** **

**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 September 27, 2003** |
|           |   |   |
| **o**          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                  to                  **

 

**Commission File Number 0-22248**

 

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

 

Yes                            ý                                    No                                o

 

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

 

Yes                            ý                                    No                                o

 

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

 

| **Class**                     |   | **Outstanding  as of October 31, 2003** |
|-------------------------------|--------|----------------------------------------------|
| common stock, $.001 par value |   | 23,447,811                                   |

 

 

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**ULTRATECH,INC.**

 

**INDEX**

 
| **PART 1.**                       | **FINANCIAL INFORMATION**                                                                                                                 |
|-----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                                                      |   |   |
| **Item 1.**                       | **Condensed Consolidated Financial Statements**                                                                                           |
|                              |                                                                                                                                      |   |   |
|                              | Condensed  Consolidated Balance Sheets as of September 27, 2003 and  December 31, 2002                                          |
|                              |                                                                                                                                      |   |   |
|                              | Condensed Consolidated Statements of  Operations for the three and nine months ended September 27, 2003 and  September 28, 2002 |
|                              |                                                                                                                                      |   |   |
|                              | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 27, 2003 and  September 28, 2002           |
|                              |                                                                                                                                      |   |   |
|                              | Notes to Condensed Consolidated Financial  Statements                                                                                     |
|                              |                                                                                                                                      |   |   |
| **Item 2.**                       | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                                           |
|                              |                                                                                                                                      |   |   |
| **Item 3.**                       | **Quantitative and Qualitative Disclosures  About Market Risk**                                                                           |
|                              |                                                                                                                                      |   |   |
| **Item 4.**                       | **Controls and Procedures**                                                                                                               |
|                              |                                                                                                                                      |   |   |
| **PART 2.**                       | **OTHER INFORMATION**                                                                                                                     |
|                              |                                                                                                                                      |   |   |
| **Item 1.**                       | **Legal Proceedings**                                                                                                                     |
|                              |                                                                                                                                      |   |   |
| **Item 2.**                       | **Changes in Securities and Use of Proceeds**                                                                                             |
|                              |                                                                                                                                      |   |   |
| **Item 3.**                       | **Defaults upon Senior Securities**                                                                                                       |
|                              |                                                                                                                                      |   |   |
| **Item 4.**                       | **Submission of Matters to a Vote of Security  Holders**                                                                                  |
|                              |                                                                                                                                      |   |   |
| **Item 5.**                       | **Other Information**                                                                                                                     |
|                              |                                                                                                                                      |   |   |
| **Item 6.**                       | **Exhibits and Reports on Form 8-K**                                                                                                      |
|                              |                                                                                                                                      |   |   |
|                              |                                                                                                                                      |   |   |
| **SIGNATURES AND CERTIFICATIONS** |

 

2

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

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

 

**ULTRATECH, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| **(In thousands)**                                  |   | **Sep. 27,  2003** |        | **Dec.  31,  2002*** |   |
|-----------------------------------------------------|--------|--------------------|-------------|----------------------|--------|
|                                                |   | **(Unaudited)**    |        |                 |   |
| ***ASSETS***                                        |   |               |        |                 |   |
|                                                |   |               |        |                 |   |
| Current assets:                                     |   |               |        |                 |   |
| Cash, cash equivalents, and  short-term investments |   | **$**              | **159,834** |                 | $      | 157,529 |   |
| Accounts receivable                                 |   | **19,915**         |        | 12,870               |   |
| Inventories                                         |   | **14,797**         |        | 25,182               |   |
| Income taxes receivable                             |   | **433**            |        | 1,179                |   |
| Deferred income taxes                               |   | **475**            |        | —               |   |
| Prepaid expenses and other  current assets          |   | **2,318**          |        | 1,627                |   |
| Total current assets                                |   | **197,772**        |        | 198,387              |   |
|                                                |   |               |        |                 |   |
| Equipment and leasehold  improvements, net          |   | **18,351**         |        | 19,090               |   |
|                                                |   |               |        |                 |   |
| Intangible assets, net                              |   | **571**            |        | 858                  |   |
|                                                |   |               |        |                 |   |
| Demonstration inventories, net                      |   | **4,447**          |        | 2,208                |   |
|                                                |   |               |        |                 |   |
| Other assets                                        |   | **1,593**          |        | 1,823                |   |
|                                                |   |               |        |                 |   |
| Total assets                                        |   | **$**              | **222,734** |                 | $      | 222,366 |   |
|                                                |   |               |        |                 |   |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***    |   |               |        |                 |   |
|                                                |   |               |        |                 |   |
| Current liabilities:                                |   |               |        |                 |   |
| Notes payable                                       |   | **$**              | **2,600**   |                 | $      | 9,769 |   |
| Accounts payable                                    |   | **8,026**          |        | 6,719                |   |
| Deferred product and services  income               |   | **8,475**          |        | 6,293                |   |
| Deferred license income                             |   | **5,680**          |        | 8,463                |   |
| Other current liabilities                           |   | **12,343**         |        | 14,983               |   |
| Total current liabilities                           |   | **37,124**         |        | 46,227               |   |
|                                                |   |               |        |                 |   |
| Other liabilities                                   |   | **3,353**          |        | 4,385                |   |
|                                                |   |               |        |                 |   |
| Stockholders’ equity                           |   | **182,257**        |        | 171,754              |   |
|                                                |   |               |        |                 |   |
| Total liabilities and  stockholders’ equity    |   | **$**              | **222,734** |                 | $      | 222,366 |   |

 

Notes:

 

----

* The Balance Sheet as of Dec. 31, 2002 has beenderived from the audited financial statements at that date.

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

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**ULTRATECH,INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)**

 
|                                                       |   | **Three  Months Ended** |       | **Nine  Months Ended** |   |
|------------------------------------------------------------|--------|-------------------------|------------|------------------------|--------|
| **(In thousands, except per share amounts)**               |   | **Sep 27,  2003**       |       | **Sep  28,  2002**     |   | **Sep 27,  2003** |   | **Sep  28,  2002** |   |
| Net sales:                                                 |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Products                                                   |   | **$**                   | **22,732** | ** **             | $      | 3,720 |   | **$** | **62,574** | ** ** | $ | 35,214 |   |
| Services                                                   |   | **2,885**               | ** ** | 2,642                  |   | **7,951** | ** ** | 8,253 |   |
| Licenses                                                   |   | **927**                 | ** ** | 928                    |   | **2,783** | ** ** | 4,317 |   |
| Total net sales                                            |   | **$**                   | **26,544** | ** **             | $      | 7,290 |   | **$** | **73,308** | ** ** | $ | 47,784 |   |
| Cost of sales:                                             |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Cost of products sold                                      |   | **11,675**              | ** ** | 5,252                  |   | **35,856** | ** ** | 26,392 |   |
| Cost of services                                           |   | **1,519**               | ** ** | 1,870                  |   | **4,884** | ** ** | 5,950 |   |
| Cost of inventory writedown                                |   | **(363**                | **)**      | 5,733                  |   | **(982** | **)** | 5,733 |   |
| Cost of discontinued products                              |   | **—**              | ** ** | 2,169                  |   | **(121** | **)** | 2,169 |   |
| Total cost of sales                                        |   | **12,831**              | ** ** | 15,024                 |   | **39,637** | ** ** | 40,244 |   |
| Gross profit (loss)                                        |   | **$**                   | **13,713** | ** **             | $      | (7,734 | ) | **$** | **33,671** | ** ** | $ | 7,540 |   |
|                                                       |   |                    |       |                   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                        |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Research, development, and  engineering                    |   | **5,544**               | ** ** | 5,991                  |   | **15,718** | ** ** | 17,723 |   |
| Amortization of intangible  assets                         |   | **96**                  | ** ** | 96                     |   | **286** | ** ** | 286 |   |
| Selling, general, and  administrative                      |   | **6,362**               | ** ** | 5,849                  |   | **16,628** | ** ** | 17,753 |   |
| Restructure of operations                                  |   | **—**              | ** ** | 4,297                  |   | **(114** | **)** | 4,297 |   |
| Operating income (loss)                                    |   | **$**                   | **1,711**  | ** **             | $      | (23,967 | ) | **$** | **1,153** | ** ** | $ | (32,519 | ) |
| Interest expense                                           |   | **(112**                | **)**      | (35                    | )      | **(235** | **)** | (50 | ) |
| Interest - special                                         |   | **312**                 | ** ** | —                 |   | **312** | ** ** | — |   |
| Interest and other income, net                             |   | **805**                 | ** ** | 1,487                  |   | **2,977** | ** ** | 4,755 |   |
| Income (loss) before tax                                   |   | **$**                   | **2,716**  | ** **             | $      | (22,515 | ) | **$** | **4,207** | ** ** | $ | (27,814 | ) |
| Income taxes (benefit) -  special                          |   | **(352**                | **)**      | (3,648                 | )      | **(352** | **)** | (4,866 | ) |
| Income taxes (benefit)                                     |   | **(172**                | **)**      | —                 |   | **273** | ** ** | — |   |
| Net income (loss)                                          |   | **$**                   | **3,240**  | ** **             | $      | (18,867 | ) | **$** | **4,286** | ** ** | $ | (22,948 | ) |
| Earnings per share - basic:                                |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Net income (loss)                                          |   | **$**                   | **0.14**   | ** **             | (0.83  | ) | **$** | **0.19** | ** ** | $ | (1.02 | ) |
| Number of shares used in per  share calculations - basic   |   | **23,010**              | ** ** | 22,609                 |   | **22,870** | ** ** | 22,570 |   |
| Earnings per share - diluted:                              |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Net income (loss)                                          |   | **$**                   | **0.13**   | ** **             | $      | (0.83 | ) | **$** | **0.18** | ** ** | $ | (1.02 | ) |
| Number of shares used in per  share calculations - diluted |   | **25,144**              | ** ** | 22,609                 |   | **23,883** | ** ** | 22,570 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

4

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**ULTRATECH, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
|                                                       |   | **Nine  Months Ended** |       |
|------------------------------------------------------------|--------|------------------------|------------|
| **(In thousands)**                                         |   | **Sept. 27,  2003**    |       | **Sept.  28,  2002** |   |
|                                                       |   |                   | ** ** |   |   |
| **Cash flows from operating  activities:**                 |   |                   | ** ** |   |   |
| Net income (loss)                                          |   | **$**                  | **4,286**  | ** ** | $ | (22,948 | ) |
| Charges to income not affecting cash                       |   | **6,530**              | ** ** | 16,913 |   |
| Net effect of changes in operating assets and  liabilities |   | **(2,351**             | **)**      | (12,654 | ) |
| Net cash generated by (used in) operating  activities      |   | **8,465**              | ** ** | (18,689 | ) |
|                                                       |   |                   | ** ** |   |   |
| **Cash flows from investing  activities:**                 |   |                   | ** ** |   |   |
| Capital expenditures                                       |   | **(4,306**             | **)**      | (4,191 | ) |
| Net decrease (increase) in available-for-sale  securities  |   | **23,800**             | ** ** | (24,520 | ) |
| Net increase in restricted cash                            |   | **—**             | ** ** | (1,520 | ) |
| Net cash generated by (used in) investing  activities      |   | **19,494**             | ** ** | (30,231 | ) |
|                                                       |   |                   | ** ** |   |   |
| **Cash flows from financing  activities:**                 |   |                   | ** ** |   |   |
| Net proceeds from (repayment of) notes payable             |   | **(7,233**             | **)**      | 10,060 |   |
| Proceeds from issuance of Common Stock                     |   | **6,522**              | ** ** | 2,372 |   |
| Net cash provided by (used in) financing  activities       |   | **(711**               | **)**      | 12,432 |   |
|                                                       |   |                   | ** ** |   |   |
| Net effect of exchange rate changes on cash                |   | **(98**                | **)**      | (65 | ) |
|                                                       |   |                   | ** ** |   |   |
| Net increase (decrease) in cash and cash  equivalents      |   | **27,150**             | ** ** | (36,553 | ) |
|                                                       |   |                   | ** ** |   |   |
| Cash and cash equivalents at beginning of period           |   | **18,178**             | ** ** | 62,729 |   |
|                                                       |   |                   | ** ** |   |   |
| Cash and cash equivalents at end of period                 |   | **$**                  | **45,328** | ** ** | $ | 26,176 |   |

 

*See accompanying notes tocondensed consolidated financial statements*

 

5

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**Ultratech, Inc.Notes to Condensed Consolidated FinancialStatements(Unaudited)September 27, 2003**

 

**(1)  Description of Business**

 

Ultratech, Inc.develops, manufactures and markets photolithography and laser thermalprocessing equipment for manufacturers of integrated circuits andnanotechnology components located throughout North America, Europe, Japan andthe rest of Asia.

 

TheCompany supplies step-and-repeat photolithography systems based on one-to-oneimaging technology. Markets for the Company’s photolithography products includeadvanced packaging and the manufacture of various nanotechnology components,including thin film head magnetic recording devices, optical networkingdevices, laser diodes and colored LED’s.

 

Inevaluating its business segments, the Company gave consideration to the ChiefExecutive Officer’s review of financial information and the organizationalstructure of the Company’s management. Based on this review, the Companyconcluded that, at the present time, resources are allocated and otherfinancial decisions are made based, primarily, on consolidated financialinformation. Accordingly, the Company has determined that it operates in onebusiness segment, which is the manufacture and distribution of capitalequipment to manufacturers of integrated circuits and nanotechnologycomponents.

 

**(2) Summary of Significant AccountingPolicies**

 

BASISOF PRESENTATION - The unaudited condensed consolidated financial statementshave been prepared by the Company in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for fairpresentation have been included.

 

Operatingresults for the three and nine-month periods ended September 27, 2003 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003, or any future period.

 

USE OFESTIMATES – The preparation of the financial statements and relateddisclosures, in conformity with accounting principles generally accepted in theUnited States, requires management to make estimates and judgments that affectthe reported amounts in the financial statements and accompanying notes. On anongoing basis, management evaluates its estimates, including those related toinventories, warranty obligations, purchase order commitments, bad debts,income taxes, intangible assets, restructuring and contingencies andlitigation. Management bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

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

 

Underthe provisions of EITF 00-21, separate units of accounting exist if all of thefollowing criteria are met: the item has value on a standalone basis; there isobjective and reliable evidence of fair value; delivery of undelivered items isprobable and in control of the Company; and consideration allocable to thedelivered item is not contingent on delivery of additional items.

 

Inresponse to EITF 00-21, the Company has reviewed its arrangements involvingmultiple deliverables. The Company has concluded that the adoption of EITF00-21 has no effect on its current revenue

 

6

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recognition policy. Although application of EITF 00-21 results in theidentification of separate accounting units, e.g. the system and its installation,the Company believes that all required elements of revenue recognition underSAB 101 are not met at the time of shipment of its systems. Therefore, revenuerecognition for systems must be delayed until all elements of revenuerecognition are met, generally upon acceptance of the system.

 

Accordingly,the Company recognizes revenues on system sales when the contractual obligationfor installation (if any) has been satisfied, or installation is substantiallycomplete, and/or customer acceptance provisions have lapsed, providedcollections of the related receivable are probable. In the event of a delay inthe installation of our products caused by the customer, we may seek acceptanceof the system and warranty commencement after shipment and transfer of title,but prior to completion of installation. Revenue recorded as a result of thesecustomer acceptances is reduced by an amount representing the fair-value ofinstallation services. In these instances, revenue is recorded only if theproduct has met product specifications prior to shipment and management deemsthat no significant uncertainties as to product performance exist.

 

TheCompany generally recognizes revenue from spare parts sales upon shipment. TheCompany has concluded that the adoption of EITF 00-21 has no significant effecton its current revenue recognition policy with regards to spare parts, as theserevenue arrangements generally do not contain multiple elements.

 

TheCompany sells service contracts for which revenue is deferred and recognizedratably over the contract period.

 

TheCompany recognizes revenue from licensing and technology support agreementsratably over the contract period, or the estimated useful life of the licensedtechnologies, whichever is shorter.

 

BASICAND DILUTED EARNINGS PER SHARE - The following sets forth the computation ofbasic and diluted net loss per share:

 
|                                                     |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| **(Unaudited, in thousands, except  per share amounts)** |   | **Sept. 27,  2003**     |   | **Sept. 28,  2002**    |   | **Sept. 27,  2003** |   | **Sept. 28,  2002** |   |
|                                                     |   |                    |   |                   |   |   |   |   |   |
| Numerator:                                               |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 3,240  |                   | $      | (18,867 | ) | $ | 4,286 |   | $ | (22,948 | ) |
|                                                     |   |                    |   |                   |   |   |   |   |   |
| Denominator:                                             |   |                    |   |                   |   |   |   |   |   |
| Denominator for basic earnings per share                 |   | 23,010                  |   | 22,609                 |   | 22,870 |   | 22,570 |   |
| Effect of dilutive employee stock options                |   | 2,134                   |   | —                 |   | 1,013 |   | — |   |
| Denominator for diluted earnings per share               |   | 25,144                  |   | 22,609                 |   | 23,883 |   | 22,570 |   |
|                                                     |   |                    |   |                   |   |   |   |   |   |
| Earnings per share - basic:                              |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 0.14   |                   | $      | (0.83 | ) | $ | 0.19 |   | $ | (1.02 | ) |
|                                                     |   |                    |   |                   |   |   |   |   |   |
| Earnings per share - diluted:                            |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 0.13   |                   | $      | (0.83 | ) | $ | 0.18 |   | $ | (1.02 | ) |

 

Forthe three and nine-month periods ended September 27, 2003, options topurchase 405,000 and 1,428,000 shares of Common Stock at an average exerciseprice of $29.30 and $23.34, respectively, were excluded from the computation ofdiluted net income per share, as the effect would have been anti-dilutive. Forthe three and nine-month periods ended September 28, 2002, options topurchase 4,771,000 shares of Common Stock at an average exercise price of$16.47 were excluded from the computation of diluted net loss per share, as theeffect would have been anti-dilutive. Options are anti-dilutive when theCompany has a net loss or when the exercise price of the stock option isgreater than the average market price of the Company’s Common Stock.

 

7

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STOCK-BASEDCOMPENSATION - On December 31, 2002, the FASB issued Statement ofFinancial Accounting Standards No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”**(SFAS148).  SFAS 148 amends FASB StatementNo. 123, “Accounting for Stock-Based Compensation”, to provide alternativemethods of transition to the fair value method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure provisions of Statement 123 to requiredisclosure in the summary of significant accounting policies of the effects ofan entity’s accounting policy with respect to stock-based employee compensationon reported net income and earnings per share in annual and interim financialstatements.  SFAS 148 is effective forfiscal years ending after December 15, 2002, with earlier applicationpermitted.

 

At September 27, 2003, the Company had several stock-basedemployee compensation plans, including stock option plans and an employee stockpurchase plan. The Company accounts for these plans under the intrinsic valuemethod. No stock option-based employee compensation cost is reflected in net income(loss), as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing table illustrates the effect on net income (loss) and earnings pershare if the Company had applied the fair value recognition method.

 
|                                                                                                                                   |   | **Three months ended** |   | **Nine months ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
| **In thousands, except per share amounts**                                                                                             |   | **Sept. 27,  2003**    |   | **Sept. 28,  2002**   |   | **Sept. 27,  2003** |   | **Sept. 28,  2002** |   |
| Net  income (loss) as reported                                                                                                         |   | $                      | 3,240  |                  | $      | (18,867 | ) | $ | 4,286 |   | $ | (22,948 | ) |
| Total  stock-based employee compensation expense, determined under fair value based  method for all awards, net of related tax effects |   | $                      | (2,492 | )                     | $      | (2,495 | ) | $ | (6,723 | ) | $ | (8,061 | ) |
| Pro  forma net income (loss)                                                                                                           |   | $                      | 748    |                  | $      | (21,362 | ) | $ | (2,437 | ) | $ | (31,009 | ) |
|                                                                                                                                   |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| Net  income (loss) per share - basic, as reported                                                                                      |   | $                      | 0.14   |                  | $      | (0.83 | ) | $ | 0.19 |   | $ | (1.02 | ) |
| Pro  forma net income (loss) per share - basic                                                                                         |   | $                      | 0.03   |                  | $      | (0.99 | ) | $ | (0.11 | ) | $ | (1.42 | ) |
|                                                                                                                                   |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| Net  income (loss) per share - diluted, as reported                                                                                    |   | $                      | 0.13   |                  | $      | (0.83 | ) | $ | 0.18 |   | $ | (1.02 | ) |
| Pro  forma net income (loss) per share - diluted                                                                                       |   | $                      | 0.03   |                  | $      | (0.99 | ) | $ | (0.11 | ) | $ | (1.42 | ) |

 

**(3) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** |   | **Sept. 27,  2003** |   | **Dec. 31,  2002** |   |
|--------------------|--------|---------------------|--------|--------------------|--------|
|               |   | **(Unaudited)**     |   |               |   |
| Raw materials      |   | $                   | 8,476  |               | $      | 12,094 |   |
| Work-in-process    |   | 5,270               |   | 10,289             |   |
| Finished products  |   | 1,051               |   | 2,799              |   |
|               |   | $                   | 14,797 |               | $      | 25,182 |   |

 

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

 

TheCompany has a line of credit agreement with a brokerage firm. Under the termsof this agreement, the Company may borrow funds at a cost equal to the currentFederal funds rate plus 100 basis points (2.00% as of September 27, 2003).Certain of the Company’s cash, cash equivalents and short-term investmentssecure borrowings outstanding under this facility. Funds are advanced to theCompany under this facility based on pre-determined advance rates on the cashand securities held by the Company in this brokerage account. This agreementhas no set expiration date and there are no loan covenants. As ofSeptember 27, 2003, $2.5 million was outstanding under this facility, witha related collateral requirement of approximately $3.6 million of the Company’scash, cash equivalents and short-term investments.

 

8

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InJune 2003, the Company replaced a credit facility requiring $2.0 millionof restricted cash with a credit facility requiring $4.0 million incompensating balances, consisting of the Company’s cash, cash equivalents andshort-term investments. The requirement for this credit facility results fromcontractual provisions of a lease for certain of the Company’s facilities,wherein the Company is required to supply the landlord with a $2.0 millionletter of credit.

 

**(5) Other Current Liabilities**

 

Other current liabilities consist of the following:

 
| **(In thousands)**                                |   | **Sept. 27,  2003** |   | **Dec. 31,  2002** |   |
|---------------------------------------------------|--------|---------------------|--------|--------------------|--------|
|                                              |   | **(Unaudited)**     |   |               |   |
| Salaries  and benefits                            |   | $                   | 2,522  |               | $      | 3,247 |   |
| Warranty  reserves                                |   | 1,663               |   | 1,462              |   |
| Advance  billings                                 |   | 1,282               |   | 1,024              |   |
| Income  taxes payable                             |   | 1,087               |   | 440                |   |
| Accrued  restructuring cost                       |   | 1,635               |   | 2,558              |   |
| Reserve  for losses on purchase order commitments |   | 936                 |   | 2,120              |   |
| Other                                             |   | 3,218               |   | 4,132              |   |
|                                              |   | $                   | 12,343 |               | $      | 14,983 |   |

 

**Warranty reserves**

 

TheCompany generally warrants its products for a period of 12 months from the dateof customer acceptance for material and labor to repair the product.Accordingly, a provision for the estimated cost of the warranty is recorded atthe time revenue is recognized. Extended warranty terms, if granted, result indeferral of revenue approximating the fair value for similar service contracts.The Company estimates the costs that may be incurred under its basic limitedwarranty and records a liability in the amount of such costs at the time theproduct is shipped. Recognition of the related warranty cost is deferred untilproduct revenue is recognized. Factors that affect the Company’s warrantyliability include the number of installed units, historical and anticipatedrates of warranty claims, and cost per claim. The Company periodically assessesthe adequacy of its recorded warranty liabilities and adjusts the amounts asnecessary.

 

Changesin the Company’s product liability are as follows:

 
|                                 |   | **Three months ended** |   | **Nine months ended** |   |
|--------------------------------------|--------|------------------------|--------|-----------------------|--------|
| **In thousands**                     |   | **Sept. 27, 2003**     |   | **Sept. 28, 2002**    |   | **Sept. 27, 2003** |   | **Sept. 28, 2002** |   |
| Balance,  beginning of the period    |   | $                      | 1,615  |                  | $      | 1,177 |   | $ | 1,462 |   | $ | 1,895 |   |
| Warranties  issued during the period |   | 950                    |   | 248                   |   | 2,794 |   | 1,752 |   |
| Settlements  made during the period  |   | (902                   | )      | (548                  | )      | (2,593 | ) | (2,770 | ) |
| Balance,  end of the period          |   | $                      | 1,663  |                  | $      | 877 |   | $ | 1,663 |   | $ | 877 |   |

 

**(6) Deferred Rent**

 

In2002, in conjunction with a $3.2 million sale/leaseback transaction, theCompany recorded a deferred rent credit equal to the excess of the saleproceeds over the adjusted basis in the equipment sold. In September 2003,the Company paid $1.8 million to close this transaction and to purchase therelated capital asset. The impact from this transaction on the Company’sresults of operations for the quarter ended September 27, 2003 wasimmaterial.

 

Aspart of the Company’s review of its lease commitments in the period endedDecember 31, 2002, certain matters were identified related to priorfinancial reporting periods that necessitated the recording of additionalexpenses. Such matters were related to (i) the extension of the Company’s leaseof its headquarters building in November 1999 and (ii) the lease of anadditional building in March 2000. The

 

9

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Company does not believe these amounts are material to the periods inwhich they should have been recorded. Had this adjustment been recorded in theproper periods, the impact for the three and nine-month periods endedSeptember 28, 2002 would be an increase to the net loss of $0.1 millionand $0.4 million ($0.01 and $0.02 per share), respectively.

 

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

 

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

 
|                                                     |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|----------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
| **(Unaudited, in thousands)**                            |   | **Sept. 27,  2003**    |   | **Sept. 28,  2002**   |   | **Sept. 27,  2003** |   | **Sept. 28,  2002** |   |
| Net  income (loss)                                       |   | $                      | 3,240  |                  | $      | (18,867 | ) | $ | 4,286 |   | $ | (22,948 | ) |
| Accumulated  other comprehensive income (loss)           |   |                   |   |                  |   |   |   |   |   |
| Unrealized  gain (loss) on available-for-sale securities |   | (263                   | )      | 287                   |   | (332 | ) | (447 | ) |
| Unrealized  loss on foreign exchange forward contracts   |   | (117                   | )      | (18                   | )      | (98 | ) | (65 | ) |
| Tax  effect                                              |   | —                 |   | —                |   | — |   | — |   |
| Comprehensive  income (loss)                             |   | $                      | 2,860  |                  | $      | (18,598 | ) | $ | 3,856 |   | $ | (23,460 | ) |

 

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

 
| **In thousands:**                                        |   | **Sept. 27,  2003** |   | **Dec. 31,  2002** |   |
|----------------------------------------------------------|--------|---------------------|--------|--------------------|--------|
| Unrealized  gains (losses) on:                           |   |                |   |               |   |
| Available-for-sale  investments                          |   | $                   | 1,571  |               | $      | 1,903 |   |
| Foreign  exchange contracts                              |   | (117                | )      | (19                | )      |
| Accumulated  other comprehensive income at end of period |   | $                   | 1,454  |               | $      | 1,884 |   |

 

**(8) Restructure ofOperations**

 

InSeptember 2002, in response to worsening conditions in the semiconductorindustry in particular, and the general economy as a whole, the Company decidedto reduce its workforce by approximately 15% and to cease or suspend activitiesrelated to certain engineering and administrative initiatives. As a result ofthis decision, the Company recognized a restructuring charge of $4.3 million,or $0.19 per share for the three-month period ended September 28, 2002.The Company reduced this charge by $0.2 million during the three-month periodended December 31, 2002, primarily as a result of canceling its plans toexit a certain building and an adjustment of its international severance costs.Of the total net charge for the year ended December 31, 2002 of $4.1million, the cash component included employee severance costs of $0.9 million,contract termination fees of $0.2 million and facility closure costs of $0.1million. The non-cash component of this charge included $2.5 million ofimpairment to the carrying value of equipment and leasehold improvements and$0.3 million of impairment to prepaid expenses and other current assets.

 

As ofSeptember 27, 2003, all amounts of these restructuring costs had beenpaid. Cash components of accrued restructuring costs, and amounts chargedagainst the plan for the nine-month period then ended, relative to theSeptember 2002 restructure of operations, were as follows:

 
| **(in millions)**        |   | **Balance at  Dec. 31, 2002** |   | **Expenditures** |   | **Balance at  Sept. 27, 2003** |   |
|--------------------------|--------|-------------------------------|--------|------------------|--------|--------------------------------|--------|
|                     |   |                          |   |             |   |                           |   |
| Facility closure costs   |   | $                             | 0.1    |             | $      | (0.1                           | )      | $ | — |   |
| Employee severance costs |   | 0.1                           |   | (0.1             | )      | —                         |   |
| Other costs              |   | 0.2                           |   | (0.2             | )      | —                         |   |
| Total                    |   | $                             | 0.4    |             | $      | (0.4                           | )      | $ | — |   |

 

10

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InSeptember 2001, the Company reached a decision to consolidate itsmanufacturing operations and eliminate approximately 20% of its workforce. As aresult of this decision, the Company recognized a restructuring charge of $12.0million, or $0.54 per share (diluted) in the quarter ended September 29,2001. Additionally, the Company recognized restructuring charges of $0.3million, or $0.01 per share (diluted) in the quarter ended December 31,2001, primarily related to employee severance costs of $0.6 million (fromadditional personnel actions) and higher fixed asset disposal costs of $0.4million, partially offset by revised facility closure and other cost estimatesof $0.7 million. Of the full-year charge of $12.3 million, non-cash componentsincluded a $4.1 million impairment charge for intangible assets related to theCompany’s XLS reduction product platform acquired in 1998 and a $1.5 millionimpairment charge for fixed assets disposed of in conjunction with theconsolidation of manufacturing facilities. The cash components of this chargeincluded $4.0 million for estimated expenditures related to the closure offacilities, $2.5 million for employee severance costs and $0.1 million of otherrestructuring costs. As of September 27, 2003, the amount of restructuringcosts accrued but unpaid was $1.6 million.

 

Cashcomponents of accrued restructuring costs as of September 27, 2003, andamounts charged against the plan for the nine-month period then ended, relativeto the September 2001 restructure of operations, were as follows:

 
| **(in millions)**         |   | **Balance at  Dec. 31, 2002** |   | **Expenditures** |   | **Balance at  Sept. 27, 2003** |   |
|---------------------------|--------|-------------------------------|--------|------------------|--------|--------------------------------|--------|
|                      |   |                          |   |             |   |                           |   |
| Employee  severance costs |   | $                             | — |             | $      | —                         |   | $ | — |   |
| Facility  closure costs   |   | 2.2                           |   | (0.6             | )      | 1.6                            |   |
| Other  costs              |   | —                        |   | —           |   | —                         |   |
| Total                     |   | $                             | 2.2    |             | $      | (0.6                           | )      | $ | 1.6 |   |

 

**(9) Subsequent Event**

 

InOctober 2003, the Company reached an agreement to terminate its lease fora facility in Wilmington, Massachuttes. This facility had been shut down inconjunction with the Company’s 2001 restructure of operations (see Footnote 8,above). As a direct result of this agreement, the Company anticipates afavorable credit to its results of operations of approximately $0.02 to $0.03per share for the three-month period ending December 31, 2003.

 

11

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

 

**OVERVIEW**

 

Certainof the statements contained herein may be considered forward-looking statementsunder Section 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 integration and development of thelaser processing operation; cyclicality in the semiconductor and nanotechnologyindustries; delays, deferrals and cancellations of orders by customers; pricingpressures; competition; lengthy sales cycles, including the timing of systemacceptances; ability to volume produce systems and meet customer requirements;mix of products sold; rapid technological change and the importance of timelyproduct introductions; dependence on new product introductions and commercialsuccess of any new products; sole or limited sources of supply; internationalsales; customer concentration; manufacturing variances and production levels;expiration of technology support and licensing arrangements, and the resultingadverse impact on the Company’s licensing revenues; timing and degree ofsuccess of technologies licensed to outside parties; product concentration andlack of product revenue diversification; lengthy development cycles foradvanced lithography technologies and applications; inventory obsolescence;asset impairment; ability and resulting costs to attract or retain sufficientpersonnel to achieve the Company’s targets for a particular period; futureacquisitions; changes to financial accounting standards; intellectual propertymatters; environmental regulations; effects of certain anti-takeoverprovisions; volatility of stock price; and any adverse effects of terroristattacks in the United States or elsewhere, or government responses thereto, ormilitary actions in Iraq, Afghanistan and elsewhere, on the economy, ingeneral, or on our business in particular. Such risks and uncertainties aredescribed in the Company’s filings with the SEC, including the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002 and thisQuarterly Report on Form 10-Q for the quarter ended September 27, 2003.

 

Due tothese and additional factors, certain statements, historical results andpercentage relationships discussed below are not necessarily indicative of theresults of operations for any future period.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

TheCompany’s discussion and analysis of its financial condition and results ofoperations are based upon the Company’s consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these consolidated financialstatements requires the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements. By their nature, these estimates and judgments aresubject to an inherent degree of uncertainty. On an on-going basis, the Companyevaluates its estimates, including those related to inventories, warrantyobligations, purchase order commitments, bad debts, income taxes, intangibleassets, restructuring and contingencies and litigation. Management bases its estimatesand judgments on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements. The Company has reviewed these policies with its AuditCommittee.

 

12

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**Revenue Recognition**

 

InNovember 2002, the Emerging Task Force issued EITF 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses how toaccount for arrangements that may involve delivery or performance of multipleproducts, services and/or rights to use assets, and when and, if so, how an arrangementinvolving multiple deliverables should be divided into separate units ofaccounting.  It does not changeotherwise applicable revenue recognition criteria. It applies to arrangementsentered into in fiscal periods beginning after June 15, 2003, with earlyadoption permitted.

 

Underthe provisions of EITF 00-21, separate units of accounting exist if all of thefollowing criteria are met: the item has value on a standalone basis; there isobjective and reliable evidence of fair value; delivery of undelivered items isprobable and in control of the Company; and consideration allocable to thedelivered item is not contingent on delivery of additional items.

 

Inresponse to EITF 00-21, the Company has reviewed its arrangements involvingmultiple deliverables. The Company has concluded that the adoption of EITF00-21 has no effect on its current revenue recognition policy. Althoughapplication of EITF 00-21 results in the identification of separate accountingunits, e.g. the system and its installation, the Company believes that allrequired elements of revenue recognition under SAB 101 are not met at the timeof shipment of its systems. Therefore, revenue recognition for systems must bedelayed until all elements of revenue recognition are met, generally uponacceptance of the system.

 

Accordingly,the Company recognizes revenues on system sales when the contractual obligationfor installation (if any) has been satisfied, or installation is substantiallycomplete, and/or customer acceptance provisions have lapsed, providedcollections of the related receivable are probable. In the event of a delay inthe installation of our products caused by the customer, we may seek acceptanceof the system and warranty commencement after shipment and transfer of title,but prior to completion of installation. Revenue recorded as a result of thesecustomer acceptances is reduced by an amount representing the fair-value ofinstallation services. In these instances, revenue is recorded only if theproduct has met product specifications prior to shipment and management deemsthat no significant uncertainties as to product performance exist.

 

TheCompany generally recognizes revenue from spare parts sales upon shipment. TheCompany has concluded that the adoption of EITF 00-21 has no significant effecton its current revenue recognition policy with regards to spare parts, as theserevenue arrangements generally do not contain multiple elements.

 

TheCompany sells service contracts for which revenue is deferred and recognized ratablyover the contract period.

 

TheCompany recognizes revenue from licensing and technology support agreementsratably over the contract period, or the estimated useful life of the licensedtechnologies, whichever is shorter.

 

**Inventories and Purchase OrderCommitments**

 

TheCompany estimates the effects on inventory and purchase order commitments ofobsolescence and unrealizable carrying values, respectively, based uponestimates of future demand for its products and market conditions. The Companypresently records writedowns to reflect the reduction in carrying value forinventories and purchase order commitments in excess of 12 months of productiondemand (18 months for certain long lead-time items). Due to the cyclical natureof the Company’s business, during periods of declining demand for the Company’sproducts, the Company may write-down inventories and purchase order commitmentsin excess of an 18-month production demand (24 months for certain longlead-time items). Should actual production demand differ from management’sestimates, additional inventory and purchase order commitment write-downs wouldbe required.

 

**Warranty Obligations**

 

TheCompany provides for the estimated cost of its product warranties at the timerevenue is recognized. The Company’s warranty obligation is affected by productfailure rates, material usage rates and the efficiency by which the productfailure is corrected. Should actual product failure rates, material usage ratesand labor efficiencies differ from the Company’s estimates, revisions to theestimated warranty liability would be required.

 

13

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**Allowances for Bad Debts**

 

TheCompany maintains an allowance for estimated losses resulting from theinability of its customers to make required payments. If the financialcondition of the Company’s customers were to deteriorate, or even a singlecustomer was otherwise unable to make payments, additional allowances may berequired. The average selling price of the Company’s systems is in excess of$1.5 million. Accordingly, a single customer default could have a materialadverse effect on the Company’s results of operations.

 

**Deferred Income Taxes**

 

TheCompany records a valuation allowance to reduce its deferred tax assets to theamount that is more likely than not to be realized. Based on the uncertainty offuture pre-tax income for U.S. tax purposes, the Company has presently fullyreserved its domestic deferred tax assets. In the event the Company was todetermine that it would be able to realize these deferred tax assets in thefuture, an adjustment to the deferred tax asset valuation reserve wouldincrease income in the period such determination was made.

 

Thefollowing discussion should be read in conjunction with the Company’s 2002Annual Report on Form 10-K, which is available from the Company upon request.

 

**RESULTS OF OPERATIONS**

 

Factorsthat have caused results to fluctuate significantly in the past and most likelywill continue to significantly impact results in the future, and could causeactual results to differ materially, include the following: integration anddevelopment of the Company’s laser processing operation; high degree ofindustry competition; cyclicality in the Company’s served markets; delays,deferrals and cancellations of orders by customers; customer concentration;market acceptance of new products and enhanced versions of the Company’sexisting products; lengthy and costly development cycles for lithography andlaser thermal processing technologies and applications; mix of products sold;timing of new product announcements and releases by the Company or itscompetitors; expiration of technology support and licensing arrangements, andthe resulting adverse impact on the Company’s licensing revenues; product discounts;changes in pricing by the Company, its competitors or suppliers; timing anddegree of success of technologies licensed to outside parties; productconcentration and lack of product revenue diversification; outcome oflitigation; lengthy sales and manufacturing cycles and the pattern of capitalspending by customers, including the timing of system acceptances; inventoryobsolescence; manufacturing inefficiencies and the ability to volume producesystems; the ability and resulting costs to attract or retain sufficientpersonnel to achieve the Company’s targets for a particular period; dilutiveeffect of employee stock option grants on net income per share, which islargely dependent upon the Company maintaining profitability and the marketprice of the Company’s stock; sole or limited sources of supply; internationalsales; rapid technological change and the importance of timely productintroductions; future acquisitions; changes to financial accounting standards;intellectual property matters; environmental regulations; any adverse effectsof worldwide terrorist attacks on the economy in general or on our business inparticular; political and economic instability throughout the world; businessinterruptions due to natural disasters or utility failures; and regulatorychanges; and the other risk factors listed in this filing and other Companyfilings with the SEC. The Company undertakes no obligation to update any of itsdisclosures to reflect such future events.

 

TheCompany derives a substantial portion of its total net sales from sales of arelatively small number of newly manufactured systems, which typically range inprice from $1.0 million to $3.6 million for the Company’s 1X steppers. As aresult of these high sale prices, the timing and recognition of revenue from asingle transaction has had and most likely will continue to have a significantimpact on the Company’s net sales and operating results for any particularperiod.

 

TheCompany’s backlog at the beginning of a period typically does not include allof the sales needed to achieve the Company’s sales objectives for that period.In addition, orders in backlog are subject to cancellation, shipment orcustomer acceptance delays, and deferral or rescheduling by a customer withlimited or no penalties. Consequently, the Company’s net sales and operatingresults for a period have been and will continue to be dependent upon theCompany obtaining orders for systems to be shipped and accepted in the sameperiod in which the order is received. The Company’s business and financialresults for a particular period could be materially adversely affected if ananticipated order for even one system is not received in time to permitshipment and customer acceptance during that period. Furthermore, a substantialportion of the Company’s shipments has historically been realized near the endof each quarter. Delays in installation and customer acceptance due, forexample, to the inability of the Company to

 

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successfully demonstrate the agreed-upon specifications or criteria atthe customer’s facility, or to the failure of the customer to permitinstallation of the system in the agreed upon time, may cause net sales in aparticular period to fall significantly below the Company’s expectations, whichmay materially adversely affect the Company’s operating results for thatperiod. Additionally, the failure to receive anticipated orders or delays inshipments due, for example, to rescheduling, delays, deferrals or cancellationsby customers, additional customer configuration requirements, or to unexpectedmanufacturing difficulties or delays in deliveries by suppliers due to theirlong production lead times or otherwise, have caused and may continue to causenet sales in a particular period to fall significantly below the Company’sexpectations, materially adversely affecting the Company’s operating resultsfor that period. In particular, the long manufacturing cycles of the Company’sSaturn Spectrum family of wafer steppers, laser thermal processing systems andthe long lead time for lenses and other materials, could cause shipments ofsuch products to be delayed from one quarter to the next, which couldmaterially adversely affect the Company’s financial condition and results ofoperations for a particular quarter.

 

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

 

The following table illustrates the results of Ultratech,Inc., expressed as a percentage of net sales:

 
|                                    |   | **Three  Months Ended** |       | **Nine  Months Ended** |   |
|-----------------------------------------|--------|-------------------------|------------|------------------------|--------|
|                                    |   | **Sep 27,  2003**       |       | **Sep  28,  2002**     |   | **Sep 27,  2003** |   | **Sep  28,  2002** |   |
| Net sales:                              |   |                    | ** ** |                   |   |   |   |   |   |
| Products                                |   | **85.6**                | **%**      | 51.0                   | %      | **85.4** | **%** | 73.7 | % |
| Services                                |   | **10.9**                | **%**      | 36.2                   | %      | **10.8** | **%** | 17.3 | % |
| Licenses                                |   | **3.5**                 | **%**      | 12.7                   | %      | **3.8** | **%** | 9.0 | % |
| Total net sales                         |   | **100.0**               | **%**      | 100.0                  | %      | **100.0** | **%** | 100.0 | % |
|                                    |   |                    |       |                   |   |   |   |   |   |
| Cost of sales:                          |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Cost of products sold                   |   | **44.0**                | **%**      | 72.0                   | %      | **48.9** | **%** | 55.2 | % |
| Cost of services                        |   | **5.7**                 | **%**      | 25.7                   | %      | **6.7** | **%** | 12.5 | % |
| Cost of inventory writedown             |   | **(1.4**                | **)%**     | 78.6                   | %      | **(1.3** | **)%** | 12.0 | % |
| Cost of discontinued products           |   | **0.0**                 | **%**      | 29.8                   | %      | **(0.2** | **)%** | 4.5 | % |
| Total cost of sales                     |   | **48.3**                | **%**      | 206.1                  | %      | **54.1** | **%** | 84.2 | % |
| Gross profit (loss)                     |   | **51.7**                | **%**      | (106.1                 | )%     | **45.9** | **%** | 15.8 | % |
|                                    |   |                    |       |                   |   |   |   |   |   |
| Operating expenses:                     |   |                    | ** ** |                   |   |   | ** ** |   |   |
| Research, development, and  engineering |   | **20.9**                | **%**      | 82.2                   | %      | **21.4** | **%** | 37.1 | % |
| Amortization of intangible  assets      |   | **0.4**                 | **%**      | 1.3                    | %      | **0.4** | **%** | 0.6 | % |
| Selling, general, and  administrative   |   | **24.0**                | **%**      | 80.2                   | %      | **22.7** | **%** | 37.2 | % |
| Restructure of operations               |   | **0.0**                 | **%**      | 58.9                   | %      | **(0.2** | **)%** | 9.0 | % |
| Operating expenses                      |   | **45.2**                | **%**      | 222.7                  | %      | **44.4** | **%** | 83.8 | % |
| Operating income (loss)                 |   | **6.4**                 | **%**      | (328.8                 | )%     | **1.6** | **%** | (68.1 | )% |
| Interest expense                        |   | **(0.4**                | **)%**     | (0.5                   | )%     | **(0.3** | **)%** | (0.1 | )% |
| Interest - special                      |   | **1.2**                 | **%**      | 0.0                    | %      | **0.4** | **%** | 0.0 | % |
| Interest and other income, net          |   | **3.0**                 | **%**      | 20.4                   | %      | **4.1** | **%** | 10.0 | % |
| Income (loss) before tax                |   | **10.2**                | **%**      | (308.8                 | )%     | **5.7** | **%** | (58.2 | )% |
| Income taxes (benefit) -  special       |   | **(1.3**                | **)%**     | (50.0                  | )%     | **(0.5** | **)%** | (10.2 | )% |
| Income taxes (benefit)                  |   | **(0.6**                | **)%**     | 0.0                    | %      | **0.4** | **%** | 0.0 | % |
| Net income (loss)                       |   | **12.2**                | **%**      | (258.8                 | )%     | **5.8** | **%** | (48.0 | )% |

 

15

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**Net sales**

 

Netsales consist of revenues from system sales, spare parts sales, service andlicensing of technologies. For the three months ended September 27, 2003,net sales were $26.5 million, an increase of 264% as compared with $7.3 millionfor the comparable period in 2002. System sales, a component of product sales,increased 1004%, to $19.3 million, on a unit volume increase of 367%. TheCompany does not believe it is practical or helpful to disclose the comparisonof weighted-average selling prices of systems sold with the prior period, dueto the absense of sales of comparable units. Geographically, the increase inunit volumes was primarily attributable to stronger sales in Japan and NorthAmerica. On a market segment basis, the increase in unit volumes was primarilyattributable to demand from semiconductor-packaging customers. The Companybelieves that a significant portion of its system sales will continue to bederived from bump processing customers, including bump-processing customersfrom Japan.

 

Systemsales for the quarter ended September 27, 2003 included the sale of twoXLS reduction lithography systems for a total of $0.9 million. These systemshad previously been written-off in 2001.

 

On aproduct market application basis, system sales to the semiconductor industrywere $14.9 million for the three months ended September 27, 2003, ascompared with $0.9 million for the comparable period in 2002. This change wasdue primarily to demand from bump processing customers. System sales to thenanotechnology market were $4.4 million for the three months endedSeptember 27, 2003, an increase of 403% as compared with system sales of$0.9 million for the comparable period in 2002.

 

Sparepart sales, a component of product sales, increased 78%, to $3.4 million forthe three months ended September 27, 2003, as compared to $1.9 million inthe comparable period in 2002. This increase was primarily a result of the 367%unit volume increase in system sales and the accompanying spare parts sales onthose systems.

 

Revenuesfrom services were $2.9 million for the three months ended September 27,2003, an increase of 9% as compared with $2.6 million for the comparable periodin 2002. The Company believes this increase may reflect increased utilizationof its systems by its customers.

 

Revenuesfrom licensing and licensing support arrangements were $0.9 million for thethree months ended September 27, 2003, as compared with $0.9 million forthe comparable period in 2002. The Company presently anticipates that revenuesfrom licensing and licensing support arrangements will be approximately $0.9million for the quarter ending December 31, 2003.

 

Forthe three months ended September 27, 2003, international net sales were$16.3 million, or 61% of total net sales, as compared with $3.0 million, or 41%of total net sales for the comparable period in 2002. The Company’s operationsin foreign countries are not generally subject to significant exchange ratefluctuations, principally because sales contracts for the Company’s systems aregenerally denominated in U.S. dollars. In Japan, however, orders are oftendenominated in Japanese yen. This subjects the Company to the risk of currencyfluctuations. The Company attempts to mitigate this exposure through the use offoreign exchange contracts; however, there can be no assurance of the successof any such efforts. International sales expose the Company to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which, in turn, impact the relative cost ofownership of the Company’s products. (See “Additional Risk Factors:International Sales”).

 

AtSeptember 27, 2003, the Company had approximately $13.9 million ofdeferred revenue resulting from products shipped but not yet installed andaccepted, as compared with $10.5 million at December 31, 2002 and $3.4million at September 28, 2002. Deferred product and services income, whichrepresents deferred revenue less related manufacturing and warranty costs, was$8.5 million at September 27, 2003, as compared with $6.3 million atDecember 31, 2002 and $2.6 million at September 28, 2002. Deferredlicense income decreased by $0.9 million during the three-month period endedSeptember 27, 2003, to $5.7 million, as a result of amortization ofproceeds received in prior periods.

 

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

 

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Forthe nine months ended September 27, 2003, net sales were $73.3 million, anincrease of 54% from the $47.8 million achieved during the comparable period in2002. System sales increased 87%, to $54.1 million, on a unit volume increaseof 80%. The weighted-average selling prices of systems sold increased 5%, ascompared to the year-ago period, due primarily to a lower proportion ofrefurbished systems sold. For the nine months ended September 27, 2003,international net sales were $44.8 million, or 61% of total net sales, ascompared with $24.1 million, or 50% of total net sales for the comparableperiod in 2002. Geographically, the increase in unit volumes was primarilyattributable to a 117% increase in Japan and a 200% increase in Taiwan. On amarket segment basis, the increase in unit volumes was primarily attributableto an increase in demand from semiconductor-packaging customers. Spare partsales increased 35%, to $8.5 million, primarily as a result of the 80% unitvolume increase in system sales and the accompanying spare parts sales on thosesystems. Revenues from services declined 4%, to $8.0 million, primarily as aresult of lower revenues from system relocations and lower service contractrevenues related to reduction steppers. Revenues from licensing and licensingsupport arrangements declined to $2.8 million, as compared with $4.3 million inthe comparable period in 2002, as a result of a technology support agreementthat expired in February 2002.

 

Theanticipated timing of shipments and customer acceptances will require theCompany to fill a number of production slots in the current and subsequentquarters in order to meet its near-term sales targets. If the Company isunsuccessful in its efforts to secure those production orders, or if existingproduction orders are delayed or cancelled, its results of operations will bematerially adversely impacted in the near-term. Accordingly, the Company cangive no assurance that it will be able to achieve or maintain its current orprior level of sales.

 

TheCompany expects that net sales for the quarter ending December 31, 2003may be higher than net sales for the comparable period in 2002, and may beslightly higher than net sales for the three-month period endedSeptember 27, 2003.

 

TheCompany’s sales backlog declined during the three-month period endedSeptember 27, 2003. The Company believes that this weakness in bookingsmay have resulted from the timing of certain orders and may have reflectedseasonal weakness, and the Company anticipates an increase in bookings andbacklog during the three-month period ending December 31, 2003. Continuedweakness in bookings may result in the inability of the Company to achieve itsnear-term sales goals, including those for the quarter ending December 31,2003. This, in turn, would have a material adverse impact on the Company’sresults of operations.

 

Becausethe Company’s net sales are subject to a number of risks, including intensecompetition in the capital equipment industry, uncertainty relating to thetiming and market acceptance of the Company’s products, the condition of themacro-economy and the semiconductor industry and the other risks describedherein, the Company may not exceed or maintain its current or prior level ofnet sales for any period in the future. Additionally, the Company believes thatthe market acceptance and volume production of its Saturn Spectrum 3e,its 300mm offerings, its laser thermal processing systems and its 1000 seriesfamily of wafer steppers, are of critical importance to its future financialresults. To the extent that these products do not achieve 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, the Company’s business, financial conditionand results of operations would be materially adversely affected.

 

**Gross profit (loss)**

 

TheCompany’s gross profit as a percentage of net sales, or gross margin, was 51.7%for the three months ended September 27, 2003, as compared with a grossloss of 106.1% for the comparable period in 2002. The impact of inventory andpurchase order commitment writedowns was favorable to gross margin by 1.4percentage points for the three months ended September 27, 2003, ascompared with an adverse impact to gross margin of 108.4 percentage points forthe comparable period in 2002.

 

On ayear-to-date basis, gross margin was 45.9% for the nine months endedSeptember 27, 2003, as compared with 15.8% for the comparable period in2002. The impact of inventory and purchase order commitment writedowns wasfavorable to gross margin by 1.5 percentage points for the nine months endedSeptember 27, 2003, as compared to an adverse impact to gross margin of16.5 percentage points for the comparable period in 2002.

 

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Systemsales for the quarter ended September 27, 2003 included the sale of twoXLS reduction lithography systems for a total of $0.9 million. These systemshad been written-off in 2001. The benefit to gross margin as a result of thesesales was 1.8 percentage points and 0.7 percentage points for the three andnine-month periods ended September 30, 2003, respectively.

 

Boththe current quarter and year-to-date improvements in gross margin (exclusive ofthe aforementioned impact of inventory writedowns and the cost of discontinuedproducts), as compared to the comparable periods in 2002, were primarily due toan improvement in model mix. On a year-to-date basis, the improvement in grossmargin was partially offset by the impact of lower licensing revenues, which haveno related cost of sales. The benefit to gross margin as a result of theselicensing revenues was 1.7 percentage points and 2.1 percentage points for thethree and nine-month periods ended September 27, 2003, respectively, ascompared with a benefit to gross margin of 30.1 percentage points and 7.4percentage points for the respective comparable periods in 2002.

 

TheCompany has included the information presented above, with respect to theimpact to gross margin from special charges, sales of discontinued products andlicensing and licensing support revenues, because it believes this informationis helpful to a stockholder’s understanding of the Company’s operating results.

 

Duringthe three and nine-month periods ended September 27, 2003, the Companyrecognized special benefits from the sell-through of inventory previouslywritten down to a lower basis. These benefits totaled $0.4 million and $1.1million, respectively. The Company presently records writedowns to reflect thereduction in carrying value for inventories and purchase order commitments inexcess of 12 months of production demand (18 months for certain long lead-timeitems). Based on the Company’s current expectations with respect to marketdemand for its products, gross margin may be similarly benefited during thequarter ending December 31, 2003.

 

In thethree-month period ended September 28, 2002, as a direct result ofworsening conditions in the semiconductor industry in particular, and thegeneral economy as a whole, the Company discontinued or suspended developmentof certain advanced reduction lithography programs, including 157nm, anddiscontinued certain 1X products and platforms. Additionally, the Companysignificantly reduced its revenue outlook for 2003. As a result, the Companyrecognized inventory and purchase order commitment writedowns of $6.7 millionand $1.2 million, respectively, in the three-month period endedSeptember 28, 2002.

 

TheCompany’s gross profit as a percentage of sales has been and most likely willcontinue to be significantly affected by a variety of factors, including themix of products sold; inventory and open purchase order commitment write-downs;the rate of capacity utilization; product discounts and competition in theCompany’s targeted markets; technology support and licensing revenues, whichhave little, if any, associated cost of sales; non-linearity of shipmentsduring the quarter; the introduction of new products, which typically havehigher manufacturing costs until manufacturing efficiencies are realized andwhich are typically discounted more than existing products until the productsgain market acceptance; the percentage of international sales, which typicallyhave lower gross margins than domestic sales principally due to higher fieldservice and support costs; and the implementation of subcontractingarrangements.

 

TheCompany believes that gross margin for the quarter ending December 31,2003, exclusive of special charges, may be higher as compared to the comparableperiod in 2002, but may be lower than gross margin achieved in the quarterended September 27, 2003 due, in part, to the favorable impact of the saleof discontinued products in the period ended September 27, 2003.

 

Newproducts generally have lower gross margins until there is widespread marketacceptance and until production and after-sales efficiencies can be achieved.Should significant market demand fail to develop for the Company’s laserprocessing systems, the Company’s business, financial condition and results ofoperations would be materially adversely affected.

 

**Research, development and engineeringexpenses**

 

TheCompany’s research, development, and engineering expenses were $5.5 million forthe three months ended September 27, 2003, as compared to $6.0 million forthe comparable period in 2002. On a year-to-date basis, research, development,and engineering expenses were $15.7 million, as compared with $17.7 million forthe comparable period in 2002. Both the current quarter and year-to-datedeclines in spending, relative to the year-ago periods, were primarilyattributable to the discontinuance of the Company’s

 

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advanced reduction stepper platforms in the second half of 2002,partially offset by increased spending on the Company’s laser thermalprocessing technologies.

 

TheCompany continues to invest significant resources in the development andenhancement of its laser processing systems and technologies, and its 1Xoptical products and related technologies, including its next generationplatform for its 1X optical products. The Company presently expects that,primarily as a result of the Company’s restructuring of operations inSeptember 2002, the absolute dollar amount of research, development andengineering expenses for the quarter ending December 31, 2003 will belower than expenses incurred for the comparable period in 2002. Additionally,research, development and engineering expenses for the quarter endingDecember 31, 2003 may be flat to slightly lower than levels incurred duringthe three-month period ended September 27, 2003.

 

**Amortization of intangible assets**

 

Amortizationof intangible assets was $0.1 million and $0.3 million for the three andnine-month periods, respectively, ended September 27, 2003 andSeptember 28, 2002.

 

**Selling, general and administrativeexpenses**

 

Selling,general, and administrative expenses were $6.4 million for the three-monthperiod ended September 27, 2003, as compared with $5.8 million for thecomparable period in 2002. As a percentage of net sales, selling, general, andadministrative expenses decreased to 24.0%, as compared with 80.2% in theyear-ago period. The year-over-year increase in selling, general, andadministrative expenses was primarily attributable to higher selling expensesassociated with a 264% increase in Company revenue.

 

Forthe nine-month period ended September 27, 2003, selling, general andadministrative expenses were $16.6 million, as compared with $17.8 million forthe comparable period in 2002. As a percentage of net sales, selling, generaland administrative expenses decreased to 22.7%, as compared with 37.2% in theyear-ago period. This year-over-year decline, in absolute dollars, wasprimarily attributable to cost containment measures implemented in the secondhalf of 2002, partially offset by higher selling expenses associated with a 53%increase in Company revenue.

 

TheCompany anticipates that selling, general and administrative expenses for thethree-month period ending December 31, 2003 will be higher than the comparableperiod in 2002 due, primarily, to higher selling expenses (resulting fromhigher anticipated sales levels), and administrative initiatives resulting fromcompliance efforts associated with the Sarbanes-Oxley Act of 2002.Additionally, the Company anticipates that selling, general and administrativeexpenses for the three-month period ending December 31, 2003 will be lowerthan levels incurred during the three-month period ended September 27,2003, primarily as a result of seasonal trade show expenses incurred during thethird quarter of 2003.

 

**Restructure of operations**

 

InSeptember 2002, in response to worsening conditions in the semiconductorindustry in particular, and the general economy as a whole, the Company decidedto reduce its workforce and to cease or suspend activities related to certainengineering and administrative initiatives. As a result of this decision, theCompany recognized a restructuring charge of $4.3 million, or $0.19 per share(diluted) in the quarter ended September 28, 2002. The cash component ofthis charge included employee severance costs of $1.0 million, contracttermination fees of $0.2 million and facility closure costs of $0.2 million.The non-cash component of this charge included $2.6 million of impairment toequipment and leasehold improvements and $0.3 million of impairment to prepaidexpenses and other current assets. Subsequent to recording these provisions,the Company reversed $0.2 million (employee severance benefits) and $0.1million (sale of capital equipment previously written down) of theserestructuring charges during the three-month periods ended December 31,2002 and June 28, 2003, respectively.

 

InOctober 2003, the Company reached an agreement to terminate its lease fora facility in Wilmington, Massachuttes. This facility had been shut down inconjunction with the Company’s 2001 restructure of operations. As a directresult of this agreement, the Company anticipates a favorable credit to itsresults of operations of approximately $0.02 to $0.03 per share for thethree-month period ending December 31, 2003.

 

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**Interest and other income, net**

 

Interestand other income, net, which consists primarily of interest income, was $1.1million and $3.3 million for the three and nine-month periods endedSeptember 27, 2003, respectively, inclusive of $0.3 million of specialinterest recorded during the three-month period ended September 27, 2003(shown as a separate line item on the statement of operations) relating to thesettlement of a research and development tax credit claim with the CaliforniaFranchise Tax Board. This compares with $1.5 million and $4.8 million for thecomparable three and nine-month periods in 2002, respectively. Both the currentquarter and year-to-date declines in interest and other income, net, wereprimarily attributable to significantly lower interest rates.

 

TheCompany presently maintains an investment portfolio with a weighted-averagematurity of less than one year. Consequently, changes in short-term interestrates have had a major impact on the Company’s interest income. Future changesare expected to have a similar impact. The Company presently expects thatinterest and other income, net, for the three-month period ending December 31,2003, will be significantly lower than levels achieved in the comparable periodin 2002, primarily as a result of lower interest rates, and will also be lowerthan levels achieved during the three-month period ended September 27,2003, exclusive of special interest recorded in that period.

 

**Income tax expense**

 

Forthe three-month period ended September 27, 2003, the Company recorded anincome tax benefit of $0.5 million, inclusive of a special tax benefit of$352,000 related to the settlement of a research and development tax creditclaim with the California Franchise Tax Board. Additionally, the Companyrecorded a $475,000 benefit from the reversal of reserves associated withdeferred tax assets carried on the balance sheet of its Japan subsidiary, reflectingimproved operating trends in that region. Offsetting these tax benefits was atax expense of $0.3 million related, primarily, to taxable income in Japan, forwhich there is no corresponding net operating loss carry-forward benefit. Forthe nine-month period ended September 27, 2003, the Company recorded anincome tax benefit of $0.1 million, as the current income tax provision(generated principally in Japan) was more than offset by the aforementionedspecial tax benefit and the reversal of the Japan deferred tax asset reserves.

 

Forthe three-month period ended September 30, 2002, the Company recorded abenefit income tax provision of $3.6 million, which is net of income taxexpense of foreign subsidiaries. The benefit provision related primarily to resolutionof the Company’s IRS audit for the years 1993 through 1996. For the nine-monthperiod ended September 28, 2002, the Company recorded a benefit income taxprovision of $4.9 million. In addition to the aforementioned IRS auditresolution, the year-to-date provision included a carry back of 2002 losses torecover prior years’ federal alternative minimum taxes of approximately $1.2million. The ability to recover prior years’ alternative minimum taxes was dueto a U.S. federal law change, allowing for the recovery of these amounts.

 

TheCompany anticipates that it will recognize income tax expense during thethree-month period ended December 31, 2003, primarily as a result offoreign income taxes. However, the Company believes that the tax rate in 2003 willbe substantially less than the statutory rate, primarily as a result ofavailable federal net operating loss carry-forwards.

 

Income taxes can be affected by estimates of whether,and within which jurisdictions, future earnings will occur and how and whencash is repatriated to the United States, combined with other aspects of anoverall income tax strategy. Additionally, taxing jurisdictions couldretroactively disagree with the Company’s tax treatment of certain items, andsome historical transactions have income tax effects going forward. Accountingrules require these future effects to be evaluated using current laws, rulesand regulations, each of which can change at any time and in an unpredictablemanner. The Company believes it has adequately provided for any reasonablyforeseeable outcome related to these matters, and it does not anticipate anymaterial earnings impact from their ultimate resolutions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Netcash generated by operating activities was $8.5 million for the nine monthsended September 27, 2003, as compared with net cash used in operations of$18.7 million for the comparable period in 2002. Net cash generated byoperating activities during the nine months ended September 27, 2003 wasattributable to net income of $4.3 million and non-cash charges to income of$6.5 million, partially offset by the use of cash

 

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resulting from a net change in operating assets and liabilities of $2.4million. The $2.4 million use of cash from the net change in operating assetsand liabilities was primarily a result of an increase in accounts receivable of$7.0 million, an increase in long-term demonstration inventories of $2.9million, a decrease in deferred license income of $2.8 million and a decreasein other current liabilities of $2.6 million, partially offset by a decrease ininventories of $10.2 million and an increase in deferred product and servicesincome of $2.2 million.

 

TheCompany believes that because of the relatively long manufacturing cycle ofcertain of its systems, particularly newer products, the Company’s inventorieswill continue to represent a significant portion of working capital. Currently,the Company is devoting significant resources to the development, introductionand commercialization of its laser thermal processing system and to thedevelopment of its next generation platform of its 1X lithography technologies.The Company currently intends to continue to develop these products andtechnologies during the remainder of 2003, and will continue to incursignificant operating expenses in the areas of research, development andengineering, manufacturing and general and administrative costs in order tofurther develop, produce and support these new products. Additionally, grossprofit margins, inventory and capital equipment levels may be adverselyimpacted in the future by costs associated with the initial production of thelaser thermal processing system and by future generations of the Company’s 1X wafersteppers. These costs include, but are not limited to, additional manufacturingoverhead, costs of demonstration systems and facilities, costs associated withmanaging multiple sites and the establishment of additional after-sales supportorganizations. Additionally, there can be no assurance that operating expenseswill not increase, relative to sales, as a result of adding additionalmarketing and administrative personnel, among other costs, to support theCompany’s new products. If the Company is unable to achieve significantlyincreased net sales or if its sales fall below expectations, the Company’s cashflow and operating results will be materially adversely affected until, amongother factors, costs and expenses can be reduced. The failure of the Company toachieve its sales targets for these new products could result in additionalinventory write-offs and asset impairment charges, either of which couldmaterially adversely impact the Company’s results of operations.

 

Duringthe nine months ended September 27, 2003, net cash provided by investingactivities was $19.5 million, attributable to a net reduction inavailable-for-sale securities of $23.8 million, partially offset by capitalexpenditures of $4.3 million.

 

Netcash used in financing activities was $0.7 million during the nine-month periodended September 27, 2003, attributable to net repayments of notes payableof $7.2 million, partially offset by $6.5 million in proceeds received from theissuance of Common Stock under the Company’s employee stock option and stockpurchase plans.

 

AtSeptember 27, 2003, the Company had working capital of $160.6 million. TheCompany’s principal source of liquidity at September 27, 2003 consisted of$159.8 million in cash, cash equivalents and short-term investments.

 

TheCompany has approximately $8.4 million of retained earnings in its foreignsubsidiaries. Possible adverse tax consequences associated with repatriatingthese funds may effectively restrict their use to cash requirements in thosespecific jurisdictions.

 

During2002, the Company received proceeds of $3.2 million in conjunction with asale/leaseback transaction. To provide additional security to the lessor, theCompany granted a security interest in certain of its other equipment. TheCompany recorded a deferred rent credit equal to the excess of the saleproceeds over the adjusted basis in the equipment sold. In September 2003,the Company paid $1.8 million to close this transaction and to purchase therelated capital asset. The impact from this transaction on the Company’sresults of operations for the quarter ended September 27, 2003 wasimmaterial.

 

InSeptember 2002, the Company entered into a line of credit agreement with abrokerage firm. Under the terms of this agreement, the Company may borrow fundsat a cost equal to the current Federal funds rate plus 100 basis points (2.00%as of September 27, 2003). Certain of the Company’s cash, cash equivalentsand short-term investments secure borrowings outstanding under this facility.Funds are advanced to the Company under this facility based on pre-determinedadvance rates on the cash and securities held by the Company in this brokerageaccount. This agreement has no set expiration date and there are no loancovenants. As of September 27, 2003, $2.5 million was outstanding underthis facility, with a related

 

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collateral requirement of approximately $3.6 million of the Company’scash, cash equivalents and short-term investments.

 

InJanuary 2003, the Company’s Board of Directors authorized the purchase ofup to 5.0 million shares of the Company’s Common Stock at prevailing marketprices. As of October 31, 2003, the Company had not elected to repurchaseshares under this arrangement. Should the Company decide to acquire its ownshares in the open market, potentially large amounts of the Company’s cash,cash equivalents and short-term investments would be required.

 

TheCompany’s off-balance sheet transactions consist of certain financialguarantees, both expressed and implied, related to product liability,infringement of intellectual property and latent product defects. Other thanliabilities recorded pursuant to known product defects, at September 27,2003, the Company did not record a liability associated with these guarantees,as the Company has little or no history of costs associated with suchindemnification requirements.

 

Thefollowing summarizes the Company’s contractual obligations atSeptember 27, 2003, and the effect such obligations are expected to haveon its liquidity and cash flows in future periods:

 
| **(in millions)**                                       |   | **Total** |   | **Less than  1 year** |   | **1-3 years** |   | **After  3 years** |   |
|---------------------------------------------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|--------------------|--------|
| Notes payable obligations                               |   | $         | 2.5    |                  | $      | 2.5           |   | $                  | — |   | $ | — |   |
| Non-cancelable capitalized lease obligations            |   | 0.1       |   | 0.1                   |   | —        |   | —             |   |
| Non-cancelable operating lease obligations -  buildings |   | 29.5      |   | 3.6                   |   | 8.3           |   | 17.6               |   |
| Long-term vendor accounts payable                       |   | 0.7       |   | 0.7                   |   | —        |   | —             |   |
| Total contractual cash obligations                      |   | $         | 32.8   |                  | $      | 6.9           |   | $                  | 8.3    |   | $ | 17.6 |   |

 

AtSeptember 27, 2003, the Company had open purchase order commitments ofapproximately $19 million, primarily related to the purchase of inventories,equipment and leasehold improvements. The Company records writedowns forpurchase order commitments it deems in excess of normal operating requirements(see “Critical Accounting Policies and Estimates”).

 

Thedevelopment and manufacture of new lithography systems and enhancements arehighly capital-intensive. In order to be competitive, the Company believes itmust continue to make significant expenditures for capital equipment; sales,service, training and support capabilities; systems, procedures and controls;and expansion of operations and research and development, among many otheritems. The Company expects that its cash, cash equivalents and short-terminvestments will be sufficient to meet the Company’s cash requirements for atleast the next twelve months. However, in the near-term, the Company maycontinue to utilize existing and future lines of credit, and other sources offinancing, in order to maintain its present levels of cash, cash equivalentsand short-term investments. Beyond the next twelve months, the Company mayrequire additional equity or debt financing to address its working capital orcapital equipment needs. In addition, the Company may seek to raise equity ordebt capital at any time that it deems market conditions to be favorable.Additional financing, if needed, may not be available on reasonable terms, orat all.

 

TheCompany may in the future pursue additional acquisitions of complementaryproduct lines, technologies or businesses. Future acquisitions by the Companymay result in potentially dilutive issuances of equity securities, theincurrence of debt and contingent liabilities and amortization expenses andimpairment charges related to goodwill and other intangible assets, which couldmaterially adversely affect the Company’s financial condition and results ofoperations. In addition, acquisitions involve numerous risks, includingdifficulties in the assimilation of the operations, technologies, personnel andproducts of the acquired companies; the diversion of management’s attentionfrom other business concerns; risks of entering markets in which the Companyhas limited or no direct experience; and the potential loss of key employees ofthe acquired company. In the event the Company acquires product lines,technologies or businesses which do not complement the Company’s business, orwhich otherwise do not enhance the Company’s sales or operating results, theCompany may incur substantial write-offs and higher recurring operating costs,which could have a material adverse effect on the Company’s business, financialcondition and results of operations. In the event that any such acquisitiondoes occur, there can be no assurance as to the effect thereof on the Company’sbusiness or operating results.

 

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**Foreign currency**

 

TheCompany uses foreign exchange contracts to hedge the risk that unremittedJapanese yen denominated receipts from customers for actual or forecasted salesof equipment after receipt of customer purchase orders may be adverselyaffected by changes in foreign currency exchange rates. As part of its overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, the Company attempts to hedge most of theseJapanese yen denominated foreign currency exposures anticipated over theensuing twelve-month period. At September 27, 2003, the Company had hedgedapproximately 100% of these Japanese yen denominated exposures. To hedge thisexposure, the Company used foreign exchange forward contracts that generallyhave maturities of nine months or less. The Company often closes foreignexchange sale contracts by purchasing an offsetting purchase contract. AtSeptember 27, 2003, the Company had contracts for the sale of $6.0 millionof foreign currencies at fixed rates. The Company had approximately $0.1million of deferred losses on foreign exchange contracts at September 27,2003.

 

**ADDITIONAL RISKFACTORS**

*In addition to risks described inthe foregoing discussions, the following risks apply to the Company and itsbusiness:*

 

**Highly Competitive Industry**                                       Thecapital equipment industry in which the Company operates is intensely competitive.A substantial investment is required to install and integrate capital equipmentinto a semiconductor, semiconductor packaging or nanotechnology deviceproduction line. The Company believes that once a device manufacturer orpackaging subcontractor has selected a particular vendor’s capital equipment,the manufacturer generally relies upon that equipment for the specificproduction line application and, to the extent possible, subsequent generationsof similar products. Accordingly, it is difficult to achieve significant salesto a particular customer once another vendor’s capital equipment has beenselected.

 

Withrespect to the Company’s laser annealing technologies, the primary competitioncomes from rapid thermal annealing (“RTA”), which is the current manufacturingtechnology. RTA does not limit semiconductor device manufacturers from scalingtheir transistors to obtain improved performance. However, improved annealingtechnology results in faster transistors for a given size. RTA manufacturersrecognize the need to reduce thermal cycle times and are working toward thisgoal. Several companies have published papers on their prototype annealingtools that incorporate flash lamp technology in order to reduce annealing timesand increase anneal temperatures. The Company believes these tools arepresently in the development phase. Additionally, competition to the Company’slaser processing systems may come from other laser annealing tools, includingthose presently being used by the flat panel display industry to crystallizeamorphous silicon. Manufacturers of these tools may try to extend the use oftheir technologies to semiconductor device applications. In July 2000, theCompany licensed its then existing laser annealing technology, with reservations,to a manufacturer of semiconductor equipment. The Company presently anticipatesthis company will offer laser-annealing tools to the semiconductor industrythat will compete with the Company’s offerings.

 

TheCompany experiences intense competition worldwide from a number of leadingstepper manufacturers, such as Nikon Inc. (“Nikon”), Canon, Inc. (“Canon”) andASM Lithography (“ASML”), all of which have substantially greater financial,marketing and other resources than the Company. Nikon supplies a 1X stepper foruse in the manufacture of liquid crystal displays and Canon, Nikon and ASMLoffer reduction steppers for thin film head fabrication. With respect to thesemiconductor packaging and nanotechnology markets, the Company experiencescompetition from various proximity aligner companies such as Suss Microtec AG.ASML, Canon and Nikon have each introduced i-line step-and-scan system as alower cost alternative to the deep ultra-violet (DUV) step-and-scan system foruse on the less critical layers. These systems compete with wide-fieldsteppers, such as the Company’s Saturn and Titan steppers, for advancedmix-and-match applications. In addition, the Company believes that the highcost of developing new lithography tools has increasingly caused its competitorsto collaborate with customers and other parties in various areas such asresearch and development, manufacturing and marketing, or to acquire othercompetitors, thereby resulting in a combined competitive threat withsignificantly enhanced financial, technical and other resources.

 

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

 

TheCompany believes that to be competitive, it will require significant financialresources in order to continue to invest in new product development, featuresand enhancements, to introduce next generation stepper systems on a timelybasis, and to maintain customer service and support centers worldwide. Inmarketing its products, the Company may also face competition from vendorsemploying other technologies. In addition, increased competitive pressure hasled to intensified price-based competition in certain of the Company’s markets,resulting in lower prices and margins. Should these competitive trendscontinue, the Company’s business, financial condition and operating resultswould continue to be materially adversely affected. There can be no assurancethat the Company will be able to compete successfully in the future.

 

Foreignintegrated circuit manufacturers have a significant share of the worldwidemarket for certain types of integrated circuits for which the Company’s systemsare used. The Japanese stepper manufacturers are well established in the Japanesestepper market, and it is extremely difficult for non-Japanese lithographyequipment companies to penetrate this market. Although the Company hasexperienced recent success in the introduction of its Saturn Spectrum family ofwafer steppers into the Japanese marketplace, to date the Company has notestablished itself as a major competitor in the Japanese equipment market andthere can be no assurance that the Company will be able to achieve significantsales to Japanese manufacturers in the future.

 

**Development of New Product Lines;Expansion of Operations****        **Currently, theCompany is devoting significant resources to the development, introduction andcommercialization of its laser processing systems and to enhancements andfuture versions of its Saturn Spectrum 3e and Saturn Spectrum 300e2wafer steppers and related platforms. The Company intends to continue todevelop these products and technologies during the remainder of 2003 and in2004, and will continue to incur significant operating expenses in the areas ofresearch, development and engineering, manufacturing and general andadministrative costs in order to further develop, produce and support these newproducts. Additionally, gross profit margins and inventory levels may beadversely impacted in the future by costs associated with the initialproduction of its laser processing systems and by future generations of its1X-lithography systems. These costs include, but are not limited to, additionalmanufacturing overhead, additional inventory write-offs, costs of demonstrationsystems and facilities, costs associated with managing multiple sites and theestablishment of additional after-sales support organizations. Additionally,there can be no assurance that operating expenses will not increase, relativeto sales, as a result of adding additional marketing and administrativepersonnel, among other costs, to support the Company’s new products. If theCompany is unable to achieve significantly increased net sales or if its salesfall below expectations, the Company’s operating results will be materiallyadversely affected.

 

TheCompany’s ability to commercialize its laser annealing, or laser processingtechnologies, depends on its ability to demonstrate a manufacturing-worthytool. The Company does not presently have in-house capability to fabricatedevices. As a result, the Company must rely on partnering with companies todevelop the laser anneal process. The development of new process technologiesis largely dependent upon the Company’s ability to interest potential customersin working on joint process development. The Company’s ability to delivertimely solutions is also limited by wafer turnaround at the potentialcustomer’s fabrication facility.

 

**Cyclicality of Semiconductor andNanotechnology Industries****       **The Company’s businessdepends in significant part upon capital expenditures by******manufacturers of semiconductors, bumpedsemiconductors and nanotechnology components, including thin film head magneticrecording devices, which in turn depend upon the current and anticipated marketdemand for 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 the Company. The semiconductor industry, which

 

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includes the semiconductor-packaging sector, has been in a downturn.The Company also believes that markets for new generations of semiconductorsand semiconductor packaging will also be subject to similar fluctuations. TheCompany’s business and operating results would be materially adversely affectedby continued downturns or slowdowns in the semiconductor packaging market or byloss of market share. Accordingly, the Company can give no assurance that itwill be able to achieve or maintain its current or prior level of sales.

 

TheCompany attempts to mitigate the risk of cyclicality by participating inmultiple markets including semiconductor, semiconductor packaging, thin filmhead and other nanotechnology sectors, as well as diversifying into new marketssuch as photolithography for optical networking (a nanotechnology application)and laser-based thermal annealing for implant activation and otherapplications. Despite such efforts, when one or more of such marketsexperiences a downturn or a situation of excess capacity, such as has beenoccurring in the semiconductor, semiconductor packaging, optical networking andthin film head markets, the Company’s net sales and operating results arematerially adversely affected.

 

During2002 and 2001, approximately 20% and 33%, respectively, of the Company’s netsales were derived from sales to nanotechnology manufacturers, including microsystems, thin film heads and optical networking devices. During the first ninemonths of 2003, approximately 25% of the Company’s net sales were derived fromsales to nanotechnology manufacturers.

 

**Lengthy Sales Cycles**                          Sales ofthe Company’s systems depend, in significant part, upon the decision of aprospective customer to increase manufacturing capacity or to restructurecurrent manufacturing facilities, either of which typically involves asignificant commitment of capital. Many of the Company’s customers havecancelled the development of new manufacturing facilities and havesubstantially reduced their capital equipment budgets. In view of thesignificant investment involved in a system purchase, the Company hasexperienced and may continue to experience delays following initialqualification of the Company’s systems as a result of delays in a customer’sapproval process. Additionally, the Company is presently receiving orders forsystems that have lengthy delivery schedules, which may be due to longerproduction lead times or a result of customers’ capacity schedulingrequirements. In order to maintain or exceed the Company’s present level of netsales, the Company is dependent upon obtaining orders for systems that willship and be accepted in the current period. There can be no assurance that theCompany will be able to obtain those orders. For these and other reasons, theCompany’s systems typically have a lengthy sales cycle during which the Companymay expend substantial funds and management effort in securing a sale. Lengthysales cycles subject the Company to a number of significant risks, includinginventory obsolescence and fluctuations in operating results, over which theCompany has little or no control.

 

**Customer and Market Concentrations****                                **Historically,the Company has sold a substantial portion of its systems to a limited numberof customers. For the nine-month period ended September 27, 2003, fivecustomers accounted for approximately 52% of the Company’s system revenue. In2002, Intel Corporation accounted for 19% and Sumitomo Chemical Company, Ltd.accounted for 10% of the Company’s total net sales.

 

AtSeptember 27, 2003, one customer accounted for 36% of the Company’s systembacklog. Cancellation, deferrals or rescheduling of orders by this customerwould have a material adverse impact on the Company’s future results ofoperations.

 

During2002, the Company experienced significant levels of order cancellations, delaysand deferrals. In particular, the Company has removed from backlog asignificant number of systems from a single customer because delivery may bedeferred beyond one year. Company policy requires that orders with deliverydates beyond one year be excluded from reportable backlog.

 

TheCompany expects that sales to a relatively few customers will continue toaccount for a high percentage of its net sales in the foreseeable future andbelieves that the Company’s financial results depend in significant part uponthe success of these major customers and the Company’s ability to meet theirfuture capital equipment needs. Although the composition of the groupcomprising the Company’s largest customers may vary from period to period, theloss of a significant customer or any reduction in orders by any 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, may have amaterial adverse effect on the Company’s business, financial condition andresults of operations. The

 

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Company’s ability to maintain or increase its sales in the futuredepends, in part, on its ability to obtain orders from new customers as well asthe financial condition and success of its existing customers, thesemiconductor and nanotechnology industries and the economy in general.

 

Inaddition to the business risks associated with dependence on major customers,these significant customer concentrations have in the past resulted insignificant concentrations of accounts receivable. These significant andconcentrated receivables expose the Company to additional risks, including therisk of default by one or more customers representing a significant portion ofthe Company’s total receivables. If the Company were required to takeadditional accounts receivable reserves, its business, financial condition andresults of operations would be materially adversely affected.

 

On amarket application basis, sales to semiconductor packaging customers accountedfor approximately 68% of system revenue for the nine-month period ended September 27,2003, and 53% of system revenue for the year ended December 31, 2002. TheCompany’s future results of operations and financial position would bematerially adversely impacted by further downturns in this market segment, orby loss of market share.

 

**Rapid Technological Change;Importance of Timely Product Introduction**

 

Thesemiconductor and nanotechnology manufacturing industries are subject to rapidtechnological change and new product introductions and enhancements. TheCompany’s ability to be competitive in these and other markets will depend, inpart, upon its ability to develop new and enhanced systems and related softwaretools, and to introduce these systems and related software tools at competitiveprices and on a timely and cost-effective basis to enable customers tointegrate them into their operations either prior to or as they begin volumeproduct manufacturing. The Company will also be required to enhance theperformance of its existing systems and related software tools. Any success ofthe Company in developing new and enhanced systems and related software toolsdepends upon a variety of factors, including product selection, timely andefficient completion of product design, timely and efficient implementation ofmanufacturing and assembly processes, product performance in the field andeffective sales and marketing. Because new product development commitments mustbe made well in advance of sales, new product decisions must anticipate bothfuture demand and the technology that will be available to supply that demand.There can be no assurance that the Company will be successful in selecting,developing, manufacturing or marketing new products and related software toolsor enhancing its existing products and related software tools. Any such failurewould materially adversely affect the Company’s business, financial conditionand results of operations.

 

Becauseof the large number of components in the Company’s systems, significant delayscan occur between a system’s introduction and the commencement by the Companyof volume production of such systems. The Company has experienced delays fromtime to time in the introduction of, and technical and manufacturingdifficulties with, certain of its systems, product enhancements and relatedsoftware tools, and may experience delays and technical and manufacturingdifficulties in future introductions or volume production of new systems,product enhancements and related software tools.

 

TheCompany may encounter additional technical, manufacturing or other difficultiesthat could further delay future introductions or volume production of systemsor enhancements. The Company’s inability to complete the development or meetthe technical specifications of any of its systems or enhancements and relatedsoftware tools, or its inability to manufacture and ship these systems orenhancements and related software tools in volume and in time to meet therequirements for manufacturing the future generation of semiconductor ornanotechnology devices would materially adversely affect the Company’sbusiness, financial condition and results of operations. In addition, theCompany may incur substantial unanticipated costs to ensure the functionalityand reliability of its products early in the products’ life cycles. If newproducts have reliability or quality problems, reduced orders or highermanufacturing costs, delays in collecting accounts receivable and additionalservice and warranty expenses may result. Any of such events may materiallyadversely affect the Company’s business, financial condition and results ofoperations.

 

**Intellectual Property Rights**                                       Althoughthe Company attempts to protect its intellectual property rights throughpatents, copyrights, trade secrets and other measures, it believes that anysuccess will depend more upon the innovation, technological expertise andmarketing abilities of its employees. Nevertheless, the Company has a policy ofseeking patents when appropriate on inventions resulting from its ongoingresearch and development and manufacturing activities.  The Company owns various United States and

 

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foreign patents, which expire on dates ranging from March 2004 toAugust 2021 and has various United States and foreign patent applicationspending. The Company also has various registered trademarks and copyrightregistrations covering mainly software programs used in the operation of itsstepper systems. The Company also relies upon trade secret protection for itsconfidential and proprietary information. There can be no assurance that theCompany will be able to protect its technology adequately or that competitorswill not be able to develop similar technology independently. There can be noassurance that any of the Company’s pending patent applications will be issuedor that U.S. or foreign intellectual property laws will protect the Company’sintellectual property rights. In addition, litigation may be necessary toenforce the Company’s patents, copyrights or other intellectual property rights,to protect the Company’s trade secrets, to determine the validity and scope ofthe proprietary rights of others or to defend against claims ofinfringement.  Such litigation couldresult in substantial costs and diversion of resources and could have amaterial adverse effect on the Company’s business, financial condition andresults of operations, regardless of the outcome of the litigation. Patentsissued to the Company may be challenged, invalidated or circumvented and therights granted thereunder may not provide competitive advantages to theCompany. Furthermore, others may independently develop similar products,duplicate the Company’s products or, if patents are issued to the Company,design around the patents issued to the Company. Additionally, the Companypresently has several agreements in force to license certain of itstechnologies. Challenges to, or invalidation of, patents related to thosetechnologies would expose the Company to the risk of forfeiture of revenues andfurther risk of damage claims.

 

OnFebruary 29, 2000, in the U.S. District Court of Virginia, the Companyfiled patent infringement lawsuits against Nikon, Canon and ASML. InApril 2000, the Company reached a settlement with Nikon and inSeptember 2001, the Company reached a settlement with Canon. The patentlitigation case against ASML is ongoing. The Court has made a preliminarydetermination that ASML does not infringe the patent. The Company has filed anappeal against this preliminary determination of the Court. On October 12,2001, the Company was sued in the District Court in Massachusetts for allegedinfringement of certain patents owned by Silicon Valley Group, Inc. (“SVG”), acompany acquired by ASML. The Company is in the process of defending againstthis claim and believes the claim is without merit.

 

Withthe exception of the SVG claim, there are no pending lawsuits against theCompany regarding infringement claims with respect to any existing patent orany other intellectual property right. However, the Company has from time totime been notified of claims that it may be infringing intellectual propertyrights possessed by third parties. Some of the Company’s customers havereceived notices of infringement from Technivision Corporation and the LemelsonMedical, Education and Research Foundation, Limited Partnership alleging thatthe manufacture of certain semiconductor products and/or the equipment used tomanufacture those semiconductor products infringes certain issued patents. TheCompany has been notified by certain of these customers that the Company may beobligated to defend or settle claims that the Company’s products infringe anyof such patents and, in the event it is subsequently determined that thecustomer infringes any of such patents, they intend to seek reimbursement fromthe Company for damages and other expenses resulting from this matter.

 

Infringementclaims by third parties or claims for indemnification resulting frominfringement claims may be asserted in the future and such assertions, ifproven to be true, may materially adversely affect the Company’s business,financial condition and results of operations, regardless of the outcome of anylitigation. With respect to any such future claims, the Company may seek toobtain a license under the third party’s intellectual property rights. However,a license may not be available on reasonable terms or at all. The Company coulddecide, in the alternative, to resort to litigation to challenge such claims.Such challenges could be expensive and time consuming and could materiallyadversely affect the Company’s business, financial condition and results ofoperations, regardless of the outcome of any litigation.

 

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

 

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Inaddition to glass, the Company procures many of its other critical systems’components, subassemblies and services from single outside suppliers or alimited group of outside suppliers in order to ensure overall quality andtimeliness of delivery. Many of these components and subassemblies havesignificant production lead times. To date, the Company has been able to obtainadequate services and supplies of components and subassemblies for its systemsin a timely manner.  However, disruptionor termination of certain of these sources could result in a significantadverse impact on the Company’s ability to manufacture its systems. This, inturn, would have a material adverse effect on the Company’s business, financialcondition and results of operations. The Company’s reliance on sole or alimited group of suppliers and the Company’s increasing 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. Although the timeliness, yield and quality of deliveriesto date from the Company’s subcontractors have been acceptable, manufacture ofcertain of these components and subassemblies is an extremely complex process,and long lead-times are required. Any inability to obtain adequate deliveriesor any other circumstance that would require the Company to seek alternativesources of supply or to manufacture such components internally could delay theCompany’s ability to ship its products, which could damage relationships withcurrent and prospective customers and have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

**International Sales**                                        Internationalnet sales accounted for approximately 48% and 51% of total net sales for theyears 2002 and 2001, respectively. For the nine months ended September 27,2003, international net sales accounted for approximately 61% of total netsales, as compared with 50% for the comparable period in 2002. The Companyanticipates that international sales, which typically have lower gross marginsthan domestic sales, principally due to increased competition and higher fieldservice and support costs, will continue to account for a significant portionof total net sales. As a result, a significant portion of the Company’s netsales will continue to be subject to certain risks, including: dependence onoutside sales representative organizations; 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; difficulties in staffing and managing foreign subsidiary and branchoperations; and potentially adverse tax consequences.

 

Althoughthe Company generally transacts its international sales in U.S. dollars,international sales expose the Company to a number of additional risk factors,including fluctuations in the value of local currencies relative to the U.S.dollar, which, in turn, impact the relative cost of ownership of the Company’sproducts and may further impact the purchasing ability of its internationalcustomers. However, in Japan, the Company has direct sales operations andorders are often denominated in Japanese yen. This may subject the Company to ahigher degree of risk from currency fluctuations. The Company attempts to mitigatethis exposure through the use of foreign exchange contracts.  The Company is also subject to the risksassociated with the imposition of legislation and regulations relating to theimport or export of semiconductors and nanotechnology products.  The Company cannot predict whether theUnited States, Japan or any other country will implement changes to quotas,duties, taxes or other charges or restrictions upon the importation orexportation of the Company’s products. These factors, or the adoption ofrestrictive policies, may have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

**Dependence on Key Personnel**                            TheCompany’s future operating results depend, in significant part, upon thecontinued contributions of key personnel, many of whom would be difficult toreplace. Few of such persons have an employment agreement with the Company(though the Company is currently negotiating employment contracts with threeexecutive officers). The Company does not maintain any life insurance on any ofits key persons.  The loss of keypersonnel could have a material adverse effect on the business, financialcondition and results of operations of the Company.  In addition, the Company’s future operating results depend insignificant part upon its ability to attract and retain other qualifiedmanagement, manufacturing, technical, sales and support personnel for itsoperations. There are only a limited number of persons with the requisiteskills to serve in these positions and it may become increasingly difficult forthe Company to hire such personnel over time. At times, competition for suchpersonnel has been intense, particularly in the San Francisco Bay Area wherethe Company maintains its headquarters and principal operations, and there canbe no assurance that the Company will be successful in attracting or retainingsuch

 

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personnel.The failure to attract or retain such persons would materially adversely affectthe Company’s business, financial condition and results of operations.

 

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

 

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

 

**Effects of Certain Anti-TakeoverProvisions**** **Certain provisions of theCompany’s Certificate of Incorporation, equity incentive plans, ShareholderRights Plan, licensing agreements, Bylaws and Delaware law may discouragecertain transactions involving a change in control of the Company.  In addition to the foregoing, the Company’sclassified board of directors, the shareholdings of the Company’s officers,directors and persons or entities that may be deemed affiliates and the abilityof the Board of Directors to issue “blank check” preferred stock withoutfurther stockholder approval could have the effect of delaying, deferring orpreventing a change in control of the Company and may adversely affect thevoting and other rights of holders of Common Stock.

 

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

 

As ofOctober 31, 2003, the Company had issued and outstanding options to purchase5,346,703 shares of its Common Stock. Among other determinants, the marketprice of the Company’s stock has a major bearing on the number of stock optionsoutstanding that are included in the weighted-average shares used indetermining the Company’s net income (loss) per share. During periods ofextreme volatility, the impact of higher stock prices can have a materiallydilutive effect on the Company’s net income per share (diluted).****Additionally,options are excluded from the calculation of net income (loss) per share whenthe Company has a net loss or when the exercise price of the stock option isgreater than the average market price of the Company’s Common Stock, as theimpact of the stock options would be anti-dilutive.

 

**TerroristAttacks and Threats, Government Responses Thereto, and Military ActionsMay Negatively Impact All Aspects of Our Operations, Revenues, Costs andStock 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 the Company’s CommonStock and may limit the capital resources available to the Company or itscustomers

 

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or suppliers, which could result in decreased ordersfrom customers, less favorable financing terms from suppliers, and scarcity orincreased costs of materials and components of our products. Any of theseoccurrences could have a significant impact on our operating results, revenuesand costs and may result in increased volatility of the market price of ourCommon Stock.

 

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

 

**Information Available on CompanyWeb-site**

 

The Company’sweb-site is located at www.ultratech.com. The Company makes available, free ofcharge, through its web-site, its annual report on Form 10-K, quarterly reportson Form 10-Q, Form 3, 4 and 5 filings and current reports on Form 8-K (andamendments to those reports), as soon as reasonably practicable after suchreports are filed with the SEC.

 

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

 

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

 

**Foreign Currency Risk Management**

Foreignexchange contracts are used primarily by the Company to hedge the risk thatunremitted Japanese yen denominated receipts, for actual or forecasted sales ofequipment, may be adversely affected by changes in foreign currency exchangerates after receipt of customer purchase orders. As part of its overallstrategy to manage the level of exposure to currency exchange rate fluctuations,the Company attempts to hedge most of these Japanese yen denominated foreigncurrency exposures anticipated over the ensuing twelve-month period. AtSeptember 27, 2003, the Company had taken action to hedge approximately100% of these Japanese yen denominated exposures. To hedge this exposure, theCompany used foreign exchange contracts that generally have maturities of ninemonths or less. The Company often closes foreign exchange sale contracts bypurchasing an offsetting purchase contract.

 

TheCompany records these foreign exchange contracts at fair value in itsconsolidated balance sheet and the related gains or losses on these contractsare deferred in stockholders’ equity (as a component of comprehensive income).These deferred gains and losses are recognized in income, as a component ofrevenue, in the period in which the sales being hedged are received andrecognized in income. However, to the extent that any of these contracts arenot considered to be perfectly effective in offsetting the change in the valueof the sales being hedged, any changes in fair value relating to theineffective portion of these contracts are immediately recognized in income.These amounts were not material to the periods presented.

 

Gainsand losses on foreign exchange contracts that are not designated as hedges areincluded as a component of interest and other income, net, in the Company’sconsolidated statement of operations.

 

At September 27, 2003, the Company had contracts for the sale of$6.0 million of Japanese Yen at fixed rates. The Company had approximately $0.1million of deferred losses on foreign exchange contracts at September 27,2003.

 

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

 

Basedon their evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934) are effective as of September 27, 2003.

 

DuringOctober 2003, the Company took steps to strengthen its controls over useraccess to its business computer system. Additionally, the Company has recentlyadded an internal audit and corporate governance function.

 

Otherthan as noted above, there have been no significant changes in internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed in our reports filed orsubmitted under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, 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:** |   | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                           |   |
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| **Item 1.** |   | **Legal Proceedings.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                           |   |
|        |   | On February 29, 2000, in the U.S. District Court of Virginia,  the Company filed patent infringement lawsuits against Nikon, Canon and ASML.  In April 2000, the Company reached a settlement with Nikon and in  September 2001, the Company reached a settlement with Canon. The patent  litigation against ASML is ongoing. The Court has made a preliminary  determination that ASML does not infringe the patent. The Company has filed  an appeal against this preliminary determination of the Court. On  October 12, 2001, the Company was sued in the District Court in  Massachusetts for alleged infringement of certain patents owned by Silicon  Valley Group, Inc. (“SVG”), a company acquired by ASML. The Company is in the  process of defending against this claim and believes the claim is without  merit. |                                                                                                                                                           |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |
| **Item 2.** |   | **Changes in  Securities and Use of Proceeds.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                           | None.  |
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| **Item 3.** |   | **Defaults upon  Senior Securities.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                           | None.  |
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| **Item 4.** |   | **Submission of  Matters to a Vote of Security Holders.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                           | None.  |
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| **Item 5.** |   | **Other Information.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                           | None.  |
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| **Item 6.** |   | **Exhibits and  Reports on Form 8-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                           |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |
|        |   | **(a) Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                           |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |
|        |   | 31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certification of Chief Executive Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |   |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |   |
|        |   | 31.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certification of Chief Financial Officer required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                             |   |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |   |
|        |   | 32.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |   |
|        |   | 32.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |
|        |   | **(b) Reports on Form  8-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                           |   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                           |   |
|        |   | Current Reports on Form 8-K, dated August 21, 2003 and  September 18, 2003, were furnished during the quarter ended  September 27, 2003, reporting updates to the Company’s quarterly  teleconference guidance. A Current Report on Form 8-K, dated July 24,  2003 was furnished during the quarter ended September 27, 2003,  reporting the Company’s quarterly results for the period ended June 28,  2003.                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                           |   |

 

32

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**SIGNATURES**

 

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

 

 
| **ULTRATECH, INC.** |
|---------------------|
| (Registrant)        |
|                |
|                |   |   |   |
| Date:               | November 3, 2003 |   | By: |  /s/ Bruce R. Wright |   |
|                |   |   | Bruce R. Wright |
|                |   |   | Senior Vice President, Finance and Chief  Financial  Officer (Duly Authorized Officer and Principal  Financial and Accounting Officer) |
|                     |  |  |  |  |  |

 

33

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**EXHIBITINDEX**

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

** **

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