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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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, NJ 07836
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 691-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 Par Value
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of the registrant's stock on December
29, 2000 of $30.19 per share was approximately $187,213,624. Shares of common
stock held by each officer and director and by each person or group who owns
5% or more of the outstanding common stock have been excluded in that such
persons or groups may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The registrant had 14,871,885 shares of Common Stock outstanding as of
December 31, 2000.
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TABLE OF CONTENTS
Item No. Page
-------- ----
PART I
1. Business......................................................... 1
2. Properties....................................................... 18
3. Legal Proceedings................................................ 18
4. Submission of Matters to a Vote of Security Holders.............. 19
PART II
5. Market Price for Registrant's Common Equity and Related
Stockholder Matters.............................................. 20
6. Selected Financial Data.......................................... 20
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 22
7.A. Quantitative and Qualitative Disclosures about Market Risk....... 27
8. Financial Statements and Supplementary Data...................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................ 27
PART III
10. Directors, Executive Officers and Key Employees of the
Registrant....................................................... 28
11. Executive Compensation........................................... 30
12. Security Ownership of Certain Beneficial Owners and Management... 33
13. Certain Relationships and Related Transactions................... 36
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 37
PART 1
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including those
concerning our expectations of future sales, gross profits, research,
development and engineering expenses, selling, general and administrative
expenses, product introductions and cash requirements, are forward-looking
statements. These forward looking statements include but are not limited to
those identified in this report with an asterisk (*) symbol. Additional
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.
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 reasons including the
following: variations in the level of orders which can be affected by general
economic conditions and growth rates in the semiconductor manufacturing
industry and in the markets served by our customers, the international
economic and political climates, difficulties or delays in product
functionality or performance, the delivery performance of sole source vendors,
the timing of future product releases, failure to respond adequately to either
changes in technology or customer preferences, changes in pricing by us or our
competitors, ability to manage growth, risk of nonpayment of accounts
receivable or changes in budgeted costs. Our stockholders should carefully
review the cautionary statements contained in this Form 10K, including "Risk
Factors" set forth in Item 1 below.
Item 1. Business
General
We are a worldwide leader in the design, development, manufacture and
support of process control metrology systems used in semiconductor device
manufacturing. Our proprietary systems non-destructively measure the thickness
and other properties of thin films applied during various steps in the
manufacture of integrated circuits, enabling semiconductor device
manufacturers to increase yields and lower overall production costs. We
provide our customers with a flexible full-fab metrology solution by offering
families of systems that meet their transparent and opaque thin film
measurement needs in various applications across the fabrication process. Our
two primary families of metrology solutions offer leading-edge metrology
technology, flexible systems cost-effectively designed for specific
manufacturing applications and a common production-worthy automation platform,
all backed by worldwide support.
We design our systems with the flexibility to allow our customers to mix and
match tools both within and across our product lines to provide cost-effective
solutions that meet their specific manufacturing applications. Our primary
transparent and opaque thin film measurement systems are all built on our
production-worthy Vanguard common automation platform which has been in
production since the spring of 1997. The Vanguard platform, provides a common
software system, user interface, and hardware base for our systems. We also
provide our customers with direct service and application support worldwide,
which is dedicated to ensuring tool uptime and promoting additional
applications for our solutions across the fab.
Metal and Opaque Thin Film Measurement Solutions. Our MetaPULSE family of
metrology systems incorporates our proprietary technology for optical acoustic
metrology, which allows customers to simultaneously measure the thickness and
other properties of up to six metal or other opaque film layers in a non-
contact manner on product wafers. By minimizing the need for test wafers,
MetaPULSE systems enable our customers to achieve significant cost savings. We
believe that we currently offer the only systems that can non-destructively
measure up to six metal film layers with the degree of accuracy semiconductor
device manufacturers demand.
Our MetaPULSE systems use ultra-fast lasers to generate sound waves that
pass down through a stack of metal or opaque films such as copper and
aluminum, sending back to the surface an echo which is detected and
1
analyzed. These systems precisely measure the films with Angstrom accuracy and
sub-Angstrom repeatability at high throughputs. This accuracy and
repeatability is critical to semiconductor device manufacturers' ability to
achieve higher manufacturing yields with the latest fabrication processes.
In addition to measuring thickness, MetaPULSE systems provide critical
information about the properties of a film stack, such as detection of missing
layers during deposition, which is not available from traditional single-layer
test wafer metrology. We therefore believe that MetaPULSE offers significant
cost and performance advantages to customers depositing multi-layer film
stacks. As the industry moves toward the widespread adoption of copper
metalization, we believe that MetaPULSE systems will become even more widely
used to control device process parameters*.
Transparent Film Measurement Solutions. Our SpectraLASER line of transparent
film metrology systems provides precise and repeatable measurements of an
ever-increasing library of new thin films by incorporating our proprietary and
patented ellipsometer technology. Our patented technology, which uses four
lasers operating simultaneously at multiple angles and wavelengths, provides
our systems with an inherently stable design. In addition, our use of long
life solid state lasers rather than the traditional white light sources of
competitive systems reduces maintenance costs and minimizes the cost and time
required to re-qualify a light source when it is replaced. SpectraLASER
systems can also incorporate reflectometry technology, which is often more
suitable for measuring thicker films. The addition of reflectometry technology
to our SpectraLASER systems allows simultaneous measurement using both
technologies, addressing a trend in the industry to use film stacks composed
of an increasing number of layers of different films without compromising
throughput in the fab.
To complement our SpectraLASER family of transparent film metrology systems,
we have developed our MatrixMetrology family of systems, which was introduced
in September 1999 at the Semicon Taiwan industry conference. These systems
incorporate advanced ellipsometry and reflectometry technologies. Each model
is specifically configured in its hardware and software architecture to
provide an optimized metrology solution for a specific semiconductor process
application, such as CMP, diffusion or etch. Our MatrixMetrology line, when
combined with our existing families of metrology systems, is designed to
provide customers with a flexible full-fab line of metrology solutions for
transparent and opaque thin films, all built on our award-winning Vanguard
automation platform.
Technology
We believe that our expertise in engineering, research and development
enables us to rapidly develop new technologies and products in response to
emerging industry trends. The breadth of our technology enables us to offer
our customers a combination of measurement technologies, which we believe is
critical for today's advanced thin film metrology applications.
Optical Acoustics. Optical acoustic metrology involves the use of ultra-fast
laser induced sonar for metal and opaque thin film measurement. This
technology sends ultrasonic waves into multi-layer opaque films, then analyzes
the resulting echoes to determine the thickness of each individual layer
simultaneously. The echo's amplitude and phase can be used to detect film
properties, missing layers and interlayer problems. Since different phenomena
affect amplitude and phase uniquely, a variety of interlayer problems can be
detected and measured.
The use of optical acoustics to measure multi-layer metal and opaque films
was pioneered by scientists at Brown University in collaboration with us. The
proprietary optical acoustic technology in our MetaPULSE systems measures the
thickness of single or multi-layer opaque films ranging from less than 20
Angstroms to greater than five microns. It provides these measurements at a
rate of 60 wafers per hour with one to two percent accuracy and 0.5%
repeatability. Our optical acoustic technology also enables our MetaPULSE
systems to measure film properties on product wafers at existing test sites by
using small measurement spots of only ten microns in combination with pattern
recognition software algorithms.
2
Ellipsometry. Ellipsometry is a non-contact, non-destructive optical
technique for transparent thin film measurement. When a surface or interface
is struck by polarized light, ellipsometers measure the change in the
reflected light's polarization. By measuring at multiple wavelengths, an
ellipsometer can determine multiple properties of transparent films. The
combination of multiple angles of incidence and multiple wavelength
ellipsometry also allows accurate and reliable measurement across a wide range
of thicknesses and a wide variety of films and film stacks.
Since 1977, when we introduced our AutoEL, the industry's first production-
oriented, microprocessor-based ellipsometer, we have been an industry leader
in ellipsometry technology. We hold patents on several ellipsometry
technologies developed by our engineers, including our proprietary technique
which uses four lasers for multiple angle of incidence, multiple wavelength
ellipsometry. Incorporating this proprietary technology, our SpectraLASER
systems provide the accuracy and analytical power of research-grade
spectroscopic ellipsometers together with the high throughput required for
production applications.
Reflectometry. For applications requiring broader spectrum coverage, some
ellipsometry tools are also equipped with a reflectometer. Reflectometry uses
white light to determine the properties of transparent thin films by analyzing
the wavelength of light reflected from the surface of a wafer. This light is
analyzed with software algorithms to determine film thickness and, in some
cases, other material properties of the measured film. Reflectometry is often
more suitable for measuring thicker films, whereas ellipsometry is often more
suitable for measuring very thin films. Thus, neither system alone is capable
of accurate and reliable measurements over the full range of film thickness.
Using state-of-the-art deep ultraviolet reflectometers along with our
proprietary ellipsometry tools, our SpectraLASER systems have the ability to
simultaneously measure the thickness and optical properties of films ranging
in thickness from 20 Angstroms to several microns. Our MatrixMetrology systems
also incorporates next-generation reflectometry technology to enhance their
metrology performance in a broad range of semiconductor device manufacturing
applications.
Products
Our thin film measurement systems are non-contact, non-destructive metrology
systems capable of measuring thin film properties across the wafer with a high
degree of precision and repeatability. Our thin film measurement solutions
consist of five product families, three of which are built on our Vanguard
automation platform. In 1977 we introduced the industry's first production-
oriented, microprocessor-based ellipsometer, the AutoEL. As semiconductor
device manufacturing technology continued to advance rapidly, we developed our
second product family, the FOCUS ellipsometer. More recently, we introduced
two additional product families, the SpectraLASER family of transparent thin
film measurement systems and the MetaPULSE family of systems for measuring
metal and other opaque films. At the Semicon Taiwan industry conference in
September 1999, we introduced our new line of MatrixMetrology systems
optimized for the CMP, diffusion and etch processes. All of our SpectraLASER,
MetaPULSE and MatrixMetrology systems will be produced on our common Vanguard
automation platform. Finally, at the Semicon West industry conference in July
2000, we introduced two new integrated metrology tools for opaque and
transparent films. Our i-MP and i-SL tools extend our proprietary technologies
to real time integrated process monitoring across the fab. We have not begun
commercial shipments of our i-MP and i-SL systems.
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The following table summarizes various features of our principal products:
Year of
Product Line Introduction Principal Applications Price Range
------------ ------------ ------------------------- ---------------------
MetaPULSE Systems 1997 $900,000-$1.6 million
MetaPULSE 200(five
models) Deposition, CMP, CVD, PVD
MetaPULSE 300(five
models) Deposition, CMP, CVD, PVD
SpectraLASER Systems 1997 $350,000-$900,000
SpectraLASER 200(four
models) CMP, Diffusion, CVD, PVD,
Lithography, Etch
SpectraLASER 300(four
models) CMP, Diffusion, CVD, PVD,
Lithography, Etch
MatrixMetrology Systems 1999 $400,000-$1.0 million
MatrixMetrology S200
CMP CMP
MatrixMetrology S200
Etch Etch
MatrixMetrology S200
Diffusion Diffusion
MatrixMetrology S300
CMP CMP
MatrixMetrology S300
Etch Etch
MatrixMetrology S300
Diffusion Diffusion
FOCUS Series 1991 $200,000-$600,000
FOCUS FE III Diffusion, Etch, CMP, CVD
FOCUS FE VII Diffusion, Etch, CMP, CVD
CALIBER 300 Diffusion, Etch, CMP, CVD
AutoEL Series 1977 $20,000-$100,000
AutoEL III Ellipsometer Diffusion, Thin Films
AutoEL IV Ellipsometer Diffusion, Thin Films
MetaPULSE
Our MetaPULSE product family uses non-destructive optical acoustic
technology to simultaneously measure up to six layers of metal or other opaque
thin films with a broad range of thicknesses. Because it requires only a ten
micron measurement spot, MetaPULSE is able to deliver reliable measurement on
existing test spots on product wafers, reducing the cost associated with using
test wafers. MetaPULSE systems can also detect many problems and film
properties that remain invisible to traditional single-layer metrology
systems. To date, we have sold or received orders for over 100 MetaPULSE
systems worldwide, including many that have been deployed in copper
interconnect production applications.
MetaPULSE 200. Our MetaPULSE 200 system is the first production metal and
opaque thin film metrology system that simultaneously measures up to six
layers in a multi-layer metal film stack while providing early detection of
problems due to missing layers, poor adhesion and interlayer reaction and the
roughness of top and buried layers. It delivers the Angstrom accuracy and sub-
Angstrom repeatability demanded by semiconductor device manufacturers at high
throughput of up to 60 product wafers per hour.
MetaPULSE 300. Our MetaPULSE 300 incorporates all of the features of our
MetaPULSE 200 system and is configured to measure 300 millimeter product
wafers.
SpectraLASER
Our SpectraLASER family of transparent thin film measurement systems
incorporates our proprietary ellipsometry techniques, which uses multiple
angle of incidence, multiple wavelength ellipsometry to deliver the accuracy
and analytical power of research-grade spectroscopic ellipsometers with the
high throughput required for production applications. SpectraLASER's four-
laser array provides ellipsometry at wavelengths across the spectrum from deep
blue to near infrared, a broader range of wavelengths than most competitive
systems. These features give our SpectraLASER systems the analytical power to
quickly and easily characterize new processes,
4
solve film metrology problems and qualify new process tools. Our SpectraLASER
systems combine these ellipsometry technologies with a deep ultraviolet
reflectometer, enabling them to measure a broader range of film thicknesses
and enhancing their ability to handle current and future generation
lithography applications.
The laser light sources employed by our SpectraLASER systems allow them to
provide repeatable measurements for powerful transparent film process control.
Intense laser light allows fast, small-spot measurements on product wafers in
CMP, CVD, diffusion, lithography and etch applications. Unlike the white light
sources used in many competing products, which begin to degrade in weeks and
require lamp changes every few months, the solid state lasers in our
SpectraLASER and MatrixMetrology systems deliver stable light output for two
to three years. In addition, because a laser light source is preconfigured to
emit light at a particular wavelength, users of our SpectraLASER and
MatrixMetrology systems need not undergo a lengthy recalibration process each
time they replace a light source.
SpectraLASER 200. Our SpectraLASER 200 simultaneously emits laser light at
multiple wavelengths and uses multiple angles of incidence for data
acquisition, measuring a spectrum of optical properties at each wavelength.
The SpectraLASER 200 accepts 100 millimeter and 200 millimeter wafers at
throughput of up to 100 wafers per hour.
SpectraLASER 300. Our SpectraLASER 300 incorporates all of the features of
our SpectraLASER 200 product, and accepts 200 millimeter and 300 millimeter
cassettes or 300 millimeter pod loaders at throughput of up to 80 wafers per
hour.
MatrixMetrology Systems
Our MatrixMetrology systems further enhance our full-fab solution and allow
our customers to mix and match technologies to fit their production needs. We
offer several specialized MatrixMetrology systems designed for use in specific
semiconductor device manufacturing applications. These MatrixMetrology systems
include:
MatrixMetrology S200 CMP. Our MatrixMetrology S200 CMP system, designed for
use in the CMP phase of the semiconductor device manufacturing process, offers
a high throughput 120 wafer-per-hour visible reflectometer and a 110 wafer-
per-hour long life helium neon gas laser ellipsometer.
MatrixMetrology S200 Etch. Our MatrixMetrology S200 Etch system, designed
for use in the etch phase of the semiconductor device manufacturing process,
has all of the features of the S200 CMP product, and also provides customers
with a 780 nanometer ellipsometer.
MatrixMetrology S200 Diffusion. Our MatrixMetrology S200 Diffusion system,
designed for use in the diffusion phase of the semiconductor device
manufacturing process, has all of the features of our S200 Etch and S200 CMP
systems, along with a 458 nanometer ellipsometer and a deep ultraviolet 190-
470 nanometer reflectometer.
MatrixMetrology S300 CMP, Etch and Diffusion. Our MatrixMetrology S300 CMP,
Etch and Diffusion systems incorporate all of the features of our
MatrixMetrology S200 CMP, Etch and Diffusion systems and are configured to
measure 300 millimeter product wafers.
Vanguard Automation Platform
Our Vanguard automation platform provides a common hardware, software and
automation system for our MetaPULSE, SpectraLASER and MatrixMetrology
families. The modular nature of the Vanguard platform will enable our
customers to upgrade their MetaPULSE, SpectraLASER and MatrixMetrology systems
and integrate new applications into their existing systems in a rapid and
cost-effective manner. By using the same Vanguard platform, our customers can
minimize the amount of equipment configuration and employee training required
to modify their metrology systems in response to changing production demands.
5
FOCUS Series
In the early 1990s, semiconductor manufacturing technology advanced rapidly
with the proliferation of 200 millimeter wafers and line widths under one
micron. In response to this industry trend, we introduced the FOCUS
ellipsometer family. Based on our patented Focused Beam measurement
technology, our FOCUS series of ellipsometers offered increased repeatability
and accuracy as well as a greater degree of automation and cleanliness for our
customers. We believe that the ability to handle complex applications has made
our FOCUS ellipsometers an industry standard in film thickness metrology.
FOCUS FE III. Our FOCUS FE III system provides a low cost 100 to 200
millimeters automated ellipsometer using our dual wavelength Focused Beam
technology. It directly measures sample wafers with a small spot at multiple
angles of incidence.
FOCUS FE VII. Our FOCUS FE VII system is designed for high volume, sub-
micron device manufacturing requiring superior film thickness and index of
refraction measurements in diffusion, etch, CMP and CVD applications. Using
the same type of Focused Beam technology as the FOCUS FE III, our FOCUS FE VII
can provide accurate results for both film composition and film thickness.
CALIBER 300. Our Caliber 300 was one of the first commercial, production-
oriented ellipsometers to measure 300 millimeter wafers. Caliber 300 combines
our patented Focused Beam technology with an ultra-fast wafer handler.
AutoEL Series
In 1977, our predecessor company developed the industry's first production-
oriented, microprocessor-based ellipsometer, the AutoEL. Our AutoEL series of
ellipsometers offers customers a fully automated desktop solution with long-
term repeatability and thin film precision. Using our proprietary Ellipto MAP
software, the AutoEL family of ellipsometers can display maps of film
thickness, refractive index and absorption, as well as the optical constants
of bare substrates. Film thicknesses and refractive index data points measured
and calculated by the AutoEL can be automatically downloaded to a personal
computer where the data can be displayed immediately or stored on a disk for
off-line processing.
AutoEL III Ellipsometer. Our AutoEL III family of ellipsometers provides
low-cost tabletop automatic tools for routine measurements of thickness and
index. Its operating wavelength is 633 nanometers.
AutoEL IV Ellipsometer. Our AutoEL IV ellipsometers have the same
specifications as our AutoEL III and operate at wavelengths of 405 nanometers,
546 nanometers and 633 nanometers.
Customers
We sell our products worldwide to over 100 semiconductor device
manufacturers, including both independent semiconductor device manufacturers
and foundries throughout the world. In addition, we have a diverse customer
base in terms of both geographic location and type of semiconductor device
manufactured. Our customers are located in 24 different countries.
We depend on a relatively small number of customers and end users for a
large percentage of our revenues. In the years 1998, 1999 and 2000 sales to
customers that individually represented at least five percent of our revenues
accounted for 43.2%, 49.3% and 27.8% of our revenues. In 2000, sales to Intel
accounted for 19.4% of our revenues and no other individual customer accounted
for more than 10% of our revenues. We do not have purchase contracts with any
of our customers that obligate them to continue to purchase our products.
6
Research and Development
The thin film transparent and opaque process control metrology market is
characterized by continuous technological development and product innovations.
We believe that the rapid and ongoing development of new products and
enhancements to existing products is critical to our success. Accordingly, we
devote a significant portion of our technical, management and financial
resources to research and development programs.
The core competencies of our research and development team include metrology
systems for high volume manufacturing, ellipsometry, ultra-fast optics,
picosecond acoustic and optical design, advanced metrology application
development and algorithm development. We have been granted or hold exclusive
licenses to sixteen U.S. and foreign patents covering technology in the
transparent thin film measurement, altered material characterization and
picosecond ultrasonic areas. We also have several pending regular and
provisional applications in the U.S. and in other countries.
To leverage our internal research and development capabilities, we maintain
close relationships with leading research institutions in the metrology field
including Brown University. Our five year partnership with Brown University
has resulted in the development of the optical acoustic technology underlying
our MetaPULSE product line. We have been granted exclusive licenses from Brown
University Research Foundation, subject to rights returned by Brown and the
United States government for their own non-commercial uses for several patents
relating to this technology.
Our research and development expenditures in 1998, 1999 and 2000 were $5.1
million, $5.0 million and $9.0 million, respectively. We plan to continue our
strong commitment to new product development in the future, and we expect that
our level of research and development expenses will increase in absolute
dollar terms in future periods*.
Sales, Customer Service and Application Support
We maintain an extensive network of direct sales, customer service and
application support offices in several locations throughout the world. We
maintain sales, service or applications offices in California, New Jersey,
Texas, Germany, Holland, Ireland, Israel, Korea, Singapore and Taiwan. In
addition, we make use of leading independent sales organizations in Japan,
Singapore, China, Taiwan and Korea. We believe that these organizations
significantly enhance our sales capabilities in the regions they serve without
requiring a significant capital outlay from us.
We provide our customers with comprehensive support before, during and after
the delivery of our products. For example, in order to facilitate the smooth
integration of our tools into our customers' operations, we often assign
dedicated, site-specific field service and applications engineers to provide
long-term support at selected customer sites. We also provide comprehensive
service and applications training for customers at our new training facility
in Mt. Arlington, New Jersey and at customer locations. In addition, we
maintain a group of highly skilled applications scientists at strategically
located facilities throughout the world and at selected customer locations.
Manufacturing
Our principal manufacturing activities include assembly, final test and
calibration. These activities are conducted in our manufacturing facility in
Ledgewood, New Jersey. Our core manufacturing competencies include electrical,
optical and mechanical assembly and testing as well as the management of new
product transitions. While we use standard components and subassemblies
wherever possible, most mechanical parts, metal fabrications and critical
components used in our products are engineered and manufactured to our
specifications. We expect to rely increasingly on subcontractors and turnkey
suppliers to fabricate components, build assemblies and perform other non-core
activities in a cost-effective manner.*
We rely on sole and limited source suppliers for certain parts and
subassemblies. This reliance creates a potential inability to obtain an
adequate supply of required components, and reduced control over pricing and
time of delivery of components. An inability to obtain adequate supplies would
require us to seek alternative sources of
7
supply or might require us to redesign our systems to accommodate different
components or subassemblies. However, if we were forced to seek alternative
sources of supply, manufacture such components or subassemblies internally, or
redesign our products, this could prevent us from shipping our products to our
customers on a timely basis, which could have a material adverse effect on our
operations.
Intellectual Property
We have a policy of seeking patents on inventions governing new products or
technologies as part of our ongoing research, development, and manufacturing
activities. We have been granted or hold exclusive licenses to 16 U.S. and
foreign patents. The patents we own or exclusively license have expiration
dates ranging from 2005 to 2017. We also have 23 pending regular and
provisional applications in the U.S. and other countries. Our patents and
applications principally cover various aspects of the transparent thin film
measurement and altered material characterization.
We have been granted exclusive licenses from Brown University Research
Foundation, subject to rights retained by Brown and the United States
government for their own non-commercial uses, for several patents relating to
the optical acoustic technology underlying our MetaPULSE product family. The
terms of these exclusive licenses are equal to the lives of the patents. We
pay royalties to Brown based upon a percentage of our revenues from the sale
of systems that incorporate technology covered by the Brown patents. We also
have the right to support patent activity with respect to new ultra-fast
acoustic technology developed by Brown scientists, and to acquire exclusive
licenses to this technology. Brown may terminate the licenses if we fail to
pay royalties to Brown or if we materially breach our license agreement with
Brown.
Our pending patents may never be issued, and even if they are, these
patents, our existing patents and the patents we license may not provide
sufficiently broad protection to protect our proprietary rights, or they may
prove to be unenforceable. To protect our proprietary rights, we also rely on
a combination of copyrights, trademarks, trade secret laws, contractual
provisions and licenses. There can be no assurance that any patents issued or
licensed by us will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide us with a competitive advantage.
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 infringement 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 products. There is a
risk that our means of protecting our proprietary rights may not be adequate.
For example, our competitors may independently develop similar technology or
duplicate our products. If we fail to adequately protect our intellectual
property, it would be easier for our competitors to sell competing products.
Competition
The market for semiconductor capital equipment is highly competitive. We
face substantial competition from established companies in each of the markets
that 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.
Significant competitive factors in the market for metrology systems include
system performance, ease of use, reliability, cost of ownership, technical
support and customer relationships. We believe that, while price and delivery
are important competitive factors, the customers overriding requirement is for
a product that meets their technical capabilities. To remain competitive, we
believe we will need to maintain a high level of investment in research and
development and sales and marketing. No assurances can be given that we will
continue to be competitive in the future.
8
Backlog
We schedule production of our systems based upon order backlog and informal
customer forecasts. We include in backlog only those orders to which a
purchase order number has been assigned by the customer and for which delivery
has been specified within 12 months. Because shipment dates may be changed and
customers may cancel or delay orders with little or no penalty, our backlog as
of any particular date may not be a reliable indicator of actual sales for any
succeeding period. At December 31, 2000 we had a backlog of approximately
$48.5 million compared with a backlog of approximately $16.3 million at
December 31, 1999.
Employees
As of December 31, 2000, we had 289 employees. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe our employee relations are good.
While we have generally been able to find qualified candidates to fill new
positions, personnel shortages occasioned by the strong economy and low
unemployment continue to make it more difficult to recruit qualified
candidates for certain positions in design, field support, testing and process
engineering. Once replacement personnel are recruited, we then face the task
of training and integrating these new employees. There can be no assurance
that we will be successful in retaining, recruiting, training and integrating
the necessary key personnel and any failure to expand these areas in an
efficient manner could have a material effect on our results of operations.
Risk Factors
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. The semiconductor device
industry has experienced downturns which have seriously harmed our past
operating results. Recurrence of downturns in the semiconductor industry will
likely lead to proportionately greater downturns in our revenues. 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
downturns in 1998 and 1996, during which industry revenues declined by an
estimated 8.4% and 8.6% as reported by World Semiconductor Trade Statistics,
Inc. Our revenues decreased from $35.3 million in 1997 to $20.1 million in
1998. Any future downturn in the semiconductor device industry, or any failure
of that industry to continue capital expenditures, will 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
Coherent, Inc. is our sole supplier of the lasers we use in some of our
systems, and we also obtain some of the other 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
9
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 $1.6 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
10
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. In 1999 and 2000, sales to customers that individually
represented at least five percent of our revenues accounted for 49.3% and
27.8% of our revenues. In 1999 and 2000, sales to Intel accounted for 31.2%
and 19.4% of our revenues. 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. Approximately 89% of
our revenues in 2000 were derived from the sale of systems that we did not
begin selling until the first quarter of 1997 or later.
11
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
12
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 are presently involved in a patent interference proceeding
with a competitor, Therma-Wave, Inc., in the United States Patent Office. In
this proceeding, we are defending 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, and the proceeding was initiated in June 1998. In November 1999,
the patent office denied our request to dismiss the proceedings. If we lose
the interference, a reissue patent will be granted to Therma-Wave permitting
Therma-Wave to assert patent rights against the ellipsometers we use in our
transparent thin film measurement systems. In that event, we would either have
to pay future royalties to Therma-Wave or redesign our transparent thin film
measurement systems. Either of these events could harm our business, financial
condition and results of operations. See "Part I, Item 3--Legal Proceedings."
In addition, in a letter dated February 10, 1998, Therma-Wave asked us to
review our technology for possible infringement of several of Therma-Wave's
patents. We denied any such infringement in a letter to Therma-Wave dated
March 10, 1998. In a letter dated March 13, 1998, Therma-Wave requested
further information regarding the basis for our belief that our technology did
not infringe Therma-Wave's patents. There has been no further correspondence
between us and Therma-Wave
13
regarding Therma-Wave's patent inquiries. Although we do not believe that we
are infringing any of Therma-Wave's patents, Therma-Wave could nevertheless
initiate an infringement action against us, which would be costly and
distracting regardless of its outcome.
In a letter dated December 3, 1998, Axic, Inc. asked us to review our
technology for possible infringement of one of Axic's patents. We denied any
such infringement in a letter to Axic dated December 22, 1998. There has been
no further correspondence between us and Axic regarding its patent
infringement claims.
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 2000, 54.7% of our revenue was derived from sales in foreign countries,
including certain countries in Asia such as Taiwan, 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, 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
14
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, China and Singapore
Historically, a substantial 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
material 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. For the year ended December 31, 2000,
sales to Tokyo Electron Limited, our exclusive distributor in Japan, accounted
for 21.9% of our revenues. 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
15
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
Our sales to customers in Asian markets represented approximately 28.3% and
39.5% of our revenues in 1999 and 2000. 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 over the last 24 months. These weaknesses began to
adversely affect our sales to semiconductor device and capital equipment
manufacturers located in these regions in the fourth quarter of 1997, and
continued to adversely affect our sales in 1998 and the first half of 1999. 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 52.9% and 54.7% of our
revenues in 1999 and 2000. We anticipate that international sales will
continue to 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 embargos,
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.
16
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.
17
individually or together, could cause us to take actions that we would not
consider absent their influence, or could delay, deter or prevent a change of
control of our company or other business combination that might otherwise be
beneficial to our public stockholders.
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 2. Properties
We own our 20,000 square foot executive office building in Flanders, New
Jersey, and we lease our 31,000 square foot manufacturing facility in
Ledgewood, New Jersey pursuant to a lease agreement that expires in 2009. In
February 2000, we leased a 15,000 square foot engineering facility in Mt.
Arlington, New Jersey pursuant to a lease agreement that expires in 2003. In
September 2000, we leased an additional 8,000 square feet at our Mt.
Arlington, New Jersey location to accommodate our customer support and service
departments, as well as our new technical training center. We also lease space
for our sales, service and applications offices in California, Texas, Korea,
Taiwan and various other locations throughout the world. We believe that our
existing facilities and capital equipment are adequate to meet our current
requirements, and that suitable additional or substitute space is available on
commercially reasonable terms if needed.
Item 3. Legal Proceedings
We are presently involved in a patent interference proceeding with Therma-
Wave, Inc. in the United States Patent Office. In this proceeding, we are
defending 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 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.
Preliminary motions and statements have been filed. In November 1999, the
Patent Office denied our request to dismiss the proceedings. If we lose the
interference, a reissue patent will be granted to Therma-Wave permitting
Therma-Wave to assert patent rights against the ellipsometers we use in our
transparent thin film measurement systems. In that event, we could assert a
defense of intervening rights against Therma-Wave's reissued patent since we
relied on the restricted claims of Therma-Wave's original patent. If the
intervening rights defense and other
18
defenses fail, we would either have to pay future royalties to Therma-Wave or
redesign our SpectraLASER and other transparent thin film measurement systems.
Either of these events could harm our business, financial condition and
results of operations.
In addition, from time to time we are subject to legal proceedings and
claims in the ordinary course of business. Other than the Therma-Wave patent
interference proceeding discussed above, we are not now involved in any
material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
19
PART ll
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is traded on the Nasdaq National Market under the symbol
"RTEC." The following table sets forth, for the periods indicated, the high
and low sale prices per share of our common stock as reported on the Nasdaq
National Market.
Price Range of
Common Stock
---------------
High Low
------- -------
1999
Fourth Quarter (beginning November 12, 1999)............ $ 36.75 $ 16.00
2000
First Quarter........................................... $ 59.44 $ 27.06
Second Quarter.......................................... $ 45.00 $ 22.00
Third Quarter........................................... $ 48.00 $ 24.00
Fourth Quarter.......................................... $ 44.00 $ 22.38
As of February 7, 2001, there were approximately 77 stockholders of record
of our common stock.
We have never declared or paid a cash dividend on our Common Stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain our earnings, if any, for the development of our
business. The declaration of any future dividends by us is within the
discretion of our Board of Directors and will be dependent on our earnings,
financial condition and capital requirements as well as any other factors
deemed relevant by our Board of Directors.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our
Consolidated Financial Statements and the related Notes thereto appearing
elsewhere in this Form 10-K, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The balance sheet data as of
December 31, 1999 and 2000 and the statement of operations data for the years
ended December 31, 1998, 1999 and 2000 set forth below were derived from
audited consolidated financial statements included elsewhere in this Form 10-
K. The selected financial data as of December 31, 1996, 1997 and 1998, and for
the periods from January 1, 1996 to June 13, 1996, June 14, 1996 to December
31, 1996 and for the year ended December 31, 1997 were derived from audited
financial statements not included herein.
The table below sets forth our selected financial data as well as that of
our predecessor company. Our results of operations and those of our
predecessor company are not directly comparable because we revalued the assets
and liabilities of our predecessor company in connection with its acquisition
pursuant to the provisions of APB No. 16, and because our results of
operations for the period from June 14, 1996 to December 31, 1996 include
various non-recurring expenses for acquired in-process research and
development and the write-down of intangibles. The financial information of
our predecessor company excludes the effects of purchase accounting
adjustments, including increased interest expense and amortization. In
addition, because our predecessor company was taxed as an S-corporation and we
are taxed as a C-corporation, the effective tax rate reflected in our
historical results of operations is significantly higher than the tax rate
reflected in the historical results of operations of our predecessor company.
Further, we changed our business strategy immediately after the acquisition.
Finally, we adopted a new revenue recognition method effective January 1,
2000.
20
Predecessor
Company Rudolph Technologies
----------- -----------------------------------------------------------
Period from Period from
January 1 June 14 to
to June 13, December 31, Year Ended December 31,
----------- ------------ ----------------------------------------------
1996 1996 1997 1998 1999 2000
----------- ------------ --------- --------- ---------- ----------
(In (In thousands, except share and per share data)
thousands)
Statement of Operations
Data:
Revenues................ $17,501 $ 14,373 $ 35,339 $ 20,106 $ 38,095 $ 88,107
Cost of revenues (1).... 7,497 6,579 13,903 13,179 18,301 41,854
------- --------- --------- --------- ---------- ----------
Gross profit............ 10,004 7,794 21,436 6,927 19,794 46,253
------- --------- --------- --------- ---------- ----------
Operating expenses:
Research and
development........... 1,817 2,345 5,750 5,096 5,003 9,022
In-process research and
development........... -- 3,821 -- -- -- --
Selling, general and
administrative........ 4,144 4,340 9,475 7,077 9,588 14,463
Write-down of purchased
technology............ -- 6,734 -- -- -- --
Amortization........... 19 3,650 4,201 4,208 436 339
------- --------- --------- --------- ---------- ----------
Total operating
expenses............... 5,980 20,890 19,426 16,381 15,027 23,824
------- --------- --------- --------- ---------- ----------
Operating income
(loss)................. 4,024 (13,096) 2,010 (9,454) 4,767 22,429
Interest expense
(income)............... 55 2,013 3,717 4,210 3,701 (2,173)
Other income............ (26) (156) (92) (199) (21) (1)
------- --------- --------- --------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 3,995 (14,953) (1,615) (13,465) 1,087 24,603
Provision (benefit) for
income taxes........... 143 -- (614) 613 (2,179) (431)
------- --------- --------- --------- ---------- ----------
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 3,852 (14,953) (1,001) (14,078) 3,266 25,034
Extraordinary item (net
of tax of $5) (2)...... -- -- -- -- 427 --
Cumulative effect of a
change in accounting
principle (net of tax
of $924)............... -- -- -- -- -- 1,458
------- --------- --------- --------- ---------- ----------
Net income (loss)....... $ 3,852 (14,953) (1,001) (14,078) 2,839 23,576
=======
Preferred stock
dividends.............. 239 468 507 508 --
--------- --------- --------- ---------- ----------
Net income (loss)
available to common
stockholders........... $ (15,192) $ (1,469) $ (14,585) $ 2,331 $ 23,576
========= ========= ========= ========== ==========
Net income (loss) per
share available to
common stockholders
from continuing
operations:
Basic.................. $ (5.80) $ (0.56) $ (3.24) $ 0.35(3) $ 1.69(4)
Diluted................ $ (5.80) $ (0.56) $ (3.24) $ 0.26(3) $ 1.58(4)
Weighted average common
shares outstanding:
Basic.................. 2,617,373 2,617,373 4,503,396 7,880,622 14,773,295
Diluted................ 2,617,373 2,617,373 4,503,396 10,431,477 15,805,188
December 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
------------ --------- --------- ---------- ----------
Balance Sheet Data:
Cash and cash
equivalents............ $ 1,578 $ 189 $ 431 $ 35,076 $ 29,736
Working capital
(deficit).............. 4,262 3,134 (1,052) 49,217 70,187
Total assets............ 27,013 28,513 21,121 64,947 98,554
Long-term debt, less
current portion........ 26,000 24,000 25,370 -- --
Redeemable preferred
stock.................. 5,639 6,107 6,614 -- --
Accumulated deficit..... (14,953) (15,954) (30,032) (27,193) (3,617)
Total stockholders'
equity (deficit)....... (13,707) (15,327) (26,759) 57,610 83,508
- -------
(1) Our cost of revenues for 1998 includes a $1.4 million expense for the
write-down of inventory to net realizable value.
(2) In 1999, an extraordinary loss was recorded for the early extinguishment
of debt.
(3) The per share amounts for the year ended December 31, 1999 exclude the per
share effects of an extraordinary loss from the early retirement of debt
of $0.05 basic and $0.04 diluted.
(4) The per share amounts for the year ended December 31, 2000, exclude the
per share effects of a cumulative effect of a change in accounting
principle of $0.09, basic and diluted.
21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a worldwide leader in the design, development, manufacture and
support of process control metrology systems used in semiconductor device
manufacturing. Our proprietary systems measure the thickness and other
properties of thin films applied during various steps in the manufacture of
integrated circuits, enabling semiconductor device manufacturers to improve
yields and reduce overall production costs. We provide our customers with a
flexible full-fab metrology solution by offering families of systems that meet
their transparent and opaque thin film measurement needs in various
applications across the fabrication process. Our two primary families of
metrology solutions offer leading-edge metrology technology, flexible systems
cost-effectively designed for specific manufacturing applications and a common
production-worthy automation platform, all backed by worldwide support.
Our predecessor company was founded in 1940 as Rudolph Research Corporation,
and for the past sixty years we have built a reputation for metrology
excellence. We began our association with the semiconductor industry by
selling research instruments in the 1950s and 1960s to pioneers in solid state
electronics, including Intel, AMD, Chartered Semiconductor, Fujitsu, Hyundai,
IBM, Lucent, Philips, Samsung, STMicroelectronics, Texas Instruments, TSMC,
Toshiba and UMC.
In June 1996, our predecessor company was purchased in a leveraged
transaction by our management and a group of investors. The acquisition
resulted in our incurring a significant amount of debt. At the time of the
transaction, we changed our name to Rudolph Technologies, Inc. and changed our
corporate strategy to focus exclusively on the production semiconductor
metrology business. Our strategy was to capitalize on our reputation for
accuracy and repeatability in the measurement of very thin films, primarily in
the diffusion phase of the semiconductor device manufacturing process, to gain
market share in other areas of the semiconductor device manufacturing process.
We addressed our market opportunity by increasing our investment in research
and development to expand our product offerings and increase our
infrastructure.
During 1996 and 1998, the semiconductor device industry began unforeseen
periods of reduced capital equipment purchases. The related industry-wide
downturns in the semiconductor capital equipment industry led to decreased
sales of our products as many customers delayed shipments or canceled orders
altogether. We incurred significant losses in 1998 not only because of the
downturn in our industry but also because we continued to invest in research
and development and in building our infrastructure.
Effective January 1, 2000, we changed our method of accounting for revenue
recognition to comply with Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101").
Previously, we 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. Under the new accounting method adopted retroactive to January 1,
2000, we now recognize an allocable portion of revenue at shipment,
installation and upon customer acceptance in accordance with SAB 101.
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*. In 1998, 1999 and 2000 sales to customers that
individually represented at least five percent of our revenues accounted for
43.2%, 49.3% and 27.8% of our revenues. Intel and Advanced Micro Devices
accounted for 19.8% and 11.1% of our revenues in 1998. In 1999 and 2000 sales
to Intel accounted for 31.2% and 19.4% of our revenues.
In addition, a significant portion of our revenues in each quarter and year
has been derived from sales to particular distributors. These distributors
purchase our products for ultimate distribution to customers in particular
geographic regions. In 1998, sales to Tokyo Electron Limited, or TEL, our
exclusive distributor in Japan, and to
22
distributor Metron Technology accounted for 17.6% and 15.3% of our revenues.
In 1999, sales to TEL and Metron Technology accounted for 6.3% and 5.8% of our
revenues. In 2000, sales to TEL accounted for 21.9% of our revenues. We
terminated our distribution agreement with Metron in August 1999. Currently,
the only distributor we use is TEL. We expect that sales to TEL will continue
to account for a significant portion of our revenues for at least the next
five years*.
We do not have purchase contracts with any of our customers or distributors
that obligate them to continue to purchase our products, and they could cease
purchasing products from us at any time. A delay in purchase or cancellation
by any of our large customers could cause quarterly revenues to vary
significantly. In addition, during a given quarter, a significant portion of
our revenues may be derived from the sale of a relatively small number of
systems. Our transparent film measurement systems range in 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 $1.6 million
per system. Accordingly, a small change in the number of systems we sell may
also cause significant changes in our operating results. Because fluctuations
in the timing of orders from our major customers or distributors or in the
number of our individual systems we sell could cause our revenues to fluctuate
significantly in any given quarter or year, we do not believe that period-to-
period comparisons of our financial results are necessarily meaningful, and
they should not be relied upon as an indication of our future performance.
A significant portion of our revenues has been derived from customers
outside of the United States, and we expect this trend to continue. In 1998,
approximately 58.2% of our revenues were derived from customers outside of the
United States, of which 41.8% were derived from customers in Asia and 16.4%
were derived from customers in Europe. In 1999, approximately 52.9% of our
revenues were derived from customers outside of the United States, of which
28.3% were derived from customers in Asia and 19.9% were derived from
customers in Europe. In 2000, approximately 54.7% of our revenues were derived
from customers outside of the United States, of which 39.5% were derived from
customers in Asia and 12.1% were derived from customers in Europe.
Substantially all of our revenues to date have been denominated in United
States dollars.
The sales cycle for our systems typically ranges from six to 15 months, and
can be longer when our customers are evaluating new technology. Due to the
length of these cycles, we invest significantly in research and development
and sales and marketing in advance of generating revenues related to these
investments. Additionally, the rate and timing of customer orders may vary
significantly from month to month. Accordingly, if sales of our products do
not occur when we expect, and we are unable to adjust our estimates on a
timely basis, our expenses and inventory levels may increase relative to
revenues and total assets.
Results of Operations
The following table sets forth, for the periods indicated, our statements of
operations data as percentages of our revenues. Our results of operations are
reported as one reportable business segment.
23
Year Ended
December 31,
--------------------
1998 1999 2000
----- ----- -----
Revenues................................................. 100.0% 100.0% 100.0%
Cost of revenues......................................... 65.5 48.0 47.5
----- ----- -----
Gross profit............................................. 34.5 52.0 52.5
----- ----- -----
Operating expenses:
Research and development................................ 25.3 13.1 10.2
Selling, general and administrative..................... 35.2 25.2 16.4
Amortization............................................ 21.0 1.1 0.4
----- ----- -----
Total operating expenses............................... 81.5 39.4 27.0
----- ----- -----
Operating income (loss).................................. (47.0) 12.5 25.5
Interest expense (income)................................ 20.9 9.7 (2.5)
Other income............................................. (1.0) (0.1) --
----- ----- -----
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of a
change in accounting principle.......................... (67.0) 2.9 28.0
Provision (benefit) for income taxes..................... 3.0 (5.7) (0.5)
----- ----- -----
Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle.............. (70.0) 8.6 28.5
Extraordinary item....................................... -- 1.1 --
Cumulative effect of accounting change .................. -- -- 1.7
----- ----- -----
Net income (loss)........................................ (70.0) 7.5 26.8
Preferred stock dividends................................ 2.5 1.3 --
----- ----- -----
Net income (loss) available to common stockholders....... (72.5)% 6.1% 26.8%
===== ===== =====
Results of Operations 1998, 1999 and 2000
Revenues. Our revenues are derived from the sale of our metrology systems,
services and spare parts. Our revenues were $20.1 million, $38.1 million and
$88.1 million in the years 1998, 1999 and 2000. These changes represent an
increase of 89.5% from 1998 to 1999 and an increase of 131.2% from 1999 to
2000. The increase in revenues from 1998 to 1999 was primarily due to the
introduction of our new MetaPULSE copper line of products, penetration of our
MetaPULSE products into new customers, and the introduction of our new
MatrixMetrology line of transparent products. The increase in revenues from
1999 to 2000 was primarily due to increases in unit volume shipments to
existing customers and expanded sales of our 300 millimeter and copper
products, partially offset by the impact of the new accounting method for
revenue recognition. Revenues from customers outside of the United States
represented 58.2%, 52.9% and 54.7% of our revenues in 1998, 1999 and 2000.
Revenues from customers outside of the United States decreased as a percentage
of revenues from 1998 to 1999 as a result of reduced sales to existing
customers in Asia due to an economic downturn in a number of Asian countries.
We expect that revenues generated from customers outside of the United States
will continue to account for a significant percentage of our revenues*.
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 $6.9 million, $19.8 million and $46.3 million in 1998, 1999
and 2000. These changes represent an increase of 185.8% from 1998 to 1999 and
an increase of 133.8% from 1999 to 2000. Our gross profit represented 34.5%,
52.0% and 52.5% of our revenues in 1998, 1999 and 2000. The increase in gross
profit margin from 1998 to 1999 resulted from increased revenues covering a
larger portion of fixed costs, increased margins on our MetaPULSE,
SpectraLASER and MatrixMetrology product lines, as well as the elimination of
manufacturing inefficiencies and inventory writedowns that were taken in 1998.
The increase in gross profit margin from 1999 to 2000 resulted from improved
manufacturing efficiencies due to outsourcing and cycle time reduction
initiatives and higher revenues, which cover a larger portion of fixed costs.
The increase in gross profit dollars was the result of higher unit sales.
There can be no assurances that our outsourcing and cycle time reduction
initiatives will be effective or materially increase our gross profit margins.
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
24
consulting fees, prototype equipment expenses and the cost of related
supplies. Our research and development expenditures were, $5.1 million, $5.0
million and $9.0 million in 1998, 1999 and 2000. These changes represent a
decrease of 1.8% from 1998 to 1999 and an increase of 80.3% from 1999 to 2000.
Research and development expenditures represented 25.3%, 13.1% and 10.2% of
revenues in 1998, 1999 and 2000. Research and development costs remained
relatively flat from 1998 to 1999. The increase in research and development
expenses from 1999 to 2000 resulted from higher personnel costs, parts costs
associated with new product development and engineering facilities expansion.
We anticipate that our research and development expenses will increase in
absolute dollars in the future due to planned increases in personnel,
consultants and material costs.*
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,
royalties for licensed technology and other non-personnel related expenses.
Our selling, general and administrative expense was $7.1 million, $9.6 million
and $14.5 million in 1998, 1999 and 2000. These changes represent an increase
of 35.5% from 1998 to 1999 and an increase of 50.8% from 1999 to 2000.
Selling, general and administrative expense represented 35.2%, 25.2% and 16.4%
of revenues in 1998, 1999 and 2000. The increase from 1998 to 1999 resulted
from higher compensation expense related to personnel and corporate incentive
plans, cost associated with establishing a direct sales force in Europe, and
increased royalty costs associated with licensed technology. The increase from
1999 to 2000 resulted from increased royalty costs associated with licensed
technology and higher personnel related costs.
Amortization. Amortization expense is related to the core technology and
goodwill we acquired from our predecessor company in 1996. Our expense for
amortization was $4.2 million, $0.4 million and $0.4 million in 1998, 1999 and
2000. Amortization expense decreased in 1999 because we completed our
amortization of acquired technology in 1998.
Interest Expense (Income). Interest expense was $4.2 million in 1998. In
1999 interest expense, net of interest income of $0.3 million, was $3.7
million. In November 1999, we retired all of our outstanding debt with a
portion of the proceeds of our initial public offering. In 2000, interest
income was $2.2 million as we invested the net proceeds from our initial
public offering.
Other Income. Included in other income is miscellaneous nonrecurring income
resulting from the disposal of capital equipment and several other
nonrecurring transactions. Other income was $199,000, $21,000 and $1,000 in
1998, 1999 and 2000.
Provision (Benefit) for 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. Our provision (benefit) for
income taxes was a provision of $613,000 in 1998, a benefit of $2.2 million in
1999 and a benefit of $0.4 million in 2000. During 1998 we utilized all of our
tax loss carrybacks, while incurring significant losses from operations.
Combining these factors with an industry forecast of low growth, we increased
the deferred tax valuation allowance for various temporary differences
including a net operating loss carryforward. In 1999 and 2000, based on
industry and internal forecasts combined with the successful completion of our
initial public offering and the reduction of debt, we reduced the deferred tax
valuation allowance by $2.3 million and $8.6 million, for certain deferred tax
assets that more likely than not would be realized. We computed our effective
tax rate for 1998, 1999 and 2000 on prevailing federal and state rates
adjusted for increases or decreases in our deferred tax valuation accounts and
for current taxes payable or refundable during the carryback period.
Extraordinary Item. Our extraordinary item in 1999 resulted from the write-
off of deferred financing costs related to the early extinguishment of debt in
the amount of $427,000, net of tax of $5,000.
Change in Accounting Principle. Effective January 1, 2000 we changed our
method of accounting for revenue recognition in accordance with SAB 101.
Previously, we recognized revenue upon the shipment of equipment to customers,
which usually preceded installation and final customer acceptance, provided
final
25
customer acceptance and collection of the related receivable were probable.
Under our new accounting method adopted retroactive to January 1, 2000, we now
recognize an allocable portion of revenue at shipment, installation and upon
customer acceptance in accordance with SAB 101. The cumulative effect of the
change on prior years resulted in a charge to income of $1.5 million (net of
taxes of $0.9 million), for the year ended December 31, 2000. The effect of
the change on the year ended December 31, 2000 was to decrease income before
the cumulative effect of the accounting change by $1.3 million ($0.09 per
basic share, $0.08 per diluted share).
Preferred Stock Dividends. We accrued cumulative dividends on our 8%
preferred stock of $0.5 million in 1998 and 1999. In November 1999, we retired
all of our outstanding preferred stock with a portion of the proceeds of our
initial public offering and paid all accrued dividends.
Liquidity and Capital Resources
From the purchase of our predecessor company in 1996 through November 1999,
we financed our operations from internally generated funds, sales of equity,
and both a revolving credit facility and long-term loans with a related party.
In November 1999, we completed an initial public offering and retired all of
our outstanding debt and preferred stock, leaving proceeds to us of
approximately $35.7 million. Our principal liquidity requirements are the
financing of working capital, inventories and capital expenditures.
Net cash used in operating activities was $6.9 million, $0.7 million and
$4.6 million in 1998, 1999 and 2000. The decrease in cash used by operating
activities from 1998 to 1999 was due primarily to a decrease in our net
losses, offset by the cash impact of an increase in accounts receivable due to
increased sales volume. The increase from 1999 and 2000 is primarily the
result of having to fund an increase in accounts receivable of $17.8 million
and an increase in inventories of $12.4 million, offset by net income of $23.6
million.
Net cash used in investing activities was $0.9 million, $1.0 million and
$1.4 million in 1998, 1999 and 2000. Capital expenditures for 1998 and 1999
were primarily used to establish our new manufacturing and customer training
facility in New Jersey. Capital expenditures for 2000 were primarily used for
the purchase and installation of enterprise resource planning software,
related computer equipment necessary for our operations and costs associated
with renovations to our corporate headquarters. Capital expenditures over the
next twelve months are expected to be approximately $2.5 million.*
Net cash provided by financing activities was $8.0 million, $36.3 million
and $0.7 million in 1998, 1999 and 2000. In 1998, net cash provided by
financing activities was principally provided by loans and an equity
transaction discussed below.
In July 1998, we issued 4,115,021 shares of Class A common stock and Class
B common stock with proceeds of $3.0 million. The shares of common stock were
offered to our existing stockholders in a private transaction. The proceeds
from the issuance of the capital stock were used for general corporate
purposes.
In November 1998, we issued a 14% junior subordinated note in the principal
amount of $7.0 million, of which we had been advanced a total of $6.3 million.
In November 1999, we completed the initial public offering of 5,520,000
shares of our common stock at $16.00 per share. Net proceeds to us after the
underwriting discount and other fees amounted to $80.8 million. We used a
portion of these funds to retire all outstanding long-term debt and repay
outstanding preferred stock in the amount of $7.1 million, including accrued
dividends of $1.7 million.
In 2000, net cash provided by financing activities equaled the cash
proceeds received by us when our employees exercised stock options and
participated in the employee stock purchase plan.
We believe that our cash and cash equivalents and cash flow from
operations, will be adequate to meet our anticipated cash needs for working
capital and capital expenditures needs for at least the next twelve months*.
After that time, we may require additional equity or debt financing to address
our working capital, capital
26
equipment, or expansion needs. In addition, any significant acquisitions by us
may require additional equity or debt financing to fund the purchase price, if
paid in cash. There can be no assurance that additional funding will be
available when required or that it will be available on terms acceptable to
us.
Impact of Recent Accounting Pronouncements
During June 1998, as amended in July 1999 for Statement No. 137, the
Financial Accounting Standards Board issued Statement No. 133, "Accounting for
Derivative Investments and Hedging Activities," known as SFAS 133. Based on
our current operations, we have concluded that the future adoption of SFAS 133
will have no impact on our operations or financial position.
Item 7a. 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 ensures the safety and
preservation of our invested funds by limiting default risk, market risk and
reinvestment risk. As of December 31, 2000, our investments consisted
primarily of commercial paper that matures 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.
Item 8. Financial Statements and Supplementary Data
Our audited financial statements appear beginning on Page F-1 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
27
PART III
Item 10. Directors, Executive Officers and Key Employees of the Registrant
Our directors and executive officers and their ages as of December 31, 2000
are as follows:
Name Age Position
- ---- --- --------
Directors and Executive Officers:
Paul F. McLaughlin............... 55 Chairman and Chief Executive Officer
Robert M. Loiterman.............. 41 Vice President, Engineering
Steven R. Roth................... 40 Vice President, Finance and Administration and Chief
Financial Officer
David Belluck (1)................ 37 Director
Daniel H. Berry (1).............. 54 Director
Paul Craig (2)................... 43 Director
Stephen J. Fisher................ 37 Director
Carl E. Ring, Jr. (2)............ 62 Director
Richard F. Spanier............... 60 Director and Retired, Chairman Emeritus
Aubrey C. Tobey (1).............. 74 Director
Key Employees:
George J. Collins................ 51 Director of Marketing
Ajay Khanna...................... 40 Director of International Sales
Walter R. Knott.................. 47 Director of Manufacturing
Robert DiCrosta.................. 52 Director of Customer Support
Matthew J. Smith................. 38 Director of North American Sales
- -------
(1) Member of the audit committee of the board of directors.
(2) Member of the compensation committee of the board of directors.
All references to "our" in the biographical information set forth below
include our predecessor company.
Biographical information for directors and executive officers:
Paul F. McLaughlin has served as our Chairman since January 2000 and as
Chief Executive Officer and as a director since June 1996. From 1994 to June
1996, Mr. McLaughlin served as an associate at Riverside Partners, Inc., a
private equity investment firm. Mr. McLaughlin has over 15 years experience in
the semiconductor capital equipment business including 6 years as Vice
President at Perkin-Elmer Corporation, a pioneer in optical lithography. Mr.
McLaughlin holds a B.S. in Metallurgical Engineering from Rensselaer
Polytechnic Institute, an M.S. in Metallurgy and Materials Science from Lehigh
University and an M.B.A. from Harvard University, Graduate School of Business
Administration.
Robert M. Loiterman has served as our Vice President of Engineering since
June 1996. From June 1993 to June 1996, Mr. Loiterman served as our Director
of Engineering, from January 1990 to June 1993 he served as a project manager
and from January 1988 to January 1990 he served as a design engineer. Mr.
Loiterman holds a B.S. in Electrical Engineering from Rutgers University.
Steven R. Roth has served as our Vice President, Finance and Administration
and Chief Financial Officer since September 1996. From August 1991 to August
1996, Mr. Roth served as a Director of Corporate Finance for Bell
Communications Research, now called Telcordia, a research and development
company serving the telecommunications industry. Mr. Roth is a C.P.A. and
holds a B.S. in Accounting from Villanova University.
David Belluck has served as one of our directors since June 1996. Since
February 1989, Mr. Belluck has been a general partner of Riverside Partners,
Inc., a private equity investment firm. Mr. Belluck holds a B.A. from Harvard
University and an M.B.A. from Harvard University, Graduate School of Business
Administration. Mr. Belluck is currently a director of Atchison Casting,
Evergreen Electronics and Riverside Partners, Inc.
28
Daniel H. Berry has served as one of our directors since October 1998. Since
May 1999, Mr. Berry has served as President and Chief Operating Officer of
Ultratech Stepper, Inc., a lithography tool supplier. From August 1998 to May
1999 he served as Executive Vice President and Chief Operating Officer of
Ultratech Stepper and from January 1994 to August 1999, he served as a Senior
Vice President of Sales and Marketing of that company. Mr. Berry holds a B.S.
in Electrical Engineering from the Polytechnic Institute of Brooklyn.
Paul Craig has served as one of our directors since June 1996. Since
February 1989, Mr. Craig has served as a general partner and the director of
Riverside Partners, Inc., a private equity investment firm. He is also a
member of the board of directors of Evergreen Electronics. Mr. Craig holds a
B.A. from Harvard University.
Stephen J. Fisher has served as one of our directors since June 1996. Since
July 1998, Mr. Fisher has served as a partner of Liberty Partners, L.P., a
private equity investment firm. From June 1994 to July 1998, Mr. Fisher served
as a Vice President of Liberty Capital Partners, Inc. Mr. Fisher holds a B.S.
and an M.B.A. from Washington University and a J.D. from Boston University
School of Law. Mr. Fisher is currently a director of Medical Logistics and
Gallaher Paper Company.
Carl E. Ring, Jr. has served as one of our directors since June 1996. He is
a founding partner of Liberty Partners, L.P. Mr. Ring holds a B.A. in
mathematics from George Washington University and an M.B.A. from Harvard
University, Graduate School of Business Administration. Mr. Ring is a director
of Monaco Coach Corporation and Gallaher Paper Company.
Richard F. Spanier has served as Chairman Emeritus of our board of directors
since January 2000 and prior to that as our Chairman since September 1966.
From September 1966 to June 1996, Mr. Spanier served as our President and
Chief Executive Officer. Mr. Spanier holds a B.S. in Physics, an M.S. in
Physical Chemistry and a Ph.D. in Chemical Physics from Stevens Institute of
Technology.
Aubrey C. Tobey has served as one of our directors since October 1998. Since
April 1987, Mr. Tobey has served as President of ACT International Consulting,
Inc., a company which provides marketing and management services for high
technology companies. Mr. Tobey holds a B.S. in Mechanical Engineering from
Tufts University and an M.S. in Mechanical Engineering from the University of
Connecticut. Mr. Tobey is a director of Chartered Semiconductor Manufacturing,
Ltd.
Biographical information for key employees:
George J. Collins has served as our Director of Marketing since April 1996.
From April 1994 to April 1996, Mr. Collins served as Marketing Manager for
Topometrix Corporation. Mr. Collins holds a B.S. in Chemistry from Thiel
College, and a Ph.D. in Food Science and an M.B.A. from Rutgers University.
Ajay Khanna has served as our International Sales Director since August
1996. From June 1988 to July 1996, he served as our International Sales
Manager. Mr. Khanna holds a B.S. in Electrical Engineering from Clarkson
University and an M.B.A. from the University of Michigan.
Walter R. Knott has served as our Director of Manufacturing since 1997. From
1996 to 1997, Mr. Knott served as Manager of Operations and Shared Resources
for Philips Electronics, a manufacturer of electron microscopes. From 1991 to
1996, he served as Vice President of Operations for Whatman Incorporated, a
manufacturer of filtration, purification, and chromatography equipment and
supplies. Mr. Knott holds a B.S. from Rutgers University and an M.B.A. from
Fairleigh Dickinson University.
Robert DiCrosta has served as our Director of Customer Support since July
2000. From 1998 to 2000, Mr. DiCrosta served as Regional Director of
International Computers Limited, a division of Fujitsu. Mr. DiCrosta holds a
B.S. in Marketing from the University of Bridgeport and an M.B.A. from New
York University.
Matthew J. Smith has served as our Director of North American Sales since
July 1999. From April 1998 to July 1999, Mr. Smith served as the Director of
Sales for the Semiconductor Equipment Group of Leica, Inc., a
29
manufacturer of microscopes and other optical metrology equipment. From
September 1994 to March 1998, Mr. Smith was the Director of Business
Development at the Semiconductor Equipment Group of Leica. Mr. Smith studied
optical instrumentation and photography at the Rochester Institute of
Technology.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors and persons who own
more than ten percent of a registered class of the Company's equity securities
to file an initial report of ownership on Form 3 and changes in ownership on
Form 4 or Form 5 with the Securities and Exchange Commission (the "SEC") and
the National Association of Securities Dealers, Inc. Such persons are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the fiscal year ended December 31, 2000, all
officers, directors and greater than ten percent beneficial owners complied
with all Section 16(a) filing requirements.
Item 11. Executive Compensation
The following table sets forth the compensation that we paid to our
executive officers during 1998, 1999 and 2000.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------------------ ------------------
Name and Principal Other Annual Securities All Other
Position Year Salary Bonus(1) Compensation Underlying Options Compensation(2)
- ------------------ ---- -------- -------- ------------ ------------------ ---------------
Paul F. McLaughlin...... 2000 $281,846 $120,000 -- -- $ 6,020
Chairman and Chief 1999 $258,470 $ 78,000 -- 143,545 $10,652
Executive Officer 1998 $220,014 -- -- 382,098 --
Robert M. Loiterman..... 2000 $179,567 $ 42,750 -- -- $ 5,912
Vice President, 1999 $162,064 $ 41,250 -- 88,909 $11,253
Engineering 1998 $148,514 -- -- 42,052 --
Steven R. Roth.......... 2000 $150,477 $ 28,875 -- -- $ 5,628
Vice President, Finance 1999 $129,107 $ 26,600 -- 88,909 $ 6,927
and Administration and 1998 $111,300 -- -- 28,035 --
Chief Financial Officer
- -------
(1) Includes bonuses earned during the fiscal year and paid in the subsequent
year.
(2) Includes amounts paid for health insurance premiums and amounts
contributed by us under our 401(k) Saving and Retirement Plan.
Option Grants
We did not grant any options to our executive officers during the fiscal
year ended December 31, 2000.
30
Option Exercises and Values
The following table sets forth information for our executive officers
relating to the number and value of securities underlying exercisable and
unexercisable options they held at December 31, 2000.
Fiscal Year-End Option Exercises and Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 2000 December 31, 2000(1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Paul F. McLaughlin...... -- $ -- 358,208 97,918 $10,161,862 $1,389,456
Robert M. Loiterman..... 6,553 181,322 58,004 58,751 1,464,131 833,677
Steven R. Roth.......... -- -- 53,090 58,751 1,319,700 833,677
- -------
(1) Value of unexercised options is based on the last reported sale price of
our common stock on the Nasdaq National Market of $30.19 per share on
December 31, 2000 minus the exercise price.
Stock Plans
1996 Non-Qualified Stock Option Plan
In 1996, we adopted the 1996 Non-Qualified Stock Option Plan. Under the 1996
plan, we may grant options to purchase up to 1,069,902 shares of common stock
to employees and certain other individuals. The 1996 plan is administered by a
committee of our board of directors. This committee has the power to determine
the terms of the options granted. The options granted pursuant to the 1996
plan generally expire ten years from the date of grant and become exercisable
after nine years or sooner upon the achievement of financial targets over a
period of six years. All of the options that we have granted under the 1996
plan are fully vested. Options granted to date have exercise prices equal to
the fair value of the common stock on the date of grant. As of December 31,
2000, options to purchase 530,733 shares of our common stock under the 1996
Plan were issued and outstanding and no options were available for future
grant.
1999 Stock Plan
Our board of directors adopted the 1999 plan in August 1999, and our
stockholders approved the 1999 plan prior to the closing of our initial public
offering. The 1999 plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, to employees, and for the grant of nonstatutory stock options and
stock purchase rights to employees, directors and consultants. As of December
31, 2000, options to purchase 985,219 shares of our common stock were issued
and outstanding and options to purchase 1,009,634 shares of our common stock
were available for future grant under the 1999 Plan. The 1999 plan provides
for annual increases in the number of shares available for issuance
thereunder, on the first day of each year, effective beginning with 2001,
equal to the lesser of 2% of the outstanding shares of common stock on the
first day of the year, 400,000 shares or a lesser amount as the board may
determine.
Our compensation committee administers the 1999 plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the committee will consist of two
or more "outside directors" within the meaning of Section 162(m) of the
Internal Revenue Code. The administrator has the power to determine the terms
of the options or stock purchase rights granted, including the exercise price,
the number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise. The administrator determines the exercise price of nonstatutory
stock options granted under the 1999 plan, but with respect to nonstatutory
stock options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Internal Revenue Code, the exercise price
must at least be equal to the fair market value of the common stock on the
date of grant.
The exercise price of all incentive stock options granted under the 1999
plan must be at least equal to the fair market value of the common stock on
the date of grant and the term of such options may not exceed ten years.
31
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date and the term of such incentive stock
option must not exceed five years. The administrator determines the term of
all other options.
No optionee may be granted an option to purchase more than 500,000 shares in
any fiscal year. In connection with his or her initial service, an optionee
may be granted an option to purchase up to an additional 500,000 shares, which
shall not count against the yearly limit set forth in the previous sentence.
An optionee generally must exercise an option granted under the 1999 plan at
the time set forth in the optionee's option agreement after termination of the
optionee's status as our employee, director or consultant. Generally, in the
case of the optionee's termination by death or disability, the option will
remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for a period of three months. However, an option
may never be exercised later than the expiration of the option's term.
The administrator determines the exercise price of stock purchase rights
granted under the 1999 plan. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
entered into in connection with the exercise of the stock purchase right shall
grant us a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase
pursuant to restricted stock purchase agreements will generally be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option will lapse at a
rate that the administrator determines.
The 1999 plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or
substituted, the administrator shall provide notice to the optionee that he or
she has the right to exercise the option or stock purchase right as to all of
the shares subject to the option or stock purchase right, including shares
which would not otherwise be exercisable, for a period of 15 days from the
date of the notice. The option or stock purchase right will terminate upon the
expiration of the 15-day period.
Unless terminated sooner, the 1999 plan will terminate automatically in
2009. In addition, the board of directors has the authority to amend, suspend
or terminate the 1999 plan, provided that no such action may affect any share
of common stock previously issued and sold or any option previously granted
under the 1999 plan. An optionee generally may not transfer options and stock
purchase rights granted under the 1999 plan and only the optionee may exercise
an option and stock purchase right during his or her lifetime.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by our board of directors
and approved by our stockholders prior to our initial public offering. A total
of 300,000 shares of common stock has been reserved for issuance under the
stock purchase plan, 34,452 of which have been issued as of December 31, 2000.
The number of shares reserved for issuance under the stock purchase plan will
be subject to an annual increase on the first day of each of our fiscal years,
beginning in 2001, equal to the lesser of (1) 300,000 shares of common stock,
(2) 2% of our outstanding common stock on the first day of the year, or (3)
such other amount as may be determined by the board of directors. The stock
purchase plan is administered by our compensation committee.
The stock purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, is being implemented by a series of overlapping
offering periods of 24 months' duration. Each offering period includes four 6-
month purchase periods. The first offering period began on November 12, 1999
and continued through April 30, 2000. Thereafter, the offering periods start
on the first trading day on or after May 1 and November 1 of each year.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee (1) who immediately
after grant owns stock possessing 5.0% or more of the total combined voting
power or value of all
32
classes of our capital stock, or (2) whose rights to purchase stock under all
of our employee stock purchase plans accrues at a rate that exceeds $25,000
worth of stock for each calendar year may not be granted an option to purchase
stock under the stock purchase plan. The stock purchase plan permits
participants to purchase common stock through payroll deductions of up to
15.0% of the participant's eligible compensation which includes the
participant's base salary, wages, overtime pay, commissions, bonuses and other
compensation remuneration paid directly to the employee. The maximum number of
shares a participant may purchase during a six-month purchase period is 3,000
shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each six-month purchase period. The price
of stock purchased under the stock purchase plan is 85% of the lower of the
fair market value of the common stock at the beginning of an offering period
or at the end of a purchase period. In the event the fair market value at the
end of a purchase period is less than the fair market value at the beginning
of the offering period, participants will be withdrawn from the current
offering period following their purchase of shares on the purchase date and
will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically
upon termination of employment with us.
A participant may not transfer rights granted under the stock purchase plan
other than by will, the laws of descent and distribution or as otherwise
provided under the stock purchase plan. The stock purchase plan provides that,
in the event of our merger with or into another corporation or a sale of all
or substantially all of our assets, a successor corporation may assume or
substitute for each outstanding option. If the successor corporation refuses
to assume or substitute for the outstanding options, the offering period then
in progress will be shortened, and a new exercise date will be set. The stock
purchase plan will terminate in 2009. However, the board of directors has the
authority to amend or terminate the stock purchase plan, except that, subject
to certain exceptions described in the stock purchase plan, no such action may
adversely affect any outstanding rights to purchase stock under the stock
purchase plan.
Employment Agreements and Change in Control Arrangements
In 2000, we entered into management agreements with Paul F. McLaughlin,
Robert M. Loiterman, and Steven R. Roth. The management agreements with Mr.
Loiterman and Mr. Roth provide for terms of one year with automatic renewals
for additional one-year terms unless we or the executive deliver a notice of
non-renewal to the other party. Mr. McLaughlin's management agreement provides
for an initial term of two years with automatic renewals for additional two
year terms. For our protection, the management agreements with each of Messrs.
Loiterman and Roth prohibit the executives from competing with us in any way
or soliciting our employees during their terms of employment and for one year
after termination of their employment. Mr. McLaughlin's management agreement
prohibits him from competing with us in any way or soliciting our employees
during the term of his employment and for two years after termination of his
employment.
The management agreements provide that if we terminate an executive's
employment without cause or if the executive terminates with good cause, we
will be required to pay that executive his base salary for one year or two
years in the case of Mr. McLaughlin. The agreements also provide that in the
event of the termination of an executive's employment upon a change in
control, which results in the executive not being offered a management
agreement on comparable terms, the executive will be entitled to receive his
base salary for one year, or two years in the case of Mr. McLaughlin. In this
context, a change of control would occur if, among other events, we were sold
to an independent third party and that independent third party acquired enough
of our stock to elect a majority of our board of directors, or that
independent third party acquired all, or substantially all, of our assets.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of
our common stock by:
. each person or entity known to us to own beneficially more than 5% of
our common stock;
. each of our directors;
33
. each of our executive officers; and
. all of our executive officers and directors as a group.
This table lists applicable percentage ownership based on 14,871,885 shares
of common stock outstanding on December 31, 2000, and 15,871,885 shares of
common stock outstanding after completion of the offering. Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock held by that person that are
currently exercisable or exercisable within 60 days of December 31, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
The shares of common stock shown below for directors and executive officers
include shares issuable upon the exercise of options to purchase our common
stock as follows:
. Mr. McLaughlin, 362,375;
. Mr. Loiterman, 60,504 shares;
. Mr. Roth, 55,590 shares;
. Mr. Berry, 1,783 shares;
. Mr. Tobey, 1,783 shares; and
. all directors and executive officers as a group, 482,035 shares.
34
Except as otherwise noted, the address of each person on the table below is
c/o Rudolph Technologies, Inc., One Rudolph Road, Flanders, NJ 07836. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
stockholder's name.
Shares Beneficially
Owned
--------------------
Name and Address Number Percent(1)
- ---------------- --------- ----------
Liberty Partners Holdings 11, L.L.C. (2)................. 6,847,972 46.0%
c/o Liberty Capital Partners, Inc.
1177 Avenue of the Americas
New York, NY 10036
Riverside Rudolph, L.L.C................................. 1,089,964 7.3
One Exeter Plaza
Boston, MA 02116
Paul F. McLaughlin....................................... 685,383 4.5
Robert M. Loiterman...................................... 93,849 *
Steven R. Roth........................................... 66,589 *
David Belluck............................................ -- *
c/o Riverside Rudolph, L.L.C.
One Exeter Plaza
Boston, MA 02116
Daniel H. Berry.......................................... 6,783 *
Paul Craig (3)........................................... 1,089,964 7.3
c/o Riverside Rudolph, L.L.C.
One Exeter Plaza
Boston, MA 02116
Stephen J. Fisher (2).................................... 6,847,972 46.0
c/o Liberty Capital Partners, Inc.
1177 Avenue of the Americas
New York, NY 10036
Carl E. Ring, Jr. (2).................................... 6,847,972 46.0
c/o Liberty Capital Partners, Inc.
1177 Avenue of the Americas
New York, NY 10036
Richard F. Spanier....................................... 360,417 2.4
Aubrey C. Tobey.......................................... 1,783 *
All directors and executive officers as a group (ten
persons) (4)............................................ 9,152,740 59.6
Total Number of Shares Being Offered:....................
- -------
* Less than 1%.
(1) Applicable percentage ownership is based on 14,871,885 shares of common
stock outstanding as of December 31, 2000. Beneficial ownership of shares
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes shares as to which a person holds sole
or shared voting or investment power. Shares of common stock subject to
options that are presently exercisable or exercisable within 60 days of
December 31, 2000 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
noted the address for the stockholders named in this table is c/o Rudolph
Technologies, Inc., One Rudolph Road, Flanders, NJ 07836.
(2) The number of shares of common stock beneficially owned by Messrs. Fisher
and Ring consists of 6,847,972 shares of our common stock held by Liberty
Partners Holdings 11, L.L.C. Mr. Fisher and Mr. Ring are limited partners
of Liberty Partners, L.P., which acts as the managing member of Liberty
Partners Holdings 11, L.L.C., and are partners of Liberty Investment
Partnership 11, which is a member of Liberty Partners Holding
35
11, L.L.C. Mr. Fisher and Mr. Ring disclaim beneficial ownership of all
shares except to the extent of their pecuniary interest in Liberty Partners
Holdings 11, L.L.C.
(3) The number of shares of common stock beneficially owned by Mr. Craig
consists of 1,089,964 shares of our common stock held by Riverside
Rudolph, L.L.C. Mr. Craig is the managing member of Riverside Rudolph,
L.L.C. Riverside Rudolph, L.L.C. was formed by the officers of Riverside
Partners, Inc. to hold their investments in us. Mr. Craig disclaims
beneficial ownership of all shares except to the extent of his pecuniary
interest in Riverside Rudolph, L.L.C.
(4) The number of shares of common stock beneficially owned by our directors
and executive officers as a group includes 6,847,972 and 1,089,964 shares
of our common stock held by Liberty Partners Holdings 11, L.L.C. and
Riverside Rudolph, L.L.C.
Item 13. Certain Relationships and Related Transactions
None.
36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements
The financial statements and financial statement information required by
this Item are included on pages F-1 through F-20 of this report. The Report
of Independent Accountants appears on page F-2 of this report.
2. Financial Statement Schedule
See Index to financial statements on page F-1 of this report.
3. Exhibits
The following is a list of exhibits. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference.
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation of Registrant (incorporated
herein by reference to Exhibit (3.1(b)) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No. 333-
86871 filed on September 9, 1999).
3.2 Amended and Restated Bylaws of Registrant (incorporated herein by
reference to Exhibit (3.2(b)) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-86871), filed on
September 9, 1999.
10.1+ License Agreement, dated June 28, 1995, between the Registrant and
Brown University Research Foundation (incorporated herein by
reference to Exhibit (10.1) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-86871), filed on
September 9, 1999).
10.2 Distributor Agreement, dated May 15, 1987, between the Registrant
and Tokyo Electron Limited (incorporated herein by reference to
Exhibit (10.2) to the Registrant's Registration Statement on Form S-
1, as amended (SEC File No. 333-86871), filed on September 9, 1999).
10.3 Form of Indemnification Agreement (incorporated herein by reference
to Exhibit (10.3) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-86871), filed on September 9,
1999).
10.4 1996 Non-Qualified Stock Option Plan (incorporated herein b
reference to Exhibit (4.3) to the Registrant's Registration
Statement on Form S-8, filed on September 9, 1999).
10.5 Form of 1999 Stock Plan (incorporated herein by reference to Exhibit
(10.4) to the Registrant's Registration Statement on Form S-1, as
amended (SEC File No. 333-86871), filed on September 9, 1999).
10.6 Form of 1999 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit (10.5) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-86871), filed on
September 9, 1999).
10.7 Management Agreement, dated June 14, 1996, between the Registrant
and Paul F. McLaughlin (incorporated herein by reference to Exhibit
(10.6) to the Registrant's Registration Statement on Form S-1, as
amended (SEC File No. 333-86871), filed on September 9, 1999)
10.8 Management Agreement, dated June 14, 1996, between the Registrant
and Robert Loiterman (incorporated herein by reference to Exhibit
(10.7) to the Registrant's Registration Statement on Form S-1, as
amended (SEC File No. 333-86861) filed on September 9, 1999).
10.9 Management Agreement, dated May 5, 1997 between the Registrant and
Steven R. Roth (incorporated herein by reference to Exhibit (10.8)
to the Registrant's Registration Statement on Form S-1, as amended
(SEC File No. 333-86871), filed on September 9, 1999).
37
10.10 Registration Agreement, dated June 14, 1996 by and among the
Registrant, 11, L.L.C., Riverside Rudolph, L.L.C., Dr Richard F.
Spanier, Paul F. McLaughlin (incorporated herein by reference to
Exhibit (10.9) to the Registrant's Registration Statement on Form S-1,
as amended (SEC File No. 333-86871), filed on September 9, 1999).
10.11 Stockholders Agreement, dated June 14, 1996 by and among the
Registrant, Administration of Florida, Liberty Partners Holdings 11,
L.L.C., Riverside Dr. Richard F. Spanier, Paul McLaughlin, Dale
Moorman, Thomas Cooper and (incorporated herein by reference to
Exhibit (10.10) to the Registrant's Form S-1, as amended (SEC File No.
333-86871), filed on September 9, 1999
10.12 Management Agreement, dated as of July 24, 2000, by and between
Rudolph Technologies, Inc. and Paul F. McLaughlin (incorporated herein
by reference to Exhibit 10.12 to Registrant's quarterly report on
Form 10-Q, filed on November 3, 2000).
10.13 Management Agreement, dated as of July 24, 2000, by and between
Rudolph Technologies, Inc. and Robert Loiterman (incorporated herein
by reference to Exhibit 10.13 to Registrant's quarterly report on
Form 10-Q, filed on November 3, 2000).
10.14 Management Agreement, dated as of July 24, 2000 by and between Rudolph
Technologies, Inc. and Steven R. Roth (incorporated herein by
reference to Exhibit 10.14 to Registrant's quarterly report on
Form 10-Q, filed on November 3, 2000).
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
- -------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
b. Reports on Form 8-K
None
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE
Page
----
Consolidated Financial Statements:
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000............. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1999 and 2000.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000..................................................... F-6
Notes to the Consolidated Financial Statements........................... F-7
Consolidated Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts............................ F-20
F-1
Report of Independent Accountants
To the Stockholders and Board of Directors
of Rudolph Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Rudolph Technologies, Inc. and subsidiary (the "Company") at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the consolidated financial statement schedule listed
in the index appearing under Item 14(a)(2) on page 37, presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2B to the consolidated financial statements, during the
year ended December 31, 2000 the Company changed its method of recognizing
revenue.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 26, 2001
F-2
RUDOLPH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
-----------------
1999 2000
-------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 35,076 $29,736
Accounts receivable, less allowance of $300 in 1999 and
$443 in 2000.............................................. 9,472 27,132
Inventories................................................ 11,403 23,773
Income tax receivables..................................... -- 1,349
Deferred income taxes...................................... -- 2,834
Prepaid expenses and other current assets.................. 525 344
-------- -------
Total current assets...................................... 56,476 85,168
Property, plant and equipment, net.......................... 3,106 3,824
Intangibles................................................. 2,859 2,520
Deferred income taxes....................................... 2,312 6,628
Other assets................................................ 194 414
-------- -------
Total assets.............................................. $ 64,947 $98,554
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... 2,169 3,517
Accrued liabilities:
Commissions................................................ 669 622
Payroll and related expenses............................... 1,223 1,851
Warranty................................................... 475 1,072
Deferred revenue........................................... 654 4,999
Other liabilities.......................................... 2,069 2,920
-------- -------
Total current liabilities................................. 7,259 14,981
-------- -------
Long-term liabilities:
Deferred compensation...................................... 78 65
-------- -------
Total long-term liabilities............................... 78 65
-------- -------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1999 and 2000................................ -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 14,684,706 issued and outstanding at
December 31, 1999; 14,871,885 issued and outstanding at
December 31, 2000......................................... 15 15
Additional paid-in-capital................................. 85,025 87,385
Accumulated other comprehensive loss....................... (237) (275)
Accumulated deficit........................................ (27,193) (3,617)
-------- -------
Total stockholders' equity................................. 57,610 83,508
-------- -------
Total liabilities and stockholders' equity................. $ 64,947 $98,554
======== =======
The accompanying notes are an integral part of the financial statements.
F-3
RUDOLPH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year Ended December 31,
---------------------------------
1998 1999 2000
--------- ---------- ----------
Revenues.................................... $ 20,106 $ 38,095 $ 88,107
Cost of revenues............................ 13,179 18,301 41,854
--------- ---------- ----------
Gross profit............................... 6,927 19,794 46,253
--------- ---------- ----------
Operating expenses:
Research & development..................... 5,096 5,003 9,022
Selling, general & administrative.......... 7,077 9,588 14,463
Amortization............................... 4,208 436 339
--------- ---------- ----------
Total operating expenses.................. 16,381 15,027 23,824
--------- ---------- ----------
Operating income (loss)..................... (9,454) 4,767 22,429
Interest expense (income)................... 4,210 3,701 (2,173)
Other income................................ (199) (21) (1)
--------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes, extraordinary item and
cumulative effect of a change in
accounting principle...................... (13,465) 1,087 24,603
Provision (benefit) for income taxes........ 613 (2,179) (431)
--------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of a change in
accounting principle ..................... (14,078) 3,266 25,034
Extraordinary item (net of tax of $5)....... -- 427 --
Cumulative effect of change in accounting
principle (net of tax of $924)............. -- -- 1,458
--------- ---------- ----------
Net income (loss).......................... (14,078) 2,839 23,576
Preferred stock dividends................... 507 508 --
--------- ---------- ----------
Net income (loss) available to common
stockholders............................... $ (14,585) $ 2,331 $ 23,576
========= ========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of a change in
accounting principle ..................... $ (3.13) $ 0.41 $ 1.69
Extraordinary item......................... -- (0.05) --
Cumulative effect of a change in accounting
principle................................. -- -- (0.09)
Preferred stock dividends.................. (0.11) (0.06) --
--------- ---------- ----------
Net income (loss) available to common
stockholders.............................. $ (3.24) $ 0.30 $ 1.60
========= ========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of a change in
accounting principle...................... $ (3.13) $ 0.31 $ 1.58
Extraordinary item......................... -- (0.04) --
Cumulative effect of a change in accounting
principle ................................ -- -- (0.09)
Preferred stock dividends.................. (0.11) (0.05) --
--------- ---------- ----------
Net income (loss) available to common
stockholders.............................. $ (3.24) $ 0.22 $ 1.49
========= ========== ==========
Pro forma amounts assuming the accounting
change is applied retroactively
(See Note 2B):
Income (loss) before extraordinary item..... $ (13,610) $ 2,485 $ 25,034
========= ========== ==========
Per share amounts:
Basic...................................... $ (3.02) $ 0.32 $ 1.69
Diluted.................................... $ (3.02) $ 0.24 $ 1.58
Net income (loss) available to common
shareholders............................... $ (14,117) $ 1,550 $ 23,576
========= ========== ==========
Per share amounts:
Basic...................................... $ (3.13) $ 0.20 $ 1.60
Diluted.................................... $ (3.13) $ 0.15 $ 1.49
Weighted average number of shares
outstanding:
Basic...................................... 4,503,396 7,880,622 14,773,295
Diluted.................................... 4,503,396 10,431,477 15,805,188
The accompanying notes are an integral part of the financial statements.
F-4
RUDOLPH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1998, 1999 and 2000
(In thousands, except share data)
Common Stock Additional Other
------------------ Paid in Comprehensive Accumulated Comprehensive
Shares Amount Capital Loss Deficit Total (Loss) Income
---------- ------ ---------- ------------- ----------- -------- -------------
Balance at December 31, 1997.. 2,617,373 $ 1 $ 792 $(166) $(15,954) $(15,327)
Issuance of common stock:
Class A..................... 3,230,997 1 2,355 -- -- 2,356
Class B..................... 884,024 -- 644 -- -- 644
Issuance of warrants in
connection with debt
financing................... -- -- 140 -- -- 140
Net loss..................... -- -- -- -- (14,078) (14,078) $(14,078)
Accretion of preferred stock
dividend.................... -- -- (507) -- -- (507)
Currency translation......... -- -- -- 13 -- 13 13
---------- --- ------- ----- -------- -------- --------
Comprehensive loss........... $(14,065)
========
Balance at December 31, 1998.. 6,732,394 2 3,424 (153) (30,032) (26,759)
Retirement of common stock:
Class A..................... (4,802,291) (2) -- -- -- (2)
Class B..................... (2,301,074) -- -- -- -- --
Conversion to common stock:
Class A..................... 4,802,291 5 -- -- -- 5
Class B..................... 2,301,074 2 -- -- -- 2
Exercise of stock warrants... 2,045,702 2 -- -- -- 2
Issuance of common stock, net
of expenses................. 5,520,000 6 80,833 -- -- 80,839
Exercise of employee stock
options..................... 386,610 -- 258 -- -- 258
Net income................... -- -- -- -- 2,839 2,839 $ 2,839
Accretion of preferred stock
dividend.................... -- -- (508) -- -- (508)
Issuance of compensatory
stock option................ -- -- 1,018 -- -- 1,018
Currency translation......... -- -- -- (84) -- (84) (84)
---------- --- ------- ----- -------- -------- --------
Comprehensive income......... $ 2,755
========
Balance at December 31, 1999.. 14,684,706 15 85,025 (237) (27,193) 57,610
Net income................... -- -- -- -- 23,576 23,576 $ 23,576
Exercise of employee stock
options and employee stock
purchase plan............... 187,179 -- 672 -- -- 672
Tax benefit of exercise of
employee stock options...... -- -- 1,688 -- -- 1,688
Currency translation ........ -- -- (38) (38) (38)
---------- --- ------- ----- -------- -------- --------
Comprehensive income ........ $ 23,538
========
Balance at December 31, 2000
............................. 14,871,885 $15 $87,385 $(275) $ (3,617) $ 83,508
========== === ======= ===== ======== ========
The accompanying notes are an integral part of the financial statements.
F-5
RUDOLPH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Cash Flows From Operating Activities:
Net income (loss)................................ $(14,078) $ 2,839 $ 23,576
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Amortization..................................... 4,208 436 339
Amortization of unearned compensation............ -- 1,018 --
Depreciation..................................... 778 568 661
Extraordinary item............................... -- 427 --
Provision for doubtful accounts.................. 71 6 143
Gain on sale of property......................... (147) -- --
Deferred income taxes............................ 1,263 (2,312) (7,150)
Tax benefit for exercise of employee stock
options......................................... -- -- 1,688
Decrease (increase) in assets:
Accounts receivable............................. 1,199 (5,116) (17,815)
Income tax receivables.......................... 288 270 (1,349)
Inventories..................................... 889 (1,982) (12,400)
Prepaid expenses and other current assets....... (14) (408) (46)
Increase (decrease) in liabilities:
Accounts payable................................ (36) 1,054 1,347
Accrued liabilities............................. (1,447) 1,038 1,178
Deferred revenue................................ -- 654 4,345
Other liabilities............................... 154 794 857
-------- -------- --------
Net cash used in operating activities........... (6,872) (714) (4,626)
-------- -------- --------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment........ (986) (1,036) (1,388)
Proceeds from disposal of property, plant and
equipment....................................... 82 51 16
-------- -------- --------
Net cash used in investing activities........... (904) (985) (1,372)
-------- -------- --------
Cash Flows From Financing Activities:
Principal borrowings on long-term debt........... 4,000 2,345 --
Principal payments on long-term debt............. (2,000) (30,396) --
Net borrowing under lines of credit.............. 3,000 (9,600) --
Capital contribution............................. 3,000 -- --
Exercise of employee stock options and employee
stock purchase plan............................. -- 258 672
Redemption of preferred stock.................... -- (7,122) --
Proceeds from sale of common stock, net of
expenses........................................ -- 80,845 --
-------- -------- --------
Net cash provided by financing activities....... 8,000 36,330 672
-------- -------- --------
Effect of exchange rate changes on cash.......... 18 14 (14)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 242 34,645 (5,340)
Cash and cash equivalents at beginning of
period.......................................... 189 431 35,076
-------- -------- --------
Cash and cash equivalents at end of period....... $ 431 $ 35,076 $ 29,736
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest......................................... $ 4,031 $ 3,275 --
Income taxes..................................... -- -- $ 5,454
The accompanying notes are an integral part of the financial statements.
F-6
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Organization and Nature of Operations:
Rudolph Technologies, Inc. (the "Company") designs, develops, manufactures
and supports high-performance process control metrology systems used in
semiconductor device manufacturing. The Company operates in a single segment
and supports a wide variety of applications in the areas of diffusion, etch,
lithography, CVD, PVD, and CMP. The Company is the successor to Rudolph
Research Corporation ("predecessor company") which was acquired on June 14,
1996 (the "Acquisition"). The Acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the fair value of the net
assets acquired.
2. Summary of Significant Accounting Policies:
A. Consolidation:
The consolidated financial statements reflect the consolidated balance
sheet, results of operations and cash flows of the Company and its subsidiary.
All intercompany accounts and transactions have been eliminated.
B. Revenue Recognition and 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.
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. Under the new accounting method adopted retroactive to January
1, 2000, the Company now allocates revenue to each component of a multi-
element arrangement and defers recognition of revenue until contractual
obligations of each element have been performed and, where applicable
subjective customer acceptance has been obtained. The pro forma amounts
presented in the income statement were calculated assuming the accounting
change was made retroactively to all prior periods. For the year ended
December 31, 2000 the Company recognized $1,725 in revenue that was included
in the cumulative effect adjustment as of January 1, 2000.
Revenues from parts sales are recognized at the time of shipment. Revenue
from service contracts is recognized ratably over the period of the contract.
A provision for the estimated cost of fulfilling warranty obligations is
recorded at the time the related revenue is recognized.
Sales contracts with our distributors contain fixed prices, current payment
terms and are not subject to distributor's resale or any other contingencies.
Accordingly, sales of finished products to our distributors are recognized as
revenue at the time of shipment. Our distributors do not maintain inventory of
our products, other than a small quantity of spare parts for warranty and
maintenance purposes. Our distributors hold spare parts on a consignment
basis.
C. Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by management include
allowance for doubtful accounts, inventory obsolescence, depreciation,
amortization, taxes, contingencies, and product warranty. Actual results could
differ from those estimates.
F-7
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
D. Cash and Cash Equivalents:
Cash and cash equivalents include cash and highly liquid debt instruments
with original maturities of three months or less when purchased.
E. Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is computed using the straight-line method over the
estimated useful lives of the assets which are thirty years for buildings,
seven years for machinery and equipment and furnitures and fixtures, and three
years for computer equipment. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life of the related asset. Repairs and maintenance costs are expensed as
incurred and major renewals and betterments are capitalized. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the fair value is
less than the carrying amount of the asset, a loss is recognized for the
difference. Asset impairment is determined based upon undiscounted cash flows.
The fair value of an asset is computed based upon discounted cash flows.
F. Intangibles:
Intangibles, which resulted from the Acquisition, consist of goodwill and
purchased technology which are amortized on a straight-line basis over useful
lives of 12 years and 2.5 to 12 years, respectively. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired.
Intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
evaluating impairment of intangible assets, the Company utilizes the same
methodology as discussed in the preceding paragraph.
G. Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of accounts receivable and
cash. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral for sales on credit. The Company
maintains reserves for potential credit losses. Substantially all of its cash
is held with one major financial institution.
H. Warranties:
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 has established reserves of $475 and $1,072 at December 31, 1999 and
2000, respectively, for these anticipated future warranty costs.
I. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Demonstration units, which are available for sale, are stated at their
manufacturing costs and reserves are recorded to adjust the demonstration
units to their net realizable value.
J. Income Taxes:
The Company accounts for income taxes using the asset and liability approach
for deferred taxes which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. A valuation
allowance is recorded to reduce a deferred tax asset to that portion which
more likely than not will be realized.
F-8
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
K. Translation of Foreign Currencies:
The Company has foreign operations in Korea, Taiwan, Singapore and Europe
which use their local currency as their functional currency. Assets and
liabilities are translated at exchange rates in effect at the balance sheet
date, and income and expense accounts and cash flow items are translated at
average exchange rates during the period. Resulting translation adjustments are
recorded directly as a separate component of stockholders' equity. Foreign
exchange rate gains and losses included in operating results are not material
for all periods presented.
L. Stock Based Compensation:
The Company accounts for its employee stock option plan in accordance with
provisions of the Accounting Principles Board's Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company provides additional disclosure required
by Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" (see Note 8).
M. Software Development Costs:
The Company accounts for software development costs in accordance with SFAS
No. 86, "Accounting for Costs of Computer Software to Be Sold, Leased or
Marketed." SFAS No. 86 requires that certain software product development costs
incurred after technological feasibility has been established, be capitalized
and amortized, commencing upon the general release of the software product to
the Company's customers, over the economic life of the software product. Annual
amortization of capitalized costs is computed using the greater of: (i) the
ratio of current gross revenues for the software product over the total of
current and anticipated future gross revenues for the software product or (ii)
the straight-line basis. Software product development costs incurred prior to
the product reaching technological feasibility are expensed as incurred and
included in research and development costs. Capitalized costs to date have been
immaterial to date and, accordingly, SFAS No. 86 had no significant impact on
the financial position or results of operations of the Company.
N. Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value due to their short maturities.
O. Risks Inherent in the Business:
The Company sells its products to the semiconductor device industry and
believes that changes in any of the following areas could have a material
adverse effect on the Company's financial position, results of operations or
cash flows: advances and trends in new technologies and industry standards;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand for
products and services offered by the Company; changes in customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; risks associated with
changes in domestic and international economic and/or political conditions or
regulations; dependency on suppliers and availability of necessary product
components and the Company's ability to attract and retain employees necessary
to support its growth.
P. Recent Accounting Pronouncements:
During June 1998, as amended in July 1999 for SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133--an amendment of SFAS No. 133", the Financial
Accounting Standards Board issued Statement No. 133 "Accounting for Derivative
F-9
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Investments and Hedging Activities". Based on the Company's current operations,
management has concluded that the future adoption of SFAS No. 133 will have no
impact on the Company's operations or financial position.
Q. Reclassification:
The prior year financial statements have been reclassified to conform to this
year's presentation.
3. Property, Plant and Equipment:
Property, plant and equipment is comprised of the following:
December 31,
----------------
1999 2000
------- -------
Land and building............................................. $ 1,613 $ 1,639
Machinery and equipment....................................... 865 882
Furniture and fixtures........................................ 269 864
Computer equipment............................................ 964 1,643
Leasehold improvements........................................ 811 832
------- -------
4,522 5,860
Accumulated depreciation...................................... (1,416) (2,036)
------- -------
Net property, plant and equipment............................. $ 3,106 $ 3,824
======= =======
Depreciation expense amounted to $778, $568 and $661 for the years ended
December 31, 1998, 1999, and 2000 respectively.
4. Inventories:
Inventories are comprised of the following:
December 31,
---------------
1999 2000
------- -------
Materials....................................................... $ 4,729 $10,701
Work-in-process................................................. 4,937 11,295
Finished goods.................................................. 1,737 1,777
------- -------
Total inventories............................................. $11,403 $23,773
======= =======
The Company has established reserves of $575 and $960 at December 31, 1999
and 2000, for slow moving and obsolete inventory.
5. Intangibles:
Intangibles are comprised of the following:
December 31,
------------------
1999 2000
-------- --------
Purchased technology....................................... $ 22,731 $ 22,731
Goodwill................................................... 3,178 3,178
-------- --------
25,909 25,909
Accumulated amortization................................... (23,050) (23,389)
-------- --------
Total intangibles........................................ $ 2,859 $ 2,520
======== ========
F-10
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Amortization of intangibles amounted to $4,208, $436 and $339 for the years
ended December 31, 1998, 1999 and 2000, respectively.
6. Commitments and Contingencies:
The Company rents space for its manufacturing and service operations and
sales offices. Total rent expense for these facilities amounted to $302, $510
and $797 for the years ended December 31, 1998, 1999 and 2000, respectively.
The Company also leases certain equipment pursuant to operating leases,
which expire through 2001. Rent expense related to these leases amounted to
$76, $64 and $52 for the years ended December 31, 1998, 1999 and 2000,
respectively.
Total future minimum lease payments under noncancelable operating leases as
of December 31, 2000 amounted to $878, $834, $660, $515 and $520 for the years
2001 to 2005, respectively.
Under various licensing agreements, the Company is obligated to pay
royalties based on net sales of products sold that use certain licensed
technologies. There are no minimum annual royalty payments. Royalty expense,
which is included in selling, general and administrative expense, amounted to
$398, $924 and $3,285 for the years ended December 31, 1998, 1999 and 2000,
respectively.
The Company is presently involved in a patent interference proceeding with
Therma-Wave, Inc. in the United States Patent Office. In this proceeding, the
Company is 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.
Preliminary motions and statements have been filed. In November, 1999 the
patent office denied the Company's request to dismiss the proceedings. If the
Company loses the interference, a reissue patent will be granted to Therma-
Wave permitting Therma-Wave to assert patent rights against the ellipsometers
the Company uses in its transparent thin film measurement systems. In that
event, the Company could assert a defense of intervening rights against
Therma-Wave's reissued patent since the Company relied on the restricted
claims of Therma-Wave's original patent. If the intervening rights defense and
other defenses fail, the Company would either have to pay future royalties to
Therma-Wave or redesign its SpectraLASER and other transparent thin film
measurement systems. Management is unable to estimate the ultimate resolution
of this matter. However, should the Company be required to pay royalties or
redesign its products, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, from time to time the Company is subject to legal proceedings
and claims in the ordinary course of business. Other than the Therma-Wave,
Inc. patent interference proceeding discussed above, the Company is not
involved in any material legal proceedings.
7. Long-Term Debt:
On November 23, 1999 the Company retired all outstanding loans of $39,320
payable to a related party. The amount included $10,800 to repay the senior
revolving term loan, $11,125 to repay the senior term loan, $11,000 to repay
the subordinated term loan and $6,395 to repay the junior subordinated note.
The early extinguishment of debt resulted in an extraordinary loss in the
amount of $427, net of tax of $5. The loans were retired from the proceeds
received from the Company's initial public offering.
F-11
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
8. Stock Options:
In 1996, the Company adopted the 1996 Stock Option Plan (the "Option Plan").
Under the Option Plan, the Company was authorized to grant options to purchase
up to 1,069,902 shares of common stock. All of the outstanding options became
100% vested upon the initial public offering of the Company on November 12,
1999. As of December 31, 1999 and 2000, there were no shares of common stock
reserved for future grants under the Option Plan.
During 1999, options issued under the Option Plan entitle the holders to
purchase shares of common stock at a per share price of $0.56, which was less
than the estimated fair value of the common stock on the date of grant. As a
result, the Company recognized compensation expense of $1,018 for the
difference between the estimated fair value of the common stock on the date
the option was granted and the exercise price.
The Company established an Employee Stock Purchase Plan (the "ESPP")
effective August 31, 1999. Under the terms of the ESPP, eligible employees may
have up to 15% of eligible compensation deducted from their pay and applied to
the purchase of shares of Common Stock. The price the employee must pay for
each share of stock will be 85% of the lower of the fair market value of the
Common Stock at the beginning or at the end of the purchase term of six
months. The ESPP qualifies as a non-compensatory plan under section 423 of the
Internal Revenue Code. As of December 31, 1999 and 2000, there were 300,000
and 265,548 shares available for issuance under the ESPP, respectively.
The Company established the 1999 Stock Plan (the "1999 Plan") effective
August 31, 1999. The 1999 Plan provides for the grant of 2,000,000 stock
options and stock purchase rights to employees, directors and consultants at
an exercise price equal to or greater than the fair market value of the common
stock on the date of grant. Options granted under the 1999 Plan vest over a
five year period and expire ten years from the date of grant. As of December
31, 1999 and 2000, there were 1,146,650 and 1,009,634 shares of common stock
reserved for future grants under the 1999 Plan, respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma operating results had the Company adopted the fair
value method. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models. For the
years ended December 31, 1998 and 1999, with the exception of the ESPP, the
fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model using a dividend yield of 0%,
volatility of 66%, expected life of an option of 9 years and a risk-free
interest rate of 4.85%. For the year ended December 31, 2000 the fair value
for each option grant was estimated on the date of grant using a dividend
yield of 0%, volatility of 109%, expected life of an option of 5 years and a
risk free interest rate of 5.2%. The fair value for each option grant from the
ESPP was estimated on the date of grant using a dividend yield of 0%
volatility of 109%, expected life of 6 months and a risk free interest rate of
5.2%. For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Had
compensation costs been determined based upon the fair value at the grant date
for awards under the Option Plan, consistent with the methodology prescribed
under SFAS No. 123, the Company's pro forma net income (loss) attributable to
common stockholders under SFAS No. 123 would have been $(14,786), $2,846 and
$21,879 for the years ended December 31, 1998, 1999 and 2000, respectively.
The pro forma basic net income (loss) per share would have been $(3.28), $0.36
and $1.49 for the years ended December 31, 1998, 1999 and 2000, respectively.
The pro forma diluted net income (loss) per share would have been $(3.28),
$0.28, and $1.40 for the years ended December 31, 1998, 1999 and 2000,
respectively. With the exception of the options noted above, the exercise
price of option grants was equal to the fair market value of the Company's
common stock at the date of grant. Since options vest over several years and
additional awards are expected to be issued in the future, the pro forma
results are not likely to be representative of the effects of the application
of the fair value based method on future periods.
F-12
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The following tables summarize the stock option activity for the years ended
December 31, 1998, 1999 and 2000:
Options Outstanding
-------------------------------
Weighted
Average
Exercise
Price
Number of per Number
Shares Share Exercisable
--------- -------- -----------
Balance at December 31, 1997.................... 382,133 $ 0.59 283,524
Granted......................................... 617,726 0.73
Canceled........................................ (39,338) 0.73
--------- ------ -------
Balance at December 31, 1998.................... 960,521 0.67 475,607
Granted......................................... 976,202 14.29
Exercised....................................... (386,610) 0.67
Canceled........................................ (18,451) 13.11
--------- ------ -------
Balance at December 31, 1999.................... 1,531,662 9.21 678,311
Granted......................................... 247,500 36.19
Exercised....................................... (152,727) 1.17
Canceled........................................ (110,483) 19.35
--------- ------ -------
Balance at December 31, 2000.................... 1,515,952 $13.68 690,326
=========
Stock option information as of December 31, 2000:
Options Vested and
Options Outstanding Exercisable
------------------------------------------------- -------------------------------
Weighted Avg.
Weighted Avg. Exercise
Options Remaining Price per Number
Exercise Price Outstanding Contract Life Share Exercisable
-------------- ----------- ------------- ------------- -----------
$ 0.56 - $ 0.73 530,733 6.96 $ 0.66 530,733
16.00 - 16.00 753,219 8.86 16.00 159,593
25.69 - 42.25 232,000 9.56 -- --
--------------- --------- -------
$ 0.56 - $42.25 1,515,952 8.01 $ 4.21 690,326
=============== ========= =======
9. Redeemable Preferred Stock:
On June 14, 1996, the Company sold 45,875.29 shares of Series A voting
preferred stock (referred to as Series A preferred stock), $0.01 par value at
$100 per share and 8,124.71 shares of Series B non-voting preferred stock,
(referred to as Series B preferred stock), $0.01 par value at $100 per share.
Series A preferred stockholders vote on a share-for-share basis with Series A
voting common shareholders (see Note 10). Holders of preferred stock were
entitled to receive cumulative dividends at an annual rate of 8.0% on the
liquidation value of each such share. The preferred stock contained a
redemption feature which allowed the holders of the preferred stock to require
redemption of all of the preferred stock if certain ownership percentages are
not met. The preferred stock could have been redeemed at the Company's option
at any time at a price per share of $100 plus accrued and unpaid dividends. On
November 23, 1999 the Company redeemed all outstanding shares of Series A and
Series B preferred stock at a price of $5,400 plus $1,722 of accrued
dividends. The preferred stock was retired from the proceeds received from the
sale of common stock.
10. Equity Securities:
On June 14, 1996, the Company issued and sold 1,571,294 shares of Class A
voting common stock, $0.0003 par value at $0.57 per share and 1,046,079 shares
of Class B non-voting common stock, $0.0003 par value at $0.57
F-13
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
per share. The Company also issued to the holder of the Class A voting common
stock a warrant to purchase 534,951 shares of Class A common stock of the
Company at a purchase price of $0.0003 per share.
During 1998 the Company issued additional Class A voting common stock and
Class B non-voting common stock in connection with certain capital
contributions. The Company also issued to the holder of the Class A voting
common stock warrants to purchase 945,740 shares of Class A common stock of
the Company at a purchase price of $0.0003 per share based upon the holder's
antidilution rights.
In November, 1999, the Board of Directors authorized a 35.66-for-one split
of the Class A and Class B outstanding common stock. All share and per share
amounts in the accompanying financial statements have been adjusted for the
split.
On November 12, 1999, 5,520,000 shares of a new single class of common stock
were sold, the net proceeds of $80,845 were used to pay all outstanding debt
(see Note 7) and redeem all outstanding redeemable preferred stock (see Note
9). The Company also exchanged each share of Class A and Class B common stock
outstanding for one share of the new single class of common stock. In
addition, all the outstanding warrants were exercised and exchanged on a
cashless basis for 2,045,702 shares of common stock.
The Company is authorized to issue up to 5,000,000 shares of preferred stock
in series with rights, privileges and qualifications as determined by the
Company's Board of Directors.
11. Employee Benefit Plans:
The Company has a 401(k) savings plan to provide retirement and incidental
benefits for its employees. As allowed under Section 401(k) of the Internal
Revenue Code, the Plan provides tax-deferred salary deductions for eligible
employees. Employees may contribute from 1.0% to 15.0% of their annual
compensation to the Plan, limited to a maximum annual amount as set
periodically by the Internal Revenue Service. The Plan provides a 50% match of
all employee contributions up to 6 percent of the employee's salary. Company
matching contributions to the Plan totaled $158, $170 and $188 for the years
ended December 31, 1998, 1999 and 2000, respectively.
In addition, the Company has a profit sharing program, wherein a percentage
of pre-tax profits, at the discretion of the Board of Directors, is provided
to all employees who have completed a stipulated employment period. The
Company did not make contributions to this program for the years ended
December 31, 1998, 1999 and 2000.
F-14
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
12. Income Taxes:
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
-------------------------
1998 1999 2000
------- ------- -------
Current:
Federal........................................... $ (842) $ 40 $ 5,062
State............................................. (161) 93 733
------- ------- -------
(1,003) 133 5,795
------- ------- -------
Deferred:
Federal........................................... 1,549 (2,068) (4,962)
State............................................. 67 (244) (1,264)
------- ------- -------
1,616 (2,312) (6,226)
------- ------- -------
Total income tax expense (benefit)............. $ 613 $(2,179) $ (431)
======= ======= =======
Deferred tax assets are comprised of the following:
December 31,
---------------
1999 2000
------- ------
Amortization of intangibles..................................... $ 6,211 $6,198
Deferred revenue................................................ -- 1,737
Deferred interest............................................... 2,701 --
Inventory obsolescence reserve.................................. 219 372
Fixed assets.................................................... 97 136
Warranty........................................................ 180 392
Accounts receivable............................................. 114 172
Employee stock options.......................................... -- 294
Research credits................................................ 779 --
Other........................................................... 224 161
Net operating loss carryforwards................................ 387 --
Less valuation allowance........................................ (8,600) --
------- ------
Net deferred tax asset.......................................... $ 2,312 $9,462
======= ======
During the years ended December 31, 1999 and 2000, the valuation allowance
decreased approximately $2.8 million and $8.6 million, respectively.
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. The reductions in 1999 and 2000 were
primarily due to changes in economic circumstances which made the realization
of deferred tax assets relating to deferred interest and amortization of
intangibles, more likely than not.
F-15
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income taxes
as follows:
Year Ended December 31,
---------------------------
1998 1999 2000
------- ------- -------
Federal income tax provision (benefit) at
statutory rate................................. $(4,578) $ 370 $ 8,611
State taxes, net of federal effect.............. (161) 132 (345)
Change in valuation allowance................... 5,386 (2,841) (8,600)
Other........................................... (34) 160 (97)
------- ------- -------
Provision (benefit) for income taxes............ $ 613 $(2,179) $ (431)
======= ======= =======
Effective tax rate.............................. (5)% (200)% (2)%
======= ======= =======
Earnings subject to foreign taxation and foreign taxes paid were not
material.
13. Related Party Transactions:
Upon the completion of the Company's initial public offering on November 12,
1999, the Company terminated the management, consulting and financial services
agreement it had with related parties for an annual fee. Such services
included, but were not limited to, advice and assistance concerning any and
all aspects of the operation, planning and financing of the Company.
Management fee expense amounted to $200 and $173 for the years ended December
31, 1998 and 1999, respectively.
14. Geographic Reporting and Customer Concentration:
Year Ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
Revenues from third parties:
United States....................................... $ 8,388 $17,959 $39,902
Asia................................................ 8,380 10,798 34,765
Europe.............................................. 3,289 7,578 10,695
Other............................................... 49 1,760 2,745
------- ------- -------
Total............................................ $20,106 $38,095 $88,107
======= ======= =======
Customers comprising 10% or more of the Company's
total revenue for the period indicated:
A................................................... 19.8% 31.2% 19.4%
B................................................... 17.6% 6.3% 21.9%
C................................................... 15.3% 5.8% --
D................................................... 11.1% 6.0% 3.3%
Substantially all of the assets of the Company are within the United States
of America.
15. Earnings Per Share:
The Company has adopted SFAS No. 128, Earnings per Share, which requires the
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS"). Basic EPS is computed by dividing income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS gives effect to all
potential dilutive common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an anti-dilutive effect on earnings.
F-16
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The computations of Basic EPS and Diluted EPS for the years ended December
31, 1998, 1999 and 2000 are as follows:
Income/(loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
For the year ended December 31, 1998
Net loss................................ $(14,078)
Preferred stock dividends............... (507)
--------
Basic EPS:
Net loss available to common
stockholders......................... $(14,585) 4,503,396 $(3.24)
Effect of dilutive stock options...... -- -- --
-------- ---------- ------
Diluted EPS:
Net loss available to common
stockholders ........................ $(14,585) 4,503,396 $(3.24)
======== ========== ======
For the year ended December 31, 1999
Net income.............................. $ 2,839
Preferred stock dividends............... (508)
--------
Basic EPS:
Net income available to common
stockholders......................... $ 2,331 7,880,622 $ 0.30
Effect of dilutive stock options...... -- 2,550,855 (0.08)
-------- ---------- ------
Diluted EPS:
Net income available to common
stockholders ........................ $ 2,331 10,431,477 $ 0.22
======== ========== ======
For the year ended December 31, 2000
Net income.............................. $ 23,576
Preferred stock dividends............... --
--------
Basic EPS:
Net income ........................... $ 23,576 14,773,295 $ 1.60
Effect of dilutive stock options...... -- 1,031,893 (0.11)
-------- ---------- ------
Diluted EPS:
Net income ........................... $ 23,576 15,805,188 $ 1.49
======== ========== ======
For the year ended December 31, 1998, the Company had outstanding options
and warrants to purchase an aggregate 3,033,208 shares of common stock, which
were excluded from the calculation of earnings per share for such period, due
to the anti-dilutive nature of these instruments. For the year ended December
31, 1999, all outstanding options and warrants were included in the
calculation of earnings per share. For the year ended December 31, 2000, the
Company had outstanding options to purchase 184,750 shares of common stock
which were excluded from the calculation due to the anti-dilutive nature of
these instruments.
16. Comprehensive Income
The disclosures required by SFAS No. 130, "Reporting Comprehensive Income"
have been included within the consolidated stockholders' equity (deficit)
statement. The difference between net income/(loss) and comprehensive
income/(loss) for the Company is due to currency translation adjustments. The
effects of income taxes on comprehensive income were not material.
17. Quarterly Consolidated Financial Data (unaudited)
The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters ended December 31, 2000.
In the opinion of the Company's management, this quarterly information has
been prepared on the same basis as the consolidated financial statements and
includes all adjustments
F-17
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
(consisting only of normal recurring adjustments) necessary to present fairly
the information for the period presented. The results of operations for any
quarter are not necessarily indicative of results for the full year or for any
future period.
The Company's business is not seasonal; therefore year-over-year quarterly
comparisons of the Company's results of operations may not be as meaningful as
the sequential quarterly comparisons set forth below which tend to reflect the
cyclical activity of the semiconductor industry as a whole. Quarterly
fluctuations in expenses are related directly to sales activity and volume and
may also reflect the timing of operating expenses incurred throughout the
year.
As discussed in Note 2B, the Company changed its accounting method for
revenue recognition in the fourth quarter of the year ended December 31, 2000,
effective January 1, 2000. Accordingly, the following unaudited quarterly
consolidated financial data for the first three quarters of the year ended
December 31, 2000 has been restated to reflect the impact of the change in
accounting method as if adopted on January 1, 2000.
Fourth
Quarter
Ended
First Quarter Ended Second Quarter Ended Third Quarter Ended December 31,
March 31, 2000 June 30, 2000 September 30, 2000 2000 Total
--------------------- ---------------------- --------------------- ------------ ----------
As As As
Previously As Previously As Previously As As As
Reported Restated Reported Restated Reported Restated Reported Reported
---------- ---------- ---------- ---------- ---------- ---------- ------------ ----------
Revenues................ $16,993 $15,842 $20,003 $19,901 $24,649 $23,440 $28,924 $88,107
Gross profit............ 9,025 7,874 10,769 10,667 13,138 11,928 15,784 46,253
Income before income
taxes and cumulative
effect of change in
accounting principle... 4,621 3,470 6,051 5,948 7,492 6,283 8,902 24,603
Cumulative effect of
change in accounting
principle.............. -- 1,458 -- -- -- -- -- 1,458
Income taxes............ 1,770 1,329 (2,525) (2,564) 1,189 729 75 (431)
Net income.............. 2,851 683 8,576 8,512 6,303 5,554 8,827 23,576
Basic:
Income before
cumulative effect of
change in accounting
principle............. $ 0.19 $ 0.14 $ 0.58 $ 0.58 $ 0.43 $ 0.38 $ 0.59 $ 1.69
Cumulative effect of
change in accounting
principle............. -- (0.09) -- -- -- -- -- (0.09)
Net income............. $ 0.19 $ 0.05 $ 0.58 $ 0.58 $ 0.43 $ 0.38 $ 0.59 $ 1.60
Diluted:
Income before
cumulative effect of
change in accounting
principle............. $ 0.18 $ 0.13 $ 0.54 $ 0.54 $ 0.40 $ 0.35 $ 0.56 $ 1.58
Cumulative effect of
change in accounting
principle............. -- (0.09) -- -- -- -- -- (0.09)
Net income............. $ 0.18 $ 0.04 $ 0.54 $ 0.54 $ 0.40 $ 0.35 $ 0.56 $ 1.49
Weighted average number
of shares outstanding:
Basic................... 14,684,706 14,684,706 14,730,631 14,730,631 14,801,773 14,801,773 14,859,795 14,773,295
Diluted................. 15,864,997 15,864,997 15,756,738 15,756,738 15,797,230 15,797,230 15,760,343 15,805,188
F-18
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Quarters Ended
-------------------------------------------------------------- ---
March 31, June 30, September 30, December
1999 1999 1999 31, 1999 Total
---------- ---------- ------------- ----------- -----------
Revenues................ $ 6,532 $ 8,638 $ 10,050 $ 12,875 $ 38,095
Gross profit............ 3,303 4,494 5,308 6,689 19,794
Income (loss) before
income taxes and
extraordinary item..... (445) 358 378 796 1,087
Extraordinary item...... -- -- -- 427 427
Income taxes............ 93 -- 28 (2,300) (2,179)
Net income (loss)....... (671) 222 196 2,584 2,331
Net income per share:
Basic:
Income before
extraordinary item.... $ (0.08) $ 0.05 $ 0.05 $ 0.28 $ 0.41
Extraordinary item..... -- -- -- (0.04) (0.05)
Preferred stock
dividends............. (0.02) (0.02) (0.02) -- (0.06)
Net income............. $ (0.10) $ 0.03 $ 0.03 $ 0.24 $ 0.30
Diluted:
Income before
extraordinary item.... $ (0.08) $ 0.04 $ 0.04 $ 0.24 $ 0.33
Extraordinary item..... -- -- -- (0.04) (0.04)
Preferred stock
dividends............. (0.02) (0.01) (0.02) -- (0.05)
Net income............. $ (0.10) $ 0.03 $ 0.02 $ 0.20 $ 0.22
Weighted average number
of shares outstanding:
Basic................... 6,732,394 6,794,223 7,103,365 10,892,503 7,880,622
Diluted................. 6,732,394 8,839,925 9,149,067 12,694,442 10,431,477
F-19
RUDOLPH TECHNOLOGIES, INC.
SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- ------------ ------------------------- ---------- ----------
Balance at Charged to Charged to Balance at
Beginning of Costs & Other End of
Description Period Expenses Accounts (net) Deductions Period
----------- ------------ ---------- -------------- ---------- ----------
Year 2000:
Allowance for doubtful accounts.... $ 300 $ 143 -- $ -- $ 443
Deferred tax asset valuation
allowance........................ 8,600 -- -- 8,600 --
Inventory valuation................ 575 385 -- -- 960
Year 1999:
Allowance for doubtful accounts.... 294 6 -- -- 300
Deferred tax asset valuation
allowance........................ 11,441 -- -- 2,841 8,600
Inventory valuation................ 413 162 -- -- 575
Year 1998:
Allowance for doubtful accounts.... 500 71 -- 277(a) 294
Deferred tax asset valuation
allowance........................ 5,864 5,577 -- -- 11,441
Inventory valuation................ 540 1,407 -- 1,534 413
- --------
a)Amounts written off as uncollectible.
F-20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 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.
/s/ Paul F. McLaughlin
By: __________________________________
Paul F. McLaughlin
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATE INDICATED.
Signature Title Date
--------- ----- ----
/s/ Paul F. McLaughlin Chairman and Chief February 12, 2001
_____________________________________________ Executive Officer
Paul F. McLaughlin
/s/ Steven R. Roth Vice President, Chief February 12, 2001
_____________________________________________ Financial Officer
Steven R. Roth (Principal Financial
Officer and Principal
Accounting Officer)
/s/ David Belluck Director February 14, 2001
_____________________________________________
David Belluck
/s/ Daniel H. Berry Director February 12, 2001
_____________________________________________
Daniel H. Berry
/s/ Paul Craig Director February 14, 2001
_____________________________________________
Paul Craig
/s/ Stephen J. Fisher Director February 12, 2001
_____________________________________________
Stephen J. Fisher
/s/ Carl E. Ring, Jr Director February 12, 2001
_____________________________________________
Carl E. Ring, Jr
/s/ Richard F. Spanier Director February 12, 2001
_____________________________________________
Richard F. Spanier
/s/ Aubrey C. Tobey Director February 13, 2001
_____________________________________________
Aubrey C. Tobey