, could cause shipments of suchproducts to be delayed from one quarter to the next, which could materiallyadversely affect the Company’s financial condition and results of operationsfor a particular quarter.

 

Additionally, the need for continued expenditures forresearch and development, capital equipment, ongoing training and worldwidecustomer service and support, among other factors, will make it difficult forthe Company to reduce its operating expenses in a particular period if theCompany fails to achieve its net sales goals for the period.

 

**Net sales**

 

Net sales consist ofrevenues from system sales, spare parts sales, service and licensing oftechnologies. For the three months ended March 29, 2003, net sales were $22.0million, an increase of 11% as compared with $19.8 million for the comparableperiod in 2002. System sales, a component of product sales, increased

 

14

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26%, to $15.9 million, ona unit volume increase of 29%. The weighted-average selling prices of systemssold increased 15%, due primarily to a lower proportion of refurbished systemssold in the three months ended March 29, 2003, as compared to the comparableperiod in 2002. Geographically, the increase in unit volumes was attributableto a 400% increase in Japan, driven by demand for bump processing andnanotechnology tools. On a market segment basis, the increase in unit volumeswas primarily attributable to demand from bump processing customers. TheCompany believes that a significant portion of its system sales will continueto be derived from bump processing customers, including bump-processingcustomers from Japan.

 

Spare part sales, acomponent of product sales, increased 22%, to $2.8 million for the three monthsended March 29, 2003, as compared to $2.3 million in the comparable period in2002. This increase was primarily attributable to certain system upgrades, andto the timing of certain spare parts shipments.

 

Revenues from serviceswere $2.4 million for the three months ended March 29, 2003, essentiallyunchanged from the comparable period in 2002.

 

Revenues from licensingand licensing support arrangements declined to $0.9 million for the threemonths ended March 29, 2003, as compared with $2.5 million for the comparableperiod in 2002. This decline was a result of the expiration of a largetechnology support agreement in February 2002. The Company presentlyanticipates that revenues from licensing and licensing support arrangementswill be approximately $0.9 million per quarter for the remainder of 2003.

 

At March 29, 2003, theCompany had approximately $9.7 million of deferred revenue resulting fromproducts shipped but not yet installed and accepted, as compared with $10.5million at December 31, 2002. Deferred product and services income, whichrepresents deferred revenue less related manufacturing and warranty costs,decreased approximately $0.4 million. During the three months ended March 29,2003, deferred license income decreased by $0.9 million, to $7.5 million, as aresult of amortization of proceeds received in prior periods.

 

Deferred income relatedto the Company’s products is recognized upon satisfying the contractualobligations for installation (if any) and/or customer acceptance. Deferredincome related to service revenue is recognized over the life of the relatedservice contract. Deferred income relative to the Company’s licensingactivities is recognized over the estimated useful life of the licensedtechnologies, or the period of any technology transfer support arrangements.Amortization of license income results in current period license revenue.

 

On a product marketapplication basis, system sales to the semiconductor industry were $12.3million for the three months ended March 29, 2003, an increase of 8% ascompared with system sales of $11.3 million for the comparable period in 2002.This increase was due primarily to a 49% increase in demand from bumpprocessing customers. System sales to the nanotechnology market were $3.6million for the three months ended March 29, 2003, an increase of 183% ascompared with system sales of $1.3 million for the comparable period in 2002,primarily as a result of increased demand from optical device customers.

 

For the three monthsended March 29, 2003, international net sales were $12.6 million, or 57% oftotal net sales, as compared with $7.4 million, or 37% of total net sales forthe comparable period in 2002. The Company’s operations in foreign countriesare not generally subject to significant exchange rate fluctuations,principally because sales contracts for the Company’s systems are generallydenominated in U.S. dollars. In Japan, however, orders are often denominated inJapanese yen. This subjects the Company to the risk of currency fluctuations.The Company attempts to mitigate this exposure through the use of foreignexchange contracts; however, there can be no assurance of the success of anysuch efforts. International sales expose the Company to a number of additionalrisks, including fluctuations in the value of local currencies relative to theU.S. dollar, which, in turn, impact the relative cost of ownership of theCompany’s products. (See “Additional Risk Factors: International Sales”).

 

The anticipated timing ofshipments and customer acceptances will require the Company to fill a number ofproduction slots in the current and subsequent quarters in order to meet itsnear-term sales targets. If the Company is unsuccessful in its efforts tosecure those production orders, or if existing production orders are delayed orcancelled, its results of operations will be materially adversely impacted inthe near-term. Accordingly, the Company can give no assurance that it will beable to achieve or maintain its current or prior level of sales.

 

15

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Our served markets havebeen and are presently experiencing severe downturns due, in part, to themacro-economic conditions facing the U.S. and world economies. The Companyexpects that net sales for the quarter ending June 28, 2003 may be higher thannet sales for the comparable period in 2002. However, the present SARS outbreakin Asia may have an adverse impact on the Company’s sales for the period endingJune 28, 2003, as the Company has put in place travel restrictions effectivefor certain geographic areas. These travel restrictions, in turn, could resultin delays in the installation and/or acceptance of the Company’s systems. TheCompany anticipates that it will experience an operating loss, and mayexperience a net loss, for the three-month period ending June 28, 2003.

 

The Company experiencedweakness in its business during the three-month period ended September 30,2002, as system revenue levels were significantly below that of the precedingand successive periods. The Company believes this weakness may have beenseasonal. The Company’s present sales goal for the three-month period endingSeptember 30, 2003 requires that a substantial number of new system orders,with near-term delivery dates, be obtained. The Company’s business has, inprior years, been subject to seasonality, although the Company believes suchseasonality had been masked in more recent years by strong cyclical trendswithin the semiconductor and nanotechnology industries.

 

Should declines in theCompany’s outlook for 2003 and 2004 occur, the Company may be required to takeadditional steps to reduce its future operating expenses and may also berequired to increase its inventory and purchase order commitment reservepositions. These actions, if required, would materially adversely impact theCompany’s financial condition and results of operations.

 

Because the Company’s netsales are subject to a number of risks, including intense competition in thecapital equipment industry, uncertainty relating to the timing and marketacceptance of the Company’s products and the condition of the macro-economy andthe semiconductor industry, the Company may not exceed or maintain its currentor prior level of net sales for any period in the future. Additionally, theCompany believes that the market acceptance and volume production of its SaturnSpectrum 3e, its 300mm offerings, its laser thermal processingsystems and its 1000 series family of wafer steppers, are of critical importanceto its future financial results. To the extent that these products do notachieve significant sales due to difficulties involving manufacturing orengineering, the inability to reduce the current long manufacturing cycles forthese products, competition, excess capacity in the semiconductor ornanotechnology device industries, customer acceptances, or any other reason,the Company’s business, financial condition and results of operations would bematerially adversely affected.

** **

**Gross profit**

 

The Company’s grossprofit as a percentage of net sales, or gross margin, was 37.0% for the threemonths ended March 29, 2003, as compared with 40.1% for the comparable periodin 2002. On a comparative basis, gross margins were adversely affected by lowerlicensing revenues, which have no related cost of sales, partially offset bycost savings associated with the Company’s restructuring of operations inSeptember 2002 and the favorable impact of fewer refurbished system sales inthe current period. Exclusive of licensing and licensing support revenues,gross margin was 34.2% for the three-month period ended March 29, 2003, ascompared with 31.6% for the comparable period in 2002.

 

The Company’s grossprofit as a percentage of sales has been and most likely will continue to besignificantly affected by a variety of factors, including the mix of productssold; inventory and open purchase commitment reserve provisions; the rate ofcapacity utilization; product discounts and competition in the Company’stargeted markets; technology support and licensing revenues, which have little,if any, associated cost of sales; non-linearity of shipments during thequarter; the introduction of new products, which typically have highermanufacturing costs until manufacturing efficiencies are realized and which aretypically discounted more than existing products until the products gain marketacceptance; the percentage of international sales, which typically have lowergross margins than domestic sales principally due to higher field service andsupport costs; and the implementation of subcontracting arrangements.

 

The Company believes thatgross margin for the quarter ending June 28, 2003 may be higher, as compared tothe comparable period in 2002. Should the Company’s business outlook decline;the Company might incur a higher risk of inventory obsolescence and excesspurchase commitments, which would materially adversely impact results ofoperations. Additionally, increased price-based competition may continue tocontribute to further erosion of gross margin.

 

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New products generallyhave lower gross margins until there is widespread market acceptance and untilproduction and after-sales efficiencies can be achieved. Should significant marketdemand fail to develop for the Company’s 300mm offerings, its Saturn Spectrum 3eor the Verdant laser thermal processing system, the Company’s business,financial condition and results of operations would be materially adverselyaffected.

** **

**Research, development and engineering expenses**

 

The Company’s research,development, and engineering expenses were $4.6 million for the three monthsended March 29, 2003, as compared to $5.8 million for the comparable period in2002. The year-over-year decline in spending was primarily attributable to thediscontinuance of the Company’s advanced reduction stepper platforms and toother cost reduction measures implemented in the second half of 2002.

 

The Company continues toinvest significant resources in the development and enhancement of its laserthermal processing systems and technologies, and its 1X optical products andrelated technologies. The Company presently expects that, as a result of theCompany’s restructuring of operations in September 2002, the absolute dollaramount of research, development and engineering expenses for the quarter endingJune 28, 2003 will be lower than expenses incurred for the comparable period in2002. However, research, development and engineering expenses for the quarterending June 28, 2003 are expected to increase significantly, as compared to thequarter ended March 29, 2003, primarily as a result of increased spending onlaser thermal processing technologies and applications.

** **

**Amortization of intangible assets**

 

Amortization ofintangible assets was $0.1 million for the three-month periods ended March 29,2003 and March 30, 2002.

** **

**Selling, general and administrative expenses**

 

Selling, general, andadministrative expenses were $5.1 million for the three-month period endedMarch 29, 2003, as compared with $6.1 million for the comparable period in2002. As a percentage of net sales, selling, general, and administrativeexpenses decreased to 23.2%, as compared with 30.7% in the year-ago period. Theyear-over-year decline, in absolute dollars and as a percentage of net sales,was primarily attributable to cost containment measures implemented in thesecond half of 2002.

 

The Company presentlyanticipates that selling, general and administrative expenses for thethree-month period ending June 28, 2003 will be lower than the comparableperiod in 2002, due primarily to the Company’s restructuring of operations inSeptember 2002, but may be higher than levels incurred for the three monthsended March 29, 2003.

** **

**Interest and other income, net**

 

Interest and otherincome, net, which consists primarily of interest income, was $1.1 million forthe three months ended March 29, 2003, as compared with $1.7 million for thecomparable period in 2002. The decrease, relative to the comparable 2002 period,was primarily attributable to significantly lower interest rates on theCompany’s investments and lower average invested balances.

 

The Company presentlymaintains an investment portfolio with a weighted-average maturity of less thanone year. Consequently, changes in short-term interest rates have a majorimpact on the Company’s interest income. Future changes are expected to have asimilar impact. The Company presently expects that interest and other income,net, for the three-month period ending June 28, 2003, will be significantlylower than levels achieved in the comparable period in 2002, primarily as aresult of lower interest rates and lower invested balances, and will also belower than levels achieved for the three-month period ended March 29, 2003.

** **

**Income tax expense**

 

For the three monthsended March 29, 2003, the Company recorded an income tax provision of $0.3million. This provision is primarily related to taxable income in Japan, forwhich there is no corresponding net operating loss carry-forward benefit. TheCompany did not recognize a tax benefit for the three-month period ended March30, 2002, and did not recognize a domestic tax benefit for the three-monthperiod ended March 29, 2003, due to uncertainty related to the utilization of itsfederal net operating loss carry-forward.

 

17

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The Company anticipatesthat it will recognize income tax expense during the remainder of 2003,primarily as a result of foreign income taxes. However, the Company believesthat the tax rate in 2003 will be substantially less than the statutory rate,primarily as a result of available federal net operating loss carry-forwards.

 

Incometaxes can be affected by estimates of whether, and within which jurisdictions,future earnings will occur and how and when cash is repatriated to the UnitedStates, combined with other aspects of an overall income tax strategy.Additionally, taxing jurisdictions could retroactively disagree with theCompany’s tax treatment of certain items, and some historical transactions haveincome tax effects going forward. Accounting rules require these future effectsto be evaluated using current laws, rules and regulations, each of which canchange at any time and in an unpredictable manner. The Company believes it hasadequately provided for any reasonably foreseeable outcome related to thesematters, and it does not anticipate any material earnings impact from theirultimate resolutions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Net cash generated byoperating activities was $3.4 million for the three months ended March 29,2003, as compared with net cash used in operations of $6.1 million for thecomparable period in 2002. Net cash generated by operating activities duringthe first three months of 2003 was primarily attributable to non-cash chargesto income of $2.5 million and a net change in operating assets and liabilitiesof $2.0 million, partially offset by the Company’s net loss for the period of$1.0 million. The $2.0 million net change in operating assets and liabilitieswas primarily a result of a decline in inventories of $4.2 million, a declinein income taxes receivable of $1.2 million and a decline in accounts receivableof $1.0 million, partially offset by an increase in demonstration inventoriesof $2.0 million, a decrease in accrued salary and benefit costs of $1.0 millionand a decrease in deferred licensing revenue of $0.9 million.

 

The Company believes thatbecause of the relatively long manufacturing cycle of certain of its systems, particularlynewer products, the Company’s inventories will continue to represent asignificant portion of working capital. Currently, the Company is devotingsignificant resources to the development, introduction and commercialization ofits Verdant laser thermal processing system and to the volume production of itsSaturn Spectrum 3e and 300mm wafer steppers. The Company currentlyintends to continue to develop these products and technologies during theremainder of 2003, and will continue to incur significant operating expenses inthe areas of research, development and engineering, manufacturing and generaland administrative costs in order to further develop, produce and support thesenew products. Additionally, gross profit margins, inventory and capitalequipment levels may be further adversely impacted in the future by costsassociated with the initial production of the Verdant laser thermal processingsystem and by future generations of the Company’s Saturn Spectrum 3eand 300mm wafer steppers. These costs include, but are not limited to,additional manufacturing overhead, costs of demonstration systems andfacilities, costs associated with managing multiple sites and the establishmentof additional after-sales support organizations. Additionally, there can be noassurance that operating expenses will not increase, relative to sales, as aresult of adding additional marketing and administrative personnel, among othercosts, to support the Company’s new products. If the Company is unable toachieve significantly increased net sales or if its sales fall belowexpectations, the Company’s cash flow and operating results will be materiallyadversely affected until, among other factors, costs and expenses can bereduced. The failure of the Company to achieve its sales targets for these newproducts could result in additional inventory write-offs and asset impairmentcharges, either of which could materially adversely impact the Company’sresults of operations.

 

The semiconductor andnanotechnology industries have been and are presently experiencing a severedownturn due, in part, to macro-economic conditions facing the U.S. and worldeconomies. As a result, the Company has experienced significantly lower orderrates for its systems and this trend may continue in the near-term. Prolongedweakness in the Company’s business would continue to place the Company’sinventories at a greater risk of obsolescence. Lower demand for the Company’ssystems may continue to lead to additional inventory write-offs and purchase commitmentreserves, which would materially adversely impact the Company’s results ofoperations. Additionally, worsening business conditions would increase thelikelihood of further restructuring of operations and impairments to theCompany’s assets, either of which would have a material adverse impact onresults of operations.

 

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During the three monthsended March 29, 2003, net cash used in investing activities was $0.6 million,attributable to the designation of $2.0 million as restricted cash and capitalexpenditures of $0.9 million, partially offset by a net decrease inavailable-for-sale securities of $2.3 million. The requirement for restrictedcash results from contractual provisions of a lease for certain of theCompany’s facilities. This contractual commitment had previously been metthrough an unsecured letter of credit provided by a bank.

 

Net cash provided byfinancing activities was $0.2 million during the three-month period ended March29, 2003, attributable to $0.6 million in proceeds received from the issuanceof Common Stock under the Company’s employee stock purchase plan and itsemployee stock option plans, partially offset by repayment of notes payable of$0.3 million.

 

At March 29, 2003, theCompany had working capital of $148.7 million. The Company’s principal sourceof liquidity at March 29, 2003 consisted of $157.9 million in cash, cashequivalents and short-term investments.

 

The Company hasapproximately $6.9 million of retained earnings in its foreign subsidiaries.Possible adverse tax consequences associated with repatriating these funds mayeffectively restrict their use to cash requirements in those specificjurisdictions.

 

During 2002, the Companyreceived proceeds of $3.2 million in conjunction with a sale/leasebacktransaction. To provide additional security to the lessor, the Company granteda security interest in certain of its other equipment having a net book valueof approximately $1.2 million at March 29, 2003. The Company recorded adeferred rent credit equal to the excess of the sale proceeds over the adjustedbasis in the equipment sold. During the three-year term of this agreement, thedeferred rent credit will be amortized as an offset to rental expense. At March29, 2003, credits of $0.7 million and $0.8 million representing the short-termand long-term portions of deferred rent, respectively, were carried asliabilities on the Company’s balance sheet.

 

In September 2002, theCompany entered into a line of credit agreement with a brokerage firm. Underthe terms of this agreement, the Company may borrow funds at a cost equal tothe current Federal funds rate plus 100 basis points (2.25% as of March 29,2003). Certain of the Company’s cash, cash equivalents and short-term investmentssecure borrowings outstanding under this facility. Funds are advanced to theCompany under this facility based on pre-determined advance rates on the cashand securities held by the Company in this brokerage account. This agreementhas no set expiration date and there are no loan covenants. As of March 29,2003, $9.0 million was outstanding under this facility, with a relatedcollateral requirement of approximately $12.9 million of the Company’s cash,cash equivalents and short-term investments. Additionally, the Company hadshort-term borrowings of $0.5 million outstanding under other creditfacilities.

 

In January 2003, theCompany’s Board of Directors authorized the purchase of up to 5.0 millionshares of the Company’s Common Stock at prevailing market prices. As of May 1,2003, the Company had not elected to repurchase shares under this arrangement.Should the Company decide to acquire its own shares in the open market,potentially large amounts of the Company’s cash, cash equivalents and short-terminvestments would be required.

 

The Company’s off-balancesheet transactions consist of certain financial guarantees, both expressed andimplied, related to product liability, infringement of intellectual propertyand latent product defects. Other than liabilities recorded pursuant to knownproduct defects, at March 29, 2003, the Company did not record a liabilityassociated with these guarantees, as the Company has little or no history ofcosts associated with such indemnification requirements.

 

The following summarizesthe Company’s contractual obligations at March 29, 2003, and the effect suchobligations are expected to have on its liquidity and cash flows in futureperiods:

 
| **(in  millions)**                                      |   | **Total** |   | **Less than  1 year** |   | **1-3 years** |   | **After  3 years** |   |
|---------------------------------------------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|--------------------|--------|
| Notes payable obligations                               |   | $         | 9.3    |                  | $      | 9.3           |   | $                  | — |   | $ | — |   |
| Non-cancelable capitalized lease obligations            |   | 0.2       |   | 0.2                   |   | —        |   | —             |   |
| Non-cancelable operating lease obligations -  equipment |   | 2.7       |   | 1.2                   |   | 1.5           |   | —             |   |
| Non-cancelable operating lease obligations -  buildings |   | 31.1      |   | 3.6                   |   | 7.9           |   | 19.6               |   |
| Long-term vendor accounts payable                       |   | 1.1       |   | 0.7                   |   | 0.4           |   | —             |   |
| Total contractual cash obligations                      |   | $         | 44.4   |                  | $      | 15.0          |   | $                  | 9.8    |   | $ | 19.6 |   |

 

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At March 29, 2003, theCompany had open purchase order commitments of approximately $19 million,primarily related to the purchase of inventories, equipment and leaseholdimprovements. The Company records reserves for purchase order commitments itdeems in excess of normal operating requirements (see “Critical AccountingPolicies and Estimates”).

 

The development andmanufacture of new lithography systems and enhancements are highlycapital-intensive. In order to be competitive, the Company believes it mustcontinue to make significant expenditures for capital equipment; sales,service, training and support capabilities; systems, procedures and controls;and expansion of operations and research and development, among many otheritems. The Company expects that its cash, cash equivalents and short-term investmentswill be sufficient to meet the Company’s cash requirements for at least thenext twelve months. However, in the near-term, the Company may continue toutilize existing and future lines of credit, and other sources of financing, inorder to maintain its present levels of cash, cash equivalents and short-terminvestments. Beyond the next twelve months, the Company may require additionalequity or debt financing to address its working capital or capital equipmentneeds. In addition, the Company may seek to raise equity or debt capital at anytime that it deems market conditions to be favorable. Additional financing, ifneeded, may not be available on reasonable terms, or at all.

 

The Company may in thefuture pursue additional acquisitions of complementary product lines,technologies or businesses. Future acquisitions by the Company 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 the Company’s financial condition and results of operations. Inaddition, acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which the Company has limited or nodirect experience; and the potential loss of key employees of the acquiredcompany. In the event the Company acquires product lines, technologies orbusinesses which do not complement the Company’s business, or which otherwisedo not enhance the Company’s sales or operating results, the Company may incursubstantial write-offs and higher recurring operating costs, which could have amaterial adverse effect on the Company’s 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 the Company’s business oroperating results.

** **

**Foreign currency**

 

The Company uses foreignexchange contracts to hedge the risk that unremitted Japanese yen denominatedreceipts from customers for actual or forecasted sales of equipment afterreceipt of customer purchase orders may be adversely affected by changes inforeign currency exchange rates. As part of its overall strategy to manage thelevel of exposure to the risk of foreign currency exchange rate fluctuations,the Company attempts to hedge most of these Japanese yen denominated foreigncurrency exposures anticipated over the ensuing twelve-month period. At March29, 2003, the Company had hedged these Japanese yen denominated exposures. Tohedge this exposure, the Company used foreign exchange forward contracts thatgenerally have maturities of nine months or less, which generally will berolled over to provide continuing coverage throughout the year. The Companyoften closes foreign exchange sale contracts by purchasing an offsettingpurchase contract. At March 29, 2003, the Company had contracts for the sale of$2.3 million of foreign currencies at fixed rates.

 

**Additional****RiskFactors**

 

*In addition to risks described in the foregoing discussions,the following risks apply to the Company and its business:*

** **

**Cyclicality of Semiconductor andNanotechnology Industries****                                            **TheCompany’s business depends in significant part upon capital expenditures by******manufacturers ofsemiconductors, bumped semiconductors and nanotechnology components, includingthin film head magnetic recording devices, which in turn depend upon thecurrent and anticipated market demand for such devices and products utilizingsuch devices. The semiconductor industry historically has been highly cyclicaland has experienced recurring periods of oversupply. This has, from time totime, resulted in significantly reduced demand for capital equipment

 

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including the systemsmanufactured and marketed by the Company. The semiconductor industry, whichincludes the semiconductor-packaging sector, is presently experiencing a severedownturn. The Company also believes that markets for new generations ofsemiconductors and semiconductor packaging will also be subject to similarfluctuations. The Company’s business and operating results would be materiallyadversely affected by continued downturns or slowdowns in the semiconductorpackaging market or by loss of market share. Accordingly, the Company can giveno assurance that it will be able to achieve or maintain its current or priorlevel of sales.

 

The Company attempts tomitigate the risk of cyclicality by participating in multiple markets includingsemiconductor, semiconductor packaging, thin film head and other nanotechnologysectors, as well as diversifying into new markets such as photolithography foroptical networking (a nanotechnology application) and laser-based thermalannealing for implant activation and other applications. Despite such efforts,when one or more of such markets experiences a downturn or a situation ofexcess capacity, such as is presently occurring in the semiconductor,semiconductor packaging, optical networking and thin film head markets, theCompany’s net sales and operating results are materially adversely affected.

 

During 2002, 2001 and2000, approximately 20%, 33% and 18%, respectively, of the Company’s net saleswere derived from sales to nanotechnology manufacturers, including microsystems, thin film heads and optical networking devices.

** **

**Highly Competitive Industry****                                      **Thecapital equipment industry in which the Company operates is intenselycompetitive. A substantial investment is required to install and integratecapital equipment into a semiconductor, semiconductor packaging ornanotechnology device production line. The Company believes 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. The Company experiences intensecompetition worldwide from a number of leading stepper manufacturers, such asNikon Inc. (“Nikon”), Canon, Inc. (“Canon”) and ASM Lithography (“ASML”), allof which have substantially greater financial, marketing and other resourcesthan the Company. Nikon supplies a 1X stepper for use in the manufacture ofliquid crystal displays and Canon, Nikon and ASML offer reduction steppers forthin film head fabrication. With respect to the semiconductor packaging andnanotechnology markets, the Company experiences intense competition fromvarious proximity aligner companies such as Suss Microtec AG.

 

ASML, Canon and Nikonhave each introduced i-line step-and-scan system as a lower cost alternative tothe deep ultra-violet (DUV) step-and-scan system for use on the less criticallayers. These systems compete with wide-field steppers, such as the Company’sSaturn and Titan steppers, for advanced mix-and-match applications. Inaddition, the Company believes that the high cost of developing new lithographytools has increasingly caused its competitors to collaborate with customers andother parties in various areas such as research and development, manufacturingand marketing, or to acquire other competitors, thereby resulting in a combinedcompetitive threat with significantly enhanced financial, technical and otherresources.

 

The Company expects itscompetitors to continue to improve the performance of their current productsand to introduce new products with improved price and performancecharacteristics that will also compete directly with the Company’s products.This could cause a decline in sales or loss of market acceptance of theCompany’s steppers, and thereby materially adversely affect the Company’sbusiness, financial condition and results of operations. There can be noassurance that enhancements to, or future generations of, competing productswill not be developed that offer superior cost of ownership and technicalperformance features.

 

The Company believes thatto be competitive, it will require significant financial resources in order tocontinue to invest in new product development, features and enhancements, tointroduce next generation stepper systems on a timely basis, and to maintaincustomer service and support centers worldwide. In marketing its products, theCompany may also face competition from vendors employing other technologies. Inaddition, increased competitive pressure has led to intensified price-basedcompetition in certain of the Company’s markets, resulting in lower prices andmargins. Should these competitive trends continue, the Company’s business,financial condition and operating results would continue to be materially

 

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adversely affected. Therecan be no assurance that the Company will be able to compete successfully inthe future.

 

With respect to theCompany’s laser annealing technologies, marketed under the Verdant productname, the primary competition comes from rapid thermal annealing (“RTA”), whichis the current manufacturing technology. RTA does not limit semiconductordevice manufacturers from scaling their transistors to obtain improvedperformance. However, improved annealing technology results in fastertransistors for a given size. RTA manufacturers recognize the need to reducethermal cycle times and are working toward this goal. Several companies havepublished papers on their prototype annealing tools that incorporate flash lamptechnology in order to reduce annealing times and increase anneal temperatures.The Company believes these tools are presently in the development phase.Additionally, competition to the Verdant products may come from other laserannealing tools, including those presently being used by the flat panel displayindustry to crystallize amorphous silicon. Manufacturers of these tools may tryto extend the use of their technologies to semiconductor device applications.In July 2000, the Company licensed its then existing laser annealingtechnology, with reservations, to a manufacturer of semiconductor equipment.The Company presently anticipates this company will offer laser-annealing toolsto the semiconductor industry that will compete with the Company’s offerings.

 

Foreign integratedcircuit manufacturers have a significant share of the worldwide market forcertain types of integrated circuits for which the Company’s systems are used.The Japanese stepper manufacturers are well established in the Japanese steppermarket, and it is extremely difficult for non-Japanese lithography equipmentcompanies to penetrate this market. Although the Company has experienced recentsuccess in the introduction of its Saturn Spectrum family of wafer steppersinto the Japanese marketplace, to date the Company has not established itselfas a major competitor in the Japanese equipment market and there can be noassurance that the Company will be able to achieve significant sales toJapanese manufacturers in the future.

** **

**Development of New Product Lines;Expansion of Operations****                                             **Currently,the Company is devoting significant resources to the development, introductionand commercialization of its Verdant laser thermal processing systems and toenhancements of its Saturn Spectrum 3e and Saturn Spectrum 300e2wafer steppers and related platforms. The Company intends to continue todevelop these products and technologies during 2003, and will continue to incursignificant operating expenses in the areas of research, development andengineering, manufacturing and general and administrative costs in order tofurther develop, produce and support these new products. Additionally, grossprofit margins and inventory levels may be further adversely impacted in thefuture by costs associated with the initial production of its Verdant laserthermal processing systems and by future generations of its 1X-lithography systems.These costs include, but are not limited to, additional manufacturing overhead,additional inventory write-offs, costs of demonstration systems and facilities,costs associated with managing multiple sites and the establishment ofadditional after-sales support organizations. Additionally, there can be noassurance that operating expenses will not increase, relative to sales, as aresult of adding additional marketing and administrative personnel, among othercosts, to support the Company’s new products. If the Company is unable toachieve significantly increased net sales or if its sales fall belowexpectations, the Company’s operating results will be materially adverselyaffected.

 

The Company’s ability tocommercialize its laser annealing, or laser thermal processing technologies,depends on its ability to demonstrate a manufacturing-worthy tool. The Companydoes not presently have in-house capability to fabricate devices. As a result,the Company must rely on partnering with companies to develop the laser annealprocess. The development of new process technologies is largely dependent uponthe Company’s ability to interest potential customers in working on jointprocess development. The Company’s ability to deliver timely solutions is alsolimited by wafer turnaround at the potential customer’s fabrication facility.

** **

**Lengthy Sales Cycles****                         **Salesof the Company’s systems depend, in significant part, upon the decision of aprospective customer to increase manufacturing capacity or to restructurecurrent manufacturing facilities, either of which typically involves asignificant commitment of capital. Many of the Company’s customers havecancelled the development of new manufacturing facilities and havesubstantially reduced their capital equipment budgets. In view of thesignificant investment involved in a system purchase, the Company hasexperienced and may continue to experience delays following initialqualification of the Company’s systems as a result of delays in a customer’sapproval process. Additionally, the Company is presently

 

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receiving orders forsystems that have lengthy delivery schedules, which may be due to longerproduction lead times or a result of customers’ capacity scheduling requirements.In order to maintain or exceed the Company’s present level of net sales, theCompany is dependent upon obtaining orders for systems that will ship and beaccepted in the current period. There can be no assurance that the Company willbe able to obtain those orders. For these and other reasons, the Company’ssystems typically have a lengthy sales cycle during which the Company mayexpend substantial funds and management effort in securing a sale. Lengthysales cycles subject the Company to a number of significant risks, includinginventory obsolescence and fluctuations in operating results, over which theCompany has little or no control.

** **

**Customer and Market Concentrations****                                **Historically,the Company has sold a substantial portion of its systems to a limited numberof customers. For the three-month period ended March 29, 2003, five customersaccounted for approximately 95% of the Company’s system revenue. In 2002, IntelCorporation accounted for 19% and Sumitomo Chemical Company, Ltd. accounted for10% of the Company’s total net sales.

 

At March 29, 2003, onecustomer accounted for 42% of the Company’s system backlog. Cancellation,deferrals or rescheduling of orders by this customer would have a materialadverse impact on the Company’s future results of operations.

 

During 2002, the Companyexperienced significant levels of order cancellations, delays and deferrals. Inparticular, the Company has removed from backlog a significant number ofsystems from a single customer because delivery may be deferred beyond oneyear. Company policy requires that orders with delivery dates beyond one yearbe excluded from reportable backlog.

 

The Company expects thatsales to a relatively few customers will continue to account for a highpercentage of its net sales in the foreseeable future and believes that theCompany’s financial results depend in significant part upon the success ofthese major customers and the Company’s ability to meet their future capitalequipment needs. Although the composition of the group comprising the Company’slargest customers may vary from period to period, the loss of a significantcustomer or any reduction in orders by any significant customer, includingreductions due to market, economic or competitive conditions in thesemiconductor, semiconductor packaging or nanotechnology industries or in theindustries that manufacture products utilizing integrated circuits, thin filmheads or other nanotechnology components, may have a material adverse effect onthe Company’s business, financial condition and results of operations. TheCompany’s ability to maintain or increase its sales in the future depends, inpart, on its ability to obtain orders from new customers as well as thefinancial condition and success of its existing customers, the semiconductorand nanotechnology industries and the economy in general.

 

In addition to thebusiness risks associated with dependence on major customers, these significantcustomer concentrations have in the past resulted in significant concentrationsof accounts receivable. These significant and concentrated receivables exposethe Company to additional risks, including the risk of default by one or morecustomers representing a significant portion of the Company’s totalreceivables. If the Company were required to take additional accountsreceivable reserves, its business, financial condition and results ofoperations would be materially adversely affected.

 

On a market applicationbasis, sales to semiconductor packaging customers accounted for approximately77% of system revenue for the three-month period ended March 29, 2003, and 53%of system revenue for the year ended December 31, 2002. The Company’s futureresults of operations and financial position would be materially adverselyimpacted by further downturns in this market segment, or by loss of marketshare.

** **

**Rapid Technological Change; Importance of Timely ProductIntroduction**

 

The semiconductor andnanotechnology manufacturing industries are subject to rapid technologicalchange and new product introductions and enhancements. The Company’s ability tobe competitive in these and other markets will depend, in part, upon itsability to develop new and enhanced systems and related software tools, and tointroduce these systems and related software tools at competitive prices and ona timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.The Company will also be required to enhance the performance of its existingsystems and related software tools. Any success of the Company in developingnew and enhanced systems and related software tools depends upon a variety offactors, including product

 

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selection, timely andefficient completion of product design, timely and efficient implementation ofmanufacturing and assembly processes, product performance in the field andeffective sales and marketing. Because new product development commitments mustbe made well in advance of sales, new product decisions must anticipate bothfuture demand and the technology that will be available to supply that demand.There can be no assurance that the Company will be successful in selecting,developing, manufacturing or marketing new products and related software toolsor enhancing its existing products and related software tools. Any such failurewould materially adversely affect the Company’s business, financial conditionand results of operations.

 

Because of the largenumber of components in the Company’s systems, significant delays can occurbetween a system’s introduction and the commencement by the Company of volumeproduction of such systems. The Company has experienced delays from time totime in the introduction of, and technical and manufacturing difficulties with,certain of its systems and enhancements and related software tools and mayexperience delays and technical and manufacturing difficulties in futureintroductions or volume production of new systems or enhancements and relatedsoftware tools.

 

The Company may encounteradditional technical, manufacturing or other difficulties that could furtherdelay future introductions or volume production of systems or enhancements. TheCompany’s inability to complete the development or meet the technicalspecifications of any of its systems or enhancements and related softwaretools, or its inability to manufacture and ship these systems or enhancementsand related software tools in volume and in time to meet the requirements for manufacturingthe future generation of semiconductor or nanotechnology devices wouldmaterially adversely affect the Company’s business, financial condition andresults of operations. In addition, the Company may incur substantialunanticipated costs to ensure the functionality and reliability of its productsearly in the products’ life cycles. If new products have reliability or qualityproblems, reduced orders or higher manufacturing costs, delays in collectingaccounts receivable and additional service and warranty expenses may result.Any of such events may materially adversely affect the Company’s business,financial condition and results of operations.

** **

**Intellectual Property Rights****                                      **Althoughthe Company attempts to protect its intellectual property rights throughpatents, copyrights, trade secrets and other measures, it believes that anysuccess will depend more upon the innovation, technological expertise andmarketing abilities of its employees. Nevertheless, the Company has a policy ofseeking patents when appropriate on inventions resulting from its ongoingresearch and development and manufacturing activities.  The Company owns various United States andforeign patents, which expire on dates ranging from March 2004 to May 2021 andhas various United States and foreign patent applications pending. The Companyalso has various registered trademarks and copyright registrations coveringmainly software programs used in the operation of its stepper systems. TheCompany also relies upon trade secret protection for its confidential andproprietary information. There can be no assurance that the Company will beable to protect its technology adequately or that competitors will not be ableto develop similar technology independently. There can be no assurance that anyof the Company’s pending patent applications will be issued or that U.S. orforeign intellectual property laws will protect the Company’s intellectualproperty rights. In addition, litigation may be necessary to enforce theCompany’s patents, copyrights or other intellectual property rights, to protectthe Company’s trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement.  Such litigation could result in substantialcosts and diversion of resources and could have a material adverse effect onthe Company’s business, financial condition and results of operations,regardless of the outcome of the litigation. Patents issued to the Company maybe challenged, invalidated or circumvented and the rights granted thereundermay not provide competitive advantages to the Company. Furthermore, others mayindependently develop similar products, duplicate the Company’s products or, ifpatents are issued to the Company, design around the patents issued to theCompany. Additionally, the Company presently has several agreements in force tolicense certain of its technologies. Challenges to, or invalidation of, patentsrelated to those technologies would expose the Company to the risk of forfeitureof revenues and further risk of damage claims.

 

On February 29, 2000, inthe U.S. District Court of Virginia, the Company filed patent infringementlawsuits against Nikon, Canon and ASML. In April 2000, the Company reached asettlement with Nikon and in September 2001, the Company reached a settlementwith Canon. The patent litigation case against ASML is ongoing. The Court hasmade a preliminary determination that ASML does not infringe the patent. TheCompany intends to appeal this preliminary determination of the Court. OnOctober 12, 2001,

 

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the Company was sued inthe District Court in Massachusetts for alleged infringement of certain patentsowned by Silicon Valley Group, Inc. (“SVG”), a company acquired by ASML. TheCompany is in the process of defending against this claim and believes theclaim is without merit.

 

With the exception of theSVG claim, there are no pending lawsuits against the Company regardinginfringement claims with respect to any existing patent or any otherintellectual property right. However, the Company has from time to time beennotified of claims that it may be infringing intellectual property rightspossessed by third parties. Some of the Company’s customers have received noticesof infringement from Technivision Corporation and the Lemelson Medical,Education and Research Foundation, Limited Partnership alleging that themanufacture of certain semiconductor products and/or the equipment used tomanufacture those semiconductor products infringes certain issued patents. TheCompany has been notified by certain of these customers that the Company may beobligated to defend or settle claims that the Company’s products infringe anyof such patents and, in the event it is subsequently determined that thecustomer infringes any of such patents, they intend to seek reimbursement fromthe Company for damages and other expenses resulting from this matter.

 

Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions, if proven to be true, maymaterially adversely affect the Company’s business, financial condition andresults of operations, regardless of the outcome of any litigation. Withrespect to any such future claims, the Company may seek to obtain a licenseunder the third party’s intellectual property rights. However, a license maynot be available on reasonable terms or at all. The Company could decide, inthe alternative, to resort to litigation to challenge such claims. Suchchallenges could be expensive and time consuming and could materially adverselyaffect the Company’s business, financial condition and results of operations,regardless of the outcome of any litigation.

** **

**Sole or Limited Sources of Supply****                                  **TheCompany relies heavily on outside suppliers and subcontractors to manufacturecertain components and subassemblies in an attempt to maximize the Company’savailable manufacturing capacity. The Company orders one of the most critical componentsof its technology, the glass for its 1X lenses, from suppliers on purchaseorders. The Company designs the 1X lenses and provides the lens specificationsto other suppliers that grind the lens elements. The Company then assembles andtests the optical 1X lenses in its metrology laboratory.  The Company has recorded the criticalparameters of each of its optical lenses sold since 1982, and believes thatsuch information enables it to supply lenses to its customers that match thecharacteristics of its customers’ existing lenses.

 

In addition to glass, theCompany procures many of its other critical systems’ components, subassembliesand services from single outside suppliers or a limited group of outsidesuppliers in order to ensure overall quality and timeliness of delivery. Manyof these components and subassemblies have significant production lead times.To date, the Company has been able to obtain adequate services and supplies ofcomponents and subassemblies for its systems in a timely manner.  However, disruption or termination ofcertain of these sources could result in a significant adverse impact on theCompany’s ability to manufacture its systems. This, in turn, would have amaterial adverse effect on the Company’s business, financial condition andresults of operations. The Company’s reliance on sole or a limited group ofsuppliers and the Company’s increasing reliance on subcontractors involveseveral risks, including a potential inability to obtain an adequate supply ofrequired components due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing.Although the timeliness, yield and quality of deliveries to date from theCompany’s subcontractors have been acceptable, manufacture of certain of thesecomponents and subassemblies is an extremely complex process, and longlead-times are required. Any inability to obtain adequate deliveries or anyother circumstance that would require the Company to seek alternative sourcesof supply or to manufacture such components internally could delay theCompany’s ability to ship its products, which could damage relationships withcurrent and prospective customers and have a material adverse effect on theCompany’s business, financial condition and results of operations.

** **

**International Sales****                                       **Internationalnet sales accounted for approximately 48% and 51% of total net sales for theyears 2002 and 2001, respectively. For the three months ended March 29, 2003,international net sales accounted for approximately 57% of total net sales, ascompared with 37% for the comparable period in 2002. The Company anticipatesthat international sales, which typically have lower gross margins thandomestic sales, principally due to increased competition and higher fieldservice and support costs, will continue to account for a significant portionof total net sales. As a result, a significant portion of the

 

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Company’s net sales willcontinue to be subject to certain risks, including the current SARS outbreak inAsia, which could delay or curtail installation and acceptance of the Company’ssystems in those areas impacted; dependence on outside sales representativeorganizations; unexpected changes in regulatory requirements; difficulty insatisfying existing regulatory requirements; exchange rate fluctuations;tariffs and other barriers; political and economic instability; difficulties inaccounts receivable collections; natural disasters; difficulties in staffingand managing foreign subsidiary and branch operations; and potentially adversetax consequences.

 

Although the Companygenerally transacts its international sales in U.S. dollars, internationalsales expose the Company to a number of additional risk factors, includingfluctuations in the value of local currencies relative to the U.S. dollar,which, in turn, impact the relative cost of ownership of the Company’s productsand may further impact the purchasing ability of its international customers.However, in Japan, the Company has direct sales operations and orders are oftendenominated in Japanese yen. This may subject the Company to a higher degree ofrisk from currency fluctuations. The Company attempts to mitigate this exposurethrough the use of foreign exchange contracts. The Company is also subject to the risks associated with the impositionof legislation and regulations relating to the import or export ofsemiconductors and nanotechnology products. The Company cannot predict whether the United States, Japan or any othercountry will implement changes to quotas, duties, taxes or other charges orrestrictions upon the importation or exportation of the Company’s products.These factors, or the adoption of restrictive policies, may have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

** **

**Dependence on Key Personnel****                           **TheCompany’s future operating results depend, in significant part, upon thecontinued contributions of key personnel, many of whom would be difficult toreplace. None of such persons has an employment or non-competition agreementwith the Company. The Company does not maintain any life insurance on any ofits key persons.  The loss of key personnelcould have a material adverse effect on the business, financial condition andresults of operations of the Company. In addition, the Company’s future operating results depend insignificant part upon its ability to attract and retain other qualified management,manufacturing, technical, sales and support personnel for its operations. Thereare only a limited number of persons with the requisite skills to serve inthese positions and it may become increasingly difficult for the Company tohire such personnel over time. At times, competition for such personnel hasbeen intense, particularly in the San Francisco Bay Area where the Companymaintains its headquarters and principal operations, and there can be noassurance that the Company will be successful in attracting or retaining suchpersonnel. The failure to attract or retain such persons would materiallyadversely affect the Company’s business, financial condition and results ofoperations.

** **

**Changes to Financial Accounting Standards May Affect theCompany’s Reported Results of Operations****                 **TheCompany prepares its financial statements to conform with generally acceptedaccounting principles, or GAAP. These principles are subject to interpretationby the American Institute of Certified Public Accountants, the SEC and variousbodies formed to interpret and create appropriate accounting policies.  A change in those policies can have asignificant effect on the Company’s reported results and may affect itsreporting of transactions completed before a change is announced.

 

Accounting policiesaffecting many other aspects of our business, including rules relating torevenue recognition, off-balance sheet transactions, employee stock options,restructurings, asset disposals, intangible assets, derivatives, financialinstruments and in-process research and development charges, have recently beenrevised or are under review. Changes to those rules or the questioning ofcurrent practices may have a material adverse effect on the Company’s reportedfinancial results or on the way it conducts business.  In addition, the Company’s preparation of financial statements inaccordance with GAAP requires that it make estimates and assumptions thataffect the recorded amounts of assets and liabilities, disclosure of thoseassets and liabilities at the date of the financial statements and the recordedamounts of expenses during the reporting period.  A change in the facts and circumstances surrounding thoseestimates could result in a change to the Company’s estimates and could impactits future operating results.

** **

**Effects of Certain Anti-TakeoverProvisions****                                         **Certainprovisions of the Company’s Certificate of Incorporation, equity incentiveplans, Shareholder Rights Plan, licensing agreements, Bylaws and Delaware lawmay discourage certain transactions involving a change in control of theCompany.  In addition to the foregoing,the Company’s classified board of directors, the shareholdings of the Company’sofficers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to

 

26

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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.

** **

**Volatility of Stock Price andDilutive Impact of Employee Stock Options****                                            **TheCompany believes that factors such as announcements of developments related tothe Company’s business, fluctuations in the Company’s operating results, ashortfall in revenue or earnings, changes in analysts’ expectations, generalconditions in the semiconductor and nanotechnology industries or the worldwideor regional economies, sales of securities of the Company into the marketplace,an outbreak or escalation of hostilities, announcements of technologicalinnovations or new products or enhancements by the Company or its competitors,developments in patents or other intellectual property rights and developmentsin the Company’s relationships with its customers and suppliers could cause theprice of the Company’s Common Stock to fluctuate, perhaps substantially. Themarket price of the Company’s Common Stock may continue to experiencesignificant fluctuations in the future, including fluctuations that may beunrelated to the Company’s performance.

 

As of May 1, 2003, theCompany had issued and outstanding options to purchase approximately 5.1million shares of its Common Stock. Among other determinants, the market priceof the Company’s stock has a major bearing on the number of stock optionsoutstanding that are included in the weighted-average shares used indetermining the Company’s net income (loss) per share. During periods ofextreme volatility, the impact of higher stock prices can have a materiallydilutive effect on the Company’s net income per share (diluted).****Additionally,options are excluded from the calculation of net income (loss) per share whenthe Company has a net loss or when the exercise price of the stock option isgreater than the average market price of the Company’s Common Stock, as theimpact of the stock options would be anti-dilutive.

** **

**Terrorist Attacks and Threats, Government Responses Thereto,and Military Actions May Negatively Impact All Aspects of Our Operations,Revenues, Costs and Stock Price****                                         **Terroristattacks in the United States and elsewhere, government responses thereto, andmilitary actions in Iraq, Afghanistan and elsewhere may disrupt our operationsor those of our customers and suppliers and may affect the availability ofmaterials needed to manufacture our products or the means to transport thosematerials to manufacturing facilities and finished products to customers. Inaddition, any of these events could increase volatility in the United States andworld financial markets which may depress the price of the Company’s CommonStock and may limit the capital resources available to the Company or itscustomers or suppliers, which could result in decreased orders from customers,less favorable financing terms from suppliers, and scarcity or increased costsof materials and components of our products. Any of these occurrences couldhave a significant impact on our operating results, revenues and costs and mayresult in increased volatility of the market price of our Common Stock.

** **

**Environmental Regulations****                                           **TheCompany is subject to a variety of governmental regulations relating to theuse, storage, discharge, handling, emission, generation, manufacture anddisposal of toxic or other hazardous substances used to manufacture theCompany’s systems.  The Company believesthat it is currently in compliance in all material respects with suchregulations and that it has obtained all necessary environmental permits toconduct its business. Nevertheless, the failure to comply with current orfuture regulations could result in substantial fines being imposed on theCompany, suspension of production, alteration of the manufacturing process orcessation of operations. Such regulations could require the Company to acquireexpensive remediation equipment or to incur substantial expenses to comply withenvironmental regulations. Any failure by the Company to control the use,disposal or storage of, or adequately restrict the discharge of, hazardous ortoxic substances could subject the Company to significant liabilities.

** **

**Information Available on Company Web-site**

 

The Company’s web-site islocated at www.ultratech.com. The Company makes available, free of charge,through its web-site, its annual report on Form 10-K, quarterly reports on Form10-Q and current reports on Form 8-K (and amendments to those reports), as soonas reasonably practicable after such reports are filed with the SEC.

 

27

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**Item 3.****        Quantitativeand Qualitative Disclosures About Market Risk**

 

Reference is made to Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002 and to the subheading “Derivative Instrumentsand Hedging” in Item 8, “Financial Statements and Supplementary Data”, underthe heading “Notes to Consolidated Financial Statement” of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

** **

**Foreign Currency Risk Management**

 

Foreign exchangecontracts are used primarily by the Company to hedge the risk that unremittedJapanese yen denominated receipts, for actual or forecasted sales of equipment,may be adversely affected by changes in foreign currency exchange rates afterreceipt of customer purchase orders. As part of its overall strategy to managethe level of exposure to currency exchange rate fluctuations, the Companyattempts to hedge most of these Japanese yen denominated foreign currencyexposures anticipated over the ensuing twelve-month period. At March 29, 2003,the Company had taken action to hedge approximately 100% of these Japanese yendenominated exposures. To hedge this exposure, the Company used foreignexchange contracts that generally have maturities of nine months or less, whichgenerally will be rolled over to provide continuing coverage throughout theyear. The Company often closes foreign exchange sale contracts by purchasing anoffsetting purchase contract.

 

The Company records theseforeign exchange contracts at fair value in its consolidated balance sheet andthe related gains or losses on these contracts are deferred in stockholders’equity (as a component of comprehensive income). These deferred gains andlosses are recognized in income, as a component of revenue or cost of sales, inthe period in which the sales or purchases being hedged are received andrecognized in income. However, to the extent that any of these contracts arenot considered to be perfectly effective in offsetting the change in the valueof the sales or purchases being hedged, any changes in fair value relating tothe ineffective portion of these contracts are immediately recognized inincome. These amounts were not material to the periods presented.

 

Gains and losses onforeign exchange contracts that are not designated as hedges are included as acomponent of interest and other income, net, in the Company’s consolidatedstatement of operations.

 

At March 29, 2003, the Company had contracts for the sale of $2.3million of Japanese Yen at fixed rates. The Company had less than $0.1 millionof deferred losses on foreign exchange contracts at March 29, 2003.

 

**Item 4.****           Controlsand Procedures**

 

Based on theirevaluation, as of a date within 90 days of the filing of this Form 10-Q, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthe Company’s disclosure controls and procedures (as defined in Rules 13a-14and 15d-14 under the Securities Exchange Act of 1934) are effective. There havebeen no significant changes in internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

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 Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rulesand forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed in our reports filed or submitted under the Securities Exchange Actof 1934, as amended, is accumulated and communicated to management to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, our management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. Management isfurther required to apply judgement in evaluating the cost-benefit relationshipof possible controls and procedures.

 

28

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| **PART 2****:** |   | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                              |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
| **Item 1.**     |   | **Legal Proceedings.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | On February 29, 2000, in the U.S. District  Court of Virginia, the Company filed patent infringement lawsuits against  Nikon, Canon and ASML. In April 2000, the Company reached a settlement with  Nikon and in September 2001, the Company reached a settlement with Canon. The  patent litigation against ASML is ongoing. The Court has made a preliminary  determination that ASML does not infringe the patent. The Company intends to  appeal this preliminary determination of the Court. On October 12, 2001, the  Company was sued in the District Court in Massachusetts for alleged  infringement of certain patents owned by Silicon Valley Group, Inc. (“SVG”),  a company acquired by ASML. The Company is in the process of defending  against this claim and believes the claim is without merit. |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
| **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.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                              | None.  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
| **Item 5.**     |   | **Other Information****.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | On April 17, 2003, the Company announced  that Dennis R. Raney had been appointed to its Board of Directors. In conjunction  with this appointment, the Company amended its bylaws to change the maximum  number of directors to nine, from the previous maximum of eight.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
| **Item 6.**     |   | **Exhibits and Reports on Form****8-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | **(a) Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | 3.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Bylaws of Registrant, as amended.                                                                                                                                                 |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | 10.14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Termination Agreement and General Release of All Claims, dated as of  September 30,2002, by and between Ellery Buchanan and the Registrant.                                       |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | 10.15                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Consulting Agreement, dated as of October 1, 2002, by and between  Ellery Buchanan and the Registrant.                                                                            |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |   |
|            |   | 10.16                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Non-Disclosure Agreement, dated October 1, 2002, by and between  Ellery Buchanan and the Registrant.                                                                              |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | 99.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Certifications of Chief Executive Officer and 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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                              |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                              |   |
|            |   | Current Reports on Form 8-K, dated February 27, 2003 and March 27,  2003, were filed during the quarter ended March 29, 2003, reporting updates  to the Company’s quarterly teleconference guidance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                              |   |

** **

**29**

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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 STEPPER, INC.**

(Registrant)

 

 
| Date:  | May 8, 2003 | 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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**CERTIFICATIONS**

 

I, Arthur Zafiropoulo, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of UltratechStepper, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 8, 2003

 

 
|   | /s/ Arthur Zafiropoulo  |   |
|--------|-------------------------|--------|
|   | Arthur Zafiropoulo      |
|   | Chief Executive Officer |

 

31

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I, Bruce Wright, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of UltratechStepper, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 8, 2003

 

 
|   | /s/ Bruce Wright        |   |
|--------|-------------------------|--------|
|   | Bruce Wright            |   |
|   | Chief Financial Officer |   |

 

32

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**EXHIBIT INDEX**

 
| 3.2    |   | Bylaws of Registrant, as amended.                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| 10.14  |   | Termination Agreement and General Release of All Claims, dated as of  September 30,2002, by and between Ellery Buchanan and the Registrant.                                       |
|   |   |                                                                                                                                                                              |
| 10.15  |   | Consulting Agreement, dated as of October 1, 2002, by and between  Ellery Buchanan and the Registrant.                                                                            |
|   |   |                                                                                                                                                                              |
| 10.16  |   | Non-Disclosure Agreement, dated October 1, 2002, by and between  Ellery Buchanan and the Registrant.                                                                              |
|   |   |                                                                                                                                                                              |
| 99.1   |   | Certifications of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

33

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