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


FORM 10-Q

(MARK ONE)

   [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934
             For the quarterly period ended: March 31, 2003

OR

    [_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934
             For the transition period from              to
 
Commission File No. 000-27965
 
 
RUDOLPH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE 22-3531208
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
 
One Rudolph Road,
Flanders, New Jersey  07836
(Address of principal executive offices, including zip code)
 
(973) 691-1300
(Registrant's telephone number, including area code)
 
 


 

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [_]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [_]

        The number of outstanding shares of the Registrant's Common Stock on May 9, 2003 was 16,369,564.

 

 

PART I    FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements (unaudited)
 
Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures

 

PART II    OTHER INFORMATION

Item 6.
Exhibits and Reports on Form 8-K

 

 

 

 

 

 

 

 

 

 


 

 

PART I   FINANCIAL INFORMATION
Item 1.   Financial Statements
 
RUDOLPH TECHNOLOGIES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
 
 
March 31,
2003
December 31,
2002
ASSETS
Current assets:
     Cash and cash equivalents $    39,371 $  42,047
     Short-term investments 31,267 31,223
     Accounts receivable, net 18,127 16,142
     Inventories 30,303 30,488
     Prepaid expenses and other current assets 3,339 4,033
          Total current assets 122,407 123,933
Net property, plant and equipment 7,270 7,454
Goodwill 13,209 13,209
Identifiable intangible assets, net 11,037 11,256
Deferred income taxes 5,299 5,299
Other assets 710 812
          Total assets $ 159,932 $ 161,963

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities $     4,806 $     6,502
     Other current liabilities 11,369 11,380
          Total current liabilities 16,175 17,882
Commitments and contingencies
Stockholders' equity:
     Common stock 16 16
     Additional paid-in capital 137,671 137,668
     Accumulated other comprehensive loss (797) (295)
     Retained earnings 6,867 6,692
          Total stockholders' equity 143,757 144,081
          Total liabilities and stockholders' equity $  159,932 $ 161,963
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 

 


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

Three Months Ended
March 31,

2003

2002

Revenues $  14,505 $   12,038
Cost of revenues 8,389 6,875
          Gross profit 6,116

5,163

Operating expenses:
          Research and development 3,438 2,422
          Selling, general and administrative 2,873 2,409
          Amortization 219 64
                    Total operating expenses 6,530

4,895

Operating (loss) income (414) 268
Interest income and other, net 642

426

Income before income taxes 228 694
Provision for income taxes 53 247
Net income $   175 $       447
Earnings per share:
    Basic $     0.01 $     0.03
    Diluted $    0.01 $     0.03
Weighted average shares outstanding:
     Basic 16,331,068 16,145,675
     Diluted 16,546,599 16,845,390
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.

 

 

 

 

 


 
RUDOLPH TECHNOLOGIES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Three Months Ended
March 31,
2003 2002
Cash flows from operating activities:
     Net income $  175 $  447
    Adjustments to reconcile net income to net cash used in
        operating activities:
          Amortization 219 64
          Depreciation 344 293
          Tax benefit from sale of shares through employee stock plans - 273
          Provision for doubtful accounts 65 3
          Deferred income taxes - 31
          Decrease (increase) in assets:
               Accounts receivable (2,040) (2,820)
               Income taxes receivable 161 (76)
               Inventories 179 2,033
               Prepaid expenses and other 418 (80)
          Increase (decrease) in liabilities:
               Accounts payable (1,371) (425)
               Accrued liabilities (329) (31)
               Income taxes payable (70) -
               Deferred revenue 712 80
               Other liabilities (648) (89)
                         Net cash used in operating activities (2,185) (297)
Cash flows from investing activities:
          Purchases of short-term investments (340) (29,313)
          Purchases of property, plant and equipment (160) (113)
                         Net cash used in investing activities (500) (29,426)
Cash flows from financing activities:
          Proceeds from sales of shares through employee stock plans 3 645
                         Net cash provided by financing activities 3 645
Effect of exchange rate changes on cash 6 (6)
Net decrease in cash and cash equivalents (2,676) (29,084)
Cash and cash equivalents at beginning of period 42,047 94,642
Cash and cash equivalents at end of period $   39,371 $   65,558
 
 
 
 
The accompanying notes are an integral part of these financial statements.

 

 
 
RUDOLPH TECHNOLOGIES, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
 
 
NOTE 1.    Basis of Presentation

        The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the "Company") and in the opinion of management reflect all adjustments, consisting only of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America.  Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Actual amounts could differ materially from those amounts.  The interim results for the three month period ended March 31, 2003 are not necessarily indicative of results to be expected for the entire year.  This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

NOTE 2:   Business Combinations

        On September 25, 2002, the Company acquired all of the outstanding stock of ISOA, Inc., a Texas corporation (ISOA), through a merger of Oasis Acquisition, Inc., a wholly owned subsidiary of the Company, with and into ISOA, with ISOA as the surviving corporation, renamed Yield Metrology Group (YMG).  YMG is a spin-off from Texas Tech University's International Center for Informatics Research.  Over the past 16 years, YMG has licensed its technology for use in the semiconductor industry and recently began transitioning to a semiconductor capital equipment supplier.  YMG's core technologies are knowledge-based algorithms used in wafer macro-defect detection and classification.  Customers in Asia, Europe and the U.S. are currently using its recently introduced WaferView family of tools.   The Company believes YMG's technology will significantly expand its product offering and provide additional value to its customers.  YMG will continue to maintain its offices in Richardson, Texas.  The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of YMG have been included in the Company's consolidated financial statements since the date of acquisition.

        The purchase consideration for YMG, including direct acquisition costs, was $25,235 in cash.  The purchase price has been allocated to the net assets acquired and liabilities assumed based upon their respective fair market values.

        The allocation of the purchase consideration to the assets acquired and liabilities assumed follows:

Cash $ 166
Accounts receivable 1,623
Inventories 1,413
Property, plant and equipment 2,838
Other assets 445
Accounts payable and accrued liabilities (1,684)
Deferred taxes (817)
Other liabilities (4,945)
Identifiable intangible assets 13,400
Goodwill 12,796
$ 25,235

        The excess of the purchase price over the fair value of the net assets acquired and liabilities assumed was allocated to goodwill.  The total goodwill of $12,796, none of which is deductible for tax purposes, is not being amortized in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets."  All remaining and future acquired goodwill will be subject to an impairment test each year using a fair-value-based approach pursuant to SFAS No. 142.  Identifiable intangible assets include patented technology and in-process research and development (IPRD).   The Company is amortizing the patented technology of approximately $9,900 on a straight-line basis over its estimated remaining useful life of 16 years.  The amount allocated to IPRD of $3,500 is related to automated defect inspection technology to be used in stand alone and integrated metrology equipment.  Such amount was charged to expense at the acquisition date as the IPRD had not reached technological feasibility and had no alternative future use.

        The Company used the income approach to estimate the fair value of the developed technology and IPRD.  The income approach measures the value of an asset by the present value of its future economic benefits.  Value indications are developed in this technique by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the asset.   The discount rate selected is generally based on rates of return available from alternative investments of similar type and risk as of September 25, 2002.  The income approach was deemed to be an appropriate method of valuation for these assets, since the income approach focuses on the ability of the assets to generate future earnings.

        The following unaudited pro forma consolidated financial information presents the combined results of operations of the Company and YMG as if the acquisition occurred at the beginning of the periods presented, after giving effect to certain adjustments, including amortization expense.  The unaudited pro forma consolidated financial information does not necessarily reflect the results of operations that would have occurred had the acquisition been completed as of the dates indicated or of the results that may be obtained in the future.

Three Months Ended
March 31, 2002

  (unaudited)
    

Revenues

$  14,403

Net income

$       607

Earnings per share:

    Basic

$      0.04

    Diluted

$      0.04

NOTE 3.   Short-Term Investments

        The Company has evaluated its investment policies consistent with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and determined that all of its investment securities are to be classified as available-for-sale.  Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated other comprehensive loss."  Realized gains and losses, interest and dividends on available-for-sale securities are included in interest income and other, net.  Net realized gains were $328 for the three months ended March 31, 2003.  Net realized losses were $79 for the three months ended March 31, 2002.   Gross unrealized gains on available-for-sale securities were $395 and $562 as of March 31, 2003 and December 31, 2002, respectively.  Gross unrealized losses on available-for-sale securities were $12 and $4 as of March 31, 2003 and December 31, 2002, respectively.

NOTE 4.    Identifiable Intangible Assets

        Identifiable intangible assets as of March 31, 2003 are as follows:

Gross Carrying
Amount
Accumulated
Amortization
Purchased technology

$     22,731

$        21,284
Patented technology (Note 2)

9,900

310
     Total

$     32,631

$     21,594

        Identifiable intangible assets as of December 31, 2002 are as follows:

Gross Carrying
Amount
Accumulated
Amortization
Purchased technology

$     22,731

$        21,220
Patented technology

9,900

155
     Total

$     32,631

$     21,375

      Intangible asset amortization expense for the three months ended March 31, 2003 and 2002 was $219 and $64, respectively.  Assuming no change in the gross carrying value of identifiable intangible assets, the estimated amortization expense for the twelve months ending December 31, 2003 and for each of the next five years is $876.

NOTE 5.   Accounts Receivable

        Accounts receivable are net of the allowance for doubtful accounts of $315 and $250 as of March 31, 2003 and December 31, 2002, respectively.

NOTE 6.    Inventories
 
March 31, December 31,
2003 2002
Materials

$  16,454

$  16,530
Work-in-process

11,046

11,622
Finished goods

2,803

2,336
     Total inventories

$  30,303

$  30,488

 
      
 
NOTE 7.   Property, Plant and Equipment
March 31, December 31,
2003 2002
Land and building

$  5,014

$   4,968
Machinery and equipment

1,513

1,502
Furniture and fixtures

1,411

1,393
Computer equipment

2,815

2,770
Leasehold improvements

1,013

979

11,766

11,612
Accumulated depreciation

(4,496)

(4,158)
     Net property, plant and equipment

$   7,270

$  7,454

 

NOTE 8.   Warranty Reserves

 

        The Company generally provides a warranty on its products for a period of twelve to fifteen months against defects in material and workmanship.  The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized.  The Company’s estimate is based primarily on historical experience.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

 

Changes in the Company’s warranty reserves are as follows:

 

 

 

Three months ended
March 31,

 

2003

2002

Balance, beginning of the period

 

$     1,120

 

$     972

 

Provision for warranties issued during the period

 

255

 

222

 

Settlements made during the period

 

(293

)

(278

)

Balance, end of the period

 

$     1,082

$     916

 

 

NOTE 9.   Comprehensive (Loss) Income

        The disclosures required by SFAS No. 130, "Reporting Comprehensive Income," have been included below.  The difference between net income and comprehensive (loss) income for the Company is due to currency translation adjustments and unrealized gain (loss) on investments.

        The components of comprehensive (loss) income were as follows:

       
March 31, March 31,
2003 2002
Net income

$       175

$     447
Change in net unrealized gains on
   investments

(298)

(402)
Change in currency translation adjustments

(204)

28
     Total

$    (327)

$      73

 
NOTE 10.   Earnings Per Share
 
        Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period.  Potentially dilutive common equivalent shares consist of stock options for the 2003 and 2002 periods.  During the three months ended March 31, 2003 and 2002, there were stock options with exercise prices above the average fair market value of the Company's common stock for the respective periods which were excluded from the computation of diluted earnings per share due to the anti-dilutive nature of these options.  For the three months ended March 31, 2003 and 2002, the weighted average number of stock options excluded from the computation of diluted earnings per share were 1,908,989 and 426,960, respectively.
 
        The Company's basic and diluted earnings per share amounts are as follows:

 

Three Months Ended
March 31,
2003 2002
Numerator:
     Net income $    175 $      447
Denominator:
     Basic earnings per share -
        weighted average shares outstanding
16,331,068 16,145,675
     Effect of potential dilutive securities:
        Employee stock options - dilutive
        shares
215,531 699,715
     Diluted earnings per share -
        weighted average shares outstanding
16,546,599 16,845,390
Earnings per share:
     Basic $    0.01 $     0.03
     Diluted $    0.01 $     0.03

 

NOTE 11.   Stock-Based Compensation

        At March 31, 2003, the Company has stock-based employee compensation plans.  The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.  As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceed the exercise price.   No stock-based employee compensation cost is reflected in net income, as all options are granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The Company has adopted the disclosure standards of SFAS No. 123, "Accounting for Stock-Based Compensation," which requires the Company to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method of accounting for stock options as defined in SFAS No. 123 had been applied.  The following table illustrates the effect on net income and per share amounts if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

Three Months Ended

March 31,

2003 2002
Net income, as reported $         175 $          447
Deduct: Total stock-based employee compensation expense
    determined under fair value based method, net of related
    income tax benefits

1,264

1,075
Pro forma net loss $  (1,089) $       (628)
Net income (loss) per share:
    Basic-as reported $         0.01 $         0.03
    Basic-pro forma $      (0.07) $      (0.04)
    Diluted-as reported $         0.01 $         0.03
    Diluted-pro forma $      (0.07) $      (0.04)

          The fair value of each stock option granted during the three month periods ended March 31, 2003 and 2002 are estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

March 31,
Employee Stock Options: 2003 2002

Expected life (years)

5.0 5.0

Expected volatility

85.0% 85.0%

Expected dividend yield

0.0% 0.0%

Risk-free interest rate

3.8% 3.8%

Weighted average fair value of options granted during the period

$   9.35 $   25.27
                                        
March 31,
Employee Stock Purchase Plan Shares: 2003 2002

Expected life (years)

1.3 0.7

Expected volatility

85.0% 95.0%

Expected dividend yield

0.0% 0.0%

Risk-free interest rate

1.7% 3.5%

Weighted average fair value of options granted during the period

$   8.85 $   13.21

 

NOTE 12.   Geographic Reporting and Customer Concentration

        For geographical reporting, revenues are attributed to the geographic location in which the customer is located.  Revenue by geographic region is as follows: 

Three Months Ended

March 31,

2003

2002

United States

$   5,278

$  5,685

Asia

4,678

4,691

Europe

4,549

1,662

     Total

$  14,505

$ 12,038

        Customers comprising 10% or more of revenue:

Three Months Ended
March 31,
2003 2002
Customer A 47.3% 27.6%
Customer B - 18.0%
Customer C - 16.5%
Customer D - 11.2%

 

NOTE 13.   Recent Accounting Pronouncements        

         In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations."  SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets.  The Company also records a corresponding asset which is depreciated over the life of the asset.  Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.  The Company adopted SFAS No. 143 on January 1, 2003.  The adoption did not have any effect on the Company's consolidated financial statements.

        In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."   This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting.   EITF Issue No. 00-21 will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or the Company may elect to report the change in accounting as a cumulative-effect adjustment.  The Company is reviewing EITF Issue No. 00-21 and has not yet determined the impact this issue will have on its consolidated operating results and financial position.

       In November 2002, the FASB issued Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to   Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34."  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim annual financial statements about its obligations under guarantees issued.  The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken.  The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and the adoption of this interpretation did not have a material effect on the Company’s consolidated financial statements.

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation  requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with variable interest entities created prior to January 31, 2003, the provisions of this interpretation are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003.  The provisions of this interpretation are effective immediately for all arrangements entered into with new variable interest entities created after January 31, 2003. The company has not invested in any  variable interest entities created after January 31, 2003.

 

 

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

        Certain statements in this quarterly report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  In addition, we may, from time to time, make oral forward looking statements.  Forward looking statements may be identified by the words "anticipate", "believe", "expect", "intend", "will" and similar expressions, as they relate to us or our management.  These statements include, without limitation, the statements that (i) we expect demand for our products to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume, (ii) we anticipate that our effective tax rate for our current year to be approximately 23% and (iii) we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.

        The forward looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Actual results may differ materially from those projected in such forward looking statements due to a number of factors, risks and uncertainties, including the risk factors set forth in this current report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2002.  We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this quarterly report.

Critical Accounting Policies

        Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  We review the accounting policies we use in reporting our  financial results on a regular basis.   The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, intangible assets, income taxes and warranty obligations.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions.  These estimates and judgments are reviewed by management on an ongoing basis, and by the Audit Committee at the end of each quarter prior to the public release of our financial results.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition.   Revenue is recognized upon shipment provided that there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured.  Certain sales of our products are sold and accounted for as multiple element arrangements, consisting of the sale of the product and installation.  We generally recognize revenue upon delivery of the product, which is prior to installation, as the actions required to perform the installation are deemed to be perfunctory.   Installation is deemed to be perfunctory based on our sales and installation history for similar products and customers and the fact that other vendors can and have performed the installation.  When customer acceptance is subjective and not obtained prior to shipment, we defer a portion of the product revenue until such time as positive affirmation of acceptance has been obtained from the customer.  Customer acceptance is generally based on our products meeting published performance specifications.  The amount of revenue allocated to the shipment of products is done on a residual method basis.  Under this method, the total arrangement value is allocated first to undelivered contract elements, based on their fair values, with the remainder being allocated to product revenue.  The fair value of installation services is based upon billable hourly rates and the estimated time to complete the service.  Revenue related to undelivered installation services is deferred until such time as installation is completed at the customer's site.

       Allowance for Doubtful Accounts.   We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments or our assumptions are otherwise incorrect, additional allowances may be required.

        Excess and Obsolete Inventory.   We write down our excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product life-cycles, product demand and market conditions.  If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

        Long-Lived Assets and Acquired Intangible Assets.  We periodically review long-lived assets, other than goodwill, for impairment whenever events changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Goodwill, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, is reviewed for possible impairment at least annually during the fourth quarter for each year.  A review of goodwill may be initiated prior to conducting the annual analysis if events or changes in circumstances indicate that the carrying value of goodwill may be impaired.  Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and the impairment of such long-lived assets, if any, could have a material effect on our consolidated financial statements.

        Warranties.    We provide for the estimated cost of product warranties at the time revenue is recognized.  While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure.  Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

        Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes.   These temporary differences result in deferred tax assets, which are included within our consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.   Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and any valuation allowance recorded against our deferred tax assets.  At March 31, 2003, we had no valuation allowance established against our deferred tax assets.  The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will be recoverable.  In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

Impact of Recent Accounting Pronouncements

       In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations."  SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets.  We also record a corresponding asset which is depreciated over the life of the asset.  Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.   We adopted SFAS No. 143 on January 1, 2003.  The adoption did not have any effect on our consolidated financial statements.

       In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."  This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting.  EITF Issue No. 00-21 will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or we may elect to report the change in accounting as a cumulative-effect adjustment.  We are reviewing EITF Issue No. 00-21 and have not yet determined the impact this issue will have on our consolidated operating results and financial position.

       In November 2002, the FASB issued Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to   Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34."  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim annual financial statements about its obligations under guarantees issued.  The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken.  The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and the adoption of this interpretation did not have a material effect on our consolidated financial statements.

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation  requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. For arrangements entered into with variable interest entities created prior to January 31, 2003, the provisions of this interpretation are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003.  The provisions of this interpretation are effective immediately for all arrangements entered into with new variable interest entities created after January 31, 2003.  We have not invested in any  variable interest entities created after January 31, 2003.

Results of Operations for the Three Month Periods Ended March 31, 2003 and 2002

        During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems.  Our transparent film measurement systems range in price from approximately $30,000 to $1.0 million per system, our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system and our macro-defect detection systems range in price from approximately $650,000 to $1.4 million per system.  Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results.

        Revenues.    Our revenues are derived from the sale of our metrology systems, licensing our defect technology, provision of services and sale of spare parts.  Our revenues were $14.5 million for the three month period ended March 31, 2003, compared to $12.0 million for the same period in the prior year, representing an increase of 20%.  This year over year change was primarily due to revenues generated from YMG, acquired on September 25, 2002.

        Our business continues to be impacted by the slowdown in the semiconductor industry and in economies worldwide.  We have been further affected by the cyclical nature of the semiconductor industry with recurring periods of oversupply and overcapacity.  These factors have resulted in a downturn in demand for our products.  We currently do not have visibility as to the length or severity of the downturn.  We do expect demand for our products to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume.  There has been no current evidence, however, that customer buying patterns will significantly increase in the near term.  There is a risk that the slowdown may be prolonged further.

        Cost of Revenues and Gross Profit.    Cost of revenues consists of the labor, material and overhead costs of manufacturing our systems, royalties, spare parts cost and the cost associated with our worldwide service support infrastructure.  Our gross profit was $6.1 million for the three month period ended March 31, 2003, compared to $5.2 million for the same period in the prior year.  Our gross profit represented 42% of our revenues for the three month period ended March 31, 2003 and 43% of our revenues for the same period in the prior year.  The decrease in gross profit as a percentage of revenue for the three month period ended March 31, 2003 compared to the three month period ended March 31, 2002 is primarily due to a change in product mix and fixed manufacturing costs being a higher component of cost of revenues.

        Research and Development.    Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities.  They also include consulting fees, prototype equipment expenses and the cost of related supplies.  Our research and development expense was $3.4 million for the three month period ended March 31, 2003, compared to $2.4 million for the same period in the prior year.  Research and development expense represented 24% of our revenues for the three month period ended March 31, 2003, compared to 20% of revenues for the same period in the prior year.  The dollar increase in research and development expenses primarily reflects the inclusion of expenses related to the engineering team acquired from YMG and the formation of the Integrated Metrology Group in the second quarter of 2002.

           Selling, General and Administrative.    Selling, general and administrative expense is primarily comprised of salaries and related costs for sales, marketing, and general administrative personnel, as well as commissions and other non-personnel related expenses.  Our selling, general and administrative expense was $2.9 million for the three month period ended March 31, 2003, compared to $2.4 million for the same period in the prior year.  Selling, general and administrative expense represented 20% of our revenues for both the three month period ended March 31, 2003 and 2002.  The year over year dollar increase in selling, general and administrative expense was primarily due to administrative costs associated with YMG.

        Amortization.    Amortization expense was $0.2 million for the three month period ended March 31, 2003, compared to $0.1 million for the three month period ended March 31, 2002.  The year over year dollar increase is attributable to the amortization of intangible assets having definite useful lives acquired from the acquisition of YMG.

        Interest income and other, net.    Interest income and other, net was $0.6 million for the three month period ended March 31, 2003, compared to $0.4 million for the same period in the prior year.  The year over year increase in interest income and other, net in the three month period ended March 31, 2003 was the result of investments in higher yielding fixed income securities and realized gains on investments.

        Income Taxes.    We use the liability method of accounting for income taxes prescribed by SFAS No. 109, "Accounting for Income Taxes."  Income tax expense was $0.1 million in the three month period ended March 31, 2003.  We anticipate that our effective tax rate for our current year to be approximately 23% as compared to 36% in the same period in the prior year.  Our anticipated effective tax rate is less than the expected combined federal and state tax rates of 40% primarily as a result of a decrease in our anticipated income before income taxes combined with the positive impact of our research and experimentation tax credits on our effective tax rate.

 

Liquidity and Capital Resources

        At March 31, 2003, we had $70.6 million of cash, cash equivalents and short-term investments and $106.2 million in working capital.  At December 31, 2002 we had $73.3 million of cash, cash equivalents and short-term investments and $106.1 million in working capital.

        Operating activities used $2.2 million and $0.3 million in cash for the three month periods ended March 31, 2003 and 2002, respectively.  The net cash used in operating activities during the three month period ended March 31, 2003 was primarily a result of an increase in accounts receivable of $2.0 million and a decrease in accounts payable of $1.4 million, partially offset by an increase in deferred revenue and a decrease in prepaid expenses and other totaling $1.1 million.  The net cash used in operating activities for the three month period ended March 31, 2002 was primarily a result of an increase in accounts receivable of $2.8 million, partially offset by a decrease in inventories of $2.0 million and net income of $0.5 million.

        Net cash used in investing activities during the three month period ended March 31, 2003 of $0.5 million includes purchases of short-term investments of $0.3 million and capital expenditures of $0.2 million.  Net cash used in investing activities during the three month period ended March 31, 2002 of $29.4 million was due to purchases of short-term investments of $29.3 million and capital expenditures of $0.1 million.

        Net cash provided by financing activities for the three month period ended March 31, 2003 and 2002 of $3 thousand and $0.6 million was a result of proceeds received from sales of shares through employee stock plans.

        Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash.   We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.  Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means.  There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.

 

Factors that May Affect Future Results

Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems and may from time to time continue to do so

        Our operating results are subject to significant variation due to the cyclical nature of the semiconductor device industry, which is currently experiencing a downturn.  While we are not able to predict the duration or severity of this downturn or the effect it may have on our operating results, past downturns have often resulted in substantial decreases in the semiconductor device industry's demand for capital equipment, including its thin film metrology equipment, and have seriously harmed our operating results.  Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors.  There is typically a nine to twelve month lag between a change in the economic condition of the semiconductor device industry and the resulting change in the level of capital expenditures by semiconductor device manufacturers. In most cases, the resulting decrease in capital expenditures has been more pronounced than the precipitating downturn in semiconductor device industry revenues.  The current semiconductor device industry downturn may continue for the next several quarters.   The current downturn and any future downturn in the semiconductor device industry, or any reduction by that industry in capital expenditures, may seriously harm our business, financial condition and results of operations.

We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenues

        We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers.  Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers exposes us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality.  Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales.   From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers.  The lead time required for shipments of some of our components can be as long as four months.  In addition, the lead time required to qualify new suppliers for lasers could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months.  If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems.  Further, a significant increase in the price of one or more of these components or subassemblies included in our systems could seriously harm our results of operations.

Our largest customers account for a significant portion of our revenues, and our revenues would significantly decline if one or more of these customers were to purchase significantly fewer of our systems or they delayed or cancelled a large order

        In 2000, 2001, 2002 and the first three months of 2003, sales to end user customers that individually represented at least five percent of our revenues accounted for 27.8%, 42.5%, 46.8% and 71.5% of our revenues.  In 2000, 2001, 2002 and the first three months of 2003, sales to Intel, a key customer, accounted for 19.4%, 33.4%, 46.8% and 47.3% of our revenues.  We operate in the highly concentrated, capital intensive semiconductor device manufacturing industry.  Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue.  If any of our key customers were to purchase significantly fewer of our systems in the future, or if a large order were delayed or cancelled, our revenues would significantly decline.  We expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for at least the next several years.  In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.

Our operating results have in the past varied and probably will in the future continue to vary significantly from quarter to quarter, causing volatility in our stock price

         Our quarterly operating results have varied significantly in the past and may continue to do so in the future, which could cause our stock price to decline. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

- changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor device industry, demand for products that use semiconductors, market acceptance of our systems and those of our customers and changes in our product offerings;

- seasonal variations in customer demand, including the tendency of European sales to slow significantly in the third quarter of each year;

- the timing, cancellation or delay of customer orders and shipments;

- product development costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and

- the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels.

        In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results.  Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly.   As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.

Our revenue may vary significantly each quarter due to relatively small fluctuations in our unit sales

         During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems.  Our transparent film measurement systems range in price from approximately $30,000 to $1.0 million per system, our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system and our macro-defect detection systems range in price from approximately $650,000 to $1.4 million per system.   Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results.  This, in turn, could cause fluctuations in the market price of our common stock.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline

        Variations in the length of our sales cycles could cause our revenues, and thus our business, financial condition and operating results, to fluctuate widely from period to period.  This variation could cause our stock price to decline.  Our customers generally take a long time to evaluate our film metrology systems and many people are involved in the evaluation process.  We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process.  The length of time it takes for us to make a sale depends upon many factors, including:

- the efforts of our sales force and our independent distributor;

- the complexity of the customer's fabrication processes;

- the internal technical capabilities and sophistication of the customer;

- the customer's budgetary constraints; and

- the quality and sophistication of the customer's current metrology equipment.

        Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer, if ever, varies widely in length.  Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from six to 15 months. Sometimes our sales cycles can be much longer, particularly with customers in Japan.  During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.

        If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period before purchasing any more of our systems.  The number of additional products a customer purchases, if any, depends on many factors, including a customer's capacity requirements.  The period between a customer's initial purchase and any subsequent purchases can vary from six months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and possibly in our stock price.

If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry we will lose market share to our competitors

        We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles.  To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new film metrology systems that meet the performance and price demands of semiconductor device manufacturers.   We must also continue to refine our current systems so that they remain competitive.  We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them.   Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.

Even if we are able to successfully develop new products, if these products do not gain general market acceptance we will not be able to generate revenues and recover our research and development costs.

        Metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel, and identify and eliminate metrology system design flaws.  Any new systems we introduce may not achieve a significant degree of market acceptance or, once accepted, may fail to sell well for a sustained period.

        We expect to spend a significant amount of time and resources developing new systems and refining our existing systems.  In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of those systems.  Our ability to commercially introduce and successfully market new systems is subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems.  In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that do materialize may be cancelled.  As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales to recoup research and development expenditures.

Even if we are able to develop new products that gain market acceptance, sales of new products could impair our ability to sell existing product lines

        Competition from our new S-ultra systems could have a negative effect on sales of our other transparent thin film metrology systems and the prices we could charge for these systems.  We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our S-ultra, WaferView or next generation systems.  This diversion of resources could have a further negative effect on sales of our current systems.  Similarly, competition from our new MetaPULSE-II system could have a negative impact on MetaPULSE systems.

        Additionally, the new line of i-MOD products will incorporate some of our advanced metrologies into small footprint modules that are designed to be integrated into process tool equipment.   These integrated metrology systems are unlikely to replace our existing stand-alone systems because of their relative lack of accessibility and because the range of applications will be limited.  However, there could be a negative effect on stand-alone systems that use the same technology.

If our relationships with our large customers deteriorate, our product development activities could be jeopardized

        The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers.  In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers.   Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems will be impaired.

Our ability to reduce costs is limited by our ongoing need to invest in research and development

        Our industry is characterized by the need for continual investment in research and development as well as customer service and support.  As a result of our need to maintain our spending levels in these areas, our operating results could be materially harmed if our revenues fall below expectations.  In addition, because of our emphasis on research and development and technological innovation, our operating costs may increase further in the future.

We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage

         Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology.  If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products.  We own or have licensed a number of patents relating to our transparent and opaque thin film metrology and macro-defect inspection systems, and have filed applications for additional patents.  Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable.  In addition, the patents we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties.  Third parties may also design around these patents.

        In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology.  We routinely enter into confidentiality agreements with our employees.  However, in the event that these agreements may be breached, we may not have adequate remedies.  Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties.

Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important intellectual property rights by us

        Our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties.  From time to time we may receive communications from third parties asserting that our products or systems infringe, or may infringe, the proprietary rights of these third parties.  These claims of infringement may lead to protracted and costly litigation which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction.   Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenues.  We may also be required to obtain a license from the third party or cease activities utilizing the third party's proprietary rights.  We may not be able to enter into such a license or such license may not be available on commercially reasonable terms.  The loss of important intellectual property rights could therefore prevent our ability to sell our systems, or make the sale of such systems more expensive for us.

Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, has in the past resulted and may in the future result in costly and time-consuming litigation

        We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or other proprietary rights.   In addition, we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights.  Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States

         In 2002 and the first three months of  2003, 40.6% and 63.6% of our revenue were derived from sales in foreign countries, including certain countries in Asia such as Taiwan, China, Korea, Singapore and Japan.  The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems.  For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally.  The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent prosecution process, the contents of a patent are published upon filing which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights.   There is a risk that our means of protecting our proprietary rights may not be adequate in these countries.  For example, our competitors in these countries may independently develop similar technology or duplicate our systems.  If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.

Our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices

        The market for semiconductor capital equipment is highly competitive.  We face substantial competition from established companies in each of the markets we serve.  We principally compete with KLA-Tencor and Therma-Wave.  We compete to a lesser extent with companies such as Dai Nippon Screen, Nanometrics, Sopra, Zeiss, Sony and Leica.  Each of our product lines also competes with products that use different metrology techniques.  Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do.   As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products.  Moreover, there may be significant merger and acquisition activity among our competitors and potential competitors.  These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.  Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment.  While we believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers, our larger competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers.

        Many of our competitors are investing heavily in the development of new systems that will compete directly with ours.   We have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions.  We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics.  Such product introductions by our competitors would likely cause us to decrease the prices of our systems and increase the level of discounts we grant our customers.

Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win customers from our competitors even if our systems are superior to theirs

        We believe that once a semiconductor device manufacturer has selected one vendor's capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor's equipment, for the life of the application.  Once a vendor's equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor's equipment.  Accordingly, unless our systems offer performance or cost advantages that outweigh a customer's expense of switching to our systems, it will be difficult for us to achieve significant sales to that customer once it has selected another vendor's capital equipment for an application.

We must attract and retain key personnel with knowledge of semiconductor device manufacturing and metrology equipment to help support our future growth, and competition for such personnel in our industry is high

        Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel.  The loss of any of these key personnel, who would be extremely difficult to replace, could harm our business and operating results.  During downturns in our industry, we have often experienced significant employee attrition, and we may experience further attrition in the event of a future downturn.  Although we have employment and noncompetition agreements with key members of our senior management team, including Messrs. McLaughlin, Loiterman and Roth, these individuals or other key employees may nevertheless leave our company.  We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees.  Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.

We manufacture all of our systems at a single facility, and any prolonged disruption in the operations of that facility could have a material adverse effect on our revenues

        We produce all of our systems in our manufacturing facility located in Ledgewood, New Jersey.  Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility.  As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines.  If we cannot timely deliver our systems, our revenues could be adversely affected.

We rely upon an independent distributor for a significant portion of our sales, and a disruption in our relationship could have a negative impact on our sales in Japan

        Historically, a portion of our sales in Japan has been made through our sole independent distributor, Tokyo Electron Limited (TEL).  In 2000, 2001, 2002 and the first three months of 2003, sales to TEL accounted for 21.9%, 14.8%, 6.8% and 8.7% of our revenues.  We expect that sales through TEL will represent a portion of our sales for the next several years.  TEL also provides field service to our customers.  The activities of TEL are not within our control.  A reduction in the sales or service efforts or financial viability of TEL, or a termination of our relationship with them, could harm our sales, our financial results and our ability to support our customers.  Although we believe that we maintain good relations with TEL, such relationship may nevertheless deteriorate in the future.

Because we derive a significant portion of our revenues from sales in Asia, our sales and results of operations could be adversely affected by the instability of Asian economies

        Our sales to customers in Asian markets represented approximately 39.5%, 36.6%, 30.1% and 32.3% of our revenues in 2000, 2001, 2002 and the first three months of 2003.  Countries in the Asia Pacific region, including Japan, Korea, China, Singapore and Taiwan, each of which accounted for a significant portion of our business in that region, have experienced currency, banking and equity market weaknesses in the past.   We expect that turbulence in the Asian markets could adversely affect our sales in future periods.

Due to our significant level of international sales, we are subject to operational, financial and political risks such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, adverse tax consequences and difficulties in managing foreign sales representatives and foreign branch operations

        International sales accounted for approximately 54.7%, 53.7%, 40.6% and 63.6% of our revenues in 2000, 2001, 2002 and the first three months of 2003.  We anticipate that international sales will account for a significant portion of our revenue for at least the next five years.  Due to the significant level of our international sales, we are subject to material risks which include:

        Unexpected changes in regulatory requirements including tariffs and other market barriers.  The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products.  Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes or other restrictions imposed by their governments on trade with United States companies such as ourselves.   Any such restrictions could lead to a reduction in our sales to customers in these countries.

        Political and economic instability.  We are subject to various global risks related to political and economic instabilities in countries in which we derive sales.  If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the U.S., such events may result in reduced demand for our products.   There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea.  In addition, several Asian countries, particularly Japan, have experienced significant economic instability.  An outbreak of hostilities or other political upheaval in Taiwan or South Korea, or an economic downturn in Japan, would likely harm the operations of our customers in these countries, causing our sales to suffer.  The effect of such events on our revenues could be material because we derive substantial revenues from sales to semiconductor device foundries in Taiwan such as TSMC and UMC, from memory chip manufacturers in South Korea such as Hynix and Samsung, and from semiconductor device manufacturers in Japan such as NEC and Toshiba.

        Difficulties in staffing and managing foreign branch operations.   During periods of tension between the governments of the United States and other countries, it is often difficult for United States companies such as ourselves to staff and manage operations in such countries.

Since a substantial portion of our revenues are derived from sales in other countries yet are denominated in U.S. dollars, we could experience a significant decline in sales or experience collection problems in the event the dollar becomes more expensive relative to local currencies

        A substantial portion of our international sales are denominated in U.S. dollars.  As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States.  Such conditions could negatively impact our international sales.  Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars.

Terrorist attacks and terrorist threats may negatively impact all aspects of our operations, revenues, costs and stock price

        The terrorist attacks in September 2001 in the United States and the U.S. response to these attacks and the resulting decline in consumer confidence has had a substantial adverse impact on the economy.  If consumer confidence does not recover, our revenues and profitability may be adversely impacted in 2003 and beyond.  In addition, any similar future events may disrupt our operations or those of our customers and suppliers.

        In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales.   Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers.  This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.

We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner

        Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures.  To this end, we may choose to acquire new and complementary businesses, products, or technologies instead of developing them ourselves.  We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions.  We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees.  Integrating any business, product or technology we acquire could be expensive and time-consuming, could disrupt our ongoing business and could distract our management.  In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings.  In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders.  If we are unable to integrate any acquired entities, products or technologies effectively, our business, financial condition and operating results will suffer.  In addition, any amortization of intangible assets or other assets or charges resulting from the costs of acquisitions could harm our business and operating results.

If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease

        Our systems are complex and sometimes have contained errors, defects and bugs when introduced.  If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems could be harmed. Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems.   Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers.  We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems.   Our product liability policy currently provides only $2.0 million of coverage per claim with an overall umbrella limit of $4.0 million.  In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

Provisions of our charter documents and Delaware law could discourage potential acquisition proposals and could delay, deter or prevent a change in control of our company

        Provisions of our certificate of incorporation and bylaws may inhibit changes in control of our company not approved by our board of directors.  These provisions also limit the circumstances in which a premium can be paid for the common stock, and in which a proxy contest for control of our board may be initiated.  These provisions provide for:

- a prohibition on stockholder actions through written consent;

- a requirement that special meetings of stockholders be called only by our chief executive officer or board of directors;

- advance notice requirements for stockholder proposals and director nominations by stockholders;

- limitations on the ability of stockholders to amend, alter or repeal our by-laws; and

- the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine.

         We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects.

 


 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

        We are exposed to changes in interest rates primarily from our investments in certain available-for-sale securities.  Our available-for-sale securities consist primarily of fixed income investments (U.S. Treasury and Agency securities, commercial paper and corporate bonds).  We continually monitor our exposure to changes in interest rates and credit ratings of issuers from our available-for-sale securities.  Accordingly, we believe that the effects of changes in interest rates and credit ratings of issuers are limited and would not have a material impact on our financial condition or results of operations.  However, it is possible that we are at risk if interest rates or credit ratings of issuers change in an unfavorable direction.  The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected.

Foreign Currency Risk

        We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes.  All sales arrangements with international customers are denominated in U.S. dollars.  We have branch operations in Taiwan, Singapore, China and Korea and a wholly-owned subsidiary in Europe, which are subject to currency fluctuations.  These foreign branches are limited in their operations and level of investment so that the risk of currency fluctuations is not expected to be material.


 

Item 4. Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures.

        Our chief executive officer and our chief financial officer, after evaluating our "disclosure controls and procedures" (as defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

        The Company's management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud.  Because of inherent limitations in any system of disclosure controls and procedures, no evaluation of controls can provide absolute assurance that all instances of error or fraud, if any, within the Company may be detected.

(b)     Changes in Internal Controls.

        Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 


PART II    OTHER INFORMATION

 

Item 6.   Exhibits and Reports on Form 8-K

        (a) Exhibits

        Exhibit No.      Description

99.1             Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to 18 U.S.C.
                    Section 1350.

99.2             Certification of  Steven R. Roth, Chief Financial Officer, pursuant to 18 U.S.C.
                    Section 1350.

        (b) Reports on Form 8-K

  1. On March 31, 2003, we furnished a Current Report on Form 8-K.  This report contained Certifications that were furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


 

 

SIGNATURES

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

                                                                                                        Rudolph Technologies, Inc.

 

Date: May 14, 2003                                                                    By:  /s/ Paul F. McLaughlin                                
                                                                                                              Paul F. McLaughlin
                                                                                                               Chairman and Chief Executive Officer
 
 
Date: May 14, 2003                                                                    By:   /s/ Steven R. Roth                                     
                                                                                                                Steven R. Roth
                                                                                                                Senior Vice President, Chief Financial Officer

 

 

RUDOLPH TECHNOLOGIES, INC.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION

 

I, Paul F. McLaughlin, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Rudolph Technologies, Inc.;

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
  1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

  2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

  3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
    1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
  2. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

By:  /s/ Paul F. McLaughlin                 
Paul F. McLaughlin
Chairman and Chief Executive Officer

 

 

I, Steven R. Roth, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Rudolph Technologies, Inc.;

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
  1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

  2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

  3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
    1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
  2. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003                                 

By:  /s/ Steven R. Roth                                
Steven R. Roth
Senior Vice President, Chief Financial Officer

EXHIBIT INDEX

 

        Exhibit
          No.                 Description

99.1             Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to 18 U.S.C.
                    Section 1350.

99.2             Certification of  Steven R. Roth, Chief Financial Officer, pursuant to 18 U.S.C.
                    Section 1350.

 


EXHIBIT 99.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER 

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Paul F. McLaughlin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Rudolph Technologies, Inc. on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Rudolph Technologies, Inc.

 

Date: May 14, 2003                                                                      By:  /s/ Paul F. McLaughlin                                
                                                                                                                                Paul F. McLaughlin
                                                                                                                Chairman and Chief Executive Officer

 

 


EXHIBIT 99.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Steven R. Roth, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Rudolph Technologies, Inc. on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Rudolph Technologies, Inc.

 

  Date: May 14, 2003                                                                         By:   /s/ Steven R. Roth                                     
                                                                                                                                    Steven R. Roth
                                                                                                                Senior Vice President, Chief Financial Officer