**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**For thetransition periodfrom                to                **

 

**Commission FileNumber         0-22248**

 

**ULTRATECH, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

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

 

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

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date:

 
| **Class**                      |   | **Outstanding  as of April 30, 2004** |
|--------------------------------|--------|--------------------------------------------|
| common stock,  $.001 par value |   | 23,705,363                                 |

 

 

----

 

**ULTRATECH, INC.**

 

**INDEX**

 
| **PART 1.**                        | **FINANCIAL INFORMATION**                                                                                               | 3      |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|                               |                                                                                                                    |   |
| **Item 1.**                        | **Condensed Consolidated Financial  Statements**                                                                        | 3      |
|                               |                                                                                                                    |   |
|                               | Condensed  Consolidated Balance Sheets as of April 3, 2004 and December 31,  2003                             | 3      |
|                               |                                                                                                                    |   |
|                               | Condensed  Consolidated Statements of Operations for the three months ended  April 3, 2004 and March 29, 2003 | 4      |
|                               |                                                                                                                    |   |
|                               | Condensed  Consolidated Statements of Cash Flows for the three months ended  April 3, 2004 and March 29, 2003 | 5      |
|                               |                                                                                                                    |   |
|                               | Notes  to Condensed Consolidated Financial Statements                                                                   | 6      |
|                               |                                                                                                                    |   |
| **Item 2.**                        | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**                         | 11     |
|                               |                                                                                                                    |   |
| **Item 3.**                        | **Quantitative and Qualitative  Disclosures About Market Risk**                                                         | 24     |
|                               |                                                                                                                    |   |
| **Item 4.**                        | **Controls and Procedures**                                                                                             | 25     |
|                               |                                                                                                                    |   |
| **PART 2.**                        | **OTHER INFORMATION**                                                                                                   | 26     |
|                               |                                                                                                                    |   |
| **Item 1.**                        | **Legal Proceedings**                                                                                                   | 26     |
|                               |                                                                                                                    |   |
| **Item 2.**                        | **Changes in  Securities and Use of Proceeds**                                                                          | 26     |
|                               |                                                                                                                    |   |
| **Item 3.**                        | **Defaults  upon Senior Securities**                                                                                    | 26     |
|                               |                                                                                                                    |   |
| **Item 4.**                        | **Submission  of Matters to a Vote of Security Holders**                                                                | 26     |
|                               |                                                                                                                    |   |
| **Item 5.**                        | **Other  Information**                                                                                                  | 26     |
|                               |                                                                                                                    |   |
| **Item 6.**                        | **Exhibits  and Reports on Form 8-K**                                                                                   | 26     |
|                               |                                                                                                                    |   |
|                               |                                                                                                                    |   |
| **SIGNATURES  AND CERTIFICATIONS** | 28                                                                                                                      |

 

2

----

 

**PART1.****                                                 FINANCIALINFORMATION**

**Item 1.****           Condensed****Consolidated Financial Statements (Unaudited)**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| **(In thousands)**                                 |   | **April 3, 2004** |        | **Dec. 31,  2003*** |   |
|----------------------------------------------------|--------|------------------------|-------------|---------------------|--------|
|                                               |   | **(Unaudited)**        |        |                |   |
| ***ASSETS***                                       |   |                   |        |                |   |
|                                               |   |                   |        |                |   |
| Current  assets:                                   |   |                   |        |                |   |
| Cash,  cash equivalents and short-term investments |   | **$**                  | **165,229** |                | $      | 165,902 |   |
| Accounts  receivable, net                          |   | **15,429**             |        | 9,398               |   |
| Inventories                                        |   | **19,480**             |        | 19,037              |   |
| Income  taxes receivable                           |   | **—**             |        | 349                 |   |
| Prepaid  expenses and other current assets         |   | **1,690**              |        | 2,099               |   |
| Total  current assets                              |   | **201,828**            |        | 196,785             |   |
|                                               |   |                   |        |                |   |
| Equipment  and leasehold improvements, net         |   | **18,385**             |        | 18,481              |   |
|                                               |   |                   |        |                |   |
| Demonstration  inventories, net                    |   | **3,560**              |        | 3,071               |   |
|                                               |   |                   |        |                |   |
| Intangible  assets, net                            |   | **381**                |        | 476                 |   |
|                                               |   |                   |        |                |   |
| Other  assets                                      |   | **2,074**              |        | 1,935               |   |
| Total  assets                                      |   | **$**                  | **226,228** |                | $      | 220,748 |   |
|                                               |   |                   |        |                |   |
| ***LIABILITIES AND  STOCKHOLDERS’ EQUITY***   |   |                   |        |                |   |
|                                               |   |                   |        |                |   |
| Current  liabilities:                              |   |                   |        |                |   |
| Notes  payable                                     |   | **$**                  | **2,525**   |                | $      | 2,564 |   |
| Accounts  payable                                  |   | **8,576**              |        | 7,729               |   |
| Deferred  product and service income               |   | **3,919**              |        | 1,088               |   |
| Deferred  license income                           |   | **3,824**              |        | 4,752               |   |
| Other  current liabilities                         |   | **10,445**             |        | 10,151              |   |
| Total  current liabilities                         |   | **29,289**             |        | 26,284              |   |
|                                               |   |                   |        |                |   |
| Other  liabilities                                 |   | **4,185**              |        | 3,725               |   |
|                                               |   |                   |        |                |   |
| Total  stockholders’ equity                   |   | **192,754**            |        | 190,739             |   |
| Total  liabilities and stockholders’ equity   |   | **$**                  | **226,228** |                | $      | 220,748 |   |

 

----

* The Balance Sheet as of December 31,2003 has been derived from the audited financial statements at that date.

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements*

 

3

----

 

 

**ULTRATECH,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                       |   | **Three  Months Ended** |       |
|------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands, except per share  amounts)**              |   | **April 3,  2004** |       | **March 29,  2003** |   |
| Net  sales:                                                |   |                    | ** ** |   |   |
| Products                                                   |   | **$**                   | **22,790** | ** ** | $ | 18,636 |   |
| Services                                                   |   | **2,893**               | ** ** | 2,436 |   |
| Licenses                                                   |   | **928**                 | ** ** | 928 |   |
| Total  net sales                                           |   | **26,611**              | ** ** | 22,000 |   |
|                                                       |   |                    |       |   |   |
| Cost  of sales:                                            |   |                    | ** ** |   |   |
| Cost  of products sold                                     |   | **12,033**              | ** ** | 12,325 |   |
| Cost  of services                                          |   | **1,858**               | ** ** | 1,541 |   |
| Recovery  of inventory writedown                           |   | **(340**                | **)**      | — |   |
| Total  cost of sales                                       |   | **13,551**              | ** ** | 13,866 |   |
| Gross  profit                                              |   | **13,060**              | ** ** | 8,134 |   |
|                                                       |   |                    |       |   |   |
| Operating  expenses:                                       |   |                    | ** ** |   |   |
| Research,  development, and engineering                    |   | **6,210**               | ** ** | 4,591 |   |
| Selling,  general, and administrative                      |   | **7,087**               | ** ** | 5,106 |   |
| Amortization  of intangible assets                         |   | **95**                  | ** ** | 95 |   |
| Operating  loss                                            |   | **(332**                | **)**      | (1,658 | ) |
|                                                       |   |                    |       |   |   |
| Interest  expense                                          |   | **(35**                 | **)**      | (66 | ) |
| Interest  and other income, net                            |   | **959**                 | ** ** | 1,051 |   |
| Income  (loss) before tax                                  |   | **592**                 | ** ** | (673 | ) |
|                                                       |   |                    |       |   |   |
| Income  tax provision                                      |   | **65**                  | ** ** | 310 |   |
| Net  income (loss)                                         |   | **$**                   | **527**    | ** ** | $ | (983 | ) |
|                                                       |   |                    | ** ** |   |   |
| Earnings  (loss) per share - basic:                        |   |                    | ** ** |   |   |
| Net  income (loss)                                         |   | **$**                   | **0.02**   | ** ** | $ | (0.04 | ) |
| Number  of shares used in per share computations - basic   |   | **23,683**              | ** ** | 22,680 |   |
| Earnings  (loss) per share - diluted:                      |   |                    | ** ** |   |   |
| Net  income (loss)                                         |   | **$**                   | **0.02**   | ** ** | $ | (0.04 | ) |
| Number  of shares used in per share computations - diluted |   | **25,663**              | ** ** | 22,680 |   |

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements*

 

4

----

 

**ULTRATECH,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                       |   | **Three  Months Ended** |       |
|------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands)**                                         |   | **April 3,  2004** |       | **March 29,  2003** |   |
|                                                       |   |                    | ** ** |   |   |
| **Cash flows from operating activities:**                  |   |                    | ** ** |   |   |
| Net  income (loss)                                         |   | **$**                   | **527**    | ** ** | $ | (983 | ) |
| Charges  to income not affecting cash                      |   | **1,976**               | ** ** | 2,473 |   |
| Net  effect of changes in operating assets and liabilities |   | **(2,763**              | **)**      | 1,959 |   |
| Net  cash generated by (used in) operating activities      |   | **(260**                | **)**      | 3,449 |   |
|                                                       |   |                    | ** ** |   |   |
| **Cash flows from investing activities:**                  |   |                    | ** ** |   |   |
| Capital  expenditures                                      |   | **(1,531**              | **)**      | (904 | ) |
| Net  decrease (increase) in available-for-sale securities  |   | **(6,732**              | **)**      | 2,270 |   |
| Net  increase in restricted cash                           |   | **—**              | ** ** | (2,000 | ) |
| Net  cash used in investing activities                     |   | **(8,263**              | **)**      | (634 | ) |
|                                                       |   |                    | ** ** |   |   |
| **Cash flows from financing activities:**                  |   |                    | ** ** |   |   |
| Net  repayment of notes payable                            |   | **(39**                 | **)**      | (348 | ) |
| Proceeds  from issuance of common stock                    |   | **1,402**               | ** ** | 585 |   |
| Net  cash provided by financing activities                 |   | **1,363**               | ** ** | 237 |   |
|                                                       |   |                    | ** ** |   |   |
| Net  effect of exchange rate changes on cash               |   | **161**                 | ** ** | (5 | ) |
| Net  increase (decrease) in cash and cash equivalents      |   | **(6,999**              | **)**      | 3,047 |   |
|                                                       |   |                    | ** ** |   |   |
| Cash  and cash equivalents at beginning of period          |   | **25,149**              | ** ** | 18,178 |   |
| Cash  and cash equivalents at end of period                |   | **$**                   | **18,150** | ** ** | $ | 21,225 |   |

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements*

 

5

----

 

**Ultratech, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

**April 3, 2004**

 

**(1)  Description ofBusiness**

 

Ultratech, Inc.(referred to as “Ultratech” and “we”) develops, manufactures and marketsphotolithography and laser thermal processing equipment for manufacturers ofsemiconductor and nanotechnology components located throughout North America,Europe, Japan and the rest of Asia.

 

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

 

In evaluating ourbusiness segments, Ultratech gave consideration to the Chief ExecutiveOfficer’s review of financial information and the organizational structure ofour management. Based on this review, we concluded that, at the present time,resources are allocated and other financial decisions are made based,primarily, on consolidated financial information. Accordingly, we havedetermined that we operate in one business segment, which is the manufacture anddistribution of capital equipment to manufacturers of integrated circuits andnanotechnology components.

 

**(2) Basis of Presentation**

 

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

 

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

 

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

 

**(3) Stock Based Compensation**

 

We account for thecompensation expense for our stock-based employee compensation plans under theintrinsic value method. Accordingly, no stock-based employee compensation costis recorded in the condensed consolidated statements of operations, as alloptions granted under these plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

 

The following tableillustrates the effect on net income (loss) and earnings (loss) per share if wehad applied the fair value recognition method to account for stock-basedemployee compensation.

 

6

----

 
|                                                                                                                                   |   | **Three  months ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
| **In thousands, except per share amounts**                                                                                             |   | **April 3,  2004** |   | **March 29,  2003** |   |
| Net  income (loss) as reported                                                                                                         |   | $                       | 527    |   | $ | (983 | ) |
| Total  stock-based employee compensation expense, determined under fair value based  method for all awards, net of related tax effects |   | $                       | (2,939 | ) | $ | (2,177 | ) |
| Pro  forma net loss                                                                                                                    |   | $                       | (2,412 | ) | $ | (3,160 | ) |
|                                                                                                                                   |   |                    |   |   |   |
| Net  income (loss) per share - basic, as reported                                                                                      |   | $                       | 0.02   |   | $ | (0.04 | ) |
| Pro  forma net loss per share - basic                                                                                                  |   | $                       | (0.10  | ) | $ | (0.14 | ) |
|                                                                                                                                   |   |                    |   |   |   |
| Net  income (loss) per share - diluted, as reported                                                                                    |   | $                       | 0.02   |   | $ | (0.04 | ) |
| Pro  forma net loss per share - diluted                                                                                                |   | $                       | (0.10  | ) | $ | (0.14 | ) |

 

The table above used thefollowing weighted-average assumptions to estimate the fair value of stockoptions at the date of grant using the Black-Scholes option-pricing model.

 
|                                                    |   | **Three  months ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|
|                                                    |   | **April 3,  2004** |   | **March 29,  2003** |   |
|                                                    |   |                    |   |   |   |
| Expected  life (in years): stock options                |   | 3.5                     |   | 3.5 |   |
|                                                    |   |                    |   |   |   |
| Expected  life (in years): Employee Stock Purchase Plan |   | 1.25                    |   | 1.25 |   |
|                                                    |   |                    |   |   |   |
| Risk-free  interest rate                                |   | 2.49                    | %      | 2.38 | % |
|                                                    |   |                    |   |   |   |
| Volatility  factor                                      |   | 0.63                    |   | 0.73 |   |
|                                                    |   |                    |   |   |   |
| Dividend  yield                                         |   | 0.00                    | %      | 0.00 | % |

 

**(4) Recent Accounting Pronouncements**

 

In January 2003, theFASB issued FASB Interpretation No. 46, *Consolidation of Variable InterestEntities* (“FIN 46”). FIN 46 requires that if an entity has acontrolling financial interest in a variable interest entity, the assets,liabilities and results of activities of the variable interest entity (“VIE”)should be included in the consolidated financial statements of the entity. Forarrangements entered into after January 31, 2003, FIN 46 is effectiveimmediately. For arrangements entered into prior to February 1, 2003, FIN46 was scheduled to be effective at the end of the period ending afterDecember 15, 2003. In December 2003, FIN 46 was revised(“Interpretation 46R”) to require application in financial statements of publicentities that have interests in special-purpose entities for periods endingafter December 15, 2003. For all other types of variable interestentities, application is required for periods ending after March 15, 2004.The initial adoption of FIN 46 did not, nor do we believe the adoption of theremaining provisions of FIN 46 will have a material impact on our results ofoperations or financial condition.

 

**(5) Earnings (Loss) Per Share**

 

The following sets forththe computation of basic and diluted net income (loss) per share:

 

7

----

 
|                                                     |   | **Three  months ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|
| **(Unaudited, in thousands, except  per share amounts)** |   | **April 3,  2004** |   | **March 29,  2003** |   |
|                                                     |   |                    |   |   |   |
| Numerator:                                               |   |                    |   |   |   |
| Net  income (loss)                                       |   | $                       | 527    |   | $ | (983 | ) |
|                                                     |   |                    |   |   |   |
| Denominator:                                             |   |                    |   |   |   |
| Denominator  for basic net income (loss) per share       |   | 23,683                  |   | 22,680 |   |
| Effect  of dilutive employee stock options               |   | 1,980                   |   | — |   |
| Denominator  for diluted net income (loss) per share     |   | 25,663                  |   | 22,680 |   |
|                                                     |   |                    |   |   |   |
| Earnings  (loss) per share - basic:                      |   |                    |   |   |   |
| Net  income (loss)                                       |   | $                       | 0.02   |   | $ | (0.04 | ) |
|                                                     |   |                    |   |   |   |
| Earnings  (loss) per share - diluted:                    |   |                    |   |   |   |
| Net  income (loss)                                       |   | $                       | 0.02   |   | $ | (0.04 | ) |

 

For the three monthperiod ended April 3, 2004, options to purchase 791,700 shares of commonstock at an average exercise price of $29.66 were excluded from the computationof diluted net income per share, as the effect would have been anti-dilutive.For the three month period ended March 29, 2003, options to purchase5,080,000 shares of common stock at an average exercise price of $15.84 wereexcluded from the computation of diluted net loss per share, as the effectwould have been anti-dilutive. Options are anti-dilutive when we have a netloss or when the exercise price of the stock option is greater than the averagemarket price of our common stock.

 

**(6) Inventories**

 

Inventories consist ofthe following:

 
| **(In thousands)** |   | **April 3,  2004** |   | **Dec. 31,  2003** |   |
|--------------------|--------|-------------------------|--------|--------------------|--------|
|               |   | **(Unaudited)**         |   |               |   |
| Raw  materials     |   | $                       | 8,875  |               | $      | 8,647 |   |
| Work-in-process    |   | 9,777                   |   | 9,286              |   |
| Finished  products |   | 828                     |   | 1,104              |   |
|               |   | $                       | 19,480 |               | $      | 19,037 |   |

 

**(7) Line of Credit**

 

We have a line of creditagreement with a brokerage firm. Under the terms of this agreement, we mayborrow funds at a cost equal to the current Federal funds rate plus 100 basispoints (2.00% as of April 3, 2004). Certain of our cash, cash equivalentsand short-term investments secure borrowings outstanding under this facility.Funds are advanced to us under this facility based on pre-determined advancerates on the cash and securities held by us in this brokerage account. Thisagreement has no set expiration date and there are no loan covenants. As ofApril 3, 2004, $2.5 million was outstanding under this facility, with arelated collateral requirement of approximately $3.6 million of our cash, cashequivalents and short-term investments.

 

**(8) Other Current Liabilities**

 

Other current liabilitiesconsist of the following:

 

8

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| **(In thousands)**                                |   | **April 3,  2004** |   | **Dec. 31,  2003** |   |
|---------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
|                                              |   | **(Unaudited)**         |   |               |   |
| Salaries and benefits                             |   | $                       | 3,270  |               | $      | 2,841 |   |
| Warranty  reserves                                |   | 1,596                   |   | 1,257              |   |
| Advance  billings                                 |   | 1,787                   |   | 1,523              |   |
| Income  taxes payable                             |   | 232                     |   | 745                |   |
| Reserve  for losses on purchase order commitments |   | 841                     |   | 841                |   |
| Other                                             |   | 2,719                   |   | 2,944              |   |
|                                              |   | $                       | 10,445 |               | $      | 10,151 |   |

 

**WarrantyReserves**

 

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

 

Changes in our productliability are as follows:

 
|                                 |   | **Three  months ended** |   |
|--------------------------------------|--------|-------------------------|--------|
| **In thousands**                     |   | **April 3,  2004** |   | **March 29,  2003** |   |
| Balance,  beginning of the period    |   | $                       | 1,257  |   | $ | 1,462 |   |
| Warranties  issued during the period |   | 1,227                   |   | 911 |   |
| Amortization  during the period      |   | (888                    | )      | (684 | ) |
| Balance,  end of the period          |   | $                       | 1,596  |   | $ | 1,689 |   |

 

**Deferred Service Income**

 

We sell service contractsfor which revenue is deferred and recognized ratably over the contract period,for time based service contracts, or as service hours are delivered, forcontracts based on a purchased quantity of hours. Changes in our deferredservice contract revenue are as follows:

 
|                                                   |   | **Three  months ended** |   |
|--------------------------------------------------------|--------|-------------------------|--------|
| **In thousands**                                       |   | **April 3,  2004** |   | **March 29,  2003** |   |
| Balance,  beginning of the period                      |   | $                       | 821    |   | $ | 815 |   |
| Service  contracts sold during the period              |   | 1,992                   |   | 1,881 |   |
| Service  contract revenue recognized during the period |   | (1,946                  | )      | (1,812 | ) |
| Balance,  end of the period                            |   | $                       | 867    |   | $ | 884 |   |

 

**(9) Comprehensive Income (Loss)**

 

The components ofcomprehensive income (loss) are as follows:

 

9

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|                                                          |   | **Three  months ended** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|
| **(Unaudited, in thousands)**                                 |   | **April 3,  2004** |   | **March 29,  2003** |   |
| Net  income (loss)                                            |   | $                       | 527    |   | $ | (983 | ) |
| Accumulated  other comprehensive income (loss)                |   |                    |   |   |   |
| Unrealized  gain (loss) on available-for-sale securities      |   | (105                    | )      | (180 | ) |
| Unrealized  gain (loss) on foreign exchange forward contracts |   | 161                     |   | (5 | ) |
| Comprehensive  income (loss)                                  |   | $                       | 583    |   | $ | (1,168 | ) |

 

Accumulated othercomprehensive income presented in the condensed consolidated balance sheets iscomprised of changes in unrealized gains or losses on available-for-salesecurities and the effect of exchange rate changes on foreign exchange forwardcontracts, net of tax. Accumulated other comprehensive income consists of thefollowing:

 
| **In thousands:**                                        |   | **April 3,  2004** |   | **Dec. 31,  2003** |   |
|----------------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
| Unrealized  gains (losses) on:                           |   |                    |   |               |   |
| Available-for-sale  investments                          |   | $                       | 1,152  |               | $      | 1,257 |   |
| Foreign  exchange contracts                              |   | (159                    | )      | (320               | )      |
| Accumulated  other comprehensive income at end of period |   | $                       | 993    |               | $      | 937 |   |

 

**(10) Contingencies**

 

**Legal Proceedings**

 

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon,and in September 2001, we reached a settlement with Canon. The patentlitigation against ASML is ongoing after having been transferred to theNorthern District of California. After the District Court made a preliminarydetermination that ASML did not infringe the patent, we appealed the decisionto the Court of Appeal for the Federal Circuit in Washington, D.C., and oralarguments were heard in February 2004. The Court of Appeal for the Federal Circuit in Washington, D.C. reversedthe preliminary determination of the District Court and remanded the case backto the District Court for further proceedings. ASML has petitioned the Court ofAppeal for the Federal Circuit in Washington, D.C. for reconsideration of theirdecision.  Our response to the ASMLpetition was filed with the Court of Appeals on May 3, 2004.

 

On October 12, 2001,we were sued in the District Court of Massachusetts by SVG Lithography Systems(“SVGL”), alleging infringement of several patents. SVGL is a division ofSilicon Valley Group, Inc., which is a wholly owned subsidiary of ASML. Asof March 2004, all claims made by SVGL have been dismissed.

 

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**Item 2.****                                                           Management’s****Discussion and Analysis of Financial Condition andResults of Operations**

 

Certain of the statementscontained herein may be considered forward-looking statements underSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, thatinvolve risks and uncertainties, such as lengthy and costly development cyclesfor advanced lithography and laser-processing technologies and applications;integration and development of the laser processing operation; delays,deferrals and cancellations of orders by customers; high degree of industrycompetition; pricing pressures and product discounts; changes in pricing by us,our competitors or suppliers; intellectual property matters; cyclicality in thesemiconductor and nanotechnology industries; customer concentration; marketacceptance of new products and enhanced versions of our existing products;international sales; lengthy sales cycles, including the timing of system acceptances;changes to financial accounting standards; expiration of licensingarrangements, and the resulting adverse impact on our licensing revenues;timing of new product announcements and releases by us or our competitors;ability to volume produce systems and meet customer requirements; mix ofproducts sold; rapid technological change and the importance of timely productintroductions; dependence on new product introductions and commercial successof any new products; outcome of litigation; sole or limited sources of supply;manufacturing variances and production levels; timing and degree of success oftechnologies licensed to outside parties; product concentration and lack ofproduct revenue diversification; inventory obsolescence; asset impairment; abilityand resulting costs to attract or retain sufficient personnel to achieve ourtargets for a particular period; dilutive effect of employee stock optiongrants on net income per share, which is largely dependent upon us maintainingprofitability and the market price of our stock; 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, certainstatements, historical results and percentage relationships discussed below arenot necessarily indicative of the results of operations for any futureperiod.  These forward-lookingstatements are based on management’s current beliefs and expectations, some orall of which may prove to be inaccurate, and which may change.  We undertake no obligation to revise orupdate any forward-looking statements to reflect any event or circumstance thatmay arise after the date of this report.

 

**OVERVIEW**

 

Ultratech, Inc.(referred to as “Ultratech” and “we”) develops, manufactures and marketsphotolithography and laser thermal processing equipment for manufacturers ofsemiconductor and nanotechnology components located throughout North America,Europe, Japan and the rest of Asia.

 

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

 

**RESULTS OF OPERATIONS**

 

We derive a substantialportion of our total net sales from sales of a relatively small number of newlymanufactured systems, which typically range in price from $1.0 million to $3.0million. As a result of these high sale prices, the timing and recognition ofrevenue from a single transaction has had and most likely will continue to havea significant impact on our net sales and operating results for any particularperiod.

 

Our backlog at thebeginning of a period typically does not include all of the sales needed to achieveour sales objectives for that period. In addition, orders in backlog aresubject to cancellation, shipment or customer acceptance delays, and deferralor rescheduling by a customer with limited or no penalties. Consequently, ournet sales and operating results for a period have been and will continue to bedependent upon our obtaining orders for systems to be shipped and accepted inthe same period in which the order is

 

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received. Our businessand financial results for a particular period could be materially adverselyaffected if an anticipated order for one system is not received in time topermit shipment and customer acceptance during that period. Furthermore, asubstantial portion of our shipments have historically been made near the endof each quarter. Delays in installation and customer acceptance due, forexample, to our inability to successfully demonstrate the agreed-uponspecifications or criteria at the customer’s facility, or to the failure of thecustomer to permit installation of the system at the agreed upon time, maycause net sales in a particular period to fall significantly below ourexpectations, which would materially adversely affect our operating results forthat period. Additionally, the failure to receive anticipated orders or delaysin shipments due, for example, to rescheduling, delays, deferrals orcancellations by customers, additional customer configuration requirements, orto unexpected manufacturing difficulties or delays in deliveries by suppliersdue to their long production lead times, have caused and may in the futurecause net sales in a particular period to fall significantly below ourexpectations, materially adversely affecting our operating results for that period.In particular, the long manufacturing cycles of our Saturn Spectrum family ofwafer steppers, laser thermal processing systems and the long lead time forlenses and other materials, could cause shipments of these products to bedelayed from one quarter to the next, which could materially adversely affectour financial condition and results of operations for a particular quarter.

 

Additionally, the needfor continued expenditures for research and development, capital equipment,ongoing training and worldwide customer service and support, among otherfactors, will make it difficult for us to reduce our operating expenses in aparticular period if we fail to achieve our net sales goals for the period.

 

**Net sales**

 
|              |   | **Three  Months Ended** |       |                     |       |                  |       |
|-------------------|--------|-------------------------|------------|--------------------------|------------|-----------------------|------------|
| **(in millions)** |   | **April 3,  2004** |       | **March 29,  2003** |       | **Amount of  Change** |       | **Percentage  Change** |   |
| Sales  of:        |   |                    | ** ** |                     | ** ** |                  | ** ** |   | ** ** |
| Systems           |   | $                       | 20.4       |                     | $          | 15.9                  |       | $ | 4.5 |   | 28 | % |
| Spare  parts      |   | $                       | 2.4        |                     | $          | 2.8                   |       | $ | (0.4 | ) | (14 | )% |
| Services          |   | $                       | 2.9        |                     | $          | 2.4                   |       | $ | 0.5 |   | 21 | % |
| Licenses          |   | $                       | 0.9        |                     | $          | 0.9                   |       | $ | 0.0 |   | 0 | % |
| Total  net sales  |   | $                       | 26.6       |                     | $          | 22.0                  |       | $ | 4.6 |   | 21 | % |

 

Net sales consist ofrevenues from system sales, spare parts sales, services and licensing oftechnologies. System sales increased 28%, to $20.4 million, on a unit volumeincrease of 44%. The weighted-average selling prices of systems sold decreased11% due primarily to a shift in product mix from our 300-millimeter product toour 200-millimeter product. In the first quarter of 2004 and 2003, refurbishedsystems accounted for approximately 23% of units sold. This percentage canfluctuate from quarter to quarter and any such fluctuation impacts the weightedaverage selling price of the systems sold.

 

On a product marketapplication basis, system sales to the semiconductor industry, primarily foradvanced packaging applications, were $11.8 million for the quarter endedApril 3, 2004, essentially unchanged when compared with system sales tothis market in the first quarter of 2003. During the remainder of 2004, webelieve that the semiconductor industry will continue to strengthen resultingin increased equipment purchases and that we are positioned to grow as theutilization of advanced packaging in the semiconductor industry increases.System sales to the nanotechnology market were $8.7 million for the quarterended April 3, 2004, an increase of 141% as compared with system sales tothis market in the first quarter of 2003, primarily as a result of growth inthe micro-systems and thin film head markets. During the remainder of 2004, webelieve that revenue from the nanotechnology market will increase from therevenue levels reported in 2003, but may decrease from the level reported inthe first quarter of 2004. However, revenue from the nanotechnology market issubject to significant and sudden fluctuations, particularly in the thin filmhead market. Therefore, expected revenue levels from this market may not berealized.

 

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Spare parts sales for thefirst quarter of 2004 declined 14%, to $2.4 million, as compared to the firstquarter of 2003.  This decrease was theresult of field upgrade work and the sale of parts previously on consignmentwith customers in the first quarter of 2003 without similar transactions in thefirst quarter of 2004. Revenues from services increased 21%, to $2.9 millionfor the first quarter of 2004, primarily as a result of increased activity byour customers in Japan and a project to move a customer’s system to a newlocation.

 

Revenues from licensingand licensing support arrangements were unchanged at $.9 million. We presentlyanticipate that revenues from licensing and licensing support arrangements willremain at approximately $0.9 million per quarter for the remainder of 2004.

 

At April 3, 2004, wehad approximately $6.2 million of deferred revenue resulting from productsshipped but not yet installed and accepted and deferred services revenue, ascompared with $1.2 million at December 31, 2003. The increase was due totwo systems having been shipped but not yet recognized as revenue atApril 3, 2004.  There were no suchsystems at December 31, 2003. Deferred revenue related to our products isrecognized upon satisfying the contractual obligations for installation and/orcustomer acceptance. During the first quarter of 2004, deferred license incomedecreased by $.9 million, to $3.8 million, as a result of amortization ofproceeds received in prior periods. Amortization of deferred license incomeresults in current period license revenue.

 

For the quarter endedApril 3, 2004, international net sales were $20.4 million, or 77% of totalnet sales, as compared with $12.6 million, or 57% of total net sales for thefirst quarter of 2003. We expect sales to international customers to representa significant majority of our revenues during the remainder of 2004 asindicated by industry estimates that seven of the industry’s ten largestforecasted purchasers of semiconductor equipment are international companies.Our revenue 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. For the quarter endedApril 3, 2004, we recorded system sales in Japan of $8.7 million of which65% were denominated in Japanese yen. This subjects us to the risk of currencyfluctuations. We attempt to mitigate this risk by entering into foreigncurrency forward exchange contracts for the period between when an order isreceived and when it is recorded as revenue. Consequently, the foreign exchangegains or losses associated with yen denominated revenue transactions includedin the revenue amount reported in our condensed consolidated statement ofoperations were immaterial.  Afterrecording revenue, we use various mechanisms, such as foreign currency forwardexchange contracts and natural hedges, to offset substantial portions of thegains or losses associated with our Japanese yen denominated receivables due toexchange rate fluctuations. We had approximately $8.7 million of Japanese yendenominated receivables at April 3, 2004. International sales expose us toa number of additional risks, including fluctuations in the value of localcurrencies relative to the U.S. dollar, which, in turn, impact the relativecost of ownership of our products. (See “Additional Risk Factors: InternationalSales”).

 

**Gross profit (loss)**

 
|   |   | **Three  Months Ended** |   |
|--------|--------|-------------------------|--------|

 
| **Expressed as a % of total net  sales** |   | **April 3,  2004** |   | **March 29,  2003** |   |
|------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                     |   |                    |   |                     |   |
| Total  net sales                         |   | 100.0                   | %      | 100.0                    | %      |
|                                     |   |                    |   |                     |   |
| Cost  of products and services sold      |   | 52.2                    | %      | 63.0                     | %      |
| Cost  (recovery) of inventory writedown  |   | (1.3                    | )%     | —                   |   |
| Gross  margin                            |   | 49.1                    | %      | 37.0                     | %      |

 

During the first quarterof 2004, we reported a benefit of $0.3 million resulting from the sale ofinventory previously written down. There was no comparable item recorded in thefirst quarter of 2003.  We presentlyrecord write-downs to reflect the reduction in carrying value for inventoriesand purchase order commitments in excess of 12 months of production demand (18months for certain long lead-time items).

 

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Based on our currentexpectations with respect to market demand for our products, gross margin maybe favorably impacted by similar recoveries during the remainder of 2004.Exclusive of licensing revenues, gross margin was 47.2% for the quarter endedApril 3, 2004 as compared with 34.2% for the same period in 2003,inclusive of the aforementioned recovery. We believe disclosure of gross margins without reference to licensingrevenues provides additional appropriate disclosure to allow comparison of ourproduct gross margins over time.

 

On a comparative basis,gross margins, exclusive of the aforementioned recoveries and charges were47.8% and 37.0% for the first quarters of 2004 and 2003, respectively. Webelieve disclosure of gross margins exclusive of these recoveries and chargesprovides additional appropriate disclosure to allow comparison of our grossmargins over time. The 10.8 percentage point improvement in gross margin in thefirst quarter of 2004 as compared to the first quarter of 2003 was dueprimarily to increased production levels (7.1 points), resulting from betterutilization of the Company’s manufacturing infrastructure, favorable productionvariances (3.0 points), and improved warranty costs resulting from improvedproduct quality and other items (0.7 points).

 

Our gross profit as apercentage of sales has been and most likely will continue to be significantlyaffected by a variety of factors, including the mix of products sold;writedowns of inventory and open purchase commitments; the rate of capacityutilization; product discounts, pricing and competition in our targetedmarkets; technology support and licensing revenues, which have no associatedcost of sales; non-linearity of shipments during the quarter which can resultin manufacturing inefficiencies; the introduction of new products, whichtypically have higher manufacturing costs until manufacturing efficiencies arerealized and which are typically discounted more than existing products untilthe products gain market acceptance; the percentage of international sales,which typically have lower gross margins than domestic sales principally due tohigher field service and support costs; and start-up costs and inefficienciesassociated with the implementation of subcontracting arrangements.

 

**Operating Expenses**

 

Research, development andengineering expenses for the first quarter of 2004 were $6.2 million, anincrease of $1.6 million from the amount reported for the first quarter of2003.  As a percentage of net sales,research, development and engineering expenses increased to 23.3%, as comparedto 20.9% in the year-ago period. This increase was due to increased investmentswe made in our laser processing technologies and our next generation 1X stepperproducts.

 

Selling, general, andadministrative expenses were $7.1 million for the first quarter of 2004, anincrease of $2.0 million as compared with the comparable period in 2003. As apercentage of net sales, selling, general, and administrative expensesincreased to 26.6% in the first quarter of 2004, as compared with 23.2% in thefirst quarter of 2003. The year-over-year increase in selling, general, and administrativeexpenses was primarily attributable to increased marketing staffing and relatedcosts for ramping up activities in laser processing ($0.8 million), increasedlegal costs related to our being a plaintiff in a patent infringement lawsuit($0.3 million), increased administrative expenses associated with ourcompliance with the Sarbanes-Oxley Act of 2002 and related SEC and Nasdaq rules($0.3 million) and an increase in other expenses associated with a 21% increasein Company revenue ($0.6 million).

 

**Interest and other income, net**

 

Interest and otherincome, net, which consists primarily of interest income, was $1.0 million forthe first quarter of 2004 as compared with $1.1 million for first quarter of2003. The decrease in 2004 from 2003 was primarily attributable to lowerinterest rates on our investments. We presently maintain an investmentportfolio with a weighted-average maturity of less than one year. Consequently,changes in short-term interest rates have had a major impact on our interest income.Future changes in interest rates are expected to have a similar impact.

 

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**Income tax expense**

 

For the three monthsended April 3, 2004, we recorded an income tax provision of $0.1 millionas compared to $0.3 million for the first quarter in 2003.  The decrease in the income tax provision isdue primarily to reduced earnings from our Japanese subsidiary. We presentlyanticipate that we will recognize income tax expense in 2004 of approximately10% of pre-tax income, primarily as a result of foreign income taxes andfederal alternative minimum tax. We believe that the tax rate in 2004 will besubstantially less than the statutory rate because of available federal netoperating loss carry-forwards.

 

Incometaxes can be affected by estimates of whether, and within which jurisdictions,future earnings will occur and how and when cash is repatriated to the UnitedStates, combined with other aspects of an overall income tax strategy.Additionally, taxing jurisdictions could retroactively disagree with our taxtreatment of certain items, and some historical transactions have income taxeffects going forward. Accounting rules require these future effects to beevaluated using current laws, rules and regulations, each of which canchange at any time and in an unpredictable manner. We believe we haveadequately provided for any reasonably foreseeable outcome related to thesematters, and do not anticipate any material earnings impact from their ultimateresolutions.

 

**Outlook**

 

Although we believe thatour served markets have generally strengthened during the last twelve months,the anticipated timing of orders, shipments and customer acceptances willrequire us to fill a number of production slots in the current and subsequentquarters in order to meet our near-term sales targets. If we are unsuccessfulin our efforts to secure those production orders, or if existing productionorders are delayed or cancelled, our results of operations will be materiallyadversely impacted. Accordingly, we may not be able to achieve or maintain ourcurrent or prior level of sales.  Wepresently expect that net sales for the quarter ending July 3, 2004 willincrease approximately 10% to 15% from the level of net sales reported for the secondquarter of 2003 of $24.8 million.

 

Because our net sales aresubject to a number of risks, including intense competition in the capitalequipment industry, uncertainty relating to the timing and market acceptance ofour products and the condition of the macro-economy and the semiconductorindustry, we may not exceed or maintain our current or prior level of net salesfor any period in the future. Additionally, we believe that the marketacceptance and volume production of our Saturn Spectrum 3e, our 300mmofferings, our laser processing systems and our 100 and 1000 series family ofwafer steppers, are of critical importance to our future financial results. AtApril 3, 2004, these critical systems represented 82% of our backlog. Tothe extent that these products do not achieve or maintain significant sales dueto difficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing cycles for these products, competition, excesscapacity in the semiconductor or nanotechnology device industries, customeracceptances, or any other reason, our business, financial condition and resultsof operations would be materially adversely affected.

 

We believe that grossmargin for the quarter ending July 3, 2004, excluding special items, willimprove to between 47% and 50%, as compared to gross margin of 45% for thesecond quarter of 2003, primarily due to increased revenues which result inbetter utilization of our manufacturing infrastructure. Should our salesdecline or not increase to the level expected, we may incur a higher risk ofinventory obsolescence and excess purchase commitments, which would materiallyadversely impact our results of operations. Additionally, increased price-basedcompetition would contribute to erosion of gross margin.  New products generally have lower grossmargins until there is widespread market acceptance and until production andafter-sales efficiencies can be achieved. Should significant market demand failto develop for our laser processing systems, our business, financial conditionand results of operations may be materially adversely affected.

 

We continue to investsignificant resources in the development and enhancement of our laserprocessing systems and technologies and our 1X products and relatedtechnologies.  Further, we expect thatselling, general and administrative expenses will continue to be impacted bythe factors noted above in the

 

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explanation of currentperiod variances.  As a result, for thethree-month period ending July 3, 2004, we expect an operating margin of1% to 4% and earnings per share of between $0.04 and $0.07.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Net cash used inoperating activities was $0.3 million for the quarter ended April 3, 2004,as compared with net cash generated by operations of $3.4 million for thecomparable period in 2003. Net cash used in operating activities during thefirst quarter of 2004 was attributable to net income of $0.5 million andnon-cash charges to income of $2.0 million, offset by the use of cash resultingfrom a net change in operating assets and liabilities of $2.8 million. The $2.8million use of cash from the net change in operating assets and liabilities wasprimarily a result of an increase in accounts receivable of $6.0 millionresulting from higher shipments in the first quarter of 2004 as compared to thefourth quarter of 2003, offset partially by a related increase in deferredproduct and services income of $2.8 million. We expect that accounts receivableand deferred product and services income will continue to increase during theremainder of 2004 as business levels increase.

 

We believe that becauseof the relatively long manufacturing cycle of certain of our systems,particularly newer products, our inventories will continue to represent asignificant portion of working capital. Currently, we are devoting significantresources to the development, introduction and commercialization of our laserprocessing system and to the development of our next generation 1X lithographytechnologies. We currently intend to continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturingand selling, general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit margins,inventory and capital equipment levels may be adversely impacted in the futureby costs associated with the initial production of our laser processing systemand by future generations of our 1X wafer steppers. These costs include, butare not limited to, additional manufacturing overhead, costs of demonstrationsystems and facilities and the establishment of additional after-sales supportorganizations. Additionally, our operating expenses may increase, relative tosales, as a result of adding additional marketing and administrative personnel,among other costs, to support our new products. If we are unable to achievesignificantly increased net sales or if our sales fall below expectations, ourcash flow and operating results will be materially adversely affected until,among other factors, costs and expenses can be reduced. Failure to achieve oursales targets for these new products could result in additional inventorywrite-offs and asset impairment charges, either of which could materiallyadversely impact our results of operations.

 

During the quarter endedApril 3, 2004, net cash used in investing activities was $8.3 million,attributable to capital expenditures of $1.5 million and a net increase inavailable-for-sale securities of $6.7 million. We are planning to incur capitalexpenditures during the remainder of 2004 of between $6 million and $10 millionfor equipment and facility improvements driven primarily by our new productintroductions.

 

Net cash provided byfinancing activities was $1.4 million during the quarter ended April 3,2004, attributable to proceeds received from the issuance of common stock underour employee stock option and stock purchase plans.

 

At April 3, 2004, wehad working capital of $172.5 million. Our principal source of liquidity atApril 3, 2004 consisted of $165.2 million in cash, cash equivalents andshort-term investments.

 

In September 2002,we entered into a line of credit agreement with a brokerage firm. Under theterms of this agreement, we may borrow funds at a cost equal to the currentFederal funds rate plus 100 basis points (2.00% as of April 3, 2004).Certain of our cash, cash equivalents and short-term investments secure borrowingsoutstanding under this facility. Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants. As of April 3, 2004, $2.5 million was outstanding underthis facility, with a related collateral requirement of approximately $3.6million of our cash, cash equivalents and short-term investments.

 

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The development andmanufacture of new lithography systems and enhancements are highlycapital-intensive. In order to be competitive, we believe we must continue tomake significant expenditures for capital equipment; sales, service, trainingand support capabilities; systems, procedures and controls; expansion ofoperations; and research and development, among many other items. We expectthat cash generated from operations and our cash, cash equivalents andshort-term investments will be sufficient to meet our cash requirements for atleast the next twelve months. However, in the near-term, we may continue toutilize existing and future lines of credit, and other sources of financing, inorder to maintain our present levels of cash, cash equivalents and short-terminvestments. Beyond the next twelve months, we may require additional equity ordebt financing 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 futurepursue acquisitions of complementary product lines, technologies or businesses.Future acquisitions by us may result in potentially dilutive issuances ofequity securities, the incurrence of debt and contingent liabilities andamortization expenses and impairment charges related to goodwill and otherintangible assets, which could materially adversely affect our financial conditionand results of operations. In addition, acquisitions involve numerous risks,including difficulties in the assimilation of the operations, technologies,personnel and products of the acquired companies; the diversion of management’sattention from other business concerns; risks of entering markets in which wehave limited or no direct experience; and the potential loss of key employeesof the acquired company. In the event we acquire product lines, technologies orbusinesses which do not complement our business, or which otherwise do notenhance our sales or operating results, we may incur substantial write-offs andhigher recurring operating costs, which could have a material adverse effect onour business, financial condition and results of operations. In the event thatany such acquisition does occur, there can be no assurance as to the effectthereof on our business or operating results.

 

**Foreign currency**

 

As part of our overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yendenominated foreign currency exposures. We use foreign currency forwardcontracts to hedge the risk that unremitted Japanese yen denominated receiptsfrom customers for actual or forecasted sales of equipment after receipt ofcustomer orders may be adversely affected by changes in foreign currencyexchange rates. After recording revenue, we use various mechanisms, such asforeign currency forward exchange contracts and natural hedges, to offsetsubstantial portions of the potential gains or losses associated with ourJapanese yen denominated receivables and liabilities due to exchange ratefluctuations. At April 3, 2004, we had taken action to hedge approximatelyall of these Japanese yen denominated exposures. With the exception of naturalhedges resulting from having both assets and liabilities denominated inJapanese yen, we hedge our exposures by entering into foreign currency forwardcontracts that generally have maturities of nine months or less. We often closeforeign currency forward contracts by entering into an offsetting contract. AtApril 3, 2004, we had contracts for the sale and purchase of $9.1 and $0.2million, respectively, of foreign currencies at fixed rates of exchange.

 

**ADDITIONAL RISK FACTORS**

 

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

 

**Development of New Product Lines; Expansion ofOperations **Currently,we are devoting significant resources to the development, introduction andcommercialization of our laser processing systems and to enhancements of ourSaturn Spectrum 3e and Saturn Spectrum 300e2 wafersteppers and next generation related platforms. We intend to continue todevelop these products and technologies during 2004, and to incur significantoperating expenses in the areas of research, development and engineering,manufacturing and general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit margins andinventory levels may be further adversely impacted in the future by costsassociated with the initial production of our laser processing systems and byfuture generations of our 1X lithography systems. These costs include, but arenot limited to, additional manufacturing overhead, additional inventorywrite-offs, costs of demonstration systems and facilities, and costs associatedwith the establishment of additional after-sales support organizations.Additionally, operating expenses may 

 

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increase, relative tosales, as a result of adding additional marketing and administrative personnel,among other costs, to support our new products. If our new products do notresult in significantly increased net sales or if our sales fall belowexpectations, our operating results will be materially adversely affected.

 

Our ability tocommercialize our laser processing technologies depends on our ability todemonstrate a manufacturing-worthy tool. We do not presently have in-housecapability to fabricate semiconductor devices. As a result, we must partnerwith semiconductor companies to develop the anneal process. The development ofnew process technologies is largely dependent upon our ability to interestpotential customers in working on joint process development. Our ability todeliver timely solutions is also limited by wafer turnaround at the potentialcustomer’s fabrication facility.

 

**Highly Competitive Industry** The capitalequipment industry in which we operate is intensely competitive. A substantialinvestment is required to install and integrate capital equipment into asemiconductor, semiconductor packaging or nanotechnology device productionline. We believe that once a device manufacturer or packaging subcontractor hasselected a particular vendor’s capital equipment, the manufacturer generallyrelies upon that equipment for the specific production line application and, tothe extent possible, subsequent generations of similar products. Accordingly,it is difficult to achieve significant sales to a particular customer onceanother vendor’s capital equipment has been selected.

 

We experience competitionin advanced packaging from various proximity aligner companies such as SussMicrotec AG (Suss Microtec) and projection companies such as Ushio, Inc.(Ushio) and Tamarack Scientific Co., Inc. (Tamarack). In nanotechnology,we experience competition from proximity aligner companies, such as SussMicrotec, as well as other stepper manufacturers who have developed or aredeveloping tools specifically designed for nanotechnology applications. Weexpect our competitors to continue to improve the performance of their currentproducts and to introduce new products with improved price and performancecharacteristics. This could cause a decline in sales or loss of market share inour served markets, and thereby materially adversely affect our business,financial condition and results of operations. Enhancements to, or futuregenerations of, competing products may be developed that offer superior cost ofownership and technical performance features.

 

With respect to our laserannealing technologies, marketed under the V100 product name, the primarycompetition comes from companies that offer products utilizing rapid thermalprocessing (RTP), which is the current manufacturing technology. Anotherpotential advanced annealing solution utilizes flash lamp annealing technology(FLA). Several companies have published papers on annealing tools that incorporateflash lamp technology in order to reduce annealing times and increase annealtemperatures. Developers of flash lamp annealing (FLA) technology claim to haveovercome annealing difficulties at the 65nm node. Additionally, competition toour laser processing products may come from other laser annealing tools,including those presently being used by the flat panel display industry tore-crystallize silicon. Manufacturers of these tools may try to extend the useof their technologies to semiconductor device applications.  We believe customers will choose betweenthese technology alternatives based on their assessment of a combination ofprice and performance benefits for their specific applications.

 

In July 2000, welicensed certain rights to our then existing laser processing technology, withreservations, to a competing manufacturer of semiconductor equipment. Wepresently anticipate this company will offer laser annealing tools to thesemiconductor industry that will compete with our offerings.

 

We believe that to becompetitive, we will require significant financial resources in order tocontinue to invest in new product development, in new features and enhancementsto existing products, to introduce new generation stepper systems in our servedmarkets on a timely basis, and to maintain customer service and support centersworldwide. In marketing our products, we may also face competition from vendorsemploying other technologies. In addition, increased competitive pressure hasled to intensified price-based competition in certain of our markets, resultingin lower prices and margins. Should these competitive trends continue, ourbusiness, financial condition and operating results may be materially adverselyaffected. We may not be able to compete successfully in the future.

 

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**Intellectual Property Rights **Although we attempt to protect our intellectualproperty rights through patents, copyrights, trade secrets and other measures,we believe that our success will depend more upon the innovation, technologicalexpertise and marketing abilities of our employees. Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities. We own 85 UnitedStates and foreign patents, which expire on dates ranging from May 2004 toOctober 2021 and have 58 United States and foreign patent applicationspending. We also have various registered trademarks and copyright registrationscovering mainly software programs used in the operation of our systems. Inaddition, we rely upon trade secret protection for our confidential andproprietary information. We may not be able to protect our technologyadequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not result in a patent beingissued and U.S. or foreign intellectual property laws may not protect ourintellectual property rights. In addition, litigation may be necessary toenforce our patents, copyrights or other intellectual property rights, toprotect our trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement. Suchlitigation has resulted in, and in the future could result in, substantialcosts and diversion of resources and could have a material adverse effect onour business, financial condition and results of operations, regardless of theoutcome of the litigation. Patents issued to us may be challenged, invalidatedor circumvented and the rights granted thereunder may not provide competitiveadvantages to us. Furthermore, others may independently develop similartechnology or products or design around our patents. Challenges to, orinvalidation of, patents related to our technologies would expose us to therisk of forfeiture of revenues and further risk of damage claims.

 

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon,and in September 2001, we reached a settlement with Canon. The patentlitigation against ASML is ongoing after having been transferred to the NorthernDistrict of California. After the District Court made a preliminarydetermination that ASML did not infringe the patent, we appealed the decisionto the Court of Appeal for the Federal Circuit in Washington, D.C., and oralarguments were heard in February 2004. The Court of Appeal for the Federal Circuit in Washington, D.C. reversedthe preliminary determination of the District Court and remanded the case backto the District Court for further proceedings. ASML has petitioned the Court ofAppeal for the Federal Circuit in Washington, D.C. for reconsideration of theirdecision.  Our response to the ASMLpetition was filed with the Court of Appeals on May 3, 2004.

 

We are involved in otherlawsuits and legal actions regarding infringement claims that we believe not tobe material to our business or financial condition. Additionally, we have fromtime to time been notified of claims that we may be infringing intellectualproperty rights possessed by third parties.

 

Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions, if proven to be true, maymaterially adversely affect our business, financial condition and results ofoperations, regardless of the outcome of any litigation. With respect to anysuch future claims, we may seek to obtain a license under the third party’sintellectual property rights. However, a license may not be available to us onreasonable terms or at all. We could decide, in the alternative, to resort tolitigation to challenge such claims. Such challenges could be expensive andtime consuming and could materially adversely affect our business, financialcondition and results of operations, regardless of the outcome of anylitigation.

 

**Cyclicality of Semiconductor, Semiconductor Packagingand Nanotechnology Industries** Our business depends in significant part uponcapital expenditures by******manufacturers of semiconductors, bumped semiconductorsand nanotechnology components, including thin film head magnetic recordingdevices, which in turn depend upon the current and anticipated market demandfor such devices and products utilizing such devices. The semiconductorindustry historically has been highly cyclical and has experienced recurringperiods of oversupply. This has, from time to time, resulted in significantlyreduced demand for capital equipment including the systems manufactured andmarketed by us. The semiconductor industry, which includes thesemiconductor-packaging sector, recently experienced a severe downturn. Webelieve that markets for new generations of semiconductors and semiconductorpackaging will also be

 

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subject to similarfluctuations. Our business and operating results would be materially adverselyaffected by downturns or slowdowns in the semiconductor, semiconductorpackaging or nanotechnology markets or by loss of market share. Accordingly, wemay not be able to achieve or maintain our current or prior level of sales.

 

We attempt to mitigatethe risk of cyclicality by offering products in multiple markets includingsemiconductor, semiconductor packaging, thin film head and other nanotechnologysectors, as well as diversifying into new markets such as photolithography for opticalnetworking (a nanotechnology application) and laser-based annealing for implantactivation and other applications. Despite such efforts, when one or more ofsuch markets experiences a downturn or a situation of excess capacity, our netsales and operating results are 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 2004, five customers represented approximately 58% of our systemrevenue.  In 2003, Intel Corporationaccounted for 26% of our net sales. At April 3, 2004, four customersaccounted for 45% of our system backlog. Cancellation, deferrals orrescheduling of orders by any of these customers would have a material adverseimpact on our future results of operations.

 

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 thebusiness risks associated with dependence on a small number of major customers,these significant customer concentrations have in the past resulted insignificant 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 any of our major customers were unable or unwilling topay or if we were required to take additional accounts receivable reserves, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

 

On a market applicationbasis, sales to the semiconductor industry, primarily for advanced packagingapplications, accounted for approximately 58% and 75% of system revenue for thefirst quarter of 2004 and the year ended December 31, 2003, respectively.During the first quarter of 2004 and for the full year 2003, approximately 42%and 25%, respectively, of our systems revenue was derived from sales tonanotechnology manufacturers, including micro systems, TFH and opticalnetworking device manufacturers. Our future results of operations and financialcondition would be materially adversely impacted by a downturn in any of thesemarket segments, or by loss of market share in any of these segments.

 

**International Sales **International net sales accounted forapproximately 77% and 61% of total net sales for the first quarter of 2004 andthe year ended December 31, 2003, respectively. We anticipate thatinternational sales, which typically have lower gross margins than domesticsales, principally due to increased competition and higher field service andsupport costs, will continue to account for a significant majority of total netsales. As a result, a significant portion of our net sales will continue to besubject to certain risks, including unexpected changes in regulatoryrequirements; difficulty in satisfying existing regulatory requirements;exchange rate fluctuations; tariffs and other barriers; political and economicinstability; difficulties in accounts receivable collections; naturaldisasters; some dependence on outside

 

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sales representativeorganizations; difficulties in staffing and managing foreign subsidiary andbranch operations; and potentially adverse tax consequences.

 

Although we generallytransact our international sales in U.S. dollars, international sales expose usto a number of additional risks, including fluctuations in the value of localcurrencies relative to the U.S. dollar, which, in turn, impact the relativecost of ownership of our products and may further impact the purchasing abilityof our international customers. However, in Japan, we have a direct salesoperation and orders are often denominated in Japanese yen. This may subject usto a higher degree of risk from currency exchange rate fluctuations. We attemptto mitigate this exposure through the use of foreign exchange forwardcontracts. We are also subject to the risks associated with the imposition oflegislation and regulations relating to the import or export of semiconductorsand nanotechnology products. We cannot predict whether the United States, Japanor any other country will implement changes to quotas, duties, taxes or othercharges or restrictions upon the importation or exportation of our products.These factors, or the adoption of restrictive policies, may have a materialadverse effect on our business, financial condition and results of operations.

 

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

 

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

 

Accounting policiesaffecting many other aspects of our business, including rules relating torevenue recognition, off-balance sheet transactions, employee stock options,restructurings, asset disposals, intangible assets, derivative and otherfinancial instruments, and in-process research and development charges, haverecently been revised or are under review. Changes to those rules or thequestioning of current practices may have a material adverse effect on ourreported financial results or on the way we conduct business. In addition, ourpreparation of financial statements in accordance with U.S. GAAP requires thatwe make estimates and assumptions that affect the recorded amounts of assetsand liabilities, disclosure of those assets and liabilities at the date of thefinancial statements and the recorded amounts of expenses during the reportingperiod. A change in the facts and circumstances surrounding those estimatescould result in a change to our estimates and could impact our future operatingresults.

 

**Rapid Technological Change; Importance of TimelyProduct 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

 

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software tools. Anysuccess we may have in developing new and enhanced systems and related softwaretools depends upon a variety of factors, including product selection, timelyand efficient completion of product design, timely and efficient implementationof manufacturing and assembly processes, product performance in the field andeffective sales and marketing. Because new product development commitments mustbe made well in advance of sales, new product decisions must anticipate bothfuture demand and the technology that will be available to supply that demand.There can be no assurance that we will be successful in selecting, developing,manufacturing or marketing new products and related software tools or enhancingour existing products and related software tools. Any such failure wouldmaterially adversely affect our business, financial condition and results ofoperations.

 

Because of the largenumber of components in our systems, significant delays can occur between asystem’s introduction and when we commence volume production of such systems.We have experienced delays from time to time in the introduction of, andtechnical and manufacturing difficulties with, certain of our systems andenhancements and related software features and options, and may experiencedelays and technical and manufacturing difficulties in future introductions orvolume production of new systems or enhancements and related software featuresand options.

 

We may encounteradditional technical, manufacturing or other difficulties that could furtherdelay future introductions or volume production of systems or enhancements. Ourinability to complete the development or meet the technical specifications ofany of our systems or enhancements and related software tools, or our inabilityto manufacture and ship these systems or enhancements and related softwaretools in volume and in time to meet the requirements for manufacturing thefuture generation of semiconductor or nanotechnology devices would materiallyadversely affect our business, financial condition and results of operations.In addition, we may incur substantial unanticipated costs to ensure thefunctionality and reliability of our products early in the products’ lifecycles. If new products have reliability or quality problems, reduced orders orhigher manufacturing costs, delays in collecting accounts receivable and additionalservice and warranty expenses may result. Any of such events may materiallyadversely affect our business, financial condition and results of operations.

 

**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 orderone of the most critical components of our technology, the glass for our 1Xlenses, 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 ourother critical systems’ components, subassemblies and services from singleoutside suppliers or a limited group of outside suppliers in order to ensureoverall quality and timeliness of delivery. Many of these components andsubassemblies have significant production lead times. To date, we have beenable to obtain adequate services and supplies of components and subassembliesfor our systems in a timely manner. However, disruption or termination ofcertain of these sources could result in a significant adverse impact on ourability to manufacture our systems. This, in turn, would have a materialadverse effect on our business, financial condition and results of operations.Our reliance on a sole or a limited group of suppliers and our reliance onsubcontractors involve several risks, including a potential inability to obtainan adequate supply of required components due to the suppliers’ failure orinability to provide such components in a timely manner, or at all, and reducedcontrol over pricing and timely delivery of components. Although thetimeliness, yield and quality of deliveries to date from our subcontractorshave been acceptable, manufacture of certain of these components andsubassemblies is an extremely complex process, and long lead-times arerequired. Any inability to obtain adequate deliveries or any other circumstancethat would require us to seek alternative sources of supply or to manufacturesuch components internally could delay our ability to ship our products, whichcould damage relationships with current and prospective customers and have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Dependence on Key Personnel **Our future operating results depend, insignificant part, upon the continued contributions of key personnel, many ofwhom would be difficult to replace. We have entered

 

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into employmentagreements with only a limited number of our employees, including our ChiefExecutive Officer, President and Chief Financial Officer, and our employees areemployed “at will.” These employment agreements contain vesting accelerationand severance payment provisions that could result in significant costs orcharges to us should the employee be terminated without cause, die or have adisability. We do not maintain any life insurance on any of our key people. Theloss of key personnel could have a material adverse effect on our business,financial condition and results of operations. In addition, our futureoperating results depend in significant part upon our ability to attract andretain other qualified management, manufacturing, technical, sales and supportpersonnel for our operations. There are only a limited number of people withthe requisite skills to serve in these positions and it may become increasinglydifficult for us to hire such personnel over time. At times, competition forsuch personnel has been intense, particularly in the San Francisco Bay Areawhere we maintain our headquarters and principal operations, and there can beno assurance that we will be successful in attracting or retaining suchpersonnel. The failure to attract or retain such persons would materiallyadversely affect our business, financial condition and results of operations.

 

**Volatility of Stock Price and Dilutive Impact ofEmployee Stock Options **Webelieve that factors such as announcements of developments related to ourbusiness, fluctuations in our operating results, a shortfall in revenue orearnings, changes in analysts’ expectations, general conditions in thesemiconductor and nanotechnology industries or the worldwide or regionaleconomies, sales of our securities into the marketplace, an outbreak orescalation of hostilities, announcements of technological innovations or newproducts or enhancements by us or our competitors, developments in patents orother intellectual property rights and developments in our relationships withour customers and suppliers could cause the price of our common stock to fluctuate,perhaps substantially. The market price of our common stock may continue toexperience significant fluctuations in the future, including fluctuations thatmay be unrelated to our performance.

 

As of May 1, 2004,we had approximately 5.8 million stock options outstanding. Among otherdeterminants, the market price of our stock has a major bearing on the numberof stock options outstanding 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 (diluted).****Additionally, options areexcluded from the calculation of net income (loss) per share when we have a netloss or when the exercise price of the stock option is greater than the averagemarket price of our common stock, as the impact of the stock options would beanti-dilutive.

 

**Effects of Certain Anti-Takeover Provisions **Certain provisionsof our Certificate of Incorporation, equity incentive plans, Shareholder RightsPlan, licensing agreements, Bylaws and Delaware law may discourage certaintransactions involving a change in control of our company. In addition to theforegoing, our classified board of directors, the shareholdings of ourofficers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to issue “blank check” preferred stockwithout further stockholder approval could have the effect of delaying, deferringor preventing a change in control of the Company and may adversely affect thevoting and other rights of holders of Common Stock.

 

**California Manufacturing Location **We perform all of our manufacturing activities(final assembly, system testing and certain subassembly) in clean roomenvironments totaling approximately 26,000 square feet located in San Jose,California. Performing manufacturing operations in California exposes us to ahigher risk of natural disasters, including earthquakes. In addition, in thepast California has experienced power shortages, which have interrupted ouroperations.  Such shortages could occurin the future and could again interrupt our operations resulting in productshipment delays, increased costs and other problems, any of which could have amaterial adverse effect on our business, customer relationships and results oroperations. We are not insured against natural disasters and power shortagesand the occurrence of such an event could materially adversely impact our resultsof operations.

 

**Environmental Regulations **We are subject to a variety of governmentalregulations relating to the use, storage, discharge, handling, emission,generation, manufacture and disposal of toxic or other hazardous substancesused to manufacture our systems. We believe that we are currently in compliancein all material

 

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respects with suchregulations and that we have obtained all necessary environmental permits toconduct our business. Nevertheless, the failure to comply with current orfuture regulations could result in substantial fines being imposed on us,suspension of production, alteration of the manufacturing process or cessationof operations. Such regulations could require us to acquire expensiveremediation equipment or to incur substantial expenses to comply withenvironmental regulations. Any failure by us to control the use, disposal orstorage of, or adequately restrict the discharge of, hazardous or toxicsubstances 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 directly onUltratech may significantly disrupt our ability to conduct our business. Any ofthese occurrences could have a significant impact on our operating results,revenues and costs and may result in increased volatility of the market priceof our common stock.

 

**Information Available on Company Web-site**

 

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

 

**Item 3.****                                   Quantitative****andQualitative Disclosures about Market Risk**

 

Reference is made to PartII, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” inour Annual Report on Form 10-K for the year ended December 31, 2003 and tothe subheading “Derivative Instruments and Hedging” in Item 8, “FinancialStatements and Supplementary Data”, under the heading “Notes to ConsolidatedFinancial Statements” of our Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**Interest rate risk**

 

Our exposure to marketrisk due to potential changes in interest rates, relates primarily to ourinvestment portfolio, which consisted primarily of fixed interest rateinstruments as of April 3, 2004. These instruments are held for purposesother than trading. We maintain an investment policy designed to ensure thesafety and preservation of our invested funds by limiting market risk and therisk of default. If interest rates were to suddenly rise by 50 basis points,the market value of our portfolio would decline by approximately $0.6 million.

 

**Foreign Currency Risk Management**

 

The majority of ourrevenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies,primarily Japanese Yen. To protect against reductions in value and thevolatility of future cash flows caused by changes in currency exchange rates wehave established transaction and balance sheet hedging programs. We use foreigncurrency forward contracts to hedge the risk that unremitted Japanese yendenominated receipts from customers for actual or forecasted sales of equipmentafter receipt of customer orders may be adversely affected by changes inforeign currency exchange rates. At April 3, 2004, we had taken action tohedge approximately all of these

 

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Japanese yen denominatedexposures. To hedge this exposure, we enter into foreign currency forwardcontracts that generally have maturities of nine months or less. We often closeforeign currency forward contracts by entering into an offsetting contract. AtApril 3, 2004, we had contracts for the sale and purchase of $9.1 and $0.2million, respectively, of foreign currencies at fixed rates of exchange. Ourhedging programs reduce, but do not always entirely eliminate, the impact ofcurrency movements.

 

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

 

We conducted anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the period covered by this report (the “Evaluation Date”).  Based upon the evaluation, our principalexecutive officer and principal financial officer concluded as of theEvaluation Date that our disclosure controls and procedures were effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

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

 

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**PART 2:****                                                OTHERINFORMATION**

**Item 1.****                                                           LegalProceedings**.

 

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon,and in September 2001, we reached a settlement with Canon. The patentlitigation against ASML is ongoing after having been transferred to theNorthern District of California. After the District Court made a preliminarydetermination that ASML did not infringe the patent, we appealed the decisionto the Court of Appeal for the Federal Circuit in Washington, D.C., and oralarguments were heard in February 2004. The Court of Appeal for the Federal Circuit in Washington, D.C. reversedthe preliminary determination of the District Court and remanded the case backto the District Court for further proceedings. ASML has petitioned the Court ofAppeal for the Federal Circuit in Washington, D.C. for reconsideration of theirdecision.  Our response to the ASMLpetition was filed with the Court of Appeals on May 3, 2004.

 

On October 12, 2001,we were sued in the District Court of Massachusetts by SVG Lithography Systems(“SVGL”), alleging infringement of several patents. SVGL is a division ofSilicon Valley Group, Inc., which is a wholly owned subsidiary of ASML. Asof March 2004, all claims made by SVGL have been dismissed.

 

We are involved in otherlawsuits and legal actions that we believe are not material to our business orfinancial condition.

 
| **Item  2.** |   | **Changes in Securities and Use of Proceeds.**           |   | None.  |
|--------------|--------|----------------------------------------------------------|--------|--------|
|         |   |                                                     |   |   |
| **Item  3.** |   | **Defaults upon Senior Securities.**                     |   | None.  |
|         |   |                                                     |   |   |
| **Item  4.** |   | **Submission of Matters to a Vote of Security Holders.** |   | None.  |
|         |   |                                                     |   |   |
| **Item  5.** |   | **Other Information.**                                   |   | None.  |
|         |   |                                                     |   |   |
| **Item  6.** |   | **Exhibits and Reports on Form 8-K**                     |   |   |

 

**(a) Exhibits**

 
| 10.1   |   | 1993 Stock Option /  Stock Issuance Plan (Amended and Restated as of March 2, 2004).                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.1   |   | Certification of Chief  Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                            |
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification of Chief  Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                            |
|   |   |                                                                                                                                                           |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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

 

During the quarter endedApril 3, 2004:

 

•                  wefurnished a Current Report on Form 8-K dated February 4, 2004 to theSecurities and Exchange Commission reporting under Items 7 and 12 the issuanceof a press release to report our financial results for the fourth quarter andfiscal year ended December 31, 2003; and

 

•                  wefurnished a Current Report on Form 8-K dated March 25, 2004 to theSecurities and Exchange Commission reporting under Item 9 the posting of anupdate to our quarterly teleconference guidance on our website.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|         | **ULTRATECH, INC.**                                                                |   |
|--------------|------------------------------------------------------------------------------------|--------|
| (Registrant) |
|         |
|         |
| Date:        | May  7, 2004                                                                  |   | By: |  /s/Bruce R.  Wright |   |
|         | Bruce R. Wright                                                                    |
|         | Senior Vice President,  Finance and Chief Financial                                |
|         | Officer  (Duly Authorized Officer and Principal  Financial and Accounting Officer) |
|              |                                                                                    |        |  |  |  |  |  |

 

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**EXHIBIT INDEX**

 
| 10.1   |   | 1993 Stock Option /  Stock Issuance Plan (Amended and Restated as of March 2, 2004).                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.1   |   | Certification of Chief  Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                            |
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification of Chief  Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                            |
|   |   |                                                                                                                                                           |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

** **

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