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| DELAWARE | 22-3531208 |
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| Incorporation or Organization) | Identification Number) |
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PART II OTHER INFORMATION
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| June 30, 2002 |
December 31, 2001 |
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| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ 67,878 | $ 94,642 | ||
| Short-term investments | 29,951 | - | ||
| Accounts receivable, net | 15,441 | 13,523 | ||
| Inventories | 22,622 | 22,695 | ||
| Prepaid expenses and other current assets | 3,547 | 3,435 | ||
| Total current assets | 139,439 | 134,295 | ||
| Net property, plant and equipment | 4,946 | 5,221 | ||
| Intangibles | 2,053 | 2,181 | ||
| Deferred taxes | 5,732 | 5,790 | ||
| Other assets | 1,239 | 311 | ||
| Total assets | $ 153,409 | $ 147,798 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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| Current liabilities: | ||||
| Accounts payable and accrued liabilities | $ 3,959 | $ 2,668 | ||
| Other current liabilities | 4,745 | 2,980 | ||
| Total current liabilities | 8,704 | 5,648 | ||
| Commitments and contingencies | ||||
| Stockholders' equity: | ||||
| Common stock | 16 | 16 | ||
| Additional paid-in capital | 135,657 | 134,315 | ||
| Accumulated other comprehensive loss | (195) | (304) | ||
| Retained earnings | 9,227 | 8,123 | ||
| Total stockholders' equity | 144,705 | 142,150 | ||
| Total liabilities and stockholders' equity | $ 153,409 | $ 147,798 |
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Three Months Ended |
Six Months Ended |
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2002 |
2001 |
2002 |
2001 |
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| Revenues | $ 13,118 | $ 23,088 | $ 25,156 | $ 53,649 | ||||
| Cost of revenues | 7,737 | 11,089 | 14,612 | 24,902 | ||||
| Gross profit |
5,381 |
11,999 |
10,544 |
28,747 |
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| Operating expenses: | ||||||||
| Research and development | 2,536 | 3,481 | 4,958 | 6,427 | ||||
| Selling, general and administrative | 2,178 | 2,760 | 4,587 | 7,501 | ||||
| Amortization | 64 | 85 | 128 | 169 | ||||
| Total operating expenses |
4,778 |
6,326 |
9,673 |
14,097 |
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| Operating income | 603 | 5,673 | 871 | 14,650 | ||||
| Interest income and other, net |
416 |
860 |
843 |
1,575 |
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| Income before income taxes | 1,019 | 6,533 | 1,714 | 16,225 | ||||
| Provision for income taxes | 363 | 2,416 | 610 | 6,006 | ||||
| Net income | $ 656 | $ 4,117 | $ 1,104 | $ 10,219 | ||||
| Earnings per share: | ||||||||
| Basic | $ 0.04 | $ 0.26 | $ 0.07 | $ 0.65 | ||||
| Diluted | $ 0.04 | $ 0.25 | $ 0.07 | $ 0.62 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 16,179,502 | 16,039,391 | 16,163,240 | 15,703,506 | ||||
| Diluted | 16,722,438 | 16,712,286 | 16,790,226 | 16,386,236 | ||||
| Six Months Ended | |||
| June 30, | |||
| 2002 | 2001 | ||
| Cash flows from operating activities: | |||
| Net income | $ 1,104 | $ 10,219 | |
| Adjustments to reconcile net
income to net cash provided by operating activities: |
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| Amortization | 128 | 169 | |
| Depreciation | 592 | 430 | |
| Tax benefit for exercise of employee stock options | 273 | 1,535 | |
| Provision for doubtful accounts | (26) | (50) | |
| Deferred income taxes | 58 | 1,716 | |
| Decrease (increase) in assets: | |||
| Accounts receivable | (1,838) | 334 | |
| Income taxes receivable | - | 1,349 | |
| Inventories | 204 | (1,530) | |
| Prepaid expenses and other | (1,372) | 196 | |
| Increase (decrease) in liabilities: | |||
| Accounts payable | 982 | (1,300) | |
| Accrued liabilities | 288 | (8) | |
| Income taxes payable | 261 | 593 | |
| Deferred revenue | 463 | 1,833 | |
| Other liabilities | 1,023 | (415) | |
| Net cash provided by operating activities | 2,140 | 15,071 | |
| Cash flows from investing activities: | |||
| Purchases of short-term investments | (29,687) | - | |
| Purchases of property, plant and equipment | (307) | (1,962) | |
| Net cash used in investing activities | (29,994) | (1,962) | |
| Cash flows from financing activities: | |||
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Proceeds from sale of common stock, net of expenses |
- | 42,031 | |
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Exercise of employee stock options and employee stock purchase plan |
1,069 | 1,808 | |
| Net cash provided by financing activities | 1,069 | 43,839 | |
| Effect of exchange rate changes on cash | 21 | (48) | |
| Net increase (decrease) in cash and cash equivalents | (26,764) | 56,900 | |
| Cash and cash equivalents at beginning of period | 94,642 | 29,736 | |
| Cash and cash equivalents at end of period | $ 67,878 | $ 86,636 | |
The accompanying unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the "Company") and in the opinion of management reflect all adjustments, consisting only of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from those amounts. The results for the three and six month periods ended June 30, 2002 are not necessarily indicative of results to be expected for the entire year. This financial information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The Company has evaluated its investment policies consistent with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and determined that all of its investment securities are to be classified as available-for-sale. Available for sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated other comprehensive loss." Realized gains and losses, interest and dividends on available-for-sale securities are included in interest income and other, net. Gross unrealized gains on available-for-sale securities were $253 and gross unrealized losses on available-for-sale securities were $10 as of June 30, 2002.
Accounts receivable are net of the allowance for doubtful accounts of $302 and $328 as of June 30, 2002 and December 31, 2001, respectively.
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
| Materials | $ 13,484 |
$ 15,048 | ||||||
| Work-in-process | 8,269 |
5,637 | ||||||
| Finished goods | 869 |
2,010 | ||||||
| Total inventories | $ 22,622 |
$ 22,695 |
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June 30, December 31, 2002 2001 Land and building $ 2,599
$ 2,611 Machinery and equipment 1,436
1,410 Furniture and fixtures 1,213
1,181 Computer equipment 2,402
2,139 Leasehold improvements 816
789 8,466
8,130 Accumulated depreciation (3,520)
(2,909) Net property, plant and equipment $ 4,946
$ 5,221
NOTE 6. Comprehensive Income
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ 656 | $ 4,117 | $ 1,104 | $ 10,219 | ||||||||||||
| Denominator: | ||||||||||||||||
| Basic earnings per share - weighted average shares outstanding | 16,179,502 | 16,039,391 | 16,163,240 | 15,703,506 | ||||||||||||
| Effect of potential dilutive securities: | ||||||||||||||||
| Employee stock options - dilutive shares | 542,936 | 672,895 | 626,986 | 682,730 | ||||||||||||
| Diluted earnings per share - weighted average shares outstanding | 16,722,438 | 16,712,286 | 16,790,226 | 16,386,236 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ 0.04 | $ 0.26 | $ 0.07 | $ 0.65 | ||||||||||||
| Diluted | $ 0.04 | $ 0.25 | $ 0.07 | $ 0.62 | ||||||||||||
Three Months Ended
Six Months Ended
June 30,
June 30,
2002 2001 2002 2001 United States $ 5,483 $ 7,839 $ 11,400 $ 26,473 Asia 4,732 8,402 9,193 18,703 Europe 2,903 4,934 4,563 6,560 Other - 1,913 - 1,913 Total $ 13,118 $ 23,088 $ 25,156 $ 53,649
Six Months Ended June 30, 2002 2001 Customer A 26.7% 40.4%
NOTE 9. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of SFAS No. 142 did not have a significant impact on the Company's financial position and results of operations for the three and six months ended June 30, 2002. The Company's recorded goodwill balance at June 30, 2002 is immaterial to the Company's financial position and amortization of goodwill was immaterial for the three and six months ended June 30, 2001. The Company's intangible assets have definite useful lives and such lives were not impacted by the adoption of SFAS No. 142. Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization for the twelve months ended December 31, 2002 and the next four succeeding years is approximately $256 per year.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (effective for fiscal years beginning after June 15, 2002). SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long lived assets and retirement of assets. The Company does not expect the adoption of SFAS No. 143 to have a significant impact on its financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" (effective for the Company on January 1, 2002). SFAS No. 144 requires that all long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reporting continuing operations or in discontinued operations. SFAS No. 144, replaces Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". The adoption of SFAS No. 144 did not have a significant impact on the Company's financial position and results of operations for the three and six months ended June 30, 2002.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145," Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No 13 and Technical Corrections". SFAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended SFAS 13 for certain sales-leaseback and sublease accounting. The Company is required to adopt the provisions of SFAS 145 effective January 1, 2003. This statement is not expected to impact the Company as it is now constituted.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146," Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company is required to adopt the provisions of SFAS 146 effective for exit or disposal activities initiated after December 31, 2002. This statement is not expected to impact the Company as it is now constituted.
Note 10. Subsequent Events
On July 23, 2002, the Company announced that it has entered into a definitive agreement to acquire privately held ISOA, a defect control company based in Richardson, Texas. The acquisition is an all cash transaction valued at approximately $27.5 million.
The Company defers costs directly attributable to proposed business combinations. Direct costs incurred in connection with unsuccessful attempts to acquire an enterprise are charged to expense in the period in which the plans to acquire the enterprise are abandoned. At June 30, 2002, the Company has deferred approximately $900,000 of direct acquisition costs which are reflected in "other assets".
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, intangible assets, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by our Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. Revenue is recognized upon shipment provided that there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured. Certain sales of our products are sold and accounted for as multiple element arrangements, consisting of the sale of the product and installation. We generally recognize revenue upon delivery of the product, which is prior to installation, as the actions required to perform the installation are deemed to be perfunctory. Installation is deemed to be perfunctory based on our sales and installation history for similar products and customers and the fact that other vendors can and have performed the installation. If in the future we do not meet the criteria that we currently use to determine the perfunctory nature of installation or such criteria changes, we may have to recognize revenue at a later date. When customer acceptance is subjective and not obtained prior to shipment, we defer a portion of the product revenue until such time as positive affirmation of acceptance has been obtained from the customer. Customer acceptance is generally based on our products meeting published performance specifications. The amount of revenue allocated to the shipment of products is done on a residual method basis. Under this method, the total arrangement value is allocated first to undelivered contract elements, based on their fair values, with the remainder being allocated to product revenue. The fair value of installation services is based upon billable hourly rates and the estimated time to complete the service. Revenue related to undelivered installation services is deferred until such time as installation is completed at the customer's site.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments or our assumptions are otherwise incorrect, additional allowances may be required.
Excess and Obsolete Inventory. We write down our excess and obsolete inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product life-cycles, product demand and market conditions. If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Warranties. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and any valuation allowance recorded against our deferred tax assets. At June 30, 2002, we had no valuation allowance established against our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance which could materially impact our financial position and results of operations.
During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in price from approximately $200,000 to $1.0 million per system and our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results.
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenues
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers. We do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of components exposes us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead time required for shipments of some of our components can be as long as four months. In addition, the lead time required to qualify new suppliers for lasers could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems. Further, a significant increase in the price of one or more of these components or subassemblies included in our systems could seriously harm our results of operations.
Our operating results have in the past varied and probably will in the future continue to vary significantly from quarter to quarter, causing volatility in our stock price
- 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.
Our revenue may vary significantly each quarter due to relatively small fluctuations in our unit sales
During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in price from approximately $200,000 to $1.0 million per system and our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results. This, in turn, could cause fluctuations in the market price of our common stock.
Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline
Variations in the length of our sales cycles could cause our revenues, and thus our business, financial condition and operating results, to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our film metrology systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process. The length of time it takes for us to make a sale depends upon many factors, including:
- the efforts of our sales force and our independent distributor;
- the complexity of the customer's fabrication processes;
- the internal technical capabilities and sophistication of the customer;
- the customer's budgetary constraints; and
- the quality and sophistication of the customer's current metrology equipment.
Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer, if ever, varies widely in length. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from six to 15 months. Sometimes our sales cycles can be much longer, particularly with customers in Japan. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.
If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period before purchasing any more of our systems. The number of additional products a customer purchases, if any, depends on many factors, including a customer's capacity requirements. The period between a customer's initial purchase and any subsequent purchases can vary from six months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and possibly in our stock price.
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
If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry we will lose market share to our competitors
We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new film metrology systems that meet the performance and price demands of semiconductor device manufacturers. We must also continue to refine our current systems so that they remain competitive. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.
Even if we are able to successfully develop new products, if these products do not gain general market acceptance we will not be able to generate revenues and recover our research and development costs
Metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel and identify and eliminate metrology system design flaws. We recently developed our S and S-ultra 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 S and S-ultra systems could have a negative effect on sales of our other transparent thin film metrology systems, including our SpectraLASER and FOCUS systems, and the prices we could charge for these systems. We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our S and S-ultra systems. This diversion of resources could have a further negative effect on sales of our current systems.
If our relationships with our large customers deteriorate, our product development activities could be jeopardized
The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems will be impaired.
Our ability to reduce costs is limited by our ongoing need to invest in research and development
Our industry is characterized by the need for continual investment in research and development as well as customer service and support. As a result of our need to maintain our spending levels in these areas, our operating results could be materially harmed if our revenues fall below expectations. In addition, because of our emphasis on research and development and technological innovation, our operating costs may increase further in the future.
We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage
Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products. We own or have licensed a number of patents relating to our transparent and opaque thin film metrology systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable. In addition, the patents we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Third parties may also design around these patents.
In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees. However, in the event that these agreements may be breached, we may not have adequate remedies. Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties.
Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important intellectual property rights by us
Our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time we may receive communications from third parties asserting that our products or systems infringe, or may infringe, the proprietary rights of these third parties. These claims of infringement may lead to protracted and costly litigation which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction. Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenues. We may also be required to obtain a license from the third party or cease activities utilizing the third party's proprietary rights. We may not be able to enter into such a license or such license may not be available on commercially reasonable terms. The loss of important intellectual property rights could therefore prevent our ability to sell our systems, or make the sale of such systems more expensive for us.
Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, has in the past resulted and may in the future result in costly and time-consuming litigation
We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or other proprietary rights. In addition, we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties.
Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States
In 2001, 53.7% of our revenue was derived from sales in foreign countries, including certain countries in Asia such as Taiwan, Korea, Singapore and Japan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U. S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent prosecution process, the contents of a patent are published upon filing which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. There is a risk that our means of protecting our proprietary rights may not be adequate in these countries. For example, our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.
Our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices
The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets we serve. We principally compete with KLA-Tencor and Therma-Wave. We compete to a lesser extent with companies such as Dai Nippon Screen, Nanometrics and Sopra. Each of our product lines also competes with products that use different metrology techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products which could impair sales of our products. Moreover, there may be significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. While we believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers, our larger competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers.
Many of our competitors are investing heavily in the development of new systems that will compete directly with ours. We have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. Such product introductions by our competitors would likely cause us to decrease the prices of our systems and increase the level of discounts we grant our customers.
Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win customers from our competitors even if our systems are superior to theirs
We believe that once a semiconductor device manufacturer has selected one vendor's capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor's equipment, for the life of the application. Once a vendor's equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor's equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer's expense of switching to our systems, it will be difficult for us to achieve significant sales to that customer once it has selected another vendor's capital equipment for an application.
We must attract and retain key personnel with knowledge of semiconductor device manufacturing and metrology equipment to help support our future growth, and competition for such personnel in our industry is high
Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel, who would be extremely difficult to replace, could harm our business and operating results. During downturns in our industry, we have often experienced significant employee attrition, and we may experience further attrition in the event of a future downturn. Although we have employment and noncompetition agreements with key members of our senior management team, including Messrs. McLaughlin, Loiterman and Roth, these individuals or other key employees may nevertheless leave our company. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.
We manufacture all of our systems at a single facility, and any prolonged disruption in the operations of that facility could have a material adverse effect on our revenues
We produce all of our systems in our manufacturing facility located in Ledgewood, New Jersey. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our revenues could be adversely affected.
We rely upon an independent distributor for a significant portion of our sales, and a disruption in our relationship could have a negative impact on our sales in Japan
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
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
Since a substantial portion of our revenues are derived from sales in other countries yet are denominated in U.S. dollars, we could experience a significant decline in sales or experience collection problems in the event the dollar becomes more expensive relative to local currencies
If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner
If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease
Provisions of our charter documents and Delaware law could discourage potential acquisition proposals and could delay, deter or prevent a change in control of our company
These provisions provide for:
- a prohibition on stockholder actions through written consent;
- a requirement that special meetings of stockholders be called only by our chief executive officer or board of directors;
- advance notice requirements for stockholder proposals and director nominations by stockholders;
- limitations on the ability of stockholders to amend, alter or repeal our by-laws; and
- the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
(a) An election of directors was held with the following individuals being elected to the Board of Directors:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. On May 31, 2002, We filed a Current Report on Form 8-K to report, under Item 4, the change in its independent accountants from Arthur Andersen LLP to KPMG LLP.
2. On August 14, 2002, We filed a Current Report on Form 8-K. This report contained Certifications that were furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Rudolph Technologies, Inc.