Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1999
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 04-2564110
(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 February
29, 2000 of $45.125 per share was approximately $407,992,092. 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 14,684,706 shares of Common Stock outstanding as of
February 29, 2000 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 26, 2000 are incorporated herein by reference in Part III, Items
10,11,12,13.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Item No. Page
-------- ----
PART I
1. Business......................................................... 1
2. Properties....................................................... 15
3. Legal Proceedings................................................ 15
4. Submission of Matters to a Vote of Security Holders.............. 16
PART II
5. Market Price for Registrant's Common Equity and Related
Stockholder Matters.............................................. 17
6. Selected Financial Data.......................................... 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 19
7.A. Quantitative and Qualitative Disclosures about Market Risk....... 23
8. Financial Statements and Supplementary Data...................... 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................ 23
PART III
10. Directors and Executive Officers of the Registrant............... 24
11. Executive Compensation........................................... 24
12. Security Ownership of Certain Beneficial Owners and Management... 24
13. Certain Relationships and Related Transactions................... 24
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 25
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 high-performance 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
will also incorporate 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. Finally, 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.
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
3
Year of
Product Line Introduction Principal Applications Price Range
------------ ------------ ------------------------- ---------------------
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 50 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, 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,
4
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, will
offer 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,
will have all of the features of the S200 CMP product, and will also provide
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, will have 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 will incorporate all of the features of our
MatrixMetrology S200 CMP, Etch and Diffusion systems and will be 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.
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.
5
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 1997, 1998 and 1999, sales to
customers that individually represented at least five percent of our revenues
accounted for 7.7%, 43.2% and 49.3% of our revenues. In 1999, sales to Intel
accounted for 31.2% 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.
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 eleven U.S. and foreign patents covering technology in the
transparent thin film measurement, altered material
6
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 four 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 1997, 1998 and 1999 were $5.8
million, $5.1 million and $5.0 million. 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, 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 Ledgewood, 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 new manufacturing and
service 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 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 15 U.S. and
foreign patents. The patents we own or exclusively license have expiration
dates ranging from 2005 to 2017. We also have 20 pending regular and
provisional applications in the U.S. and other countries. Our patents
7
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.
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, 1999 we had a backlog of approximately
$16.3 million compared with a backlog of approximately $7.0 million at
December 31, 1998.
8
Employees
As of December 31, 1999, we had 189 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
Fluctuations in Operating Results
Our 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.
We reported net income available to common stockholders in 1999 of $2.3
million compared to a net loss available to common shareholders of $14.6
million in 1998. We may not be able to maintain profitability in the future,
which may cause our business to suffer and the price of our common stock to
substantially decline. 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.
In addition, continued investments in research, development and engineering
and the development of worldwide sales, marketing and customer satisfaction
organization will result in significantly higher fixed costs. There can be no
assurance that we will be able to achieve a rate of growth or level of sales
in any future period commensurate with our level of expenses. The impact of
these and other factors on our operating results in any future period cannot
be forecast with any degree of certainty. Due to the foregoing factors, we are
likely to experience in some future quarter or quarters operating results
which may be below the expectations of analysts and investors. In such event,
the price of our Common Stock would likely be materially adversely affected.
Semiconductor Equipment Industry Volatility
Our operating results will be subject to significant variation due to the
cyclical nature of the semiconductor device industry. For example, our
revenues decreased from $35.3 million in 1997 to $20.1 million in 1998, then
increased to $38.1 million in 1999. 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
9
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. Although the
semiconductor device industry is recovering, the industry may not continue to
improve; the industry may experience other, possibly more severe and
prolonged, downturns in the future; and any continued recovery of the
semiconductor device industry may not result in an increased demand by
semiconductor device manufacturers for capital equipment. Any future downturn
in the semiconductor device industry, or any failure of that industry to fully
recover from its recent downturn, will seriously harm our business, financial
condition and results of operations.
Acceptance by Customers of New Technology
If we are not able to successfully develop new products, or 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 promote our new MatrixMetrology systems. This
diversion of resources could have a further negative effect on sales of our
current systems.
Customer Concentration
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. 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 1998 and 1999, sales to customers that individually represented at
least five percent of our revenues accounted for 43.2% and 49.3% of our
revenues. In 1999, sales to a single customer accounted for 31.2% of our
revenues. There are only a limited number of mostly large companies operating
in the highly concentrated, capital intensive semiconductor device
manufacturing industry. Accordingly, we expect that we will
10
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.
Sole or Limited Sources of Supply
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 revenue. 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. Although our supply agreement with Coherent has expired,
we are currently negotiating a follow-on contract with Coherent. We do not
have long-term contracts with many of our suppliers. Our dependence on sole
source suppliers of components exposes us to several risks, including a
potential inability to obtain an adequate supply of components, price
increases, late deliveries and poor component quality. Disruption or
termination of the supply of these components could delay shipments of our
systems, damage our customer relationships and reduce our sales. From time to
time in the past, we have experienced temporary difficulties in receiving
shipments from our suppliers. The lead time required for shipments of some of
our components can be as long as four months. In addition, the lead time
required to qualify new suppliers for lasers could be as long as a year, and
the lead time required to qualify new suppliers of other components could be
as long as nine months. If we are unable to accurately predict our component
needs, or if our component supply is disrupted, we may miss market
opportunities by not being able to meet the demand for our systems. Further, a
significant increase in the price of one or more of these components or
subassemblies included in our systems could seriously harm our results of
operations.
Dependence on Product Development
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
78% of our revenues in 1999 were derived from the sale of systems that we did
not begin selling until after the first quarter of 1997.
Dependence upon Personnel
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, these individuals
or other key employees may nevertheless leave us. 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.
11
Lengthy Sales Cycle
Our customers generally take a long time to evaluate our film metrology
systems and many people are involved in the evaluation process. We expend
significant resources educating and providing information to our prospective
customers regarding the uses and benefits of our systems in the semiconductor
fabrication process. The length of time it takes for us to make a sale depends
upon many factors, including: the efforts of our sales force and our
independent sales representatives and distributors; the complexity of the
customer's fabrication processes; the internal technical capabilities and
sophistication of the customer; the customer's budgetary constraints; and the
quality and sophistication of the customer's current metrology equipment.
Because of the number of factors influencing the sales process, the period
between our initial contact with a customer and the time when we recognize
revenue from that customer, if ever, varies widely in length. Our sales
cycles, including the time it takes for us to build a product to customer
specifications after receiving an order, typically range from six to 15
months. Sometimes our sales cycles can be much longer, particularly with
customers in Japan. During these cycles, we commit substantial resources to
our sales efforts in advance of receiving any revenue, and we may never
receive any revenue from a customer despite our sales efforts. If we do make a
sale, our customers often purchase only one of our systems, and then evaluate
its performance for a lengthy period before purchasing any more of our
systems. The number of additional products a customer purchases, if any,
depends on many factors, including a customer's capacity requirements. The
period between a customer's initial purchase and any subsequent purchases can
vary from six months to a year or longer, and variations in the length of this
period could cause fluctuations in our operating results and possibly in our
stock price.
International Sales
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 58.2% and 52.9% of our
revenues in 1998 and 1999. 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
12
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.
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 41.8% and 28.3% of our revenues in 1998 and 1999.
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. Although we have recently received
an increased level of orders from customers in the Asia Pacific region, we
expect that turbulence in the Asian markets could adversely affect our sales
in future periods.
Highly Competitive Industry
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. We operate in the highly competitive
semiconductor capital equipment industry and face competition from a number of
companies, many of which have greater financial, engineering, manufacturing,
marketing and customer support resources and broader product offerings 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 recent downturn in the semiconductor device and semiconductor capital
equipment industries. These transactions by our competitors and potential
competitors may provide them with a competitive advantage over us by enabling
them to rapidly expand their product offerings and service capabilities to
meet a broader range of customer needs. Many of our customers and potential
customers in the semiconductor device manufacturing industry are large
companies that require global support and service for their semiconductor
capital equipment. While we believe that our global support and service
infrastructure is sufficient to meet the needs of our customers and potential
customers, our larger competitors have more extensive infrastructures than we
do, which could place us at a disadvantage when competing for the business of
global semiconductor device manufacturers.
Many of our competitors are investing heavily in the development of new
systems that will compete directly with ours. We have from time to time
selectively reduced prices on our systems in order to protect our market
share, and competitive pressures may necessitate further price reductions. We
expect our competitors in each product area to continue to improve the design
and performance of their products and to introduce new products with
competitive prices and performance characteristics. Such product introductions
by our competitors would likely cause us to decrease the prices of our systems
and increase the level of discounts we grant our customers.
Intellectual Property Rights
We may fail to adequately protect our intellectual property and, therefore,
lose our competitive advantage. Our future success and competitive position
depend in part upon our ability to obtain and maintain proprietary technology
for our principal product families, and we rely, in part, on patent, trade
secret and trademark law to protect that technology. If we fail to adequately
protect our intellectual property, it will be easier for our competitors to
sell competing products. We own or have licensed a number of patents relating
to our transparent and opaque thin film metrology systems, and have filed
applications for additional patents. Any of our pending patent applications
may be rejected, and we may not in the future be able to develop additional
proprietary technology that is patentable. In addition, the patents we do own
or that have been issued or licensed to us may not provide us with competitive
advantages and may be challenged by third parties. Third parties may also
design around these patents.
13
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.
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.
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.
Volatility of Stock Price
The stock market in general, and the stock prices of technology companies in
particular, have recently experienced volatility which has often been
unrelated to the operating performance of any particular company or companies.
If market or industry-based fluctuations continue, our stock price could
decline regardless of our actual operating performance and investors could
lose a substantial part of their investments. The market price of our common
stock will likely fluctuate in response to a number of factors including the
following: our failure to meet the performance estimates of securities
analysts; changes in financial estimates of our revenues and operating results
by securities analysts; the timing of announcements by us or our competitors
of significant contracts or acquisitions; and general stock market conditions.
Year 2000 Issue
The Year 2000 issue resulted from the fact that many computer programs
worldwide used two digits, rather than four, to define the applicable year.
For example, computers on January 1, 2000 may have assumed that 01/01/00 was
the first day of the year 1900 rather than 2000.
During 1999, we completed a multi-phase Year 2000 project consisting of
assessment remediation and testing of our internal infrastructure and products
and communicating with our suppliers to determine if they were Year 2000
ready. To date, we have not experienced any significant business disruptions
as a result of the Year 2000 issue. In addition, we have not been informed of
any such problems experienced by our suppliers. Nevertheless, it is too soon
to conclude that there will not be any problems arising from the Year 2000
issue, particularly with some of our customers, suppliers and other critical
service providers, or that we have identified all of the risks associated with
the Year 2000 issue. If such problems arise, our business and results of
operations could be seriously harmed.
14
Executive Officers
Our executive officers and their ages as of December 31, 1999 are as
follows:
Name Age Position
---- --- --------
Paul F. McLaughlin.......... 54 Chairman, Chief Executive Officer, and Director
Robert M. Loiterman......... 40 Vice President, Engineering
Steven R. Roth.............. 39 Vice President, Finance and Administration and
Chief Financial Officer
PAUL F. MCLAUGHLIN has served as our Chairman and Chief Executive Officer
since January 2000 and as our President, 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.
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 signed an agreement to lease a 15,000 square foot
engineering facility in Mt. Arlington, New Jersey. This lease agreement
expires in 2003. 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 defenses fail, we would either have to
pay future royalties to Therma-Wave or redesign our SpectraLASER and
15
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
On November 6, 1999, we submitted several matters to our stockholders for
action by written consent. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against and the number of abstentions (numbers do not reflect the 35.66-one
stock split effected in November 1999).
1) To approve the amendment and restatement to our Certificate of
Incorporation which, among other changes, (i) increased the number of
authorized shares of common stock to 50,000,000 shares, (ii) created an
aggregate of 5,000,000 shares of "blank check" preferred stock and (iii)
and effected a 35.66-for-one stock split of our common stock.
Common Stock: FOR: 193,552 AGAINST: 0 ABSTAIN: 5,628
Preferred Stock: FOR: 52,933 AGAINST: 0 ABSTAIN: 1,067
2) To approve and adopt a new 1999 Stock Plan.
Common Stock: FOR: 193,552 AGAINST: 0 ABSTAIN: 5,628
Preferred Stock: FOR: 52,933 AGAINST: 0 ABSTAIN: 1,067
3) To approve and adopt a new 1999 Employee Stock Purchase Plan.
Common Stock: FOR: 193,552 AGAINST: 0 ABSTAIN: 5,628
Preferred Stock: FOR: 52,933 AGAINST: 0 ABSTAIN: 1,067
4) To approve the amendment and restatement of our Certificate of
Incorporation, to be effective after the closing of the Company's initial
public offering, which reflected the retirement of our Series A and Series
B preferred stock.
Common Stock: FOR: 193,552 AGAINST: 0 ABSTAIN: 5,628
Preferred Stock: FOR: 52,933 AGAINST: 0 ABSTAIN: 1,067
5) To approve an amendment to our Amended and Restated Bylaws effective upon
the closing of our initial public offering.
Common Stock: FOR: 193,552 AGAINST: 0 ABSTAIN: 5,628
Preferred Stock: FOR: 52,933 AGAINST: 0 ABSTAIN: 1,067
16
PART ll
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since November 12, 1999, the date of our initial public offering, our Common
Stock has traded in The Nasdaq Stock Market under the symbol RTEC. The range
of high and low closing prices for the Common Stock as reported by the
National Association of Securities Dealers, Inc. for the period indicated
below is as follows:
Fiscal 1999 High Low
----------- ----- ---
4th Quarter (beginning November 35.75
12, 1999)....................... 16.00 (initial public offering)
As of February 29, 2000, we had approximately 36 holders 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, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data set forth below as of and for the years ended
December 31, 1997, 1998, and 1999 were derived from audited consolidated
financial statements included in this Form 10-K. The selected financial data
for the periods from January 1, 1996 to June 13, 1996 and June 14, 1996 to
December 31, 1996 and as of December 31, 1996 and for the year ended December
31, 1995 were derived from audited financial statements not included herein.
17
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. 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, the
financial information of our predecessor company excludes the effects of
purchase accounting adjustments, including increased interest expense and
amortization.
Predecessor Company Rudolph Technologies
------------------------ ---------------------------------------------
Period Period from
Year Ended January 1, June 14 to Year Ended December 31,
December 31, to June 13, December 31, --------------------------------
1995 1996 1996 1997 1998 1999
------------ ----------- ------------ --------- --------- ----------
(In thousands, except share and per share data)
Statement of Operations
Data:
Revenues................ $29,436 $17,501 $ 14,373 $ 35,339 $ 20,106 $ 38,095
Cost of revenues (1).... 13,655 7,497 6,579 13,903 13,179 18,301
------- ------- --------- --------- --------- ----------
Gross profit............ 15,781 10,004 7,794 21,436 6,927 19,794
------- ------- --------- --------- --------- ----------
Operating expenses:
Research and
development........... 2,888 1,817 2,345 5,750 5,096 5,003
In-process research &
development........... -- -- 3,821 -- -- --
Selling, general and
administrative........ 7,125 4,144 4,340 9,475 7,077 9,588
Write-down of purchased
technology............ -- -- 6,734 -- -- --
Amortization........... 10 19 3,650 4,201 4,208 436
------- ------- --------- --------- --------- ----------
Total operating
expenses.............. 10,023 5,980 20,890 19,426 16,381 15,027
------- ------- --------- --------- --------- ----------
Operating income
(loss)................. 5,758 4,024 (13,096) 2,010 (9,454) 4,767
Interest expense, net... 113 55 2,013 3,717 4,210 3,701
Other income............ (38) (26) (156) (92) (199) (21)
------- ------- --------- --------- --------- ----------
Income (loss) before
income taxes and
extraordinary item..... 5,683 3,995 (14,953) (1,615) (13,465) 1,087
Provision (benefit) for
income taxes........... 274 143 -- (614) 613 (2,179)
------- ------- --------- --------- --------- ----------
Income (loss) before
extraordinary item..... -- -- -- -- -- 3,266
Extraordinary item (net
of tax of $5) (2)...... -- -- -- -- -- 427
------- ------- --------- --------- --------- ----------
Net income (loss)....... $ 5,409 $ 3,852 (14,953) (1,001) (14,078) 2,839
======= =======
Preferred Stock
Dividends.............. 239 468 507 508
--------- --------- --------- ----------
Income (loss) available
to common
stockholders........... $ (15,192) $ (1,469) $ (14,585) $ 2,331
========= ========= ========= ==========
Income (loss) per common
share:
Basic.................. $ (5.80) $ (0.56) $ (3.24) $ 0.30
Diluted................ $ (5.80) $ (0.56) $ (3.24) $ 0.22
Weighted average common
shares outstanding:
Basic.................. 2,617,373 2,617,373 4,503,396 7,880,622
Diluted................ 2,617,373 2,617,373 4,503,396 10,431,477
December 31,
-------------------------------------
1996 1997 1998 1999
-------- -------- -------- -------
Balance Sheet Data:
Cash and cash equivalents................ $ 1,578 $ 189 $ 431 $35,076
Working capital (deficit)................ 4,262 3,134 (1,052) 49,217
Total assets............................. 27,013 28,513 21,121 64,947
Long-term debt, less current portion..... 26,000 24,000 25,370 --
Total stockholder's equity (deficit)..... (13,707) (15,327) (26,759) 57,610
- -------
(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.
18
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 high-performance 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 fifty-nine 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 Bell Laboratories. We believe we have the largest
installed base of ellipsometers in the world. Our customers include most of
the major semiconductor device manufacturers worldwide, including AMD,
Chartered Semiconductor, Fujitsu, Hyundai, IBM, Lucent, Philips, Samsung, ST
Microelectronics, 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. At the time of the
transaction, we changed our name to Rudolph Technologies 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 1998, the semiconductor device industry began a period of reduced
capital equipment purchases. The related industry-wide downturn 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.
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 the years 1999, 1998 and 1997 sales to customers that
individually represented at least five percent of our revenues accounted for
49.3%, 43.2% and 7.7% of our revenues. In 1999, sales to one customer
accounted for 31.2% of our revenues. In 1998, sales to two customers accounted
for 19.8% and 11.1% of our revenues, respectively. In 1997, no individual
customer accounted for more than 10% 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 the year ended December 31, 1999, sales to Tokyo
Electron Limited or TEL, our exclusive distributor in Japan, and distributor
Metron Technology each accounted for 6.3% of our revenues. In 1998, sales to
TEL and Metron accounted for 17.6% and 15.3% of our revenues. In 1997, sales
to TEL accounted for 29.9% of our revenues. On August 25, 1999 we terminated
our distribution agreement with Metron. Currently, the only distributor we use
is TEL.
A significant portion of our revenues has been derived from customers
outside of the United States, and we expect this trend to continue*. 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 from customers in
19
Europe. 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 1997,
approximately 66.0% of our revenues were derived from customers outside of the
United States, of which 57.9% were derived from customers in Asia and 8.0%
were derived from customers in Europe.
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.
Year Ended
December 31,
--------------------
1997 1998 1999
----- ------ -----
(In thousands)
Statement of Operations Data:
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 39.3 65.5 48.0
----- ------ -----
Gross profit............................................ 60.7 34.5 52.0
----- ------ -----
Operating expenses:
Research and development................................ 16.3 25.3 13.1
Selling, general and administrative..................... 26.8 35.2 25.2
Amortization............................................ 11.9 20.9 1.1
----- ------ -----
Total operating expenses................................ 55.0 81.5 39.4
----- ------ -----
Operating income (loss)................................. 5.7 (47.0) 12.5
Interest expense, net................................... 10.5 20.9 9.7
Other income............................................ (0.3) (1.0) (0.1)
----- ------ -----
Income (loss) before income taxes and extraordinary
item................................................... (4.5) (67.0) 2.9
Provision (benefit) for income taxes.................... (1.7) 3.0 (5.7)
----- ------ -----
Income (loss) before extraordinary item................. -- -- 8.6
Extraordinary item (net of tax)......................... -- -- 1.1
----- ------ -----
Net income (loss)....................................... (2.8) (70.0) 7.5
Preferred Stock Dividends............................... 1.3 2.5 1.3
----- ------ -----
Income (loss) available to common stockholders.......... (4.1)% (72.5)% 6.1%
===== ====== =====
Revenues. Our revenues were $35.3 million, $20.1 million and $38.1 million
in the years 1997, 1998 and 1999. These changes represent a decrease of 43.1%
from 1997 to 1998 and an increase of 89.5% from 1998 to 1999. The decrease in
revenues from 1997 to 1998 was primarily due to lower sales volume resulting
from the downturn in the semiconductor device industry in 1998, which resulted
in reduced capital spending by semiconductor device manufacturers. 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. Revenues from customers outside of the United
States represented 66.0%, 58.2% and 52.9% of our revenues in year 1997, 1998
and 1999. Revenues from customers outside of the United States decreased as a
percentage of revenues from 1997 to 1998 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. Our gross profit was $21.4 million, $6.9
million and $19.8 million in 1997, 1998 and 1999. These changes represent a
decrease of 67.7% from 1997 to 1998 and an increase of 185.8% from 1998 to
1999. Our gross profit represented 60.7%, 34.5% and 52.0% of our revenues in
1997, 1998 and 1999. In 1998, manufacturing inefficiencies of our new product
lines and lower absorption of manufacturing overhead attributed to a 10%
decrease in profit margins. We also recorded an expense of $1.4 million for
the writedown of inventory consisting of excess parts for older product lines
and parts which design and engineering advancements
20
had rendered obsolete. The inventory writedown expense reduced our gross
profit margin for 1998 by 7.0%. The remaining decrease in gross profit margin
from 1997 to 1998 was attributable to the spreading of relatively fixed
service costs over lower revenues and the expansion of our service
infrastructure, including the opening of a branch office in Taiwan. 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 and SpectraLASER product lines, as well as the elimination of
manufacturing inefficiencies and inventory writedowns that were taken in 1998.
Research and Development. Our research and development expenditures were
$5.8 million, $5.1 million and $5.0 million in 1997, 1998 and 1999. These
changes represent a decrease of 11.4% from 1997 to 1998 and a decrease of 1.8%
from 1998 to 1999. Research and development expenditures represented 16.3%,
25.3% and 13.1% of revenues in 1997, 1998 and 1999. The increase in research
and development expenditures as a percentage of revenues in 1998 resulted from
lower revenues and our decision to maintain research and development spending
during the downturn in our industry. The decrease in dollars in 1998 resulted
from the cost for prototype equipment incurred in 1997 with no significant
prototype equipment cost recurring in 1998. Research and development costs
remained relatively flat from 1998 to 1999. 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. Our selling, general and administrative
expense was $9.5 million, $7.1 million and $9.6 million in 1997, 1998 and
1999. These changes represent a decrease of 25.3% from 1997 to 1998 and an
increase of 35.5% from 1998 to 1999. Selling, general and administrative
expense represented 26.8%, 35.2% and 25.2% of revenues in 1997, 1998 and 1999.
The decrease in dollars in 1998 resulted from a reduction in commissions paid
to foreign sales representatives as a result of the semiconductor device
industry slowdown and the Asian economic crisis. This decrease was partially
offset by an increase in royalty costs associated with licensed technology
included in one of our new systems. In 1999, the increase in dollars 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. We expect
selling, general and administrative expenses to decrease as a percentage of
revenues but increase in absolute dollars*.
Amortization. Our expense for amortization was $4.2 million, $4.2 million
and $0.4 million in 1997, 1998 and 1999. Amortization expense decreased in
1999 because we completed our amortization of acquired technology in 1998.
Interest Expense, net. Interest expense was $3.7 million and $4.2 million in
1997 and 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.
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 $92,000, $199,000 and $21,000 in
1997, 1998 and 1999.
Provision (Benefit) for Income Taxes. Our provision (benefit) for income
taxes was a benefit of $614,000 in 1997, a provision of $613,000 in 1998 and a
benefit of $2.2 million in 1999. 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, 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 for certain deferred tax assets that more likely
than not would be realized. We computed our effective tax rate for 1997, 1998
and 1999 based 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 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.
21
Preferred Stock Dividends. We accrued cumulative dividends on our 8%
preferred stock of $0.5 million in each year from 1997 to 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 raising $88.3
million and retired all of our outstanding debt and preferred stock, leaving
residual 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 $2.0 million, $6.9 million and
$0.7 million in 1997, 1998 and 1999. The increase in cash used by operating
activities from 1997 to 1998 was due primarily to our funding of net losses
and a decrease in accounts receivable due to lower sales, a decrease in
current liabilities due to lower purchases, and a write-off of obsolete
inventory. The decrease 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.
Net cash used in investing activities was $0.6 million, $0.9 million, and
$1.0 million in 1997, 1998 and 1999. Capital expenditures for 1997 were
primarily used to upgrade computer systems and for leasehold improvements to
relocate our sales and service facility in California. 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 are
not expected to exceed $1.2 million*.
Net cash provided by financing activities was $1.2 million, $8.0 million and
$36.3 million in 1997, 1998 and 1999. In 1997 and 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 junior subordinated note in the principal
amount of $7.0 million, of which we had been advanced a total of $6.4 million.
The unpaid principal amount of the junior subordinated note bears interest at
an annual rate of 14%.
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
underwriter's 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.
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 through at least the end of the first quarter of
2001*. After that time, we may require additional equity or debt financing to
address our working capital, capital 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.
Effects of Inflation
Inflation has not been a material factor affecting our business.
22
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, 1999, our investments consisted
primarily of municipal and government securities that mature in one year or
less.
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 and Korea 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.
23
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registrant will file a definitive proxy statement
within one hundred twenty (120) days after the end of the fiscal year pursuant
to Regulation 14A (the "Proxy Statement") for its Annual Meeting of
Stockholders currently scheduled for May 26, 2000, and the information
included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to directors is
incorporated by reference to the Proxy Statement. The information required by
this Item with respect to Executive Officers is set forth herein under
"Executive Officers of the Registrant". Information regarding compliance with
Section 16 of the Securities Exchange act of 1934, as amended, is incorporated
by reference to the information under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item with respect to the compensation of
our executive officers and is incorporated by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Proxy Statement.
24
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-17 of this report. The Report
of Independent Public Accountants appears on page F-2 of this report.
2. Financial Statement Schedules
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(c)) 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 by
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. 333-86871), 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).
25
10.10 Registration Agreement, dated June 14, 1996 by and among the Registrant, Liberty Partners Holdings
11, L.L.C., Riverside Rudolph, L.L.C., Dr. Richard F. Spanier, Paul F. McLaughlin, and Dale Moorman
(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, the State Board of
Administration of Florida, Liberty Partners Holdings 11, L.L.C., Riverside Rudolph, L.L.C.,
Dr. Richard F. Spanier, Paul McLaughlin, Dale Moorman, Thomas Cooper and Robert Loiterman
(incorporated herein by reference to Exhibit (10.10) to the Registrant's Registration Statement on
Form S-1, as amended (SEC File No. 333-86871), filed on September 9, 1999).
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1 Financial Data Schedule
- -------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
b. Reports on Form 8-K
None
26
RUDOLPH TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Financial Statements:
Report of PricewaterhouseCoopers LLP, Independent Accountants........... F-2
Balance Sheets as of December 31, 1999 and 1998......................... F-3
Statements of Operations for the years ended December 31, 1999, 1998 and
1997................................................................... F-4
Stockholders' Equity (Deficit) for the years ended December 31, 1999,
1998 and 1997.......................................................... F-5
Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997................................................................... F-6
Notes to Financial Statements .......................................... F-7
Financial Statement Schedules:
Schedule of Valuation and Qualifying Accounts........................... F-18
F-1
Report of Independent Accountants
To the Stockholders and Board of Directors
of Rudolph Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows listed in the
index appearing under Item 14(a)(1) on page 25 present fairly, in all material
respects, the financial position of Rudolph Technologies, Inc. at December 31,
1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 25, presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and the 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, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 28, 2000
F-2
RUDOLPH TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
------------------
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................ $ 35,076 $ 431
Accounts receivable, less allowance of $300 in 1999 and
$294 in 1998............................................ 9,472 4,412
Inventories.............................................. 11,403 9,418
Income tax receivables................................... -- 270
Prepaid expenses and other assets........................ 525 210
-------- --------
Total current assets................................... 56,476 14,741
Property, plant and equipment, net......................... 3,106 2,631
Intangibles................................................ 2,859 3,295
Deferred income taxes...................................... 2,312 --
Other assets............................................... 194 454
-------- --------
Total assets........................................... $ 64,947 $ 21,121
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................... $ -- $ 9,600
Current portion of long-term debt........................ -- 2,500
Accounts payable......................................... 2,169 1,113
Accrued liabilities:
Commissions............................................ 669 564
Payroll and related expenses........................... 1,223 463
Warranty............................................... 475 342
Other liabilities........................................ 2,723 1,211
-------- --------
Total current liabilities.............................. 7,259 15,793
Long-term liabilities
Deferred compensation.................................... 78 103
Long-term debt........................................... -- 25,370
-------- --------
Total long-term liabilities............................ 78 25,473
-------- --------
Commitments and contingencies (Note 6)
Redeemable preferred stock (at liquidation value).......... -- 6,614
Stockholders' equity (deficit)
Class A common stock, $.0003 par value, no shares
authorized, issued and outstanding at December 31, 1999;
6,874,976 shares authorized, 4,802,291 shares issued and
outstanding at December 31, 1998........................ -- 2
Class B common stock, $.0003 par value no shares
designated, issued and outstanding at December 31, 1999;
3,035,705 shares authorized, 1,930,103 shares issued and
outstanding at December 31, 1998........................ -- --
Common stock, par value $.001 per share 50,000,000 shares
authorized, 14,684,706 issued and outstanding at
December 31, 1999; no shares authorized, issued and
outstanding at December 31, 1998........................ 15 --
Additional paid-in-capital............................... 85,025 3,424
Accumulated other comprehensive loss..................... (237) (153)
Accumulated deficit...................................... (27,193) (30,032)
-------- --------
Total stockholders' equity (deficit)................... 57,610 (26,759)
-------- --------
Total liabilities and stockholders' equity (deficit)... $ 64,947 $ 21,121
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
RUDOLPH TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Years Ended
December 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
Revenues..................................... $ 38,095 $ 20,106 $ 35,339
Cost of revenues............................. 18,301 13,179 13,903
---------- --------- ---------
Gross profit............................... 19,794 6,927 21,436
---------- --------- ---------
Operating expenses:
Research & development..................... 5,003 5,096 5,750
Selling, general & administrative.......... 9,588 7,077 9,475
Amortization............................... 436 4,208 4,201
---------- --------- ---------
Total operating expenses................. 15,027 16,381 19,426
---------- --------- ---------
Operating income (loss)...................... 4,767 (9,454) 2,010
Interest expense............................. 3,701 4,210 3,717
Other income................................. (21) (199) (92)
---------- --------- ---------
Income (loss) before income taxes and
extraordinary item.......................... 1,087 (13,465) (1,615)
Provision (benefit) for income taxes......... (2,179) 613 (614)
---------- --------- ---------
Income (loss) before extraordinary item...... 3,266 (14,078) (1,001)
Extraordinary item (net of tax of $5)........ 427 -- --
---------- --------- ---------
Net income (loss)............................ 2,839 (14,078) (1,001)
Preferred stock dividends.................... 508 507 468
---------- --------- ---------
Income (loss) available to common
stockholders................................ $ 2,331 $ (14,585) $ (1,469)
========== ========= =========
Income (loss) per share available to common
stockholders:
Basic:
Income (loss) before extraordinary item.... $ 0.41 $ (3.13) $ (0.38)
Extraordinary item......................... (0.05) -- --
Preferred stock dividends.................. (0.06) (0.11) (0.18)
---------- --------- ---------
Net income (loss) per share available to
common stockholders....................... $ 0.30 $ (3.24) $ (0.56)
========== ========= =========
Diluted:
Income (loss) before extraordinary item.... $ 0.31 $ (3.13) $ (0.38)
Extraordinary item......................... (0.04) -- --
Preferred stock dividends.................. (0.05) (0.11) (0.18)
---------- --------- ---------
Net income (loss) per share available to
common stockholders....................... $ 0.22 $ (3.24) $ (0.56)
========== ========= =========
Weighted average number of shares
outstanding:
Basic...................................... 7,880,622 4,503,396 2,617,373
Diluted.................................... 10,431,477 4,503,396 2,617,373
The accompanying notes are an integral part of the financial statements.
F-4
RUDOLPH TECHNOLOGIES, INC.
STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
Common Stock Other
------------------ Additional Comprehensive Accumulated Comprehensive
Shares Amount Paid in Capital Loss Deficit Total (Loss) Income
---------- ------ --------------- ------------- ----------- -------- -------------
Balance at December 31, 1996.. 2,617,373 $ 1 $ 1,260 $ (15) $(14,953) $(13,707)
Net loss...................... -- -- -- -- (1,001) (1,001) $ (1,001)
Accretion of preferred stock
dividend..................... -- -- (468) -- -- (468)
Currency translation.......... -- -- -- (151) -- (151) (151)
---------- --- ------- ----- -------- -------- --------
Comprehensive loss............ $ (1,152)
========
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 $ 2,839
Net income.................... -- -- -- -- 2,839 2,839
Accretion of preferred stock
dividend..................... (508) -- -- (508) (84)
Issuance of compensatory stock
option....................... 1,018 1,018
Currency Translation.......... (84) -- (84)
Comprehensive income..........
---------- --- ------- ----- -------- -------- --------
Balance at December 31, 1999.. 14,684,706 $15 $85,025 $(237) $(27,193) $ 57,610 $ 2,755
========== === ======= ===== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-5
RUDOLPH TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
For the Years Ended
December 31,
---------------------------
1999 1998 1997
-------- -------- -------
Cash flow from operating activities
Net income (loss)................................ $ 2,839 $(14,078) $(1,001)
Adjustment to reconcile net income (loss) to net
cash used in operating activities
Amortization and other adjustments to
intangibles.................................... 436 4,208 4,201
Amortization of unearned compensation........... 1,018 -- --
Depreciation.................................... 568 778 448
Extraordinary item.............................. 427 -- --
Provision for doubtful accounts................. 6 71 353
Gain on sale of property........................ -- (147) --
Decrease (increase) in assets:
Accounts receivable............................ (5,116) 1,199 (1,131)
Income tax receivable.......................... 270 288 (558)
Inventories.................................... (1,982) 889 (4,559)
Prepaid expenses and other..................... (408) (14) 394
Deferred income taxes.......................... (2,312) 1,263 (1,263)
Increase (decrease) in liabilities:
Accounts payable............................... 1,054 (36) 122
Accrued liabilities............................ 1,038 (1,447) 1,065
Other liabilities.............................. 1,448 154 (30)
-------- -------- -------
Net cash used in operating activities............. (714) (6,872) (1,959)
-------- -------- -------
Cash flows from investing activities
Purchase of property, plant and equipment........ (1,036) (986) (586)
Proceeds from disposal of property, plant and
equipment....................................... 51 82 --
-------- -------- -------
Net cash used in investing activities............. (985) (904) (586)
-------- -------- -------
Cash flows from financing activities
Principal borrowings on long-term debt........... 2,345 4,000 --
Principal payments on long-term debt............. (30,396) (2,000) (1,600)
Net borrowing under lines of credit.............. (9,600) 3,000 2,800
Capital Contribution............................. -- 3,000 --
Exercise of employee stock options............... 258 -- --
Redemption of preferred stock.................... (7,122) -- --
Proceeds from sale of common stock, net of
expenses........................................ 80,845 -- --
-------- -------- -------
Net cash provided by financing activities......... 36,330 8,000 1,200
-------- -------- -------
Effect of exchange rate changes on cash........... 14 18 (44)
-------- -------- -------
Net(decrease)increase in cash and cash
equivalents...................................... 34,645 242 (1,389)
Cash and cash equivalents at beginning of
period.......................................... 431 189 1,578
-------- -------- -------
Cash and cash equivalents at end of period....... $ 35,076 $ 431 $ 189
======== ======== =======
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest........................................ $ 3,275 $ 4,031 $ 3,939
Income taxes.................................... -- -- 1,257
The accompanying notes are an integral part of the financial statements.
F-6
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE 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. In connection with the initial public offering in November
1999, the Company was restructured and merged Rudolph Technologies, Inc. into
it's parent, Rudolph Holdings, creating one entity, Rudolph Technologies, Inc.
2. Summary Significant Accounting Policies:
A. Revenue Recognition:
Revenues from finished product sales are recognized at the time of shipment
to the customer, which principally occurs after the customer has tested or
approved the finished product. 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 and installation 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.
B. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
C. 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.
D. Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation of property
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
carry amount may not be recoverable. If the fair value is less than the
carrying
F-7
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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.
E. 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 carry 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.
F. Deferred Financing Costs:
Included in other assets were deferred financing costs of $431 at December
31, 1998, consisting of costs to obtain the working capital line of credit and
long-term debt. These costs were amortized on a basis which approximates the
interest method, over the life of the respective debt. Amortization expense
amounted to $90, $107 and $107 for each of the years ended December 31, 1999,
1998 and 1997. During 1999, an extraordinary loss of $427, net of tax was
recorded for the early extinguishment of debt. (see note 7)
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 $342 at December 31, 1999 and
1998, 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 state the demonstration units
at 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.
K. Translation of Foreign Currencies:
The Company has foreign operations in Korea and Taiwan, 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,
expense accounts and cash flow items at average exchange rates during the
period. Resulting translation
F-8
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
adjustments are recorded directly as a separate component of stockholders'
equity (deficit). 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' (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company provides additional
disclosure required by 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
Statement of Financial Accounting Standards No. 86. "Accounting for Costs of
Computer Software to Be Sold, Leased or Marketed" ("SFAS No. 86"). SFAS No. 86
requires that certain software product development costs ("Capitalized
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 incurred to date have been immaterial 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.
The fair values of the Company's debt, including current maturities, were
estimated using discounted cash flow analysis, based on the estimated current
incremental borrowing rates for similar types of securities. The carrying
amount of the Company's debt at December 31, 1998 approximated fair value.
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 Statement No. 137 "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--an amendment of FASB Statement No. 133", the
Financial Accounting Standards Board issued Statement No. 133 "Accounting for
Derivative Investments and Hedging Activities" ("SFAS 133"). Based on the
Company's current operations,
F-9
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
management has concluded that the future adoption of SFAS 133 will have no
impact on the Company's operations or financial position.
3. Property, Plant And Equipment:
Property, plant and equipment is comprised of the following:
December 31,
---------------
1999 1998
------- ------
Land and building...................................... $ 1,613 $1,609
Machinery and equipment................................ 865 754
Furniture and fixtures................................. 269 250
Computer equipment..................................... 964 592
Leasehold improvements................................. 811 312
------- ------
4,522 3,517
Accumulated Depreciation............................... (1,416) (886)
------- ------
Net Property, Plant and Equipment...................... $ 3,106 $2,631
======= ======
Depreciation expense amounted to $568, $778, and $448 for the years ended
December 31, 1999, 1998, and 1997, respectively.
4. Inventories:
Inventories are comprised of the following:
December 31,
--------------
1999 1998
------- ------
Materials................................................ $ 4,729 $3,664
Work-in-process.......................................... 4,937 3,722
Finished goods........................................... 1,737 2,032
------- ------
Total Inventories...................................... $11,403 $9,418
======= ======
The Company has established reserves of $575 and $413 at December 31, 1999
and 1998, respectively, for slow moving and obsolete inventory.
In the fourth quarter of 1998, the Company recorded a charge of $1,407 for
the writedown of inventory for excess parts, for older product lines and for
parts which design and engineering advancements rendered obsolete.
5. Intangibles:
Intangibles are comprised of the following:
December 31,
------------------
1999 1998
-------- --------
Purchased Technology............................... $ 22,731 $ 22,731
Goodwill........................................... 3,178 3,178
-------- --------
25,909 25,909
Accumulated Amortization........................... (23,050) (22,614)
-------- --------
Total Intangibles................................ $ 2,859 $ 3,295
======== ========
F-10
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Amortization of Intangibles expense amounted to $436, $4,208, and $4,201 for
the years ended December 31, 1999, 1998 and 1997, 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 $510, $302,
and $242 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company also leases certain equipment pursuant to operating leases,
which expire through 2001. Rent expense related to these leases amounted to
$64, $76, and $40 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Total future minimum lease payments under noncancelable operating leases as
of December 31, 1999 amounted to $503, $461, $372, $344 and $344 for the years
2000 to 2004, 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
$924, $398, and $30 for the years ended December 31, 1999, 1998 and 1997,
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, we are not involved in
any material legal proceedings.
F-11
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
7. Long-Term Debt:
Long-Term Debt is comprised of the following at December 31, 1998:
1998
--------
Senior term loan, due 2002, interest rate of prime plus
1.75%...................................................... $ 13,000
Subordinated term loan, due in 2003, interest rate of prime
plus 4%.................................................... 11,000
Junior Subordinated Note, due in 2001, with interest at
14%........................................................ 3,870
Senior revolving term loan, balance due in 2002, interest
rate of prime plus 1.5%.................................... 9,600
--------
37,470
Less current maturities..................................... (12,100)
--------
Total Long-Term Debt...................................... $ 25,370
========
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.
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 Class B common stock to employees at prices not less
than the fair value of the Class B common stock on the date of grant. These
options generally expire ten years from the date of grant and become
exercisable after nine years or sooner upon the achievement of certain
financial targets over a period of six years. 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 1998, there were 4,979 and 109,380
shares of common stock reserved for future grants under the Option Plan,
respectively.
Certain options issued under the Option Plan entitle the holders to purchase
shares of Class B 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. As of December 31, 1999, there were 300,000 shares available for
issuance under the ESPP.
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, there were 1,146,650 shares of common stock reserved for future
grants under the 1999 Plan.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," (SFAS 123) requires the disclosure of pro forma operating
results had the Company adopted the fair value method. Under
F-12
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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,
1999, 1998, and 1997 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 all periods. For purposes of pro
forma 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 $2,846, $(14,786), and $(1,510) for the
years ended December 31, 1999 and 1998, and 1997, respectively. The pro forma
basic net income (loss) per share would have been $0.36, $(3.28), and $(0.58)
for the years ended December 31, 1999, 1998, and 1997, respectively. The pro
forma diluted net income (loss) per share would have been $0.28, $(3.28), and
$(0.58) for the years ended December 31, 1999, 1998, and 1997, respectively.
The following tables summarize the stock option activity for the years ended
December 31, 1999, 1998, and 1997 and the stock option information as of
December 31, 1999:
Options Outstanding
---------------------------------------
Weighted Average
Number of Exercise Price Number
Shares per Share Exercisable
--------- ---------------- -----------
Balance at December 31, 1996.... 346,470 $ 0.57 36,448
Granted......................... 35,663 0.73 --
Canceled........................ -- -- --
--------- ------ --------
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 14.29 107,852
Exercised....................... (386,610) 0.67 (386,610)
Canceled........................ (18,451) 13.11 --
--------- ------ --------
Balance at December 31, 1999.... 1,531,662 $ 9.21 678,311
========= ====== ========
Stock option information as of December 31, 1999:
Options Vested and
Options Outstanding Exercisable
------------------------------------------------------------------
Weighted Avg.
Weighted Avg. Exercise
Exercise Options Remaining Price Number
Price Outstanding Contract Life per Share Exercisable
-------- ----------- ------------- ------------- -----------
$ 0.57 193,139 6.5 $ 0.57 193,100
0.73 380,772 8.5 0.73 380,810
0.56 104,401 9.6 0.56 104,401
16.00 853,350 9.9 16.00 --
------------- --------- --- ------ -------
$ 0.56-$16.00 1,531,662 9.1 $ 0.66 678,311
============= ========= === ====== =======
9. Redeemable Preferred Stock:
On June 14, 1996, the Company issued and 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. Holders of preferred stock
F-13
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
were entitled to receive cumulative dividends at an annual rate of 8% 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 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. 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.
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% to 15% 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 $170, $158 and $133 for the years
ended December 31, 1999, 1998 and 1997, 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, 1999, 1998 and 1997.
F-14
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
12. Income Taxes:
The components of income tax expense (benefit) are as follows:
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Current:
Federal................................... $ 40 $ (842) $ 557
State..................................... 93 (161) 141
------- ------- -------
133 (1,003) 698
Deferred:
Federal................................... (2,068) 1,549 (1,245)
State..................................... (244) 67 (67)
------- ------- -------
(2,312) 1,616 (1,312)
------- ------- -------
Total Income Tax Expense (Benefit)........ $(2,179) $ 613 $ (614)
======= ======= =======
Deferred tax assets are comprised of the following:
December 31,
-----------------
1999 1998
------- --------
Amortization of intangibles.......................... $ 6,211 $ 7,185
Deferred Interest.................................... 2,701 2,042
Inventory obsolescence reserve....................... 219 199
Fixed assets......................................... 97 25
Warranty............................................. 180 126
Accounts receivable.................................. 114 109
Research Credits..................................... 779 191
Other................................................ 224 138
Net operating loss carryforwards..................... 387 1,426
Less valuation allowance............................. (8,600) (11,441)
------- --------
Net deferred tax asset............................. $ 2,312 $ --
======= ========
During the year ended December 31, 1999, the valuation allowance decreased
approximately $2.8 million. Realization of deferred tax assets is dependant
upon generating sufficient taxable income prior to their expiration.
Approximately $2.3 million of the reduction was due to changes in economic
circumstances which made the utilization of deferred tax assets relating to
deferred interest and amortization of intangibles, more likely than not. With
respect to the remaining deferred tax assets, management currently believes it
is more likely than not that they will not be realized through future taxable
earnings. At December 31, 1998, the net deferred tax asset was reduced to zero
with a valuation allowance as a result of recurring losses and with the
uncertainty regarding the Company's ability to generate sufficient taxable
income. The Company has available at December 31, 1999 approximately $879 of
unused net operating loss carryforwards and carrybacks that may be applied
against future taxable income and that expire in the year 2018.
F-15
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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,
-----------------------------
1999 1998 1997
-------- -------- -------
Federal income tax provision (benefit)
at statutory rate.................... $ 370 $ (4,578) $(549)
State taxes........................... 132 (161) 141
Change in valuation allowance......... (2,841) 5,386 (1,295)
Other................................. 160 (34) 1,089
-------- -------- -------
Provision (benefit) for income taxes.. $ (2,179) $ 613 $ (614)
======== ======== =======
Effective tax rate.................... (200%) (5%) 38%
======== ======== =======
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 received from 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 $173, $200 and, $200 for the years ended
December 31, 1999, 1998 and 1997, respectively.
14. Geographic Reporting and Customer Concentration:
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Revenues from third parties:
United States............................ $17,959 $ 8,388 $12,031
Asia..................................... 10,798 8,380 20,468
Europe................................... 7,578 3,289 2,833
Other.................................... 1,760 49 7
------- ------- -------
Total.................................. $38,095 $20,106 $35,339
======= ======= =======
Customers comprising 10% or more of the
Company's total revenue for the period
indicated:
A........................................ 31.2% 19.8% 3.4%
B........................................ 6.3% 17.6% 29.9%
C........................................ 5.8% 15.3% 5.3%
D........................................ 6.0% 11.1% 0.0%
15. Earnings Per Share:
The Company has adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share ("FAS 128"), 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 FINANCIAL STATEMENTS--(Continued)
The computations of Basic EPS and Diluted EPS for the years ended December
31, 1999, 1998, and 1997 are as follows:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the year ended December 31, 1999
Net income......................... $ 2,839
Preferred Stock Dividends.......... (508)
--------
Basic EPS:
Income available to common
stockholders.................... 2,331 7,880,622 $ 0.30
Effect of dilutive stock
options......................... -- 2,550,855 (0.08)
-------- ---------- ------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions..................... $ 2,331 10,431,477 $ 0.22
======== ========== ======
For the year ended December 31, 1998
Net loss........................... $(14,078)
Preferred Stock Dividends.......... (507)
--------
Basic EPS:
Income available to common
stockholders.................... (14,585) 4,503,396 $(3.24)
Effect of dilutive stock
options......................... -- -- --
-------- ---------- ------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions..................... $(14,585) 4,503,396 $(3.24)
======== ========== ======
For the year ended December 31, 1997
Net loss........................... $ (1,001)
Preferred Stock Dividends.......... (468)
--------
Basic EPS:
Income available to common
stockholders.................... (1,469) 2,617,373 $(0.56)
Effect of dilutive stock
options......................... -- -- --
-------- ---------- ------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions..................... $ (1,469) 2,617,373 $(0.56)
======== ========== ======
For the years ended December 31, 1998 and 1997, the Company had outstanding
options and warrants to purchase an aggregate 3,033,208 and 917,084 shares of
common stock, respectively, were not included in the calculation of earnings
per share for such periods, due to the anti-dilutive nature of these
instruments.
F-17
RUDOLPH TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
RUDOLPH TECHNOLOGIES, INC.
SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS
Dollars 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
Description Period Expenses Accounts (net) Deductions of Period
----------- ------------ ---------- -------------- ---------- ----------
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
Year 1997
Allowance for doubtful
accounts............. 147 353 -- -- 500
Deferred tax asset
valuation allowance.. 7,159 -- -- 1,295 5,864
Inventory valuation... 540 -- -- -- 540
- -------
(a) Amounts written off as uncollectible
F-18
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 March 24, 2000
_____________________________________________ Executive Officer
Paul F. McLaughlin
/s/ Steven R. Roth Vice President, Chief March 24, 2000
_____________________________________________ Financial Officer
Steven R. Roth (Principal Financial
Officer and Principal
Accounting Officer)
/s/ David Belluck Director March 24, 2000
_____________________________________________
David Belluck
/s/ Daniel H. Berry Director March 24, 2000
_____________________________________________
Daniel H. Berry
/s/ Paul Craig Director March 24, 2000
_____________________________________________
Paul Craig
/s/ Stephen J. Fisher Director March 24, 2000
_____________________________________________
Stephen J. Fisher
/s/ Carl E. Ring, Jr Director March 24, 2000
_____________________________________________
Carl E. Ring, Jr
/s/ Richard F. Spanier Director March 24, 2000
_____________________________________________
Richard F. Spanier
/s/ Aubrey C. Tobey Director March 24, 2000
_____________________________________________
Aubrey C. Tobey