One Rudolph Road, PO Box 1000

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 [_]

 

PART I    FINANCIAL INFORMATION

PART II    OTHER INFORMATION

PART I   FINANCIAL INFORMATION

Item 1.   Financial Statements

 

RUDOLPH TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

 

		September 30, 2006 (unaudited)		December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$     57,878		$      37,986
Marketable securities		34,736		42,821
Accounts receivable, net		64,904		26,046
Inventories		58,269		30,073
Prepaid expenses and other current assets		6,200		3,093
Total current assets		221,987		140,019
Property, plant and equipment, net		17,707		8,599
Goodwill		145,591		13,245
Identifiable intangible assets, net		38,520		8,628
Other assets		3,789		9,510
Total assets		$  427,594		$     180,001
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$      22,196		$         9,952
Other current liabilities		18,803		4,773
Total current liabilities		40,999		14,725
Non-current liabilities		4,224		742
Total liabilities		45,223		15,467
Commitments and contingencies
Stockholders' equity:
Common stock		29		17
Additional paid-in capital		358,879		147,278
Accumulated other comprehensive loss		(1,044)		(928)
Retained earnings		24,507		20,191
Unearned compensation		-		(2,024)
Total stockholders' equity		382,371		164,534
Total liabilities and stockholders' equity		$  427,594		$     180,001

 

 

 

 

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 September 30,				Nine Months Ended September 30,
		2006		2005		2006		2005
Revenues		$   58,166		$    20,201		$  146,706		$     64,643
Cost of revenues		27,599		10,672		77,199		34,233
Gross profit		30,567		9,529		69,507		30,410
Operating expenses:
Research and development		7,528		3,070		20,163		9,446
In-process research and development		-		-		9,900		-
Selling, general and administrative		9,330		4,712		25,362		14,870
Amortization		1,126		219		2,923		657
Total operating expenses		17,984		8,001		58,348		24,973
Operating income		12,583		1,528		11,159		5,437
Interest income and other, net		769		208		2,282		1,049
Income before income taxes		13,352		1,736		13,441		6,486
Provision for income taxes		5,281		575		9,125		1,715
Net income		$    8,071		$    1,161		$    4,316		$       4,771
Earnings per share:
Basic		$       0.28		$       0.07		$      0.16		$         0.28
Diluted		$       0.28		$        0.07		$      0.16		$         0.28
Weighted average shares outstanding:
Basic		28,848,577		16,921,560		26,708,363		16,886,530
Diluted		29,119,355		16,959,047		26,975,950		16,935,334

 

 

 

  The accompanying notes are an integral part of these financial statements.

 

  RUDOLPH TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

	Nine Months Ended September 30,
	2006		2005
Cash flows from operating activities:
Net income	$      4,316		$   4,771
Adjustments to reconcile net income to net cash and cash           equivalents provided by operating activities:
Amortization	3,018		657
Depreciation	3,101		1,288
In-process research and development	9,900		-
Foreign currency exchange loss	38		134
Net loss on sale of marketable securities	159		464
Share-based compensation	1,044		396
Tax benefit for sale of shares through employee stock plans	-		133
Provision for doubtful accounts and inventory valuation	3,957		283
Deferred income taxes	263		(64)
Decrease (increase) in assets excluding effects of business                combinations:
Accounts receivable	(24,602)		(1,283)
Inventories	(7,530)		2,854
Prepaid expenses and other assets	205		(1,289)
Increase (decrease) in liabilities excluding effects of business                combinations:
Accounts payable and accrued liabilities	3,769		404
Income tax payable	5,685		(44)
Deferred revenue	4,085		(84)
Other current liabilities	1,241		2,158
Non-current liabilities	(45)		399
Net cash provided by operating activities	8,604		11,177
Cash flows from investing activities:
Purchases of marketable securities	(59,611)		(38,044)
Proceeds from sales of marketable securities	81,091		54,619
Purchases of property, plant and equipment	(5,242)		(1,031)
Capitalized software	(1,543)		(679)
Purchase of business, net of cash acquired	(12,071)		(669)
Net cash provided by investing activities	2,624		14,196
Cash flows from financing activities:
Proceeds from sales of shares through employee stock plans	7,651		1,325
Tax benefit for sale of shares through employee stock plans	986		-
Net cash provided by financing activities	8,637		1,325
Effect of exchange rate changes on cash	27		(267)
Net increase in cash and cash equivalents	19,892		26,431
Cash and cash equivalents at beginning of period	37,986		12,627
Cash and cash equivalents at end of period	$   57,878		$    39,058

 

 

 

 

 

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)

(Unaudited)

NOTE 1.    Basis of Presentation

        The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the "Company" or "Rudolph") 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 and nine month periods ended September 30, 2006 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, 2005.

NOTE 2.   Business Combinations        

        On February 15, 2006, the Company completed its merger with August Technology Corporation.   August Technology was a world-class provider of automated defect detection and product characterization systems for microelectronic device manufacturers. Their systems provided manufacturers with information that enables process-enhancing decisions, ultimately lowering manufacturing costs and decreasing time-to-market. They had traditionally provided systems to address the automated inspection needs of the early stages of the final manufacturing or back-end of the microelectronic device manufacturing process. In addition, they had introduced new products for edge and backside inspection systems for advanced macro defect detection primarily in the front-end of the wafer manufacturing process. When used in conjunction with one another these systems allow a manufacturer to inspect the top, edge and back of a wafer's surface.

        The merger was approved by August Technology's shareholders, and the issuance of shares of Rudolph common stock was approved by Rudolph's stockholders, at their respective special meetings held that day. The combined company will continue to be known as Rudolph Technologies, Inc. The aggregate purchase price was $247,258, consisting of $37,200 in cash, 11,298,265 shares of common stock valued at $197,833, the fair value of assumed August Technology options of $6,608 and transaction costs of $5,617. The measurement date was determined to be the date that the merger was consummated since the aggregate amount of cash and the number of shares to be distributed in the merger was not determinable until that date.  The market price used to value the Rudolph shares issued as consideration for August Technology was $17.51, which represents the average of the closing market price of Rudolph's common stock for the three day period ended February 15, 2006.   

        Subsequent to the merger date,  the Company's revenue recognition policy incorporates the merged activities.   Revenue is recognized when 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 the Company's products are sold and accounted for as multiple element arrangements, consisting primarily of the sale of the product, software, installation, and training services. The Company generally recognizes product revenue upon shipment. When customer acceptance is subjective and not obtained prior to shipment, the Company defers product revenue until such time as positive affirmation of acceptance has been obtained from the customer. Customer acceptance is generally based on the Company's 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 and training 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. Revenue related to training services is recognized ratably over the training period. Revenue from software license fees is recognized upon shipment if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement.  Such undelivered elements in these arrangements typically consist of follow-on support.  If vendor-specific objective evidence does not exist for the undelivered elements of the arrangement, all revenue is deferred and recognized ratably over the support period.

        The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of August Technology have been included in the Company's consolidated financial statements since the date of merger.   The following table summarizes the unaudited estimated fair value of the assets acquired and liabilities assumed at the date of merger:

          The above purchase price has been preliminarily allocated based on estimates of the fair values of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed during 2006, but no later than one year from the merger date.  The fair value of inventories includes a step-up of $4,468, of which, $3,356 was recognized in cost of revenues for the nine months ended September 30, 2006.  In connection with the merger, at the merger date, the Company began formulating a plan to exit or restructure certain activities. The Company has not completed this analysis, but has recorded initial liabilities of $224 in connection with the preliminary plan, of which $141 was utilized for the nine months ended September 30, 2006.  As the Company finalizes its plans to exit or restructure activities, it may record additional liabilities for, among other things, severance and severance related costs, which would also increase the goodwill recorded.

            Of the $42,700 of acquired identifiable intangible assets, the following table reflects the allocation of the acquired identifiable intangible assets and related estimates of useful lives:

           The developed technology is separated into front-end and back-end automated macro defect inspection, and analysis software and is utilized in the manufacturing of semiconductor chips. This technology is designed to automate inspection processes that are performed by the human eye through the use of imaging technology and high-speed computers. The process of forming transistors directly on silicon wafers is commonly referred to as the "front-end" process. The front-end products provide high-speed automated inspection of chips, cracks and other defects that occur during the chip manufacturing process. The merged company's product offering in this area is the AXi series, which is an automated defect inspection system.

            Once the various semiconductor devices have been created they must be interconnected to form the desired electrical circuits. This "back-end" process involves creating metal interconnecting wires that are separated by insulating materials. The back-end products provide inspection of the chips to detect defects created during the back-end manufacturing process. The back-end products include the NSX series, which are flexible automated wafer and die defect inspection systems for high-speed, consistent, reliable defect detection.

            The software technology is used to analyze and process the data provided during front-end and back-end inspection. The software provides rapid classification of defects as well as providing possible correlation among them by creating a database of prior issues and defects. This aids the Company's customers in making adjustments to the manufacturing processes to help reduce the number of defects and enable consistent performance among separate machines. The software products include fabrication-wide data management software, and tool specific defect review and process analysis software.

            Paragraph 39 of Statement of Financial Accounting Standards (SFAS) No. 141 provides guidance concerning the recognition of value associated with intangible assets and refers to an illustrative list in Appendix A of SFAS No. 141 of commonly identifiable intangible assets that meet the criteria for recognition as assets apart from goodwill. This list includes technology-based intangible assets, such as patented technology and computer software. The developed technology acquired represents proprietary know-how that was technologically feasible as of the merger date and is supported by patents.

            A useful life of nine years was assigned for each of the front-end, back-end and software developed technologies. The basis for assigning these lives was derived from a number of factors including the valuation of the developed technology, the expected life cycle of the technology, and the remaining lives of the underlying patents. The valuation, which was performed by an independent third party valuation firm, was based on projected cash flows for each of the developed technologies. After the ninth year, the cash flows generated from the developed technologies decline to a nominal amount. The life cycle of the technology is in its early stages of development due to advancements in computers and camera technology, and has only recently begun to achieve semiconductor industry acceptance. As such, risk of technology obsolescence is minimized until the later stages of the life cycle. In evaluating the patents underlying the acquired technology, the remaining lives of the patents range from 12 to 15 years.  The Company determined that the decline in cash flows to a nominal amount was a principle factor in determining the life of the technology. As such, the Company believes that a life of nine years assigned to the developed technology is appropriate.     

           Approximately $9.9 million of the acquired identifiable intangible assets represents the estimated fair value of in-process research and development (IPRD) projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the Consolidated Statement of Operations at the merger date. The purchased in-process technology projects are comprised of next generation automated macro defect inspection systems with enhanced defect capture capabilities and software projects which improves the tools' capabilities. The defect inspection and software projects had a value assigned to them of $6.9 million and $3.0 million, respectively. The estimated cost to complete the projects at the date of merger was $260 thousand and $880 thousand, for the defect inspection and software projects, respectively.

            The estimated fair value of these projects was determined using an income approach, then discounting the forecasted cash flows directly related to the IPRD. The discount rate was derived after giving consideration to the additional risks associated with an unproved technology.

             Identifiable intangible assets include developed technology, customer relationships, trade names and IPRD. The Company is amortizing the intangible assets of $32,800 on a straight-line basis over their estimated remaining useful lives. The amount allocated to IPRD of $9,900 is related to defect inspection technology. Such amount was charged to expense at the merger date as the IPRD had not reached technological feasibility and had no alternative future use.  

        The excess of the purchase price over the fair value of the net assets acquired and liabilities assumed was allocated to goodwill, none of which is deductible for tax purposes.  All remaining and future acquired goodwill is subject to an impairment test each year using a fair-value-based approach pursuant to SFAS No. 142.

        Factors that contribute to a purchase price that results in recognition of goodwill include:

*  the combination of August Technology's defect inspection technology with Rudolph's MetaPULSE <R> metrology products is expected to improve copper metrology process controls and should allow the combined company to offer a more comprehensive and better integrated set of tools to its customers and enhance its ability to compete more effectively;

*  the combination of August Technology's defect inspection experience and technology with Rudolph's complementary defect inspection experience and technology should allow the combined company to offer its customers a more comprehensive suite of tools more quickly, thus enhancing the company's ability to compete more effectively;

*  consolidation of territorial sales activities and common marketing programs;

*  redeployment or elimination of duplicative functional and facilities costs;

*  reduction of customer service costs as a result of the consolidation of the companies' global customer service and regional support networks;

*  creation of a larger sales and service organization worldwide, the expansion of the companies' dedicated sales teams and a higher profile with customers, which is expected to present greater opportunities for potential revenue enhancements by marketing and cross-selling the products of the combined company;

*  avoidance of incurring certain costs that the companies would expect to incur on a stand-alone basis in furtherance of their growth strategies.

*  the combined company is expected to have greater prominence within the financial community, providing improved access to capital;

*  the direct sales and service presence of the combined company in the important Japanese semiconductor manufacturing market (where Rudolph has three offices with over 20 employees) may increase opportunities for product orders;

*  the combined experience, financial resources, development expertise, size and breadth of product offerings of the combined company may allow it to respond more quickly and effectively to technological change, increased consolidation and industry demands; and

*  the ability of the assembled workforce to continue to deliver value-added solutions and develop new products and industry leading production technologies that solve customer problems.

            The following unaudited pro forma consolidated financial information presents the combined results of operations of the Company and August Technology as if the merger occurred at the beginning of the periods presented, after giving effect to certain adjustments, including amortization expense, merger costs and inventory step-up.  Due to the non-recurring nature of the $9,900 IPRD charge and inventory step-up, these amounts have not been included in the unaudited pro forma consolidated financial information. The unaudited pro forma consolidated financial information does not necessarily reflect the results of operations that would have occurred had the merger been completed as of the dates indicated or of the results that may be obtained in the future.

NOTE 3.   Share-Based Compensation

        Prior to January 1, 2006, the Company's share-based compensation plans were accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Under this method, no compensation expense for stock options was recognized as long as the exercise price equaled or exceeded the market price of the underlying stock on the date of the grant.   Compensation cost for restricted stock units issued to employees and directors was based upon the market value on the date grant.  Such compensation costs were charged to unearned compensation in stockholders' equity and amortized to expense over the requisite service period.  The Company elected the disclosure-only alternative permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), for fixed stock-based awards to employees. 

        On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R") using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation cost over the service period for awards expected to vest.  The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company's valuation techniques previously utilized for options in footnote disclosures required under SFAS 123, as amended by SFAS 148. Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company's current estimates.  Prior to the adoption of SFAS 123R, the Company recorded forfeitures as incurred. Upon adoption of SFAS 123R, compensation expense for all share-based payments includes an estimate for forfeitures and is recognized over the expected term of the share-based awards using the straight-line method. The impact of this change on prior period compensation cost was immaterial.   Additionally, the unearned compensation of $2,024 at the SFAS 123R adoption date relating to previous restricted stock unit grants was offset against additional paid-in capital.  Results for prior periods have not been restated. 

        The following table reflects share-based compensation expense by type of award recorded during the three and nine month periods ended September 30, 2006 in accordance with SFAS 123R:

        Valuation Assumptions for Stock Options

        For the three month period ended September 30, 2006, there were no stock options granted.   For the nine month period ended September 30, 2006, there were 5,000 stock options granted and 368,711 unvested options and 1,049,156 vested options assumed from the August Technology merger.  There were no stock options granted in the three month period ended September 30, 2005 and there were 1,000 stock options granted in the nine month period ended September 30, 2005.  The fair value of each option was estimated on the date of grant for the granted options and the merger date for the unvested options assumed from the August Technology merger, using the Black-Scholes option-pricing model with the following assumptions:

        Share-Based Compensation Plans

        The Company's share-based compensation plans are intended to attract and retain employees and to provide an incentive for them to assist the Company to achieve long-range performance goals and to enable them to participate in long-term growth of the Company.  The Company settles stock option exercises with newly issued common shares.        

        In 1996, the Company adopted the 1996 Stock Option Plan (the "Option Plan"). Under the Option Plan, the Company was authorized to grant options to purchase up to 1,069,902 shares of common stock. All of the outstanding options became 100% vested upon the initial public offering of the Company on November 12, 1999. As of September 30, 2006, there were no shares of common stock reserved for future grants under the Option Plan.

        The Company established the 1999 Stock Plan (the "1999 Plan") effective August 31, 1999. The 1999 Plan provides for the grant of 2,000,000 stock options and stock purchase rights, subject to annual increases, to employees, directors and consultants at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. Options granted under the 1999 Plan typically vest over a five-year period and expire ten years from the date of grant. Restricted stock units granted under the plan typically vest over a five-year period for employees and one year for directors.  As of September 30, 2006, there were 877,088 shares of common stock reserved for future grants under the 1999 Plan.

        The Company assumed the August Technology Corporation 1997 Stock Plan (the "1997 Plan") at the merger date.   Stock options granted under the 1997 Plan vest over periods that range from immediate to five-years and expire in either seven or ten years from the date of grant.  As of September 30, 2006, there were 654,217 shares of common stock reserved for future grants under the 1997 Plan.

        Stock Option Activity

         The following table summarized stock option activity for the nine month period ended September 30, 2006:

        The total intrinsic value of the stock options exercised during the nine months ended September 30, 2006 was $2,945.

        The options outstanding and exercisable at September 30, 2006 were in the following exercise price ranges:

        As of September 30, 2006, there was $1,692 of total unrecognized compensation cost related to stock options granted under the plans.  That cost is expected to be recognized over a weighted average period of 3.0 years.

        The Company recognized a tax benefit of $487 for stock options exercised during the nine month period ended September 30, 2006, which were assumed in the purchase price of the August Technology merger.  This benefit reduced goodwill.

       Restricted Stock Unit Activity

        A summary of the Company's nonvested restricted stock unit activity with respect to the nine month period ended September 30, 2006 follows:

        As of September 30, 2006, there was $3,148 of total unrecognized compensation cost related to restricted stock units granted under the plans.  That cost is expected to be recognized over a weighted average period of 3.9 years.

        As discussed above, results for prior periods have not been restated to reflect the effects of implementing SFAS 123R.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, as amended, to stock options granted under the Company's stock-based employee compensation plans for the three and nine month periods ended September 30, 2005.  For purposes of this pro forma disclosure, the value of the stock options was estimated using a Black-Scholes option-pricing formula and amortized to expense over the options' vesting periods, with option forfeitures accounted for as they occurred:

        Employee Stock Purchase Plan

        The Company established an Employee Stock Purchase Plan (the "ESPP") effective August 31, 1999 and amended on May 1, 2005. Under the terms of the ESPP, eligible employees may have up to 15% of eligible compensation deducted from their pay and applied to the purchase of shares of Rudolph common stock. The price the employee must pay for each share of stock will be 95% of the fair market value of the Rudolph common stock at the end of the applicable six month purchase period.  The ESPP is intended to qualify under Section 423 of the Internal Revenue Code and is a non-compensatory plan as defined by SFAS 123R.   No stock-based compensation expense for the ESPP was recorded for the three and nine month periods ended September 30, 2006.  As of September 30, 2006 and December 31, 2005, there were  1,737,066 and 1,446,600 shares available for issuance under the ESPP, respectively.

NOTE 4.   Marketable Securities

        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 losses on available-for-sale securities were $31 and $159 for the three and nine months ended September 30, 2006.  Net realized losses on available-for-sale securities were $313 and $464 for the three and nine months ended September 30, 2005.  Gross unrealized gains on available-for-sale securities were $3 and $14 as of September 30, 2006 and December 31, 2005, respectively.  Gross unrealized losses on available-for-sale securities were $313 and $533 as of September 30, 2006 and December 31, 2005, respectively.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2006.

NOTE 5.    Derivative Instruments and Hedging Activities

      The Company reports derivatives and hedging activities in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or accumulated other comprehensive loss, depending on whether the derivative is designated as part of a hedge transaction, and if it is, depending on the type of hedge transaction.

        The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At September 30, 2006, these contracts included the sale of Japanese Yen to purchase U.S. dollars. The foreign currency forward contracts were entered into by our Japanese subsidiary to economically hedge a portion of certain intercompany obligations. The forward contracts are not designated as hedges for accounting purposes and therefore, the change in fair value is recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.

        The dollar equivalent of the US dollar forward contracts and related fair values as of September 30, 2006 were as follows:

        The dollar equivalent of the US dollar forward contracts and related fair values as of December 31, 2005 were as follows:

NOTE 6.    Identifiable Intangible Assets

        Identifiable intangible assets as of  September 30, 2006 are as follows:

		Gross Carrying Amount		Accumulated Amortization		Net
Developed technology		$    37,991		$    6,757		$    31,234
Customer relationships		4,400		306		4,094
Tradenames		3,400		208		3,192
Total identifiable intangible assets		$   45,791		$   7,271		$   38,520

        Identifiable intangible assets as of December 31, 2005 are as follows:

      Intangible asset amortization expense for the three and nine months ended September 30, 2006 was $1,119 and $2,908, respectively.  For the three and nine months ended September 30, 2005, intangible asset amortization expense was $219 and $657, respectively.  Estimated amortization expense  for the remainder of 2006 amounts to $1,119 and in each of the next five years amounts to $4,476 for 2007, $4,442 for 2008, $4,101 for 2009, $4,085 for 2010 and $4,085 for 2011.

NOTE 7.   Accounts Receivable

        Accounts receivable are net of the allowance for doubtful accounts of $480 and $230 as of September 30, 2006 and December 31, 2005, respectively.

NOTE 8.    Inventories

      

NOTE 9.   Property, Plant and Equipment

		September 30,		December 31,
		2006		2005
Land and building		$       5,180		$         5,175
Machinery and equipment		9,310		3,422
Furniture and fixtures		2,271		1,375
Computer equipment		5,070		3,289
Leasehold improvements		6,778		3,081
		28,609		16,342
Accumulated depreciation		(10,902)		(7,743)
Net property, plant and equipment		$    17,707		$       8,599

NOTE 10.   Commitments and Contingencies

            Intellectual property indemnification obligations

        The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry.  These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.  The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers.  Historically, the Company has not made any indemnification payments under such agreements and no amount has been recorded in the accompanying consolidated financial statements with respect to these indemnification guarantees.

           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.   Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 15 months prior to the period ended September 30, 2006 and warranty accruals are related to sales for the nine month period ended September 30, 2006.

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

        The accrual of $2,928 for the nine months ended September 30, 2006 includes the acquired warranty liability from August Technology at the merger date totaling $1,244.

        New Lease Agreement

        On June 9, 2005, the Company entered into a ten year and six month lease agreement with Mount Olive Industrial Realty Company LLC to lease approximately 83,500 square feet of manufacturing and office space. This location replaces leased space in Mt. Arlington and Ledgewood, New Jersey and serves as the Company's manufacturing, engineering, customer support and training facility.  The Company began occupying the space in the fourth quarter of 2005 and completed its relocation in the second quarter of 2006.   The Company received landlord incentives of $820 in 2005 to offset the costs of constructing structural components for the leased space.   These incentives are recorded as deferred rent in current and non-current liabilities to be amortized over the lease term as a decrease to rent expense.  Total future minimum rent payments will be approximately $167 for 2006, $696 for 2007, $768 for 2008, $809 for 2009, $834 for 2010 and $4,724 for all periods thereafter.  The Company recognizes expense on a straight-line basis.

       
NOTE 11.   Interest Income and Other, Net

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2006		2005		2006		2005
Interest  income		$       800		$    521		$     2,433		$     1,503
Realized losses on sales of     marketable securities, net		(31)		(313)		(159)		(464)
Rental income		-		-		8		10
Total interest income and other, net		$       769		$     208		$     2,282		$    1,049

NOTE 12.   Comprehensive Income

        The difference between net income and comprehensive income for the Company is due to currency translation adjustments and unrealized gains (losses) on investments.

        The components of comprehensive income are as follows:

  

		Three Months Ended September 30,				Nine Months Ended September 30,
		2006		2005		2006		2005
Net income		$     8,071		$   1,161		$    4,316		$   4,771
Change in net unrealized losses on      investments, net of tax		234		34		136		(128)
Change in currency translation    adjustments		371		(84)		(252)		211
Total comprehensive income		$    8,676		$  1,111		$    4,200		$   4,854

 

NOTE 13.   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 and restricted stock units for the 2006 and 2005 periods.  During the three and nine months ended September 30, 2006 and 2005, there were stock options with exercise prices above the average fair market value of the Company's common stock which were excluded from the computation of diluted earnings per share due to the anti-dilutive nature of these options.  During the nine months ended September 30, 2006 and the three and nine months ended September 30, 2005, there were restricted stock units which were excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.  For the three months ended September 30, 2006,  the weighted average number of stock options excluded from the computation of diluted earnings per share was 2,108,408.   For the nine months ended September 30, 2006,  the weighted average number of stock options and restricted stock units excluded from the computation of diluted earnings per share was 2,149,889.  For the three and nine months ended September 30, 2005,  the weighted average number of stock options and restricted stock units excluded from the computation of diluted earnings per share were 2,339,297 and 2,119,667, respectively.    

        The Company's basic and diluted earnings per share amounts are as follows:

 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2006		2005		2006		2005
Numerator:
Net income		$       8,071		$    1,161		$   4,316		$        4,771
Denominator:
Basic earnings per share -         weighted average shares         outstanding		28,848,577		16,921,560		26,708,363		16,886,530
Effect of potential dilutive securities:
Employee stock options and         restricted stock units - dilutive         shares		270,778		37,487		267,587		48,804
Diluted earnings per share -         weighted average shares        outstanding		29,119,355		16,959,047		26,975,950		16,935,334
Earnings per share:
Basic		$        0.28		$     0.07		$     0.16		$        0.28
Diluted		$        0.28		$     0.07		$     0.16		$        0.28

NOTE 14.   Segment Reporting and Geographic Information

         Operating segments are business units that have separate financial information and are separately reviewed by the Company's chief decision maker.  The Company's chief decision maker is the Chief Executive Officer.  The Company and its subsidiaries currently operate in a single reportable segment: the design, development, manufacture, sale and service of process control metrology systems used in semiconductor device manufacturing.  The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. 

The following table lists the different sources of revenue: