| Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results |
| If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline |
| Investors should consider the following risks and the information contained under the heading “Cautionary Statement Regarding Forward Looking Statements” before deciding to invest in our common stock |
| Our business depends in large part upon capital spending in the semiconductor wafer and device and data storage industries, which are highly cyclical |
| Our business depends in large part upon capital expenditures by semiconductor wafer and device and data storage manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits, products utilizing integrated circuits and systems requiring data storage |
| The semiconductor and data storage industries are cyclical and have historically experienced periodic downturns, which have had a severe effect on the demand for capital equipment |
| Prior semiconductor and data storage industry downturns and construction of excess capacity by the industries have adversely affected our revenue, gross margin and net income, and have also adversely affected the trading price of our common stock, and another downturn could have a similar effect in the future |
| In addition, the need for continued investment in research and development and extensive customer service and support capability worldwide will continue to limit our ability to reduce expenses during industry downturns |
| Our operating results can vary significantly from period to period due to a number of factors |
| Our operating results can vary significantly from period to period due to a number of factors, including: • economic conditions in the semiconductor wafer and device and data storage industries; • product mix of our sales; • the sales distribution channel of our sales; • competitive pricing pressures; • our ability to design, introduce and manufacture new products on a cost effective and timely basis; • customer cancellations or rescheduled shipments; • production difficulties or the inability to obtain critical components resulting in delayed shipments; and • seasonal factors such as customers’ capital budget approval cycles |
| 9 ______________________________________________________________________ [11]Table of Contents These factors could have a material adverse effect on our results of operations |
| As cost of revenue includes manufacturing overhead, which is relatively constant from period to period, gross margin can vary significantly from period to period due to varying levels of production and revenue |
| Marketing and sales expenses can vary from period to period based on a number of factors, including mix of sales channels, geographic mix and the timing of marketing events |
| There can be no assurance that we will be profitable in any future period |
| Sales to foreign markets, especially Asian markets, constitute a substantial portion of our sales; therefore, our sales and results of operations could be adversely affected by downturns in economic conditions in countries outside of the United States |
| International sales accounted for 81prca, 83prca and 86prca of our revenue for fiscal years 2006, 2005 and 2004, respectively |
| We expect that international sales will continue to represent a significant percentage of revenue |
| Our international business may be affected by changes in demand resulting from: • fluctuations in interest and currency exchange rates; • the investment policies of foreign countries; • changes in trade policies and/or tariff regulations; and • difficulties in obtaining US export licenses |
| Given that approximately 60prca-70prca of our revenue has historically come from Japan and the Asia-Pacific region, financial instability in certain Asian countries could materially affect our competitive position and, consequently, our financial results |
| The loss of any one of our major customers would likely have a material adverse effect on us |
| A relatively limited number of customers have historically accounted for a substantial portion of our revenue in each year |
| In fiscal years 2006, 2005 and 2004, sales to our top five customers in each period accounted for approximately 61prca, 71prca and 74prca of our revenue, respectively |
| The loss of or any reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions in the semiconductor industry or in other industries that manufacture products utilizing semiconductors, could adversely affect our business, financial condition and results of operations |
| Our ability to maintain or increase our sales levels in the future will depend in part upon our ability to obtain orders from new customers as well as the financial condition and success of our existing customers and the general economy |
| There can be no assurance that we will be able to increase the level of our revenue in the future or that we will be able to retain existing customers or attract new customers |
| In addition, due to the limited number of customers, any delay in collecting or the inability to collect our accounts receivable could have a material adverse effect on our financial results |
| We must expend a significant amount of time and resources to develop new products, and if these products do not achieve commercial acceptance, our operating results may suffer |
| We expect to spend a significant amount of time and resources on research and development of new systems and refinement of 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 or refined systems |
| Our ability to introduce and successfully market our systems is subject to a wide variety of challenges during this development cycle that could delay introduction of these systems |
| Due to the complexity of our systems, such challenges include overcoming design and production issues and modifying development plans to meet the needs of our customers, as well as addressing issues that arise upon installation at customer sites |
| If we do not achieve market acceptance of new products, our operating results will suffer |
| 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 metrology systems are superior to theirs |
| We believe that once a semiconductor or magnetic data storage customer has selected one vendor’s metrology system, the customer generally relies upon that system and, to the extent possible, subsequent generations of the same vendor’s system, for the life of the application |
| Once a vendor’s metrology system has been installed, a customer must often make substantial technical modifications and may experience downtime in order to switch to another vendor’s metrology system |
| 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 system for an application |
| 10 ______________________________________________________________________ [12]Table of Contents Our failure to protect our proprietary technology may significantly impair our competitive position and protection of our proprietary technology may be impossible or expensive |
| Our proprietary technology is important to the continued success of our business |
| We rely on a combination of patent, copyright, trademark and trade secret laws and license agreements to establish and protect our proprietary rights in our products |
| We own many United States and foreign patents covering existing and potential products and have applied for additional patents in and outside the United States |
| If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products |
| 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 |
| 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 develop alternative designs which work around our patents |
| In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology and routinely enter into standard confidentiality agreements with our employees and consultants and seek to control access to and distribution of our proprietary information |
| However, in the event that these agreements are 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 |
| Despite protective measures utilized by us, we cannot be certain that: • we will be able to protect our technology adequately; • competitors or other third parties will not be able to copy or otherwise obtain our products and or technology without our authorization or develop similar technology independently; • any of our pending patent applications will be issued; • intellectual property laws will protect our intellectual property rights; or • third parties will not assert that our products infringe patent, copyright or trade secrets of such parties |
| 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 |
| Many US companies have encountered substantial problems in protecting their proprietary rights against infringement in some foreign countries |
| 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 |
| Litigation may be necessary in order to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement |
| In the past, we have been involved in lawsuits to enforce our intellectual property rights, and may be involved in such litigation in the future |
| Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations |
| Claims of infringement may result in protracted and costly litigation that could require us to pay substantial damages or have the sale of our products stopped by an injunction |
| Infringement claims could also cause product delays or require us to redesign our products, and these delays could result in the loss of substantial revenue |
| We may also be required to obtain a license from a third party or cease activities utilizing a 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 |
| Our current and potential competitors have significantly greater resources than we do, and increased competition could impair our business |
| The semiconductor and data storage equipment industries are highly competitive |
| Competition in these industries is based primarily on technology, pricing and market penetration |
| Companies that have complementary technologies and greater financial resources then we do may enter these industries and develop products that are superior to our products or achieve market acceptance |
| In the market for optical defect inspection equipment, we compete directly with companies that have significantly greater total assets and annual revenue than we do |
| In the metrology area of the device industry, we have encountered, and expect to encounter in the future, competition from companies offering similar and competing technologies, some of which have significantly greater total assets and annual revenue than we do, have an existing market presence in the device industry, or both |
| We also expect to encounter intense competition in the areas of metrology and inspection for the magnetic data storage industry |
| Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics |
| Competitive pressures can necessitate price reductions or non-revenue generating shipments of new products to certain strategic customers for evaluation purposes, which 11 ______________________________________________________________________ [13]Table of Contents can adversely affect our operating results |
| In order to remain competitive, we must maintain a high level of investment in research and development, sales, marketing and customer service |
| There can be no assurance that we will have sufficient resources to continue to make such investment or that we will be able to make the technological advances necessary to remain competitive |
| We expect acquisitions and business combinations by our competitors and potential competitors in the metrology as well as in the defect inspection markets |
| The impact of acquisitions and business combinations by our competitors could: • allow our competitors to offer new products without the lengthy time delays typically associated with internal product development; • limit our access to commercially significant technologies and/or new or complementary products; or • permit our competitors to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases |
| Accordingly, business combinations and acquisitions by our competitors could have an adverse impact on both our market share and the pricing of our products, which could have a material adverse effect on our business |
| Our dependence on subcontractors and sole or limited source suppliers may prevent us from delivering an acceptable product on a timely basis and could result in disruption of our operations |
| Certain components and subassemblies, including certain systems controllers and robotics components, incorporated in our current systems and those under development are obtained from a single source or a limited group of suppliers |
| In some instances, we have not qualified a second source for these products and the partial or complete loss of certain of these sources could have an adverse effect on our results of operations and damage customer relationships |
| For example, finding an alternative supplier or failure of an existing single supplier to perform in a timely manner could lead to a delay in the shipment of our products |
| Further, a significant increase in the price of one or more of these components or failure to perform up to specification could adversely affect our results of operations |
| Key personnel may be difficult to attract and retain |
| Our success depends to a large extent upon the efforts and abilities of a number of key employees and officers, particularly those with expertise in the semiconductor manufacturing and similar industrial manufacturing industries |
| The loss of key employees or officers such as Dr |
| Chris Koliopoulos, our chief executive officer, could have a material adverse effect on our business, financial condition or results of operations |
| We believe that our future success will depend in part on our ability to attract and retain highly skilled technical, financial, managerial and marketing personnel |
| We cannot be certain that we will be successful in attracting and retaining such personnel |
| Changes in, or interpretations of, accounting principles, such as expensing of stock options, could result in unfavorable accounting charges |
| We prepare our consolidated financial statements in conformity with US generally accepted accounting principles |
| These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles |
| A change in these principles could have a significant effect on our reported results and may even retroactively affect previously reported transactions |
| In particular, as of May 1, 2006, we adopted Statement of Financial Accounting Standards Nodtta 123 (revised 2004), “Share Based Payment” (“SFAS 123R”), which requires that the costs resulting from all share-based payment transactions be measured using a fair-value method and be recognized in the financial statements |
| If we do not complete the Merger, we expect the adoption of SFAS 123R to have a significant adverse effect on our reported financial results and impact the way in which we conduct our business |
| Please refer to the section entitled “New Accounting Pronouncements” for further information regarding SFAS 123R As part of our business strategy, if the Merger is not consummated, we may make or seek to make acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention |
| As a part of our business strategy, if the Merger is not consummated, we may make acquisitions |
| Acquisitions are typically accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of our ongoing business and distraction of management, expenses related to the acquisition and potential unknown liabilities associated with acquired businesses |
| 12 ______________________________________________________________________ [14]Table of Contents In making acquisitions, we could use substantial portions of our available cash as all or a portion of the purchase price |
| We could also issue additional securities as consideration for these acquisitions, which could cause significant stockholder dilution |
| Our acquisitions may not ultimately help us achieve our strategic goals and may pose other risks to us |
| If we are not successful in completing acquisitions that we may pursue in the future, we may be required to reevaluate our strategy, and we will have incurred substantial expenses and devoted significant management time and resources in seeking to complete proposed acquisitions that will not generate benefits for us |
| Risks relating to the Merger Obtaining approval from German antitrust authorities or satisfaction of other conditions may delay or prevent completion of the Merger and these delays may cause additional costs and distractions |
| German antitrust authorities have notified KLA-Tencor that they have begun a Phase II investigation of the Merger and, as a result, the closing of the Merger may not occur until approval is obtained from such authorities |
| Approval from German authorities may not be granted or may be conditioned upon divestitures relating to the divisions, operations or assets of KLA-Tencor or ADE In addition, KLA-Tencor has the right, under the Amended Merger Agreement, not to make any divestitures that, individually or in the aggregate, would have an impact that is both material in comparison to, and adverse to, the benefits that would be reasonably expected to accrue to KLA-Tencor from the Merger |
| As a result, any divestitures or other conditions proposed by German authorities may jeopardize, delay or preclude completion of the Merger or may reduce the anticipated benefits of the Merger |
| We will also incur additional expenses relating to the Merger during this delay that may be significant |
| In addition, the uncertainty resulting from any delay in closing could erode customer and employee confidence in ADE and divert our management’s focus and resources from other operational matters |
| Provisions of the Amended Merger Agreement may deter alternative business combinations and could negatively impact the value of our common stock if the Amended Merger Agreement is terminated in certain circumstances |
| Restrictions in the Amended Merger Agreement on solicitation generally prohibit us from soliciting any acquisition proposal or offer for a merger or business combination with any other party, including a proposal that might be advantageous to our stockholders when compared to the terms and conditions of the Merger |
| In addition, if the Merger is not completed because KLA-Tencor terminates the Amended Merger Agreement because our board of directors withdraws its support of the Merger or we terminate the Amended Merger Agreement to accept a superior acquisition proposal made by a third party, we may be required to pay KLA-Tencor a termination fee of dlra15 million |
| These provisions may deter third parties from proposing or pursuing alternative business combinations that might result in greater value to our stockholders than the Merger |
| In the event the Merger is terminated by KLA-Tencor and/or us in circumstances that obligate us to pay the termination fee to KLA-Tencor, the value of our common stock may be reduced |
| The Company, its directors, KLA-Tencor and South are involved in pending litigation with respect to the Merger, the result of which is uncertain |