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(MARK ONE)
OR
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DELAWARE | 22-3531208 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification Number) |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [_]
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Item 4. | Controls and Procedures |
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
Item 6. | Exhibits |
September 30,
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December
31,
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ASSETS | ||||
Current assets: | ||||
Cash and cash equivalents | $ 39,442 | $ 41,220 | ||
Short-term investments | 40,387 | 39,342 | ||
Accounts receivable, net | 16,341 | 10,244 | ||
Inventories | 32,998 | 28,321 | ||
Prepaid expenses and other current assets | 3,357 | 3,958 | ||
Total current assets | 132,525 | 123,085 | ||
Net property, plant and equipment | 8,607 | 6,817 | ||
Goodwill | 13,245 | 13,245 | ||
Identifiable intangible assets, net | 9,722 | 10,379 | ||
Other assets | 6,725 | 6,845 | ||
Total assets | $ 170,824 | $ 160,371 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: | ||||
Accounts payable and accrued liabilities | $ 8,622 | $ 5,967 | ||
Other current liabilities | 8,164 | 5,867 | ||
Total current liabilities | 16,786 | 11,834 | ||
Commitments and contingencies | ||||
Stockholders' equity: | ||||
Common stock | 17 | 17 | ||
Additional paid-in capital | 142,246 | 141,154 | ||
Accumulated other comprehensive loss | (1,351) | (1,096) | ||
Retained earnings | 13,126 | 8,462 | ||
Total stockholders' equity | 154,038 | 148,537 | ||
Total liabilities and stockholders' equity | $ 170,824 | $ 160,371 |
Three Months Ended
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Nine Months Ended
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2004 |
2003 |
2004 |
2003 |
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Revenues | $ 21,845 | $ 14,169 | $ 61,170 | $ 42,605 | |||||
Cost of revenues | 11,447 | 7,890 | 32,268 | 24,282 | |||||
Gross profit | 10,398 | 6,279 | 28,902 | 18,323 | |||||
Operating expenses: | |||||||||
Research and development | 3,913 | 3,149 | 12,229 | 9,798 | |||||
Selling, general and administrative | 3,857 | 2,592 | 10,828 | 7,996 | |||||
Amortization | 219 | 219 | 657 | 657 | |||||
Total operating expenses | 7,989 | 5,960 | 23,714 | 18,451 | |||||
Operating income (loss) | 2,409 | 319 | 5,188 | (128) | |||||
Interest income and other, net | 923 |
285 |
1,523 | 1,332 | |||||
Income before income taxes | 3,332 | 604 | 6,711 | 1,204 | |||||
Provision for income taxes | 1,138 | 139 | 2,047 | 278 | |||||
Net income | $ 2,194 | $ 465 | $ 4,664 | $ 926 | |||||
Earnings per share: | |||||||||
Basic | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 | |||||
Diluted | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 | |||||
Weighted average shares outstanding: | |||||||||
Basic | 16,755,374 | 16,376,434 | 16,729,557 | 16,354,962 | |||||
Diluted | 16,819,564 | 16,781,359 | 16,925,324 | 16,606,139 |
Nine Months Ended
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2004 |
2003 |
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Cash flows from operating activities: | |||
Net income | $ 4,664 | $ 926 | |
Adjustments to reconcile
net income to net cash provided by
operating activities: |
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Amortization | 657 | 657 | |
Depreciation | 955 | 1,033 | |
Net loss (gain) on sale of marketable securities | 99 | (398) | |
Tax benefit from sale of shares through employee stock plans | 203 | 17 | |
Provision for doubtful accounts | 117 | 95 | |
Deferred income taxes | - | 119 | |
Decrease (increase) in assets: | |||
Accounts receivable | (6,238) | 4,292 | |
Inventories | (6,472) | 4,509 | |
Prepaid expenses and other assets | 785 | 1,202 | |
Increase (decrease) in liabilities: | |||
Accounts payable and accrued liabilities | 2,649 | (1,618) | |
Other current liabilities | 2,290 | (3,570) | |
Net cash (used in) provided by operating activities | (291) | 7,264 | |
Cash flows from investing activities: | |||
Net increase in marketable securities | (1,433) | (8,311) | |
Purchases of property, plant and equipment | (940) | (257) | |
Net cash used in investing activities | (2,373) | (8,568) | |
Cash flows from financing activities: | |||
Proceeds from sales of shares through employee stock plans | 889 | 552 | |
Net cash provided by financing activities | 889 | 552 | |
Effect of exchange rate changes on cash | (3) | 44 | |
Net decrease in cash and cash equivalents | (1,778) | (708) | |
Cash and cash equivalents at beginning of period | 41,220 | 42,047 | |
Cash and cash equivalents at end of period | $ 39,442 | $ 41,339 |
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the "Company") and in the opinion of management reflect all adjustments, consisting only of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from those amounts. The interim results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of results to be expected for the entire year. This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE 2. Stock-Based Compensation
At September 30, 2004, the Company has stock-based employee compensation plans. The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. No stock-based employee compensation cost is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has adopted the disclosure standards of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which requires the Company to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method of accounting for stock options, as defined in SFAS No. 123, had been applied. The following table illustrates the effect on net income and per share amounts if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
Three Months Ended |
Nine Months Ended |
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September 30, |
September 30, |
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2004 | 2003 | 2004 | 2003 | |||||
Net income, as reported | $ 2,194 | $ 465 | $ 4,664 | $ 926 | ||||
Deduct: Total stock-based employee
compensation
expense determined under fair value based method, net of related income tax benefits |
1,471 |
1,328 |
4,289 |
3,781 |
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Pro forma net income (loss) | $ 723 | $ (863) | $ 375 | $ (2,855) | ||||
Net income (loss) per share: | ||||||||
Basic-as reported | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 | ||||
Basic-pro forma | $ 0.04 | $ (0.05) | $ 0.02 | $ (0.17) | ||||
Diluted-as reported | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 | ||||
Diluted-pro forma | $ 0.04 | $ (0.05) | $ 0.02 | $ (0.17) |
The fair value of each stock option granted during the three and nine month periods ended September 30, 2004 and 2003 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended |
Nine Months Ended |
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September 30, | September 30, | |||||||
Employee Stock Options: | 2004 | 2003 | 2004 | 2003 | ||||
Expected life (years) |
5.0 | 5.0 | 5.0 | 5.0 | ||||
Expected volatility |
71.7% | 59.2% | 68.0% | 62.6% | ||||
Expected dividend yield |
0.0% | 0.0% | 0.0% | 0.0% | ||||
Risk-free interest rate |
3.5% | 3.1% | 3.1% | 3.6% | ||||
Weighted
average fair value of options granted
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$ 9.10 | $ 11.13 | $ 13.57 | $ 9.54 |
Three Months Ended |
Nine Months Ended |
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September 30, | September 30, | |||||||
Employee Stock Purchase Plan Shares: | 2004 | 2003 | 2004 | 2003 | ||||
Expected life (years) |
1.6 | 1.3 | 1.4 | 1.1 | ||||
Expected volatility |
55.7% | 55.0% | 55.6% | 59.6% | ||||
Expected dividend yield |
0.0% | 0.0% | 0.0% | 0.0% | ||||
Risk-free interest rate |
1.5% | 1.7% | 1.5% | 1.7% | ||||
Weighted
average fair value of options granted
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$ 6.57 | $ 5.62 | $ 6.31 | $ 5.80 |
NOTE 3. Marketable Securities
The Company has evaluated its investment policies consistent with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated other comprehensive loss." Realized gains and losses, interest and dividends on available-for-sale securities are included in interest income and other, net. Net realized gains on available-for-sale securities were $7 and net realized losses on available-for-sale securities were $99 for the three and nine months ended September 30, 2004, respectively. Net realized losses on available-for-sale securities were $120 and net realized gains on available-for-sale securities were $398 for the three and nine months ended September 30, 2003, respectively. Gross unrealized gains on available-for-sale securities were $87 and $192 as of September 30, 2004 and December 31, 2003, respectively. Gross unrealized losses on available-for-sale securities were $403 and $47 as of September 30, 2004 and December 31, 2003, respectively.
NOTE 4. Identifiable Intangible Assets and Goodwill
Identifiable intangible assets:
Identifiable intangible assets as of September 30, 2004 are as follows:
Weighted Average Useful Life
Gross Carrying
AmountAccumulated
AmortizationNet
Purchased technology 12 years $ 3,091
$ 2,031 $ 1,060 Patented technology 16 years 9,900
1,238 8,662 Total $ 12,991
$ 3,269 $ 9,722
Identifiable intangible assets as of December 31, 2003 are as follows:
Weighted Average Useful Life |
Gross Carrying
|
Accumulated
|
Net |
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Purchased technology | 12 years |
$ 3,091 |
$ 1,838 | $ 1,253 | |||
Patented technology | 16 years |
9,900 |
774 | 9,126 | |||
Total |
$ 12,991 |
$ 2,612 | $ 10,379 |
Intangible asset amortization expense for each of the three and nine months ended September 30, 2004 and 2003 was $219 and $657, respectively. Assuming no change in the gross carrying value of identifiable intangible assets, estimated amortization expense amounts to $876 for 2004, 2005, 2006 and 2007, and $787 for 2008.
Accounts receivable are net of the allowance for doubtful accounts of $366 and $249 as of September 30, 2004 and December 31, 2003, respectively.
September 30, |
December 31, |
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2004 |
2003 |
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Materials | $ 18,581 | $ 13,476 | ||
Work-in-process | 10,205 | 10,446 | ||
Finished goods | 4,212 | 4,399 | ||
Total inventories |
$ 32,998 |
$ 28,321 |
September 30,
December 31,
2004
2003
Land and building $ 5,176
$ 5,152 Machinery and equipment 3,896
1,885 Furniture and fixtures 1,423
1,401 Computer equipment 3,475
2,812 Leasehold improvements 908
884 14,878
12,134 Accumulated depreciation (6,271)
(5,317) Net property, plant and equipment $ 8,607
$ 6,817
NOTE 8. Commitments and Contingencies
Intellectual property indemnification obligations
The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. Historically, the Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.
Warranty Reserves
The Company generally provides a warranty on its products for a period of twelve to fifteen months against defects in material and workmanship. The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company's estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company's warranty reserves are as follows:
Nine Months Ended
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2004 |
2003 |
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Balance, beginning of the period |
$ 950 |
$ 1,120 |
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Provision for warranties issued during the period | 1,165 | 739 | ||
Consumption of reserves |
(1,064) |
(885) |
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Balance, end of the period |
$ 1,051 |
$ 974 |
Legal Matters
On September 30, 2003, the Company's wholly-owned subsidiary, ISOA, Inc. ("ISOA"), filed a counterclaim in the Dallas, Texas District Courts in response to a claim filed on September 23, 2003 against Rudolph and ISOA by August Technology Corporation ("August") and STI, Inc. ("STI") related to a commercial dispute. The dispute arose from a December 24, 1997 Development Agreement between ISOA and STI. August acquired STI from ASTI Holdings, Ltd. in April 2003.
Under the Development Agreement, ISOA agreed to provide to STI certain engineering resources in the development of software for STI's semiconductor metrology systems. In return, STI agreed to pay to ISOA a minimum royalty of $1.0 million of which approximately one-third was paid. August alleged that ISOA did not fulfill its obligations under the Development Agreement and sought a judgment against ISOA for repayment of the monies previously paid and attorney's fees incurred in bringing this action. The Company had maintained that ISOA fulfilled its obligations under the Development Agreement and that August remained obligated to pay all amounts as agreed to under the Development Agreement. August further alleged that ISOA did not perform substantially in order to justify any additional payments. The Company further believed that intellectual property delivered by ISOA under the terms of the Development Agreement may have been and continue to be used in current systems on the market from August. ISOA's counterclaim sought full payment of the minimum royalty, ongoing royalty payments for any August macro-defect inspection tools using ISOA's property, damages, costs, and attorneys' fees.
On August 6, 2004, the Company and ISOA entered into a settlement agreement with August and STI. Under the terms of the settlement, both companies have agreed to dismiss all claims against each other related to this matter. The Company received a one-time payment of $502,500 from ASTI Holdings in connection with the settlement, which is reflected in the Company's consolidated financial statements for the three months ended September 30, 2004 in interest income and other, net.
In addition, from time to time the Company is subject to legal proceedings and claims in the ordinary course of business. The Company is not aware of any legal proceedings or claims that management believes would have a material adverse effect on the Company's consolidated financial statements taken as a whole.
NOTE 9.
Interest Income and Other, Net
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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2004 | 2003 | 2004 | 2003 | |||||
Interest income |
$ 394 |
$ 405 |
$ 1,062 |
$ 934 | ||||
Realized gains (losses) on sales
of marketable securities |
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398 |
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Rental income |
19 |
- | 57 | - | ||||
Litigation settlement income | 503 | - | 503 | - | ||||
Total |
$ 923 |
$ 285 |
$ 1,523 |
$ 1,332 |
NOTE 10. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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2004 | 2003 | 2004 | 2003 | |||||
Net income |
$ 2,194 |
$ 465 |
$ 4,664 |
$ 926 | ||||
Change in net unrealized gains
(losses) on investments |
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(264) |
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Change in currency translation
adjustments |
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(279) |
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Total |
$ 2,187 |
$ 431 |
$ 4,409 |
$ 383 |
Three Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
2004 | 2003 | 2004 | 2003 | |||||
Numerator: | ||||||||
Net income | $ 2,194 | $ 465 | $ 4,664 | $ 926 | ||||
Denominator: | ||||||||
Basic earnings per share -
weighted average shares outstanding |
16,755,374 | 16,376,434 | 16,729,557 | 16,354,962 | ||||
Effect of potential dilutive securities: | ||||||||
Employee stock options - dilutive
shares |
64,190 | 404,925 | 195,767 | 251,177 | ||||
Diluted earnings per share -
weighted average shares outstanding |
16,819,564 | 16,781,359 | 16,925,324 | 16,606,139 | ||||
Earnings per share: | ||||||||
Basic | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 | ||||
Diluted | $ 0.13 | $ 0.03 | $ 0.28 | $ 0.06 |
NOTE 12. Segment Reporting and Geographic Information
Operating segments are business units that have separate financial information and are separately reviewed by the Company's chief decision makers. The Company's chief decision maker is the Chief Executive Officer. The Company and its subsidiaries currently operate in a single industry segment: the design, development, manufacture, sale and service of process control metrology systems used in semiconductor device manufacturing. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level.
The following table lists the different sources of revenue:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Revenue Type 2004
2003
2004
2003
Systems: Metrology
79% 72% 78% 75% Inspection 4% 6% 3% 3% Parts 8% 10% 9% 8% Services
7% 7% 9% 8% Licensing 2% 5% 1% 6% Total
100%
100%
100%
100%
For geographical reporting, revenues are attributed to the geographic location in which the customer is located. Revenue by geographic region is as follows:
Three Months Ended |
Nine Months Ended |
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September 30, |
September 30, |
|||||||
2004 |
2003 |
2004 |
2003 |
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United States |
$ 7,034 |
$ 6,164 |
$ 18,499 |
$ 15,098 |
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Asia |
14,070 |
6,030 |
36,986 |
13,955 |
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Europe |
741 |
1,975 |
5,685 |
13,552 |
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Total |
$ 21,845 |
$ 14,169 |
$ 61,170 |
$ 42,605 |
Customers comprising 10% or more of revenue:
Nine Months Ended
September 30,
2004
2003
Taiwan Semiconductor Manufacturing Company 19.4% 4.0% Intel Corporation 17.6% 42.6%
NOTE 13. Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS No. 148 are effective for all financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure portion of this statement beginning in the fiscal quarter ended June 30, 2003. The application of the disclosure portion of this standard had no impact on the Company's consolidated financial position or results of operations. On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of stock options. The FASB issued an exposure draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95," on March 31, 2004. The eventual adoption of this proposed statement, if issued in final form by the FASB, will have a material effect on the Company's consolidated operating results and financial position.
NOTE 14. Reclassifications
Certain prior year amounts have been reclassified to conform to current financial statement presentation.
Certain statements in this quarterly report on Form 10-Q are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, we may, from time to time, make oral forward looking statements. Forward looking statements may be identified by the words "anticipate", "believe", "expect", "intend", "will" and similar expressions, as they relate to us or our management. These statements include, without limitation, (i) the statement that we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future, and (ii) the statements related to our belief that the opening of our direct sales and support operation in Japan will negatively impact our gross profit and selling, general and administrative expenses.
The forward looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those projected in such forward looking statements due to a number of factors, risks and uncertainties, including the factors that may affect future results set forth in this current report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003. We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, intangible assets, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured. Certain sales of our products are sold and accounted for as multiple element arrangements, consisting primarily of the sale of the product, installation and training services. We generally recognize product revenue upon shipment. When customer acceptance is subjective and not obtained prior to shipment, we defer product revenue until such time as positive affirmation of acceptance has been obtained from the customer. Customer acceptance is generally based on our products meeting published performance specifications. The amount of revenue allocated to the shipment of products is done on a residual method basis. Under this method, the total arrangement value is allocated first to undelivered contract elements, based on their fair values, with the remainder being allocated to product revenue. The fair value of installation and training services is based upon billable hourly rates and the estimated time to complete the service. Revenue related to undelivered installation services is deferred until such time as installation is completed at the customer's site. Revenue related to training services is recognized ratably over the training period.
Allowance for Doubtful Accounts . We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments or our assumptions are otherwise incorrect, additional allowances may be required.
Excess and Obsolete Inventory . We write down our excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product life-cycles, product demand and market conditions. If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Long-Lived Assets and Acquired Intangible Assets . We periodically review long-lived assets, other than goodwill, for impairment whenever changes in events or circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill, in accordance with SFAS No. 142, is reviewed for possible impairment at least annually during the fourth quarter for each year. A review of goodwill may be initiated prior to conducting the annual analysis if events or changes in circumstances indicate that the carrying value of goodwill may be impaired. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and the impairment of such long-lived assets, if any, could have a material effect on our consolidated financial statements.
Warranties . We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
Accounting for Income Taxes . As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes and any valuation allowance recorded against our deferred tax assets. At September 30, 2004 we had no valuation allowance established against our deferred tax assets. The need for a valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.
Impact of Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS No. 148 are effective for all financial statements for fiscal years ending after December 15, 2002. We adopted the disclosure portion of this statement beginning in the fiscal quarter ended June 30, 2003. The application of the disclosure portion of this standard had no impact on our consolidated financial position or results of operations. On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of stock options. The FASB issued an exposure draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95," on March 31, 2004. The eventual adoption of this proposed statement, if issued in final form by the FASB, will have a material effect on our consolidated operating results and financial position.
Results of Operations for the Three and Nine Month Periods Ended September 30, 2004 and 2003
We are a worldwide leader in the design, development, manufacture and support of process control metrology systems used in semiconductor device manufacturing. Our thin film measurement proprietary systems measure the thickness and other properties of thin films applied during various steps in the manufacture of integrated circuits, enabling semiconductor device manufacturers to improve yields and reduce overall production costs. Our macro-defect inspection proprietary systems detect and classify defects in semiconductor wafers. We provide our customers with a flexible full-fab metrology solution by offering families of systems that meet their transparent and opaque thin film measurement and macro-defect inspection needs in various applications across the fabrication process. Our three primary families of metrology solutions offer leading-edge metrology technology, flexible systems cost-effectively designed for specific manufacturing applications and a common production-worthy automation platform, all backed by worldwide support.
Our business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors including, general worldwide economic conditions as well as other economic drivers such as personal computer and cell phone sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project a year over year increase in capital spending of 40 - 50% for 2004 and project a material decline for 2005. We monitor capital equipment spending through announced capital spending plans by our customers and monthly-published industry data such as the book to bill ratio. The book to bill ratio is a 3-month running statistic that compares bookings or orders placed with capital equipment suppliers to billings or shipments. A book to bill above one shows that equipment manufacturers are ordering equipment at a pace that exceeds the equipment suppliers' shipments for the period.
Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few end user customers, and we expect this trend to continue. In the nine month period ended September 30, 2004 and the years ended 2003, 2002 and 2001 sales to end user customers that individually represented at least five percent of our revenues accounted for 52.3%, 59.4%, 46.8% and 42.5% of our revenues, respectively. In the nine month period ended September 30, 2004 and the years ended 2003, 2002 and 2001 sales to Intel accounted for 17.6%, 35.3%, 46.8% and 33.4% of our revenues, respectively. For the nine months ended September 30, 2004, sales to Taiwan Semiconductor Manufacturing Company accounted for 19.4% of our revenues.
We do not have purchase contracts with any of our customers or our distributor that obligates them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenues to vary significantly. In addition, during a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in average selling price from approximately $30,000 to $1.0 million per system, our opaque film measurement systems range in average selling price from approximately $900,000 to $1.8 million per system and our macro-defect inspection systems range in average selling price from approximately $250,000 to $1.4 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results. Because fluctuations in the timing of orders from our major customers or distributors or in the number of our individual systems we sell could cause our revenues to fluctuate significantly in any given quarter or year, we do not believe that period-to-period comparisons of our financial results are necessarily meaningful, and they should not be relied upon as an indication of our future performance.
A significant portion of our revenues has been derived from customers outside of the United States, and we expect this trend to continue. In the nine month period ended September 30, 2004, approximately 69.8% of our revenues were derived from customers outside of the United States, of which 60.5% were derived from customers in Asia and 9.3% were derived from customers in Europe. In 2003, approximately 65.4% of our revenues were derived from customers outside of the United States, of which 39.9% were derived from customers in Asia and 25.5% were derived from customers in Europe. In 2002, approximately 40.6% of our revenues were derived from customers outside of the United States, of which 30.1% were derived from customers in Asia and 10.4% were derived from customers in Europe. In 2001, approximately 53.7% of our revenues were derived from customers outside of the United States, of which 36.6% were derived from customers in Asia and 14.5% were derived from customers in Europe. Substantially all of our revenues to date have been denominated in United States dollars. We expect that revenues generated from customers outside of the United States will continue to account for a significant percentage of our revenues.
Effective October 2004, we opened a new direct sales and support operation in Japan. The new operation will offer our customers in Japan a direct link to us. We have established a main office in Takatsu, Japan, with branch offices in Osaka and on Kyushu Island. We currently have an installed base of more than 500 metrology tools in Japan. Tokyo Electron Limited has served as our Japanese distributor for over twenty years. The transition from our distributor arrangement with Tokyo Electron Limited is expected to take 12 - 15 months. As part of the transition, our operations will be staffed with the same support personnel currently supporting our products at Tokyo Electron Limited.
The sales cycle for our systems typically ranges from six to 15 months, and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenues related to these investments. Additionally, the rate and timing of customer orders may vary significantly from month to month. Accordingly, if sales of our products do not occur when we expect, and we are unable to adjust our estimates on a timely basis, our expenses and inventory levels may increase relative to revenues and total assets.
Revenues. Our revenues are derived from the sale of our systems, services, spare parts and licensing. Our revenues were $21.8 million and $61.2 million for the three and nine month periods ended September 30, 2004, compared to $14.2 million and $42.6 million for the three and nine month periods ended September 30, 2003, representing an increase of 54.2% and 43.6% for the respective periods.
Although there has been sequential improvements in the business environment during the past year, there is uncertainty as to the strength and length of this cyclical growth phase in our industry. Due to the continued low visibility in our projected sales, we maintain a cautious outlook for future orders and sales levels.
The following table lists the different sources of our revenue:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Revenue Type 2004
2003
2004
2003
Systems: Metrology
79% 72% 78% 75% Inspection 4% 6% 3% 3% Parts 8% 10% 9% 8% Services
7% 7% 9% 8% Licensing 2% 5% 1% 6% Total
100%
100%
100%
100%
Systems revenue has increased as a percentage of revenue for the three and nine month periods ended September 30, 2004, compared to the three and nine month periods ended September 30, 2003 as a result of recent improvement in the semiconductor device manufacturing sector this past year. System revenue generated by our latest product releases and major enhancements in each of our product families amounted to 40% and 37% of total revenue for the three and nine month periods ended September 30, 2004. Parts and service revenue is slightly higher as a percentage of revenue for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003 as customers continue to spend more on repair and maintenance of their existing equipment. If the industry sustains a prolonged recovery, we expect systems revenues as a percentage of revenue to increase and parts and service revenues as a percentage of revenue to decrease as customers buy new equipment. Licensing revenue is derived from contracts obtained as a result of the acquisition of our Yield Metrology Group in September 2002. Licensing our technologies is not part of our core business strategy. Therefore, we expect licensing revenue to continue to be a small portion of our revenue.
Gross Profit . Our gross profit has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, excess and obsolete inventory write-offs, pricing by competitors or suppliers, new product introductions, product sales mix, production volume, customization and reconfiguration of systems, international and domestic sales mix, and parts and service margins. Our gross profit was $10.4 million and $28.9 million for the three and nine month periods ended September 30, 2004, compared to $6.3 million and $18.3 million for the three and nine month periods ended September 30, 2003. Our gross profit represented 47.6% and 47.2% of our revenues for the three and nine month periods ended September 30, 2004 and 44.3% and 43.0% of our revenues for the same periods in the prior year. The increase in gross profit as a percentage of revenue for the three and nine month periods ended September 30, 2004, compared to the three and nine month periods ended September 30, 2003 is primarily due to an increase in metal tool shipments, which typically have higher margins, and leverage generated by fixed manufacturing and customer service costs representing a smaller percentage of the overall cost of goods sold. These increases were partially offset by a decrease in licensing revenues. The start of our direct sales and support operations in Japan will negatively impact our gross profit. As a result of the transition arrangement with us and Tokyo Electron Limited, effective October 1, 2004, we will begin the fourth quarter with a fully staffed sales and service team. Initially, this investment will have a negative impact on our gross profit for at least the next several quarters until sales can be generated directly from our new operations. Therefore, we are expecting gross profit for the three month period ended December 31, 2004 to be approximately 47%.
Research and Development . The thin film transparent, opaque process control and macro-defect inspection metrology market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to existing products, including the transition to copper and low-k dielectrics, the progression to 300 mm wafers, the continuous shrinkage in critical dimensions, and the evolution of ultra-thin gate process control, is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities. They also include consulting fees and the cost of related supplies. Our research and development expense was $3.9 million and $12.2 million for the three and nine month periods ended September 30 2004, compared to $3.1 million and $9.8 million for the same periods in the prior year. Research and development expense represented 17.9% and 20.0% of our revenues for the three and nine month periods ended September 30, 2004, compared to 22.2% and 23.0% of revenues for the same periods in the prior year. The year over year dollar increase in research and development expenses primarily reflects higher compensation costs and an increase in product development costs. We anticipate research and development expense will be approximately 17 - 18% of revenues for the three month period ended December 31, 2004 as we continue to roll out new products.
Selling, General and Administrative . Selling, general and administrative expense is primarily comprised of salaries and related costs for sales, marketing, and general administrative personnel, as well as commissions and other non-personnel related expenses. Our selling, general and administrative expense was $3.9 million and $10.8 million for the three and nine month periods ended September 30, 2004, compared to $2.6 million and $8.0 million for the same periods in the prior year. Selling, general and administrative expense represented 17.7% of our revenues for both the three and nine month periods ended September 30, 2004, compared to 18.3% and 18.8% of our revenues for the same periods in the prior year. The year over year dollar increase in selling, general and administrative expense was primarily due to increased compensation costs, increased administrative costs at our branch offices, higher marketing costs for new product releases and an increase in costs associated with Sarbanes-Oxley section 404 reporting requirements compliance. The start of our operations in Japan will also have an effect on our selling, general and administrative expenses. We currently anticipate that selling, general and administrative expenses will represent approximately 20 - 21% of revenue for the three month period ended December 31, 2004 due to start up costs and the ongoing sales, administration and facility costs in Japan and ongoing Sarbanes-Oxley section 404 reporting requirements compliance costs.
Interest income and other, net . Interest income and other, net was $0.9 million and $1.5 million for the three and nine month periods ended September 30, 2004, compared to $0.3 million and $1.3 million for the same periods in the prior year. Interest income and other, net consisted primarily of interest income, realized gains and losses on sales of marketable securities, rental income and income from the settlement of the August Technology lawsuit in the third quarter of 2004. The year over year increase in interest income and other, net in the three months period ended September 30, 2004 was primarily attributable to litigation settlement income of $0.5 million. The year over year increase in interest income and other, net in the nine month period ended September 30, 2004 was primarily attributable to the litigation settlement income and an increase in interest income of $0.1 million, partially offset by a decrease in realized gains and losses of $0.5 million.
Income Taxes . We use the asset and liability method of accounting for income taxes prescribed by SFAS No. 109, "Accounting for Income Taxes." Income tax expense was $1.1 million and $2.0 million for the three and nine month periods ended September 30, 2004. Our effective tax rate for the nine month period ended September 30, 2004 is 30.5% as compared to 23.1% in the prior year period. The increase in the effective tax rate is due to the expiration of the research tax credit on July 1, 2004. The research tax credit was extended on October 4, 2004 and can be applied retroactively to July 1, 2004. The effect of this change in the tax law will be accounted for during the fourth quarter of 2004 and we anticipate our effective rate for the year to be approximately 28%. Our anticipated effective tax rate is less than the expected combined federal and state tax rates of 40% primarily as a result of the positive impact of our research and experimentation tax credits on our effective tax rate.
Liquidity and Capital Resources
At September 30, 2004, we had $79.8 million of cash, cash equivalents and marketable securities and $115.7 million in working capital. At December 31, 2003, we had $80.6 million of cash, cash equivalents and marketable securities and $111.3 million in working capital.
Typically during periods of revenue growth, changes in accounts receivable and inventories represent a use of cash as we incur costs and expend cash in advance of receiving cash from our customers. Similarly, during periods of declining revenue, changes in accounts receivable and inventories represent a source of cash as inventory purchases decline and revenue from prior periods is collected.
Operating activities used $0.3 million and provided $7.3 million in cash for the nine month periods ended September 30, 2004 and 2003, respectively. The net cash used in operating activities during the nine month period ended September 30, 2004 was primarily a result of an increase in accounts receivable of $6.2 million and an increase in inventories of $6.5 million, partially offset by profit before depreciation and amortization of $4.7 million, an increase in accounts payable and accrued liabilities of $2.6 million and an increase in other current liabilities of $2.3 million. The net cash provided by operating activities during the nine month period ended September 30, 2003 was primarily a result of a decrease in inventories of $4.5 million, a decrease in accounts receivable of $4.3 million and a decrease in income taxes receivable and prepaid expenses and other of $1.2 million, partially offset by a decrease in deferred revenue of $2.6 million.
Net cash used in investing activities during the nine month period ended September 30, 2004 of $2.4 million was due to capital expenditures of $0.9 million and net purchases of short-term investments of $1.4 million. Net cash used in investing activities during the nine month period ended September 30, 2003 of $8.6 million was due to net purchases of short-term investments of $8.3 million and capital expenditures of $0.3 million.
Net cash provided by financing activities for the nine month periods ended September 30, 2004 and 2003 of $0.9 million and $0.6 million, respectively, was a result of proceeds received from sales of shares through employee stock plans.
Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.
Factors that May Affect Future Results
Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems and may from time to time continue to do so
Our operating results are subject to significant variation due to the cyclical nature of the semiconductor device industry. The semiconductor device industry recently experienced a prolonged downturn, which has seriously harmed our recent operating results. Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. There is typically a nine to twelve month lag between a change in the economic condition of the semiconductor device industry and the resulting change in the level of capital expenditures by semiconductor device manufacturers. In most cases, the resulting decrease in capital expenditures has been more pronounced than the precipitating downturn in semiconductor device industry revenues. Any future downturn in the semiconductor device industry, or any reduction by that industry in capital expenditures, may seriously harm our business, financial condition and results of operations.
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenues
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers exposes us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead time required for shipments of some of our components can be as long as four months. In addition, the lead time required to qualify new suppliers for lasers could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems. Further, a significant increase in the price of one or more of these components or subassemblies included in our systems could seriously harm our results of operations.
Our largest customers account for a significant portion of our revenues, and our revenues would significantly decline if one or more of these customers were to purchase significantly fewer of our systems or they delayed or cancelled a large order
In 2001, 2002, 2003 and for first nine months ended September 30, 2004, sales to end user customers that individually represented at least five percent of our revenues accounted for 42.5%, 46.8%, 59.4%, and 52.3% of our revenues. In 2001, 2002, 2003 and for the nine months ended September 30, 2004, sales to Intel, a key customer, accounted for 33.4%, 46.8%, 35.3% and 17.6% of our revenues. For the nine months ended September 30, 2004, sales to Taiwan Semiconductor Manufacturing Company accounted for 19.4% of our revenues. We operate in the highly concentrated, capital intensive semiconductor device manufacturing industry. Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. If any of our key customers were to purchase significantly fewer of our systems in the future, or if a large order were delayed or cancelled, our revenues would significantly decline. We expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for at least the next several years. In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.
Our operating results have in the past varied and probably will in the future continue to vary significantly from quarter to quarter, causing volatility in our stock price
Our quarterly operating results have varied significantly in the past and may continue to do so in the future, which could cause our stock price to decline. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:
changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor device industry, demand for products that use semiconductors, market acceptance of our systems and those of our customers and changes in our product offerings;
seasonal variations in customer demand, including the tendency of European sales to slow significantly in the third quarter of each year;
the timing, cancellation or delay of customer orders and shipments;
product development costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and
the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels.
In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly. As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.
Our revenue may vary significantly each quarter due to relatively small fluctuations in our unit sales
During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in average selling price from approximately $30,000 to $1.0 million per system, our opaque film measurement systems range in average selling price from approximately $900,000 to $1.8 million per system and our macro-defect detection systems range in average selling price from approximately $250,000 to $1.4 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results. This, in turn, could cause fluctuations in the market price of our common stock.
Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline
Variations in the length of our sales cycles could cause our revenues, and thus our business, financial condition and operating results, to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our film metrology systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process. The length of time it takes for us to make a sale depends upon many factors, including:
the efforts of our sales force and/or our independent distributor;
the complexity of the customer's fabrication processes;
the internal technical capabilities and sophistication of the customer;
the customer's budgetary constraints; and
the quality and sophistication of the customer's current metrology equipment.
Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer, if ever, varies widely in length. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from six to 15 months. Sometimes our sales cycles can be much longer, particularly with customers in Japan. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.
If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period before purchasing any more of our systems. The number of additional products a customer purchases, if any, depends on many factors, including a customer's capacity requirements. The period between a customer's initial purchase and any subsequent purchases can vary from six months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and possibly in our stock price.
If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry we will lose market share to our competitors
We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new film metrology systems that meet the performance and price demands of semiconductor device manufacturers. We must also continue to refine our current systems so that they remain competitive. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.
Even if we are able to successfully develop new products, if these products do not gain general market acceptance we will not be able to generate revenues and recover our research and development costs
Metrology and inspection product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel, and identify and eliminate system design flaws. Any new systems we introduce may not achieve a significant degree of market acceptance or, once accepted, may fail to sell well for a sustained period.
We expect to spend a significant amount of time and resources developing new systems and refining our existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of those systems. Our ability to commercially introduce and successfully market new systems is subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that do materialize may be cancelled. As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales to recoup research and development expenditures.
Even if we are able to develop new products that gain market acceptance, sales of new products could impair our ability to sell existing products
Competition from our new ultra -II<TM> systems could have a negative effect on sales of our other transparent thin film metrology systems and the prices we could charge for these systems. We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our ultra -II, WaferView<R> or next generation systems. This diversion of resources could have a further negative effect on sales of our current systems. Competition from our new Meta PULSE-II<TM> system may also have a negative impact on sales of Meta PULSE<R> systems. Additionally, the new line of i -MOD<TM> products will incorporate some of our advanced metrologies into small footprint modules that are designed to be integrated into process tool equipment and may, therefore, have a negative effect on the sales of our stand-alone systems that use the same technology.
If our relationships with our large customers deteriorate, our product development activities could be jeopardized
The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems will be impaired.
Our ability to reduce costs is limited by our ongoing need to invest in research and development
Our industry is characterized by the need for continual investment in research and development as well as customer service and support. As a result of our need to maintain our spending levels in these areas, our operating results could be materially harmed if our revenues fall below expectations. In addition, because of our emphasis on research and development and technological innovation, our operating costs may increase further in the future.
We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage
Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products. We own or have licensed a number of patents relating to our transparent and opaque thin film metrology and macro-defect inspection systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable. In addition, the patents we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Third parties may also design around these patents.
In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees and other third parties. However, in the event that these agreements may be breached, we may not have adequate remedies. Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties.
Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important intellectual property rights by us
Our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time we may receive communications from third parties asserting that our products or systems infringe, or may infringe, the proprietary rights of these third parties. These claims of infringement may lead to protracted and costly litigation which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction. Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenues. We may also be required to obtain a license from the third party or cease activities utilizing the third party's proprietary rights. We may not be able to enter into such a license or such license may not be available on commercially reasonable terms. The loss of important intellectual property rights could therefore prevent our ability to sell our systems, or make the sale of such systems more expensive for us.
Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, has in the past resulted and may in the future result in costly and time-consuming litigation
We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or other proprietary rights. In addition, we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties.
Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States
In 2001, 2002, 2003 and for the nine months ended September 30, 2004, 53.7%, 40.6%, 65.4% and 69.8% of our revenue was derived from sales in foreign countries, including certain countries in Asia such as Taiwan, China, Korea, Singapore and Japan and certain Western European countries. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent prosecution process, the contents of a patent are published upon filing which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. There is a risk that our means of protecting our proprietary rights may not be adequate in these countries. For example, our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.
Our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices
The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets we serve. We principally compete with KLA-Tencor and Therma-Wave. We compete to a lesser extent with companies such as Dai Nippon Screen, Nanometrics, Sopra, August Technology and Leica. Each of our products also competes with products that use different metrology techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there may be significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. While we believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers, our larger competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers.
Many of our competitors are investing heavily in the development of new systems that will compete directly with ours. We have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. Such product introductions by our competitors would likely cause us to decrease the prices of our systems and increase the level of discounts we grant our customers.
Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win customers from our competitors even if our systems are superior to theirs
We believe that once a semiconductor device manufacturer has selected one vendor's capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor's equipment, for the life of the application. Once a vendor's equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor's equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer's expense of switching to our systems, it will be difficult for us to achieve significant sales to that customer once it has selected another vendor's capital equipment for an application.
We must attract and retain key personnel with knowledge of semiconductor device manufacturing and metrology equipment to help support our future growth, and competition for such personnel in our industry is high
Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel, who would be extremely difficult to replace, could harm our business and operating results. During downturns in our industry, we have often experienced significant employee attrition, and we may experience further attrition in the event of a future downturn. Although we have employment and noncompetition agreements with key members of our senior management team, including Messrs. McLaughlin, Loiterman and Roth, these individuals or other key employees may nevertheless leave our company. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.
We manufacture all of our systems at a single facility, and any prolonged disruption in the operations of that facility could have a material adverse effect on our revenues
We produce all of our systems in our manufacturing facility located in Ledgewood, New Jersey. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our revenues could be adversely affected.
If we are unsuccessful in our transition from an independent distributor to a direct sales operation in Japan, our financial results and customer relationships could be adversely affected
Historically, a portion of our sales in Japan have been made to our sole independent distributor, Tokyo Electron Limited (TEL). In 2001, 2002, 2003 and for the first nine months ended September 30, 2004, sales to TEL accounted for 14.8%, 6.8%, 9.5% and 7.5% of our revenues. TEL has served as our Japanese distributor for over twenty years. Effective October 2004, we opened a new direct sales and support operation in Japan to replace TEL. The new operation will offer our customers in Japan a direct link to us. The transition from our distributor arrangement with TEL is expected to take 12 - 15 months. If we are unsuccessful with the transition of providing sales and services directly in Japan, our financial results and our ability to support our customers in Japan could be adversely affected.
Because we derive a significant portion of our revenues from sales in Asia, our sales and results of operations could be adversely affected by the instability of Asian economies
Our sales to customers in Asian markets represented approximately 36.6%, 30.1%, 39.9% and 60.5% of our revenues in 2001, 2002, 2003 and for the first nine months ended September 30, 2004. Countries in the Asia Pacific region, including Japan, Korea, China, Singapore and Taiwan, each of which accounted for a significant portion of our business in that region, have experienced currency, banking and equity market weaknesses in the past. We expect that turbulence in the Asian markets could adversely affect our sales in future periods.
Due to our significant level of international sales, we are subject to operational, financial and political risks such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, adverse tax consequences and difficulties in managing foreign sales representatives and foreign branch operations
International sales accounted for approximately 53.7%, 40.6%, 65.4% and 69.8% of our revenues in 2001, 2002, 2003 and for the first nine months ended September 30, 2004. We anticipate that international sales will account for a significant portion of our revenue for at least the next five years. Due to the significant level of our international sales, we are subject to material risks which include:
Unexpected changes in regulatory requirements including tariffs and other market barriers . The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products. Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes or other restrictions imposed by their governments on trade with United States companies such as ourselves. Any such restrictions could lead to a reduction in our sales to customers in these countries.
Political and economic instability . We are subject to various global risks related to political and economic instabilities in countries in which we derive sales. If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the U.S., such events may result in reduced demand for our products. There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea. In addition, several Asian countries, particularly Japan, have experienced significant economic instability. An outbreak of hostilities or other political upheaval in Taiwan or South Korea, or an economic downturn in Japan, would likely harm the operations of our customers in these countries, causing our sales to suffer. The effect of such events on our revenues could be material because we derive substantial revenues from sales to semiconductor device foundries in Taiwan such as TSMC and UMC, from memory chip manufacturers in South Korea such as Hynix and Samsung, and from semiconductor device manufacturers in Japan such as NEC and Toshiba.
Difficulties in staffing and managing foreign branch operations. During periods of tension between the governments of the United States and other countries, it is often difficult for United States companies such as ourselves to staff and manage operations in such countries.
Since a substantial portion of our revenues are derived from sales in other countries yet are denominated in U.S. dollars, we could experience a significant decline in sales or experience collection problems in the event the dollar becomes more expensive relative to local currencies
A substantial portion of our international sales are denominated in U.S. dollars. As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. Such conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars.
Terrorist attacks and terrorist threats may negatively impact all aspects of our operations, revenues, costs and stock price
The terrorist attacks in September 2001 in the United States and the U.S. response to these attacks and the resulting decline in consumer confidence has had a substantial adverse impact on the economy. Any similar future events may disrupt our operations or those of our customers and suppliers. In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.
We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, we may choose to acquire new and complementary businesses, products, or technologies instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire could be expensive and time-consuming, could disrupt our ongoing business and could distract our management. In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders. If we are unable to integrate any acquired entities, products or technologies effectively, our business, financial condition and operating results will suffer. In addition, any amortization of intangible assets or other assets or charges resulting from the costs of acquisitions could harm our business and operating results.
If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease
Our systems are complex and sometimes have contained errors, defects and bugs when introduced. If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems could be harmed. Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems. Our product liability policy currently provides $1.0 million to $2.0 million of coverage per claim, depending on location of claim, with an overall umbrella limit of $4.0 million. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.
Provisions of our charter documents and Delaware law could discourage potential acquisition proposals and could delay, deter or prevent a change in control of our company
Provisions of our certificate of incorporation and bylaws may inhibit changes in control of our company not approved by our board of directors. These provisions also limit the circumstances in which a premium can be paid for the common stock, and in which a proxy contest for control of our board may be initiated. These provisions provide for:
a prohibition on stockholder actions through written consent;
a requirement that special meetings of stockholders be called only by our chief executive officer or board of directors;
advance notice requirements for stockholder proposals and director nominations by stockholders;
limitations on the ability of stockholders to amend, alter or repeal our by-laws; and
the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine.
We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to changes in interest rates primarily from our investments in certain available-for-sale securities. Our available-for-sale securities consist primarily of fixed income investments (U.S. Treasury and Agency securities and corporate bonds). We continually monitor our exposure to changes in interest rates and credit ratings of issuers from our available-for-sale securities. It is possible that we are at risk if interest rates or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected. Based on sensitivity analysis performed on our financial investments held as of September 30, 2004, an immediate adverse change of 10% in interest rates (e.g. 3.00% to 3.30%) would result in a $0.2 million decrease in the fair value of our available-for-sale securities.
Foreign Currency Risk
We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes. Substantially all sales arrangements with international customers are denominated in U.S. dollars. We have branch operations in Taiwan, Singapore, China and Korea and wholly-owned subsidiaries in Europe and Japan, which are subject to currency fluctuations. These foreign branches are limited in their operations and level of investment so that the risk of currency fluctuations is not expected to be material.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer, after evaluating our "disclosure controls and procedures" (as defined in Securities Exchange Act of 1934 (the "Exchange Act") Rule 13a-15(e) and 15d-15(e)), have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
The Company's management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures will prevent all errors and fraud. Because of the inherent limitations in any system of disclosure controls and procedures, no evaluation of controls can provide absolute assurance that all instances of error or fraud, if any, within the Company may be detected. Nonetheless, our chief executive officer and chief financial officer believe that the disclosure controls and procedures we currently have in place are effective.
Changes in Internal Controls over Financial Reporting .
There was no change in our internal controls over financial reporting that occurred during our third fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On September 30, 2003, our wholly-owned subsidiary, ISOA, Inc. ("ISOA"), filed a counterclaim in the Dallas, Texas District Courts in response to a claim filed on September 23, 2003 against us and ISOA by August Technology Corporation ("August") and STI, Inc. ("STI") related to a commercial dispute. The dispute arose from a December 24, 1997 Development Agreement between ISOA and STI. August acquired STI from ASTI Holdings, Ltd. in April 2003.
Under the Development Agreement, ISOA agreed to provide to STI certain engineering resources in the development of software for STI's semiconductor metrology systems. In return, STI agreed to pay to ISOA a minimum royalty of $1.0 million of which approximately one-third was paid. August alleged that ISOA did not fulfill its obligations under the Development Agreement and sought a judgment against ISOA for repayment of the monies previously paid and attorney's fees incurred in bringing this action. We had maintained that ISOA fulfilled its obligations under the Development Agreement and that August remained obligated to pay all amounts as agreed to under the Development Agreement. August further alleged that ISOA did not perform substantially in order to justify any additional payments. We further believed that intellectual property delivered by ISOA under the terms of the Development Agreement may have been and continue to be used in current systems on the market from August. ISOA's counterclaim sought full payment of the minimum royalty, ongoing royalty payments for any August macro-defect inspection tools using ISOA's property, damages, costs, and attorneys' fees.
On August 6, 2004, the Company and ISOA entered into a settlement agreement with August and STI. Under the terms of the settlement, both companies have agreed to dismiss all claims against each other related to this matter. We received a one-time payment of $502,500 from ASTI Holdings in connection with the settlement, which is reflected in our consolidated financial statements for the three months ended September 30, 2004 in interest income and other, net.
Exhibits
Exhibit No. Description
10.12 Form of option agreement under 1999 Stock Plan.
31.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to Securities Exchange
Act Rule 13a-14(a).
31.2 Certification of Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act
Rule 13a-14(a).32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, signed by Paul F. McLaughlin, Chief Executive Officer
of Rudolph Technologies, Inc.32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of
Rudolph Technologies, Inc.
SIGNATURES
Rudolph Technologies, Inc.
EXHIBIT INDEX
Exhibit No. Description
10.12 Form of option agreement under 1999 Stock Plan.
31.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to Securities Exchange
31.2
Certification of Steven R.
Roth, Chief Financial Officer, pursuant to Securities Exchange Act
Rule 13a-14(a).
32.1 Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, signed by Paul F. McLaughlin, Chief Executive Officer
of Rudolph Technologies, Inc.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
EXHIBIT 10.12
FORM OF OPTION AGREEMENT
UNDER 1999 STOCK PLAN
RUDOLPH TECHNOLOGIES, INC.
1999 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
You have been granted an option to purchase
Common Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number:
Date of Grant:
Vesting Commencement Date:
Exercise Price per Share:
Total Number of Shares Granted:
Total Exercise Price:
Type of Option: Incentive Stock Option
Nonstatutory Stock Option
Term/Expiration Date:
Vesting Schedule:
Subject to accelerated vesting as set forth
below, this Option may be exercised, in whole or in part, in accordance with the following
schedule:
20% of the Shares subject to the Option
shall vest twelve months after the Vesting Commencement Date, and 1/60 of the Shares
subject to the Option shall vest each month thereafter, subject to the Optionee continuing
to be a Service Provider on such dates.
Termination Period:
This Option may be exercised for three
months after Optionee ceases to be a Service Provider. Upon the death or Disability of the
Optionee, this Option may be exercised for twelve months after Optionee ceases to be a
Service Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
A. Grant of Option
.
The Plan Administrator of the Company hereby
grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement
(the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price"), subject to the terms and conditions
of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the
Plan, in the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Option Agreement, the terms and conditions of the Plan shall
prevail.
If designated in the Notice of Grant as an
Incentive Stock Option ("ISO"), this Option is intended to qualify as an
Incentive Stock Option under Section 422 of the Code. However, if this Option is intended
to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code
Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
B. Exercise of Option
.
(a) Right to Exercise. This Option is exercisable during its term in accordance with the
Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan
and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in
the form attached as Exhibit A (the "Exercise Notice"), which shall state the
election to exercise the Option, the number of Shares in respect of which the Option is
being exercised (the "Exercised Shares"), and such other representations and
agreements as may be required by the Company pursuant to the provisions of the Plan. The
Exercise Notice shall be completed by the Optionee and delivered to the Chief Financial
Officer of the Company. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be
exercised upon receipt by the Company of such fully executed Exercise Notice accompanied
by such aggregate Exercise Price.
No Shares shall be issued pursuant to the
exercise of this Option unless such issuance and exercise complies with Applicable Laws.
Assuming such compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to such
Exercised Shares.
C. Method of Payment
.
Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
3. consideration received by the Company under a cashless exercise program implemented by
the Company in connection with the Plan; or
4. surrender of other Shares which (i) 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 (ii) have a Fair Market Value on the date of surrender equal to the
aggregate Exercise Price of the Exercised Shares; or
5. with the Administrator's consent, delivery of Optionee's promissory note (the
"Note") in the form attached hereto as Exhibit C, in the amount of the aggregate
Exercise Price of the Exercised Shares together with the execution and delivery by the
Optionee of the Security Agreement attached hereto as Exhibit B. The Note shall bear
interest at the "applicable federal rate" prescribed under the Code and its
regulations at time of purchase, and shall be secured by a pledge of the Shares purchased
by the Note pursuant to the Security Agreement.
D. Non-Transferability of Option
.
This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may be
exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and
this Option Agreement shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
E. Term of Option
.
This Option may be exercised only within the
term set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
F. Tax Consequences
.
Some of the federal tax consequences relating
to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
G. Exercising the Option
.
1. Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability
upon exercise of a NSO. The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise
Price. If the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse to deliver
Shares if such withholding amounts are not delivered at the time of exercise.
2. Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no
regular federal income tax liability upon its exercise, although the excess, if any, of
the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax in the year
of exercise. In the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease
to qualify as an Incentive Stock Option and will be treated for tax purposes as a
Nonstatutory Stock Option on the date three (3) months and one (1) day following such
change of status.
3. Disposition of Shares.
(a) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal income tax
purposes.
(b) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two
years after the grant date, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO
Shares within one year after exercise or two years after the grant date, any gain realized
on such disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference between
the Fair Market Value of the Shares acquired on the date of exercise and the aggregate
Exercise Price, or (B) the difference between the sale price of such Shares and the
aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or
long-term depending on the period that the ISO Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i)
two years after the grant date, or (ii) one year after the exercise date, the Optionee
shall immediately notify the Company in writing of such disposition. The Optionee agrees
that he or she may be subject to income tax withholding by the Company on the compensation
income recognized from such early disposition of ISO Shares by payment in cash or out of
the current earnings paid to the Optionee.
H. Entire Agreement; Governing Law
.
The Plan is incorporated herein by reference.
The Plan and this Option Agreement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by means of a
writing signed by the Company and Optionee. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of Delaware.
I. NO GUARANTEE OF CONTINUED SERVICE
.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS
A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED,
BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND
AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING
SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S
RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the
Company's representative below, you and the Company agree that this Option is granted
under and governed by the terms and conditions of the Plan and this Option Agreement.
Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option Agreement and
fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions relating to the Plan and Option Agreement. Optionee
further agrees to notify the Company upon any change in the residence address indicated
below.
OPTIONEE:
RUDOLPH
TECHNOLOGIES, INC.
Signature
By
Print Name
Title
Residence Address
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement.
Spouse of Optionee
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT SECTION OF 2002
I, Paul F. McLaughlin, certify that:
- 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;
- 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
- 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 an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
- 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
- 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: November 5, 2004
By: /s/ Paul F. McLaughlin Paul F. McLaughlin Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT SECTION OF 2002
I, Steven R. Roth, certify that:
- 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;
- 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
- 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 an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
- 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
- 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: November 5, 2004
By: /s/ Steven R. Roth Steven R. Roth Senior Vice President, Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul F. McLaughlin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Rudolph Technologies, Inc. on Form 10-Q for the quarter ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Rudolph Technologies, Inc.
A signed original of this written statement required by Section 906 has been provided to Rudolph Technologies, Inc. and will be retained by Rudolph Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven R. Roth, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Rudolph Technologies, Inc. on Form 10-Q for the quarter ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Rudolph Technologies, Inc.
A signed original of this written statement required by Section 906 has been provided to Rudolph Technologies, Inc. and will be retained by Rudolph Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.