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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 000-27965
RUDOLPH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1628009
(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)
(Zip Code)
(973) 691-1300
Registrants telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the Registrant's Common Stock on
April 27, 2000 was 14,684,706.
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets at March 31, 2000 and December 31, 1999 2
Statements of Operations for the Three months ended March 31, 2000 and 1999 3
Statements of Cash Flows for the Three months ended March 31, 2000 and 1999 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
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Part 1. Financial Information
Item 1. Financial Statements
RUDOLPH TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
2000 1999
-------------- --------------
ASSETS
Current assets:
Cash $ 32,828 $ 35,076
Accounts receivable 14,628 9,472
Inventories 12,806 11,403
Prepaid and other assets 956 525
-------------- --------------
Total current assets 61,218 56,476
Net property, plant and equipment 3,152 3,106
Intangibles 2,774 2,859
Deferred taxes - 2,312
Other assets 203 194
-------------- --------------
Total assets $ 67,347 $ 64,947
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 4,505 $ 4,536
Other current liabilities 2,316 2,723
-------------- --------------
Total current liabilities 6,821 7,259
Other long-term libilities 65 78
-------------- --------------
Total liabilities 6,886 7,337
Commitments and contingencies
Stockholder's equity
Common stock 15 15
Additional paid-in capital 85,017 85,025
Other comphrehensive loss (229) (237)
Retained earnings/(loss) (24,342) (27,193)
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Total stockholder's equity 60,461 57,610
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Total liabilities & stockholder's equity $ 67,347 $ 64,947
============== ==============
The accompanying notes are an integral part these financial statements.
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RUDOLPH TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended
March 31,
------------------------------
2000 1999
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Revenues $ 16,993 $ 6,532
Cost of revenues 7,968 3,229
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Gross profit 9,025 3,303
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Operating Expenses:
Research & development 1,741 1,043
Selling, general & administrative 3,077 1,604
Amortization 85 66
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Total operating expenses 4,903 2,713
Operating income 4,122 590
Interest expense/(income) and other, net (499) 1,035
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Income (loss) before income taxes 4,621 (445)
Provision for income taxes 1,770 93
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Net income/(loss) 2,851 (538)
Preferred stock dividends - 133
------------- --------------
Net income/(loss) available to common shareholders $ 2,851 $ (671)
============= ==============
Net income/(loss) per share:
Basic $ 0.19 $ (0.10)
Diluted $ 0.18 $ (0.10)
Weighted average shares outstanding:
Basic 14,684,706 6,732,394
Diluted 15,864,997 6,732,394
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The accompanying notes are in integral part of these financial statements.
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RUDOLPH TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2000 1999
----------- ----------
Cash flow from operating activities:
Net income (loss) $ 2,851 $ (538)
Adjustment to reconcile net income (loss) to net
cash used in operating activities
Amortization 85 66
Depreciation 149 133
Provision for doubtful accounts 171 -
Decrease (increase) in assets:
Accounts receivable (5,340) (34)
Inventories (1,402) (828)
Prepaid expenses and other 108 47
Deferred income taxes 1,770 -
Increase (decrease) in liabilities:
Accounts payable 213 292
Accrued liabilities (191) 222
Other liabilities (480) 150
----------- ----------
Net cash used in operating activities (2,066) (490)
----------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (194) (213)
Proceeds from disposal of property, plant and 9 9
equipment ----------- ----------
Net cash used in investing activities (185) (204)
----------- ----------
Cash flows from financing activities:
Principal payments on long-term debt - (625)
Net borrowing under lines of credit - 1,200
----------- ----------
Net cash provided by financing activities - 575
----------- ----------
Effect of exchange rate changes on cash 3 4
----------- ----------
Net decrease in cash and cash equivalents (2,248) (115)
Cash and cash equivalents at beginning of period 35,076 431
----------- ----------
Cash and cash equivalents at end of period $ 32,828 $ 316
=========== ==========
The accompanying notes are an integral part of these financial statements.
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RUDOLPH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared by Rudolph
Technologies, Inc. and in the opinion of management reflect all adjustments,
consisting only of normal recurring accruals, necessary for their fair
presentation in accordance with generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual amounts could differ materially from those amounts.
The results for the three-month period ended March 31, 2000 are not necessarily
indicative of results to be expected for the entire year. This financial
information should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
NOTE 2. Accounts Receivable
Accounts receivable are net of the allowance for doubtful accounts of $473 and
$300 as March 31, 2000 and December 31, 1999, respectively.
NOTE 3. Inventories
March 31, December 31,
------------------ -----------------
2000 1999
------------------ -----------------
Materials $ 6,029 $ 4,729
Work-in-process 4,773 4,937
Finished goods 2,004 1,737
------------------ -----------------
Total Inventories $ 12,806 $ 11,403
================== =================
NOTE 4. Property, Plant & Equipment
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March 31, December 31,
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2000 1999
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Land and Building $ 1,613 $ 1,613
Machinery and equipment 881 865
Furnitures and fixtures 290 269
Computer equipment 1,125 964
Leasehold improvements 812 811
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4,721 4,522
Accumulated Depreciation (1,569) (1,416)
----------------- -----------------
Net property, plant and equipment $ 3,152 $ 3,106
----------------- -----------------
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NOTE 5. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" (SFAS 130). The statement established standards for the reporting and
display of comprehensive income and its components. The disclosures required by
SFAS 130 have been included below. The difference between net income (loss)and
comprehensive income for the Company is due to currency translation adjustments.
The effects of income taxes on comprehensive income was not material.
For the three months ended March 31, 2000 comprehensive income amounted to
$2,859 and for the three months ended March 31, 1999 comprehensive loss amounted
to $490.
NOTE 6. Earnings (Loss) Per Share
Basic income (loss) per share, is calculated using the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share is computed in the same manner and also gives effect to all dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options for the three-month period ending
March 31, 2000 and stock options and stock warrants for the three-month period
ending March 31, 2000. During the three-month period ended March 31, 1999,
diluted loss per share was calculated using the weighted average number of
shares of common stock outstanding during the periods. Stock options of 960,521
and stock warrants of 2,072,703 outstanding during the period were excluded from
the computation of diluted loss per share because the effect in the period with
a net loss would be anti-dilutive. The reconciling difference between the
computation of basic and diluted earnings per share for the three-month period
ended March 31, 2000, is the inclusion of the dilutive effect of stock options
issued to employees under employee stock option plans.
NOTE 7. Contingencies
The Company is presently involved in a patent interference proceeding with
Therma-Wave, Inc. in the United States Patent Office. In this proceeding, the
Company is defending its patent rights with respect to some of the multiple
angle, multiple wavelength ellipsometry technology it uses in its transparent
thin film measurement systems. Therma-Wave requested that the proceeding be
initiated in 1993 by filing a reissue application for one of its own patents, in
which it sought to broaden the original issued claims. The proceeding was
initiated by the Patent Office in June 1998.
Preliminary motions and statements have been filed. In November, 1999 the
patent office denied the Company's request to dismiss the proceedings. If the
Company loses the interference, a reissue patent will be granted to Therma- Wave
permitting Therma-Wave to assert patent rights against the ellipsometers the
Company uses in its transparent thin film measurement systems. In that event,
the Company could assert a defense of intervening rights against Therma-Wave's
reissued patent since the Company relied on the restricted claims of
Therma-Wave's original patent. If the intervening rights defense and other
defenses fail, the Company would either have to pay future royalties to
Therma-Wave or redesign its SpectraLASER and other transparent thin film
measurement systems. Management is unable to estimate the ultimate resolution of
this matter. However, should the Company be required to pay royalties or
redesign its products, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
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In addition, from time to time the Company is subject to legal proceedings and
claims in the ordinary course of business. Other than the Therma-Wave, Inc.
patent interference proceeding discussed above, we are not involved in any
material legal proceedings.
NOTE 8. Recent Accounting Pronouncements
During June 1998, as amended in July 1999 for Statement No. 137, the Financial
Accounting Standards Board issued Statement No. 133 "Accounting for Derivative
Investments and Hedging Activities" ("SFAS 133"). Based on the Company's current
operations, management has concluded that the future adoption of SFAS 133 will
have no impact on the Company's operations or financial position.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 in the second quarter of 2000. The
Company is assessing whether any of these interpretations of generally accepted
accounting principles will cause the Company to report a change in accounting
principle. While management believes that its revenue recognition policies
conform with the generally accepted accounting principles that have been used
consistently in practice in the capital equipment industry, certain issues
raised in SAB 101, including delivery and performance revenue recognition
criteria, could be interpreted to cause a change in accounting principle by the
Company and many other companies in the capital equipment industry. At this
time, the effect of SAB 101 on the Company's operating results in any future
period cannot be fully determined.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this current report on Form 10-Q are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21C of the Securities Exchange Act of 1934. These statements would
include without limitation, the statement that we believe that any future costs
associated with Year 2000 compliance will not be material, discussed below in
the paragraph titled "Year 2000 Issue". Additional forward looking statements
may be identified by the words "anticipate", "believe", "expect", "intend",
"will" and similar expressions, as they relate to us or our management.
The forward looking statements contained herein reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Actual results may differ materially from those projected in such
forward looking statements for a number of factors , risks and uncertainties,
including the risk factors set forth in our Annual Report on Form 10-K for the
year ended December 31, 1999.
Results of Operations for the Three Months Ended March 31, 2000 and 1999
Revenues. Our revenues are derived from the sale of our metrology systems,
services and spare parts. Our revenues were $17.0 million and $6.5 million in
the three months ended March 31, 2000 and 1999. This change represents an
increase of 160% and was primarily due to increases in unit volume shipments to
existing customers and expanded sales of new products. Revenues from
international customers represented 51% and 46% of our revenues in the three
months ended March 31, 2000 and 1999.
Cost of Revenues and Gross Profit. Cost of revenues consists of the labor,
material and overhead costs of manufacturing our systems, spare parts cost and
the cost associated with our worldwide service support infrastructure. Our gross
profit was $9.0 million and $3.3 million in the three months ended March 31,
2000 and 1999. This change represents an increase of 173%. Our gross profit
represented 53% and 51% of our revenues in the three months ended March 31,
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2000 and 1999. The increase in gross profit margin from 1999 to 2000 resulted
from improved manufacturing efficiencies, as a result of outsourcing and cycle
time reduction initiatives and higher revenues, which cover a larger portion of
fixed costs. The increase in gross profit dollars was the result of higher unit
sales.
Research and Development. Research and development expenditures consist
primarily of salaries and related expenses of employees engaged in research,
design and development activities. They also include consulting fees, prototype
equipment expenses and the cost of related supplies. Our research and
development expenses were $1.7 million and $1.0 million in the three months
ended March 31, 2000 and 1999. This change represents an increase of 67%.
Research and development expense represented 10% and 16% of our revenues for the
three months ended March 31, 2000 and 1999. The increase in dollars resulted
from higher personnel related and parts cost associated with new product
development. The decrease in research and development as a percentage of
revenues resulted from higher revenues in the three months ended March 31, 2000.
Selling, General and Administrative. Selling, general and administrative
expense is primarily comprised of salaries and related costs for sales,
marketing, and general and administrative personnel, as well as commissions,
royalties for licensed technology and other non-personnel related expenses. Our
selling, general and administrative expense was $3.1 million and $1.6 million in
the three months ended March 31, 2000 and 1999. This change represents an
increase of 92%. Selling, general and administrative expense represented 18% and
25% of revenues for the three months ended March 31, 2000 and 1999. The increase
is due primarily to increased commissions, royalties on licensed technology,
costs associated with our direct sales force in Europe, which was established in
the third quarter of 1999, and higher compensation expense related to corporate
incentive plans.
Amortization. Amortization expense is related to the core technology and
goodwill we acquired from our predecessor company in 1996. Amortization expense
was $0.1 million in the three months ended March 31, 2000 and 1999.
Interest (Income)/Expense, net. Interest income was $0.5 million compared to
interest expense of $1.0 million for the three months ended March 31, 20000 and
1999. Interest income was the result of interest income earned by us from
investment of the net proceeds from our initial public offering not immediately
needed to support our operations. In November 1999, we retired all of our
outstanding debt with a portion of the proceeds of our initial public offering.
Income Taxes. We use the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Our effective tax rate was 38% for the three month's ended
March 31, 2000. The provision for income taxes of $0.1 million in the three
months ended March 31, 1999 is primarily the result of state tax obligations
resulting from the acquisition of our predecessor company in 1996 that cannot be
applied against tax net operating losses.
Preferred Stock Dividends. We accrued cumulative dividends on our 8%
preferred stock of $133,000 in the three months ended March 31, 1999. In
November 1999, we retired all of our outstanding preferred stock with a portion
of the proceeds of our initial public offering and paid all accrued dividends.
We accrued no dividends in the three months ended March 31, 2000.
Recent Accounting Pronouncements.
During June 1998, as amended in July 1999 for Statement No. 137, the
Financial accounting Standards Board issued Statment No. 133 "Accounting for
Serivative Investments and Heding Activities" (SPAS 133"). Based on the
Company's current operations, management has concluded that the future adoption
of SVAS 133 will have no impact on the Company's operations of financial
position.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 in the second quarter of 2000. The
Company is
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assessing whether any of these interpretations of generally accepted accounting
principles will cause the Company to report a change in accounting principle.
While management believes that its revenue recognition policies conform with the
generally accepted accounting principles that have been used consistently in
practice in the capital equipment industry, certain issues raised in SAB 101,
including delivery and performance revenue recognition criteria, could be
interpreted to cause a change in accounting principle by the Company and many
other companies in the capital equipment industry. At this time, the effect of
SAB 101 on the Company's operating results in any future period cannot be fully
determined.
Liquidity and Capital Resources
At March 31, 2000, we had $32.8 million of cash and cash equivalents and
$54.4 million in working capital. At December 31, 1999 we had $35.1 million of
cash and cash equivalents and $49.2 million in working capital.
Net cash of $2.1 million was used in operating activities during the first
quarter of fiscal 2000 compared to $0.5 million used in operating activities
during the first quarter of fiscal 1999. The net cash used in operating
activities in the first quarter of 2000 was primarily a result of an increase in
accounts receivable of $5.3 million and an increase in inventories of $1.4
million, offset by net income of $2.9M. The net cash used in operating
activities in the first quarter of 1999 was primarily the result of the net loss
of $0.5 million. Net cash used in investing activities includes capital
expenditures of $0.2 million for the first quarter of fiscal 2000 primarily for
the purchase and installation of enterprise requirements planning software
necessary for our operations, and $0.2 million for the first quarter of fiscal
1999 primarily for leasehold improvements of our manufacturing facility.
Our future capital requirements will depend on many factors, including the
timing and amount of our revenues and our investment commitments, which will
affect our ability to generate additional cash. 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.
Year 2000 Issue
To date, we have not incurred material costs associated with Year 2000
compliance nor any disruption with vendors or operations. Furthermore, we
believe that any future costs associated with Year 2000 compliance will not be
material.
Factors that May Affect Future Results
Fluctuations in Operating Results
Our operating results have varied significantly in the past and may continue to
do so in the future, which could cause our stock price to decline. Some of the
factors that may influence our operating results and subject our stock to
extreme price and volume fluctuations include: changes in customer demand for
our systems, which is influenced by economic conditions in the semiconductor
device industry, demand for products that use semiconductors, market acceptance
of our systems and those of our customers and changes in our product offerings;
seasonal variations in customer demand, including the tendency of European sales
to slow significantly in the third quarter of each year; the timing,
cancellation or delay of customer orders and shipments; product development
costs, including increased research, development, engineering and marketing
expenses associated with our introduction of new products and product
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enhancements; and the levels of our fixed expenses, including research and
development costs associated with product development, relative to our revenue
levels.
We may not be able to maintain profitability in the future, which may cause our
business to suffer and the price of our common stock to substantially decline.
During any quarter, a significant portion of our revenue may be derived from the
sale of a relatively small number of systems. Our transparent film measurement
systems range in price from approximately $200,000 to $1.0 million per system
and our opaque film measurement systems range in price from approximately
$900,000 to $1.6 million per system. Accordingly, a small change in the number
of systems we sell may also cause significant changes in our operating results.
This, in turn, could cause fluctuations in the market price of our common stock.
In addition, continued investments in research, development and engineering
and the development of worldwide sales, marketing and customer support
organizations will result in significantly higher fixed costs. There can be no
assurance that we will be able to achieve a rate of growth or level of sales in
any future period commensurate with our level of expenses. The impact of these
and other factors on our operating results in any future period cannot be
forecast with any degree of certainty. Due to the foregoing factors, we are
likely to experience in some future quarter or quarters operating results which
may be below the expectations of analysts and investors. In such event, the
price of our Common Stock would likely be materially adversely affected.
Semiconductor Equipment Industry Volatility
Our operating results will be subject to significant variation due to the
cyclical nature of the semiconductor device industry. Downturns in the
semiconductor industry will likely lead to proportionately greater downturns in
our revenues. Our business depends upon the capital expenditures of
semiconductor device manufacturers, which, in turn, depend upon the current and
anticipated market demand for semiconductors and products using semiconductors.
The semiconductor device industry is cyclical and has historically experienced
periodic downturns, which have often resulted in substantial decreases in the
semiconductor device industry's demand for capital equipment, including its thin
film metrology equipment. There is typically a six to twelve month lag between a
change in the economic condition of the semiconductor device industry and the
resulting change in the level of capital expenditures by semiconductor device
manufacturers. In most cases, the resulting decrease in capital expenditures has
been more pronounced than the precipitating downturn in semiconductor device
industry revenues. Although the semiconductor device industry is recovering, the
industry may not continue to improve; the industry may experience other,
possibly more severe and prolonged, downturns in the future; and any continued
recovery of the semiconductor device industry may not result in an increased
demand by semiconductor device manufacturers for capital equipment. Any future
downturn in the semiconductor device industry, or any failure of that industry
to fully recover from its recent downturn, will seriously harm our business,
financial condition and results of operations.
Acceptance by Customers of New Technology
If we are not able to successfully develop new products, or if these products
do not gain general market acceptance we will not be able to generate revenues
and recover our research and development costs. Metrology product development is
inherently risky because it is difficult to foresee developments in
semiconductor device manufacturing technology, coordinate technical personnel
and identify and eliminate metrology system design flaws. We recently developed
our MatrixMetrology systems, which are thin film metrology systems specifically
designed for use in the CMP, etch, diffusion and other portions of the
semiconductor device manufacturing process where we do not currently have
significant
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market share. Any new systems introduced by us may not achieve a significant
degree of market acceptance or, once accepted, may fail to sell well for any
significant period.
We expect to spend a significant amount of time and resources to develop new
systems and refine existing systems. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in advance
of the prospect of deriving revenue from the sale of new systems. Our ability to
commercially introduce and successfully market new systems is subject to a wide
variety of challenges during this development cycle, including start-up bugs,
design defects and other matters that could delay introduction of these systems.
In addition, since our customers are not obligated by long-term contracts to
purchase our systems, our anticipated product orders may not materialize, or
orders that do materialize may be cancelled. As a result, if we do not achieve
market acceptance of new products, we may not be able to realize sufficient
sales of our systems in order to recoup research and development expenditures.
Even if we are able to develop new products that gain market acceptance, sales
of new products could impair our ability to sell existing product lines.
Competition from our new MatrixMetrology systems could have a negative effect on
sales of our other transparent thin film metrology systems, including our
SpectraLASER and FOCUS systems, and the prices we could charge for these
systems. We may also divert sales and marketing resources from our current
systems in order to successfully promote our new MatrixMetrology systems. This
diversion of resources could have a further negative effect on sales of our
current systems.
Customer Concentration
Our largest customers account for a significant portion of our revenues, and
our revenues would significantly decline if one or more of these customers were
to purchase significantly fewer of our systems or they delayed or cancelled a
large order. Historically, a significant portion of our revenues in each quarter
and year has been derived from sales to relatively few customers, and we expect
this trend to continue. There are only a limited number of mostly large
companies operating in the highly concentrated, capital intensive semiconductor
device manufacturing industry. Accordingly, we expect that we will continue to
depend on a small number of large customers for a significant portion of our
revenues for at least the next several years. In addition, as large
semiconductor device manufacturers seek to establish closer relationships with
their suppliers, we expect that our customer base will become even more
concentrated.
Sole or Limited Sources of Supply
We obtain some of the components and subassemblies included in our systems
from a single source or a limited group of suppliers, and the partial or
complete loss of one of these suppliers could cause production delays and a
substantial loss of revenue. Coherent, Inc. is our sole supplier of the lasers
we use in some of our systems, and we also obtain some of the other components
and subassemblies included in our systems from a single supplier or a limited
group of suppliers. Although our supply agreement with Coherent has expired, we
are currently negotiating a follow-on contract with Coherent. We do not have
long-term contracts with many of our suppliers. Our dependence on sole source
suppliers of components exposes us to several risks, including a potential
inability to obtain an adequate supply of components, price increases, late
deliveries and poor component quality. Disruption or termination of the supply
of these components could delay shipments of our systems, damage our customer
relationships and reduce our sales. From time to time in the past, we have
experienced temporary difficulties in receiving shipments from our suppliers.
The lead time required for shipments of some of our components can be as long as
four months. In addition, the lead time required to qualify new suppliers for
lasers could be as
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long as a year, and the lead time required to qualify new suppliers of other
components could be as long as nine months. If we are unable to accurately
predict our component needs, or if our component supply is disrupted, we may
miss market opportunities by not being able to meet the demand for our systems.
Further, a significant increase in the price of one or more of these components
or subassemblies included in our systems could seriously harm our results of
operations.
Dependence on Product Development
If we are not successful in developing new and enhanced products for the
semiconductor device manufacturing industry we will lose market share to our
competitors. We operate in an industry that is subject to evolving industry
standards, rapid technological changes, rapid changes in consumer demands and
the rapid introduction of new, higher performance systems with shorter product
life cycles. To be competitive in our demanding market, we must continually
design, develop and introduce in a timely manner new film metrology systems that
meet the performance and price demands of semiconductor device manufacturers. We
must also continue to refine our current systems so that they remain
competitive. We may experience difficulties or delays in our development efforts
with respect to new systems, and we may not ultimately be successful in
developing them. Any significant delay in releasing new systems could adversely
affect our reputation, give a competitor a first-to-market advantage or cause a
competitor to achieve greater market share.
Dependence upon Personnel
We must attract and retain key personnel with knowledge of semiconductor
device manufacturing and metrology equipment to help support our future growth,
and competition for such personnel in our industry is high. Our success depends
to a significant degree upon the continued contributions of our key management,
engineering, sales and marketing, customer support, finance and manufacturing
personnel. The loss of any of these key personnel, who would be extremely
difficult to replace, could harm our business and operating results. During
downturns in our industry, we have often experienced significant employee
attrition, and we may experience further attrition in the event of a future
downturn. Although we have employment and noncompetition agreements with key
members of our senior management team, these individuals or other key employees
may nevertheless leave us. We do not have key person life insurance on any of
our executives. In addition, to support our future growth, we will need to
attract and retain additional qualified employees. Competition for such
personnel in our industry is intense, and we may not be successful in attracting
and retaining qualified employees.
Lengthy Sales Cycle
Our customers generally take a long time to evaluate our film metrology
systems and many people are involved in the evaluation process. We expend
significant resources educating and providing information to our prospective
customers regarding the uses and benefits of our systems in the semiconductor
fabrication process. The length of time it takes for us to make a sale depends
upon many factors, including: the efforts of our sales force and our independent
sales representatives and distributors; the complexity of the customer's
fabrication processes; the internal technical capabilities and sophistication of
the customer; the customer's budgetary constraints; and the quality and
sophistication of the customer's current metrology equipment.
Because of the number of factors influencing the sales process, the period
between our initial contact with a customer and the time when we recognize
revenue from that customer, if ever, varies widely in length. Our sales cycles,
including the time it takes for us to build a product to customer specifications
after receiving an order, typically range from six to 15 months. Sometimes our
sales cycles can be much longer, particularly with customers in Japan. During
these cycles, we commit substantial resources to our
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sales efforts in advance of receiving any revenue, and we may never receive any
revenue from a customer despite our sales efforts. If we do make a sale, our
customers often purchase only one of our systems, and then evaluate its
performance for a lengthy period before purchasing any more of our systems. The
number of additional products a customer purchases, if any, depends on many
factors, including a customer's capacity requirements. The period between a
customer's initial purchase and any subsequent purchases can vary from six
months to a year or longer, and variations in the length of this period could
cause fluctuations in our operating results and possibly in our stock price.
International Sales
Due to our significant level of international sales, we are subject to
operational, financial and political risks such as unexpected changes in
regulatory requirements, tariffs, political and economic instability, outbreaks
of hostilities, adverse tax consequences and difficulties in managing foreign
sales representatives and foreign branch operations. We anticipate that
international sales will continue to account for a significant portion of our
revenue for at least the next five years. Due to the significant level of our
international sales, we are subject to material risks which include:
- Unexpected changes in regulatory requirements, including tariffs and other
market barriers. The semiconductor device industry is a high-visibility
industry in many of the European and Asian countries in which we sell our
products. Because the governments of these countries have provided extensive
financial support to our semiconductor device manufacturing customers in
these countries, we believe that our customers could be disproportionately
affected by any trade embargos, excise taxes or other restrictions imposed
by their governments on trade with United States companies such as
ourselves. Any such restrictions could lead to a reduction in our sales to
customers in these countries.
- Political and economic instability. There is considerable political
instability in Taiwan related to its disputes with China and in South Korea
related to its disputes with North Korea. In addition, several Asian
countries, particularly Japan, have recently experienced significant
economic instability. An outbreak of hostilities or other political upheaval
in Taiwan or South Korea, or an economic downturn in Japan, would likely
harm the operations of our customers in these countries, causing our sales
to suffer. The effect of such events on our revenues could be material
because we derive substantial revenues from sales to semiconductor device
foundries in Taiwan such as TSMC and UMC, from memory chip manufacturers in
South Korea such as Hyundai and Samsung, and from semiconductor device
manufacturers in Japan such as NEC and Toshiba.
- Difficulties in staffing and managing foreign branch operations. During
periods of tension between the governments of the United States and other
countries, it is often difficult for United States companies such as
ourselves to staff and manage operations in such countries. We have only
recently established a direct sales force in Europe, and we are continuing
to build our sales infrastructure in that region. Because our European sales
operations are new and our sales employees in Europe have only recently
begun working for us, these operations could be particularly susceptible to
any periods of tension that may arise between the United States and any
European country in which we operate.
Because we derive a significant portion of our revenues from sales in Asia,
our sales and results of operations could be adversely affected by the
instability of Asian economies. Countries in the Asia Pacific region, including
Japan, Korea and Taiwan, each of which accounted for a significant portion of
our business in that region, have experienced currency, banking and equity
market weaknesses over the last 24 months. These weaknesses began to adversely
affect our sales to semiconductor device manufacturers located in these regions
in the fourth quarter of 1997, and continued to adversely affect our sales in
1998 and the first half of 1999. Although we have recently received an
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increased level of orders from customers in the Asia Pacific region, we expect
that turbulence in the Asian markets could adversely affect our sales in future
periods.
Highly Competitive Industry
Our current and potential competitors have significantly greater resources
than we do, and increased competition could impair sales of our products or
cause us to reduce our prices. We operate in the highly competitive
semiconductor capital equipment industry and face competition from a number of
companies, many of which have greater financial, engineering, manufacturing,
marketing and customer support resources and broader product offerings than we
do. As a result, our competitors may be able to respond more quickly to new or
emerging technologies or market developments by devoting greater resources to
the development, promotion and sale of products which could impair sales of our
products. Moreover, there has been significant merger and acquisition activity
among our competitors and potential competitors, particularly during the recent
downturn in the semiconductor device and semiconductor capital equipment
industries. These transactions by our competitors and potential competitors may
provide them with a competitive advantage over us by enabling them to rapidly
expand their product offerings and service capabilities to meet a broader range
of customer needs. Many of our customers and potential customers in the
semiconductor device manufacturing industry are large companies that require
global support and service for their semiconductor capital equipment. While we
believe that our global support and service infrastructure is sufficient to meet
the needs of our customers and potential customers, our larger competitors have
more extensive infrastructures than we do, which could place us at a
disadvantage when competing for the business of global semiconductor device
manufacturers.
Many of our competitors are investing heavily in the development of new
systems that will compete directly with ours. We have from time to time
selectively reduced prices on our systems in order to protect our market share,
and competitive pressures may necessitate further price reductions. We expect
our competitors in each product area to continue to improve the design and
performance of their products and to introduce new products with competitive
prices and performance characteristics. Such product introductions by our
competitors would likely cause us to decrease the prices of our systems and
increase the level of discounts we grant our customers.
Intellectual Property Rights
We may fail to adequately protect our intellectual property and, therefore,
lose our competitive advantage. Our future success and competitive position
depend in part upon our ability to obtain and maintain proprietary technology
for our principal product families, and we rely, in part, on patent, trade
secret and trademark law to protect that technology. If we fail to adequately
protect our intellectual property, it will be easier for our competitors to sell
competing products. We own or have licensed a number of patents relating to our
transparent and opaque thin film metrology systems, and have filed applications
for additional patents. Any of our pending patent applications may be rejected,
and we may not in the future be able to develop additional proprietary
technology that is patentable. In addition, the patents we do own or that have
been issued or licensed to us may not provide us with competitive advantages and
may be challenged by third parties. Third parties may also design around these
patents.
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.
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Our commercial success depends in part on our ability to avoid infringing or
misappropriating patents or other proprietary rights owned by third parties.
From time to time we may receive communications from third parties asserting
that our products or systems infringe, or may infringe, the proprietary rights
of these third parties. These claims of infringement may lead to protracted and
costly litigation which could require us to pay substantial damages or have the
sale of our products or systems stopped by an injunction. Infringement claims
could also cause product or system delays or require us to redesign our products
or systems, and these delays could result in the loss of substantial revenues.
We may also be required to obtain a license from the third party or cease
activities utilizing the third party's proprietary rights. We may not be able to
enter into such a license or such license may not be available on commercially
reasonable terms. The loss of important intellectual property rights could
therefore prevent our ability to sell our systems, or make the sale of such
systems more expensive for us.
We may be required to initiate litigation in order to enforce any patents
issued to or licensed by us, or to determine the scope or validity of a third
party's patent or other proprietary rights. In addition, we may be subject to
lawsuits by third parties seeking to enforce their own intellectual property
rights. Any such litigation, regardless of outcome, could be expensive and time
consuming, and could subject us to significant liabilities or require us to
re-engineer our product or obtain expensive licenses from third parties.
Volatility of Stock Price
The stock market in general, and the stock prices of technology companies in
particular, have recently experienced volatility which has often been unrelated
to the operating performance of any particular company or companies. If market
or industry-based fluctuations continue, our stock price could decline
regardless of our actual operating performance and investors could lose a
substantial part of their investments. The market price of our common stock will
likely fluctuate in response to a number of factors including the following: our
failure to meet the performance estimates of securities analysts; changes in
financial estimates of our revenues and operating results by securities
analysts; the timing of announcements by us or our competitors of significant
contracts or acquisitions; and general stock market conditions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We do not use derivative financial instruments in our
investment portfolio. We place our investments with high credit quality issuers
and by policy, are averse to principal loss, ensuring the safety and
preservation of our invested funds by limiting default risk, market risk and
reinvestment risk. As of March 31, 2000, our investments consisted primarily of
municipal and government securities that mature in one year or less.
Foreign Currency Risk
We do not use foreign currency forward exchange contracts or purchased
currency options to hedge local currency cash flows or for trading purposes. All
sales arrangements with international customers are denominated in U.S. dollars.
We have branch operations in Taiwan and Korea which are subject to currency
fluctuations. These foreign branches are limited in their operations and level
of investment so that the risk of currency fluctuations is not expected to be
material.
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PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
By: ___________________________________
Paul F. McLaughlin
Chairman and Chief Executive Officer
By: ____________________________________
Steven R. Roth
Vice President, Chief Financial Officer
17
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