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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

(Mark one)

þ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013

or

 

¨ 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 001-33834

RUBICON TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   36-4419301

(State or Other Jurisdiction of

Incorporation or Organization)

  (I.R.S. Employer Identification No.)

900 East Green Street

Bensenville, Illinois

  60106
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 295-7000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, Par Value $0.001 per share   The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ¨     No   þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ¨     Accelerated filer   þ     Non-accelerated filer   ¨     Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   þ

As of June 30, 2013, there were 17,701,022 shares of common stock outstanding held by nonaffiliates of the registrant, with an aggregate market value of the common stock (based upon the closing price of these shares on the NASDAQ Global Market) of approximately $141,077,145.

The number of shares of the registrant’s common stock outstanding as of the close of business on March 7, 2014 was 25,765,795.

Documents incorporated by reference:

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K provided, that if such Proxy Statement is not filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed no later than the end of such 120-day period.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item of Form 10-K

   Page  
Part I         
     1.       Business      2   
     1A.       Risk Factors      11   
     1B.       Unresolved Staff Comments      21   
     2.       Properties      22   
     3.       Legal Proceedings      22   
     4.       Mine Safety Disclosures      22   

Part II

        
     5.      

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     23   
     6.      

Selected Financial Data

     26   
     7.      

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   
     7A.       Quantitative and Qualitative Disclosure About Market Risk      37   
     8.       Consolidated Financial Statements and Supplementary Data      42   
     9.      

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

     42   
     9A.       Controls and Procedures      42   
     9B.       Other Information      43   

Part III

        
     10.       Directors, Executive Officers and Corporate Governance      44   
     11.       Executive Compensation      44   
     12.      

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     44   
     13.       Certain Relationships and Related Transactions, and Director Independence      45   
     14.       Principal Accountant Fees and Services      45   

Part IV

        
     15.       Exhibits and Consolidated Financial Statement Schedules      46   
      Signatures      47   
      Exhibit Index      48   

 


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PART I

All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, net sales, projected costs, prospects and plans and objectives of management for future operations may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions such as “will,” “may,” “could,” “should,” etc. (or the negative thereof). Items contemplating or making assumptions about actual or potential future sales, market size and trends or operating results also constitute forward-looking statements.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled “Risk Factors” and elsewhere in this Annual Report could have a material adverse effect on our business, results of operations and financial condition.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are inherently subject to known and unknown risks and business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report, other than as may be required by applicable law or regulation. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

This Annual Report also contains statistical data and estimates, including those relating to market size and growth rates of the markets in which we participate, that we obtained from industry publications and reports generated by market research firms. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Although we have assessed the information in such publications and found it to be reasonable and believe the publications and reports are reliable, we have not independently verified their data.

You should read this Annual Report and the documents that we reference in this Annual Report and have filed with the Securities and Exchange Commission (the “SEC”) as exhibits with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Unless otherwise indicated, the terms “Rubicon,” the “Company,” “we,” “us,” and “our” refer to Rubicon Technology, Inc.

 

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ITEM 1. BUSINESS

OVERVIEW

We are a vertically integrated, advanced electronic materials provider specializing in monocrystalline sapphire for applications in light-emitting diodes (“LEDs”), optical systems and specialty electronic devices. The emergence of sapphire in commercial volumes at competitive prices has enabled the development of new technologies such as high brightness (“HB”) white, blue and green LEDs and highly-integrated radio frequency integrated circuits (“RFICs”). Recently, sapphire has been adopted for use in several new applications in mobile devices, specifically camera lens covers, dual flashes and home buttons on certain newer model smartphones. The reason sapphire was adopted for use on the home button on certain smartphones is because of the scratch resistance and increased touch capacitance it offers, which are important characteristics to ensure the effectiveness of the fingerprint recognition security built into the device. We believe that the use of fingerprint recognition security and other biometrics could become more prevalent in the future, which could become a strong growth driver for sapphire. We apply our proprietary crystal growth technology to produce high-quality sapphire products efficiently to supply our end-markets, and we work closely with our customers to meet their quality and delivery needs.

We are a vertically-integrated manufacturer of high-quality sapphire substrates and optical windows that are used in a variety of high-growth, high-volume end-market applications. Our largest product lines are:

 

   

sapphire cores, two to six inches in diameter, which our customers further process into wafers for use in LED applications and into components such as lens covers for mobile devices;

 

   

six-inch sapphire wafers that are used as substrates for the manufacture of LED chips and to a lesser extent for other semiconductor applications such as Silicon-on-Sapphire (“SoS”) RFICs; and

 

   

Optical sapphire components in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods. These optical sapphire products are used in equipment for a wide variety of end markets, including defense and aerospace, medical devices, oil and gas drilling, semiconductor manufacturing and other markets.

For the LED market, we sell two to four-inch material primarily in core form and six and eight-inch material primarily in polished wafer form. Eight-inch wafers are sold primarily for customers’ research and development efforts at this time. We have the ability to produce cores and wafers of up to twelve inches in diameter to support production of chips for next-generation LED and other electronic applications. Larger sapphire also has current applications in the optical markets. In other semiconductor markets, we sell primarily six-inch wafers; our major customer in that market, however, is modifying its technology to produce its higher volume RFIC products on a substrate other than sapphire, a development which will likely significantly reduce the amount of sapphire demand from that market beginning in early 2014. Other non-LED semiconductor customers are using sapphire in research and development at this time.

We recently introduced a new product offering, patterned sapphire substrates or “PSS”. HB LED chip manufacturers etch a pattern onto the surface of the sapphire wafer in the early stages of their production process in order to improve light output. We have leveraged our capability in producing larger diameter sapphire wafers to offer pre-patterned, larger diameter (four-inch and six-inch) wafers to the LED market.

We believe that LED production is following a similar path to that of production of integrated circuits on silicon substrates, which gradually migrated to production on increasingly larger substrates in order to reduce manufacturing costs. We feel that this migration to larger substrates and the related efficiency gains will help reduce the prices of LED devices and thereby facilitate greater adoption of LED technology in the backlighting and general lighting markets.

Our vertically-integrated manufacturing capabilities enable us to maintain our high quality standards while controlling costs. We design, assemble and maintain our own proprietary crystal growth furnaces to grow high-

 

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purity, low-stress, ultra-low-defect-density sapphire crystals. In addition, we possess state-of-the-art capabilities in high-precision core drilling, wafer slicing, surface lapping, edge bevel grinding, polishing, patterning and wafer cleaning processes. We foster a strong sense of innovation and agility in our product development teams in an attempt to develop new products more effectively and to rapidly capture market growth.

We plan to leverage our technological advantage in efficiently producing high-quality, large-diameter sapphire products to maintain our leadership position and capitalize on future growth opportunities. To attain this goal, we are investing in research and development activities, continuing to enhance our operational capabilities, increasing our brand recognition and diversifying into new market segments.

We are a Delaware corporation incorporated on February 7, 2001. Our common stock is listed on the NASDAQ Global Market under the symbol “RBCN.”

INDUSTRY OVERVIEW

Integrated circuits and other semiconductor devices have traditionally been fabricated on silicon substrates. However, for certain advanced applications, new electronic materials have emerged as the substrates of choice due to evolving integration and performance considerations. For example, sapphire is the preferred substrate material for HB white, blue and green LED applications due to its crystal lattice compatibility with the aluminum gallium nitride (“AlGaN”) epitaxial layers, thermal expansion properties, commercial availability and cost efficiency.

LED applications

Advancements in solid state lighting utilizing HB white, blue and green LEDs over the past decade represent a disruptive technology in the lighting industry, providing significant performance, environmental and economic improvements compared to traditional incandescent or fluorescent lighting. For example, traditional incandescent lamps are inefficient and costly, emitting over 90% of consumed power as heat and lasting only 1,500 to 2,000 hours. Fluorescent lamps produce light by passing electricity through toxic mercury vapor, which creates an environmental disposal problem. LEDs do not contain mercury or lead and are 4.0 to 6.6 times as efficient as traditional incandescent lamps, while providing 35,000 to 50,000 hours of light. These factors, along with their durability, small form factor, excellent color performance and decreasing costs, have led to growing demand for LEDs in applications such as small displays for mobile devices, flashes for digital cameras, backlighting units (“BLUs”) for displays used in notebook computers, desktop monitors, LCD televisions, public display signs, automotive lights, street lights, traffic signals and general and specialty lighting. Applications using LEDs have unit volumes in the billions and are expected to grow significantly over the next several years. The majority of HB LEDs are produced on sapphire substrates. Therefore, as the HB LED market grows, we believe the sapphire substrate market will grow as well.

Mobile devices.  LEDs are used in color displays for mobile phones and other portable electronics such as GPS systems, MP3 players and digital camera flashes. LEDs are well suited for mobile devices due to their low current drain which extends battery life and durability while generating less heat. For these reasons, the vast majority of mobile devices utilize LED lighting.

LED backlighting units for large displays.  LED BLUs now frequently replace conventional fluorescent BLUs in LCD flat panel televisions, notebook computers and desktop monitors. Benefits of LED BLUs in these applications are reduced power consumption/extended battery life, thinner displays, quicker response time and better color rendition. Displays made with LED BLUs also have no toxic materials, which helps electronics manufacturers to comply with environmental regulations.

Automotive lighting.  Automobile manufacturers are increasingly using LEDs in car and truck headlights, turning and tail light functions as well as interior lighting. Benefits include near-instant response time, reduced

 

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power usage and more stylish and effective designs. Increased LED usage in other transportation vehicles such as motorcycles and commercial jets offers additional growth potential.

Commercial signage/displays.  LEDs are widely used as light sources on large signs, LED displays and outdoor displays, such as jumbo screens used in sporting arenas and electronic billboard displays.

General illumination. LEDs are increasingly being used for outdoor and indoor commercial and public lighting, architectural lighting, street lights, traffic signals, retail displays, residential lighting, replacement lamps and off-grid lighting for developing countries. General illumination is expected to be one of the fastest growing applications for HB LEDs.

Optical applications

Sapphire is utilized for windows and optics for aerospace, sensor, medical and laser applications due to its wide-band transmission, superior strength, scratch resistance and high strength-to-weight ratio. Sapphire’s physical properties make it very well suited for jet fighter targeting pod windows, forward-looking infrared windows for commercial and business jets as well as unmanned air vehicles or drones, rocket domes and transparent armor for military vehicles.

Recently, sapphire has been adopted for use in several new applications in mobile devices, specifically camera lens covers, dual flashes and home buttons on certain newer model smartphones. The switch to sapphire for these mobile device applications is because sapphire is highly scratch resistant and offers improved touch capacitance which are important characteristics to ensure the effectiveness of the fingerprint recognition security recently built into the home button functionality of one of the major brands of smartphones. Biometrics, such as fingerprint recognition, provides greater security than a password. Data security is becoming an increasing concern in society and we believe that the use of biometrics could increase in coming years, which could increase demand for sapphire.

Other semiconductor applications

SoS integrated circuits consist of a thin layer of silicon grown on a sapphire substrate and are primarily used in advanced wireless and military applications, such as RFICs. In particular, SoS RFICs are currently used in mobile phones, broadband television set-top boxes, satellites and radiation-hardened applications for the defense industry.

Sapphire is also currently being experimented with as a substrate to produce certain power devices. If our customers are successful with their development efforts, this market could evolve into a growth opportunity for sapphire suppliers.

Sapphire substrate industry supply chain

The production process for sapphire substrates is substantially similar to that of silicon wafers. A typical process flow consists of crystal growth, fabrication, slicing, lapping and polishing steps. Output quality is measured in flatness, desired crystal planar orientation, etch pitch density and crystalline structure uniformity. A great emphasis is placed on continuously improving yields and increasing production efficiency to drive costs lower to take advantage of emerging high-volume opportunities. Device manufacturers are seeking larger diameter sapphire wafers to allow them to gain efficiency in their production processes through higher throughput and reduced edge loss. Historical methods of sapphire crystal growth, which rely on lower-volume batch processes, are less able to meet the needs of leading end-market customers for high-quality crystals, demanding dimensional tolerances, high production volumes, cost efficiency and on-time delivery. Sapphire is the material on which the entire value chain is built.

 

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TECHNOLOGY

Rubicon, as a vertically integrated manufacturer, has developed proprietary advanced technology at every stage of production from raw material processing through crystal growth, fabrication, wafer finishing, patterning and cleaning.

Our proprietary ES2 crystal growth technique produces high-quality sapphire crystals for use in our sapphire products. ES2 is derived from the standard Kyropoulos method of crystal growth. We developed this technique with the goal of establishing greater control over the crystal growth process while maintaining minimal temperature variations. Unlike other techniques, during the ES2 technique, the growing sapphire crystal exists in an unconstrained, low stress environment inside a closed growth chamber. The closed system allows for enhanced control of the melt, resulting in higher quality crystals. The temperature gradient between the melt and the crystal in the ES2 technique is significantly lower than in other crystal growth techniques. These aspects of the ES2 technique enable us to grow crystals that have a significantly lower dislocation density, higher crystal purity and greater uniformity than sapphire crystals grown using other techniques. The ES2 technique provides an inherent annealing process once the crystal is fully grown. This thermal annealing is an integral means of relieving stress in the crystal during the ES2 process. We believe we can readily scale our ES2 technology in a production environment while maintaining high crystal quality even as crystal boule size is increased. As a result of our proprietary ES2 technology, we believe that we currently offer the most efficient method for manufacturing large form factor, high-quality sapphire in the market today.

We have automated the crystal growth process of our proprietary ES2 technique. Our furnace environments are controlled by closed-loop control systems and the overall crystal growth process is run with minimal operator intervention, which reduces the potential for human error. In addition, a single operator can supervise the control of multiple ES2 furnaces simultaneously, which reduces costs.

We believe our proprietary ES2 process provides significant advantages over other crystal growth methods such as CZ and EFG. Unlike the ES2 technique, the CZ and EFG methods grow crystals with much higher levels of stress. This stress can decrease the overall quality of the sapphire crystal and requires increased processing time to relieve this stress, which increases production costs and decreases throughput, especially in larger diameter crystals. During the EFG process, the crystal is grown in a sheet form by pulling it through a die directly from the melt; while in the CZ process, the crystal must be rotated and pulled as the aluminum oxide melt is consumed. These constrained growth environments with higher thermal gradients increase stress and decrease crystal quality.

Our research and development (“R&D”) activity plays a vital role in supporting our technology, product and revenue roadmaps. In 2013, 2012 and 2011, our R&D expenses totaled $2.3 million, $2.3 million and $1.8 million, respectively. Our R&D is focused on three key areas:

 

   

large area sapphire growth and fabrication;

 

   

higher precision sapphire processing; and

 

   

cost-effective optical components for mobile devices.

Our technical staff possesses deep and broad expertise in materials science and engineering. We also develop and utilize sophisticated metrology equipment to perform material and process characterization.

PRODUCTS

We offer a wide variety of sapphire products designed to meet the stringent specifications of our customers. Using our proprietary ES2 technology, we grow high-quality sapphire boules. We fabricate our products from the boules and sell them in four general categories: core, as-cut, as-ground and polished. We currently offer two, three, four, six and eight-inch diameter wafers, in C, R, A, and M planar orientations. A sapphire crystal has multiple orientation planes resulting from its crystalline structure symmetry.

 

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Each orientation of the crystal structure is represented by a letter and differs in lattice structure. These variations result in different chemical, electrical and physical properties depending on the particular orientation plane. As a result, customers require different orientation planes depending on the intended application. For example, LED manufacturers typically request C plane crystals while SoS manufacturers typically request R plane crystals.

While we continue to offer all of the following products, our sales efforts are now focused on selling two through four-inch cores to our polishing customers and four, six and eight-inch polished wafers to our semiconductor device manufacturing customers.

 

Product

  

Size

  

Orientation

  

Applications

Core    2,” 3,” 4”    C, R, A, M   

•   LED

•   Optical windows

•   Blue laser diode

As-Cut    2,” 3,” 4,” 6”, 8”    C, R, A, M   

•   Wafers for LED

•   Wafers for blue laser diodes

•   Wafers for SOS RFICs

As-Ground    2,” 3,” 4,” 6”, 8”    C, R, A, M   

•   Wafers for LED

•   Wafers for SOS RFICs

•   Blanks for optical windows

•   Wafer carriers

Polished    4”, 6”, 8”    C, R, A   

•   Epi-polished wafers for SOS RFICs

•   Polished optical windows

•   Double-side polished wafer carriers

Patterned Sapphire Substrate    4”, 6”    C   

•   Epi-polished patterned wafers for RFICs

Core

Our core product line consists of our sapphire cores drilled from sapphire boules with high-precision. In 2013, 2012 and 2011, sales of core accounted for 56%, 15% and 46% of our revenue, respectively. Revenue from sapphire cores increased through the first half of 2011, then declined due to excess inventory at polishers and LED manufacturers. Major suppliers of sapphire, including us, added capacity in 2010 and 2011, resulting in excess supply during 2012 which caused lower product prices. We chose to sell fewer sapphire cores in 2012 awaiting price improvement. Compared with historical pricing, core prices continued to be low in 2013, but prices steadily increased through most of 2013. We expect that pricing will continue to recover as LED production volumes increase.

As-cut

Our as-cut product line consists of sapphire cores sliced using a wire saw machine. We believe we are able to offer our customers one of the highest-precision cut sapphire wafers in the market. This is especially important to customers who require precise orientation planes for applications such as LEDs, SoS, RFICs and blue laser diodes. In each year ended December 31, 2013, 2012 and 2011, sales of as-cut wafers accounted for less than 10% of our revenue.

As-ground

Our as-ground product line consists of cut sapphire wafers that undergo a double-sided lapping and edge grinding process. The lapping process ensures that the surface of the wafer is flat and smooth and has a high

 

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degree of parallelism. The grinding process bevels the edges of the wafers, making them more durable and less susceptible to chipping and cracking. In each year ended December 31, 2013, 2012 and 2011, sales of as-ground wafers accounted for less than 10% of our revenue.

Polished

Our polished product line primarily consists of finely polished, ultra-clean, six and eight-inch sapphire wafers. Our polished wafers undergo two polishing phases including both a mechanical and a chemical mechanical planarization phase. We believe we are currently one of a small number of fully vertically integrated firms offering six and eight-inch, high-quality C-plane and R-plane polished wafers. In 2013, 2012 and 2011 sales of polished wafers accounted for 29%, 75% and 49% of our revenue, respectively. Sales of six-inch polished sapphire wafers increased in 2011 and 2012 with certain LED chip manufacturers migrating to a six-inch production platform and with the growth of the SoS RFIC market, which has subsequently decreased in size. The percentage of revenue coming from six-inch wafer sales in 2012 was particularly high due to reduced sales of sapphire core in that period. The proportion of revenue from polished wafers in the future will depend on a number of factors, including customer adoption of large-diameter sapphire wafers in the LED market, customer decisions to purchase patterned versus polished wafers and pricing for our various products, including cores.

Patterned sapphire substrates

Our patterned sapphire substrates (“PSS”) product line was introduced in 2013 and consists of finely polished, ultra-clean, four and six-inch patterned sapphire wafers. LED chip manufacturers etch a pattern onto the surface of the sapphire wafer in the early stages of their production process in order to improve light output. We are leveraging our capability in producing larger diameter sapphire wafers to offer pre-patterned, larger diameter (four-inch and six-inch) wafers to the LED market. We offer fully customizable, sub-micron patterning capability with dimensional tolerances within one tenth of a micron. We also offer the industry’s smallest edge exclusion zone maximizing the usable wafer surface area yielding more chips per wafer. We believe we are the first vertically integrated sapphire producer to offer high volume four and six-inch patterned substrates. During 2013, we shipped samples of four and six-inch wafers with a wide variety of pattern types, densities and heights. We believe this product line will generate increasing revenue in 2014. In 2013, sales of PSS wafers accounted for less than 10% of our revenue.

Other

We also offer optically-polished windows and ground window blanks of sapphire. We provide sapphire and other crystal products in many sizes, shapes and product formats for specialty applications.

MANUFACTURING

The process of growing the crystal begins by heating the raw material, aluminum oxide, until it reaches an ideal temperature above its melting point. This ideal temperature is essential for our process because it allows us to produce high-purity crystals with very low defect rates. Following the heating, a seed rod is inserted in the melted material as the material is being cooled to crystallize into a boule. Following the growth process, each boule is rigorously inspected by using polarized lighting and magnification to find imperfections, such as bubbles, dislocations and granular deposits within the crystal.

We then drill the resulting boules into cylindrical cores using our custom high-precision crystal orientation equipment and proprietary processes. We use wire saws to slice each core into wafers of precise size and shape. These wafers are then pre-polished using precision lapping and edge-grinding equipment and then are ready to be polished into epitaxial wafers. All of these processes are performed in clean environments to reduce the chance of crystal contamination. Epi-polishing and wafer cleaning are performed in Class 10,000 and Class 100 clean-room environments, respectively.

 

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We are dedicated to quality assurance throughout our entire operation. We employ detailed material traceability from raw material to finished product. Our quality system is certified as ISO9001:2000, and we have in-house expertise at the Six Sigma Black Belt level.

All of our long-lived assets are located in the U.S. and Malaysia.

SALES AND MARKETING

We market and sell our products through our direct sales force to customers in Asia, Australia, North America and Europe. Our direct sales force includes experienced and technically sophisticated sales professionals and engineers who are knowledgeable in the development, manufacturing and use of sapphire substrates, windows and other optical materials. Our sales staff works with customers during all stages of the substrate manufacturing process, from developing the precise composition of the substrate through manufacturing and processing the substrate to the customer’s specifications.

A key component of our marketing strategy is developing and maintaining strong relationships with our customers, especially at the senior management level. We achieve this by working closely with our customers to optimize our products for their production processes. In addition, we are able to develop long-term relationships with key customers by offering product specification assistance, providing direct access to enable them to evaluate and audit our operations, delivering high-quality products and providing superior customer service. We believe that maintaining close relationships with senior management and providing technical support improves customer satisfaction and provides us with a competitive advantage when selling our products.

In order to increase brand recognition of our products and of Rubicon in general, we publish technical articles, advertise in trade journals, distribute promotional materials and participate in industry trade shows and conferences.

CUSTOMERS

Our principal customers are semiconductor device manufacturers and wafer polishing companies. A substantial portion of our sales have been to a small number of customers. In 2013 and 2012, our top two customers accounted for approximately 44% and 67% of our revenue, respectively. In 2011, our top three customers accounted for approximately 69%. Although we are attempting to diversify and expand our customer base, we expect our sales to continue to be concentrated among a small number of customers. However, we also expect that our significant customers may change from time to time. In 2013, sales to Peregrine Semiconductor Corporation and Nanjing J-crystal Photoelectric Technology Co. represented approximately 27% and 17% of our revenues, respectively. In 2012, sales to Peregrine Semiconductor Corporation and LG Innotek represented approximately 38% and 29% of our revenues, respectively. In 2011, sales to LG Innotek, Tera Xtal Technology Corp. and Crystalwise Technology represented approximately 38%, 19% and 12% of our revenues, respectively. No other customer accounted for 10% or more of our revenues during 2013, 2012, or 2011.

In 2013, 60% of our sales were made to customers in Asia, 25% of our sales were made to customers in Australia, 11% of our sales were made to customers in North America and 4% of our sales were made to customers in Europe. In 2012, 48% of our sales were made to customers in Asia, 19% of our sales were made to customers in Australia, 17% of our sales were made to customers in North America and 16% of our sales were made to customers in Europe. In 2011, 87% of our sales were made to customers in Asia, 9% of our sales were made to customers in North America and 4% of our sales were made to customers in Europe. Our customer supply agreements tend to be for short periods of time, typically 90 days. Therefore, fluctuations in demand could cause our quarterly revenue to vary significantly. Our standard arrangement with most customers includes payment terms.

 

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INTELLECTUAL PROPERTY

Our ability to compete successfully depends upon our ability to protect our proprietary technologies and other confidential information. We rely primarily upon a combination of trade secret laws and non-disclosure agreements with employees, customers and potential customers to protect our intellectual property. We have five patents and twelve pending patent applications with the U.S. Patent and Trademark Office, mostly covering aspects of our core production, wafer grinding and lapping technologies. However, we believe that factors such as the technological and innovative abilities of our personnel, the success of our ongoing product development efforts and our efforts to maintain trade secret protection are more important than patents in maintaining our competitive position. We pursue the registration of certain of our trademarks in the U.S. and currently have three registered trademarks.

COMPETITION

The markets for high-quality sapphire products are very competitive and have been characterized by rapid technological change. The products we produce must meet certain demanding requirements to succeed in the marketplace. Although we account for a significant percentage of the total market volume today, we face significant competition from other established providers of similar products as well as from new and potential entrants into our markets.

We have several competitors that compete directly with us. In recent years, certain companies that formerly competed with us only in sapphire cores have entered into wafer polishing and are trying to establish positions in the large-diameter wafer market. These companies tend to focus on providing core and as-cut products rather than offering polished products. There are a limited number of companies that are substantially larger than we are that compete with us in a relatively small segment of their overall business. These larger companies tend to focus on providing polished products to customers rather than providing core, as-cut and as-ground products.

We believe that the key competitive factors in our markets are:

 

   

consistently producing high-quality products in the desired size, orientation and finish;

 

   

driving innovation through focused research and development efforts;

 

   

possessing sufficient supply capacity to meet end-market customer demands;

 

   

offering solutions through collaborative efforts with customers;

 

   

pricing; and

 

   

providing a low total cost-of-ownership for customers.

Although we face significant competition, we believe that our proprietary ES2 crystal growth technology, our fabrication and polishing capabilities and our business practices allow us to compete effectively on all of the above factors.

ENVIRONMENTAL REGULATION

In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of federal, state and local laws regulating the discharge of these materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions, whether intentional or inadvertent, could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, which could have a material adverse effect on our business.

 

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EMPLOYEES

As of December 31, 2013, we had 292 full-time employees, of which 264 work in technology and operations. None of our employees are represented by a labor union. We consider our employee relations to be good.

OTHER INFORMATION

You may access, free of charge, our reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) indirectly through our Internet website (www.rubicontechnology.com). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Alternatively, if you would like a paper copy of any such SEC report (without exhibits) or document, write to Investor Relations, Rubicon Technology, Inc., 900 East Green Street, Bensenville, Illinois 60106, and a copy of such requested document will be provided to you, free of charge. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

 

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ITEM 1A.  RISK FACTORS

You should carefully read the risk factors set forth below, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. Our business is subject to a number of important risks and uncertainties, some of which are described below. The risks described below, however, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business operations. Any of these risks may have a material adverse effect on our business, financial condition, results of operations and cash flows. Please refer to the discussion of “forward-looking” statements on page one of this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may affect future results described below.

Our results of operations, financial condition and business will be harmed if we are unable to effectively match our capacity with customer demand.

The markets we serve are emerging markets. As a result, there can be significant fluctuations in demand for our products, which may result in our manufacturing facilities being underutilized from time to time, which can negatively impact our gross margins and overall business. Currently, there is limited demand for six-inch sapphire wafers. As a result, we currently are not fully utilizing our manufacturing facilities. We expect this underutilization of some of our manufacturing facilities to continue into the first half of 2014. There can be no assurance that such sudden market changes will not occur again in the future adversely affecting our profitability.

We plan to continue to expand our production capacity as demand for our products strengthens. Our capacity expansion involves significant risks, including the availability of capital equipment and the timing of its installation, availability and timing of required electric power, management of expansion costs, timing of production ramp-up, qualification of our new equipment and demands on management’s time. If our business does not grow fast enough to utilize this new capacity effectively, our business and financial results could be adversely affected. Conversely, delays in expanding our manufacturing capacity could impact our ability to meet future demand for our products. As a result, we might not be able to fulfill customer orders in a timely manner, which could adversely affect our customer relationships and operating results. Moreover, our efforts to increase our production capacity may not succeed in enabling us to manufacture the required quantities of our products in a timely manner or at the gross margins that we achieved in the past. There can be no assurance that we will be able to successfully reach our production, timing and cost goals for our expansion.

We have incurred significant losses in prior periods and may incur losses in the future.

We have incurred significant losses in prior periods. As of December 31, 2013, we had an accumulated deficit of $127.6 million. While we had net income of $38.1 million in 2011 and $29.1 million in 2010, we incurred net losses of $30.4 million, $5.5 million, $9.6 million and $2.9 million in 2013, 2012, 2009 and 2007, respectively. There can be no assurance that we will have sufficient revenue growth to offset expenses or to achieve profitability in future periods.

The average selling prices of products in the LED supply chain have historically been volatile.

Historically, our industry has experienced volatility in product demand and pricing. Changes in average selling prices of our products as a result of competitive pricing pressures, increased sales discounts and new product introductions by our competitors could have a significant impact on our profitability. Although we attempt to optimize our product mix, introduce new products, reduce manufacturing costs and pass along certain increases in costs to our customers in order to lessen the effect of decreases in selling prices, we may not be able to successfully do so in a timely manner and our results of operations and business may be harmed. In addition, rapid changes in market conditions have, at times, caused financial hardship for our customers, resulting is some write-offs of our accounts receivable. While we monitor the financial health of our customers, rapid changes in market conditions may result in additional accounts receivable write-offs in the future which could affect our results of operations.

 

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If LED lighting does not achieve greater market acceptance, or if alternative technologies are developed and gain market traction, prospects for our growth and profitability would be limited.

Our future success largely depends on increased market acceptance of LED lighting. Approximately 59% and 49% of our revenue during 2013 and 2012, respectively, was from sales of our products for use in the manufacture of LED products. Potential customers for LED lighting systems may be reluctant to adopt LED lighting as an alternative to traditional lighting technology because of its higher initial cost and relatively low light output per unit in comparison with the most powerful traditional lighting devices. In addition, our potential customers may have substantial investments and know-how related to their existing lighting technologies, and may perceive risks relating to the novelty, complexity, reliability, quality, usefulness and cost-effectiveness of LED products compared to other lighting sources available in the market. If acceptance of LED lighting does not increase significantly, then opportunities to increase our revenues and operate profitably would be limited.

Moreover, if effective new sources of light other than LED devices are developed, our current products and technologies could become less competitive or obsolete. Any of these factors could have a material and adverse impact on our growth and profitability.

If the acceptance of newly developed products does not meet our expectations, or our efforts to enhance existing products are not successful, our future operating results may be harmed.

The development of new products may require substantial investment in development efforts and equipment. If our newly developed products, such as our PSS product line, do not achieve market acceptance, we may be unable to generate anticipated revenue and our operating results could be harmed.

Our continuing efforts to enhance our current products and to develop new products involve several risks, including:

 

   

our ability to anticipate and respond in a timely manner to changes in customer requirements;

 

   

the significant research and development and equipment investment that we may be required to make before market acceptance of a particular new or enhanced product;

 

   

the possibility that the industry may not accept our new or enhanced products after we have invested a significant amount of resources in development; and

 

   

competition from new technologies, processes and products introduced by our current and/or future competitors.

The technology used in the LED industry continues to change rapidly, and if we are unable to modify our products to adapt to future changes in the LED industry, we will be unable to attract or retain customers.

We do not design or manufacture LEDs. Our ability to expand into new applications in the LED market depends on continued advancement in the design and manufacture of LEDs by others. The LED industry has been characterized by a rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater functionality. Our future success will depend on our ability to develop new products for use in LED applications and to adjust our product specifications, such as our previous development of larger diameter wafers, in response to these developments in a timely manner. If our development efforts are not successful or are delayed, or if our newly developed products, such as PSS, do not achieve market acceptance, we may be unable to attract or retain customers and our operating results could be harmed. In addition, although sapphire is currently the preferred substrate material for HB white, blue and green LED applications, we cannot assure you that the LED market will continue to demand the performance attributes of sapphire. Silicon carbide is another substrate material currently used for certain LED applications, including some that also use sapphire substrates. Other substrates being investigated and used in research and development for certain LED applications are silicon, aluminum nitride, zinc oxide and bulk gallium nitride. If sapphire is displaced as the substrate of choice for certain LED applications, our financial condition and results of operations would be materially and adversely affected unless we were able to successfully offer the competing substrate material.

 

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If the development and acceptance of our products for the SoS RFIC market do not meet our expectations, our future operating results may be harmed.

The level of market acceptance of our SoS RFIC products may impact our future operating results. Our success in the SoS RFIC market depends on a number of factors, including the success of our customers’ products in current applications and the acceptance of SoS RFIC products for newly targeted applications.

In addition, it is possible that other solutions, such as silicon-on-insulator, may become preferred over SoS. We cannot assure you that the RFIC market will continue to require the performance attributes of SoS solutions. If our products are not accepted more broadly in the RFIC market, our results of operations and business may be harmed.

We depend on a few customers for a major portion of our sales and our results of operations would be adversely impacted if they reduced their order volumes.

Historically, we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a small number of customers. In 2013 and 2012, our top two customers accounted for approximately 44% and 67% of our revenue, respectively. If we were to lose one of our major customers or have a major customer significantly reduce its volume of business with us, our revenues and profitability would be materially reduced unless we are able to replace such demand with other orders promptly. We expect to continue to be dependent on our significant customers, the number and identity of which may change from period to period.

In addition, we generally sell our products on the basis of purchase orders. Delays in product orders could cause our quarterly revenue to vary significantly. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, natural disasters, delays in manufacturing their own product offerings into which our products are incorporated, securing other sources for the products that we manufacture or developing such products internally.

We are subject to risks from international sales that may harm our operating results.

In 2013 and 2012, revenue from international sales was approximately 89% and 83%, respectively, of our total revenue. We expect that revenue from international sales will continue to constitute a significant portion of our total revenue for the foreseeable future. Our international sales are subject to a variety of risks, including risks arising from:

 

   

trading restrictions, tariffs, trade barriers and taxes;

 

   

differing intellectual property laws;

 

   

economic and political risks, wars, acts of terrorism, political unrest, pandemics, such as a recurrence of the SARS outbreak or avian flu, boycotts, curtailments of trade and other business restrictions;

 

   

the difficulty of enforcing contracts and collecting receivables through some foreign legal systems;

 

   

unexpected changes in regulatory requirements and other governmental approvals, permits and licenses;

 

   

import and export restrictions;

 

   

sales variability as a result of transacting our foreign sales in U.S. dollars as prices for our products become less competitive in countries with currencies that are low or are declining in value against the U.S. dollar and more competitive in countries with currencies that are high or increasing in value against the U.S. dollar; and

 

   

periodic foreign economic downturns.

Our future success will depend on our ability to anticipate and effectively manage these and other risks associated with our international sales. Our failure to manage any of these risks could harm our operating results.

 

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Our manufacturing processes may be interrupted or our production may be delayed if we cannot maintain sufficient electrical supply, which could adversely affect our business, financial condition and operating results.

Our manufacturing process requires a stable source of electricity. From time to time, we have experienced limited disruptions in our supply of electricity. Such disruptions, depending upon their duration, could result in a significant drop in throughput and yield of in-process crystal boules and create delays in our production. Although we use generators and other back-up sources of electricity, these replacement sources of electricity are only capable of providing effective back-up for limited periods of time. We cannot assure you that we will be successful in avoiding future disruptions in power or in mitigating the effects of such disruptions. Any material disruption in electrical supply could delay our production and could adversely affect our business, financial condition and operating results.

Our gross margins and profitability may be adversely affected by energy costs.

Most of our power consumption takes place in our crystal growth facilities in the U.S. Electricity prices could increase due to overall changes to the price of energy due to conditions in the Middle East, natural gas shortages in the U.S. and other economic conditions and uncertainties regarding the outcome and implications of such events. Once our current agreements expire, if electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect our gross margins and results of operations.

Our contracts for electricity require us to purchase certain minimum amounts in order to retain the pricing under the contract. If the amount we use is less than the required minimum, the difference is resold at the then prevailing market price and, if the resale price is lower than our contract price, we will experience a loss on that resale, which could adversely affect our gross margins and operating results.

Our future operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results for particular periods to fall below expectations.

Our revenues and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:

 

   

timing of orders from and shipments to major customers;

 

   

the gain or loss of significant customers;

 

   

fluctuations in gross margins as a result of changes in capacity utilization, product mix or other factors;

 

   

market acceptance of our products and our customers’ products;

 

   

our ability to develop, introduce and market new products and technologies on a timely basis;

 

   

the need to pay higher labor costs as we grow;

 

   

announcements of technological innovations, new products or upgrades to existing products by us or our competitors;

 

   

competitive market conditions, including pricing actions by our competitors and our customers’ competitors;

 

   

developments in trade secrets, patent or other proprietary rights by us or our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

 

   

interruption of operations at our manufacturing facilities or the facilities of our suppliers;

 

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the level and timing of capital spending of our customers;

 

   

additions or departures of key personnel;

 

   

potential seasonal fluctuations in our customers’ business activities; and

 

   

natural disasters, such as floods, hurricanes and earthquakes, as well as interruptions in power supply resulting from such events or due to other causes.

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. If our revenues or operating results fall below the expectations of investors or any securities analysts that may publish research on our company, the price of our common stock would likely decline.

Our gross margins could decline as a result of changes in our product mix and other factors, which may adversely impact our operating results.

We anticipate that our gross margins will fluctuate from period to period as a result of the mix of products that we sell in any given period. If our sales mix shifts to lower margin products in future periods, our overall gross margin levels and operating results would be adversely impacted. Increased competition and the adoption of alternatives to our products, more complex engineering requirements, lower demand and other factors may lead to a further downward shift in our product margins, leading to price erosion and lower revenues for us in the future.

Our proprietary intellectual property rights may not adequately protect our products and technologies, and the failure to protect such rights could harm our competitive position and adversely affect our operating results.

To protect our technology, we have chosen to rely primarily on trade secrets rather than seeking protection through publicly filed patents. Trade secrets are inherently difficult to protect. While we believe we use reasonable efforts to protect our trade secrets, our directors, employees, consultants or contractors may unintentionally or willfully disclose our information to competitors, whether during or after the termination of their services to our company. If we were to seek to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable.

In addition, courts outside the U.S. are sometimes less willing to protect trade secrets than U.S. courts. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to protect our intellectual property and our business could be harmed.

We have five issued patents covering our products and technologies and twelve patent applications pending. There can be no assurance that our pending patents will be issued or that any patents issued will be of significant value to our business. Our commercial success will depend on obtaining and maintaining trade secret, patent and other intellectual property protection of our products and technologies. We will only be able to protect products and technologies from unauthorized use by third parties to the extent that valid, protectable and enforceable trade secrets, patents or other intellectual property rights cover them.

If we are not able to defend the trade secret or patent protection positions of our products and technologies, then we may not be able to successfully compete with competitors developing or marketing competing products and we may not generate enough revenue from product sales to justify the cost of development of our products and to achieve or maintain profitability.

 

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The protection of our intellectual property rights and the defense of claims of infringement against us by third parties may subject us to costly litigation.

Other companies might allege that we are infringing certain of their patents or other rights. If we are unable to resolve these matters satisfactorily, or to obtain licenses on acceptable terms, we may face litigation. Any litigation to enforce patents issued to us, to protect trade secrets or know-how possessed by us or to defend us or indemnify others against claimed infringement of the rights of others could have a material adverse effect on our financial condition and operating results. Regardless of the validity or successful outcome of any such intellectual property claims, we may need to expend significant time and expense to protect our intellectual property rights or to defend against claims of infringement by third parties, which could have a material adverse effect on us. If we lose any such litigation where we are alleged to infringe the rights of others, we may be required to:

 

   

pay substantial damages;

 

   

seek licenses from others; or

 

   

change, or stop manufacturing or selling, some or all of our products.

Any of these outcomes could have an adverse effect on our business, results of operations or financial condition.

The markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, more established and better capitalized than we are.

The markets for selling high-quality sapphire products are very competitive and have been characterized by rapid technological change. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business, operating results and financial condition.

Some of our competitors and potential competitors are substantially larger and have greater financial, technical, marketing and other resources than we do. Given their capital resources, the large companies with which we compete, or may compete in the future, are in a better position to substantially increase their manufacturing capacity and research and development efforts or to withstand any significant reduction in orders by customers in our markets. Such larger companies typically have broader product lines and market focus and thus are not as susceptible to downturns in a particular market. In addition, some of our competitors have been in operation much longer than we have and therefore may have more long-standing and established relationships with our current and potential domestic and foreign customers.

We would be at a competitive disadvantage if our competitors bring their products to market earlier, if their products are more technologically capable than ours, or if any of our competitors’ products or technologies becomes preferred in the industry. Moreover, we cannot assure you that existing or potential customers will not develop their own products, or acquire companies with products that are competitive with our products. Any of these competitive threats could have a material adverse effect on our business, operating results or financial condition.

We are dependent on the continued services and performance of our senior management, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future success is dependent on the continued services and continuing contributions of our senior management who must work together effectively in order to design our products, expand our business, increase our revenues and improve our operating results. The loss of services of senior management, particularly Raja M. Parvez, our president and chief executive officer, and William F. Weissman, our chief financial officer, could significantly delay or prevent the achievement of our development and strategic objectives. In addition, key

 

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personnel may be distracted by activities unrelated to our business. The loss of the services, or distraction, of our senior management for any reason could adversely affect our business, operating results and financial condition.

If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.

Our success depends on our continued ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, manufacturing, administrative and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. In particular, we may encounter difficulties in recruiting and retaining a sufficient number of qualified technical personnel. The inability to attract and retain necessary technical, managerial, manufacturing, administrative and sales and marketing personnel could harm our ability to obtain new customers and develop new products and could adversely affect our business and operating results.

We rely on a limited number of suppliers for raw materials and key components.

We depend on a small number of suppliers for certain raw materials, components, services and equipment used in manufacturing our products, including key materials such as aluminum oxide and certain furnace components. We generally purchase these items with purchase orders, and we have no guaranteed supply arrangements with such suppliers. We are subject to variations in the cost of raw materials and consumables from period to period. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us or do so on a timely basis. In addition, some of these suppliers are located in regions of the world that may experience periods of political or economic instability, which could inhibit their ability to supply necessary materials to us.

Any significant delay in product delivery or other interruption or variation in supply from our key suppliers could prevent us from meeting demand for our products and from obtaining future business. If we were to lose key suppliers or our key suppliers were unable to support our demand, our manufacturing operations could be interrupted and we could be required to attempt to establish supply arrangements with other suppliers. In addition, the inability of our suppliers to support our demand could be indicative of a marketwide scarcity of the materials, which could result in even longer interruptions. Any such delay or interruption would impair our ability to meet our customers’ needs and, therefore, could damage our customer relationships and have a material adverse effect on our business and operating results.

Our products must meet exacting specifications and undetected defects may cause customers to return or stop buying our products.

Our customers establish demanding specifications for quality, performance and reliability that our products must meet. While we inspect our products before shipment, they still may contain undetected defects. If defects occur in our products, we could experience lost revenue, increased costs, delays in, or cancellations or rescheduling of orders or shipments, product returns or discounts, or damage to our reputation, any of which would harm our operating results and our business.

We are subject to numerous environmental laws and regulations, which could expose us to environmental liabilities, increase our manufacturing and related compliance costs or otherwise adversely affect our business and operating results.

In our manufacturing process, we use water, oils, slurries, acids, adhesives and other industrial chemicals. We are subject to a variety of foreign, federal, state and local laws and regulations governing the protection of the environment. These environmental laws and regulations include those relating to the use, storage, handling, discharge, emission, disposal and reporting of toxic, volatile or otherwise hazardous materials used in our manufacturing processes. These materials may have been or could be released into the environment at properties

 

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currently or previously operated by us, at other locations during the transport of the materials, or at properties to which we send substances for treatment or disposal. If we were to violate or become liable under environmental laws and regulations or become non-compliant with permits required at some of our facilities, we could be held financially responsible and incur substantial costs, including investigation and cleanup costs, fines and civil or criminal sanctions, third-party property damages or personal injury claims. In addition, new laws and regulations or stricter enforcement of existing laws and regulations could give rise to additional compliance costs and liabilities.

Our operations are concentrated in a small number of nearby facilities, and the unavailability of one or more of these facilities could harm our business.

Our manufacturing, research and development, sales and marketing, and administrative activities are concentrated in three facilities in the Chicago metropolitan area and one facility in Penang, Malaysia. Should a natural disaster, such as a tornado or flood, act of terrorism, war or outbreak of disease severely affect the Chicago area, our operations could be significantly impacted. We may not be able to replicate the manufacturing capacity and other operations of our Chicago facilities in our Malaysian facility or elsewhere, or such replication could take significant time and resources to accomplish. The disruption from such an event could adversely affect or interrupt entirely our ability to conduct our business. Similarly, should a disruption from such an event occur at our Malaysia facility, the disruption could adversely affect or interrupt our ability to conduct our business.

We may acquire other businesses, products or technologies; if we do, we may be unable to integrate them with our business effectively or at all, which may adversely affect our business, financial condition and operating results.

If we find appropriate opportunities, we may acquire complementary businesses, product lines or technologies. However, if we acquire a business, product line or technology, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing development of our business. Further, the acquisition of a business may result in the assumption of unknown liabilities or create risks with respect to our existing relationships with suppliers and customers. If we make acquisitions, we may issue shares of stock that dilute other stockholders, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which may adversely affect our business, financial condition or operating results.

Our ability to comply with the required payments and financial covenant in our loan agreement depends primarily on our ability to generate sufficient operating cash flow.

Our ability to comply with the financial covenant under our loan agreement with Silicon Valley Bank will depend primarily on our success in generating sufficient operating cash flow and receivables. Under the loan agreement, we are required to maintain a specified ratio of (i) unrestricted cash plus net billed accounts receivable to (ii) obligations under the loan agreement plus current liabilities, which ratio is tested on a quarterly basis. Industry conditions and financial, business and other factors, including those we identify as risk factors in this and our other reports, will affect our ability to generate the cash flows and receivables we need to meet those requirements. Our failure to meet the requirements could result in a default and acceleration of repayment of the indebtedness under the credit facility. In such event, the bank would be entitled to stop extending credit to us, which will hinder our ability to operate, and would proceed against the collateral securing the indebtedness, which includes substantially all of our personal property (other than intellectual property assets).

 

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We may require additional capital to fund additional product research and development efforts and the introduction of new products. If we are unable to raise additional capital when needed, we may be forced to delay, reduce or eliminate our product research and development programs or delay the introduction of new products.

Developing advanced electronic materials and related products and introducing new products to the market can be expensive. We expect our research and development expenses to increase in connection with our ongoing product research and development plans. If we are required to conduct additional studies beyond those that we currently expect, our expenses could increase beyond what we currently anticipate and the timing of the release of any new products may be delayed. In addition, introducing newly developed products to the market often requires investment before revenue is generated from those products. We currently have no commitments or arrangements for any additional financing to fund our product research and development programs other than through our loan facility. We believe our existing cash, cash equivalents and short-term investments and interest thereon, will be sufficient to fund our projected operating requirements for at least the next twelve months. However, we may need to raise substantial additional capital in the future to complete the development and commercialization of our new products.

We may finance future cash needs for new product research and development or product introductions through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our product research and development programs. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through corporate collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our new products or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section, and under similar headings in this document. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

   

the initiation, progress, timing, costs and results of studies and trials required for our new products;

 

   

the number and characteristics of new products that we pursue;

 

   

the terms and timing of any future collaboration, licensing or other arrangements that we may establish;

 

   

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

   

the effect of competing technological and market developments;

 

   

the cost of establishing sales, marketing and distribution capabilities for any new products; and

 

   

the extent to which we acquire or invest in businesses, products or technologies.

 

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Our U.S. net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

We have significant U.S. net operating loss carryforwards (the “Tax Attributes”). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended (the “IRC”). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. We may experience a change in ownership in the future as a result of changes in our stock ownership that are beyond our control, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our Tax Attributes. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

The price of our common stock has fluctuated substantially and may continue to do so.

From our initial public offering through March 7, 2014, the trading price of our common stock has ranged from a low of $2.50 to a high of $35.90.

Factors related to our company and our business, as well as broad market and industry factors, may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price include, among other things:

 

   

changes in market valuations of other companies in our industry;

 

   

changes in financial guidance or estimates by us, by investors or by any financial analysts who might cover our stock or our industry;

 

   

our ability to meet the performance expectations of financial analysts or investors;

 

   

announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;

 

   

general market and economic conditions; and

 

   

the size of the public float of our stock.

Fluctuations caused by factors such as these may negatively affect the market price of our common stock. In addition, the other risks described elsewhere in this document could adversely affect our stock price.

Our Board of Directors does not intend to declare or pay any dividends to our stockholders in the foreseeable future.

The declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors the Board of Directors considers relevant. There is no plan to pay dividends in the foreseeable future, and if dividends are paid, there can be no assurance with respect to the amount of any such dividend.

The concentration of our capital stock ownership with the affiliates of one of our directors will limit your ability to influence corporate matters.

One of our directors, together with affiliates he controls, owns in the aggregate approximately 21% of our outstanding capital stock and voting power. For the foreseeable future, they will have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of

 

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directors and significant corporate transactions, such as a merger or other sale of our company or our assets. Their ownership may limit your ability to influence corporate matters and, as a result, the market price of our common stock could be adversely affected.

We could be the subject of securities class action litigation due to future stock price volatility.

The stock market in general, and market prices for the securities of companies like ours, has experienced extreme volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. When the market price of a stock declines significantly, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, our defense of the lawsuit could be costly and divert the time and attention of our management.

Our certificate of incorporation, bylaws and Delaware law may discourage takeovers and business combinations that our stockholders might consider in their best interests.

A number of provisions in our certificate of incorporation and bylaws, as well as anti-takeover provisions of Delaware law, may have the effect of delaying, deterring, preventing or rendering more difficult a change in control of Rubicon that our stockholders might consider in their best interests. These provisions include:

 

   

establishment of a classified board of directors;

 

   

granting to the board of directors sole power to set the number of directors and to fill any vacancy on the board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

limitations on the ability of stockholders to remove directors;

 

   

the ability of our board of directors to designate and issue one or more series of preferred stock without stockholder approval, the terms of which may be determined at the sole discretion of the board of directors;

 

   

prohibition on stockholders from calling special meetings of stockholders;

 

   

prohibition on stockholders from acting by written consent; and

 

   

establishment of advance notice requirements for stockholder proposals and nominations for election to the Board of Directors at stockholder meetings.

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

The foregoing provisions of our certificate of incorporation and bylaws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

Our executive, research and development and manufacturing functions are located on properties that we lease or own. We lease properties in Franklin Park, Illinois and Bensenville, Illinois. These facilities total approximately 102,600 square feet in seven buildings, which includes 30,000 square feet in our Bensenville, Illinois facility. The leases for these facilities terminate from July 2014 through July 2015. We own a 134,400 square foot facility in Batavia, Illinois. We also own a 65,000 square foot facility in Penang, Malaysia, which processes sapphire grown by us in our Illinois facilities into finished cores and wafers.

 

ITEM 3. LEGAL PROCEEDINGS

From time to time we may be named in claims arising in the ordinary course of business. Currently, there are no legal proceedings or claims pending against us or involving us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business or financial condition.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the NASDAQ Global Market under the symbol “RBCN” on November 16, 2007. The following table sets forth the high and low sales prices for our common stock as reported on the NASDAQ Global Market for the periods indicated:

 

     High      Low  

Fiscal year ended December 31, 2013

     

First Quarter

   $ 6.97       $ 4.83   

Second Quarter

   $ 9.05       $ 5.91   

Third Quarter

   $ 13.78       $ 7.73   

Fourth Quarter

   $ 11.82       $ 8.38   

 

     High      Low  

Fiscal year ended December 31, 2012

     

First Quarter

   $ 13.59       $ 8.20   

Second Quarter

   $ 10.92       $ 8.46   

Third Quarter

   $ 11.57       $ 8.28   

Fourth Quarter

   $ 9.96       $ 5.82   

Holders

As of March 7, 2014, our common stock was held by approximately 27 stockholders of record and there were 25,765,795 shares of our common stock outstanding.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings to finance the growth and development of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration, payment and amount of any future dividends will be made at the discretion of our Board of Directors.

 

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Performance Graph

The graph below matches Rubicon Technology, Inc.’s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite Index and the RDG Technology Composite Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2008 to December 31, 2013.

 

LOGO

 

     12/31/08      12/31/09      12/31/10      12/31/11      12/31/12      12/31/13  

Rubicon Technology, Inc

     100.00         476.76         494.84         220.42         143.43         233.57   

NASDAQ Composite

     100.00         144.88         170.58         202.69         199.99         283.39   

RDG Technology Composite

     100.00         160.94         181.64         220.06         208.18         274.77   

The stock price performance reflected in this graph is not necessarily indicative of future stock price performance.

Recent Sales of Unregistered Securities

None.

 

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Issuer Purchases of Equity Securities

In August 2011, we announced a repurchase plan approved by our Board of Directors authorizing the purchase of up to $25.0 million of our outstanding common stock over a period of two years. The stock repurchase program authorized us to purchase shares of our common stock in the open market at times and prices considered appropriate by us depending upon prevailing market conditions and other corporate considerations. There were no purchases made during the year ended December 31, 2013. The plan expired in 2013.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere herein. The consolidated balance sheet data as of December 31, 2013 and 2012 and the consolidated statements of operations data for the years ended December 31, 2013, 2012 and 2011 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the U.S. The consolidated balance sheet data as of December 31, 2011, 2010 and 2009 and the consolidated statements of operations data for the years ended December 31, 2010 and 2009 have been derived from our audited consolidated financial statements, which are not included in this Form 10-K.

SELECTED CONSOLIDATED FINANCIAL DATA

 

     Year ended December 31,  
     2013     2012     2011     2010      2009  
     (In thousands, other than share and per share data)  

Consolidated statements of operations data:

           

Revenue

   $ 41,513      $ 67,243      $ 134,000      $ 77,362       $ 19,808   

Cost of goods sold

     63,434        67,283        64,365        36,205         23,427   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross (loss) profit

     (21,921     (40     69,635        41,157         (3,619

Operating expenses:

           

General and administrative

     8,629        9,018        11,336        9,883         4,811   

Sales and marketing

     1,521        1,685        1,658        1,267         1,137   

Research and development

     2,263        2,274        1,806        1,079         801   

Loss on disposal of assets

     550        19        84        234         —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     12,963        12,996        14,884        12,463         6,749   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     (34,884     (13,036     54,751        28,694         (10,368

Other (expense) income, net

     (627     450        (118     346         738   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     (35,511     (12,586     54,633        29,040         (9,630

Income tax benefit (expense)

     5,160        7,048        (16,574     71         —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (30,351   $ (5,538   $ 38,059      $ 29,111       $ (9,630
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income per common share

           

Basic

   $ (1.35   $ (0.25   $ 1.67      $ 1.34       $ (0.48

Diluted

   $ (1.35   $ (0.25   $ 1.61      $ 1.28       $ (0.48
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding used in computing net income (loss) per common share

           

Basic

     22,572,212        22,523,951        22,852,205        21,726,090         20,117,543   

Diluted

     22,572,212        22,523,951        23,596,162        22,790,896         20,117,543   
     As of December 31,  
     2013     2012     2011     2010      2009  
     (In thousands)  

Consolidated balance sheet data:

           

Cash and cash equivalents

   $ 21,071      $ 19,573      $ 4,290      $ 16,073       $ 3,860   

Working capital

     79,768        114,337        119,056        106,524         55,121   

Total assets

     202,695        248,096        259,952        206,742         101,186   

Total stockholders’ equity

     195,791        225,386        228,231        192,094         97,440   

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

OVERVIEW

We are a vertically integrated, advanced electronic materials provider specializing in monocrystalline sapphire for applications in light-emitting diodes (“LEDs”), optical systems and specialty electronic devices. The emergence of sapphire in commercial volumes at competitive prices has enabled the development of new technologies such as high brightness (“HB”) white, blue and green LEDs and highly-integrated radio frequency integrated circuits (“RFICs”). Recently, sapphire has been adopted for use in several new applications in mobile devices specifically camera lens covers, dual flashes and home buttons on certain newer model smartphones. The reason sapphire was adopted for use on the home button on certain smartphones is because of the scratch resistance and increased touch capacitance offered by sapphire, which are important characteristics to ensure the effectiveness of the fingerprint recognition security built into the device. We believe that the use of fingerprint recognition security and other biometrics could become more prevalent in the future, which could become a strong growth driver for sapphire. We apply our proprietary crystal growth technology to produce high-quality sapphire products efficiently to supply our end-markets, and we work closely with our customers to meet their quality and delivery needs.

We are a vertically-integrated manufacturer of high-quality sapphire substrates and optical windows that are used in a variety of high-growth, high-volume end-market applications. Our largest product lines are:

 

   

sapphire cores, two to six inches in diameter, which our customers further process into wafers for use in LED applications and into components such as lens covers for mobile devices;

 

   

six-inch sapphire wafers that are used as substrates for the manufacture of LED chips and to a lesser extent for other semiconductor applications such as Silicon-on-Sapphire (“SoS”) RFICs; and

 

   

Optical sapphire components in various shapes and sizes, including round and rectangular windows and blanks, domes, tubes and rods. These optical sapphire products are used in equipment for a wide variety of end markets, including defense and aerospace, medical devices, oil and gas drilling, semiconductor manufacturing and other markets.

For the LED market, we sell two to four-inch material primarily in core form and six and eight-inch material primarily in polished wafer form. Eight-inch wafers are sold primarily for customers’ research and development efforts at this time. We have the ability to produce cores and wafers of up to twelve inches in diameter to support production of chips for next-generation LED and other electronic applications. Larger sapphire also has current applications in the optical markets. In other semiconductor markets, we sell primarily six-inch wafers; our major customer in that market, however, is modifying its technology to produce its higher volume RFIC products on a substrate other than sapphire, a development which will likely significantly reduce the amount of sapphire demand from that market beginning in early 2014. Other non-LED semiconductor customers are using sapphire in research and development at this time.

We recently introduced a new product offering, patterned sapphire substrates or “PSS”. HB LED chip manufacturers etch a pattern onto the surface of the sapphire wafer in the early stages of their production process in order to improve light output. We have leveraged our capability in producing larger diameter sapphire wafers to offer pre-patterned, larger diameter (four-inch and six-inch) wafers to the LED market.

 

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We sell our products on a global basis. The Asian, Australian, North American and European markets accounted for 60%, 25%, 11% and 4%, respectively, of our revenue for the year ended December 31, 2013 and 48%, 19%, 17% and 16%, respectively, of our revenue for the year ended December 31, 2012. The Asian, North American and European markets accounted for and 87%, 9% and 4%, respectively, of our revenue for the year ended December 31, 2011. Demand from the LED market was strong though mid-year 2011, particularly in Asia where there is a high concentration of LED customers. Demand for our products from the LED market slowed in the second half of 2011 due to a slowdown in LED chip sales that resulted in a build-up of inventory in the LED supply chain, which continued throughout 2012. We experienced increased demand for our core products throughout 2013 with stronger demand from the LED general lighting market and the adoption of sapphire in newer applications like the lens cover, dual flash and home button on certain smartphones, however, improvements in pricing has been gradual. Demand for our six-inch polished wafers sold into the SoS market increased significantly in 2012, partially offsetting the decrease in sales of polished wafers sold into the LED market. However, the manufacturer of the majority of SoS chips will be introducing new products that will be produced on a substrate other than sapphire which reduced demand in the second half of 2013 and will likely significantly reduce the amount of sapphire demand from that market beginning in early 2014. We expect pricing for sapphire cores to continue to increase gradually as excess sapphire capacity in the market is absorbed by growing demand from the LED and other markets. However, we believe six-inch polished wafer prices may decline further in the near-term. We experienced limited demand for LED polished wafers in 2013, but expect increased adoption of six-inch wafers in the LED market. While we expect demand for LED chips to continue to strengthen throughout 2014 with increased adoption of LED lighting, it is difficult to predict how quickly the excess capacity will be absorbed and when the pricing environment will improve.

We currently depend on a small number of suppliers for certain raw materials, components, services and equipment, including key materials such as aluminum oxide and certain furnace components. If the supply of these components were to be disrupted or terminated, or if these suppliers were unable to supply the quantities of raw materials required, we may have difficulty in finding, or may be unable to find, alternative sources for these items. As a result, we may be unable to meet the demand for our products, which could have a material adverse impact on our business.

We manage direct sales primarily from our Bensenville, Illinois offices. Substantially all of our revenue is generated by our direct sales force and we expect this to continue in the future.

We manufacture and ship our products from our facilities in the Chicago metropolitan area and from our facility in Penang, Malaysia. We have approximately 237,000 square feet of manufacturing and office space in Batavia, Franklin Park and Bensenville, Illinois and a 65,000 square foot facility in Penang, Malaysia, which processes sapphire grown by us in our Illinois facilities into finished cores and wafers. Our Malaysia facility currently finishes the majority of our core production and can produce production volumes of polished wafers. In March 2012, we acquired additional land in Batavia, Illinois to expand our crystal growth capacity. We have not yet determined when we will begin construction on this facility.

Financial operations

Revenue. Our revenue consists of sales of sapphire materials sold in core, as-cut, as-ground and polished forms in two, three, four, six and eight-inch diameters as well as optical materials sold as blanks or polished windows. Products are made to varying specifications, such as crystal planar orientations and thicknesses. We recognize research and development revenue in the period during which the related costs are incurred.

We have focused on increasing sales of larger diameter substrates, which we define as three inch or greater in diameter, as they generally yield higher gross margins. For the year ended December 31, 2011, we experienced a significant increase in revenue in large diameter polished product lines as one of our key customers was the first LED chip maker to move to a larger diameter (6”) platform in high-volume production. In addition, increased pricing for our core products resulted in higher revenue from these products for the year ended

 

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December 31, 2011. However, in the fourth quarter of 2011, the LED market began softening considerably with the maturing of the LED backlighting markets, and the demand and pricing experienced a significant decrease across most product lines. The weak market conditions continued throughout 2012 and for the year ended December 31, 2012, we experienced a significant decrease in revenue from our core products on decreasing pricing as well as decreased demand for our large diameter polished product lines for the LED market. The decrease in our large diameter product lines for the LED market was partially offset by a strong SoS market. Throughout 2013, we experienced limited demand for our large diameter substrates and gradually improved pricing for our smaller diameter core products. While we expect demand for the LED chips to continue to strengthen throughout 2014 with increased adoption of LED lighting, it is difficult to predict how quickly the excess capacity will be absorbed and when the pricing environment will improve.

Historically, a substantial portion of our revenue has been derived from sales to a small number of customers. For the year ended December 31, 2013, our top two customers accounted for approximately 44% of our revenue. For the year ended December 31, 2012 our top two customers accounted for approximately 67% of our revenue and for the year ended December 31, 2011, our top three customers accounted for approximately 69% of our revenue. Other than as discussed above, none of our customers accounted for more than 10% of our revenue for such periods. Although we are attempting to diversify and expand our customer base, we expect our revenue to continue to be concentrated among a small number of customers. We expect that our significant customers may change from period to period.

We recognize revenue based upon shipping terms with our customers and from our government contract as costs and fees are incurred. Delays in product orders or changes to the timing of shipments could cause our quarterly revenue to vary significantly. We derive a significant portion of our revenue from customers outside of the U.S. In most periods, the majority of our sales are to the Asian market and we expect that region to continue to be a major source of revenue for us. All of our revenue and corresponding accounts receivable are denominated in U.S. dollars.

Cost of goods sold . Our cost of goods sold consists primarily of manufacturing materials, labor, manufacturing-related overhead such as utilities, depreciation and rent, provisions for excess and obsolete inventory reserves, idle plant, freight and warranties. We manufacture our products at our Illinois and Malaysia manufacturing facilities based on customer orders. We purchase materials and supplies to support such current and future demand. We are subject to variations in the cost of raw materials and consumables from period to period because we do not have long-term fixed-price agreements with most of our suppliers. We mitigate the potential impact of fluctuations in energy costs by entering into long-term purchase agreements. Once our current agreements expire, if electricity prices increase significantly, we may not be able to pass these price increases through to our customers on a timely basis, if at all, which could adversely affect our gross margins and results of operations. We determine our normal operating capacity and, if necessary, record as idle plant expense costs attributable to lower utilization of equipment and staff.

Gross profit.  Our gross profit has been and will continue to be affected by a variety of factors, including average sales prices of our products, product mix, our ability to reduce manufacturing costs, idle plant charges and fluctuations in the cost of electricity, raw materials and other supplies.

General and administrative expenses.  General and administrative expenses (“G&A”) consist primarily of salaries and associated costs for employees in finance, human resources, information technology and administrative activities, as well as charges for outside accounting, legal and insurance fees and stock-based compensation.

Sales and marketing expenses.  Sales and marketing expenses consist primarily of salaries and associated costs for employees engaged in sales activities, product samples, charges for participation in trade shows and travel.

 

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Research and development expenses.  Research and development (“R&D”) expenses include costs related to engineering personnel, materials and other product development related costs. R&D is expensed as incurred. We believe our R&D expenses will generally increase as we continue to develop new products.

Other income (expense).  Other income (expense) consists of interest income and expense and gains and losses on investments and currency translation.

Provision for income tax.  We account for income taxes under the asset and liability method whereby the expected future tax consequences of temporary differences between the book value and the tax basis of assets and liabilities are recognized as deferred tax assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to be recognized. Our most recent analysis of ownership changes that limit the utilization of the NOLs shows no ownership change. We believe that an updated analysis will not likely indicate an ownership change that would limit the utilization of our net operating losses and tax credits as of December 31, 2013. We will be updating our analysis in 2014 and the results of that analysis may, because of the primary stock offering in January 2014 indicate an ownership change. If an ownership change is determined, the utilization of the net operating losses and the tax credits may be limited.

A full valuation allowance is provided and no tax benefit is recorded until we can conclude that it is “more likely than not” that our deferred tax assets will be realized. Due to the losses in the fourth quarter of 2013, we are in a cumulative loss position for the past three years, which is considered significant negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. As of December 31, 2013, a valuation allowance of $9.5 million has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. tax benefits and will no longer accrue tax benefits or tax expense. During the twelve months ended December 31, 2011, we concluded at that time that based on the then current level of sustainable profitability that generates taxable income, it was more likely than not that our deferred tax assets will be realizable. We recognized a tax benefit of $3.3 million to record current and long-term deferred tax assets during the twelve months ended December 31, 2011.

The Illinois State Legislature has suspended the full use of net operating loss carryforwards for taxable years ended after December 31, 2010 and before December 31, 2011, and has limited the net operation loss deduction to $100,000 for the years ended December 31, 2012 through December 31, 2013. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated.

Stock-based compensation.  The majority of our stock-based compensation relates primarily to administrative personnel and is accounted for as a G&A expense. For the years ended December 31, 2013, 2012 and 2011, our stock-based compensation expense was $1.6 million, $2.0 million and $2.5 million, respectively.

 

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RESULTS OF OPERATIONS

The following table sets forth our statements of operations for the periods indicated:

 

     Year ended
December 31,
 
     2013     2012     2011  
     (in millions)  

Revenue

   $ 41.5      $ 67.2      $ 134.0   

Cost of goods sold

     63.4        67.3        64.4   
  

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (21.9     (0.1     69.6   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

General and administrative

     8.6        9.0        11.3   

Sales and marketing

     1.5        1.7        1.7   

Research and development

     2.3        2.3        1.8   

Loss on disposal of assets

     0.6        —         0.1   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     13.0        13.0        14.9   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (34.9     (13.1     54.7   

Other (expense) income

     (0.6     0.5        (0.1
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (35.5     (12.6     54.6   

Income tax benefit (expense)

     5.1        7.1        (16.5
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (30.4   $ (5.5   $ 38.1   
  

 

 

   

 

 

   

 

 

 

The following table sets forth our statements of operations as a percentage of revenue for the periods indicated:

 

     Year ended
December 31,
 
     2013     2012     2011  
     (percentage of total)  

Revenue

     100     100     100

Cost of goods sold

     153        100        48   
  

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (53     —         52   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

General and administrative

     21        13        8   

Sales and marketing

     4        3        1   

Research and development

     5        3        2   

Loss on disposal of assets

     1        —         —    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     31        19        11   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (84     (19     41   

Other (expense) income

     (1     —         —    
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (85     (19     41   

Income tax benefit (expense)

     12        11        (13
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (73%)        (8%)        28
  

 

 

   

 

 

   

 

 

 

 

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Comparison of years ended December 31, 2013 and 2012

Revenue. Revenue was $41.5 million for the year ended December 31, 2013 and $67.2 million for the year ended December 31, 2012, a decrease of $25.7 million. In 2013, we experienced higher revenue from the sale of sapphire cores, which are sold into the LED market, of $13.5 million, of which $16.3 million was attributed to higher volume partially offset by a decrease of $2.8 million that was attributed to lower pricing. We experienced a decrease in revenue from our wafer products sold to the LED and SoS markets. Revenue from sales of our polished wafers decreased by $38.3 million, which was the result of $21.7 million lower sales of polished wafers to the LED market as well as a $16.6 million decrease in polished wafers sold to the SoS market. Of the $38.3 million reduction in revenue from polished wafers, $1.0 million was attributable to lower prices and $37.2 million was attributable to lower volume. We also experienced lower optical revenue of $1.2 million due to the decrease in sales for sensor and instrumentation applications. We experienced an increase in research and development revenue of $234,000 on our contract with the Air Force Research Laboratory. Revenue with respect to this contract was recorded as costs were incurred as well as a portion of the fixed fee for the year ended December 31, 2013 and 2012. The contract will continue for a duration of three years and the total value of the contract is $4.7 million.

Demand for our core products increased throughout 2013 with stronger demand from the LED general lighting market and the adoption of sapphire in newer applications like the lens cover, dual flash and home button on certain smartphones. As a result, pricing gradually increased for our core products in the second half of 2013. We expect pricing for sapphire cores to remain steady in the first quarter of 2014 and then begin to slowly increase as excess sapphire capacity in the market continues to be absorbed by growing demand from the LED and other markets. We continued to experience limited demand for LED polished wafers during 2013 but expect increased adoption of six-inch wafers in the LED market. We have also recently begun offering four-inch polished wafers and four and six-inch patterned wafers which we expect to generate additional wafer revenue in 2014. The manufacturer of the majority of SoS chips will be introducing new products that will be produced on a substrate other than sapphire starting early 2014, therefore the amount of wafers sold into that market will be significantly reduced beginning in 2014. We operate in an extremely volatile market, so the amount of price or volume change is difficult to predict.

Gross loss.  Gross loss was $21.9 million and $40,000 for the years ended December 31, 2013 and 2012, respectively, an increased loss of $21.9 million. The increase in gross loss is primarily due to a reduction in revenue, which in turn is attributable to decreased demand of our higher margin wafer sales as well as lower utilization of our production facilities. For the years ended December 31, 2013 and 2012, we determined we were not operating at capacity and recorded costs associated with the lower utilization of equipment and staff of $13.2 million and $1.9 million, respectively.

General and administrative expenses.  G&A expenses were $8.6 million for the year ended December 31, 2013 and $9.0 million for the year ended December 31, 2012, a decrease of $389,000. In 2013, we experienced lower consulting fees of $430,000 and lower travel expenses of $93,000, partially offset by an increase in legal expenses of $103,000.

Sales and marketing expenses.  Sales and marketing expenses were $1.5 million and $1.7 million for the years ended December 31, 2013 and 2012, a decrease of $164,000. The decrease is attributable to a decrease in employee compensation.

Research and development expenses.  R&D expenses were $2.3 million for the years ended December 31, 2013 and 2012, a decrease of $11,000. We experienced a decrease in employee compensation costs offset by an increase in spending on certain R&D projects.

Other income (expense).  Other expense was $627,000 for the year ended December 31, 2013 and other income was $450,000 for the year ended December 31, 2012, an increase in other expense of $1.1 million. The increase was primarily due to an increase of $932,000 from realized losses on foreign currency translation and an increase in interest expense of $95,000.

 

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Income tax benefit. Income tax benefit was $5.1 million and $7.1 million for the year ended December 31, 2013 and 2012, respectively. In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), we evaluate our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. Due to the losses in the fourth quarter of 2013, we are in a cumulative loss position for the past three years which is considered significant negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While our financial outlook remains positive, the accounting standards attribute greater weight to objective negative evidence than to subjective positive evidence, such as our projections for future growth. Based on this evaluation, as of December 31, 2013, a valuation allowance of $9.5 million has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on net deferred tax assets related to future U.S. tax benefits and will no longer accrue tax benefits or tax expense on our Consolidated Statement of Operations. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

We are evaluating the impact of the recent regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition. Given that Revenue Procedures were issued in late January 2014, we are determining whether or not any changes in an accounting method are required. Presently, we do not anticipate a material impact to our financial statements.

Comparison of years ended December 31, 2012 and 2011

Revenue. Revenue was $67.2 million for the year ended December 31, 2012 and $134.0 million for the year ended December 31, 2011, a decrease of $66.8 million. In 2012, we experienced a decrease in revenue from our products sold to the LED market. Revenue from the sale of sapphire cores, which are sold into the LED market, for the year ended December 31, 2012 decreased by $52.6 million, of which $42.3 million was attributed to lower pricing and $10.3 million was attributed to lower volume. We also experienced lower revenue from sales of our polished wafers by $14.4 million, which was the result of $36.9 million lower sales of polished wafers to the LED market offset in part by a $22.5 million increase in polished wafers sold to the SoS market. Of the $14.4 million reduction in revenue from polished wafers, $16.9 million was attributable to lower prices offset in part by an increase in volume of $2.5 million. We experienced an increase in R&D revenue of $1.2 million as we were awarded a contract with the Air Force Research Laboratory in July 2012 to produce large area sapphire slabs. Revenue with respect to this contract was recorded as costs were incurred as well as a portion of the fixed fee for the year ended December 31, 2012. The contract will continue for a duration of three years and the total value of the contract is $4.7 million. We also experienced in 2012, lower optical revenue of $1.0 million due to the decrease in sales for sensor and instrumentation applications.

Gross (loss) profit.  Gross loss was $40,000 for the year ended December 31, 2012 as compared to a gross profit of $69.6 million for the year ended December 31, 2011, a decrease of $69.6 million. The decrease in gross profit is primarily due to the reduction in revenue, which in turn is attributable to decreased pricing for our products as well as lower utilization of our production facilities attributable to the reduced demand from the LED market due to the buildup of excess inventory in the supply chain. Due to changes in customers’ product specifications an excess and obsolete inventory reserve adjustment of $719,000 was recorded for the year ended December 31, 2012, which reduced inventory and increased cost of goods sold as various items in stock were no longer in demand. In addition, pricing for our small diameter core products declined throughout 2012 and in the fourth quarter of 2012 market prices fell below our carrying cost in inventory. As a result, we recorded a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by a net of $1.5 million for the year ended December 31, 2012. In addition, given the relative strength of the six-inch market, we wanted to make sure our boule inventory was capable of producing high-yield six-inch material. Consequently, we decided

 

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to recycle some boules from inventory that might have produced lower than normal six-inch yield. This added approximately $927,000 to cost of goods sold for the year ended December 31, 2012.

General and administrative expenses.  G&A expenses were $9.0 million for the year ended December 31, 2012 and $11.3 million for the year ended December 31, 2011, a decrease of $2.3 million. Our bad debt expense decreased by $1.9 million as we made accommodations for the year ended December 31, 2011 to certain key customers of our small diameter cores by agreeing to write off a portion of their accounts receivable balances that did not re-occur in 2012. We also experienced a decrease of employee compensation costs of $385,000, resulting from a lower performance based bonus expense. In 2012, we also experienced higher legal expenses of $488,000, offset partially by lower consulting expenses of $268,000 and lower recruiting expenses of $102,000.

Sales and marketing expenses.  Sales and marketing expenses were $1.7 million for the years ended December 31, 2012 and 2011. A slight increase of $27,000 in sales and marketing expenses is attributable to additional employee compensation costs, primarily due to annual salary increases and employee stock options expense.

Research and development expenses.  R&D expenses were $2.3 million for the year ended December 31, 2012 and $1.8 million for the year ended December 31, 2011, an increase of $468,000. The increase is attributable to higher employee compensation costs of $204,000 related to increased headcount and salary increases, an increase in spending on research projects of $186,000 and an increase in travel of $77,000.

Other income (expense).  Other income was $450,000 for the year ended December 31, 2012 and other expense was $118,000 for the year ended December 31, 2011, an increase in other income of $568,000. The increase was primarily due to an increase of $719,000 from realized gains on foreign currency translation partially offset by a $159,000 decrease in interest income on lower investment balances.

Income tax benefit (expense). Income tax benefit was $7.1 million for the year ended December 31, 2012 as compared to an income tax expense of $16.5 million for the year ended December 31, 2011. Our projected effective tax rate, while in a profit operating mode, is 30% to 35%; however, the rate of tax benefit accrued while in a loss mode will typically be higher and will vary based on the distribution of activity between our U.S. and Malaysia operations.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded our operations using a combination of issuances of common stock and cash generated from our operations. On January 2, 2013, we entered into a three-year term agreement with a bank to provide us with a senior secured credit facility of $25.0 million. The agreement provides for us to borrow up to 80% of eligible accounts receivable and up to 35% for domestically held raw material and finished goods inventory. Advances against inventory are limited to 40% of the aggregate outstanding on the revolving line of credit and $10.0 million in aggregate. We have the option to borrow at an interest rate of LIBOR plus 2.75% or the Wall Street Journal prime rate prime rate plus 0.50%. If we maintain liquidity of $20.0 million or greater with the lending institution, then the borrowing interest rate options are LIBOR plus 2.25% or the Wall Street Journal prime rate. Unused revolving line facility fee is 0.375% per annum. The facility is secured by a first priority interest in substantially all of our personal property, excluding intellectual property. We are required to maintain an adjusted quick ratio of 1.40 to 1.00, maintain operating and other deposit accounts with the bank or bank’s affiliates of 25% of our total worldwide cash, securities and investments, and we can only pay dividends or repurchase capital stock with the bank’s consent during the three year term. As of December 31, 2013 we have not yet borrowed against our debt facility.

As of December 31, 2013, we had cash and short term investments totaling $34.6 million, including cash of $5.5 million held in deposits at major banks, $15.5 million invested in money market funds and $13.6 million of short term investments including commercial paper, corporate notes and bonds, U.S. treasury securities, FDIC guaranteed certificates of deposit and common stock.

 

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Cash flows from operating activities

 

     Year ended December 31,  
     2013     2012     2011  
     (in millions)  

Net (loss) income

   $ (30.4   $ (5.5   $ 38.1   

Non-cash items:

      

Depreciation and amortization

     12.7        12.0        9.7   

Stock based compensation and other, net

     2.1        2.0        2.5   

Deferred taxes

     (5.2     (6.3     13.5   

Excess tax benefits from stock based compensation

     0.1        (0.2     (1.4
  

 

 

   

 

 

   

 

 

 

Total non-cash items:

     9.7        7.5        24.3   
  

 

 

   

 

 

   

 

 

 

Working capital:

      

Accounts receivable

     9.1        20.0        (14.0

Accounts payable

     (4.4     (4.0     3.7   

Other accruals

     (1.1     (0.4     (1.6

Inventories

     13.0        (24.2     (12.0

Prepaid expenses and other assets

     4.5        3.9        (13.9
  

 

 

   

 

 

   

 

 

 

Total working capital items:

     21.1        (4.7     (37.8
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $ 0.4      $ (2.7   $ 24.6   
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities was $412,000 for the year ended December 31, 2013. During such period, we generated a net loss of $30.4 million, which included non-cash charges of $9.7 million, and an increase in net working capital of $21.1 million. The net working capital change was comprised of a decrease in accounts receivable of $9.1 million due to an overall decreased accounts receivables balance on lower revenues, a decrease in inventory of $13.0 million as we used a significant portion of our sapphire boules stock and a decrease in accounts payable of $4.4 million due to timing of payments. We also experienced a decrease in other prepaid assets of $4.5 million, primarily related to a decrease in the purchase of furnace construction and replacement parts and items used in the polishing of wafers.

Cash used in operating activities was $2.7 million for the year ended December 31, 2012. During such period, we generated a net loss of $5.5 million, which included non-cash charges of $7.5 million, and a decrease in net working capital of $4.7 million. The net working capital change was comprised of a decrease in accounts receivable of $20.0 million due to significant collections from several key customers and an overall decreased accounts receivables balance on lower revenues, an increase in inventory of $24.2 million primarily due to an increase in our stock of raw materials and sapphire boules and a decrease in accounts payable of $4.0 million due to timing of payments. We also experienced a decrease in other prepaid assets of $3.9 million, primarily related to a decrease in the purchase of furnace construction and replacement parts and items used in the polishing of wafers.

Cash provided by operating activities was $24.6 million for the year ended December 31, 2011. During such period, we generated net income of $38.1 million, which included non-cash charges of $24.3 million, and a decrease in net working capital of $37.8 million. The decrease in net working capital was comprised of an increase in accounts receivable of $14.0 million due to timing of collections, a decrease in other accruals of $1.6 million consisting primarily of a decrease in deposits of $1.1 million from customer prepayments, an increase in prepaid expenses and other current assets of $13.9 million due to an increase in purchases of furnace construction and replacement parts for both the Illinois and Malaysia facilities, an increase in inventory of $12.0 million, which was attributed to an increase in raw materials inventory as we continued to grow our safety stock, as well as an increase in work-in-progress and finished goods inventory due to lower demand of the two and four-inch core products in the fourth quarter. This was offset by an increase in accounts payable of $3.7 million due to timing of payments.

 

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Cash flows provided by (used in) investing activities

The following table represents the major components of our cash flows from investing activities for the years ended December 31, 2013, 2012 and 2011:

 

     Year ended December 31,  
     2013     2012     2011  
     (in millions)  

Purchases of property and equipment:

      

Machinery and equipment for crystal growth

     (0.9     (5.1     (28.0

Land and building improvements

           (2.4     (5.9

Increase capacity in other areas

     (7.8     (3.5     (14.3

Proceeds from disposal of assets

     0.1        —         —    
  

 

 

   

 

 

   

 

 

 

Total purchases of property and equipment, net of proceeds from disposal of assets

     (8.6     (11.0     (48.2
  

 

 

   

 

 

   

 

 

 

Proceeds from sale of investments, net of purchases

     9.4        29.0        15.5   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   $ 0.8      $ 18.0      $ (32.7
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities was $770,000 and $18.0 million for the years ended December 31, 2013 and 2012, respectively, and net cash used in investing activities was $32.7 million for the year ended December 31, 2011. In 2013, we used approximately $7.8 million for machinery and equipment that allows us to produce patterned polished substrates at our Malaysia facility, as well as to enhance our current polishing platform in Malaysia. This was offset by proceeds from the sale of investments of $9.4 million. In 2012, we used approximately $7.5 million to continue to complete and equip our crystal growth facility in Batavia, Illinois and approximately $3.5 million to increase capacity in other areas. This was offset by sales of investments (net of purchases of investments of $5.3 million) of $29.0 million. In 2011, we used approximately $33.9 million on expansion activities for building and equipment for our crystal growth facility in Batavia, Illinois. We used approximately $14.3 million to increase capacity for post crystal growth operations, of which $10.0 million was used for continued equipment installation in our facility in Penang, Malaysia. This was partially offset by sales of investments of $25.0 million used to fund operations, capital spending and to repurchase some of our capital stock. We purchased additional investments of $9.5 million using investment earnings proceeds.

We anticipate capital expenditures in 2014 to be between $10.0 million and $15.0 million and to primarily be focused on investment in equipment to produce patterned sapphire substrates and enhance our polishing platform.

Cash flows provided by (used in) financing activities

Net cash provided by financing activities was $32,000 and $250,000 for the years ended December 31, 2013, and 2012 respectively and net cash used in financing activities was $4.0 million for the year ended December 31, 2011. Net cash provided by financing activities in 2013 was primarily the result of proceeds from the exercise of stock options of $140,000 offset by a change in the tax benefits related to stock based compensation of $114,000. Net cash provided by financing activities in 2012 was primarily the result of excess tax benefits related to stock based compensation of $160,000 and proceeds from the exercise of stock options of $72,000. Net cash used in financing activities for 2011 reflects stock repurchases of $6.5 million, partially offset by excess tax benefits related to stock based compensation of $1.4 million and proceeds from the exercise of options of $742,000.

Future liquidity requirements

We believe that our existing cash, cash equivalents, investments, anticipated cash flows from operating activities and secured credit facility will be sufficient to meet our anticipated cash needs for at least the next

 

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twelve months. In addition, on January 13, 2014, we completed a public offering of common stock in which a total of 3,047,500 shares were sold, including 397,500 shares pursuant to the full exercise of the underwriter’s over-allotment option, at a price of $10.65 per share, which resulted in our raising a total of $32.5 million in gross proceeds from the offering. Our cash needs include cash required to fund our operations, and the capital needed to fund our planned expansions in the U.S. and Asia and investments in new product development. If the assumptions underlying our business plan regarding future revenues and expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or convertible debt securities. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing or draw on our credit facility, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we are unable to obtain financing on terms favorable to us, we may be unable to successfully execute our business plan.

Contractual obligations

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments at December 31, 2013. Changes in our business needs as well as actions by third parties and other factors may cause these estimates to change. Because these estimates are complex and necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table sets forth information relating to our contractual obligations at December 31, 2013:

 

            Payments due in  
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 
     (in millions)  

Operating lease obligations

   $ 1.5       $ 1.1       $ 0.4       $ —        $ —    

Purchase obligations

     4.0         3.4         0.6         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 5.5       $ 4.5       $ 1.0       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS

None.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the risk of loss related to changes in market prices, including interest rates, of financial instruments that may adversely impact our financial position, results of operations or cash flows.

Foreign currency exchange risk.  As a result of our global operations, we are exposed to changes in foreign currency exchange rates which may adversely affect our results and financial position. Primary exposures are related to the U.S. Dollar versus the Malaysian Ringgit. While we continue to monitor this exchange risk, we are not currently entered into any foreign currency hedging transactions.

Interest rate risk.  We do not have any long-term borrowings. Our investments consist of cash, cash equivalents, investment grade commercial paper, FDIC guaranteed certificates of deposits, common stock, corporate notes and government securities. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may

 

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affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

Inflation. Our operations have not been, and we do not expect them to be, materially affected by inflation. However, historically, the prices we charge our customers are market driven, and therefore, we may not be able to increase our prices to offset any increase in our material or labor costs. Our inability or failure to do so could harm our business, financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable. Although these estimates are based on our present best knowledge of the future impact on the company of current events and actions, actual results may differ from these estimates, assumptions and judgments.

We consider to be critical those accounting policies that require our most subjective or complex judgments, which often result from a need to make estimates about the effect of matters that are inherently uncertain, and that are among the most important of our accounting policies in the portrayal of our financial condition and results of operations. We believe the following to be our critical accounting policies, including the more significant estimates and assumptions used in preparation of our financial statements.

Foreign currency translation and transactions. Rubicon Worldwide LLC’s assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates and capital accounts at historical exchange rates. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. Translation adjustments resulting from fluctuations in exchange rates for Rubicon Worldwide LLC are recorded as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.

We have determined that the functional currency of Rubicon Sapphire Technology (Malaysia) SDN BHD is the U.S. dollar. Rubicon Sapphire Technology (Malaysia) SDN BHD’s assets and liabilities are translated into U.S. dollars using the remeasurement method. Non-monetary assets are translated at historical exchange rates and monetary assets are translated at exchange rates existing at the respective balance sheet dates. Translation adjustments for Rubicon Sapphire Technology (Malaysia) SDN BHD are included in determining net income (loss) for the period. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. We record these gains and losses in other income (expense).

Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than our functional currency, which is the U.S. dollar. Gains and losses on foreign currency transactions are generally required to be recognized in the determination of net income (loss) for the period. We record these gains and losses in other income (expense).

Revenue recognition.  We recognize revenue from sales of products and billings for costs and fees from government contracts. We recognize revenue from sales of products when:

 

   

Persuasive evidence of an arrangement exists.  We require evidence of a purchase order with the customer specifying the terms and specifications of the product to be delivered, typically in the form of a signed quotation or purchase order from the customer;

 

   

Title has passed and the product has been delivered.  Title passage and product delivery generally occur when the product is delivered to a common carrier;

 

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The price is fixed or determinable.  All terms are fixed in the signed quotation or purchase order received from the customer. The purchase orders do not contain rights of cancellation, return, exchanges or refunds; and

 

   

Collection of the resulting receivable is reasonably assured.  Our standard arrangement with customers includes payment terms. Customers are subject to a credit review process that evaluates each customer’s financial position and its ability to pay. We determine collectability by considering the length of time the customer has been in business and our history of collections with that customer. If we determine that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

In July 2012, we signed a contract with the Air Force Research Laboratory to produce large-area sapphire windows on a cost plus fixed fee basis. We recognize revenue from this contract in the period during which the related costs are incurred over the contractually defined period. Our current contract will be over a period of three years.

All of our revenue is denominated in U.S. dollars.

Inventory. We value our inventory at the lower of cost or market. Market is determined based on net realizable value. Costs for raw materials are based on actual costs on a first-in, first-out basis and costs for work in process and finished goods are based on a weighted average cost basis. We establish inventory reserves when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based on customer required specifications. We evaluate the ability to realize the value of our inventory based on a combination of factors, including forecasted sales, estimated current and future market value and changes in customers’ product specifications. For the years ended December 31, 2013 and 2012, we determined we had inventory that was excess or obsolete and recorded an adjustment which reduced inventory and increased costs of goods sold by $604,000 and $719,000, respectively. We also sold our smaller diameter core material at prices lower than our cost. Based on those sales prices, we recorded at December 31, 2013 and 2012 a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $421,000 and $1.5 million, respectively. As of December 31, 2013, prices for our small diameter core products were higher than cost. Our method of estimating excess and obsolete inventory has remained consistent for all periods presented. However, if our recognition of excess or obsolete inventory is, or if our estimates of our inventory’s potential utility become, less favorable than currently expected, additional inventory reserves may be required.

There is a high degree of volatility in the markets we serve with demand for our products constantly changing. During the year ended December 31, 2012, due to the current demand of products, we decided to recycle some boules from inventory. Historically, boules put through a second growth cycle typically result in a very high-grade crystal which may result in higher yield of large diameter wafers. The recycling of boules reduced inventory and increased cost of goods sold for the year ended December 31, 2012 by $927,000.

We determine our normal operating capacity and record as expenses costs attributable to lower utilization of equipment and staff. For the years ended December 31, 2013 and 2012, we determined we were not operating at capacity and recorded costs associated with the lower utilization of equipment and staff of $13.2 million and $1.9 million, respectively. Our crystal growth operation is now operating at full capacity. The utilization of our polishing operation will also improve as we ramp up production on PSS and as we gain market share in four and six-inch polished wafers. However, until the ramp up occurs, we will incur additional adjustments for lower utilization of our polishing equipment and staff in the first half of 2014.

We value our other inventory supplies at cost, based on the purchase prices on a first- in, first out-basis. Other inventory supplies include consumable items used in the manufacturing process as well as repair and maintenance items for our machinery and equipment.

 

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Investments. We invest available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposits, common stock, corporate notes and government securities. Investments classified as available-for-sale securities are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the Consolidated Statements of Operations. Investments in which we have the ability and intent, if necessary, to liquidate in order to support our current operations are classified as short-term.

We review our available-for-sale securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification method. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded as a charge on the Consolidated Statement of Operations. As of December 31, 2013, no impairment was recorded.

Allowance for doubtful accounts.  We estimate the allowance for doubtful accounts based on an assessment of the collectability of specific customer accounts. The determination of risk for collection is assessed on a customer-by-customer basis considering our historical experience and future orders with the customer, changes in payment patterns and recent information we have about the current status of our accounts receivable balances. If we determine that a specific customer is a risk for collection, we provide a specific allowance for credit losses to reduce the net recognized receivable to the amount we reasonably believe will be collected. If a receivable is deemed uncollectible, and the account balance differs from the allowance provided, the specific amount is written off to bad debt expense. We believe that based on the customers to whom we sell and the nature of our agreements with them, our estimates are reasonable. Our method of estimating collectability has remained consistent for all periods presented and with past collections experience.

Stock-based compensation.  We grant stock-based compensation in the form of stock options, restricted stock units (“RSUs”) and restricted stock. We expense stock-based compensation based upon the fair market value on the date of grant. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model will be affected by assumptions regarding a number of complex and subjective variables. These variables include our expected stock volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, forfeitures and expected dividends.

The expected term represents the weighted-average period that our stock options are expected to be outstanding and is based upon the vesting term of our options, a review of a peer group of companies, and expected exercise behavior. Until November 2007, we were operating as a private company, and as a result, we were unable to use our actual price volatility data. Therefore, we estimated the volatility of our common stock based on volatility of similar entities over the expected term of our stock options for the years ended December 31, 2012 and 2011. In 2013, we determined we had enough historical data to use our own stock price as the basis for calculating the volatility rate. As such, we used a three year historical stock price to calculate the volatility rate used for stock options granted in the year ended December 31, 2013. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The current forfeiture rate of 19.18% was based on our past history of forfeitures.

All option grants made during 2013 and 2012 were granted at an exercise price per share equal to the closing market price of our common stock on the day before the date of the grant. Therefore, there is no intrinsic

 

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value because the exercise price per share of each option was equal to the fair value of the common stock on the date of grant. Based on the fair market value of the common stock at December 31, 2013 and 2012, there was no aggregate intrinsic value for options outstanding and exercisable.

During 2013, we granted RSUs to certain key employees. The fair value of each RSU is the market price on the date of grant and is being recorded as compensation expense ratably over the vesting terms. Each RSU granted will vest 25% at each anniversary of grant date and settle in common stock (on a one-for-one basis). The RSUs are forfeited by a participant upon termination for any reason and there is no proportionate or partial vesting in the periods between the vesting dates.

We allocate stock based compensation costs using a straight-line method which amortizes the fair value of each option on a straight-line basis over the service period. Based on the variables affecting the valuation of our common stock and the method used for allocating compensation costs, we recognized $1.6 million in stock-based compensation expense during the year ended December 31, 2013. For more information on stock-based compensation, see Note 7 – Stock Incentive Plans to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Income tax valuation allowance. Evaluating the need for and amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all the positive and negative evidence available to determine whether all or some portion of the deferred tax assets will not be realized. A valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that they will not be realized. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets, assuming that the underlying deductible differences and carryforwards are the last items to enter into the determination of future taxable income. In determining our valuation allowance, we consider the source of taxable income including taxable income in prior carryback years, future reversals of existing temporary differences, the required use of tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards. Due to the losses in the fourth quarter of 2013, we are in a cumulative loss position for the past three years which is considered significant negative evidence by the accounting standards that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While we believe our financial outlook remains positive, under the accounting standards objective verifiable evidence will have greater weight than subjective evidence such as our projections for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2013, a valuation allowance of $9.5 million has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, we expect to maintain a full valuation allowance on our U.S. net deferred tax assets. During the year ended December 31, 2011, management concluded at that time that based on the current level of sustainable profitability that generates taxable income, that it is more likely than not that our deferred tax assets will be realizable. With the release of the valuation allowance, federal and certain state and non-U.S. income taxes attributable to the fiscal year’s pre-tax income were provided for in the period. The reversal of the valuation allowance favorably impacted our effective tax rate.

Accounting for uncertainty in income taxes. We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For the years ended December 31, 2012 and 2011, we recorded a liability of $1.0 million and $363,000, respectively for uncertain tax positions. We recognize interest and/or penalties related to income tax matters in income tax expense.

 

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RECENT ACCOUNTING PRONOUNCEMENT

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . ASU No. 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our consolidated financial statements.

 

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements, together with the related notes and the report of independent registered public accounting firm, are set forth on the pages indicated in Item 15 of this Annual Report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (together, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the year covered by this report. Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed by us in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and instructions for Form 10-K, and that the information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures were effective as of December 31, 2013.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Based on its evaluation, management concluded that our internal controls over financial reporting were effective as of December 31, 2013. As required under this Item 9A, the management’s report titled

 

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“Management’s Assessment of Control Over Financial Reporting” is set forth in “Item 8 – Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.

Attestation Report of the Registered Public Accounting Firm

As required under this Item 9A, the auditor’s attestation report titled “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” is set forth in “Item 8 – Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2013 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

ITEM 9B.    OTHER INFORMATION

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Information required by Items 401, 405, 407(d)(4) and 407(d)(5) of Regulation S-K will be included under the captions “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Audit Committee” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

We have adopted a Code of Ethics that applies to all of our employees, officers and directors. A copy of the Code of Ethics is available on our website at www.rubicontechnology.com, and any waiver from the Code of Ethics will be timely disclosed on the Company’s website as will any amendments to the Code of Ethics.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K will be included under the captions “Executive Compensation” and “Director Compensation” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. The information required by Item 407(e)(4) and 407(e)(5) of Regulation S-K will be included under the captions “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance under Equity Compensation Plans

The following table represents securities authorized for issuance under our 2001 Equity Plan and our 2007 Stock Incentive Plan as of December 31, 2013.

Equity Compensation Plan Information

 

Plan Category

   Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
     Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
     Number of Securities
Remaining Available
for Future Issuances
Under the Equity
Compensation Plans
(Excluding Securities
Reflected in Column(a))
 
     (a)      (b)      (c)  

Equity compensation plans approved by security holders(1)

     1,972,011       $ 12.38         2,240,103   
  

 

 

    

 

 

    

 

 

 

 

(1) Approved before our initial public offering.

The information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 404 of Regulation S-K will be included under the caption “Certain Relationships and Related Person Transactions” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. The information required by Item 407(a) of Regulation S-K will be included under the caption “Director Independence” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item will be included under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in our proxy statement for our 2014 annual meeting of stockholders and is incorporated by reference herein. If such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed not later than the end of such 120-day period.

 

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PART IV

 

ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

(a) Financial statements. The following consolidated financial statements are filed as part of this Annual Report on Form 10-K.

 

     Page  

Management’s Report on Internal Control over Financial Reporting

     F-2    

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

     F-3    

Report of Independent Registered Public Accounting Firm

     F-4    

Consolidated Balance Sheets as of December 31, 2013 and 2012

     F-5    

Consolidated Statements of Operations for each of the three years in the period ended December  31, 2013

     F-6    

Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2013

     F-7    

Consolidated Statements Stockholders’ Equity for each of the three years in the period ended December 31, 2013

     F-8    

Consolidated Statements of Cash Flows for each of the three years in the period ended December  31, 2013

     F-9    

Notes to Consolidated Financial Statements

     F-10   

(b) Exhibits. The exhibits filed or incorporated by reference as a part of this report are listed in the Index to Exhibits which appears following the signature page to this Annual Report on Form 10-K and are incorporated by reference.

(c) Financial statement schedules not listed above have been omitted because they are inapplicable, are not required under applicable provisions of Regulation S-X, or the information that would otherwise be included in such schedules is contained in the registrant’s financial statements or accompanying notes.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 13, 2014.

 

Rubicon Technology, Inc.
By  

/s/ Raja M. Parvez

 

Raja M. Parvez

President and Chief Executive Officer

KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Raja M. Parvez and William F. Weissman, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2014.

 

Signature

  

Title

/s/ Raja M. Parvez

Raja M. Parvez

  

Director, President and Chief Executive Officer

(Principal Executive Officer)

/s/ William F. Weissman

William F. Weissman

  

Chief Financial Officer

(Principal Financial and Accounting Officer)

/s/ Don N. Aquilano

Don N. Aquilano

   Chairman of the Board of Directors

/s/ Donald R. Caldwell

Donald R. Caldwell

   Director

/s/ Michael E. Mikolajczyk

Michael E. Mikolajczyk

   Director

/s/ Raymond J. Spencer

Raymond J. Spencer

   Director

 

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EXHIBIT INDEX

The Exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K.

 

Exhibit No.

 

Description

  

Incorporation by Reference

3.1   Eighth Amended and Restated Certificate of Incorporation of Rubicon Technology, Inc.    Filed as Exhibit 3.1 to Amendment No. 2, filed on November 1, 2007, to the registrant’s Registration Statement on Form S-1 (File No. 333-145880)
3.2   Amendment No. 1 to Eighth Amended and Restated Certificate of Incorporation of Rubicon Technology, Inc.    Filed as Appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A, filed on April 29, 2011 (File No. 1-33834)
3.3   Amended and Restated Bylaws of Rubicon Technology, Inc.    Filed as Exhibit 3.2 to Amendment No. 2, filed on November 1, 2007, to the registrant’s Registration Statement on Form S-1 (File No. 333-145880)
4.1   Specimen Common Stock Certificate    Filed as Exhibit 4.1 to Amendment No. 3, filed on November 13, 2007, to the registrant’s Registration Statement on Form S-1 (File No. 333-145880)
4.2   Warrant to Purchase Shares of Series B preferred stock between Rubicon Technology, Inc. and GATX Ventures, Inc., dated July 10, 2002 (1)    Filed as Exhibit 4.8 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
4.3   Warrant to Purchase Shares of Series B preferred stock between Rubicon Technology, Inc. and GATX Ventures, Inc., dated July 10, 2002 (2)    Filed as Exhibit 4.9 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
4.4   Form of Investor Warrant to Purchase Shares of Series E preferred stock    Filed as Exhibit 4.14 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1*   Rubicon Technology, Inc. 2001 Equity Plan, dated as of August 2, 2001    Filed as Exhibit 10.1 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(a)*   Amendment No. 1 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of November 6, 2001    Filed as Exhibit 10.1(a) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(b)*   Amendment No. 2 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of May 21, 2002    Filed as Exhibit 10.1(b) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(c)*   Amendment No. 3 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of May 28, 2004    Filed as Exhibit 10.1(c) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(d)*   Amendment No. 4 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of December 6, 2004    Filed as Exhibit 10.1(d) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)

 

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Exhibit No.

 

Description

  

Incorporation by Reference

10.1(e)*   Amendment No. 5 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of June 28, 2005    Filed as Exhibit 10.1(e) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(f)*   Amendment No. 6 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of November 30, 2005    Filed as Exhibit 10.1(f) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(g)*   Amendment No. 7 to the Rubicon Technology, Inc. 2001 Equity Plan, dated as of July 26, 2006    Filed as Exhibit 10.1(g) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.1(h)*   Rubicon Technology, Inc. 2001 Equity Plan Form of Notice of Stock Option Grant and Stock Option Agreement    Filed as Exhibit 10.1(h) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.2*   Rubicon Technology, Inc. 2007 Stock Incentive Plan, as amended and restated on March 23, 2011   
10.3*   Rubicon Technology, Inc. Management Incentive Bonus Plan, dated as of February 28, 2007    Filed as Exhibit 10.4 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.4*   Amendment No. 1 to Rubicon Technology, Inc. Management Incentive Bonus Plan, dated as of August 29, 2007    Filed as Exhibit 10.4(a) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.5*   Executive Employment Agreement, dated as of dated January 29, 2009, by and between Rubicon Technology, Inc. and Raja M. Parvez Executive Employment Agreement    Filed as Exhibit 10.5(b) to the registrant’s Current Report on Form 8-K filed on December 3, 2009 (File No. 1-33834)
10.6*   Executive Employment Agreement, dated as of July 30, 2007, by and between Rubicon Technology, Inc. and William F. Weissman    Filed as Exhibit 10.8 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.7*   First Amendment to Executive Employment Agreement, dated as of January 29, 2009, by and between Rubicon Technology, Inc. and William F. Weissman    Filed as Exhibit 10.8(a) to the registrant’s Current Report on Form 8-K filed on December 3, 2009 (File No. 1-33834)
10.8*   Form of Post-IPO Change of Control Severance Agreement    Filed as Exhibit 10.10 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.9*   Form of Indemnification Agreement    Filed as Exhibit 10.11 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.10   Commercial Lease, dated as of December 23, 2004, by and between Rubicon Technology, Inc. and Bartmanns, Perales & Dolter, LLC    Filed as Exhibit 10.12 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.11   Amendment to Commercial Lease, dated as of May 6, 2005, by and between Rubicon Technology, Inc. and Bartmanns, Perales & Dolter, LLC    Filed as Exhibit 10.12(a) to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)

 

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Exhibit No.

 

Description

  

Incorporation by Reference

10.12   Industrial Building Lease, dated as of July 18, 2007, by and between Rubicon Technology, Inc. and Phillip J. Latoria, Jr.    Filed as Exhibit 10.14 to the registrant’s Registration Statement on Form S-1, filed on October 11, 2007 (File No. 333-145880)
10.13+   Master Purchase Agreement dated as of February 3, 2012 by and between Rubicon Technology, Inc. and LG Innotek Co., Ltd.    Filed as Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q/A, filed on August 23, 2012 (File No. 1-33834)
10.14   Loan and Security Agreement by and between Rubicon Technology, Inc. and Silicon Valley Bank, dated as of January 2, 2013    Filed as Exhibit 10-K to the registrant’s Current Report on Form 8-K , filed on January 3, 2013 (File No. 1-33834)
21.1   Subsidiaries of the Company   
23.1   Consent of Independent Registered Public Accounting Firm   
24.1   Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K)   
31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003   
31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003   
32.1   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003   
101.INS**   XBRL Instance Document   
101.SCH**   XBRL Taxonomy Extension Schema Document   
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document   
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document   
101.PRE**   XBRL Taxonomy Extension Presentation Document   
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document   

 

* Management contract or compensatory plan or arrangement of the Company.
** Submitted electronically with this Report on Form 10-K
+ Confidential treatment has been requested and granted for certain provisions of this Exhibit pursuant to Rule 24b-2 promulgated under the Exchange Act.

 

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Rubicon Technology, Inc.

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Management’s Report on Internal Control over Financial Reporting

     F-2    

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

     F-3    

Report of Independent Registered Public Accounting Firm

     F-4    

Consolidated Balance Sheets as of December 31, 2013 and 2012

     F-5    

Consolidated Statements of Operations for each of the three years in the period ended December  31, 2013

     F-6    

Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2013

     F-7    

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2013

     F-8    

Consolidated Statements of Cash Flows for each of the three years in the period ended December  31, 2013

     F-9    

Notes to Consolidated Financial Statements

     F-10   

 

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal controls over financial reporting.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

  i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company;

 

  ii. provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to the financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on management’s assessment using those criteria, as of December 31, 2013, management concluded that the Company’s internal controls over financial reporting were effective.

Grant Thornton LLP, independent registered public accounting firm, has audited the consolidated financial statements of the Company for the fiscal years ended December 31, 2013, 2012 and 2011 and the Company’s internal control over financial reporting as of December 31, 2013. Their reports are presented on the following pages.

Rubicon Technology, Inc.

March 13, 2014

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Rubicon Technology, Inc.

We have audited the internal control over financial reporting of Rubicon Technology, Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2013, and our report dated March 13, 2014 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Chicago, Illinois

March 13, 2014

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Rubicon Technology, Inc.

We have audited the accompanying consolidated balance sheets of Rubicon Technology, Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rubicon Technology, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2014 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Chicago, Illinois

March 13, 2014

 

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Table of Contents

Rubicon Technology, Inc.

Consolidated Balance Sheets

 

     As of December 31,  
     2013     2012  
     (in thousands, other
than share data)
 

Assets

    

Cash and cash equivalents

   $ 21,071      $ 19,573   

Restricted cash

     165        171   

Short-term investments

     13,567        24,361   

Accounts receivable, net

     3,571        10,992   

Accounts receivable—related parties

     —          1,677   

Inventories

     34,312        47,354   

Other inventory supplies

     12,533        15,813   

Prepaid expenses and other current assets

     1,186        2,353   

Deferred tax assets

     —          4,427   
  

 

 

   

 

 

 

Total current assets

     86,405        126,721   

Property and equipment, net

     115,220        119,850   

Other assets

     1,070        1,525   
  

 

 

   

 

 

 

Total assets

   $ 202,695      $ 248,096   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Accounts payable

   $ 4,465      $ 8,954   

Accrued payroll

     369        1,006   

Accrued and other current liabilities

     867        1,139   

Corporate income and franchise taxes

     192        216   

Accrued real estate taxes

     336        297   

Advance payments

     408        772   
  

 

 

   

 

 

 

Total current liabilities

     6,637        12,384   

Deferred tax liability

     267       10,326   
  

 

 

   

 

 

 

Total liabilities

     6,904        22,710   

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $0.001 par value, 5,000,000 undesignated shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.001 par value, 45,000,000 shares authorized; 24,433,523 and 24,327,140 shares issued; 22,658,679 and 22,552,296 shares outstanding

     25        25   

Additional paid-in capital

     335,935        334,314   

Treasury stock, at cost, 1,774,844

     (12,148     (12,148

Accumulated other comprehensive (loss) income

     (418     447   

Accumulated deficit

     (127,603     (97,252
  

 

 

   

 

 

 

Total stockholders’ equity

     195,791        225,386   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 202,695      $ 248,096   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Table of Contents

Rubicon Technology, Inc.

Consolidated Statements of Operations

 

     Year ended December 31,  
     2013     2012     2011  
    

(in thousands, other than share

and per share data)

 

Revenue

   $ 41,513      $ 67,243      $ 134,000   

Cost of goods sold

     63,434        67,283        64,365   
  

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (21,921     (40     69,635   

Operating expenses:

      

General and administrative

     8,629        9,018        11,336   

Sales and marketing

     1,521        1,685        1,658   

Research and development

     2,263        2,274        1,806   

Loss on disposal of assets

     550        19        84   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (34,884     (13,036     54,751   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     51        93        252   

Interest expense

     (95     —         —    

Realized (loss) gain on foreign currency translation

     (583     349        (370

Realized gain on investments

     —          8        —    
  

 

 

   

 

 

   

 

 

 

Total other (expense) income

     (627     450        (118
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (35,511     (12,586     54,633   

Income tax benefit (expense)

     5,160        7,048        (16,574
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (30,351   $ (5,538   $ 38,059   
  

 

 

   

 

 

   

 

 

 

Net (loss) income per common share

      

Basic

   $ (1.35   $ (0.25   $ 1.67   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (1.35   $ (0.25   $ 1.61   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding used in computing net (loss) income per common share

      

Basic

     22,572,212        22,523,951        22,852,205   

Diluted

     22,572,212        22,523,951        23,596,162   

The accompanying notes are an integral part of these consolidated statements.

 

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Table of Contents

Rubicon Technology, Inc.

Consolidated Statements of Comprehensive Income

 

     Year ended December 31,  
     2013     2012     2011  
     (in thousands)  

Net (loss) income

   $ (30,351   $ (5,538   $ 38,059   

Other comprehensive (loss) income:

      

Unrealized (loss) gain on investments, net of taxes

     (863     505        (42

Unrealized (loss) gain on currency translation

     (2     (8     2   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (865     497        (40
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (31,216   $ (5,041   $ 38,019   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Table of Contents

Rubicon Technology, Inc.

Consolidated Statements of Stockholders’ Equity

 

                        Stockholders’ equity  
     Common stock      Treasury Stock     Additional
paid-in
capital
    Accum
Other
Comp
Inc.
    Accum
deficit
    Total
stockholders’
equity
 
     Shares      Amount      Shares     Amount          
     (in thousands other than share data)  

Balance at January 1, 2011

     24,210,644       $ 23         (1,249,975   $ (5,661   $ 327,515      $ (10   $ (129,773   $ 192,094   

Exercise of stock options

     71,355         1         —         —         741        —         —         742   

Stock-based compensation

     —          —          —         —         2,297        —         —         2,297   

Excess tax benefit of stock based compensation

     —          —          —         —         1,404        —         —         1,404   

Stock issued to Board of Directors

     7,724         —          —         —         162        —         —         162   

Purchase of treasury stock, at cost

     —          —          (524,869     (6,487     —         —         —         (6,487

Foreign currency translation adjustments

     —          —          —         —         —         2        —         2   

Unrealized loss on investments, net of tax

     —          —          —         —         —         (42     —         (42

Net income

     —          —          —         —         —         —         38,059        38,059   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     24,289,723         24         (1,774,844     (12,148     332,119        (50     (91,714     228,231   

Exercise of stock options

     17,884         1         —         —         72        —         —         73   

Net exercise of stock warrants

     2,188         —          —         —         —         —         —         —    

Stock-based compensation

     —          —          —         —         1,801        —         —         1,801   

Stock issued to Board of Directors

     17,345         —          —         —         162        —         —         162   

Excess tax benefit of stock based compensation

     —          —          —         —         160        —         —         160   

Foreign currency translation adjustments

     —          —          —         —         —         (8     —         (8

Unrealized gain on investments, net of tax

     —          —          —         —         —         505        —         505   

Net loss

     —          —          —         —         —         —         (5,538     (5,538
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     24,327,140         25         (1,774,844     (12,148     334,314        447        (97,252     225,386   

Exercise of stock options

     27,930         —           —         —         140        —         —         140   

Stock-based compensation

     —          —          —         —         1,246        —         —         1,246   

Restricted stock issued

     73,709         —          —         —         292        —         —         292   

Stock issued to Board of Directors

     4,744         —          —         —         57        —         —         57   

Excess tax benefit of stock based compensation

     —          —          —         —         (114     —         —         (114

Foreign currency translation adjustments

     —          —          —         —         —         (2     —         (2

Unrealized loss on investments, net of tax

     —          —          —         —         —         (863     —         (863

Net loss

     —          —          —         —         —         —         (30,351     (30,351
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     24,433,523       $ 25         (1,774,844   $ (12,148   $ 335,935      $ (418   $ (127,603   $ 195,791   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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Table of Contents

Rubicon Technology, Inc.

Consolidated Statements of Cash Flows

 

    Year ended December 31,  
    2013     2012     2011  
    (in thousands)  

Cash flows from operating activities

     

Net (loss) income

  $ (30,351   $ (5,538   $ 38,059   

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities

     

Depreciation and amortization

    12,660        12,027        9,724   

Net loss on disposal of assets

    550        19        84   

Stock-based compensation

    1,375        1,801        2,297   

Stock issued to Board of Directors

    220       162        162   

Realized gain on investments

    —          (8     —    

Deferred taxes

    (5,166     (6,324     13,447   

Excess tax benefits from stock-based compensation

    114        (160     (1,404

Changes in operating assets and liabilities:

     

Accounts receivable

    9,098        19,975        (13,968

Inventories

    12,979        (24,258     (11,948

Other inventory supplies

    2,976        1,948        (9,929

Prepaid expenses and other assets

    1,571        1,981        (3,993

Accounts payable

    (4,472     (4,004     3,683   

Accrued payroll

    (510     (581     (951

Corporate income and franchise taxes

    (25     (391     212   

Accrued real estate taxes

    39        22        49   

Advance payments

    (364     763        (1,094

Accrued and other current liabilities

    (282     (172     182   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    412        (2,738     24,612   
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

     

Purchases of property and equipment

    (8,721     (10,975     (48,228

Proceeds from disposal of assets

    141        10        —    

Purchase of investments

    (2,040     (5,281     (9,439

Proceeds from sale of investments

    11,390        34,300        25,000   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    770        18,054        (32,667
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

     

Proceeds from exercise of options

    140        72        742   

Restricted cash

    6        18        344   

Purchase of treasury stock

    —         —         (6,487

Excess tax benefits from stock-based compensation

    (114     160        1,404   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    32        250        (3,997
 

 

 

   

 

 

   

 

 

 

Net effect of currency translation

    284        (283     269   

Net increase (decrease) in cash and cash equivalents

    1,498        15,283        (11,783

Cash and cash equivalents, beginning of year

    19,573        4,290        16,073   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

  $ 21,071      $ 19,573      $ 4,290   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

     

Cash paid for income taxes

  $ —       $ —       $ 6,050   

Cash paid for interest

  $ 87     $ —       $ —    

The accompanying notes are an integral part of these consolidated statements.

 

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Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

Rubicon Technology, Inc., a Delaware corporation (the “Company”), is an electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other innovative crystalline products for LEDs, RFICs, blue laser diodes, optoelectronics and other optical applications. The Company sells its products on a global basis to customers in Asia, Australia, North America and Europe. The Company maintains its operating facilities in the Chicago metropolitan area and in Penang, Malaysia.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Rubicon Worldwide LLC and Rubicon Sapphire Technology (Malaysia) SDN BHD. All intercompany transactions and balances have been eliminated in consolidation.

A summary of the Company’s significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

Cash and cash equivalents

The Company considers all unrestricted highly liquid investments immediately available to be cash equivalents. Cash equivalents primarily consist of time deposits with banks, unsettled trades and brokerage money market accounts.

Restricted cash

At December 31, 2013 and 2012, in connection with certain credit agreements, the Company is required to maintain $5,000 of restricted certificates of deposit. At December 31, 2013 and 2012, the Company held $7,800 and $2,600, respectively, of employee funds as part of a flexible spending program. At December 31, 2013 and 2012, the Company held $152,300 and $163,500, respectively, as a fixed deposit pledged to a bank as a security for a bank guarantee facility granted to the Company.

Foreign currency translation and transactions

Rubicon Worldwide LLC’s assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates and capital accounts at historical exchange rates. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. Translation adjustments resulting from fluctuations in exchange rates for Rubicon Worldwide LLC are recorded as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.

The Company has determined that the functional currency of Rubicon Sapphire Technology (Malaysia) SDN BHD is the U.S. dollar. Rubicon Sapphire Technology (Malaysia) SDN BHD’s assets and liabilities are translated into U.S. dollars using the remeasurement method. Non-monetary assets are translated at historical exchange rates and monetary assets are translated at exchange rates existing at the respective balance sheet dates. Translation adjustments for Rubicon Sapphire Technology (Malaysia) SDN BHD are included in determining net income (loss) for the period. The results of operations are translated into U.S. dollars at the average exchange rates during the respective period. The Company records these gains and losses in other income (expense).

 

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Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Foreign currency transaction gains and losses are generated from the effects of exchange rate changes on transactions denominated in a currency other than the functional currency of the Company, which is the U.S. dollar. Gains and losses on foreign currency transactions are generally required to be recognized in the determination of net income (loss) for the period. The Company records these gains and losses in other income (expense).

Investments

The Company invests available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposit, common stock, corporate notes and government securities. Investments classified as available-for-sale securities are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), in the consolidated statements of operations. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations, are classified as short-term.

The Company reviews its available-for-sale securities investments at the end of each quarter for other-than-temporary declines in fair value based on the specific identification method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the fair value and carrying value is written off and recorded as a charge on the consolidated statements of operations. As of December 31, 2013 and 2012, no impairment was recorded.

Treasury Stock

The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

Accounts receivable

The majority of the Company’s accounts receivable is due from manufacturers serving the LED and Silicon-on-Sapphire (SoS) industries. Credit is extended based on an evaluation of the customer’s financial condition. Accounts receivable are due based on contract terms and at stated amounts due from customers, net of an allowance for doubtful accounts.

Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time past due, the customer’s current ability to pay and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are recorded as a reduction to bad debt expense.

 

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Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The following table shows the activity of the allowance for doubtful accounts:

 

         Year ended December 31,      
     2013     2012  
     (in thousands)  

Beginning balance

   $ 286      $ 378   

Charges to costs and expenses

     24        (54

Accounts charged off, less recoveries

     (260     (38
  

 

 

   

 

 

 

Ending balance

   $ 50      $ 286   
  

 

 

   

 

 

 

Inventories

Inventories are valued at the lower of cost or market. Raw materials cost is determined using the first-in, first-out method, and work-in-process and finished goods costs are determined on a weighted-average cost basis which includes materials, labor and overhead. The Company reduces the carrying value of its inventories for differences between the cost and the estimated net realizable value, taking into account usage, expected demand, technological obsolescence and other information. Inventories are composed of the following:

 

     As of December 31,  
     2013      2012  
     (in thousands)  

Raw materials

   $ 18,651       $ 21,267   

Work in progress

     10,337         20,787   

Finished goods

     5,324         5,300   
  

 

 

    

 

 

 
   $ 34,312       $ 47,354   
  

 

 

    

 

 

 

The Company establishes inventory reserves when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based on customer required specifications. The Company evaluates the ability to realize the value of our inventory based on a combination of factors, including forecasted sales, estimated current and future market value and changes in customers’ product specifications. For the years ended December 31, 2013 and 2012, the Company determined it had inventory that was excess or obsolete and recorded an adjustment which reduced inventory and increased costs of goods sold by $604,000 and $719,000, respectively. The Company had accepted sales orders for smaller diameter core products at prices lower than cost during 2013 and 2012. Based on these sales prices, the Company recorded at December 31, 2013 and 2012, a lower of cost or market adjustment which reduced inventory and increased cost of goods sold by $421,000 and $1.5 million, respectively. During the year ended December 31, 2012, the Company recycled some boules from inventory. Historically, boules put through a second growth cycle typically result in a very high-grade crystal which may result in higher yield of large diameter wafers. The recycling of boules reduced inventory and increased cost of goods sold for the year ended December 31, 2012 by $927,000. The Company’s method of estimating excess and obsolete inventory has remained consistent for all periods presented.

 

F-12


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Property and equipment

Property and equipment consisted of the following:

     As of December 31,  
     2013     2012  
     (in thousands)  

Land and land improvements

   $ 4,133      $ 4,133   

Buildings

     32,269        30,364   

Machinery, equipment and tooling

     121,313        103,477   

Leasehold improvements

     7,696        7,696   

Furniture and fixtures

     949        941   

Information systems

     1,077        1,070   

Construction in progress

     5,221        17,712   
  

 

 

   

 

 

 

Total cost

     172,658        165,393   

Accumulated depreciation and amortization

     (57,438     (45,543
  

 

 

   

 

 

 

Property and equipment, net

   $ 115,220      $ 119,850   
  

 

 

   

 

 

 

Property and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and improvements are capitalized. Depreciation and amortization expense associated with property and equipment was $12.7 million, $12.0 million and $9.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Construction in progress includes costs associated with the construction of furnaces and deposits made on equipment purchases.

The estimated useful lives are as follows:

 

Asset description

  

Life

Buildings

   39 years

Machinery, equipment and tooling

   3-10 years

Leasehold improvements

   Lesser of life of lease or economic life

Furniture and fixtures

   7 years

Information systems

   3 years

Impairment of long-lived assets

When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the Company performs an analysis to review the recoverability of the asset’s carrying value. The Company makes estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income. There were no impairment losses on long lived assets for the years ended December 31, 2013, 2012 and 2011.

 

F-13


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Other assets

The Company’s other assets include overhaul costs that are accounted for using the deferral method. These overhaul costs are recorded at cost on the balance sheet as other assets and are amortized over terms in accordance with their respectful useful lives.

Warranty cost

The Company’s sales terms include a warranty that its products will meet certain specifications. The Company records a current liability for the expected cost of warranty-related claims at the time of sale. The warranty reserve is included in accrued and other current liabilities on the consolidated balance sheets.

The following table presents changes in the Company’s product warranty liability:

 

     Year ended
December 31,
 
     2013     2012  
     (in thousands)  

Balance, beginning of period

   $ 101      $ 253   

Charged to cost of sales

     102        (37

Actual product warranty expenditures

     (62     (115
  

 

 

   

 

 

 

Balance, end of period

   $ 141      $ 101   
  

 

 

   

 

 

 

Fair value of financial instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable. The carrying values of these assets and liabilities approximate their fair values due to the short-term nature of these instruments at December 31, 2013 and 2012.

Concentration of credit risks and other risks and uncertainties

Financial instruments that could potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2013 and 2012, the Company had $4.8 million and $6.9 million, respectively, on deposit at a financial institution in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company performs periodic evaluation of this institution for relative credit standing. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant risk of loss on these balances.

The Company currently depends on a small number of suppliers for certain raw materials, components, services and equipment, including key materials such as aluminum oxide and certain furnace components. If the supply of these components were to be disrupted or terminated, or if these suppliers were unable to supply the quantities of raw materials required, the Company may have difficulty in finding, or may be unable to find, alternative sources for these items. As a result, the Company may be unable to meet the demand for its products, which could have a material adverse impact on the Company.

Concentration of credit risk related to revenue and accounts receivable is discussed in Note 5.

 

F-14


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Revenue recognition

Revenues recognized include product sales and billings for costs and fees for government contracts.

Product Sales

The Company recognizes revenue from product sales when earned. Revenue is recognized when, and if, evidence of an arrangement is obtained and the other criteria to support revenue recognition are met, including:

 

   

Persuasive evidence of an arrangement exists . The Company requires evidence of a purchase order with the customer specifying the terms and specifications of the product to be delivered, typically in the form of a signed quotation or purchase order from the customer;

 

   

Title has passed and the product has been delivered . Title passage and product delivery generally occur when the product is delivered to a common carrier;

 

   

The price is fixed or determinable . All terms are fixed in the signed quotation or purchase order received from the customer. The purchase orders do not contain rights of cancellation, return, exchange or refund; and

 

   

Collection of the resulting receivable is reasonably assured.  The Company’s standard arrangement with customers includes payment terms. Customers are subject to a credit review process that evaluates each customer’s financial position and its ability to pay. Collectability is determined by considering the length of time the customer has been in business and history of collections. If it is determined that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

Government Contracts

The Company recognizes research and development revenue in the period during which the related costs are incurred over the contractually defined period. In July 2012, the Company signed a contract with the Air Force Research Laboratory to produce large-area sapphire windows on a cost plus fixed fee basis. The Company will record revenue on a gross basis as costs are incurred plus a portion of the fixed fee. For the years ended December 31, 2013 and 2012, $2.7 million and $1.2 million, respectively of revenue were recorded. The contract will continue for duration of three years and the total value of the contract is $4.7 million.

The Company does not provide maintenance or other services and it does not have sales that involve multiple elements or deliverables.

Shipping and handling costs

The Company records costs incurred in connection with shipping and handling of products as cost of goods sold. Amounts billed to customers in connection with these costs are included in revenue and are not material for any of the periods presented in the accompanying financial statements.

Sales tax

The Company collects and remits sales taxes on products sold to customers and reports such amounts under the net method in its consolidated statements of operations and records a liability until remitted to the respective tax authority.

 

F-15


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Stock-based compensation

The Company requires all share-based payments to employees, including grants of employee stock options to be measured at fair value and expensed in the consolidated statements of operations over the service period (generally the vesting period) of the grant. Expense is recognized in the consolidated statements of operations for these share-based payments.

Research and development

Research and development costs are expensed as incurred. Research and development expense was $2.3 million, $2.3 million and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Accounting for uncertainty in income taxes

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the year ended December 31, 2011, the Company accrued $11,000 for potential penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2013 and 2012.

The Company is subject to taxation in the U.S., Japan and in a state jurisdiction. The Company is exempt from Malaysian income tax for a ten year period beginning in 2009. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2002 thru 2006 and 2008 thru 2013 are open to examination by tax authorities. All tax years in Malaysia are open to examination by tax authorities.

Income taxes

Deferred tax assets and liabilities are provided for temporary differences between financial reporting and income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws expected to be in effect when the differences will reverse. Deferred income taxes also arise from the future benefits of net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Full valuation allowances on net deferred tax assets are maintained until an appropriate level of profitability that generates taxable income is deemed sustainable or until a tax strategy is developed that would enable the Company to conclude that it is more likely than not that a portion of the deferred tax assets will be realizable. Based on an evaluation in accordance with the accounting standards, as of December 31, 2013, a valuation allowance has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

F-16


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Other comprehensive income (loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive income (loss) includes net earnings (loss) and other non-owner changes in equity that bypass the statement of operations and are reported in a separate component of equity. For the years ended December 31, 2013 and 2012 other comprehensive income (loss) includes the unrealized gain (loss) on investments and foreign currency translation adjustments. A summary of the components of comprehensive income (loss) for the years ended December 31, 2013 and 2012 follows:

 

         Year Ended December 31,      
     2013     2012  
     (in thousands)  

Unrealized (loss) gain on investments, net of tax

   $ (406   $ 457   

Unrealized loss on currency translation

     (12     (10
  

 

 

   

 

 

 

Ending Balance

   $ (418   $ 447   
  

 

 

   

 

 

 

Net income (loss) per common share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of diluted common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted shares outstanding any common stock equivalents, outstanding stock options and warrants based on the treasury stock method.

Diluted net loss per common share is the same as basic net loss per common share for the years ended December 31, 2013 and 2012, because the effects of potentially dilutive securities are anti-dilutive.

The number of anti-dilutive shares excluded from the calculation of diluted net loss per share is as follows as of December 31:

 

     2013      2012  

Warrants

     179,252         143,291   

Stock options

     56,892         266,020   
  

 

 

    

 

 

 
     236,144         409,311   
  

 

 

    

 

 

 

Recent accounting pronouncement

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . ASU No. 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized

 

F-17


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

Reclassifications

Certain prior period amounts on the balance sheet have been reclassified to conform to the current period presentation.

2. SEGMENT INFORMATION

The Company has determined that it operates in only one segment as it only reports profit and loss information on an aggregate basis to its chief operating decision maker.

Revenue is attributed by geographic region based on ship-to location of the Company’s customers. The following table summarizes revenue by geographic region:

 

     Year Ended December 31,  
     2013      2012      2011  
     (in thousands)  

China

   $ 14,844       $ 3,893       $ 3,877   

Australia

     10,368         12,494         14   

Taiwan

     7,361         5,663         50,006   

United States

     4,444         11,104         12,253   

Korea

     2,214         19,862         51,461   

France

     122         8,482         359   

Japan

     309         2,999         11,362   

Other

     1,851         2,746         4,668   
  

 

 

    

 

 

    

 

 

 

Revenue

   $ 41,513       $ 67,243       $ 134,000   
  

 

 

    

 

 

    

 

 

 

The following table summarizes sales by product type:

 

     Year Ended December 31,  
     2013      2012      2011  
     (in thousands)  

Core

   $ 23,294       $ 9,755       $ 61,734   

Polished

     12,201         50,474         65,468   

Optical

     4,523         5,723         6,752   

Research & Development

     1,457         1,223         15   

Other

     38         68         31   
  

 

 

    

 

 

    

 

 

 

Revenue

   $ 41,513       $ 67,243       $ 134,000   
  

 

 

    

 

 

    

 

 

 

 

F-18


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The following table summarizes assets by geographic region:

 

     As of December 31,  
     2013      2012  
     (in thousands)  

United States

   $ 157,572       $ 210,781   

Malaysia

     45,086         37,280   

Other

     37         35   
  

 

 

    

 

 

 

Total Assets

   $ 202,695       $ 248,096   
  

 

 

    

 

 

 

3. INVESTMENTS

The Company invests available cash primarily in investment grade commercial paper, FDIC guaranteed certificates of deposits, common stock, corporate notes and government securities. The Company’s short-term investments balance of $13.6 million as of December 31, 2013 is comprised corporate notes and bonds of $3.0 million, commercial paper of $3.0 million, FDIC guaranteed certificates of deposit of $6.2 million and common stock of $1.4 million. The Company’s investments are classified as available-for-sale securities and are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss).

The following table presents the amortized cost, and gross unrealized gains and losses on all securities at December 31, 2013:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term Investments:

           

FDIC Guaranteed certificates of deposit

   $ 6,160       $ —        $ 6      $ 6,154   

Common stock

     2,000         —          642         1,358   

Corporate Notes/Bonds

     3,058         —          1         3,057   

Commercial Paper

     2,998         —          —          2,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 14,216       $ —        $ 649       $ 13,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the amortized cost, and gross unrealized gains and losses on all securities at December 31, 2012:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term Investments:

           

U.S. Treasury securities and agency

   $ 3,509       $ —        $ —        $ 3,509   

FDIC Guaranteed certificates of deposit

     6,453         —          6         6,447   

Common stock

     2,000         806         —          2,806   

Corporate Notes/Bonds

     4,606         —          4         4,602   

Commercial Paper

     6,999         —          2         6,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 23,567       $ 806       $ 12       $ 24,361   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-19


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The Company values its investments at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s fixed income available-for-sale securities consist of high-quality, investment grade commercial paper, FDIC guaranteed certificates of deposits, common stock, corporate notes and government securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. The valuation techniques used to measure the fair value of the Company’s financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2013:

 

     Level 1      Level 2      Level 3      Total  

Cash Equivalents:

           

Money market funds

   $ 15,541       $ —        $ —        $ 15,541   

Investments:

           

Available-for-sales securities—current:

           

FDIC Guaranteed certificates of deposit

     —          6,154         —          6,154   

Common stock

     1,358         —          —          1,358   

Corporate notes/bonds

     —          3,057         —          3,057   

Commercial paper

     —          2,998         —          2,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,899       $ 12,209       $ —        $ 29,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-20


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2012:

 

     Level 1      Level 2      Level 3      Total  

Cash Equivalents:

           

Money market funds

   $ 11,644       $ —        $ —        $ 11,644   

Investments:

           

Available-for-sales securities—current:

           

U.S. Treasury securities and agency

     —          3,509         —          3,509   

FDIC Guaranteed certificates of deposit

     —          6,447         —          6,447   

Common stock

     2,806         —          —          2,806   

Corporate notes/bonds

     —          4,602         —          4,602   

Commercial paper

     —          6,997         —          6,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,450       $ 21,555       $ —        $ 36,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

There are no terms or conditions restricting the Company from redeeming any of its investments.

In addition to the debt securities noted above, the Company had approximately $5.5 million and $7.9 million of time deposits included in cash and cash equivalents as of December 31, 2013 and 2012, respectively.

4. RELATED PARTY TRANSACTIONS

In November 2008, the Company purchased 1,345,444 shares of Peregrine Series D-1 Preferred shares for a total of $2.0 million, which represented less than 1% of shares outstanding. The terms and stock price of the purchase were the same as for the other investors who participated. Peregrine is a customer of the Company. On August 8, 2012, Peregrine completed its initial public offering, which resulted in a conversion of the preferred shares to common stock at a ratio of 7.34:1, or 183,303 shares of common stock. There was a lock out period until February, 2013 during which the Company could not sell these shares. For the years ended December 31, 2013 and 2012, the Company recorded an unrealized loss on investments of $1.4 million and an unrealized gain on investments of $806,000, respectively. For years ended December 31, 2013, 2012 and 2011, revenue from Peregrine was $11.0 million, $25.2 million and $5.2 million, respectively. As of December 31, 2013 there was no accounts receivable from Peregrine and as of December 31, 2012, accounts receivable from Peregrine was $1.7 million. The pricing terms and conditions of the sales to Peregrine are similar to those available to the Company’s other non-related customers.

5. SIGNIFICANT CUSTOMERS

For the year ended December 31, 2013, the Company had two customers that accounted for approximately 27% and 17% of its revenue. For the year ended December 31, 2012, the Company had two customers that accounted for approximately 38% and 29% of its revenue. For the year ended December 31, 2011, the Company had three customers that accounted for approximately 38%, 19% and 12% of its revenue.

Customers individually representing more than 10% of trade receivables accounted for approximately 47% and 93% of accounts receivable as of December 31, 2013 and 2012, respectively. The Company grants credit to customers based on an evaluation of their financial condition. Losses from credit sales are provided for in the financial statements.

 

F-21


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

6. STOCKHOLDERS’ EQUITY

Common Stock

As of December 31, 2013 the Company had reserved 1,972,011 shares of common stock for issuance upon the exercise of outstanding common stock options and vesting of restricted stock units. Also, 2,240,103 shares of the Company’s common stock were reserved for future grants of stock options (or other similar equity instruments) under the Company’s 2007 Stock Incentive Plan (the “2007 Plan”) as of December 31, 2013. In addition, 267,826 shares of the Company’s common stock were reserved for future exercise of outstanding warrants as of December 31, 2013.

Warrants

At December 31, 2013 and 2012, the Company had outstanding 267,826 warrants to purchase shares of common stock at an exercise price of $3.65 per share. The warrants were issued in conjunction with the issuance of convertible promissory notes issued by the Company to investors from August 2005 through October 2005. The warrants are immediately exercisable and expire 10 years from the date of issuance.

At December 31, 2011 the Company had outstanding 13,735 warrants to purchase shares of common stock at an exercise price of $7.28 per share. The warrants were issued in 2002 in conjunction with the procurement of loans. The warrants were immediately exercisable and expire 10 years from the date of issuance. During 2012, these warrants were exercised on a “net exercise” basis, resulting in the issuance of 2,188 shares of common stock to the warrant holders.

Treasury Stock

On August 4, 2011, the Company authorized a stock repurchase program to purchase up to $25.0 million of its common stock over a period of two years. The stock repurchase program authorizes the Company to repurchase its shares of common stock in the open market at times and prices considered appropriate by the Company depending upon prevailing market conditions and other corporate considerations. The treasury shares are accounted for using the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. The Company did not repurchase any shares for the twelve months ended December 31, 2013 and 2012. The stock repurchase plan expired in 2013.

7. STOCK INCENTIVE PLANS

The Company sponsored a stock option plan, the 2001 Equity Plan (the “2001 Plan”), which allowed for the granting of incentive and nonqualified stock options for the purchase of common stock. The maximum number of shares which could be awarded or sold under the 2001 Plan was 1,449,667 shares. Each option entitles the holder to purchase one share of common stock at the specified option exercise price. The exercise price of each incentive stock option granted must not be less than the fair market value on the grant date. At the discretion of management and with the approval of the Board of Directors, the Company granted options under the 2001 Plan. Management and the Board of Directors determined vesting periods and expiration dates at the time of the grant. On August 2, 2011, the plan expired.

In August 2007, the Company adopted the 2007 Plan, which allows for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and bonus shares. On June 22, 2011, the stockholders of the Company approved an amendment to the 2007 Plan to increase the maximum number of shares that may be awarded or sold under the 2007 Plan by 2,100,000 from

 

F-22


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

2,307,692 to 4,407,692 shares. The Board of Directors has appointed a committee to administer the plan. The plan committee determines the type of award to be granted, the fair market value, the number of shares covered by the award, and the time when the award vests and may be exercised.

The following table summarizes the activity of the stock incentive and equity plans:

 

     Shares
available
for grant
    Number of
options
outstanding
    Weighted-
average
option
exercise price
     Number of
restricted
stock shares
issued
     Number of
restricted
stock units
outstanding
 

Outstanding at January 1, 2011

     643,850        1,830,397      $ 12.98         34,863         —     

Authorized

     2,100,000        —          —           —           —     

Granted

     (389,774     382,050        16.02         7,724         —     

Exercised

     —          (73,428     10.78         —           —     

Expired

     (139,988     —          —           —           —     

Canceled/forfeited

     45,911        (45,911     20.15         —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2011

     2,259,999        2,093,108        13.45         42,587         —     

Granted

     (106,395     89,050        9.72         17,345         —     

Exercised

     —          (17,885     4.01         —           —     

Canceled/forfeited

     47,000        (47,163     15.13         —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2012

     2,200,604        2,117,110        13.32         59,932         —     

Granted

     (216,913     97,265        8.43         73,707         45,941   

Exercised

     —          (27,930     5.02         —           —     

Canceled/forfeited

     256,412        (260,375     18.31         —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2013

     2,240,103        1,926,070      $ 12.46         133,639         45,941   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

The following table sets forth option grants made during 2013, 2012 and 2011 with intrinsic value calculated based on grant date fair value.

 

Date of Grant

   Number of
options
granted
     Exercise
price
     Intrinsic
value
per share
 

January 2011

     26,000       $ 18.80 - $21.64         —     

March - April 2011

     73,500       $ 25.61 - $27.63         —     

May 2011

     51,650       $ 22.92         —     

July 2011

     12,500       $ 16,86         —     

October 2011

     75,400       $ 10.81 - $10.93         —     

December 2011

     143,000       $ 10.19         —     

January 2012

     8,500       $ 9.39         —     

April-May 2012

     36,750       $ 9.45 - $10.43         —     

July 2012

     7,000       $ 10.20         —     

September - October 2012

     36,800       $ 9.41 - $9.58      

January - July 2013

     82,815       $ 6.60 - $7.97         —     

October 2013

     14,450       $ 12.11         —     

 

F-23


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

At December 31, 2013, the exercise prices of outstanding options units were as follows:

 

Exercise Price

   Number of
options
outstanding
     Average
remaining
contractual life
(years)
     Number of
options
exercisable
 

$0.78 - $4.94

     533,365         4.05         533,365   

$6.11 - $9.58

     385,054         6.84         274,089   

$10.02 - $14.00

     374,867         7.93         250,417   

$15.00 - $18.80

     66,979         5.71         61,854   

$19.21 - $22.92

     375,150         6.76         353,625   

$24.95 - $32.67

     190,655         6.70         126,155   
  

 

 

       

 

 

 
     1,926,070         6.36         1,599,505   
  

 

 

       

 

 

 

The weighted average fair value of the options that became vested in the years ended 2013, 2012 and 2011 was $4.8 million, $8.0 million and $3.9 million, respectively.

The following table summarizes the activity of non-vested options and restricted stock units as follows:

 

     Non-vested
options
    Weighted-
Average Option
Exercise
price
 

Non-vested at January 1, 2011

     1,339,386      $ 14.12   

Granted

     382,050        16.02   

Vested

     (366,484     10.72   

Cancelled

     (41,775     20.39   
  

 

 

   

 

 

 

Non-vested at December 31, 2011

     1,313,177        13.58   

Granted

     89,050        9.72   

Vested

     (540,050     14.77   

Cancelled

     (41,175     15.38   
  

 

 

   

 

 

 

Non-vested at December 31, 2012

     821,002        15.24   

Granted

     143,206        8.49   

Vested

     (380,413     12.50   

Cancelled

     (211,288     18.55   
  

 

 

   

 

 

 

Non-vested at December 31, 2013

     372,507      $ 13.57   
  

 

 

   

 

 

 

The Company’s aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock. Based on the fair market value of the common stock at December 31, 2013 and 2012, there was no aggregate intrinsic value for options outstanding and exercisable. For the year ended December 31, 2013, the Company used historical stock prices over the past three years as the basis for its volatility assumptions. Prior to 2013, the Company used a review of peer group companies to determine the volatility rate used for its stock option grants. The assumed risk-free rates were based on U.S. Treasury rates in effect at the time of grant with a term consistent with the expected option lives. The expected term is based upon the vesting term of the Company’s options, a review of a peer group of companies, and expected exercise behavior. The forfeiture rate is based on past history of forfeited options. The expense is being allocated using the straight-line method. For the years ended December 31, 2013, 2012 and 2011, the Company recorded $1.2 million, $1.8 million and $2.3 million, respectively of stock option compensation

 

F-24


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

expense. As of December 31, 2013, the Company has $3.1 million of total unrecognized compensation cost related to non-vested options granted under the Company’s stock-based plans that it expects to recognize over a weighted-average period of 1.98 years.

For the years ended December 31, 2013, 2012 and 2011, the assumptions used for the estimated fair value at the date of option grant using the Black-Scholes option-pricing model were as follows:

 

     2013    2012    2011

Weighted average fair value per share of option

   $8.49    $9.72    $16.02

Expected term

   5.3 years    5.3 years    5.0 years

Risk free interest rate

   0.76% - 1.42%    0.62% - 1.04%    0.85% - 2.24%

Volatility

   77%    52%    51%

Dividend yield

   None    None    None

Forfeiture rate

   19.18%    16.59%    24.53%

The Company continues to account for options issued prior to January 1, 2006 under the intrinsic value method.

In October 2013, the Company granted 45,941 restricted stock units (“RSUs”) to certain key employees at a market price of $8.60. The fair value of each RSU is the market price on the date of grant and is being recorded as compensation expense ratably over the vesting terms. The intrinsic value at date of grant was $395,000. During 2013, the Company recorded $25,000 of RSU expense. Each RSU granted will vest 25% at each anniversary of grant date and settle in common stock (on a one-for-one basis). The RSUs are forfeited by a participant upon termination for any reason and there is no proportionate or partial vesting in the periods between the vesting dates. As of December 31, 2013, there was $370,000 of unrecognized compensation cost related to the non-vested restricted stock units. This cost is expected to be recognized over a weighted-average period of 3.75 years. At December 31, 2013 the intrinsic value of these RSUs was $556,000.

An analysis of restricted stock issued is as follows:

 

Non-vested restricted stock as of January 1, 2012

     1,931   

Granted

     17,345   

Vested

     (14,940
  

 

 

 

Non-vested restricted stock as of December 31, 2012

     4,336   

Granted

     73,707   

Vested

     (24,329
  

 

 

 

Non-vested restricted stock as of December 31, 2013

     53,714   
  

 

 

 

For the years ended December 31, 2013, 2012 and 2011, the Company recorded $292,000, $162,000 and $165,000, respectively, of stock compensation expense related to restricted stock.

In 2013, the Board of Directors awarded 47,050 shares of restricted stock and 70,365 stock options to key executives at a price of $7.97, the closing price of the shares on the date of the grant. Vesting of the shares is subject to achievement of specified targets by December 31, 2013 and March 31, 2014. The Company is recording stock compensation expense related to these shares based on the probability of achieving the targets. At December 31, 2013 two of these milestones were achieved and expense was recorded.

 

F-25


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

8. INCOME TAXES

Components of income before income taxes and the income tax provision are as follows:

Income (loss) before income taxes

 

     Year ended December 31,  
     2013     2012     2011  
     (in thousands)  

U.S.

   $ (38,114   $ (17,849   $ 51,618   

Foreign

     2,603        5,263        3,015   
  

 

 

   

 

 

   

 

 

 

Total

   $ (35,511   $ (12,586   $ 54,633   
  

 

 

   

 

 

   

 

 

 

Income taxes

 

     Year ended December 31,  
     2013     2012     2011  
     (in thousands)  

Current

      

U.S.

   $ —        $ (204   $ 177   

State

     —          (357     2,777   

Foreign

     6        (163     173   
  

 

 

   

 

 

   

 

 

 

Total current income tax expense (benefit)

     6        (724     3,127   
  

 

 

   

 

 

   

 

 

 

Deferred

      

U.S.

     (5,863     (5,536     13,223   

State

     691        (1,049     224   

Foreign

     6        261        —     
  

 

 

   

 

 

   

 

 

 

Total deferred income tax expense

     (5,166     (6,324     13,447   
  

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

   $ (5,160   $ (7,048   $ 16,574   
  

 

 

   

 

 

   

 

 

 

The reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:

 

     Year ended December 31,  
     2013     2012     2011  

U.S. Federal statutory rate

     (34.0 )%      (34.0 )%      35.0

State taxes net of federal benefit

     (5.5     (8.9     5.2   

Permanent differences

     —          —          (0.6

Foreign rate differential and transactional tax

     (0.7     (3.8     (1.4

Impact of foreign tax holiday

     (1.8     (10.4     —     

Valuation allowance

     26.9        —          (5.9

Other

     0.6        1.1        (2.0
  

 

 

   

 

 

   

 

 

 
     (14.5 )%      (56.0 )%      30.3
  

 

 

   

 

 

   

 

 

 

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

F-26


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Significant components of the Company’s net deferred income taxes are as follows at December 31:

 

     2013     2012  
     (in thousands)  

Deferred tax assets:

    

Allowance for doubtful accounts

   $ 20      $ 115   

Inventory reserves

     1,340        1,697   

Accrued liabilities

     76        316   

Warrant interest expense

     277        277   

Stock compensation expense

     2,850        2,503   

State net operating loss—net of tax

     3,500        1,524   

Net operating loss carryforward

     16,206        4,537   

Unrealized loss on securities held for sale

     240        —     

Tax credits

     514        297   

Valuation allowance

     (9,547     —     
  

 

 

   

 

 

 

Total deferred tax assets

     15,476        11,266   

Deferred tax liability:

    

Depreciation

     (15,620     (16,685

Unrealized gain on securities held for sale

     —          (340

Prepaid expenses

     (123     (140
  

 

 

   

 

 

 

Net deferred tax liability

   $ (267   $ (5,899
  

 

 

   

 

 

 

The Company’s deferred income tax assets and liabilities were reported on the consolidated balance sheets as follows.

 

     2013     2012  
     (in thousands)  

Current deferred income tax assets

   $ —        $ 4,427   

Long term deferred income tax liabilities

     (267     (10,326
  

 

 

   

 

 

 

Net deferred tax liability

   $ (267   $ (5,899
  

 

 

   

 

 

 

In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), the Company evaluates its deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. Due to the losses in the fourth quarter of 2013, the Company is in a cumulative loss position for the past three years which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While the Company believes its financial outlook remains positive, under the accounting standards objective verifiable evidence will have greater weight than subjective evidence such as the Company’s projections for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2013, a valuation allowance of $9.5 million has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. net deferred tax assets. Any U.S. tax benefits or tax expense recorded on the Company’s Consolidated Statement of Operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination related to the realization of deferred tax assets. In the event that the

 

F-27


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

At December 31, 2013, the Company had separate federal and Illinois net operating loss carryforwards of $72.5 million and $97.3 million, respectively, which begin to expire in 2026 and 2019, respectively. The Illinois State Legislature has suspended the full use of net operating loss carryforwards for taxable years ending after December 31, 2010 and before December 31, 2011, and has limited the net operation loss deduction to $100,000 for the years ending December 31, 2012 through December 31, 2013. In addition, at December 31, 2013, the Company had Illinois investment tax credits and research and development credits of $155,000 and $54,000, respectively which begin to expire in 2017. Tax credits are accounted for using the flow through method and therefore are taken in the year earned.

The Company completed an analysis of the utilization of net operating losses subject to limits based upon certain ownership changes as of December 31, 2012. The results of this analysis indicated no ownership change limiting the utilization of net operating losses and tax credits. The Company believes that an updated analysis will not likely indicate an ownership change that would limit the utilization of net operating losses and tax credits at December 31, 2013. The Company will be updating its analysis in 2014 and the results of that analysis may because of the stock offering in January 2014 indicate an ownership change. If an ownership change is determined, the utilization of the net operating losses and the tax credits may be limited. Additionally, the Company has not recorded a deferred tax asset NOL attributable to stock option exercises in the amount of $21.8 million for federal purposes and $26.2 million for state purposes because the Company cannot record these excess tax benefit stock option deductions until the benefit has been realized by actually reducing taxes payable.

The Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The following is a reconciliation of the unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s financial statements for the years ended December 31, 2013.

 

     (in thousands)  

Balance at January 1, 2012

   $ 363   

Decrease related to prior year

     (363

Tax positions related to current year

     1,140   
  

 

 

 

Balance at December 31, 2012

     1,140   

Tax positions related to prior year

     —     

Tax positions related to current year

     —     
  

 

 

 

Balance at December 31, 2013

   $ 1,140   
  

 

 

 

The Company is evaluating the impact of the recent regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition. Given that Revenue Procedures were issued in late January 2014, the Company is determining whether or not any changes in an accounting method are required. Presently, the Company does not anticipate a material impact to its financial statements.

For the year ended December 31, 2011 the Company accrued $11,000 for potential penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2013 and 2012. Included in the balance of total unrecognized tax benefits at December 31, 2013, are potential benefits of $1.0 million that if recognized, would affect the effective tax rate in the year recognized.

 

F-28


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company began foreign operations in Malaysia and Japan and is subject to local income taxes in both jurisdictions. The Company is exempt from Malaysian income tax for a ten-year period beginning in 2009. The impact of this tax holiday decreased foreign taxes for the years ended December 31, 2013, 2012 and 2011 by approximately $651,000, $1.3 million, and $535,000, respectively. The benefit of the tax holiday on net income per share (diluted) for the years ended December 31, 2013, 2012 and 2011 was $0.03, $0.06 and $0.02, respectively. All tax years in Malaysia are open to examination by tax authorities.

The Company’s federal tax return for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal Revenue Service (IRS) with no changes made to the Company’s taxable losses for those years. The Company’s state tax returns for the periods ended December 31, 2010 and 2009 have been audited by the Illinois Department of Revenue with no changes made to the Company’s taxable losses for those years. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2002 thru 2006 and 2008 thru 2013 are open to examination by tax authorities.

U.S. income and foreign withholding taxes have not been provided on approximately $11.1 million of cumulative undistributed earnings of foreign subsidiaries. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of a dividend, at December 31, 2013 there would have been no impact to the provision of income taxes. Due to the U.S. NOL’s and the full valuation allowance recorded any additional income from the dividends would have been offset by the NOL’s and a corresponding adjustment to the valuation allowance. At December 31, 2013 dividends per the Malaysia statute are not subject to withholding. Determination of the amount of unrecognized deferred income tax liabilities that may be due in the future on these earnings is not practicable because such liability, if any, is dependent on circumstances existing, if and when remittance occurs.

9. CREDIT FACILITY

On January 2, 2013, the Company entered into a three-year term agreement with a bank to provide the Company with a senior secured credit facility of $25.0 million. The agreement provides for the Company to borrow up to 80% of eligible accounts receivable and up to 35% of domestically held raw material and finished goods inventory. Advances against inventory are limited to 40% of the aggregate outstanding on the revolving line of credit and $10.0 million in aggregate. The Company has the option to borrow at an interest rate of LIBOR plus 2.75% or the Wall Street Journal prime rate plus 0.50%. If the Company maintains liquidity of $20.0 million or greater with the lending institution, then the borrowing interest rate options are LIBOR plus 2.25% or the Wall Street Journal prime rate. There is an unused revolving line facility fee of 0.375% per annum. The facility is secured by a first priority interest in substantially all of the Company’s personal property, excluding intellectual property. The Company is required to maintain an adjusted quick ratio of 1.40 to 1.00, maintain operating and other deposit accounts with the bank or bank’s affiliates of 25% of the Company’s total worldwide cash, securities and investments, and the Company can pay dividends or repurchase capital stock only with the bank’s consent during the three year term. For year ended December 31, 2013, the Company did not draw on this facility and the Company recorded $95,000 of interest expense charged on the unused portion of the facility.

 

F-29


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases buildings used for manufacturing and offices. The leases provide for payment of the Company’s proportionate share of operating expenses and real estate taxes.

Net rent expense under operating leases in 2013, 2012 and 2011 amounted to $1.1 million, $1.4 million and $1.1 million respectively.

Future minimum payments under all leases are as follows:

 

Year ending December 31,

   Operating
leases (in
thousands)
 

2014

   $ 1,104   

2015

     402   

2016

     4   
  

 

 

 

Balance at December 31, 2013

   $ 1,510   
  

 

 

 

Purchase Commitments

The Company has entered into agreements for electricity and to purchase equipment and components to construct furnaces. These agreements will result in the Company purchasing electricity, equipment or components for a total cost of approximately $4.0 million with deliveries occurring through December 2015.

Litigation

From time to time, the Company experiences routine litigation in the normal course of its business. The management of the Company does not believe any pending litigation will have a material adverse effect on the financial condition or results of operations of the Company.

11. BENEFIT PLAN

The Company sponsors a 401(k) savings plan (the “Plan”). Employees are eligible to participate in the Plan upon reaching 21 years of age. Employees make contributions to the Plan through payroll deferrals and employer matching contributions are discretionary. There were no employer matching contributions for the years ended December 31, 2013, 2012 and 2011.

12. SUBSEQUENT EVENT

On January 13, 2014, the Company completed a public offering of common stock in which a total of 3,047,500 shares were sold including 397,500 shares pursuant to the full exercise of the underwriter’s over-allotment option, at a price of $10.65 per share. The Company raised a total of $32.5 million in gross proceeds from the offering, or approximately $30.3 million in net proceeds after deducting the underwriting discount and expenses of $1.9 million and estimated other offering costs of approximately $425,000.

 

F-30


Table of Contents

Rubicon Technology, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

13. QUARTERLY FINANCIAL DATA (Unaudited)

Quarterly Financial Data (Unaudited)

Summary quarterly results for the two years ended December 31, 2013 are as follows (in thousands, other than share and per share data):

 

     Three Months Ended        

2013

   March 31     June 30     September 30     December 31     Full Year  

Revenue

   $ 8,307      $ 10,555      $ 11,115      $ 11,536      $ 41,513   

Gross loss

   $ (3,375   $ (6,417   $ (6,318   $ (5,811   $ (21,921

Loss from operations

   $ (6,296   $ (9,968   $ (9,595   $ (9,025   $ (34,884

Loss before income taxes

   $ (6,418   $ (10,173   $ (9,814   $ (9,106   $ (35,511

Net loss

   $ (3,376   $ (5,894   $ (5,840   $ (15,241   $ (30,351

Basic loss per common share

   $ (0.15   $ (0.26   $ (0.26   $ (0.67   $ (1.35

Diluted loss per common share

   $ (0.15   $ (0.26   $ (0.26   $ (0.67   $ (1.35

Weighted average common shares outstanding used in computing net loss per common share, basic and diluted:

     22,550,378        22,560,603        22,578,608        22,599,258        22,572,212   

 

     Three Months Ended        

2012

   March 31     June 30     September 30     December 31     Full Year  

Revenue

   $ 10,207      $ 17,003      $ 19,942      $ 20,091      $ 67,243   

Gross profit (loss)

   $ (3,408   $ 11      $ 2,445      $ 912      $ (40

Income (loss) from operations

   $ (6,646   $ (3,098   $ (1,141   $ (2,151   $ (13,036

Income (loss) before income taxes

   $ (6,271   $ (3,386   $ (844   $ (2,085   $ (12,586

Net income (loss)

   $ (3,367   $ (1,312   $ 272      $ (1,131   $ (5,538

Basic income (loss) per common share

   $ (0.15   $ (0.06   $ 0.01      $ (0.05   $ (0.25

Diluted income (loss) per common share

   $ (0.15   $ (0.06   $ 0.01      $ (0.05   $ (0.25

Weighted average common shares outstanding used in computing net income (loss) per common share:

          

Basic

     22,514,539        22,518,364        22,524,611        22,538,292        22,523,951   

Diluted

     22,514,539        22,518,364        23,050,618        22,538,292        22,523,951   

 

F-31

Exhibit 10.2

RUBICON TECHNOLOGY, INC.

2007 STOCK INCENTIVE PLAN

(As Amended and Restated Effective March 23, 2011)

ARTICLE 1

Establishment and Purposes of the Plan.

The Company established the Plan and the Board duly adopted the Plan originally on August 29, 2007. The Plan was amended and restated on February 27, 2009. The Plan was further amended and restated on December 8, 2009. The Plan was subsequently amended on June 23, 2010 and further amended and restated on March 23, 2011, subject to the approval of the Company’s stockholders.

 

1.1 Purposes of the Plan . The purposes of this Plan are:

 

  (a) to attract and retain the best available personnel for positions of substantial responsibility;

 

  (b) to provide additional incentive to Employees, Directors and Consultants; and

 

  (c) to promote the success of the Company’s business.

ARTICLE 2

Definitions

 

2.1 As used herein, the following terms shall have the meanings set forth below, unless otherwise clearly required by the context:

 

  (a) Adverse Conduct ” means, for purposes of Article 14, any of the following:

 

  (1) In the case of an Awardee who is an Employee, the Awardee’s rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company in violation of any noncompetition or other similar agreement between the Company and the Employee;

 

  (2) An Awardee’s unauthorized disclosure to anyone outside the Company, or the use in other than the Company’s business, of any confidential information or material relating to the business of the Company, acquired by the Awardee either during or after employment with the Company or either during or after having provided services to the Company as a Consultant;

 

  (3) An Awardee’s failure or refusal to disclose promptly and to assign to the Company, all right, title and interest in any invention or idea, patentable or not, made or conceived by the Awardee during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company or the failure or refusal to do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries where the Awardee has a legal obligation to so disclose, assign or take such actions;


  (4) Activity by the Awardee that results in termination of the Awardee’s employment or services for the Company for Cause;

 

  (5) An Awardee’s violation of any written Company rules, policies, procedures or guidelines regarding business conduct, where such rules, policies, procedures or guidelines have been distributed or made available to the Awardee; or

 

  (6) Any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company in violation of any noncompetition or other similar agreement between the Company and the Employee.

 

  (b) Applicable Laws ” means the requirements relating to the administration of stock incentive plans under U.S. state corporate laws, rules and regulations, U.S. federal and state securities laws, rules and regulations, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

 

  (c) Award ” means an Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or Bonus Shares granted under the Plan.

 

  (d) Award Agreement ” means a written or electronic agreement between an Awardee and the Company evidencing the terms and conditions of an Award granted pursuant to the Plan. An Award Agreement is subject to the terms and conditions of the Plan.

 

  (e) Awardee ” means the Service Provider-recipient of an outstanding Award granted under the Plan.

 

  (f) Board ” means the Board of Directors of the Company.

 

  (g) Bonus Shares ” means Shares that are granted to a Service Provider pursuant to Article 11 of the Plan without cost and without restrictions in recognition of past performance (whether determined by reference to another employee benefit plan of the Company or otherwise) or as an incentive to become a Service Provider of the Company or a Subsidiary.

 

  (h) Cause ” means, unless otherwise defined for a particular Awardee in an Award Agreement or in an employment or consulting agreement between the Company and such Awardee which addresses the effect of a termination for Cause (as therein defined) on benefits hereunder:

 

  (1) an Awardee’s commission of a felony or other crime involving fraud, dishonesty or moral turpitude;

 

  (2) an Awardee’s willful or reckless misconduct in the performance of the Awardee’s duties;

 

  (3) an Awardee’s habitual neglect of duties; provided, however that the Awardee is given at least ten (10) days prior written notice of such habitual neglect and the opportunity to cure any curable neglect; or

 

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  (4) an Awardee’s breach or violation of any agreement between the Awardee and the Company, including but not limited to any noncompetition, nonsolicitation, or nondisclosure undertaking, or of any Company policy.

Notwithstanding the foregoing, for purposes of clauses (2) and (3) above, Cause shall not include bad judgment or negligent acts not amounting to habitual neglect of duties. An Awardee who agrees to resign his affiliation with the Company or a Subsidiary in lieu of being terminated for Cause may be deemed to have been terminated for Cause for purposes of this Plan.

 

  (i) Change in Control ” means the occurrence of any of the following events:

 

  (1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities;

 

  (2) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets;

 

  (3) A change in the composition of the Board occurring within a two (2)-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are Directors as of the Effective Date, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

 

  (4) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

 

  (j) Code ” means the Internal Revenue Code of 1986, as amended, and any regulations and rulings thereunder.

 

  (k) Committee ” means the Board or the committee of the Board designated by the Board to administer this Plan in accordance with Article 4 of the Plan.

 

  (l) Common Stock ” means the common stock, $0.001 par value, of the Company.

 

  (m) Company ” means Rubicon Technology, Inc., a Delaware corporation.

 

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  (n) Consultant ” means a natural person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity (other than an Employee or Director).

 

  (o) Date of Grant ” means the date on which the Committee completes the corporate action granting an Award or such other later date following the completion of such corporate action as is established by the Committee and set forth in the Award Agreement. Notice of a grant shall be provided to each Awardee within a reasonable time after the date of such grant.

 

  (p) Director ” means a member of the Board.

 

  (q) Disability ” or “ Disabled ” means:

 

  (1) as to an Incentive Stock Option, a total and permanent disability as defined in Code Section 22(e)(3);

 

  (2) as to an Award (other than an Incentive Stock Option), that constitutes “deferred compensation” for purposes of Code Section 409A:

 

  (A) The Awardee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months;

 

  (B) The Awardee is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company;

 

  (C) The Awardee is determined to be totally disabled by the Social Security Administration; or

 

  (D) The Awardee is determined to be disabled under a disability insurance program applying the definition of disability set forth in either Subsection (A) or (C) of this definition; and

 

  (3) As to all other Awards, as determined by the Committee.

 

  (r) Effective Date ” means August 30, 2007.

 

  (s) Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

 

  (t) Exchange Act ” means the Securities Exchange Act of 1934, as amended, and any regulations and rulings thereunder.

 

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  (u) Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

 

  (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the NASDAQ Global Market, The NASDAQ Global Select Market or The NASDAQ Capital Market of The NASDAQ Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable;

 

  (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable;

 

  (3) The price per share at which Shares are initially offered for sale to the public by the Company’s underwriters in the Initial Public Offering of the Common Stock pursuant to a registration statement filed with the SEC under the Securities Act if the Award is made on the effective date of such registration statement; or

 

  (4) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Committee by the reasonable application of a reasonable valuation method.

 

  (v) Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Code Section 422.

 

  (w) Initial Public Offering ” means the underwritten initial public offering of Common Stock that is registered under the Securities Act.

 

  (x) Modification ” means any change in the terms of an Option or a Stock Appreciation Right (or change in the terms of the Plan or applicable Option or Stock Appreciation Right agreement) that may provide the holder of the Option or Stock Appreciation Right with a direct or indirect reduction in the exercise price of the Option or Stock Appreciation Right, or an additional deferral feature, or an extension or renewal of the Option or Stock Appreciation Right, regardless of whether the holder in fact benefits from the change in terms.

 

  (1) An extension of an Option or Stock Appreciation Right refers to the granting to the holder of an additional period of time within which to exercise the Option or Stock Appreciation Right.

 

  (2) A renewal of an Option or Stock Appreciation Right is the granting by the Company of the same rights or privileges contained in the original Option or Stock Appreciation Right on the same terms and conditions.

 

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  (3) Notwithstanding the foregoing provisions of this Section 2.1(x), it is not a Modification of an Option or Stock Appreciation Right to provide an additional period of time within which to exercise the Option or Stock Appreciation Right if such additional period of time ends no later than (i) the original term of the Option or Stock Appreciation Right, or (ii) ten (10) years, and it is not a Modification to change the terms of an Option or Stock Appreciation Right in any of the ways or for any of the purposes specifically described in applicable Treasury Regulations under Code Section 409A as not resulting in a modification, extension or renewal of a stock right, or the granting of a new stock right, for purposes of that section.

 

  (y) Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

 

  (z) Notice of Grant ” means a written or electronic notice evidencing certain terms and conditions of an individual Award grant. The Notice of Grant is part of the Award Agreement.

 

  (aa) Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.

 

  (bb) Option ” means a stock option granted under the Plan pursuant to Article 6 of the Plan.

 

  (cc) Option Agreement ” means an Award Agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option granted to the Optionee pursuant to the Plan. The Option Agreement is subject to the terms and conditions of the Plan.

 

  (dd) Optioned Stock ” means the Common Stock subject to an Option.

 

  (ee) Optionee ” means the holder of an outstanding Option granted under the Plan.

 

  (ff) Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

 

  (gg) Performance Award ” means an Award granted under the Plan pursuant to Article 10 of the Plan.

 

  (hh) Performance Factors ” means the performance of the Company or any Subsidiary, division, business unit or individual using one of the following measures, either on an operating or GAAP basis where applicable, and including measuring the performance of any of the following relative to a defined peer group of companies: revenue; net revenue; revenue growth; net revenue growth; earnings (including on a per share basis); earnings growth rate (including on a per share basis); earnings before interest, taxes, depreciation and amortization (“ EBITDA ”); total stockholder return; profitability; return on equity; return on capital; return on assets, cash flow, including free cash flow; cost savings; process improvement goals; achievement of balance sheet or income statement objective goals; product units shipped; and capital expenditures. When establishing Performance Factors for a Performance Period, the Committee may exclude any or all “extraordinary items” as determined under U.S. generally accepted accounting principles, including without limitation, the charges or costs associated with restructurings of the Company, discontinued operations, other unusual or nonrecurring items, and the cumulative effects of accounting changes.

 

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  (ii) Performance Period ” means the period of 12 months or longer, but not exceeding five years, established by the Committee in connection with the grant of an Award for which the Committee has established performance objectives.

 

  (jj) Plan ” means this Rubicon Technology, Inc. 2007 Stock Incentive Plan, as amended from time to time.

 

  (kk) Restricted Stock ” means Shares granted under the Plan pursuant to Article 8 of the Plan.

 

  (ll) Restricted Stock Agreement ” means an Award Agreement between the Company and an Awardee evidencing the terms and conditions of a grant of Restricted Stock to the Awardee. The Restricted Stock Agreement is subject to the terms and conditions of the Plan.

 

  (mm) Restricted Stock Unit ” means an Award granted under the Plan pursuant to Article 9 of the Plan.

 

  (nn) Rule 16b-3 ” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

 

  (oo) SEC ” means the United States Securities and Exchange Commission, or any successor thereto.

 

  (pp) Section 16(b) ” means Section 16(b) of the Exchange Act.

 

  (qq) Securities Act ” means the Securities Act of 1933, as amended, and any regulations and rulings thereunder.

 

  (rr) Service Provider ” means an Employee, Director or Consultant.

 

  (ss) Stock Appreciation Right ” means a right to receive Shares or cash from the Company pursuant to Article 7 of the Plan.

 

  (tt) Share ” means a share of the Common Stock, as adjusted in accordance with Article 13 of the Plan.

 

  (uu) Subsidiary ” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Code Section 424(f).

 

  (vv) Termination ” means the termination of an Awardee’s employment or service with the Company and all Subsidiaries. An Employee’s transfer between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor does not constitute a Termination. A Service Provider for a Subsidiary shall, however, incur a Termination if the Subsidiary ceases to be a Subsidiary and the Service Provider does not immediately thereafter become a Service Provider of the Company or another Subsidiary.

 

  (1) A Service Provider who is an Employee shall not incur a Termination in the case of any leave of absence approved by the Company, except, that:

 

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  (2) For purposes of Incentive Stock Options, no leave of absence may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the one hundred eighty-first (181st) day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option.

 

  (3) For purposes of an Award (other than an Incentive Stock Option), that constitutes “deferred compensation” for purposes of Code Section 409A, if reemployment upon expiration of a leave of absence approved by the Company is not guaranteed by statute or contract, the Awardee shall be deemed to have incurred a Termination on the one hundred eighty-first (181st) day of such leave.

 

2.2 In addition, certain terms used herein that are capitalized and set forth in quotes shall have the definitions ascribed to them in the first place in which they are used.

 

2.3 In applying the Plan’s definitions, the masculine shall include the feminine and the singular shall include the plural, and vice versa.

ARTICLE 3

Type of Awards; Shares Subject to the Plan

 

3.1 Types of Awards . The following types of Awards may be granted under the Plan: Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards, and Bonus Shares. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Committee at the time of grant.

 

3.2 Shares Subject to the Plan . Subject to adjustment as provided in Article 13 of the Plan, the maximum number of Shares which may be awarded or sold under the Plan is 4,407,692 Shares. All of the Shares that may be issued under this Plan may be issued upon the exercise of Options that qualify as Incentive Stock Options. The Shares may be authorized, but unissued, or reacquired Common Stock.

 

  (a) If an Award covered by one or more Shares is settled in cash or is forfeited without the delivery of Shares, such Shares shall again become available for future grant or sale under the Plan (unless the Plan has been terminated).

 

  (b) If an Option or Stock Appreciation Right expires or becomes unexercisable without having been exercised in full, the unpurchased Share or Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan;

 

  (c) If an Optionee tenders previously-acquired Shares in payment of the exercise price of an Option or if Shares are withheld in payment of the Option exercise price, the number of Shares represented thereby shall again be available for further Awards under the Plan;

 

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  (d) If a Stock Appreciation Right is exercised and settled in Shares, the difference between the total Shares exercised and the net Shares delivered shall again be available for further awards under the Plan; and

 

  (e) If an Awardee tenders previously-acquired Shares in satisfaction of applicable tax withholding obligations, or if any Shares covered by an Award are not delivered to the Awardee because such Shares are withheld to satisfy applicable tax withholding obligations, such Shares shall again be available for further Awards under the Plan.

 

3.3 Individual Award Limits . The maximum number of Shares with respect to which Awards (including but not limited to Options and Stock Appreciation Rights) may be granted in a single calendar year to an individual Awardee (including Awards that are denominated in Shares but may be settled by payment of an equivalent amount in cash) may not exceed 300,000 Shares (except with respect to calendar year 2009, for which such maximum number of Shares for an individual Awardee shall be 600,000). The maximum amount of Awards denominated in cash (including Awards that are denominated in cash but may be settled by payment of an equivalent amount in Shares) that may be granted in a single calendar year to an individual Awardee may not exceed $2,400,000.

 

3.4 Substitute Awards . The Committee may grant Awards under the Plan in substitution for stock and stock based awards held by service providers of another corporation in connection with a merger or consolidation of the other corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the other corporation. The Committee may direct that the substitute Awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. Such substitution of any outstanding stock option or stock appreciation right must satisfy the requirements of Treasury Regulation § 1.424-1 and Code Section 409A, as applicable. Any substitute Awards granted under the Plan shall not count against the share limitation set forth in Section 3.2 of the Plan.

ARTICLE 4

Administration of the Plan

 

4.1 Procedure .

 

  (a) Multiple Administrative Bodies . The Board shall appoint a committee of the Board to administer the Plan. The committee so appointed may consist of the Board itself.

 

  (1) The Board may appoint different committees to administer the Plan with respect to different groups of Service Providers, in which case, the Board shall specify the duties and authority of each such committee, and, to the extent such authority has been delegated by the Board, each such committee shall be the “Committee” for purposes of the Plan.

 

  (2) The Board may delegate to the Company’s chief executive officer all or part of the Committee’s duties with respect to Awards, including the granting thereof, to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act or “covered employees” within the meaning of Code Section 162(m). To the extent such authority has been delegated by the Board, the Company’s chief executive officer shall be the “Committee” for purposes of the Plan.

 

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  (3) The Board may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Board’s delegate or delegates that were consistent with the terms of the Plan.

 

  (4) Unless expressly delegated, the Board has reserved to itself the authority to amend, alter, suspend or terminate the Plan.

 

  (b) Code Section 162(m) . To the extent that the Committee determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Code Section 162(m), the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Code Section 162(m).

 

  (c) Rule 16b-3 . To the extent that the Committee determines it to be desirable to qualify transactions hereunder as exempt under Rule 16b-3, the Plan shall be administered by a Committee of two or more “non-employee directors” within the meaning of Rule 16-3 and the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

 

  (d) Exchange Requirements . To the extent required, the Plan shall be administered by a Committee of “independent directors” within the meaning of any applicable stock exchange rule.

 

4.2 Powers of the Committee . Subject to the provisions of the Plan and subject to the specific duties delegated by the Board to such Committee, the Committee shall have the authority, in its sole discretion:

 

  (a) to determine type of Awards ( i.e. , Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and/or Bonus Shares) to be granted hereunder;

 

  (b) to determine the Fair Market Value;

 

  (c) to select the Service Providers to whom Awards may be granted;

 

  (d) to determine the number of shares of Common Stock to be covered by each Award granted hereunder;

 

  (e) to approve forms of agreements for use under the Plan;

 

  (f) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to:

 

  (1) in the case of an Option or Stock Appreciation Right, the time or times when Options may be exercised (which may be based on performance objectives);

 

  (2) in the case of a grant of Restricted Stock, the amount (if any) of the consideration to be paid by a Service Provider for such Restricted Stock;

 

  (3) any vesting acceleration or waiver of forfeiture restrictions with respect to Awards, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Committee, in its sole discretion, shall determine;

 

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  (g) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;

 

  (h) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

 

  (i) to modify or amend each Award (subject to Article 16 of the Plan);

 

  (j) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Award that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Committee may deem necessary or advisable;

 

  (k) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Committee;

 

  (l) to cancel any unexpired or unpaid Options if at any time the Committee determines the Optionee is not in compliance with the terms and conditions (including, but not limited to any noncompete or nonsolicitation provisions) of the Option Agreement related to such Options; and

 

  (m) to make all other determinations deemed necessary or advisable for administering the Plan.

 

4.3 Effect of Committee’s Decision . The Committee’s decisions, determinations and interpretations shall be final and binding on all Awardees and any other holders of Awards. No member of the Board or of any of the Committees administering the Plan shall be liable for any action or determination made with respect to the Plan or any grant thereunder.

 

4.4 Repricing .

 

  (a) “Repricing” means, with respect to an Option or Stock Appreciation Right, any of the following: (i) the lowering of the exercise price after the Date of Grant; (ii) the taking of any other action that is treated as a repricing under generally accepted accounting principles; or (iii) the cancellation of the Option or Stock Appreciation Right at a time when its exercise price (or, with respect to the Stock Appreciation Right, the Fair Market Value of the Shares covered by the Stock Appreciation Right on the Date of Grant) exceeds the Fair Market Value of the underlying Shares in exchange for cash or any Award, unless the cancellation and exchange occurs in connection with a Change in Control.

 

  (b) The Committee is prohibited from Repricing any Option or Stock Appreciation Right without the prior approval of the stockholders of the Company with respect to the proposed Repricing.

 

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ARTICLE 5

Eligibility

 

5.1 The Committee may grant Nonstatutory Stock Options, Restricted Stock, Restricted Stock Awards, Performance Awards, and Bonus Shares to all Service Providers. Incentive Stock Options may be granted only to Employees. The provisions of Awards need not be the same with respect to each recipient. Each grant of an Award shall be confirmed by, and subject to the terms of an Award Agreement.

ARTICLE 6

Options

 

6.1 Generally . Subject to the limitations of the Plan, the Committee may make grants of Options to Service Providers.

 

6.2 Designation As Either An Incentive Stock Option or As A Nonstatutory Stock Option; $100,000 Limitation . Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds One Hundred Thousand Dollars ($100,000), such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6.2, Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

 

6.3 Option Term . The term of each Option shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

 

6.4 Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Committee, subject to the following:

 

  (a) In the case of an Incentive Stock Option,

 

  (1) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the Date of Grant.

 

  (2) granted to any Employee other than an Employee described in paragraph (1) immediately above, the per Share exercise price shall be no less than one hundred percent (100%) of the Fair Market Value per Share on the Date of Grant.

 

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  (b) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Committee; provided, however, that the per Share exercise price shall not be less than one hundred percent (100%) of the Fair Market Value per Share on the Date of Grant.

 

6.5 Waiting Period and Exercise Dates . At the time an Option is granted, the Committee shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.

 

6.6 Form of Consideration . The Committee shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of:

 

  (a) cash;

 

  (b) check;

 

  (c) other Shares which (1) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (2) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

 

  (d) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan to the extent permitted by Applicable Laws;

 

  (e) a reduction in the amount of any Company liability to the Optionee;

 

  (f) any combination of the foregoing methods of payment; or

 

  (g) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

In the case of an Incentive Stock Option, the Committee shall determine the acceptable form of consideration at the time of grant.

 

6.7 Procedure for Exercise; Rights as a Stockholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Option Agreement. Unless the Committee provides otherwise, vesting of any Option granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

 

  (a)

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, (ii) full payment for the Shares with respect to which the Option is exercised, and (iii) any written representations, covenants, and undertakings that the Company may prescribe in the Option Agreement. Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of

 

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  the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Article 13 of the Plan.

 

  (b) Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

 

  (c) The Committee may suspend the right to exercise a Stock Option at any time when the Committee determines that allowing the exercise and issuance of Stock would violate any federal or state securities or other laws. The Committee may provide that any time periods to exercise the Stock Option are extended during a period of suspension.

 

6.8 Notification under Code Section 83(b) . If the Optionee, in connection with the exercise of any Option, makes the election permitted under Code Section 83(b) to include in such Optionee’s gross income in the year of transfer the amounts specified in Code Section 83(b), then such Optionee shall notify the Company of such election within ten (10) days of filing the notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b). The Committee may, in connection with the grant of an Option or at any time thereafter prior to such an election being made, prohibit an Optionee from making the election described above.

 

6.9 Buyout Provisions . Subject to Section 4.4, the Committee may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Committee shall establish and communicate to the Optionee at the time that such offer is made.

 

6.10 Modifications Generally Prohibited . Once granted, no Modification shall be made in respect to any Option if such Modification would result in the Option constituting a deferral of compensation or having an additional deferral feature within the meaning of applicable Treasury Regulations under Code Section 409A.

 

6.11 Non-Transferability of Options . An Option that is an Incentive Stock Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. Unless determined otherwise by the Committee, a Nonstatutory Stock Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee. If the Committee grants a Nonstatutory Stock Option that is transferable, the Option Agreement for such Nonstatutory Stock Option shall contain such additional terms and conditions governing the Option’s transferability as the Committee deems appropriate.

 

6.12 Termination of Service Provider For Cause . If a Service Provider is terminated for Cause, any unexercised Option shall terminate effective immediately upon such termination.

 

6.13

Disability of Optionee . If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested and exercisable on the date

 

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  of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement); provided, however, that the time specified in the Option Agreement shall not be less than six (6) months. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

 

6.14 Death of Optionee . If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested and exercisable on the date of death; provided, however, that the time specified in the Option Agreement shall not be less than six (6) months. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for six (6) months following the Optionee’s death. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee’s estate or, if none, by the person(s) entitled to exercise the Option under the Optionee’s will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

 

6.15 For Any Other Reason . If an Optionee ceases to be a Service Provider, other than for Cause or upon the Optionee’s death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested and exercisable on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement); provided, however, that the time specified in the Option Agreement shall not be less than thirty (30) days. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Committee, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

ARTICLE 7

Stock Appreciation Rights

 

7.1 Generally . Subject to the limitations of the Plan, the Committee may grant Stock Appreciation Rights to Service Providers. Stock Appreciation Rights may be granted in connection with, and on the same Date of Grant, as all or any part of an Option to a Service Provider or may be granted as a separate Award.

 

7.2 Stock Appreciation Rights Not Granted In Connection With Options . The following provisions apply to all Stock Appreciation Rights that are not granted in connection with Options:

 

  (a)

Described . A Stock Appreciation Right shall entitle the Awardee, upon exercise of all or any part of the Stock Appreciation Right, to receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Shares covered by the surrendered Stock Appreciation Right over (y) the Fair Market

 

15


  Value of the Shares on the Date of Grant of the Stock Appreciation Right. The Committee may not revise or amend a Stock Appreciation Right to reduce the Fair Market Value of the Stock Appreciation Right on the Date of Grant, except as provided in Article 13 of the Plan.

 

  (b) Term . The term of each Stock Appreciation Right shall be ten (10) years from the Date of Grant or such shorter term as may be provided in the Award Agreement. No Stock Appreciation Right may be exercised after the expiration of its term.

 

  (c) Waiting Period and Exercise Dates . At the time a Stock Appreciation Right is granted, the Committee shall fix the period within which the Stock Appreciation Right may be exercised and shall determine any conditions which must be satisfied before the Stock Appreciation Right may be exercised. A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Shares covered by the Stock Appreciation Right exceeds the Fair Market Value of the Shares on the Date of Grant of the Stock Appreciation Right.

 

  (d) Exercise . Any Stock Appreciation Right granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. Unless the Committee provides otherwise, vesting of any Stock Appreciation Right granted hereunder shall be tolled during any unpaid leave of absence. A Stock Appreciation Right may not be exercised for a fraction of a Share.

 

  (e) Effect of Exercise Upon Available Shares . Exercising a Stock Appreciation Right in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Stock Appreciation Right, by the number of Shares as to which the Stock Appreciation Right is exercised.

 

  (f) Notification under Code Section 83(b) . If the Awardee, in connection with the exercise of any Stock Appreciation Right, makes the election permitted under Code Section 83(b) to include in such Awardee’s gross income in the year of transfer the amounts specified in Code Section 83(b), then such Awardee shall notify the Company of such election within ten (10) days of filing the notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b). The Committee may, in connection with the grant of a Stock Appreciation Right or at any time thereafter prior to such an election being made, prohibit an Awardee from making the election described above.

 

  (g) Buyout Provisions . Subject to Section 4.4, the Committee may at any time offer to buy out for a payment in cash or Shares a Stock Appreciation Right previously granted based on such terms and conditions as the Committee shall establish and communicate to the Awardee at the time that such offer is made.

 

  (h) Non-Transferability of Stock Appreciation Rights . Unless determined otherwise by the Committee, a Stock Appreciation Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Awardee, only by the Awardee. If the Committee grants a Stock Appreciation Right that is transferable, the Award Agreement for such Stock Appreciation Right shall contain such additional terms and conditions governing the Stock Appreciation Right’s transferability as the Committee deems appropriate.

 

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  (i) Termination of Service Provider For Cause . If a Service Provider is terminated for Cause, any unexercised Stock Appreciation Right shall terminate effective immediately upon such termination.

 

  (j) Disability of Awardee . If an Awardee ceases to be a Service Provider as a result of the Awardee’s Disability, the Awardee may exercise his or her Stock Appreciation Right within such period of time as is specified in the Award Agreement to the extent the Stock Appreciation Right is vested and exercisable on the date of termination (but in no event later than the expiration of the term of such Stock Appreciation Right as set forth in the Award Agreement); provided, however, that the time specified in the Award Agreement shall not be less than six (6) months. In the absence of a specified time in the Award Agreement, the Stock Appreciation Right shall remain exercisable for twelve (12) months following the Awardee’s termination. If, on the date of termination, the Awardee is not vested as to his or her entire Stock Appreciation Right, the Shares covered by the unvested portion of the Stock Appreciation Right shall revert to the Plan. If after termination, the Awardee does not exercise his or her Stock Appreciation Right within the time specified herein, the Stock Appreciation Right shall terminate, and the Shares covered by such Stock Appreciation Right shall revert to the Plan.

 

  (k) Death of Awardee . If an Awardee dies while a Service Provider, the Stock Appreciation Right may be exercised within such period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Stock Appreciation Right as set forth in the Notice of Grant), by the Awardee’s estate or by a person who acquires the right to exercise the Stock Appreciation Right by bequest or inheritance, but only to the extent that the Stock Appreciation Right is vested and exercisable on the date of death; provided, however, that the time specified in the Award Agreement shall not be less than six (6) months. In the absence of a specified time in the Award Agreement, the Stock Appreciation Right shall remain exercisable for six (6) months following the Awardee’s death. If, at the time of death, the Awardee is not vested as to his or her entire Stock Appreciation Right, the Shares covered by the unvested portion of the Stock Appreciation Right shall immediately revert to the Plan. The Stock Appreciation Right may be exercised by the executor or administrator of the Awardee’s estate or, if none, by the person(s) entitled to exercise the Stock Appreciation Right under the Awardee’s will or the laws of descent or distribution. If the Stock Appreciation Right is not so exercised within the time specified herein, the Stock Appreciation Right shall terminate, and the Shares covered by such Stock Appreciation Right shall revert to the Plan.

 

  (l)

For Any Other Reason . If an Awardee ceases to be a Service Provider, other than for Cause or upon the Awardee’s death or Disability, the Awardee may exercise his or her Stock Appreciation Right within such period of time as is specified in the Award Agreement to the extent that the Stock Appreciation Right is vested and exercisable on the date of termination (but in no event later than the expiration of the term of such Stock Appreciation Right as set forth in the Award Agreement); provided, however, that the time specified in the Award Agreement shall not be less than thirty (30) days. In the absence of a specified time in the Award Agreement, the Stock Appreciation Right shall remain exercisable for three months following the Awardee’s termination. If, on the date of termination, the Awardee is not vested as to his or her entire Stock Appreciation Right,

 

17


  the Shares covered by the unvested portion of the Stock Appreciation Right shall revert to the Plan. If, after termination, the Awardee does not exercise his or her Stock Appreciation Right within the time specified by the Committee, the Stock Appreciation Right shall terminate, and the Shares covered by such Stock Appreciation Right shall revert to the Plan.

 

7.3 Stock Appreciation Rights Granted In Connection With Options . The following provisions apply to all Stock Appreciation Rights that are granted in connection with Options:

 

  (a) A Stock Appreciation Right granted in connection with an Option must be granted on the same Date of Grant as the Option to which it relates.

 

  (b) A Stock Appreciation Right granted in connection with an Option shall entitle the Awardee, upon exercise of all or any part of the Stock Appreciation Right, to surrender to the Company unexercised that portion of the underlying Option relating to the same number of Shares as is covered by the Stock Appreciation Right (or the portion of the Stock Appreciation Right so exercised) and to receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Shares covered by the surrendered portion of the underlying Option over (y) the exercise price of the Shares covered by the surrendered portion of the underlying Option.

 

  (c) Upon the exercise of a Stock Appreciation Right and surrender of the related portion of the underlying Option, the Option, to the extent surrendered, shall not thereafter be exercisable.

 

  (d) Subject to any further conditions upon exercise imposed by the Committee, a Stock Appreciation Right shall be exercisable only to the extent that the related Option is exercisable and a Stock Appreciation Right shall lapse or be forfeited no later than the date on which the related Option lapses or if forfeited.

 

  (e) A Stock Appreciation Right shall terminate and shall no longer be exercisable upon the exercise of the related Option.

 

  (f) The Stock Appreciation Right is only transferable when the related Options are otherwise transferable.

 

  (g) A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Shares covered by the Stock Appreciation Right exceeds the exercise price of the Shares covered by the underlying Option.

 

7.4

Form of Payment . The manner in which the Company’s obligation arising upon the exercise of a Stock Appreciation Right shall be paid shall be determined by the Committee and shall be set forth in the Award Agreement. The Award Agreement may provide for payment in (i) Shares, (ii) cash, or (iii) a fixed combination of Shares or cash, or the Committee may reserve the right to determine the manner of payment at the time the Stock Appreciation Right is exercised. Shares of Common Stock issued upon the exercise of a Stock Appreciation Right shall be valued at their Fair Market Value on the date of exercise. Any Shares issued upon exercise of a Stock Appreciation Right shall be issued in the name of the Awardee or, if requested by the Awardee, in the name of the Awardee and his or her spouse. Until Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), in payment of a Stock Appreciation Right, no right to vote or receive dividends or any

 

18


  other rights as a stockholder shall exist with respect to the Stock Appreciation Right, notwithstanding the exercise of the Stock Appreciation Right. The Company shall issue (or cause to be issued) Shares that are to be issued in payment of a Stock Appreciation Right promptly after the Stock Appreciation Right is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Article 13 of the Plan.

 

7.5 Procedure for Exercise; Rights As a Stockholder . A Stock Appreciation Right shall be deemed exercised when the Company receives a written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Stock Appreciation Right. In addition, if the Stock Appreciation Right provides for the delivery of Shares in settlement of the Company’s obligation under the Stock Appreciation Right, prior to the delivery of Shares, the Company must also receive from the person entitled to exercise the Stock Appreciation Right any written representations, covenants, and undertakings that the Company may prescribe in the Award Agreement.

 

7.6 Modifications Generally Prohibited . Once granted, no Modification shall be made in respect to any Stock Appreciation Right if such Modification would result in the Stock Appreciation Right constituting a deferral of compensation or having an additional deferral feature within the meaning of applicable Treasury Regulations under Code Section 409A.

ARTICLE 8

Restricted Stock

 

8.1 Generally . Subject to the limitations of the Plan, the Committee may make grants of Restricted Stock to Service Providers.

 

8.2 Administration . Shares of Restricted Stock may be granted either alone or in addition to other Awards granted under the Plan. The Committee shall determine the Service Providers to whom, and the time(s) at which grants of Restricted Stock will be made, the number of shares to be awarded to any Service Provider, the amount of the consideration (if any) that is to be paid, the time(s) within which, and the conditions under which such Restricted Stock may be subject to forfeiture, and any other terms and conditions of the Awards, in addition to those contained in this Article 8.

 

8.3 Awards and Certificates . As a condition to the grant of Restricted Stock under the Plan, each Awardee shall execute and deliver to the Company (i) an agreement in form and substance satisfactory to the Committee reflecting the conditions and restrictions imposed upon the Shares awarded, (ii) the consideration, if any, to be paid for the Shares, and (iii) any written representations, covenants, and undertakings that the Committee may prescribe in the Restricted Stock Agreement. Certificates for Shares delivered pursuant to such Awards may, if the Committee so determines, bear a legend referring to the restrictions and the instruments to which such Shares of Restricted Stock are subject.

 

8.4 Form of Consideration . The consideration for Restricted Stock (if any) shall consist entirely of cash.

 

8.5

Notification under Code Section 83(b) . If, in connection with a grant of Restricted Stock, the Awardee makes the election permitted under Code Section 83(b) to include in such Awardee’s gross income in the year of transfer the amounts specified in Code Section 83(b), then such Awardee shall notify the Company of such election within ten (10) days of filing the notice of the

 

19


  election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b). The Committee may, in connection with the grant of Restricted Stock or at any time thereafter prior to such an election being made, prohibit an Awardee from making the election described above.

 

8.6 Buyout Provisions . The Committee may at any time offer to buy out for a payment in cash, Restricted Stock previously granted based on such terms and conditions as the Committee shall establish and communicate to the Awardee at the time that such offer is made.

 

8.7 Terms and Conditions . Subject to the provisions of the Plan and the applicable Restricted Stock Agreement, during a period set by the Committee, commencing with the date of such Award (the “Restriction Period”), the Awardee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock. The Committee may provide for the lapse of such restrictions in installments or otherwise and may accelerate or waive such restrictions, in whole or in part, in each case based on period of service, performance of the Awardee or of the Company for which the Awardee is employed or such other factors or criteria as the Committee may determine. Restricted Stock for which forfeiture is conditioned solely on employment and the passage of time shall not fully vest less than three (3) years from the Date of Grant of the Restricted Stock. Restricted Stock for which forfeiture is conditioned on the achievement of Performance Factors or other performance conditions shall not be fully vested less than one (1) year from the Date of Grant. Notwithstanding the foregoing, the Committee may, in its discretion and without limitation, provide in the Restricted Stock Agreement that vesting of the Restricted Stock will be accelerated to any degree determined by the Committee as a result of the Disability, death, retirement or involuntary termination of the Awardee or the occurrence of a Change in Control.

 

8.8 Rights as a Stockholder . Except as otherwise provided in this Plan and the applicable Restricted Stock Agreement, the Awardee shall have, with respect to the Shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the Shares and the right to receive any cash dividends. Absent a provision regarding the disposition of dividends in the applicable Restricted Stock Agreement, any dividend payable with respect to Restricted Stock shall be paid to the Service Provider no later than the end of the calendar year in which the same dividends on Shares are paid to the stockholders of such Shares generally, or if later, the 15th day of the third month following the date on which the same dividends on Shares are paid to the Shares’ stockholders.

 

8.9 Termination for Cause . If a Service Provider is terminated for Cause, any Restricted Stock previously granted to the Service Provider that remains unvested as of the date of termination shall be forfeited effective immediately upon such termination.

 

8.10 Termination Other Than for Cause . Except as otherwise provided in the applicable Restricted Stock Agreement or as determined by the Committee, if a Service Provider ceases to be a Service Provider other than for Cause, any Restricted Stock previously granted to the Service Provider that remains unvested as of the date of cessation shall be forfeited immediately upon such cessation.

 

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ARTICLE 9

Restricted Stock Units

 

9.1 Generally . Subject to the limitations of the Plan, the Committee may make grants of Restricted Stock Units to Service Providers. A Restricted Stock Unit is the grant of a right to receive a Share of Common Stock or the Fair Market Value in cash of a Share of Common Stock, in the future, at such time and contingent upon such terms as the Committee shall establish.

 

9.2 Administration . Restricted Stock Units may be granted either alone or in addition to other Awards granted under the Plan. The Committee shall determine the Service Providers to whom, and the time(s) at which grants of Restricted Stock Units will be made, the number of Restricted Stock Units to be awarded to any Service Provider, the time(s) within which, and the conditions under which such Restricted Stock Unit may be subject to forfeiture, and any other terms and conditions of the Awards, in addition to those contained in this Article 9.

 

9.3 Terms and Conditions . The Committee shall establish as to each grant of Restricted Stock Units the terms and conditions upon which such Restricted Units shall become vested. The Committee may base the vesting of Restricted Stock Units upon (i) the continued employment or service of the Awardee, (ii) the achievement of performance objectives, or (iii) a combination thereof. The Committee may provide for the vesting of Restricted Stock Units in installments or otherwise and may accelerate or waive such restrictions, in whole or in part, in each case based on period of service, performance of the Awardee or of the Company for which the Awardee is employed or such other factors or criteria as the Committee may determine. Restricted Stock Units with vesting conditioned solely on employment and the passage of time shall not vest less than three (3) years from the Date of Grant of the Restricted Stock Units. Restricted Stock Units with vesting conditioned on the achievement of Performance Factors or other performance conditions shall not vest less than one (1) year from the Date of Grant. Notwithstanding the foregoing, the Committee may, in its discretion and without limitation, provide in the Restricted Stock Unit Agreement that vesting of the Restricted Stock Units will accelerate to any degree determined by the Committee as a result of the Disability, death, retirement or involuntary termination of the Awardee or the occurrence of a Change in Control.

 

9.4 Dividend Equivalents . If (and only if) expressly authorized in the applicable Award Agreement, in the event that the Company pays any cash or other dividend or makes any other distribution in respect of the Common Stock, a Service Provider will be credited with an additional number of Restricted Stock Units (including fractions thereof) determined by dividing (i) the amount of cash, or the value (as determined by the Committee) of any securities or other property, paid or distributed in respect of a Share by (ii) the Fair Market Value of a Share for the date of such payment or distribution, and multiplying the result of such division by (iii) the number of Restricted Stock Units that were credited to a Service Provider immediately prior to the date of the dividend or other distribution. Credits shall be made effective as of the date of the dividend or other distribution in respect of the Common Stock to the bookkeeping account to which the Service Provider’s Restricted Stock Units are credited. Dividends credited to a Service Provider shall be subject to the same restrictions and shall be distributed at the same time and in the same manner as the Restricted Stock Units to which they relate.

 

9.5 Non-Transferability . Restricted Stock Units may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner.

 

9.6 No Rights as a Stockholder . A Service Provider who is to receive settlement of his or her vested Restricted Stock Units by the delivery of Shares shall have no rights as a stockholder of the Company until the Shares are actually issued to the Service Provider pursuant to the terms of the applicable Award Agreement. The Shares may be issued without consideration.

 

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9.7 Termination for Cause . If a Service Provider is terminated for Cause, any Restricted Stock Units previously granted to the Service Provider that have not been settled by the delivery of cash or Shares shall be forfeited effective immediately upon such termination.

 

9.8 Termination Other Than for Cause . Except as otherwise provided in the applicable Award Agreement or as determined by the Committee, if a Service Provider ceases to be a Service Provider other than for Cause, any Restricted Stock Units previously granted to the Service Provider that remain unvested as of the date of cessation shall be forfeited immediately upon such cessation.

 

9.9 Form of Payment . The manner in which the Company shall settle its obligation (if any) arising out of a grant of Restricted Stock Units shall be determined by the Committee and shall be set forth in the Award Agreement. The Award Agreement may provide for payment in (i) Shares, (ii) cash, or (iii) a fixed combination of Shares or cash, or the Committee may reserve the right to determine the manner of payment at the time that the Restricted Stock Units are settled.

 

  (a) Shares of Common Stock issued in settlement of Restricted Stock Units shall be valued at (i) their Fair Market Value on the date of payment for purposes of determining the amount of compensation paid to the Awardee, and (ii) as provided in the Award Agreement for any other purpose.

 

  (b) In addition, if the Award Agreement for a grant of Restricted Stock Units provides for the delivery of Shares in settlement of the Company’s obligation under the Award, prior to the delivery of any Shares, the Company must also receive from the Awardee any written representations, covenants, and undertakings that the Company may prescribe in the Award Agreement.

 

  (c) Any Shares issued upon settlement of Restricted Stock Units shall be issued in the name of the Awardee or, if requested by the Awardee, in the name of the Awardee and his or her spouse. Until Shares are actually issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), in settlement of Restricted Stock Units, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Article 13 of the Plan.

ARTICLE 10

Performance Awards

 

10.1 Generally . Subject to the limitations of the Plan, the Committee may make grants of Performance Awards to Service Providers who are Employees. A Performance Award shall consist of the right to receive a payment that is contingent upon the attainment of one or more performance objectives during a Performance Period. Performance Awards may be denominated in cash ( e.g. , units valued at $100 at target level of performance) or Shares. Each grant of Performance Awards shall be evidenced by an Award Agreement, which shall set forth the terms and conditions of the Performance Award.

 

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10.2 Establishment of Performance Criteria . On or prior to the Date of Grant of a Performance Award, the Committee shall establish for such Performance Award:

 

  (a) The Performance Period;

 

  (b) One or more performance objectives;

 

  (c) The formula for determining the amount or amounts that shall be earned under the Performance Award, if any, based upon the degree of attainment of the applicable performance objectives;

 

  (d) The conditions under which an Awardee shall forfeit the Performance Award; and

 

  (e) Such other terms and conditions that the Committee shall establish.

 

10.3 Performance Objectives . Performance objectives may include a threshold level of performance below which no payout or vesting will occur, target levels of performance at which a full payout of full vesting will occur, and/or a maximum level of performance at which a specified additional payout or vesting will occur. Unless otherwise provided in the Award Agreement, the Committee shall have the right to reduce or increase the amount payable to an Awardee with respect to an Award from the amount that would be payable by application of the Award’s formula.

 

10.4 Determination of Award Amount . At the expiration of the Performance Period, the Committee shall determine (i) the extent to which the predetermined performance objectives have been achieved during the Performance Period, (ii) the resulting value of the Performance Awards, and (iii) the payment, if any, owed to the Awardee.

 

10.5 Non-Transferability . Performance Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner.

 

10.6 Form of Payment . The manner in which the Company shall settle its obligation (if any) arising out of the grant of a Performance Award shall be determined by the Committee and shall be set forth in the Award Agreement. The Award Agreement may provide for payment in (i) Shares, (ii) cash, or (iii) a fixed combination of Shares or cash, or the Committee may reserve the right to determine the manner of payment at the time the Performance Award is settled.

 

  (a) Shares of Common Stock issued in settlement of a Performance Award shall be valued at (i) their Fair Market Value on the date of payment for purposes of determining the amount of compensation paid to the Awardee, and (ii) as provided in the Award Agreement for any other purpose ( e . g ., for purpose of converting a Performance Award denominated in cash into Shares for purposes of payment).

 

  (b) In addition, if the Award Agreement for a Performance Award provides for the delivery of Shares in settlement of the Company’s obligation under the Award, prior to the delivery of any Shares, the Company must also receive from the Awardee any written representations, covenants, and undertakings that the Company may prescribe in the Award Agreement.

 

  (c)

Any Shares issued upon settlement of Performance Awards shall be issued in the name of the Awardee or, if requested by the Awardee, in the name of the Awardee and his or her spouse. Until Shares are actually issued (as evidenced by the appropriate entry on the

 

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  books of the Company or of a duly authorized transfer agent of the Company), in settlement of a Performance Award grant, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Article 13 of the Plan.

ARTICLE 11

Bonus Shares

 

11.1 Generally . Subject to the limitations of the Plan, the Committee may grant Bonus Shares to any Service Provider, in such amount and upon such terms, at any time and from time to time as the Committee in its sole discretion shall determine.

 

11.2 Awards and Certificates . Prior to the delivery of any Shares to the Awardee in payment of a grant of Bonus Shares, the Company must receive from the Awardee any written representations, covenants, and undertakings that the Company may prescribe in the Award Agreement. Any Shares issued with respect to a grant of Bonus Shares shall be issued in the name of the Awardee or, if requested by the Awardee, in the name of the Awardee and his or her spouse. Until Shares are actually issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Article 13 of the Plan.

 

11.3 Non-Transferability . Until actually delivered to the Awardee, Bonus Shares may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner.

ARTICLE 12

Designation of Awards as Performance-Based Compensation

The Committee may designate an Award of Restricted Stock, Restricted Stock Units, or Performance Awards as intended to qualify as “performance based compensation” within the meaning of Code Section 162(m).

 

12.1 Any Award of Restricted Stock, Restricted Stock Units, or any Performance Award that is intended to qualify as performance-based compensation shall be, to the extent required by Code Section 162(m), either (i) conditioned upon the attainment of one or more Performance Factors, or (ii) granted based upon the achievement of one or more Performance Factors.

 

12.2 Any Award of Restricted Stock, Restricted Stock Units, or any Performance Award that is intended to qualify as performance-based compensation shall also be subject to the following:

 

  (a) No later than ninety (90) days following the commencement of each Performance Period (or such other time as may be required or permitted by Code Section 162(m)), the Committee shall, in writing, (1) grant a target number of Shares or units, (2) select the performance goal or goals applicable to the Performance Period, and (3) specify the relationship between performance goals and the number of Shares or units that may be earned by an Awardee for such Performance Period.

 

24


  (b) Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable performance objectives have been achieved and the number of units or Shares, if any, earned by an Awardee for such Performance Period.

 

  (c) In determining the number of units or Shares earned by an Awardee for a given Performance Period, subject to any applicable Award Agreement, the Committee shall have the right to reduce (but not increase) the amount earned at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period.

ARTICLE 13

Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale

 

13.1 Changes in Capitalization . Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan as well as the price per Share covered by each outstanding Option and the base amount per Share of each Stock Appreciation Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Share, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”; provided, however, that with respect to Incentive Stock Options, no such adjustment shall be authorized to the extent that such adjustment would cause the Plan to violate Code Section 422(b)(1); provided further, that with respect to Options and Stock Appreciation Rights, no such adjustment shall be authorized to the extent such adjustment would cause the Options and Stock Appreciation Rights to become “deferred compensation” subject to Code Section 409A. Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Award.

ARTICLE 14

Cancellation and Rescission of Awards

 

14.1 Cancellation of Awards . Unless the Award Agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold, or otherwise limit or restrict any unexercised (in the case of Options or Stock Appreciation Rights), unvested, or unpaid Award at any time if the Awardee is not in compliance with all applicable provisions of the Award Agreement and the Plan, or if the Awardee has engaged in any Adverse Conduct.

 

14.2 Certification of Compliance May Be Required . Upon exercise, payment or delivery pursuant to an Award, the Committee may require the Awardee to certify, in a manner acceptable to the Company, that the Awardee is in compliance with the terms and conditions of the Plan.

 

14.3

Rescission of Awards . Unless the Award Agreement specifies otherwise, for a period of two (2) years following the exercise, payment or delivery of an Award (the “Rescission Period”), the Committee may rescind any such exercise, payment, or delivery of the Award upon its

 

25


  determination that the Awardee has engaged in Adverse Conduct prior to the delivery of the Award or during the Rescission Period. In the event of any such rescission, the Awardee shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required.

ARTICLE 15

Change in Control Provisions

 

15.1 In the event of a merger or Change in Control, each outstanding Award will be treated as the Committee determines, including, without limitation, that each Award be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. The Committee will not be required to treat all Awards similarly in the transaction.

 

15.2 In the event that the successor corporation does not assume or substitute for the Award, the Awardee will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a Change in Control, the Committee will notify the Awardee in writing or electronically that the Option or Stock Appreciation Right will be fully vested and exercisable for a period of time determined by the Committee in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.

 

15.3 For the purposes of this Article 15, an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Committee may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, or Performance Award, for each Share subject to such Award (or in the case of an Award settled in cash, the number of implied shares determined by dividing the value of the Award by the per share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.

 

15.4 Notwithstanding anything in this Article 15 to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Awardee’s consent; provided, however, a modification to such performance goals only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.

 

26


ARTICLE 16

Amendment and Termination of the Plan

 

16.1 Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan.

 

16.2 Stockholder Approval . The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

 

16.3 Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Awardee, unless mutually agreed otherwise between the Awardee and the Committee, which agreement must be in writing and signed by the Awardee and the Company. Termination of the Plan shall not affect the Committee’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

ARTICLE 17

Conditions Upon Issuance of Shares

 

17.1 Legal Compliance . Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. Under no circumstances shall the Company be obligated to effect or maintain any registration under the Securities Act or other similar Applicable Laws.

 

17.2 Investment Representations . As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

 

17.3 Restrictions on Share Transferability .

 

  (a) Generally . The Committee may include in the Award Agreement such restrictions on any Shares acquired pursuant to the exercise or vesting of an Award as it may deem advisable, including restrictions under applicable federal securities laws.

 

  (b) Market Standoff . In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s Initial Public Offering, no person may sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose of or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any Shares issued pursuant to an Award granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time as may be requested by the Company or such underwriters; provided, however, that in no event shall such period exceed two hundred fourteen (214) days following the effective date of the registration statement. The limitations of this Section 17.3 (b) shall in all events terminate two years after the effective date of the Company’s Initial Public Offering.

 

27


  (1) In the event of any stock split, stock dividend, recapitalization, combination of Shares, exchange of Shares or other change affecting the Company’s outstanding Common Stock effected as a class without the Company’s receipt of consideration, any new, substituted or additional securities distributed with respect to the purchased Shares shall be immediately subject to the provisions of this Section 17.3(b), to the same extent the purchased Shares are at such time covered by such provisions.

 

  (2) In order to enforce the limitations of this Section 17.3(b), the Company may impose stop-transfer instructions with respect to the purchased shares until the end of the applicable stand off period.

ARTICLE 18

Additional Provisions

 

18.1 Term of Plan . Subject to Section 18.6 of the Plan, the Plan became effective upon its original adoption by the Board. It shall continue in effect for a term of ten (10) years from such original adoption by the Board unless terminated earlier under Article 16 of the Plan.

 

18.2 Unfunded Status of Plan . It is intended that the Plan shall constitute an “unfunded” plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver stock or make payments; provided, however, that the existence of such trusts or other arrangements is consistent with the “unfunded” status of the Plan.

 

18.3 No Right to Continue As A Service Provider . Neither the Plan nor any Award shall confer upon an Awardee any right with respect to continuing the Awardee’s relationship as a Service Provider with the Company, nor shall they interfere in any way with the Awardee’s right or the Company’s right to terminate such relationship at any time, with or without Cause.

 

18.4 Inability to Obtain Authority . The inability or failure of the Company to obtain authority from any regulatory body having jurisdiction (including, without limitation, effectiveness of a registration statement under the Securities Act), which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

 

18.5 Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

 

18.6 Stockholder Approval . The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. If such stockholder approval is not obtained, all Awards granted under the Plan shall be cancelled.

 

18.7 No Right to Participation . No Employee, Director or Consultant shall have the right to be selected to receive an Award, or, having been so selected, to be selected to receive a future Award.

 

18.8 Successors . All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise of all or substantially all of the business or assets of the Company.

 

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18.9 Severability . If any part of the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any other part of the Plan. Any Section or part of a Section so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

 

18.10 Designation of Beneficiary . The Committee may establish procedures allowing an Awardee to designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the Awardee’s death.

 

18.11 Governing Law . The Plan shall be construed in accordance with and governed by the laws of the State of Illinois.

 

18.12 Code Section 409A . To the extent that any Award shall constitute “deferred compensation” subject to Code Section 409A, such Award shall be administered in accordance with the requirements of Code section 409A(a)(2)(A)(i), which prohibits the distribution of compensation subject to Code section 409A to a “specified employee” of a publicly traded company any earlier than six months after the date of separation of service in the case of a distribution by reason of a separation of service.

[END OF PLAN]

 

29

Exhibit 21.1

Rubicon Technologies, Inc.

Subsidiaries of the Company

 

Name of Subsidiary

   State (or other jurisdiction of incorporation)

Rubicon Worldwide LLC

   Illinois

Rubicon Sapphire Technology (Malaysia) SDN BHD

   Malaysia

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We have issued our reports dated March 13, 2014, with respect to the consolidated financial statements, and internal control over financial reporting included in the Annual Report of Rubicon Technology, Inc. on Form 10-K for the year ended December 31, 2013. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Rubicon Technology, Inc. on Form S-3 (File No. 333-167272, effective June 4, 2010), on Form S-3/A (File No. 333-192536, effective December 13, 2013), on Form S-3MEF (File No. 333-167535, effective June 16, 2010), and on Forms S-8 (File No. 333-147552, effective November 20, 2007 and File No. 333-180211, effective March 19, 2012).

 

/s/ GRANT THORNTON LLP

Chicago, Illinois

March 13, 2014

EXHIBIT 31.1

Certifications

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raja M. Parvez, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Rubicon Technology, Inc. (the “registrant”);

 

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

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 13, 2014     By:  

  /s/ Raja M. Parvez

        Raja M. Parvez
        President and Chief Executive Officer

EXHIBIT 31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William F. Weissman, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Rubicon Technology, Inc. (the “registrant”);

 

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

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 13, 2014     By:  

  /s/ William F. Weissman

        William F. Weissman
        Chief Financial Officer

EXHIBIT 32.1

Certification Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002,

18 U.S.C. Section 1350

In connection with the Annual Report of Rubicon Technology, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Raja M. Parvez, President and Chief Executive Officer of the Company, and I, William F. Weissman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 13, 2014     By:  

  /s/ Raja M. Parvez

        Raja M. Parvez
        President and Chief Executive Officer
Date: March 13, 2014     By:  

  /s/ William F. Weissman

        William F. Weissman
        Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.