**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                              |
|----------------|------------|---------------------------------------------------------------------------------------------------------|
| **ý**     | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|           |       |                                                                                                    |
| ** **     | ** ** | **For  the quarterly period  ended         April 2, 2005** |
| ** **     | ** ** | ** **                                                                                              |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**      |

 

**For the transition periodfrom            to            **

 

**Commission FileNumber            0-22248**

 

**ULTRATECH,INC.**

(Exact name of registrant as specified in itscharter)

 
| **DELAWARE**                                                    | ** ** | **94-3169580**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **3050 Zanker Road, San Jose, California**                      | ** ** | **95134**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode        **(408)321-8835**

 

(Former name, former address and formerfiscal year, if changed since last report.)

 

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

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

 

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

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

 

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

 
| **Class**                     | ** ** | **Outstanding  as of April 28, 2005** |
|-------------------------------|------------|---------------------------------------|
| common stock, $.001 par value |       | 23,920,455                            |

 

 

----

 

**ULTRATECH, INC.**

 

**INDEX**

 
| **PART 1.**                        | **FINANCIAL  INFORMATION**                                                                                  | ** ** |
|------------------------------------|-------------------------------------------------------------------------------------------------------------|------------|
|                               |                                                                                                        |       |
| **Item 1.**                        | **Condensed  Consolidated Financial Statements**                                                            | ** ** |
|                               |                                                                                                        |       |
|                               | Condensed Consolidated Balance Sheets as of  April 2, 2005 and December 31, 2004                       |       |
|                               |                                                                                                        |       |
|                               | Condensed Consolidated Statements of Operations for the three months  ended April 2, 2005 and April 3, 2004 |       |
|                               |                                                                                                        |       |
|                               | Condensed Consolidated Statements of Cash Flows for the three months  ended April 2, 2005 and April 3, 2004 |       |
|                               |                                                                                                        |       |
|                               | 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.**                        | **Unregistered  Sales of Equity 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**                                                                                                | ** ** |
|                               |                                                                                                        |       |
| **SIGNATURES AND  CERTIFICATIONS** |                                                                                                        |

 

2

----

 

**PART 1.****                FINANCIALINFORMATION**

**Item 1.****    Condensed ConsolidatedFinancial Statements**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| **(In thousands)**                                  | ** ** | **Apr. 2,  2005** | ** ** | **Dec. 31,  2004 *** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| *** ***                                        | ** ** | **(Unaudited)**   | ** ** | ** **           | ** ** |
| ***ASSETS***                                        |       |              |       |                 |       |
| ** **                                          |       |              |       |                 |       |
| Current assets:                                     |       |              |       |                 |       |
| Cash, cash equivalents, and short-term  investments | ** ** | $                 | 145,627    |                 | $          | 151,627 |   |
| Accounts receivable, net                            | ** ** | 19,600            |       | 19,907               |       |
| Inventories                                         | ** ** | 29,092            |       | 27,842               |       |
| Taxes receivable                                    | ** ** | 416               |       | 509                  |       |
| Prepaid expenses and other current assets           | ** ** | 2,036             |       | 1,654                |       |
| Total current assets                                | ** ** | 196,771           |       | 201,539              |       |
|                                                |       |              |       |                 |       |
| Equipment and leasehold improvements, net           | ** ** | 22,769            |       | 21,992               |       |
|                                                |       |              |       |                 |       |
| Intangible assets, net                              | ** ** | —            |       | 95                   |       |
|                                                |       |              |       |                 |       |
| Demonstration inventories, net                      | ** ** | 3,985             |       | 4,223                |       |
|                                                |       |              |       |                 |       |
| Other assets                                        | ** ** | 2,833             |       | 2,697                |       |
|                                                |       |              |       |                 |       |
| Total assets                                        | ** ** | $                 | 226,358    |                 | $          | 230,546 |   |
|                                                |       |              |       |                 |       |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***     |       |              |       |                 |       |
|                                                |       |              |       |                 |       |
| Current liabilities:                                |       |              |       |                 |       |
| Notes payable                                       | ** ** | $                 | 7,922      |                 | $          | 7,900 |   |
| Accounts payable                                    | ** ** | 10,150            |       | 13,587               |       |
| Deferred product and services income                | ** ** | 1,721             |       | 1,244                |       |
| Deferred license revenue                            | ** ** | 113               |       | 1,041                |       |
| Other current liabilities                           | ** ** | 8,927             |       | 8,146                |       |
| Total current liabilities                           | ** ** | 28,833            |       | 31,918               |       |
|                                                |       |              |       |                 |       |
| Other liabilities                                   | ** ** | 5,613             |       | 5,338                |       |
|                                                |       |              |       |                 |       |
| Commitments and contingencies                       |       |              |       |                 |       |
|                                                |       |              |       |                 |       |
| Stockholders’ equity                           | ** ** | 191,912           |       | 193,290              |       |
|                                                |       |              |       |                 |       |
| Total liabilities and stockholders’ equity     | ** ** | $                 | 226,358    |                 | $          | 230,546 |   |

 

----

* The BalanceSheet as of December 31, 2004 has been derived from the audited financialstatements at that date.

 

*See accompanying notes to unaudited condensed consolidated financialstatements*

 

3

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**ULTRATECH, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| **(In thousands, except per share  amounts)**              | ** ** | **Apr. 2,  2005**      | ** ** | **Apr. 3,  2004** | ** ** |
| Net sales:                                                 |       |                   |       |   |   |
| Products                                                   | ** ** | $                      | 23,736     |   | $ | 22,790 |   |
| Services                                                   | ** ** | 3,098                  |       | 2,893 |   |
| Licenses                                                   | ** ** | 1,128                  |       | 928 |   |
| Total net sales                                            | ** ** | 27,962                 |       | 26,611 |   |
|                                                       | ** ** |                   |       |   |   |
| Cost of sales:                                             |       |                   |       |   |   |
| Cost of products sold                                      | ** ** | 13,392                 |       | 11,693 |   |
| Cost of services                                           | ** ** | 2,292                  |       | 1,858 |   |
| Total cost of sales                                        | ** ** | 15,684                 |       | 13,551 |   |
| Gross profit                                               | ** ** | 12,278                 |       | 13,060 |   |
|                                                       | ** ** |                   |       |   |   |
| Operating expenses:                                        |       |                   |       |   |   |
| Research, development, and engineering                     | ** ** | 7,503                  |       | 6,210 |   |
| Selling, general, and administrative                       | ** ** | 7,535                  |       | 7,087 |   |
| Amortization of intangible assets                          | ** ** | 95                     |       | 95 |   |
|                                                       | ** ** |                   |       |   |   |
| Operating loss                                             | ** ** | (2,855                 | )          | (332 | ) |
| Interest expense                                           | ** ** | (91                    | )          | (35 | ) |
| Interest and other income, net                             | ** ** | 914                    |       | 959 |   |
|                                                       |       |                   |       |   |   |
| Income (loss) before tax                                   | ** ** | (2,032                 | )          | 592 |   |
| Income tax provision (benefit)                             | ** ** | (136                   | )          | 65 |   |
| Net income (loss)                                          | ** ** | $                      | (1,896     | ) | $ | 527 |   |
|                                                       |       |                   |       |   |   |
| Earnings (loss) per share - basic:                         |       |                   |       |   |   |
| Net income (loss)                                          | ** ** | $                      | (0.08      | ) | $ | 0.02 |   |
| Number of shares used in per share  computations - basic   | ** ** | 23,877                 |       | 23,683 |   |
| Earnings (loss) per share - diluted:                       |       |                   |       |   |   |
| Net income (loss)                                          | ** ** | $                      | (0.08      | ) | $ | 0.02 |   |
| Number of shares used in per share  computations - diluted | ** ** | 23,877                 |       | 25,663 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements*

 

4

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**ULTRATECH, INCCONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS(Unaudited)**

 
| ** **                                                                            | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                                                                    | ** ** | **Apr. 2,  2005**      | ** ** | **Apr. 3,  2004** | ** ** |
| *Cash flows from operating activities:*                                               |       |                   |       |   |   |
| Net income (loss)                                                                     |       | (1,896                 | )          | 527 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                   |       |   |   |
| Depreciation                                                                          |       | 1,628                  |       | 1,623 |   |
| Amortization                                                                          |       | 482                    |       | 659 |   |
| Loss on disposal of equipment                                                         |       | —                 |       | 4 |   |
| Deferred compensation                                                                 |       | —                 |       | 30 |   |
| Deferred income taxes                                                                 |       | (19                    | )          | — |   |
| Changes in operating assets and  liabilities:                                         |       |                   |       |   |   |
| Accounts receivable                                                                   |       | 307                    |       | (6,031 | ) |
| Inventories                                                                           |       | (1,250                 | )          | (443 | ) |
| Taxes receivable                                                                      |       | 93                     |       | 349 |   |
| Prepaid expenses and other current assets                                             |       | (382                   | )          | 409 |   |
| Demonstration inventory, net                                                          |       | (59                    | )          | (752 | ) |
| Other assets                                                                          |       | (146                   | )          | (139 | ) |
| Accounts payable                                                                      |       | (3,437                 | )          | 847 |   |
| Deferred product and services income                                                  |       | 477                    |       | 2,831 |   |
| Deferred license revenue                                                              |       | (928                   | )          | (928 | ) |
| Other current liabilities                                                             |       | 810                    |       | 294 |   |
| Other liabilities                                                                     |       | 275                    |       | 460 |   |
| Net cash used in operating activities                                                 |       | (4,045                 | )          | (260 | ) |
|                                                                                  |       |                   |       |   |   |
| *Cash flows from investing activities:*                                               |       |                   |       |   |   |
| Capital expenditures                                                                  |       | (2,405                 | )          | (1,531 | ) |
| Investments in securities                                                             |       | (58,567                | )          | (29,840 | ) |
| Proceeds from sales and maturities of  securities                                     |       | 59,456                 |       | 23,108 |   |
| Net cash used in investing activities                                                 |       | (1,516                 | )          | (8,263 | ) |
|                                                                                  |       |                   |       |   |   |
| *Cash flows from financing activities:*                                               |       |                   |       |   |   |
| Proceeds from notes payable                                                           |       | 41,064                 |       | 8,805 |   |
| Repayment of notes payable                                                            |       | (41,042                | )          | (8,844 | ) |
| Proceeds from issuance of Common Stock                                                |       | 831                    |       | 1,402 |   |
| Net cash provided by financing activities                                             |       | 853                    |       | 1,363 |   |
|                                                                                  |       |                   |       |   |   |
| **Net effect of exchange rate changes on cash**                                       |       | 189                    |       | 161 |   |
|                                                                                  |       |                   |       |   |   |
| **Net decrease in cash and cash equivalents**                                         |       | (4,519                 | )          | (6,999 | ) |
|                                                                                  |       |                   |       |   |   |
| **Cash and cash equivalents at beginning of  period**                                 |       | 47,985                 |       | 25,149 |   |
|                                                                                  |       |                   |       |   |   |
| **Cash and cash equivalents at end of period**                                        |       | $                      | 43,466     |   | $ | 18,150 |   |
|                                                                                  |       |                   |       |   |   |
| Supplemental disclosures of cash flow  information:                                   |       |                   |       |   |   |
| Other non-cash changes:                                                               |       |                   |       |   |   |
| Systems transferred from (to) inventory to  (from) equipment and other assets         |       | $                      | 1,757      |   | $ | 758 |   |

 

*See accompanying notes to unaudited condensed consolidated financialstatements.*

 

5

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**Ultratech, Inc.**

**Notes t****o CondensedConsolidated Financial Statements**

**(Unaudited)**

**April 2, 2005**

 

**(1) Description of Business**

 

Ultratech, Inc. (referred to as “Ultratech” and “we”) develops,manufactures and markets photolithography and laser thermal processingequipment for manufacturers of semiconductor and nanotechnology componentslocated throughout North America, Europe, Japan, Taiwan and the rest of Asia.

 

We supply step-and-repeat photolithography systems based on one-to-oneimaging technology. Within the semiconductor industry, we target the market foradvanced packaging applications. Within the nanotechnology industry, our targetmarkets include thin film head magnetic recording devices, optical networkingdevices, laser diodes and LEDs (light emitting diodes). Our laser thermalprocessing equipment is targeted at advanced annealing applications within thesemiconductor industry.

 

In evaluating its business segments, we gave consideration to the ChiefExecutive Officer’s review of financial information and the organizationalstructure of our management. Based on this review, we concluded that, at thepresent time, resources are allocated and other financial decisions are madebased, primarily, on consolidated financial information. Accordingly, we havedetermined that we operate in one business segment, which is the manufactureand distribution of capital equipment to manufacturers of integrated circuitsand nanotechnology components.

 

**(2) Basisof Presentation**

 

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

 

Operating results for the threemonth period ended April 2, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005, or any futureperiod.

 

USE OF ESTIMATES — The preparation of the financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. By their nature, these estimates andjudgments are subject to an inherent degree of uncertainty. On an ongoingbasis, management evaluates its estimates, including those related toinventories, warranty obligations, purchase order commitments, bad debts,estimated useful lives of fixed assets, asset impairment, income taxes, intangibleassets, and contingencies and litigation. Management bases its estimates onhistorical experience and on various other analyses and assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe 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.

 

IMPACT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS - On December 16, 2004, the Financial Accounting Standards Board(FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment,which is a revision of FASB Statement No. 123, Accounting for Stock-BasedCompensation. Statement 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB StatementNo. 95, Statement of Cash Flows. Generally, the approach in Statement123(R) is similar to the approach described in Statement 123. However,Statement 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure will no longer be analternative. In April 2005, the Securities and Exchange Commission announcedthe adoption of a new rule that amends the effective date of FAS 123(R). Theeffective date of the new standard under these new rules for our consolidatedfinancial statements is January 1, 2006.

 

As permitted by Statement 123, we currentlyaccount for share-based payments to employees using the intrinsic value methodand, as such, generally recognize no compensation cost for employee stockoptions. Accordingly, the adoption of Statement 123(R)’s fair value method willhave a significant impact on our results of operations, although it will haveno impact on our overall financial position. The impact of adoption ofStatement 123(R) cannot be predicted at this time because it will dependon levels of share-based payments granted in the future, the valuationmodel used to value the options and other variables. However, had we adopted Statement 123(R) in prior periods, theimpact of that standard would have 

 

6

----

 

approximated the impact of Statement 123 asdescribed in the disclosure of pro forma net income (loss) and earnings (loss)per share in Note 3 to our condensed consolidated financial statements.

 

**(3) Stock-Based Compensation**

 

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

 

The following table illustrates the effect on net income (loss) and netincome (loss) per share, had we applied the fair value recognition method toaccount for stock-based employee compensation.

 
| ** **                                                                                                                             | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **In thousands, except per share  amounts**                                                                                            | ** ** | **Apr. 2  2005**       | ** ** | **Apr. 3  2004** | ** ** |
| Net income (loss) as reported                                                                                                          |       | $                      | (1,896     | ) | $ | 527 |   |
| Total stock-based employee compensation  expense, determined under fair value based method for all awards, net of related  tax effects |       | (2,683                 | )          | (2,939 | ) |
| Pro forma net loss                                                                                                                     |       | $                      | (4,579     | ) | $ | (2,412 | ) |
| Net income (loss) per share - basic, as  reported                                                                                      |       | $                      | (0.08      | ) | $ | 0.02 |   |
| Pro forma net loss per share - basic                                                                                                   |       | $                      | (0.19      | ) | $ | (0.10 | ) |
| Net income (loss) per share - diluted, as  reported                                                                                    |       | $                      | (0.08      | ) | $ | 0.02 |   |
| Pro forma net loss per share - diluted                                                                                                 |       | $                      | (0.19      | ) | $ | (0.10 | ) |

 

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

 
| ** **                                              | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **Apr. 2,  2005**      | ** ** | **Apr. 3,  2004** | ** ** |
|                                                    |       |                   |       |   |   |
| Expected life (in years): stock options                 |       | 3.5                    |       | 3.5 |   |
| Expected life (in years): employee stock  purchase plan |       | N/A                    |       | 1.25 |   |
| Risk-free interest rate                                 |       | 3.42                   | %          | 2.49 | % |
| Volatility factor                                       |       | 0.52                   |       | 0.63 |   |
| Dividend yield                                          |       | —                 |       | — |   |

 

 

Reflected in the table above is the termination of our Employee StockPurchase Plan in July 2004.

 

**(4) NetIncome (Loss) Per Share**

 

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

 
| ** **                                               | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| **(Unaudited, in thousands,  except per share amounts)** | ** ** | **Apr. 2,  2005**      | ** ** | **Apr. 3,  2004** | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Numerator:                                               |       |                   |       |   |   |
| Net income (loss)                                        |       | $                      | (1,896     | ) | $ | 527 |   |
|                                                     |       |                   |       |   |   |
| Denominator:                                             |       |                   |       |   |   |
| Denominator for basic net income (loss) per  share       |       | 23,877                 |       | 23,683 |   |
| Effect of dilutive employee stock options                |       | —                 |       | 1,980 |   |
| Denominator for diluted net income (loss)  per share     |       | 23,877                 |       | 25,663 |   |
|                                                     |       |                   |       |   |   |
| Earnings (loss) per share - basic:                       |       |                   |       |   |   |
| Net income (loss)                                        |       | $                      | (0.08      | ) | $ |  0.02 |   |
|                                                     |       |                   |       |   |   |
| Earnings (loss) per share - diluted:                     |       |                   |       |   |   |
| Net income (loss)                                        |       | $                      | (0.08      | ) | $ |  0.02 |   |

 

7

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For the three month periodsended April 2, 2005 and April 3, 2004, options to purchase 6,396,235 and791,700 shares of common stock at an average exercise price of $17.93 and$29.66, respectively, were excluded from the computation of diluted net income(loss) per share, as the effect would have been anti-dilutive. Options areanti-dilutive when we have a net loss or when the exercise price of the stockoption is greater than the average market price of our common stock during theperiod.

 

**(5) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** | ** ** | **Apr. 2,   2005** | ** ** | **Dec. 31,  2004** | ** ** |
|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **         | ** ** | **(Unaudited)**    | ** ** | ** **         | ** ** |
| Raw materials      |       | $                  | 11,439     |               | $          | 11,362 |   |
| Work-in-process    |       | 10,347             |       | 13,347             |       |
| Finished products  |       | 7,306              |       | 3,133              |       |
|               |       | $                  | 29,092     |               | $          | 27,842 |   |

 

**(6) Other Assets**

** **

Other assets consist of the following:

 
| **(In thousands)**                | ** ** | **Apr. 2,   2005** | ** ** | **Dec. 31, 2004** | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| Deferred compensation plan assets |       | $                  | 1,497      |                   | $          | 1,401 |   |
| Deferred income taxes             |       | 310                |       | 320                    |       |
| Other                             |       | 1,026              |       | 976                    |       |
|                              |       | $                  | 2,833      |                   | $          | 2,697 |   |

 

**(7) Line of Credit**

 

In December 2004, we entered into a line of credit agreement witha brokerage firm. Under the terms of this agreement, we may borrow funds at acost equal to the current Federal funds rate plus 100 basis points (3.75% as ofApril 2, 2005). Certain of our cash, cash equivalents and short-terminvestments secure borrowings outstanding under this facility. Funds are advancedto us under this facility based on pre-determined advance rates on the cash andsecurities held by us in this brokerage account. This agreement has no setexpiration date and there are no loan covenants, other than the aforementionedcollateral requirement. As of April 2, 2005, $7.9 million was outstanding underthis facility, with a related collateral requirement of approximately $10.5million of our cash, cash equivalents and short-term investments.

** **

**(8) Other Current Liabilities**

 

Other current liabilities consist of the following:

 
| **(In thousands)**                                | ** ** | **April 2,   2005** | ** ** | **Dec. 31,   2004** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **(Unaudited)**     | ** ** | ** **          | ** ** |
| Salaries and benefits                             |       | $                   | 3,622      |                | $          | 2,360 |   |
| Warranty accrual                                  |       | 2,026               |       | 2,013               |       |
| Advance billings                                  |       | 443                 |       | 415                 |       |
| Income taxes payable                              |       | 256                 |       | 31                  |       |
| Reserve for losses on purchase order  commitments |       | 711                 |       | 1,090               |       |
| Other                                             |       | 1,869               |       | 2,237               |       |
|                                              |       | $                   | 8,927      |                | $          | 8,146 |   |

 

8

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**Warranty Accrual**

 

We generally warrant our products for a period of 12 months for newproducts, or 3 months for refurbished products, from the date of customeracceptance for material and labor to repair the product; accordingly, anaccrual for the estimated cost of the warranty is recorded at the time theproduct is shipped. Recognition of the related warranty cost is deferred untilproduct revenue is recognized. Factors that affect our warranty liabilityinclude the number of installed units, historical and anticipated rates ofwarranty claims, and cost per claim. We periodically assess the adequacy of ourrecorded warranty liabilities and adjust the amounts as necessary.

 

Changes in our warranty accrualare as follows:

 
| ** **                                        | ** ** | **April 2,** | ** ** | **April 3,** | ** ** |
|---------------------------------------------------|------------|--------------|------------|--------------|------------|
| **In thousands**                                  | ** ** | **2005**     | ** ** | **2004**     | ** ** |
| Balance, beginning of period                      |       | $            | 2,013      |         | $          | 1,257 |   |
| Warranties issued                                 |       | 954          |       | 1,227        |       |
| Settlements                                       |       | (1,059       | )          | (704         | )          |
| Changes in liability for pre-existing  warranties |       | 118          |       | (184         | )          |
| Balance, end of period                            |       | $            | 2,026      |         | $          | 1,596 |   |

 

**Deferred Services Income**

 

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

 
| ** **                                             | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **April 2,**           | ** ** | **April 3,** | ** ** |
| **In thousands**                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Balance, beginning of the period                       |       | $                      | 1,332      |   | $ | 821 |   |
| Service contracts sold during the period               |       | 1,988                  |       | 1,992 |   |
| Service contract revenue recognized during  the period |       | (1,968                 | )          | (1,946 | ) |
| Balance, end of the period                             |       | $                      | 1,352      |   | $ | 867 |   |

 

**(9) Other Liabilities**

 

Other liabilities consist of the following:

 
| **(In thousands)**                   | ** ** | **Apr. 2,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|
|                                 |       | **(Unaudited)**   |       |               |       |
| Deferred rent                        |       | $                 | 3,411      |               | $          | 3,294 |   |
| Deferred compensation plan liability |       | 1,657             |       | 1,572              |       |
| Other                                |       | 545               |       | 472                |       |
|                                 |       | $                 | 5,613      |               | $          | 5,338 |   |

 

9

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**(10) Comprehensive Income (Loss)**

 

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

 
| ** **                                                    | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **April 2,**           | ** ** | **April 3,** | ** ** |
| **(Unaudited, in thousands)**                                 | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net income (loss)                                             |       | $                      | (1,896     | ) | $ | 527 |   |
| Accumulated other comprehensive income  (loss)                |       |                   |       |   |   |
| Unrealized loss on available-for-sale  securities             |       | (502                   | )          | (105 | ) |
| Unrealized gain (loss) on foreign exchange  forward contracts |       | 189                    |       | 161 |   |
| Comprehensive income (loss)                                   |       | $                      | (2,209     | ) | $ | 583 |   |

 

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

 
| ** **                                               | ** ** | **April 2,** | ** ** | **Dec. 31,** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|--------------|------------|
| **In thousands:**                                        | ** ** | **2005**     | ** ** | **2004**     | ** ** |
| Unrealized losses on:                                    |       |         |       |         |       |
| Available-for-sale investments                           |       | $            | (696       | )            | $          | (194 | ) |
| Foreign exchange contracts                               |       | (106         | )          | (295         | )          |
| Accumulated other comprehensive income at  end of period |       | $            | (802       | )            | $          | (489 | ) |

 

**(11)Contingencies**

 

**Legal Proceedings**.

 

On February 29, 2000, we filed lawsuits asserting patentinfringement and related claims against Nikon, Canon, and ASML in the U.S.District Court for the Eastern District of Virginia. In April 2000, wereached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C. The Court of Appeals reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court in Northern California for further proceedings.

 

We are involved in other lawsuits and legal actions that we believe notto be material to our business, results of operations or financial condition.

 

10

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

 

Certain of the statementscontained herein, which are not a historical fact and which can generally beidentified by words such as “anticipates”, “expects”, “intends”, “will”,“could”, “believes”, “estimates”, “continue”, and similar expressions, areforward-looking statements under Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties, such as risks related to ourdependence on new product introductions and market acceptance of new productsand enhanced versions of our existing products; lengthy sales cycles, includingthe timing of system installations and acceptances; lengthy and costlydevelopment cycles for laser-processing and lithography technologies andapplications; integration, development and associated expenses of the laserprocessing operation; delays, deferrals and cancellations of orders bycustomers; cyclicality in the semiconductor and nanotechnology industries;pricing pressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and theresulting adverse impact on our licensing revenues; changes to financialaccounting standards; changes in pricing by us, our competitors or suppliers;customer concentration; international sales; timing of new productannouncements and releases by us or our competitors; ability to volume producesystems and meet customer requirements; sole or limited sources of supply;ability and resulting costs to attract or retain sufficient personnel toachieve our targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon usachieving and maintaining profitability and the market price of our stock; mixof products sold; rapid technological change and the importance of timelyproduct introductions; outcome of litigation; manufacturing variances andproduction levels; timing and degree of success of technologies licensed tooutside parties; product concentration and lack of product revenuediversification; inventory obsolescence; asset impairment; effects of certainanti-takeover provisions; future acquisitions; volatility of stock price;business interruptions due to natural disasters or utility failures;environmental regulations; and any adverse effects of terrorist attacks in theUnited States or elsewhere, or government responses thereto, or militaryactions in Iraq, Afghanistan and elsewhere, on the economy, in general, or onour business in particular. Due to these and additional factors, thestatements, historical results and percentage relationships set forth below arenot necessarily indicative of the results of operations for any future period.These forward-looking statements are based on management’s current beliefs andexpectations, some or all of which may prove to be inaccurate, and which maychange. We undertake no obligation to revise or update any forward-lookingstatements to reflect any event or circumstance that may arise after the dateof this report.

** **

**OVERVIEW**

 

Ultratech, Inc. (referred to as “Ultratech” and “we”) develops,manufactures and markets photolithography and laser thermal processingequipment for manufacturers of semiconductor and nanotechnology componentslocated throughout North America, Europe, Japan, Taiwan and the rest of Asia.

 

We supply step-and-repeat photolithography systems based on one-to-oneimaging technology. Within the semiconductor industry, we target the market foradvanced packaging applications. Within the nanotechnology industry, our targetmarkets include thin film head magnetic recording devices, optical networkingdevices, laser diodes and LEDs (light emitting diodes). Our laser thermalprocessing equipment is targeted at advanced annealing applications within thesemiconductor industry.

 

**RESULTS OF OPERATIONS**

 

We derive a substantial portion of our total net sales from sales of arelatively small number of newly manufactured systems, which typically range inprice from $1.2 million to $4.0 million. As a result of these high sale prices,the timing and recognition of revenue from a single transaction has had andmost likely will continue to have a significant impact on our net sales andoperating results for any particular period.

 

Our backlog at the beginning of a period typically does not include allof the sales needed to achieve our sales objectives for that period. Inaddition, orders in backlog are subject to a high risk of cancellation,shipment or customer acceptance delays, and deferral or rescheduling by acustomer with limited or no penalties. Consequently, our net sales and operatingresults for a period have been and will continue to be dependent upon ourobtaining orders for systems to be shipped and accepted in the same period inwhich the order is received. Our business and financial results for aparticular period could be materially adversely affected if an anticipatedorder for even one system is not received in time to permit shipment andcustomer acceptance during that period. Furthermore, a substantial portion ofour shipments has historically occurred near the end of each quarter. Delays ininstallation and customer acceptance due, for example, to our inability tosuccessfully demonstrate the agreed-upon specifications or criteria at thecustomer’s facility, or to the failure of the customer to permit installationof the system in the agreed upon time, may cause net sales in a particularperiod to fall significantly below our expectations, which may materiallyadversely affect our operating results for that period. This risk is especiallyapplicable in connection with the introduction and initial sales of a newproduct line. Additionally, certain orders in backlog contain productevaluation terms. 

 

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Product evaluation terms could result in extended product acceptance cycles,which could delay recognition of revenue; or result in the return of product.

 

The failure to receive anticipated orders or delays in shipments andcustomer acceptances due, for example, to rescheduling, delays, deferrals orcancellations by customers, additional customer configuration requirements,customer evaluation or demonstration criteria, or to unexpected manufacturingdifficulties or delays in deliveries by suppliers due to their long productionlead times or otherwise, have caused and may continue to cause net sales in aparticular period to fall significantly below our expectations, materiallyadversely affecting our operating results for that period. In particular, thelong manufacturing and acceptance cycles of our laser thermal processingsystems and advanced packaging wafer steppers and the long lead time for lensesand other materials, could cause shipments and acceptances of such products tobe delayed from one quarter to the next, which could materially adverselyaffect our financial condition and results of operations for a particularquarter.

 

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

 

**Net sales**

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **    | ** ** |
|------------------------------------|------------|------------------------|------------|--------------|------------|---------------|------------|
| ** **                         | ** ** | **April 2,**           | ** ** | **April 3,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
| **(in millions)**                  | ** ** | **2005**               | ** ** | **2004**     | ** ** | **Change**    | ** ** | **Change** | ** ** |
| Sales of:                          | ** ** | ** **             | ** ** | ** **   | ** ** | ** **    | ** ** | ** ** | ** ** |
| Products: Systems                  |       | $                      | 20.3       |         | $          | 20.4          |       | $ | (0.1 | ) | -1 | % |
| Products: Spare parts and upgrades |       | 3.4                    |       | 2.3          |       | 1.1           |       | 47 | % |
| Services                           |       | 3.1                    |       | 2.9          |       | 0.2           |       | 7 | % |
| Licenses                           |       | 1.1                    |       | 0.9          |       | 0.2           |       | 22 | % |
| Total net sales                    |       | $                      | 28.0       |         | $          | 26.6          |       | $ | 1.4 |   | 5 | % |

 

Net sales consist of revenues from system sales, spare parts sales,services and licensing of technologies. System sales decreased 1%, to $20.3million, in the first quarter of 2005 as compared to the first quarter of 2004.The number of systems sold declined by 15%, as compared to last year’s firstquarter. Weighted-average selling prices increased 17%, as compared to thecomparable year-ago period, as a result of a higher proportion of 300mm systemsales events, which typically have higher selling prices than our 200mmsystems.

 

On a product market application basis, system sales to thesemiconductor industry, primarily for advanced packaging applications, were$12.9 million for the quarter ended April 2, 2005, an increase of 9% whencompared with system sales to this market in the first quarter of 2004. Theincrease was due to a shift in product mix toward our 300mm product offerings,which typically have higher selling prices than our 200mm offerings, partiallyoffset by the sale of one less system to this market. System sales to thenanotechnology market were $7.4 million for the quarter ended April 2, 2005, adecrease of 14% as compared with system sales to this market in the firstquarter of 2004, entirely as a result of one less unit shipped to this market.The weighted-average selling prices of our sales to the nanotechnology marketfor the two periods were similar.

 

Spare parts and upgrades sales for the first quarter of 2005 were $3.4million, an increase of 47% over last year’s first quarter, primarily as aresult of higher levels of system upgrades. Revenues from services increased 7%over the same period a year ago to $3.1 million, primarily as a result of anincrease in system relocations by our customers.

 

Revenues from licenses increased by $0.2 million in the currentquarter, as compared to last year’s first quarter, as a result of systemsoftware licenses related to third party sales of our equipment.

 

At April 2, 2005, we had approximately $1.7 million of deferred productand services income resulting from products shipped but not yet installed andaccepted and deferred service revenue, as compared to $1.2 million at December31, 2004. Deferred income related to our products is recognized upon satisfyingthe contractual obligations for installation and/or customer acceptance. Duringthe three month period ended April 2, 2005, deferred license revenue decreasedby $0.9 million, to $0.1 million, as a result of amortization of proceedsreceived in prior periods. Amortization of deferred license revenue results incurrent period license revenue. We expect to recognize $0.1 million of licenserevenue in the quarter ending July 2, 2005. Future revenues from licensingactivities, if any, will be contingent upon the outcome of current litigation,and upon existing and future licensing and royalty arrangements. The Companymay not be successful in generating licensing revenues in the future.

 

For the quarter ended April 2, 2005, international net sales were $20.7million, or 74% of total net sales, as compared with $20.4 million, or 77% oftotal net sales for the first quarter of 2004. We expect sales to internationalcustomers to represent a 

 

12

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significant majority of our revenues during the remainder of 2005. Ourrevenue derived from sales in foreign countries is not generally subject tosignificant exchange rate fluctuations, principally because sales contracts forour systems are generally denominated in U.S. dollars. In Japan, however,orders are often denominated in Japanese yen. This subjects us to the risk ofcurrency fluctuations. We attempt to mitigate this risk by entering intoforeign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue. After recording revenue,we use various mechanisms, such as foreign currency forward exchange contractsand natural hedges, to offset substantial portions of the gains or lossesassociated with our Japanese yen denominated receivables due to exchange ratefluctuations. We had approximately $4.6 million of Japanese yen denominatedreceivables at April 2, 2005. International sales expose us to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which impact the relative cost of ownership of ourproducts and, thus, the customer’s willingness to purchase our product. (See“Additional Risk Factors: International Sales”).

 

**Grossprofit**

 

On a comparative basis, gross margins were 43.9% and 49.1% for thefirst quarters of 2005 and 2004, respectively. The decrease in gross margin wasdue to higher manufacturing and service costs, and extended manufacturing andcustomer acceptance cycles, primarily associated with the introduction of ourlaser processing systems (5.6 percentage points) and the impact of the sale ofinventory in the first quarter of 2004 that had previously been written off(0.8 percentage points), partially offset by higher product standard margins(0.6 percentage points), the impact of higher license revenue in the firstquarter of 2005 (0.4 percentage points) and other items totaling (0.2percentage points).

 

Exclusive of licensing revenues, gross margin was 41.6% for the quarterended April 2, 2005 as compared with 47.2% for the same period in 2004. Webelieve disclosure of gross margins without reference to licensing revenuesprovides additional appropriate disclosure to allow comparison of our productand service gross margins over time because there is little, if any, cost of salesassociated with our licensing revenues. We expect license revenue to be $0.1million for the quarter ending July 2, 2005, at which point it will cease.Future revenues from licensing activities, if any, will be contingent upon theoutcome of current litigation, and upon existing and future licensing androyalty arrangements. The Company may not be successful in generating licensingrevenues in the future. Gross margins will be negatively impacted by thediscontinuance of license revenue.

 

Our gross profit as a percentage of sales has been and most likely willcontinue to be significantly affected by a variety of factors, including theintroduction of new products, which typically have higher manufacturing costsuntil manufacturing efficiencies are realized and which are typicallydiscounted more than existing products until the products gain marketacceptance; the mix of products sold; the rate of capacity utilization;writedown of inventory and open purchase commitments; technology support andlicensing revenues, which have little or no associated cost of sales; productdiscounts, pricing and competition in our targeted markets; non-linearity ofshipments during the quarter which can result in manufacturing inefficiencies;the percentage of international sales, which typically have lower gross marginsthan domestic sales principally due to higher field service and support costs;and start-up costs and inefficiencies associated with the implementation ofsubcontracting arrangements.

 

**Operatingexpenses**

 

Research, development and engineering expenses for the first quarter of2005 were $7.5 million, an increase of $1.3 million from the amount reportedfor the comparable period of 2004. As a percentage of net sales, research,development and engineering expenses increased to 26.8% in the quarter endedApril 2, 2005 as compared to 23.3% in the first quarter of 2004. This increase,in terms of dollars and as a percentage of net sales, was due to increasedinvestment in the development of our laser processing technologies.

 

Selling, general, andadministrative expenses were $7.5 million for the first quarter of 2005, anincrease of $0.4 million as compared with the comparable period in 2004. As apercentage of net sales, selling, general, and administrative expenses increasedto 26.9% in the quarter ended April 2, 2005 as compared to 26.6% in the firstquarter of 2004. This increase, in terms of dollars and as a percentage of netsales, was primarily due to increased legal costs related to our being aplaintiff in a patent infringement lawsuit.

 

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**Interestand other income, net**

** **
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **April 2,**           | ** ** | **April 3,** | ** ** |
| **(in millions)**                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Interest and other income, net:      |       |                   |       |   |   |
| Interest income                      |       | $                      | 1.0        |   | $ | 0.9 |   |
| Other income (expense)               |       | (0.1                   | )          | 0.1 |   |
| Total interest and other income, net |       | $                      | 0.9        |   | $ | 1.0 |   |

 

Interest income was $1.0 million for the first quarter of 2005, ascompared with $0.9 million for the comparable period of 2004. We presentlymaintain an investment portfolio with a weighted-average maturity of less thanone year. As a result, changes in short-term interest rates have had, and willcontinue to have, a significant impact on our interest income. Other income(expense) was ($0.1) million for the first quarter of 2005, as compared to $0.1million for last year’s first quarter, primarily as a result of lower foreignexchange gains and less favorable investment returns on our executive deferredcompensation plan.

 

**Income tax expense**

 

For the three months ended April 2, 2005, we recorded an incometax benefit of $0.1 million, as compared to a provision of $0.1 million for thefirst quarter in 2004. The tax benefit recognized in the current periodresulted from our full-year forecast of an effective tax rate of approximately7% of pre-tax income. Similarly, the year-ago tax provision resulted from ourthen- forecasted effective tax rate of approximately 10% of pre-tax income forthe year ended December 31, 2004. The estimated effective tax rate of 7% for 2005results primarily from foreign income taxes and the U.S. federal alternativeminimum tax. This effective rate is substantially less than the statutory ratebecause of available U.S. federal net operating loss carry-forwards.

 

In October 2004, the United States enacted The American JobsCreation Act of 2004 (“the Act”). The Act provides for a three year phase-outof current extraterritorial income tax (“ETI”) benefits and replaces ETI with aphased-in nine percent domestic production activity deduction that will not befully effective until 2010. We do not currently realize ETI tax benefits. Thisprovision of the Act is not expected to have a material effect on our resultsof operations or financial position in the near future. The Act also includes adeduction of 85% for certain foreign earnings that are repatriated, as definedin the Act. We do not intend to repatriate any of our foreign earnings duringthe effective period of this deduction under the Act.

 

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

 

**Outlook**

 

Although we believe that our served markets have generally strengthenedduring the last twelve months, the anticipated timing of orders, shipments andcustomer acceptances usually requires us to fill a number of production slotsin any given quarter in order to meet our sales targets. If we are unsuccessfulin our efforts to secure those production orders, or if existing productionorders are delayed or cancelled, our results of operations will be materiallyadversely impacted. Accordingly, we may not be able to achieve or maintain ourcurrent or prior level of sales. We presently expect that net sales for thesecond quarter of 2005 will be in a range of $25 million to $30 million. Forthe full year, we believe we could see annual revenue growth of 20% to 25%,over levels achieved in 2004.

 

Because our net sales are subject to a number of risks, including:risks associated with the introduction of our new laser processing productline; delays in customer acceptances; intense competition in the capitalequipment industry; uncertainty relating to the timing and market acceptance ofour products; and the condition of the macro-economy and the semiconductorindustry, we may not exceed or maintain our current or prior level of net salesfor any period in the future. Additionally, we believe that the marketacceptance and volume production of our advanced packaging systems, laserprocessing systems, and our 1000 series family of wafer steppers are ofcritical importance to our future financial results. At April 2, 2005,these critical systems represented 90% of our backlog. To the extent that theseproducts do not achieve or maintain significant sales due to difficultiesinvolving manufacturing or engineering, the inability to reduce the currentlong manufacturing and customer acceptance cycles for these products,competition, excess capacity in the semiconductor or nanotechnology device 

 

14

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industries, or any other reason, our business, financial condition andresults of operations would be materially adversely affected.

 

We believe that gross margin for the second quarter of 2005 will bebetween 41% and 44%. The final gross margin achieved will depend heavily uponsales volumes and the resulting product mix. Should our sales not reach thelevel expected, we may incur a higher risk of inventory obsolescence and excesspurchase commitments and lower utilization of our manufacturing infrastructure,which would materially adversely impact our results of operations. New productsgenerally have lower gross margins until there is widespread market acceptanceand until production and after-sales efficiencies can be achieved. Shouldsignificant market demand fail to develop for our laser processing systems andour new advanced packaging offerings, our business, financial condition andresults of operations would be materially adversely affected. In addition,higher costs associated with extended manufacturing and customer acceptanceperiods on early shipments of our new laser processing products have had, andwill continue to have, an adverse impact on our gross margins.

 

We continue to invest significant resources in the development andenhancement of our laser processing systems and technologies and our 1Xproducts and related technologies. Further, we expect that selling, general andadministrative expenses will continue to be impacted by the factors noted abovein the explanation of our current period variances. As a result, we believeoperating margin for the second quarter of 2005 will be in a range of breakevento (15%). Finally, net income per share is projected in a range of breakeven toa loss of $0.10.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Net cash used in operating activities was $4.0 million for thethree-month period ended April 2, 2005, as compared with net cash used inoperating activities of $0.3 million for the comparable period in 2004. Netcash used in operating activities during the first quarter of 2005 wasprimarily attributable to a reduction in accounts payable of $3.4 million, thenet loss for the quarter of $1.9 million and an increase in inventories of $1.3million, partially offset by non-cash charges to income for depreciation andamortization of $2.1 million, and other changes which total $0.5 million. Theincrease in inventories during the period results primarily from two laserprocessing systems, shipped to customers during the first quarter of 2005,pursuant to purchase orders containing product evaluation provisions.

 

We believe that because of the relatively long manufacturing cycle ofcertain of our systems, particularly newer products, our inventories willcontinue to represent a significant portion of working capital. Currently, weare devoting significant resources to the development, introduction andcommercialization of our laser processing system and to the development of ournext generation 1X lithography technologies. Additionally, we have purchasedsignificant levels of inventories, and have made commitments to purchaseadditional inventories, to support the current production plan for our laserprocessing and next-generation lithography systems. We currently intend tocontinue to incur significant operating expenses in the areas of research,development and engineering, manufacturing and selling, general andadministrative costs in order to further develop, produce and support these newproducts. Additionally, gross profit margins, inventory and capital equipmentlevels will be adversely impacted in the future by costs associated with theinitial production of our laser processing system and by our next-generation 1Xwafer stepper platform. These costs include, but are not limited to: additionalmanufacturing overhead; cost of demonstration and customer evaluation systems;ongoing research, development and engineering costs; additional technical,marketing and administrative personnel; and the establishment of additionalafter-sales support organizations. If we are unable to achieve significantlyincreased net sales, or if our sales fall below expectations, our cash flow andoperating results will be materially adversely affected until, among otherfactors, costs and expenses can be reduced. Our failure to achieve our salestargets for these new products could result in significant additional inventorywrite-offs and asset impairment charges, either of which would materiallyadversely impact our results of operations.

 

During the quarter ended April 2, 2005, net cash used in investingactivities was $1.5 million, attributable to capital expenditures of $2.4million, partially offset by net proceeds from sales and maturities ofshort-term investments of $0.9 million (net of purchases).

 

Net cash provided by financing activities was $0.9 million during thefirst quarter of 2005, attributable to proceeds received from the issuance ofcommon stock under our employee stock option plans.

 

At April 2, 2005, we had working capital of $167.9 million. Ourprincipal source of liquidity at April 2, 2005 consisted of $137.7 million incash, cash equivalents and short-term investments, net of outstandingborrowings under our line of credit.

 

In December 2004, we entered into a line of credit agreement witha brokerage firm replacing a similar arrangement that we had with a differentfirm. Under the terms of this agreement, we may borrow funds at a cost equal tothe current Federal funds rate plus 100 basis points (3.75% as of April 2,2005). Certain of our cash, cash equivalents and short-term investments secureborrowings outstanding under this facility. Funds are advanced to us under thisfacility in accordance with pre-determined advance rates based on the cash andsecurities held by us in this brokerage account. This agreement has no setexpiration date and there are no loan covenants. As of April 2, 2005, $7.9million was outstanding under this facility, with a related collateralrequirement of approximately $10.5 million of our cash, cash equivalents andshort-term investments.

 

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The development and manufacture of laser processing and new lithographysystems and enhancements are highly capital-intensive. In order to becompetitive, we believe we must continue to make significant expenditures for:inventories; facilities; capital equipment; sales, service, training andsupport capabilities; systems, procedures and controls; and expansion ofoperations and research and development, among many other items. We expect thatcash generated from operations and our cash, cash equivalents and short-terminvestments will be sufficient to meet our cash requirements for at least thenext twelve months. However, in the near-term, we may continue to utilizeexisting and future lines of credit, and other sources of financing, in orderto maintain our present levels of cash, cash equivalents and short-term investments.Beyond the next twelve months, we may require additional equity or debtfinancing to address our working capital or capital equipment needs. Inaddition, we may seek to raise equity or debt capital at any time that we deemmarket conditions to be favorable. Additional financing, if needed, may not beavailable on reasonable terms, or at all.

 

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

 

**Foreign Currency**

 

As part of our overall strategy to manage the level of exposure to therisk of foreign currency exchange rate fluctuations, we attempt to hedge mostof our Japanese yen denominated foreign currency exposures. We use foreigncurrency forward contracts to hedge the risk that unremitted Japanese yendenominated receipts from customers, for actual or forecasted sales ofequipment after receipt of customer orders, may be adversely affected bychanges in foreign currency exchange rates. After recording revenue, we usevarious mechanisms, such as foreign currency forward exchange contracts andnatural hedges, to offset substantial portions of the potential gains or lossesassociated with our Japanese yen denominated assets and liabilities due toexchange rate fluctuations. At April 2, 2005, we had taken action to hedgeapproximately 100% of these Japanese yen denominated exposures. In addition tonatural hedges resulting from having both assets and liabilities denominated inJapanese yen, we enter into foreign currency forward contracts that generallyhave maturities of nine months or less. We often close foreign currency forwardcontracts by entering into an offsetting contract. At April 2, 2005, we hadcontracts for the sale of $11.5 million of foreign currencies at fixed rates ofexchange.

 

**ADDITIONAL RISK FACTORS**

 

*In additionto risks described in the foregoing discussions, the following risks apply toour business and us:*

 

**Development of New Product Lines; Expansionof Operations **Currently,we are devoting significant resources to the development, introduction andcommercialization of our laser processing systems and our next-generation 1Xlithography platform. We intend to continue to develop these products andtechnologies during 2005, and will continue to incur significant operatingexpenses in the areas of: research, development and engineering; manufacturing;and selling, general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit andoperating margins may be further adversely impacted in the future by costsassociated with the initial production of our laser processing systems and byour next-generation platform for our 1X-lithography systems. Introduction ofnew products generally involves higher installation costs and productperformance uncertainties that could delay customer acceptance of our systems,resulting in a delay in recognizing revenue associated with those systems and areduction in gross margins. These costs include, but are not limited to,additional manufacturing overhead, additional inventory write-offs, costs ofdemonstration systems and facilities, and costs associated with theestablishment of additional after-sales support organizations. Additionally,operating expenses may increase, relative to sales, as a result of addingadditional marketing and administrative personnel, among other costs, tosupport our new products. If we are unable to achieve significantly increasednet sales or if our sales fall below expectations, our operating results willbe materially adversely affected.

 

Our ability to develop and commercialize our laser processingtechnologies is highly dependent on partnering with semiconductor companies todevelop the anneal process. Our ability to deliver timely solutions is alsolimited by wafer turnaround at the potential customer’s fabrication facility.

 

**Lengthy Sales Cycles  **Sales of oursystems depend, in significant part, upon the decision of a prospectivecustomer to increase manufacturing capacity or to restructure currentmanufacturing facilities, either of which typically involves a 

 

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significant commitment of capital. Many of our customers in the pasthave cancelled the development of new manufacturing facilities and havesubstantially reduced their capital equipment budgets. In view of the significantinvestment involved in a system purchase, we have experienced and may continueto experience delays following initial qualification of our systems as a resultof delays in a customer’s approval process. Additionally, we are presentlyreceiving orders for systems that have lengthy delivery schedules, which may bedue to longer production lead times or a result of customers’ capacityscheduling requirements. For these and other reasons, our systems typicallyhave a lengthy sales cycle during which we may expend substantial funds andmanagement effort in securing a sale. Lengthy sales cycles subject us to anumber of significant risks, including inventory obsolescence and fluctuationsin operating results, over which we have little or no control. In order tomaintain or exceed our present level of net sales, we are dependent uponobtaining orders for systems that will ship and be accepted in the currentperiod. We may not be able to obtain those orders.

 

**Intellectual Property Rights **Although weattempt to protect our intellectual property rights through patents,copyrights, trade secrets and other measures, we believe that our success willdepend more upon the innovation, technological expertise and marketingabilities of our employees. Nevertheless, we have a policy of seeking patentswhen appropriate on inventions resulting from our ongoing research anddevelopment and manufacturing activities. We own 95 United States and foreignpatents, which expire on dates ranging from June 2006 to April 2023and have 88 United States and foreign patent applications pending. In addition,we have various registered trademarks and copyright registrations coveringmainly software programs used in the operation of our systems. We also relyupon trade secret protection for our confidential and proprietary information.We may not be able to protect our technology adequately and competitors may beable to develop similar technology independently. Our pending patentapplications may not be issued or U.S. or foreign intellectual property lawsmay not protect our intellectual property rights. In addition, litigation maybe necessary to enforce our patents, copyrights or other intellectual propertyrights, to protect our trade secrets, to determine the validity and scope ofthe proprietary rights of others or to defend against claims of infringement.Such litigation has resulted in, and in the future could result in, substantialcosts and diversion of resources and could have a material adverse effect onour business, financial condition and results of operations, regardless of theoutcome of the litigation. Patents issued to us may be challenged, invalidatedor circumvented and the rights granted thereunder may not provide competitiveadvantages to us. Furthermore, others may independently develop similartechnology or products, or, if patents are issued to us, design around thepatents issued to us. Invalidation of our patents related to those technologiescould allow our competitors to more effectively compete against us, which couldresult in less revenue for us.

 

On February 29, 2000, we filed lawsuits asserting patentinfringement and related claims against Nikon, Canon, and ASML in the U.S.District Court for the Eastern District of Virginia. In April 2000, wereached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C. The Court of Appeals reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court in Northern California for further proceedings.

 

We are involved in other lawsuits and legal actions regardinginfringement claims, and we have from time to time been notified of claims thatwe may be infringing intellectual property rights possessed by third parties.We believe that the outcome of these matters will not be material to ourbusiness or financial condition, though currently we are spending significantresources on litigation matters, in particular in connection with a patentinfringement lawsuit in which we are the plaintiff. Some of the Company’scustomers have received notices of infringement from Technivision Corporationand the Lemelson Medical, Education and Research Foundation, LimitedPartnership (“Lemelson”) alleging that the manufacture of certain semiconductorproducts and/or the equipment used to manufacture those semiconductor productsinfringes certain issued patents regarding machine vision technology. 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. TheCompany believes that its machine vision technology does not infringe thepatent rights of other parties.

 

Infringement claims by third parties or claims for indemnificationresulting from infringement claims may be asserted in the future and suchassertions could materially adversely affect our business, financial conditionand results of operations, regardless of the outcome of any litigation. Withrespect to any such future claims, we may seek to obtain a license under thethird party’s intellectual property rights. However, a license may not beavailable on reasonable terms or at all. We could decide, in the alternative,to resort to litigation to challenge such claims. Such challenges could beexpensive and time consuming and could materially adversely affect ourbusiness, financial condition and results of operations, regardless of theoutcome of any litigation.

 

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**Cyclicality of Semiconductor, SemiconductorPackaging and Nanotechnology Industries ****Our** businessdepends in significant part upon capital expenditures by******manufacturersof semiconductors, bumped semiconductors and nanotechnology components,including thin film head magnetic recording devices, which in turn depend uponthe current and anticipated market demand for such devices and productsutilizing such devices. The semiconductor industry historically has been highlycyclical and has experienced recurring periods of oversupply. This has, fromtime to time, resulted in significantly reduced demand for capital equipmentincluding the systems manufactured and marketed by us. We believe that marketsfor new generations of semiconductors and semiconductor packaging will also be subjectto similar fluctuations. Our business and operating results would be materiallyadversely affected by downturns or slowdowns in the semiconductor packagingmarket or by loss of market share. Accordingly, we may not be able to achieveor maintain our current or prior level of sales.

 

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

 

**Highly Competitive Industry**  The capital equipment industry in which weoperate is intensely competitive. A substantial investment is required toinstall and integrate capital equipment into a semiconductor, semiconductorpackaging or nanotechnology device production line. We believe that once adevice manufacturer or packaging subcontractor has selected a particularvendor’s capital equipment, the manufacturer generally relies upon thatequipment for the specific production line application and, to the extentpossible, subsequent generations of similar products. Accordingly, it isdifficult to achieve significant sales to a particular customer once anothervendor’s capital equipment has been selected.

 

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

 

With respect to our laser annealing technologies, marketed under theLSA100 product name, the primary competition comes from companies such asApplied Materials, Inc., Mattson Technology, Inc., and AxcelisTechnologies, Inc. that offer products utilizing rapid thermal processing(RTP), which is the current prevailing manufacturing technology. RTP does notprevent semiconductor device manufacturers from scaling the lateral dimensionsof their transistors to obtain improved performance, but diffusion resultingfrom the time scales associated with RTP limits the vertical dimension of thejunctions. Faster annealing times result in shallower and more abrupt junctionsand faster transistors. We believe our annealing technology results in fastertransistors for a given size. We believe that RTP manufacturers recognize theneed to reduce thermal cycle times and are working toward this goal. InJuly 2000, we licensed certain rights to our then existing laserprocessing technology, with reservations, to a competing manufacturer ofsemiconductor equipment. We presently anticipate that this company will offerlaser-annealing tools to the semiconductor industry that will compete with ourofferings.

 

Another potential advanced annealing solution utilizes flash lamp annealingtechnology (FLA). Several companies have published papers on annealing toolsthat incorporate flash lamp technology in order to reduce annealing times andincrease anneal temperatures. Developers of FLA technology claim to haveovercome annealing difficulties at the 65nm node. This technique, which employsxenon flash lamps, has shown improvements over RTP in junction depth and sheetresistance, but we believe FLA will suffer from pattern-relatednon-uniformities. Our proprietary laser processing solution has beenspecifically developed to provide junction annealing on near-instantaneoustime-scales, while maintaining low sheet resistance. Laser spike annealing, thefirst implementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Research indicates that,at temperatures just below the melting point of silicon, time durations in themicrosecond to millisecond range, are required to achieve full activation, anddopant diffusion is minimal.

 

Additionally, competition to our laser processing products may comefrom other laser annealing tools, including those presently being used by theflat panel display industry to re-crystallize silicon. Manufacturers of thesetools may try to extend the use of their technologies to semiconductor deviceapplications.

 

We believe that to be competitive will require significant financialresources in order to continue to invest in new product development, to investin new features and enhancements to existing products, to introduce newgeneration stepper systems 

 

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in our served markets on a timely basis, and to maintain customerservice and support centers worldwide. In marketing our products, we may alsoface competition from vendors employing other technologies. In addition,increased competitive pressure has led to intensified price-based competitionin certain of our markets, resulting in lower prices and margins. Should thesecompetitive trends continue, our business, financial condition and operatingresults may be materially adversely affected.

 

**Customer and Market Concentrations  **Historically, we have sold a substantialportion of our systems to a limited number of customers. In the first quarterof 2005, our top five customers accounted for 70% of our total systems sales.In 2004, Intel Corporation accounted for 10% of our net sales. In 2003, IntelCorporation accounted for 26% of our net sales. We expect that sales to arelatively few customers will continue to account for a high percentage of ournet sales in the foreseeable future and believe that our financial resultsdepend in significant part upon the success of these major customers and ourability to meet their future capital equipment needs. Although the compositionof the group comprising our largest customers may vary from period to period,the loss of a significant customer or any reduction in orders by a significantcustomer, including reductions due to market, economic or competitiveconditions in the semiconductor, semiconductor packaging or nanotechnologyindustries or in the industries that manufacture products utilizing integratedcircuits, thin film heads or other nanotechnology components, would likely havea material adverse effect on our business, financial condition and results ofoperations. Our ability to maintain or increase our sales in the futuredepends, in part, on our ability to obtain orders from new customers as well asthe financial condition and success of our existing customers, thesemiconductor and nanotechnology industries and the economy in general.

 

In addition to the business risks associated with dependence on majorcustomers, these significant customer concentrations have in the past resultedin significant concentrations of accounts receivable. These significant andconcentrated receivables expose us to additional risks, including the risk ofdefault by one or more customers representing a significant portion of ourtotal receivables. If we were required to take additional accounts receivablereserves, our business, financial condition and results of operations would bematerially adversely affected.

 

On a market application basis, sales to the semiconductor industry,primarily for advanced packaging applications, accounted for approximately 63%and 58% of system revenue for the first three months of 2005 and 2004,respectively. During the first quarter of 2005 and 2004, approximately 37% and42%, respectively, of our systems revenue was derived from sales to nanotechnologymanufacturers, including micro systems, thin film head and optical devicemanufacturers. Our future results of operations and financial condition wouldbe materially adversely impacted by a downturn in any of these market segments,or by loss of market share in any of these segments.

 

**Rapid Technological Change; Importance ofTimely Product Introduction **Thesemiconductor and nanotechnology manufacturing industries are subject to rapidtechnological change and new product introductions and enhancements. Ourability to be competitive in these and other markets will depend, in part, uponour ability to develop new and enhanced systems and related software tools, andto introduce these systems and related software tools at competitive prices andon a timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.We will also be required to enhance the performance of our existing systems andrelated software tools. Our success in developing new and enhanced systems andrelated software tools depends upon a variety of factors, including productselection, timely and efficient completion of product design, timely andefficient implementation of manufacturing and assembly processes, productperformance in the field and effective sales and marketing. Because new productdevelopment commitments must be made well in advance of sales, new productdecisions must anticipate both future demand and the technology that will beavailable to supply that demand. We may not be successful in selecting,developing, manufacturing or marketing new products and related software toolsor enhancing our existing products and related software tools. Any such failurewould materially adversely affect our business, financial condition and resultsof operations.

 

Because of the large number of components in our systems, significantdelays can occur between a system’s introduction and the commencement byUltratech of volume production of such systems. We have experienced delays fromtime to time in the introduction of, and technical and manufacturingdifficulties with, certain of our systems and enhancements and related softwarefeatures and options, and may experience delays and technical and manufacturingdifficulties in future introductions or volume production of new systems orenhancements and related software features and options.

 

We may encounter additional technical, manufacturing or otherdifficulties that could further delay future introductions or volume productionof systems or enhancements. Our inability to complete the development or meetthe technical specifications of any of our systems or enhancements and relatedsoftware tools, or our inability to manufacture and ship these systems or enhancementsand related software tools in volume and in time to meet the requirements formanufacturing the future generation of semiconductor or nanotechnology devices,would materially adversely affect our business, financial condition and resultsof operations. In addition, we may incur substantial unanticipated costs toensure the functionality and reliability of our products early in the products’life cycles. If new products have reliability or quality problems, reducedorders or higher manufacturing costs, delays in customer acceptance, revenuerecognition and collecting accounts receivable 

 

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and additional service and warranty expenses may result. Any of suchevents may materially adversely affect our business, financial condition andresults of operations.

 

**International Sales  **Internationalnet sales accounted for approximately 74% and 77% of total net sales for thethree months ended April 2, 2005 and April 3, 2004, respectively. ** **Internationalnet sales accounted for approximately 65% and 61% of total net sales for theyears 2004 and 2003, respectively. We anticipate that international sales,which typically have lower gross margins than domestic sales, principally dueto increased competition and higher field service and support costs, willcontinue to account for a significant portion of total net sales. As a result,a significant portion of our net sales will continue to be subject to certainrisks, including 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 staffing andmanaging foreign subsidiary and branch operations; and potentially adverse taxconsequences.

 

Although we generally transact our international sales in U.S. dollars,international sales expose us 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 our products and mayfurther impact the purchasing ability of our international customers. However,in Japan, we have direct sales operations and orders are often denominated inJapanese yen. This may subject us to a higher degree of risk from currencyfluctuations. We attempt to mitigate this exposure through the use of foreigncurrency forward exchange contracts. We are also subject to the risksassociated with the imposition of legislation and regulations relating to theimport or export of semiconductors and nanotechnology products. We cannotpredict whether the United States or any other country will implement changesto quotas, duties, taxes or other charges or restrictions upon the importationor exportation of our products. These factors, or the adoption of restrictivepolicies, may have a material adverse effect on our business, financialcondition and results of operations.

 

**Changes to Financial Accounting Standards May****Affect the Company’s Reported Results of Operations**We prepareour financial statements in conformity with accounting principles generallyaccepted in the United States, or U.S. GAAP. These principles are subject tointerpretation by the Financial Accounting Standards Board (FASB), the AmericanInstitute of Certified Public Accountants (AICPA), the Securities and ExchangeCommission (SEC) and various bodies formed to interpret and create appropriateaccounting policies. A change in those policies can have a significant effecton our reported results and may affect our reporting of transactions completedbefore a change is announced.

 

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

 

**Sole or Limited Sources of Supply  **Our manufacturing activities consist ofassembling and testing components and subassemblies, which are then integratedinto finished systems. We rely on a limited number of outside suppliers andsubcontractors to manufacture certain components and subassemblies. We order oneof the most critical components of our technology, the glass for our 1X lenses,from external suppliers. We design the 1X lenses and provide the lensspecifications and the glass to other suppliers, who then machine the lenselements. We then assemble and test the optical 1X lenses.

 

We procure some of our other critical systems’ components,subassemblies and services from single outside suppliers or a limited group ofoutside suppliers in order to ensure overall quality and timeliness ofdelivery. Many of these components and subassemblies have significantproduction lead times. To date, we have been able to obtain adequate servicesand supplies of components and subassemblies for our systems in a timelymanner. However, disruption or termination of certain of these sources couldresult in a significant adverse impact on our ability to manufacture oursystems. This, in turn, would have a material adverse effect on our business,financial condition and results of operations. Our reliance on a sole or a limitedgroup of suppliers and our reliance on subcontractors involve several risks,including a potential inability to obtain an adequate supply of requiredcomponents due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing andtimely delivery of components. Although the timeliness, yield and quality ofdeliveries to date from our subcontractors have been acceptable, manufacture ofcertain of these components and subassemblies is an extremely complex process,and long lead-times are required. Any inability to obtain adequate deliveriesor any other circumstance that would require us to seek alternative sources ofsupply or to manufacture such components internally could delay our ability toship our products, which could damage relationships with current andprospective customers and have a material adverse effect on our business,financial condition and results of operations.

 

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**Dependence on Key Personnel  ****Our**futureoperating results depend, in significant part, upon the continued contributionsof key personnel, many of whom would be difficult to replace. We have enteredinto employment agreements with only a limited number of our employees,including our Chief Executive Officer, President and Chief Financial Officer,and our employees are employed “at will.” Some of these agreements containvesting acceleration and severance payment provisions that could result insignificant costs or charges to us should the employee be terminated withoutcause, die or have a disability. We do not maintain any life insurance on anyof our key people. The loss of key personnel could have a material adverseeffect on the business, financial condition and results of operations ofUltratech. In addition, our future operating results depend in significant partupon our ability to attract and retain other qualified management,manufacturing, technical, sales and support personnel for our operations. Thereare only a limited number of persons with the requisite skills to serve inthese positions and it may become increasingly difficult for us to hire suchpersonnel over time. At times, competition for such personnel has been intense,particularly in the San Francisco Bay Area where we maintain our headquartersand principal operations, and there can be no assurance that we will besuccessful in attracting or retaining such personnel. The failure to attract orretain such persons would materially adversely affect our business, financialcondition and results of operations.

 

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

 

As of April 2, 2005, we had options to purchase approximately 6.4million shares of our Common Stock outstanding. Among other determinants, themarket price of our stock has a major bearing on the number of shares subjectto outstanding stock options that are included in the weighted-average sharesused in determining our net income (loss) per share. During periods of extremevolatility, the impact of higher stock prices can have a materially dilutiveeffect on our net income (loss) per share.****Additionally,options are excluded from the calculation of net income (loss) per share whenwe have a net loss or when the exercise price of the stock option is greaterthan the average market price of our Common Stock, as the impact of the stockoptions would be anti-dilutive.

 

**Effects of Certain Anti-TakeoverProvisions  **Certainprovisions of our Certificate of Incorporation, equity incentive plans,Shareholder Rights Plan, licensing agreements, Bylaws and Delaware law maydiscourage certain transactions involving a change in control of our company.In addition to the foregoing, our classified board of directors, theshareholdings of Ultratech’s officers, directors and persons or entities thatmay be deemed affiliates and the ability of the Board of Directors to issue“blank check” preferred stock without further stockholder approval could havethe effect of delaying, deferring or preventing a change in control ofUltratech and may adversely affect the voting and other rights of holders ofCommon Stock.

 

**Changes in Securities Laws and Regulations Have Increased Our Costs.  **TheSarbanes-Oxley Act of 2002 required changes in our corporate governance, publicdisclosure and compliance practices. The number of rules and regulationsapplicable to us has increased, and will continue to increase, our legal andfinancial compliance costs, and has made some activities more difficult, suchas by requiring stockholder approval of new option plans. In addition, we haveincurred and expect to continue to incur significant costs in connection withcompliance with Section 404 of the Sarbanes-Oxley Act regarding internalcontrol over financial reporting. We expect ongoing costs to maintaincompliance to be between one and two million dollars annually. We also expectthese developments to make it more difficult and more expensive to obtaindirector and officer liability insurance, and we may be required to acceptreduced coverage or incur substantially higher costs to obtain coverage. These developmentscould make it more difficult for us to attract and retain qualified members ofour board of directors, particularly to serve on our audit committee, andqualified executive officers. In addition, in connection with ourSection 404 certification process, we may identify from time to timedeficiencies in our internal control. Any material weakness or deficiency inour internal control over financial reporting could materially and negativelyimpact our reported financial results and the market price of our stock couldsignificantly decline. Additionally, adverse publicity related to thedisclosure of a material weakness or deficiency in internal control overfinancial reporting could have a negative impact on our reputation, businessand stock price.

 

**California Manufacturing Location **We perform all of our manufacturingactivities (final assembly, system testing and certain subassembly activities)in clean room environments totaling approximately 26,000 square feet located inSan Jose, California. Performing manufacturing operations in California exposesus to a higher risk of natural disasters, including earthquakes. In addition,in the past California has experienced power shortages, which have interruptedour operations. Such 

 

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shortages could occur in the future and could again interrupt ouroperations resulting in product shipment delays, increased costs and otherproblems, any of which could have a material adverse effect on our business,customer relationships and results of operations. We are not insured againstnatural disasters and power shortages and the occurrence of such an event couldhave a material adverse impact our results of operations.

 

**Environmental Regulations**We aresubject to a variety of governmental regulations relating to the use, storage,discharge, handling, emission, generation, manufacture and disposal of toxic orother hazardous substances. We believe that we are currently in compliance inall material respects with such regulations and that we have obtained allnecessary environmental permits to conduct our business. Nevertheless, thefailure to comply with current or future regulations could result insubstantial fines being imposed on us, suspension of production, alteration ofthe manufacturing process or cessation of operations. Such regulations couldrequire us to acquire expensive remediation equipment or to incur substantialexpenses to comply with environmental regulations. Any failure by us to controlthe use, disposal or storage of, or adequately restrict the discharge of,hazardous or toxic substances could subject us to significant liabilities.

 

**Terrorist Attacks and Threats, and GovernmentResponses Thereto, May****Negatively Impact 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 Statesand world financial markets which may depress the price of our Common Stock andmay limit the capital resources available to us or our customers or suppliers,which could result in decreased orders from customers, less favorable financingterms from suppliers, and scarcity or increased costs of materials andcomponents of our products. Additionally, terrorist attacks on Ultratech itselfmay significantly disrupt our ability to conduct our business. Any of theseoccurrences could have a significant impact on our operating results, revenuesand costs and may result in increased volatility of the market price of ourCommon Stock.

 

**InformationAvailable on Company Web-site**

 

Ultratech’s web-site is located at *www.ultratech.com*.We make available, free of charge, through our web-site, our annual report onForm 10-K, quarterly reports on Form 10-Q and current reports onForm 8-K (and amendments to those reports), as soon as reasonablypracticable after such reports are filed electronically with the SEC. We haveadopted a Code of Ethics for our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions. We have posted this Code of Ethics on ourweb-site. Any future amendments to this Code will also be posted on ourweb-site.

 

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**Item 3.****  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Reference is made to Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” in our Annual Report on Form 10-K for the yearended December 31, 2004 and to the subheading “Derivative Instruments andHedging” in Item 8, “Financial Statements and Supplementary Data”, under theheading “Notes to Consolidated Financial Statements” of our Annual Report onForm 10-K for the year ended December 31, 2004.

 

**Interest rate risk**

 

Our exposure to market risk due to potential changes in interest rates,relates primarily to our investment portfolio, which consisted primarily offixed interest rate instruments as of April 2, 2005. We maintain an investmentpolicy designed to ensure the safety and preservation of our invested funds bylimiting market risk and the risk of default.

 

Certain of our cash, cash equivalents and short-term investments serveas collateral for a line of credit we maintain with a brokerage firm. The lineof credit is used for liquidity purposes, mitigating the need to liquidateinvestments in order to meet our current operating cash requirements.

 

**Foreign Currency Risk Management**

 

The majority of our revenue, expense and capital purchasing activitiesare transacted in U.S. dollars. However, we do enter into these transactions inother currencies, primarily Japanese Yen. To protect against reductions invalue and the volatility of future cash flows caused by changes in currencyexchange rates we have established transaction and balance sheet hedgingprograms. We use foreign currency forward contracts to hedge the risk thatunremitted Japanese yen denominated receipts from customers for actual orforecasted sales of equipment after receipt of customer orders may be adverselyaffected by changes in foreign currency exchange rates. After recordingrevenue, we use various mechanisms, such as foreign currency forward exchangecontracts and natural hedges, to offset substantial portions of the potentialgains or losses associated with our Japanese yen denominated assets andliabilities due to exchange rate fluctuations. At April 2, 2005, we had takenaction to hedge approximately 100% of these Japanese yen denominated exposures.In addition to natural hedges resulting from having both assets and liabilitiesdenominated in Japanese yen, we enter into foreign currency forward contractsthat generally have maturities of nine months or less. We often close foreigncurrency forward contracts by entering into an offsetting contract. At April 2,2005, we had contracts for the sale of $11.5 million of Japanese yen at fixedrates of exchange. Our hedging programs reduce, but do not always entirelyeliminate, the impact of currency movements.

 

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**Item 4.   ****Controls and Procedures**

 

We conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as of the end of the period covered by this report (the“Evaluation Date”). Based upon the evaluation, our principal executive officerand principal financial officer concluded that as of the Evaluation Date ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.

 

Disclosure controls and procedures are controls and other proceduresthat are designed to ensure that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the ExchangeAct is accumulated and communicated to management to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosure controlsand procedures, our management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives. Management is further required toapply judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

**Changes in Internal Control Over Financial Reporting**

 

There were no changes in our internal control over financial reportingduring the quarter ended April 2, 2005 that have materially affected, or arereasonably likely to materially affect our internal control over financialreporting.

 

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| **PART 2:**     | ** ** | **OTHER  INFORMATION**                                            |   |   |
|-----------------|------------|-------------------------------------------------------------------|--------|--------|
| ** **      | ** ** | ** **                                                        |   |   |
| **Item 1****.** | ** ** | **Legal  Proceedings.**                                           |   | None.  |
| ** **      | ** ** | ** **                                                        |   |   |
| **Item 2****.** | ** ** | **Unregistered  Sales of Equity 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   |
| ** **      | ** ** | ** **                                                        |   |   |
| **Ite****m 5.** | ** ** | **Other  Information.**                                           |   | None   |
| ** **      | ** ** | ** **                                                        |   |   |
| **Item****6**   | ** ** | **Exhibits**                                                      |   |   |

 
| 31.1   |   | Certification of Chief Executive Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief Financial Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|   |   |                                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive Officer 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. |

 

25

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**SIGNATURES**

 

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

 
| ** ** | **ULTRATECH, INC.** |   |
|------------|---------------------|--------|
|       | (Registrant)        |   |

 
|                              |        |
|-----------------------------------|-------------|
| Date:                             | May 5, 2005 |   | 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) |

 

26

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**EXHIBIT INDEX**

 
| 31.1   |   | Certification  of Chief Executive Officer required pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                        |
| 31.2   |   | Certification  of Chief Financial Officer required pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                         |
|   |   |                                                                                                                                                                                        |
| 32.1   |   | Certification  of Chief Executive Officer 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. |

 

27

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