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Proc-Type: 2001,MIC-CLEAR
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MIC-Info: RSA-MD5,RSA,
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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 [_]
PART II
OTHER INFORMATION
LIABILITIES AND STOCKHOLDERS' EQUITY
Three Months Ended 2003 2002 5,163 4,895 426
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 month period ended March 31, 2003 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, 2002. NOTE
2: Business Combinations On
September 25, 2002, the Company acquired all of the outstanding stock of ISOA, Inc., a
Texas corporation (ISOA), through a merger of Oasis Acquisition, Inc., a wholly owned
subsidiary of the Company, with and into ISOA, with ISOA as the surviving corporation,
renamed Yield Metrology Group (YMG). YMG is a spin-off from Texas Tech University's
International Center for Informatics Research. Over the past 16 years, YMG has
licensed its technology for use in the semiconductor industry and recently began
transitioning to a semiconductor capital equipment supplier. YMG's core technologies
are knowledge-based algorithms used in wafer macro-defect detection and
classification. Customers in Asia, Europe and the U.S. are currently using its
recently introduced WaferView family of tools. The Company believes YMG's
technology will significantly expand its product offering and provide additional value to
its customers. YMG will continue to maintain its offices in Richardson, Texas.
The transaction was accounted for using the purchase method of accounting for business
combinations and, accordingly, the results of operations of YMG have been included in the
Company's consolidated financial statements since the date of acquisition. The
purchase consideration for YMG, including direct acquisition costs, was $25,235 in
cash. The purchase price has been allocated to the net assets acquired and
liabilities assumed based upon their respective fair market values. The
allocation of the purchase consideration to the assets acquired and liabilities assumed
follows: The
excess of the purchase price over the fair value of the net assets acquired and
liabilities assumed was allocated to goodwill. The total goodwill of $12,796, none
of which is deductible for tax purposes, is not being amortized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." All
remaining and future acquired goodwill will be subject to an impairment test each year
using a fair-value-based approach pursuant to SFAS No. 142. Identifiable intangible
assets include patented technology and in-process research and development (IPRD).
The Company is amortizing the patented technology of approximately $9,900 on a
straight-line basis over its estimated remaining useful life of 16 years. The amount
allocated to IPRD of $3,500 is related to automated defect inspection technology to be
used in stand alone and integrated metrology equipment. Such amount was charged to
expense at the acquisition date as the IPRD had not reached technological feasibility and
had no alternative future use. The
Company used the income approach to estimate the fair value of the developed technology
and IPRD. The income approach measures the value of an asset by the present value of
its future economic benefits. Value indications are developed in this technique by
discounting expected cash flows to their present value at a rate of return that
incorporates the risk-free rate for the use of funds, the expected rate of inflation and
risks associated with the asset. The discount rate selected is generally based on
rates of return available from alternative investments of similar type and risk as of
September 25, 2002. The income approach was deemed to be an appropriate method of
valuation for these assets, since the income approach focuses on the ability of the assets
to generate future earnings. The
following unaudited pro forma consolidated financial information presents the combined
results of operations of the Company and YMG as if the acquisition occurred at the
beginning of the periods presented, after giving effect to certain adjustments, including
amortization expense. The unaudited pro forma consolidated financial information
does not necessarily reflect the results of operations that would have occurred had the
acquisition been completed as of the dates indicated or of the results that may be
obtained in the future. Three Months Ended
(unaudited) Revenues Net income Earnings per share: Basic Diluted NOTE 3. Short-Term
Investments
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 were $328 for the three months ended March 31,
2003. Net realized losses were $79 for the three months ended March 31, 2002.
Gross unrealized gains on available-for-sale securities were $395 and $562 as of March 31,
2003 and December 31, 2002, respectively. Gross unrealized losses on
available-for-sale securities were $12 and $4 as of March 31, 2003 and December 31, 2002,
respectively. NOTE
4. Identifiable Intangible Assets
Identifiable intangible assets as of March 31, 2003 are as follows: $
22,731 9,900 $ 32,631 $ 21,594
Identifiable intangible assets as of December 31, 2002 are as follows: $
22,731 9,900 $ 32,631 $ 21,375 Intangible asset
amortization expense for the three months ended March 31, 2003 and 2002 was $219 and $64,
respectively. Assuming no change in the gross carrying value of identifiable
intangible assets, the estimated amortization expense for the twelve months ending
December 31, 2003 and for each of the next five years is $876.
Accounts receivable are net of the allowance for doubtful accounts
of $315 and $250 as of March 31, 2003 and December 31, 2002, respectively. $ 16,454 11,046 2,803 $ 30,303 $ 30,488 $ 5,014 1,513 1,411 2,815 1,013 11,766 (4,496) $ 7,270 $ 7,454 NOTE
8. 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 Companys 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 Companys
warranty reserves are as follows: Three
months ended 2003 Balance, beginning of the period $
1,120 $
972 Provision for warranties issued during the period 255
222
Settlements made during the period (293
) (278
) Balance, end of the period $ 1,082 $ 916 NOTE 9.
Comprehensive (Loss) Income The components of
comprehensive (loss) income were as follows:
$ 175 (298) (204) $ (327) $ 73 NOTE 11. Stock-Based Compensation At
March 31, 2003, the Company has stock-based employee compensation plans. The Company
accounts for its stock option plan 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 exceed the exercise price.
No stock-based employee compensation cost is reflected in net income, as all
options are granted under those 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 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 March 31,
The fair value of each stock option granted during the three month periods ended March 31,
2003 and 2002 are estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: Expected
life (years) Expected
volatility Expected
dividend yield Risk-free
interest rate Weighted
average fair value of options granted during the period Expected
life (years) Expected
volatility Expected
dividend yield Risk-free
interest rate Weighted
average fair value of options granted during the period NOTE 12. Geographic Reporting
and Customer Concentration
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 March 31, 2003 2002 United
States $ 5,278 $ 5,685 Asia 4,691 Europe 1,662 Total $ 14,505 $ 12,038
Customers comprising 10% or more of revenue: NOTE
13. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development and/or
normal use of the assets. The Company also records a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of the
asset retirement obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows underlying the
obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption
did not have any effect on the Company's consolidated financial statements. In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
This issue addresses determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how arrangement consideration
should be measured and allocated to the separate units of accounting. EITF Issue
No. 00-21 will be effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003 or the Company may elect to report the change in accounting
as a cumulative-effect adjustment. The Company is reviewing EITF Issue No. 00-21 and
has not yet determined the impact this issue will have on its consolidated operating
results and financial position. In
November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission
of FASB Interpretation No. 34." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and the adoption of this interpretation did not have a material effect
on the Companys consolidated financial statements. In
January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation requires an investor with a
majority of the variable interests in a variable interest entity to consolidate the entity
and also requires majority and significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which the equity investors do not
have a controlling interest, or the equity investment at risk is insufficient to finance
the entitys activities without receiving additional subordinated financial support
from the other parties. For arrangements entered into with variable interest entities
created prior to January 31, 2003, the provisions of this interpretation are required to
be adopted at the beginning of the first interim or annual period beginning after June 15,
2003. The provisions of this interpretation are effective immediately for all
arrangements entered into with new variable interest entities created after January 31,
2003. The company has not invested in any variable interest entities created after
January 31, 2003.
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, the statements that (i) we expect demand for
our products to improve once customers adjust to the period of oversupply and historical
levels of capital expenditures resume, (ii) we anticipate that our effective tax rate for
our current year to be approximately 23% and (iii) 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. 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 risk factors 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, 2002. 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 condensed 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 accounts receivable, inventories, intangible assets, income taxes and warranty
obligations. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances and 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 upon shipment provided that 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 of the sale of the product and installation. We generally recognize
revenue upon delivery of the product, which is prior to installation, as the actions
required to perform the installation are deemed to be perfunctory. Installation is
deemed to be perfunctory based on our sales and installation history for similar products
and customers and the fact that other vendors can and have performed the
installation. When customer acceptance is subjective and not obtained prior to
shipment, we defer a portion of the 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 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.
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 was 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 events changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Goodwill, in accordance with Statement of Financial Accounting Standards (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, our deferred tax assets and any valuation allowance
recorded against our deferred tax assets. At March 31, 2003, we had no valuation
allowance established against our deferred tax assets. The 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 June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires us to record the fair
value of an asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets that result
from the acquisition, construction, development and/or normal use of the assets. We
also record a corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. We adopted SFAS No. 143
on January 1, 2003. The adoption did not have any effect on our consolidated
financial statements. In November 2002, the
Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This issue addresses
determination of whether an arrangement involving more than one deliverable contains more
than one unit of accounting and how arrangement consideration should be measured and
allocated to the separate units of accounting. EITF Issue No. 00-21 will be
effective for revenue arrangements entered into in fiscal periods beginning after June 15,
2003 or we may elect to report the change in accounting as a cumulative-effect
adjustment. We are reviewing EITF Issue No. 00-21 and have not yet determined the
impact this issue will have on our consolidated operating results and financial position. In November 2002,
the FASB issued Interpretation No. 45, "Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34." This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the Interpretation
are applicable to guarantees issued or modified after December 31, 2002 and the adoption
of this interpretation did not have a material effect on our consolidated financial
statements. In
January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation requires an investor with a
majority of the variable interests in a variable interest entity to consolidate the entity
and also requires majority and significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which the equity investors do not
have a controlling interest, or the equity investment at risk is insufficient to finance
the entitys activities without receiving additional subordinated financial support
from the other parties. For arrangements entered into with variable interest entities
created prior to January 31, 2003, the provisions of this interpretation are required to
be adopted at the beginning of the first interim or annual period beginning after June 15,
2003. The provisions of this interpretation are effective immediately for all
arrangements entered into with new variable interest entities created after January 31,
2003. We have not invested in any variable interest entities created after
January 31, 2003. Results of Operations for the Three Month Periods Ended March 31, 2003 and 2002 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 price
from approximately $30,000 to $1.0 million per system, our opaque film measurement systems
range in price from approximately $900,000 to $1.8 million per system and our macro-defect
detection systems range in price from approximately $650,000 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. Revenues.
Our revenues are derived from the sale of our metrology systems, licensing our defect
technology, provision of services and sale of spare parts. Our revenues were $14.5
million for the three month period ended March 31, 2003, compared to $12.0 million for the
same period in the prior year, representing an increase of 20%. This year over year
change was primarily due to revenues generated from YMG, acquired on September 25, 2002. Our business
continues to be impacted by the slowdown in the semiconductor industry and in economies
worldwide. We have been further affected by the cyclical nature of the semiconductor
industry with recurring periods of oversupply and overcapacity. These factors have
resulted in a downturn in demand for our products. We currently do not have
visibility as to the length or severity of the downturn. We do expect demand for our
products to improve once customers adjust to the period of oversupply and historical
levels of capital expenditures resume. There has been no current evidence, however,
that customer buying patterns will significantly increase in the near term. There is
a risk that the slowdown may be prolonged further. Cost of
Revenues and Gross Profit. Cost of revenues consists of the labor,
material and overhead costs of manufacturing our systems, royalties, spare parts cost and
the cost associated with our worldwide service support infrastructure. Our gross
profit was $6.1 million for the three month period ended March 31, 2003, compared to $5.2
million for the same period in the prior year. Our gross profit represented 42% of
our revenues for the three month period ended March 31, 2003 and 43% of our revenues for
the same period in the prior year. The decrease in gross profit as a percentage of
revenue for the three month period ended March 31, 2003 compared to the three month period
ended March 31, 2002 is primarily due to a change in product mix and fixed manufacturing
costs being a higher component of cost of revenues. Research and
Development. 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, prototype equipment expenses and the
cost of related supplies. Our research and development expense was $3.4 million for
the three month period ended March 31, 2003, compared to $2.4 million for the same period
in the prior year. Research and development expense represented 24% of our revenues
for the three month period ended March 31, 2003, compared to 20% of revenues for the same
period in the prior year. The dollar increase in research and development expenses
primarily reflects the inclusion of expenses related to the engineering team acquired from
YMG and the formation of the Integrated Metrology Group in the second quarter of 2002.
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
$2.9 million for the three month period ended March 31, 2003, compared to $2.4 million for
the same period in the prior year. Selling, general and administrative expense
represented 20% of our revenues for both the three month period ended March 31, 2003 and
2002. The year over year dollar increase in selling, general and administrative
expense was primarily due to administrative costs associated with YMG. Amortization.
Amortization expense was $0.2 million for the three month period ended March 31, 2003,
compared to $0.1 million for the three month period ended March 31, 2002. The year
over year dollar increase is attributable to the amortization of intangible assets having
definite useful lives acquired from the acquisition of YMG. Interest income
and other, net. Interest income and other, net was $0.6 million for
the three month period ended March 31, 2003, compared to $0.4 million for the same period
in the prior year. The year over year increase in interest income and other, net in
the three month period ended March 31, 2003 was the result of investments in higher
yielding fixed income securities and realized gains on investments. Income Taxes.
We use the liability method of accounting for income taxes prescribed by SFAS No. 109,
"Accounting for Income Taxes." Income tax expense was $0.1 million in the
three month period ended March 31, 2003. We anticipate that our effective tax rate
for our current year to be approximately 23% as compared to 36% in the same period in the
prior year. Our anticipated effective tax rate is less than the expected combined
federal and state tax rates of 40% primarily as a result of a decrease in our anticipated
income before income taxes combined with the positive impact of our research and
experimentation tax credits on our effective tax rate. Liquidity and Capital Resources At March 31, 2003,
we had $70.6 million of cash, cash equivalents and short-term investments and $106.2
million in working capital. At December 31, 2002 we had $73.3 million of cash, cash
equivalents and short-term investments and $106.1 million in working capital. Operating
activities used $2.2 million and $0.3 million in cash for the three month periods
ended March 31, 2003 and 2002, respectively. The net cash used in operating
activities during the three month period ended March 31, 2003 was primarily a result of
an increase in accounts receivable of $2.0 million and a decrease in accounts payable
of $1.4 million, partially offset by an increase in deferred revenue and a decrease in
prepaid expenses and other totaling $1.1 million. The net cash used in operating
activities for the three month period ended March 31, 2002 was primarily a result of
an increase in accounts receivable of $2.8 million, partially offset by a decrease in
inventories of $2.0 million and net income of $0.5 million. Net cash used in
investing activities during the three month period ended March 31, 2003 of $0.5 million
includes purchases of short-term investments of $0.3 million and capital expenditures of
$0.2 million. Net cash used in investing activities during the three month period
ended March 31, 2002 of $29.4 million was due to purchases of short-term investments of
$29.3 million and capital expenditures of $0.1 million. Net cash provided
by financing activities for the three month period ended March 31, 2003 and 2002 of $3
thousand and $0.6 million 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 short-term investments 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, which is currently experiencing a downturn. While we
are not able to predict the duration or severity of this downturn or the effect it may
have on our operating results, past downturns have often resulted in substantial decreases
in the semiconductor device industry's demand for capital equipment, including its thin
film metrology equipment, and have seriously harmed our 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. The current semiconductor device industry downturn may continue for the
next several quarters. The current downturn and 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 2000, 2001,
2002 and the first three months of 2003, sales to end user customers that individually
represented at least five percent of our revenues accounted for 27.8%, 42.5%, 46.8% and
71.5% of our revenues. In 2000, 2001, 2002 and the first three months of 2003, sales
to Intel, a key customer, accounted for 19.4%, 33.4%, 46.8% and 47.3% 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 price
from approximately $30,000 to $1.0 million per system, our opaque film measurement systems
range in price from approximately $900,000 to $1.8 million per system and our macro-defect
detection systems range in price from approximately $650,000 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 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
product development is inherently risky because it is difficult to foresee developments in
semiconductor device manufacturing technology, coordinate technical personnel, and
identify and eliminate metrology 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 product lines Competition
from our new S-ultra 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 S-ultra, WaferView or next
generation systems. This diversion of resources could have a further negative effect
on sales of our current systems. Similarly, competition from our new MetaPULSE-II
system could have a negative impact on MetaPULSE systems. Additionally, the
new line of i-MOD products will incorporate some of our advanced metrologies into
small footprint modules that are designed to be integrated into process tool
equipment. These integrated metrology systems are unlikely to replace our
existing stand-alone systems because of their relative lack of accessibility and because
the range of applications will be limited. However, there could be a negative effect
on 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. 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 2002 and
the first three months of 2003, 40.6% and 63.6% of our revenue were derived from
sales in foreign countries, including certain countries in Asia such as Taiwan, China,
Korea, Singapore and Japan. 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, Zeiss, Sony and Leica.
Each of our product lines 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. We rely upon an independent distributor for a significant portion of our sales, and a
disruption in our relationship could have a negative impact on our sales in Japan Historically,
a portion of our sales in Japan has been made through our sole independent distributor,
Tokyo Electron Limited (TEL). In 2000, 2001, 2002 and the first three months of
2003, sales to TEL accounted for 21.9%, 14.8%, 6.8% and 8.7% of our revenues. We
expect that sales through TEL will represent a portion of our sales for the next several
years. TEL also provides field service to our customers. The activities of TEL
are not within our control. A reduction in the sales or service efforts or financial
viability of TEL, or a termination of our relationship with them, could harm our sales,
our financial results and our ability to support our customers. Although we believe
that we maintain good relations with TEL, such relationship may nevertheless deteriorate
in the future. 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 39.5%, 36.6%, 30.1% and 32.3% of our
revenues in 2000, 2001, 2002 and the first three months of 2003. 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 54.7%, 53.7%, 40.6% and 63.6% of our revenues in
2000, 2001, 2002 and the first three months of 2003. 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. If consumer confidence does not recover, our revenues and profitability may
be adversely impacted in 2003 and beyond. In addition, 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 only
$2.0 million of coverage per 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, commercial paper and corporate
bonds). We continually monitor our exposure to changes in interest rates and credit
ratings of issuers from our available-for-sale securities. Accordingly, we believe
that the effects of changes in interest rates and credit ratings of issuers are limited
and would not have a material impact on our financial condition or results of
operations. However, 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. 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. All sales arrangements with
international customers are denominated in U.S. dollars. We have branch operations
in Taiwan, Singapore, China and Korea and a wholly-owned subsidiary in Europe, 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 (a) 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") Rules 13a-14(c) and 15d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this Quarterly
Report on Form 10-Q, have concluded that as of the Evaluation Date, 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 error and all
fraud. Because of 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. (b) Changes in Internal Controls.
Subsequent to the Evaluation Date, there were no significant changes in our internal
controls or in other factors that could significantly affect internal controls, including
any corrective actions with regard to significant deficiencies and material weaknesses. PART II
OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
FORM 10-Q
DELAWARE
22-3531208
(State
or Other Jurisdiction of
(I.R.S.
Employer
Incorporation
or Organization)
Identification
Number)
PART I FINANCIAL INFORMATION
Item 4.
Controls and Procedures
March 31,
2003
December 31,
2002
ASSETS
Current assets:
Cash and cash equivalents
$
39,371
$ 42,047
Short-term investments
31,267
31,223
Accounts receivable, net
18,127
16,142
Inventories
30,303
30,488
Prepaid expenses and other current assets
3,339
4,033
Total current assets
122,407
123,933
Net property, plant and
equipment
7,270
7,454
Goodwill
13,209
13,209
Identifiable intangible
assets, net
11,037
11,256
Deferred income taxes
5,299
5,299
Other assets
710
812
Total assets
$ 159,932
$ 161,963
Current liabilities:
Accounts payable and accrued liabilities
$
4,806
$
6,502
Other current liabilities
11,369
11,380
Total current liabilities
16,175
17,882
Commitments and
contingencies
Stockholders' equity:
Common stock
16
16
Additional paid-in capital
137,671
137,668
Accumulated other comprehensive loss
(797)
(295)
Retained earnings
6,867
6,692
Total stockholders' equity
143,757
144,081
Total liabilities and
stockholders' equity
$ 159,932
$ 161,963
March 31,
Revenues
$ 14,505
$ 12,038
Cost of revenues
8,389
6,875
Gross profit
6,116
Operating expenses:
Research and development
3,438
2,422
Selling, general and administrative
2,873
2,409
Amortization
219
64
Total operating expenses
6,530
Operating (loss) income
(414)
268
Interest income and
other, net
642
Income before income
taxes
228
694
Provision for income
taxes
53
247
Net
income
$ 175
$ 447
Earnings
per share:
Basic
$
0.01
$
0.03
Diluted
$
0.01
$
0.03
Weighted
average shares outstanding:
Basic
16,331,068
16,145,675
Diluted
16,546,599
16,845,390
Three Months Ended
March 31,
2003
2002
Cash flows from operating activities:
Net income
$ 175
$ 447
Adjustments to reconcile
net income to net cash used in
operating activities:
Amortization
219
64
Depreciation
344
293
Tax benefit from sale of shares through employee stock plans
-
273
Provision for doubtful accounts
65
3
Deferred
income taxes
-
31
Decrease (increase) in assets:
Accounts receivable
(2,040)
(2,820)
Income taxes receivable
161
(76)
Inventories
179
2,033
Prepaid expenses and other
418
(80)
Increase (decrease) in liabilities:
Accounts payable
(1,371)
(425)
Accrued liabilities
(329)
(31)
Income taxes payable
(70)
-
Deferred revenue
712
80
Other liabilities
(648)
(89)
Net cash used in operating activities
(2,185)
(297)
Cash flows from investing activities:
Purchases of short-term investments
(340)
(29,313)
Purchases of property, plant and equipment
(160)
(113)
Net cash used in investing activities
(500)
(29,426)
Cash flows from financing activities:
Proceeds from sales of shares through employee stock plans
3
645
Net cash provided by financing activities
3
645
Effect of exchange rate changes on cash
6
(6)
Net decrease in cash and cash equivalents
(2,676)
(29,084)
Cash and cash equivalents at beginning of
period
42,047
94,642
Cash and cash equivalents at end of period
$ 39,371
$ 65,558
Cash
$ 166
Accounts receivable
1,623
Inventories
1,413
Property, plant and equipment
2,838
Other assets
445
Accounts payable and accrued liabilities
(1,684)
Deferred taxes
(817)
Other liabilities
(4,945)
Identifiable intangible assets
13,400
Goodwill
12,796
$ 25,235
March 31, 2002
$ 14,403
$
607
$
0.04
$
0.04
Gross Carrying
Amount
Accumulated
Amortization
Purchased technology
$
21,284
Patented technology (Note 2)
310
Total
Gross Carrying
Amount
Accumulated
Amortization
Purchased technology
$
21,220
Patented technology
155
Total
March 31,
December 31,
2003
2002
Materials
$ 16,530
Work-in-process
11,622
Finished goods
2,336
Total inventories
March
31,
December
31,
2003
2002
Land and building
$ 4,968
Machinery and equipment
1,502
Furniture and fixtures
1,393
Computer equipment
2,770
Leasehold improvements
979
11,612
Accumulated depreciation
(4,158)
Net property, plant and equipment
March 31,
2002
March 31,
March 31,
2003
2002
Net income
$ 447
Change in net unrealized gains on
investments
(402)
Change in currency translation
adjustments
28
Total
Three
Months Ended
March 31,
2003
2002
Numerator:
Net income
$ 175
$ 447
Denominator:
Basic earnings per share -
weighted average shares outstanding
16,331,068
16,145,675
Effect of potential dilutive securities:
Employee stock options - dilutive
shares
215,531
699,715
Diluted earnings per share -
weighted average shares outstanding
16,546,599
16,845,390
Earnings per share:
Basic
$ 0.01
$ 0.03
Diluted
$ 0.01
$ 0.03
2003
2002
Net income, as reported
$
175
$
447
Deduct: Total stock-based employee
compensation expense
determined under fair value based method, net of related
income tax benefits
1,264
1,075
Pro forma net loss
$ (1,089)
$ (628)
Net income (loss) per share:
Basic-as reported
$
0.01
$
0.03
Basic-pro forma
$
(0.07)
$
(0.04)
Diluted-as
reported
$
0.01
$
0.03
Diluted-pro forma
$
(0.07)
$
(0.04)
March 31,
Employee Stock Options:
2003
2002
5.0
5.0
85.0%
85.0%
0.0%
0.0%
3.8%
3.8%
$ 9.35
$ 25.27
March 31,
Employee Stock Purchase
Plan Shares:
2003
2002
1.3
0.7
85.0%
95.0%
0.0%
0.0%
1.7%
3.5%
$ 8.85
$ 13.21
4,678
4,549
Three
Months Ended
March 31,
2003
2002
Customer A
47.3%
27.6%
Customer B
-
18.0%
Customer C
-
16.5%
Customer D
-
11.2%
Exhibit No. Description
99.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.99.2 Certification of Steven R. Roth, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K
On March 31, 2003, we furnished a Current Report on Form 8-K. This report contained Certifications that were furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Rudolph Technologies, Inc.
RUDOLPH TECHNOLOGIES, INC.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
I, Paul F. McLaughlin, certify that:
- designed such disclosure controls and procedures 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 quarterly report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
By: /s/ Paul F. McLaughlin Paul F. McLaughlin Chairman and Chief Executive Officer
I, Steven R. Roth, certify that:
- designed such disclosure controls and procedures 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 quarterly report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
By: /s/ Steven R. Roth Steven R. Roth Senior Vice President, Chief Financial Officer
EXHIBIT INDEX
Exhibit
No.
Description
99.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.99.2 Certification of Steven R. Roth, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350.
EXHIBIT 99.1
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 March 31, 2003 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.
EXHIBIT 99.2
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 March 31, 2003 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.
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