Rudolph 10Q 2001 Q3 Quarterly report


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 000-27965

RUDOLPH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE	22-3531208
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)


One Rudolph Road,
Flanders, New Jersey 07836
(Address of principal executive offices, including zip code)

(973) 691-1300
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
The number of outstanding shares of the Registrant's Common Stock on November 7, 2001 was 16,116,268.


PART I FINANCIAL INFORMATION


Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk

PART II OTHER INFORMATION

Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K



PART I FINANCIAL INFORMATION

Item 1. Financial Statements

RUDOLPH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)





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






RUDOLPH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)




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



RUDOLPH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)




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




RUDOLPH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)


NOTE 1. Basis of Presentation

The accompanying 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 generally accepted accounting principles. 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 results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of results to be expected for the entire year. This 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, 2000.

NOTE 2. Accounts Receivable

Accounts receivable are net of the allowance for doubtful accounts of $393 and $443 as of September 30, 2001 and December 31, 2000, respectively.

NOTE 3. Inventories

	September 30,		December 31,
	2001		2000
Materials		$ 14,096		$ 10,701
Work-in-process		7,661		11,295
Finished goods		2,202		1,777
Total inventories		$ 23,959		$ 23,773

NOTE 4. Property, Plant and Equipment

September 30, December 31,
2001 2000
Land and building
$ 2,563
$ 1,639
Machinery and equipment
1,411
882
Furniture and fixtures
1,203
864
Computer equipment
2,162
1,643
Leasehold improvements
852
832
8,191
5,860
Accumulated depreciation
(2,743)
(2,036)
Net property, plant and equipment
$ 5,448
$ 3,824

NOTE 5. Comprehensive Income

The disclosures required by Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") have been included below. The difference between net income and comprehensive income for the Company is due to currency translation adjustments. The effects of income taxes on comprehensive income was not material.

For the three and nine months ended September 30, 2001 comprehensive income amounted to $910 and $11,091, respectively. Comprehensive income for the three and nine months ended September 30, 2000 was $5,532 and $14,729, respectively.

NOTE 6. Income Per Share

Basic income per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options for the three and nine months ended September 30, 2001 and September 30, 2000. During the three and nine months ended September 30, 2001 and the three and nine months ended September 30, 2000, there were stock options with exercise prices above the average fair market value of the Company's common stock for the respective periods which were excluded from the computation of diluted earnings per share due to the anti-dilutive nature of these options. The weighted average number of stock options excluded from the computation of diluted earnings per share during the three and nine months ended September 30, 2001 were 577,409 and 377,678, respectively. For the three and nine months ended September 30, 2000 the weighted average number of stock options excluded from the computation of diluted earnings per share were 139,367 and 57,537, respectively.
The Company's basic and diluted net income per share amounts are as follows:


NOTE 7. Contingencies

The Company was previously involved in a patent interference proceeding with Therma-Wave, Inc. in the United States Patent Office. In this proceeding, the Company was defending its patent rights with respect to some of the multiple angle, multiple wavelength ellipsometry technology it uses in its transparent thin film measurement systems. Therma-Wave requested that the proceeding be initiated in 1993 by filing a reissue application for one of its own patents, in which it sought to broaden the original issued claims. The proceeding was initiated by the Patent Office in June 1998.

On September 28, 2001 a settlement was reached between the Company and Therma-Wave. As a condition of the settlement, Therma-Wave filed a concession of priority in the interference based upon a review of the evidence presented by the Company. In exchange the Company has agreed not to assert its patent against Therma-Wave's products. No financial consideration was paid by either party.

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 involved in any material legal proceedings.

NOTE 8. Geographic Reporting and Customer Concentration

Revenue by geographic region:


Customers comprising 10% or more of revenue:


NOTE 9. Recent Accounting Pronouncements

In September 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 ("SFAS No. 141"), Business Combinations (effective July 1, 2001) and Statement of Financial Accounting Standard No. 142 ("SFAS No. 142"), Goodwill and Other Intangible Assets (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144 ("SFAS No. 144"), Accounting for the Impairment or Disposal of Long Lived Assets. SFAS No. 144 changes the accounting for long-lived assets by requiring that all long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reporting continuing operations or in discontinued operations. SFAS No. 144, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, is effective for fiscal years beginning after December 15, 2001. The Company has not fully assessed the potential impact of the adoption of SFAS No. 144, which is effective for the Company as of January 1, 2002.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this current report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934. 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 new orders to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume, (ii) we anticipate our effective tax rate for the year to be approximately 36%, (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, and (iv) we expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for the next several years.

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 for 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, 2000.
Results of Operations for the Three and Nine Month Periods Ended September 30, 2001 and 2000
Revenues. Our revenues are derived from the sale of our metrology systems, services and spare parts. Our revenues were $15.1 million and $68.7 million for the three and nine month periods ended September 30, 2001, compared to $23.4 million and $59.2 million for the same periods in the prior year, representing a decrease of 36% for the three month period ended September 30, 2001and an increase of 16% for the nine month period ended September 30, 2001. This change year over year was primarily due to increases in unit volume shipments of our MetaPULSE product line to existing customers and expanded sales of new products.
Our business has been impacted by the slowdown in economies worldwide. We have been further affected by the cyclical nature of the semiconductor industry with recurring periods of oversupply. 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. During the first nine months of 2001, we experienced a significant slowdown in new orders as market conditions weakened. We do expect new orders 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 increase in the near term. There is a risk that the slowdown may be prolonged.
Our current outlook is for lower revenues in the remainder of 2001 reflecting the reduction of semiconductor manufacturers' capital expenditures and delay of deliveries of new equipment in 2001. Our revenue for 2002 will be dependent upon our customers' investments during the remaining part of 2001 and for the first three quarters of 2002.
Cost of Revenues and Gross Profit. Cost of revenues consists of the labor, material and overhead costs of manufacturing our systems, spare parts cost and the cost associated with our worldwide service support infrastructure. Our gross profit was $6.7 million and $35.5 million for the three and nine month periods ended September 30, 2001, compared to $11.9 million and $30.5 million for the same periods in the prior year. Our gross profit represented 45% and 52% of our revenues for the three and nine month periods ended September 30, 2001, compared to 51% of our revenues for each of the same periods in the prior year. The decrease in gross profit as a percentage of revenue for the three month period ended September 30, 2001 compared to September 30, 2000 is the result of higher customer service organization and fixed manufacturing costs.
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 expenses were $3.1 million and $9.6 million for the three and nine month periods ended September 30, 2001, compared to $2.4 million and $6.1 million for the same periods in the prior year. As a percentage of revenue, research and development expense represented 21% and 14% of our revenues for the three and nine month periods ended September 30, 2001, compared to 10% of our revenues for each of the same periods in the prior year. The percentage of revenue and dollar increase in research and development expenses resulted from higher personnel, parts cost associated with new product development and expansion of R&D facilities.
Selling, General and Administrative. Selling, general and administrative expense is primarily comprised of salaries and related costs for sales, marketing, and general and administrative personnel, as well as commissions and other non-personnel related expenses. Our selling, general and administrative expense was $2.9 million and $10.4 million for the three and nine month periods ended September 30, 2001, compared to $3.8 million and $10.0 million for the same periods of the prior year. Selling, general and administrative expense represented 19% and 15% of our revenues for the three and nine month periods ended September 30, 2001, compared to 16% and 17% of our revenues for the same periods of the prior year. The dollar decrease in selling, general and administrative expense from the three month period ended September 30, 2000 to the three month period ended September 30, 2001 is due primarily to cost cutting initiatives, such as, travel limitation, employee reductions and salary freezes as well as the completion of infrastructure initiatives.
Amortization. Amortization expense is related to the core technology and goodwill we acquired from our predecessor company in 1996. Amortization expense was $0.1 million and $0.3 million for each of the three and nine month periods ended September 30, 2001 and 2000.
Interest income and other, net. Interest income and other, net was $0.7 million and $2.3 million for the three and nine month periods ended September 30, 2001, compared to $0.6 million and $1.6 million for the same periods in the prior year. The increase in interest income earned by us in the three and nine month periods ended September 30, 2001 was the result of investing the net proceeds from our follow-on public offering of common stock not immediately needed to support our operations.

Income Taxes. We use the liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Income tax expense in the third quarter was recorded using a 32% tax rate based on investment in engineering and development programs qualifying for R&D tax benefits and revenue and profit outlook for the year. We anticipate our effective tax rate for the year to be approximately 36%. Income tax expense/(benefit) in the three and nine month periods in the prior year were recorded using a 12% and (3%) tax rate based on the reversal of the deferred tax valuation allowance. During 1998, the net deferred tax asset was reduced to zero with a valuation allowance as a result of recurring losses and with the uncertainty regarding the Company's ability to generate sufficient taxable income. The deferred tax valuation allowance was reduced by $1.7 million and $6.5 million for the three and nine months ended September 30, 2000 for certain tax assets that more likely than not would be realized.

Change in accounting principle. Effective January 1, 2000, the Company changed its method of accounting for revenue recognition to comply with Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. 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 the Company's products are sold and accounted for as multiple element arrangements, consisting of the sale of the product and installation. The Company generally recognizes 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 the Company's 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, the Company defers 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 the Company's 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. Previously, the Company had recognized revenue upon shipment of equipment to customers, which usually preceded installation and final customer acceptance, provided final customer acceptance and collection of the related receivable were probable.

The effect of the change on the three and nine months ended September 30, 2001 was to increase revenue by $1.7 million and $2.8 million, respectively. The effect of the change on the three and nine months ended September 30, 2000 was to decrease revenue by $1.2 million and $2.5 million, respectively. The deferred revenue balance to be recognized in future periods as of September 30, 2001 was $1.7 million.

Liquidity and Capital Resources
At September 30, 2001, we had $96.0 million of cash and cash equivalents and $125.9 million in working capital. At December 31, 2000 we had $29.7 million of cash and cash equivalents and $70.2 million in working capital.

For the nine month period ended September 30, 2001, operating activities provided $24.7 million in cash. Net cash used for operating activities was $3.8 million for the nine month period ended September 30, 2000. The net cash provided by operating activities during the nine month period ended September 30, 2001 was primarily a result of a decrease in accounts receivable of $12.7 million, net income of $11.1 million, and a decrease in deferred revenue of $1.8 million. The net cash used in operating activities for the nine month period ended September 30, 2000 was primarily to fund an increase in accounts receivable of $14.1 million and inventories of $8.6 million, partially offset by an increase in net income of $14.7 million, and deferred revenue of $4.8 million. Net cash used in investing activities during the nine month period ended September 30, 2001 includes capital expenditures of $2.3 million primarily to fund building renovations on our corporate headquarters, internal training tools and to purchase computer equipment necessary for our operations. Net cash used in investing activities during the nine month period ended September 30, 2000 of $0.6 million was primarily for the purchase of software and related computer equipment. Net cash provided by financing activities for the nine month period ended September 30, 2001 of $43.9 million was primarily due to the completion of our follow-on public offering of 1,000,000 shares of common stock at $45.00 per share. Net proceeds to us after the underwriter's discount and other fees amounted to $42.0 million.

Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment commitments, which will affect our ability to generate additional cash. 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. 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 will be subject to significant variation due to the cyclical nature of the semiconductor device industry. We believe the semiconductor device industry 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 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. The semiconductor device industry is cyclical and has historically experienced periodic downturns, which have often resulted in substantial decreases in the semiconductor device industry's demand for capital equipment, including its thin film metrology equipment. There is typically a six 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 semiconductor device industry experienced a downturn in 1998, during which industry revenues declined by an estimated 8.4% as reported by World Semiconductor Trade Statistics, Inc. Our revenues decreased from $35.3 million in 1997 to $20.1 million in 1998. This downturn and any future downturn in the semiconductor device industry, or any failure of that industry to continue 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 single source or 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 single supplier or a limited group of suppliers. We do not have long-term contracts with many of our suppliers. Our dependence on sole source suppliers of components 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 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.

For example, prior to the second quarter of 1999, we had not reported net income since our predecessor company was acquired by our management and a group of investors in June 1996. We reported a net loss available to common stockholders for the first quarter of 1999 of $0.7 million and for 1998 of $14.6 million. If we suffer losses in the future and are not able to maintain profitability, our business will suffer and the price of our common stock will 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 $200,000 to $1.0 million per system and our opaque film measurement systems range in price from approximately $900,000 to $1.8 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 sales representatives and distributors;

- 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.

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

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. Accordingly, 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.

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. We recently developed our MatrixMetrology systems, which are thin film metrology systems specifically designed for use in the CMP, etch, diffusion and other portions of the semiconductor device manufacturing process where we do not currently have significant market share. Any new systems introduced by us may not achieve a significant degree of market acceptance or, once accepted, may fail to sell well for any significant period.

We expect to spend a significant amount of time and resources to develop new systems and refine 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 new systems. Our ability to commercially introduce and successfully market new systems is subject to a wide variety of challenges during this 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 of our systems in order 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 MatrixMetrology systems could have a negative effect on sales of our other transparent thin film metrology systems, including our SpectraLASER and FOCUS 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 new MatrixMetrology systems. This diversion of resources could have a further negative effect on sales of our current systems.

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 expect our level of research and development expenses to increase in absolute dollar terms for at least the next several years.

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 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.
For example, we were recently involved in a patent interference proceeding with a competitor, Therma-Wave, Inc., in the United States Patent Office. In this proceeding, we recently defended our patent rights with respect to some of the multiple angle, multiple wavelength ellipsometry technology we use in our transparent thin film measurement systems. Therma-Wave requested the proceeding be initiated in 1993 by filing a reissue application for one of its own patents in which it sought to broaden the original issued claims. The proceeding was initiated by the Patent Office in June 1998. On September 28, 2001 a settlement was reached between the Company and Therma-Wave. As a condition of the settlement, Therma-Wave filed a concession of priority in the interference based upon a review of the evidence presented by the Company. In exchange the Company has agreed not to assert its patent against Therma-Wave's products. No financial consideration was paid by either party.


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

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, Philips Analytical Instruments and Therma-Wave. We compete to a lesser extent with companies such as Dai Nippon Screen, Nanometrics and Sopra. 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 has been significant merger and acquisition activity among our competitors and potential competitors, particularly during the last downturn in the semiconductor device and semiconductor capital equipment industries. 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 independent sales representatives and distributors for a significant portion of our sales, and a disruption in our relationships with these representatives or distributors could have a negative impact on our sales in Japan, and China

Historically, a portion of our sales have been made through independent sales representatives and distributors. We expect that sales through independent sales representatives and distributors will represent a portion of our sales for the next several years. In particular, all of our sales in Japan will continue to be made through an independent distributor for the next several years. In addition, all our sales in China will continue to be made through independent sales representatives. In some locations, including Japan, our independent sales representatives or distributors also provide field service to our customers. The activities of these representatives and distributors are not within our control. A reduction in the sales or service efforts or financial viability of any of our independent sales representatives and distributors, or a termination of our relationships 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 our independent sales representatives and distributors, such relationships 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

Countries in the Asia Pacific region, including Japan, Korea 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
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. 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 recently 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 Hyundai 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. We have only recently established a direct sales force in Europe, and we are continuing to build our sales infrastructure in that region. Because our European sales operations are new and our sales employees in Europe have only recently begun working for us, these operations could be particularly susceptible to any periods of tension that may arise between the United States and any European country in which we operate.

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.

If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we 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 goodwill 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

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and by policy, are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. As of September 30, 2001, our investments consisted primarily of commercial paper and municipal securities that mature in less than three months.

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 and Korea and a 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.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

The Company was previously involved in a patent interference proceeding with Therma-Wave, Inc. in the United States Patent Office. In this proceeding, the Company was defending its patent rights with respect to some of the multiple angle, multiple wavelength ellipsometry technology it uses in its transparent thin film measurement systems. Therma-Wave requested that the proceeding be initiated in 1993 by filing a reissue application for one of its own patents, in which it sought to broaden the original issued claims. The proceeding was initiated by the Patent Office in June 1998.

On September 28, 2001 a settlement was reached between the Company and Therma-Wave. As a condition of the settlement, Therma-Wave filed a concession of priority in the interference based upon a review of the evidence presented by the Company. In exchange the Company has agreed not to assert its patent against Therma-Wave's products. No financial consideration was paid by either party.

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 involved in any material legal proceedings.

Item 5. Other Information

Our directors, officers, or employees have entered, and may from time to time enter, into good faith trading plans pursuant to SEC Rule 10b5-1(c).

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.15 Amended 1996 Non-Qualified Stock Option Plan

(b) Reports on Form 8-K

None.

SIGNATURES

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

Rudolph Technologies, Inc.

Date: November 14, 2001 By: /s/ Paul F. McLaughlin
Paul F. McLaughlin
Chairman and Chief Executive Officer


Date: November 14, 2001 By: /s/ Steven R. Roth
Steven R. Roth
Vice President, Chief Financial Officer

Exhibit 10.15

RUDOLPH HOLDINGS CORPORATION

1996 NON-QUALIFIED STOCK OPTION PLAN

Purpose of Plan

The 1996 Stock Option Plan (the "Plan") of Rudolph Holdings Corporation, a Delaware corporation (the "Company"), adopted by the Board of Directors of the Company on June 14, 1996, for executive and other key employees of the Company and its subsidiaries, is intended to advance the best interests of the Company by providing those persons who have a substantial responsibility for its management and growth with additional incentives by allowing them to acquire an ownership interest in the Company and thereby encouraging them to contribute to the success of the Company and to remain in its employ. The availability and offering of stock options under the Plan also is intended to increase the Company's ability to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends.

Definitions

For purposes of the Plan, except where the context clearly indicates otherwise, the following terms shall have the meanings set forth below:

"Board" means the Board of Directors of the Company.

"Cause" shall mean the determination by the Board, in the exercise of its good faith judgment, that: (a) Participant has committed a fraud, felony or other serious act of moral turpitude; or (b) Participant has breached his duty of loyalty to the Company and its subsidiaries; or (c) Participant has committed a material breach of any agreement between the Participant and the Company or any of its subsidiaries, and if such breach is capable of cure, such breach is not cured or remedied and continues after fifteen (15) business days from the date on which written notice of the breach was first provided to Participant by the Board.

"Code" means the Internal Revenue Code of 1986, as amended, and any successor statute.

"Committee" shall mean the Stock Option Committee, or such other committee of the Board which may be designated by the Board to administer the Plan. The Committee shall be composed of two or more directors as appointed from time to time to serve by the Board.

"Common Stock" shall mean the Company's Class A Common Stock, par value $.01 per share, or Class B Common Stock, par value $.01 per share, in the event that the outstanding Common Stock is hereafter changed into or exchanged for different stock or securities of the Company, such other stock or securities.

"Independent Third Party" means any Person or group of Persons who, immediately prior to the contemplated transaction, does not own in excess of 5% of the Company's Common Stock on a fully-diluted basis, who is not controlling, controlled by or under common control with any such 5% owner of the Company's Common Stock and who is not the spouse or descendent (by birth or adoption) of any such 5% owner of the Company's Common Stock.

"Option Agreement" shall have the meaning set forth in Section 6.3.

"Options" shall have the meaning set forth in Section 5.2.

"Participant" means any executive or other key employee of the Company or any of its subsidiaries who has been selected to participate in the Plan by the Committee or the Board.

"Permanent Disability" shall mean that a Participant, as determined by the Board in its good faith judgement, is unable to perform, by reason of physical or mental incapacity, his duties or obligations as an employee of the Company or any of its subsidiaries, for a period of 90 consecutive days or a total period of 120 days in any 365 day period.

"Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof.

"Qualified Public Offering" shall mean the sale, in an underwritten public offering registered under the Securities Act, of shares of the Company's Common Stock having an aggregate offering value of at least $30 million.

"Sale of the Company" shall mean the sale of the Company and its subsidiaries to an Independent Third Party or affiliated group of Independent Third Parties pursuant to which such party or parties acquire (i) capital stock of the Company possessing the voting power to elect a majority of the Company's board of directors (whether by merger, consolidation or sale or transfer of the Company's capital stock) or (ii) all or substantially all of the assets of the Company and its subsidiaries determined on a consolidated basis.

Administration

The Plan shall be administered by the Committee; provided that if for any reason the Committee shall not have been appointed by the Board, all authority and duties of the Committee under the Plan shall be vested in and exercised by the Board. Subject to the limitations of the Plan, the Committee shall have the sole and complete authority to: (i) select Participants, (ii) grant Options to Participants in such forms and amounts as it shall determine, (iii) impose such limitations, restrictions and conditions upon such Options as it shall deem appropriate, (iv) interpret the Plan and adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan, (v) correct any defect or omission or reconcile any inconsistency in the Plan or in any Option granted hereunder and (vi) make all other determinations and take all other actions necessary or advisable for the implementation and administration of the Plan. The Committee's determinations on matters within its authority shall be conclusive and binding upon the Participants, the Company and all other Persons. All expenses associated with the administration of the Plan shall be borne by the Company. The Committee may, as approved by the Board and to the extent permissible by law, delegate any of its authority hereunder to such persons as it deems appropriate.

Limitation on Aggregate Shares

The number of shares of Common Stock with respect to which Options may be granted under the Plan and which may be issued upon the exercise thereof shall not exceed, in the aggregate, 30,000 shares; provided that the type and the aggregate number of shares which may be subject to Options shall be subject to adjustment in accordance with the provisions of Section 6.8 below; and further provided that to the extent any Options expire unexercised or are canceled, terminated or forfeited in any manner, without the issuance of Common Stock thereunder such shares shall again be available under the Plan. The 30,000 shares of Common Stock available under the Plan may be either authorized and unissued shares, treasury shares or a combination thereof, as the Committee shall determine.

Awards

Options. The Committee may grant options to Participants in accordance with this Article V.

Form of Option. Options granted under this Plan shall be nonqualified stock options and are not intended to be "incentive stock options" within the meaning of Section 422 of the Code or any successor provision (the "Options").

Exercisability. Options shall be exercisable at such time or times as the Committee shall determine at or subsequent to the date of grant.

Payment of Exercise Price. Options shall be exercised in whole or in part by written notice to the Company (to the attention of the Company's Secretary) accompanied by payment in full of the option exercise price. Payment of the option exercise price shall be made in cash (including check, bank draft or money order) or, in the discretion of the Committee, by delivery of a promissory note (if in accordance with policies approved by the Board).

Terms if Options. The Committee shall determine the term of each Option, which term shall in no event exceed ten years from the date of grant.

General Provisions

Conditions and Limitations on Exercise. Options may be made exercisable in one or more installments, upon the happening of certain events, upon the passage of a specified period of time, upon the fulfillment of certain conditions or upon the achievement by the Company of certain performance goals, as the Committee shall decide in each case when the Options are granted.

Acceleration Events. In the event of the Sale of the Company or a Qualified Public Offering, the Committee may provide, in its discretion, that the Options shall become immediately exercisable by any Participants who are employed by the Company or any of its subsidiaries at the time of such event and that such Options shall terminate if not exercised as of the date of any such Sale of the Company or Qualified Public Offering or other prescribed period of time.

Written Agreement. Each Option granted hereunder to a Participant shall be embodied in a written agreement (an "Option Agreement") which shall be signed by the Participant and by an authorized officer of the Company for and in the name and on behalf of the Company and shall be subject to the terms and conditions of the Plan prescribed in the Option Agreement, including, but not limited to, (i) the right of the Company and such other Persons as the Committee shall designate ("Designees") to repurchase from each Participant, and such Participant's transferees, all shares of Common Stock issued or issuable to such Participant on the exercise of an Option in the event of such Participant' s termination of employment, (ii) rights of first refusal granted to the Company and Designees, (iii) the obligation of the Participant to sell his Options or Common Stock in connection with a Sale of the Company, (iv) holdback and other registration right restrictions in the event of a public registration of any equity securities of the Company and (v) any other terms and conditions which the Committee shall deem necessary and desirable.

Listing, Registration and Compliance with Laws and Regulations. Options shall be subject to the requirement that if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares subject to the Options upon any securities exchange or under any state or federal securities or other law or regulation, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to or in connection with the granting of the Options or the issuance or purchase of shares thereunder, no Options may be granted or exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The holders of such Options shall supply the Company with such certificates, representations and information as the Company shall request and shall otherwise cooperate with the Company in obtaining such listing, registration, qualification, consent or approval. In the case of officers and other Persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the Committee may at any time impose any limitations upon the exercise of an Option that, in the Committee's discretion, are necessary or desirable in order to comply with such Section 16(b) and the rules and regulations thereunder. If the Company, as part of an offering of securities or otherwise, finds it desirable because of federal or state regulatory requirements to reduce the period during which any Options may be exercised, the Committee, may, in its discretion and without the Participant's consent, so reduce such period on not less than 15 days written notice to the holders thereof.

Nontransferability. Unless determined otherwise by the Committee, Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the Participant, may be exercised only by such Participant (or his legal guardian or legal representative). If the Committee makes an Option transferable, such Option shall contain such additional terms and conditions as the Committee deems appropriate. In the event of the death of a Participant, exercise of Options granted hereunder shall be made only: (i) by the executor or administrator of the deceased Participant or the Person or Persons to whom the deceased Participant's rights under the Option shall pass by will or the laws of descent and distribution. ; and (ii) to the extent that the deceased Participant was entitled thereto at the date of his death, unless otherwise provided by the Committee in such Participant's Option Agreement.

Expiration of Options.

Normal Expiration. In no event shall any part of any Option be exercisable after the date of expiration thereof (the "Expiration Date"), as determined by the Committee pursuant to section 5.6 above.

Early Expiration Upon Termination of Employment. Except as otherwise provided by the Committee in the Option Agreement, any portion of a Participant's Option that was not vested and exercisable on the date of the termination of such Participant's employment shall expire and be forfeited as of such date, and any portion of a Participant's Option that was vested and exercisable on the date of the termination of such Participant's employment shall expire and be forfeited as of such date; provided that: (i) if any Participant dies or becomes subject to any Permanent Disability, such Participant's Option shall expire 180 days after the date of his death or Permanent Disability, but in no event after the Expiration Date, (ii) if any Participant retires (with the approval of the Board), his Option shall expire 180 days after the date of his retirement, but in no event after the Expiration Date, and (iii) if any Participant is discharged other than for Cause, such Participant's Option shall expire 180 days after the date of his discharge, but in no event after the Expiration Date.

Withholding of Taxes. The Company shall be entitled, if necessary or desirable, to withhold from any Participant from any amounts due and payable by the Company to such Participant (or secure payment from such Participant in lieu of withholding) the amount of any withholding or other tax due from the Company with respect to any shares issuable under the Options, and the Company may defer such issuance unless indemnified to its satisfaction.

Adjustments. In the event of a reorganization, recapitalization, stock dividend or stock split, or combination or other change in the shares of Common Stock, the Board or the Committee may, in order to prevent the dilution or enlargement of rights under outstanding Options, make such adjustments in the number and type of shares authorized by the Plan, the number and type of shares covered by outstanding Options and the exercise prices specified therein as may be determined to be appropriate and equitable.

Rights of Participants. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its subsidiaries to terminate any Participant's employment at any time (with or without Cause), nor confer upon any Participant any right to continue in the employ of the Company or its subsidiaries for any period of time or to continue his present (or any other) rate of compensation, and except as otherwise provided under this Plan or by the Committee in the Option Agreement, in the event of any Participant's termination of employment (including, but not limited to, the termination by the Company or any subsidiary thereof, without Cause) any portion of such Participant's Option that was not previously vested and exercisable shall expire and be forfeited as of the date of such termination. No employee shall have a right to be selected as a Participant or, having been so selected, to be selected again as a Participant.

Amendment, Suspension and Termination of Plan. The Board or the Committee may suspend or terminate the Plan or any portion thereof at any time and may amend it from time to time in such respects as the Board or the Committee may deem advisable; provided that no such amendment shall be made without stockholder approval to the extent such approval is required by law, agreement or the rules of any exchange upon which the Common Stock is listed and no such amendment, suspension or termination shall impair the rights of Participants under outstanding Options without the consent of the Participants affected thereby. No Options shall be granted hereunder after the tenth anniversary of the adoption of the Plan.

Amendment, Modification and Cancellation of Outstanding Options. The Committee may amend or modify any Option in any manner to the extent that the Committee would have had the authority under the Plan initially to grant such Option; provided that no such amendment or modification shall impair the rights of any Participant under any Option without the consent of such Participant. With the Participant's consent, the Committee may cancel any Option and issue a new Option to such Participant.

Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding; provided that any such Committee member shall be entitled to the indemnification rights set forth in this section 6. 12 only if such member has acted in good faith and in a manner that such member reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such conduct was unlawful; and further provided that upon the institution of any such action, suit or proceeding a Committee member shall give the Company written notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee member undertakes to handle and defend it on his own behalf.

* * * *

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

	September 30, 2001	December 31, 2000
ASSETS

Current assets:
Cash and cash equivalents	$ 95,989	$ 29,736
Accounts receivable, net	14,438	27,132
Inventories	23,959	23,773
Prepaid expenses and other current assets	1,456	4,527
Total current assets	135,842	85,168
Net property, plant and equipment	5,448	3,824
Intangibles	2,266	2,520
Deferred taxes	6,121	6,628
Other assets	324	414
Total assets	$ 150,001	$ 98,554


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$ 4,406	$ 7,062
Other current liabilities	5,517	7,919
Total current liabilities	9,923	14,981
Other long-term liabilities	45	65
Total liabilities	9,968	15,046

Commitments and contingencies

Stockholders' equity
Common stock	16	15
Additional paid-in capital	132,817	87,385
Other comprehensive loss	(262)	(275)
Accumulated earnings/(deficit)	7,462	(3,617)
Total stockholders' equity	140,033	83,508
Total liabilities and stockholders' equity	$ 150,001	$ 98,554

	Three Months Ended September 30,		Nine Months Ended September 30,
	2001	2000	2001	2000

Revenues	$ 15,058	$ 23,440	$ 68,707	$ 59,183
Cost of revenues	8,323	11,512	33,225	28,714
Gross profit	6,735	11,928	35,482	30,469
Operating expenses:
Research and development	3,183	2,384	9,610	6,090
Selling, general and administrative	2,891	3,755	10,392	10,045
Amortization	85	84	254	254
Total operating expenses	6,159	6,223	20,256	16,389
Operating income	576	5,705	15,226	14,080
Interest income and other, net	(681)	(578)	(2,255)	(1,622)
Income before income taxes and cumulative effect of a change in accounting principle	1,257	6,283	17,481	15,702
Provision (benefit) for income taxes	398	729	6,403	(505)
Income before cumulative effect of a change in accounting principle	859	5,554	11,078	16,207
Cumulative effect of a change in accounting principle, net of tax of $924	-	-	-	1,458
Net income	$ 859	$ 5,554	$ 11,078	$ 14,749
Basic earnings per share:
Income before cumulative effect of a change in accounting principle	$ 0.05	$ 0.38	$ 0.70	$ 1.10
Cumulative effect of a change in accounting principle	-	-	-	$ (0.10)
Net income	$ 0.05	$ 0.38	$ 0.70	$ 1.00
Diluted earnings per share:
Income before cumulative effect of a change in accounting principle	$ 0.05	$ 0.35	$ 0.67	$ 1.02
Cumulative effect of a change in accounting principle	-	-	-	$ (0.09)
Net income	$ 0.05	$ 0.35	$ 0.67	$ 0.93
Weighted average shares outstanding:
Basic	16,081,194	14,801,773	15,816,201	14,744,316
Diluted	16,649,058	15,797,230	16,455,905	15,817,643

	Nine Months Ended
	September 30,
	2001	2000
Cash flows from operating activities:
Net income	$ 11,078	$ 14,749
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization	254	254
Depreciation	718	479
Tax benefit for exercise of employee stock options	1,535	-
Provision for doubtful accounts	(50)	102
Deferred income taxes	2,072	(5,548)
Decrease (increase) in assets:
Accounts receivable	12,732	(14,078)
Income taxes receivable	1,349	-
Inventories	(209)	(8,614)
Prepaid expenses and other	290	26
Increase (decrease) in liabilities:
Accounts payable	(2,112)	2,564
Accrued liabilities	(537)	774
Income taxes payable	109	725
Deferred revenue	(1,756)	4,793
Other liabilities	(762)	(39)
Net cash provided by (used in) operating activities	24,712	(3,813)
Cash flows from investing activities:
Purchase of property, plant and equipment	(2,348)	(611)
Proceeds from disposal of property, plant and equipment	-	16
Net cash used in investing activities	(2,348)	(595)
Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses	42,031	-
Exercise of employee stock options and employee stock purchase plan	1,866	347
Net cash provided by financing activities	43,897	347
Effect of exchange rate changes on cash	(8)	18
Net increase (decrease) in cash and cash equivalents	66,253	(4,043)
Cash and cash equivalents at beginning of period	29,736	35,076
Cash and cash equivalents at end of period	$ 95,989	$ 31,033

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2001		2000		2001		2000
Numerator:
Net income		$ 859		$ 5,554		$ 11,078		$ 14,749

Denominator:
Basic net income per share - weighted average shares outstanding		16,081,194		14,801,773		15,816,201		14,744,316
Effect of potential dilutive securities:
Employee stock options - dilutive shares		567,864		995,457		639,704		1,073,327

Diluted net income per share - weighted average shares outstanding		16,649,058		15,797,230		16,455,905		15,817,643

Net income per share:
Basic		$ 0.05		$ 0.38		$ 0.70		$ 1.00
Diluted		$ 0.05		$ 0.35		$ 0.67		$ 0.93

Rudolph 10-Q2001 Q3 Quarterly report

Content analysis