| CASCADE MICROTECH INC ITEM 1A RISK FACTORS Our operating results have fluctuated in the past and are likely to fluctuate in the future, which could cause us to miss analyst expectations about these results and cause the trading price of our common stock to decline |
| As a result, we believe that you should not rely on period-to-period comparisons of our financial results as an indication of our future performance |
| Factors that are likely to cause our revenue and operating results to fluctuate include: • our geographic sales mix, product sales mix and average selling prices; • timing, cancellation or delay of customer orders; • seasonality, which has caused our first quarter revenue typically to decline compared to our fourth quarter revenue of the previous year; 11 ______________________________________________________________________ • customer demand, which is influenced, in part, by conditions in the electronics and semiconductor industry, demand for products that use semiconductors and market acceptance of our products and those of our customers; • fluctuations in foreign currency exchange rates; • competition, such as competitive pressures on the price, performance and reliability of our products, the introduction or announcement of new products by us or our competitors and our competitors’ intellectual property rights, which could prevent us from introducing products that compete effectively with their products; • our production capacity and availability and cost of materials, components and subassemblies; • our ability to deliver reliable products in a timely manner, including as a result of fluctuations in yield on some of our product lines; • our customers’ decisions regarding the level and timing of research and development spending; • our product development costs, including research and development and sales and marketing expenses associated with new products or product enhancements and the costs of transitioning to new or enhanced products; and • economic conditions in the United States and the worldwide markets we serve |
| For example, a large majority of our revenue in the last five years was derived from the research and development equipment spending of companies in the semiconductor industry or, to a much lesser extent, various research organizations, including universities, that conduct research that benefits the semiconductor industry |
| Our customers’ spending on research and development is roughly proportional to the customers’ overall revenues |
| Historically, semiconductor industry revenues have been highly cyclical |
| According to industry data, the semiconductor industry has experienced four significant cyclical downturns in the 22 years from 1983 through 2005 |
| In contrast our revenue decreased approximately 29prca from 2001 to 2002 and increased approximately 27prca and 14prca from 2003 to 2004 and 2004 to 2005, respectively |
| Given this history, there is no reason to expect that our customers’ business and, therefore, their demand for our products, will be less cyclical in the future |
| If our revenue or operating results fall below the expectations of analysts or investors, the market price of our common stock could decline substantially |
| The cyclicality of the semiconductor industry affects our financial results, and, as a result, we may experience reduced sales or operating losses in a semiconductor industry downturn |
| The semiconductor industry is highly cyclical with recurring periods of wide fluctuations in product supply and demand |
| From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, periods of oversupply, maturing product and technology cycles, excess inventories and declines in general economic conditions |
| Our customers’ purchase behavior in response to these cycles has been generally unpredictable |
| In the past, our operating results have been adversely affected by the cyclical downturns in the semiconductor industry |
| Our business is heavily dependent on the level of research and development spending of our customers, the volume of semiconductor production by semiconductor manufacturers, the development of new semiconductors and semiconductor designs and the overall financial strength of our customers, which, in turn, depend upon the current and anticipated market demand for semiconductors and the products incorporating them |
| Semiconductor manufacturers in particular are known to sharply curtail their capital expenditures when confronted with an industry downturn, such as the downturns experienced from 1996 through 1998 and from 2001 through the first six months of 2003 |
| We expect that the markets for future generations of semiconductors will also be subject to similar fluctuations |
| Furthermore, some segments of the semiconductor industry may experience greater fluctuations than others |
| Any factor adversely affecting the semiconductor industry in general, or the particular 12 ______________________________________________________________________ segments, regions or major customers of the industry that our products target, will adversely affect our ability to generate revenue and could cause us to experience operating losses |
| As is the case with other companies in our industry, many of our customers defer purchasing decisions until late each quarter |
| As a result, we are significantly dependent upon the sale of our products in the third month of each quarter, and, if we do not generate enough revenue in the third month of each quarter to meet the earnings expectations of analysts or investors, the price of our common stock could decline |
| As is the case with other companies in our industry, we have historically recognized a substantial portion of our revenue in the last month of each quarter because many of our customers defer purchasing decisions until late each quarter |
| Historically, we have often recognized more than 50prca of our quarterly revenue in the third month of the quarter |
| We expect this trend to continue for the foreseeable future |
| As a result, our ability to meet the earnings expectations of analysts depends on our ability to not only generate customer orders in the third month of each quarter but also satisfy each of the various accounting requirements for recognizing the revenue generated by such sales prior to the end of the quarter |
| Moreover, our engineering probe stations typically range in price from dlra30cmam000 to dlra350cmam000 for a single unit, so a delay in the shipment of even one engineering probe station and the corresponding delay in recognition of revenue for the sale of probe stations, can have a very large impact on our quarterly results |
| If we are unable to generate a sufficient amount of sales during the last month of the quarter or if we are unable to recognize the revenue generated by sales made during this period, we could miss the earnings expectations of analysts or investors, which could cause the price of our common stock to decline |
| Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenue in any quarter is substantially dependent upon customer orders received and fulfilled in that quarter |
| Our revenue is difficult to forecast because we generally do not have a sufficient backlog of unfilled orders for our engineering probe stations, analytical probes and production probe cards to meet our quarterly revenue targets at the beginning of a quarter |
| Historically, a significant portion of our revenue in any quarter depends upon customer orders that we receive and fulfill in that quarter |
| Furthermore, because our expense levels are based in part on our expectations as to future revenue and, to a large extent, are fixed in the short term, we might be unable to adjust spending in time to compensate for any unexpected shortfall in revenue |
| Accordingly, any significant shortfall in revenue in relation to our expectations and the expectations of analysts or investors could hurt our operating results and result in a decline in the price of our common stock |
| For example, in the fourth quarter of 2005, several large orders related to sales of our S300 systems were delayed, which resulted in a decline in our fourth quarter 2005 revenue below our expectations and a consequent decline in our operating profit for the quarter |
| We continue to devote significant effort and resources to the growth and development of our Pyramid Probe products, which has had, and could continue to have, an adverse effect on our operating margins |
| Our future growth depends, in part, on continued market adoption of, and growing demand for, our production probe cards |
| Large-scale market adoption of these products will depend on our ability to demonstrate the superior reliability and cost effectiveness of these products to potential customers and on the continued growth of the market for high-speed or complex chips |
| Production customers are generally very risk-averse when adopting new technologies that could affect their production output, especially a sole source supplier such as we are in the case of Pyramid Probes |
| We have devoted significant resources to the development and growth of these products in the past, and expect to devote significantly more investment in the form of people and equipment during 2006 |
| If our production probe cards are not adopted in the market at a rate that is sufficient to offset the costs and resources that we devote to the development and promotion of these products, the future growth of our overall business and our operating margins would be adversely affected |
| 13 ______________________________________________________________________ If we do not keep pace with technological developments in the semiconductor industry, especially the trend toward faster, smaller and lower cost chips, our revenue and operating results could suffer as potential customers decide to adopt our competitors’ products |
| We must continue to invest in research and development and certain manufacturing capabilities to improve our competitive position and to meet the testing needs of our customers |
| Our future growth depends, in significant part, on our ability to work effectively with and anticipate the testing needs of our customers and on our ability to develop and support new products and product enhancements to meet these needs on a timely and cost-effective basis |
| Our customers’ testing needs are becoming more challenging as the semiconductor industry continues to experience rapid technological change driven by the demand for complex chips that have smaller element sizes and at the same time are increasing in speed and functionality and becoming less expensive to produce |
| Our customers expect that they will be able to integrate our wafer probing products into their design and production processes as soon as they are deployed |
| Therefore, to meet these expectations and remain competitive, we must continually design, develop and introduce on a timely basis new products and product enhancements with improved features |
| Successful product development and introduction on a timely basis require that we: • design innovative and performance-enhancing features that differentiate our products from those of our competitors; • identify emerging technological trends in our target markets, including new engineering and production test strategies; • respond effectively to technological changes or product announcements by others; and • adjust to changing market conditions quickly and cost-effectively |
| If we are unable to timely predict industry changes, or if we are unable to modify our products on a timely basis, we might lose customers or market share, and our operating results could suffer |
| We cannot assure you that we will successfully develop and bring new products to market in a timely and cost-effective manner, that any product enhancement or new product developed by us will gain market acceptance or that products or technologies developed by others will not render our products or technologies obsolete or uncompetitive |
| There is no assurance that products recently introduced for micro-fluidics research for the life sciences industry will generate revenues and profits |
| We have recently introduced new products for micro-fluidics research for the life sciences industry |
| To date there has been no significant revenue from these products and there can be no assurance that significant revenues will be achieved by this product line in the future |
| In addition, we cannot assure you that we shall bring new products for this industry to market in a timely and cost-effective manner and that any new product will gain market acceptance |
| Intense competition in the semiconductor wafer probing business may reduce demand for our products and reduce our sales |
| The markets for our products are highly competitive, and we expect competition to continue in the future |
| We believe that our principal competitors are the major providers of probe stations, production probe cards and analytical probes |
| Our primary competitor in the probe station market is Suss MicroTec AG (Karl Suss), but we also compete with Bekutasemikon, KK, Lucas/Signatone Corporation, The Micromanipulator Company Inc, and Wentworth Laboratories Inc, among others |
| Our Pyramid Probe cards compete with product offerings of other probe card vendors including Feinmetall GmbH, FormFactor Inc, GGB Industries Inc, Japan Electronic Materials Corporation, Mesatronics SA, Micronics Japan Company, Ltd, MicroProbe, Inc, Micro Square Technology Inc, PHICOM Corporation, SV Probe, Technoprobe Sr |
| At least three probe card vendors, FormFactor Inc, Mesatronics SA and PHICOM Corporation, are also offering probe cards built using types of lithographic patterning |
| Our primary competitor in the analytical probe market is GGB Industries |
| These competitors or other potential competitors may have developed or may be developing 14 ______________________________________________________________________ technology of which we are unaware that may render our products uncompetitive |
| Some of our competitors have significantly greater financial, technical and marketing resources than we do |
| As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to the development, promotion and sale of their products or to deliver competitive products at lower prices |
| We cannot assure you that we will maintain our current competitive position or that our production probe cards will achieve widespread acceptance in the market |
| Finally, increased competition could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance for our products, any of which could prevent us from growing our business |
| We obtain some of the materials, components and subassemblies used in our products from a single source or a limited group of suppliers |
| If these suppliers are unable to provide us with these materials, components or subassemblies in adequate quantities and on a timely basis, we may be unable to manufacture our products or meet our customers’ needs |
| Although we were not forced to delay shipment of any product due to delays in 2005 related to such suppliers, from time to time, we may experience difficulties in obtaining these materials, components and subassemblies from some suppliers, especially during periods of high demand for semiconductor capital equipment |
| The manufacture of some of the materials, components and subassemblies that we use in our products, such as thermal chucks and microscopes, is a complex process, and in the event that we cannot obtain an adequate supply of these components, it would be difficult and time-consuming to identify and qualify new suppliers |
| If some of the materials used in our lithographic probe manufacturing process become unavailable, it would be costly and time consuming to identify and qualify new suppliers |
| Moreover, many of these suppliers are small companies that may be more susceptible to downturns in general economic conditions, thereby increasing the risks of product and shipment delays, increased costs or loss of suppliers |
| Finally, we do not have written agreements with any of these suppliers to guarantee the supply of these products |
| The delay in shipments from, or complete loss of, any one of these suppliers could prevent us from producing and shipping our products, resulting in delayed or lost orders for our products and damage to our customer relationships, which would harm our results of operations |
| Furthermore, a significant increase in the price of one or more of these materials, components or subassemblies could materially adversely affect our results of operations |
| We depend upon the sale of our engineering probe stations for a significant portion of our revenue, and a decline in demand for our engineering probe stations would have a more significant impact on our revenue than a downturn in demand for our analytical probes or production probe cards |
| Historically, we have derived a large majority of our revenue from the sale of our engineering probe stations |
| We anticipate that sales of our engineering probe stations will continue to represent a large majority of our revenue for the next few years |
| Our business depends in large part upon continued demand in current markets for, and adoption in new markets of, current and future generations of our engineering probe stations |
| In addition, while our analytical probes are sometimes sold to serve as components of test equipment manufactured by third parties, they are most often sold for use with our engineering probe stations |
| Continued market adoption depends upon our ability to increase customer awareness of the benefits of our engineering probe stations and to prove their reliability and cost effectiveness |
| We may be unable to sell our engineering probe stations to existing and potential customers if those customers change their chip test strategies, change their capital equipment buying strategies or chose not to change or upgrade their existing test equipment |
| We might not be able to sustain or increase our revenue from sales of our engineering probe stations, particularly if conditions in the semiconductor market deteriorate or if the market enters into another downturn |
| 15 ______________________________________________________________________ In addition, sales of our engineering probe stations depend in part upon the level of research and development spending in the semiconductor industry |
| Historically, the level of research and development spending in the semiconductor industry has followed the overall cycles of the semiconductor industry but at a reduced rate of growth or decline, as the case may be |
| If our customers reduce their research and development spending or if the overall level of research and development spending in the semiconductor industry does not continue to follow the growth rate of the overall semiconductor industry, consistent with historical patterns, our revenue would decline, which could result in a decline in the price of our common stock |
| We believe that we currently have a significant market share in the engineering probe station market |
| As a result, it may be difficult for us to both maintain our current level of market share and capture opportunities for growing our market share, especially if the market for engineering probe stations does not continue to grow as we expect |
| If the market for engineering probe stations does not continue to grow, our business may not expand, even if we are successful in increasing our market share |
| We may make future acquisitions, which may be costly, difficult to integrate with our operations, divert management resources and dilute shareholder value |
| As part of our business strategy, we may make acquisitions of, or investments in, companies, products or technologies that complement our current product offerings, enhance our technical capabilities, expand our operations into new markets or offer other growth opportunities |
| If we fail to successfully integrate any acquired businesses, products or technologies, we would not achieve anticipated revenue and cost benefits |
| We may acquire companies, products or technologies in the future, which could pose risks to our operations including: • difficulties assimilating the acquired operations, personnel, technologies or products into our company; • diversion of management’s attention from our existing business; and • adverse effects on relationships with our existing suppliers, customers or partners |
| We face economic, political and other risks associated with our international sales and operations, which could materially harm our operating results |
| Since 1997, we have derived more than 50prca of our annual revenue from sales outside North America, primarily in Japan, other Asian countries and Europe |
| No individual country within Asia, except Japan and Taiwan, and no individual country within Europe represented 10prca or more of total revenue in 2005, 2004 or 2003 |
| Geographic revenue was as follows (in thousands): Year Ended December 31, 2005 2004 2003 United States $ 23cmam877 $ 24cmam762 $ 24cmam708 Japan 15cmam085 14cmam909 11cmam838 Taiwan 7cmam612 6cmam853 3cmam631 Other 27cmam063 17cmam891 10cmam379 $ 73cmam637 $ 64cmam415 $ 50cmam556 We expect international sales to continue to represent a substantial portion of our revenue for the foreseeable future |
| In the past, the economic climate in some foreign markets, particularly in Asia, has quickly and dramatically changed, resulting in a negative effect on our operating results |
| For example, during the Asian economic crisis that began in 1998, we saw a 34prca decline in revenue in 1998 compared to 1997 from Asia not including Japan |
| We saw a 41prca decrease in revenue from the same region in 2003 compared to 2001 |
| 16 ______________________________________________________________________ Currently, we maintain international offices in Europe and Asia, and we may establish new international offices in the future |
| If our gross margin from international operations does not exceed the expense of establishing and maintaining our international operations, our operating margins would be adversely affected |
| Additional risks we face in conducting business internationally include: • difficulties and costs of staffing and managing international operations across different geographic areas; • the possible lack of financial and political stability in foreign countries, preventing overseas sales growth; • changes in domestic or foreign law or policy resulting in the need to comply with potentially burdensome government controls, regulations, tariffs, embargoes or export license requirements; • longer payment cycles; • differing and more burdensome labor regulations and practices in Europe; • the aftermath of the war in Iraq or other armed conflicts in the Middle East; • the effects of sudden outbreaks of epidemics in Asia and other parts of the world; and • the effects of terrorist attacks in the United States and any related conflicts or similar events worldwide |
| The different cultures in countries where we do business often challenge us to meet or manage local expectations about how employees are hired, managed, compensated, or terminated |
| For example, most employees in Japan expect an organization wherein a manager’s direct reports are younger than the manager |
| In Europe, governments force the severance costs of a reduction in force action to be generally much higher than in the US Finally, there have been significant fluctuations in the exchange rates between the dollar and the currencies of countries in which we do business |
| While most of our international sales have been denominated in US dollars, our international operating expenses have been denominated in foreign currencies |
| As a result, a decrease in the value of the US dollar relative to the foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins |
| Significant unfavorable fluctuations in the exchange rates between the US dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability |
| In addition, fluctuations in exchange rates could cause customers to delay or cancel orders because of the increased cost of our products relative to those of our competitors who manufacture in other countries |
| Other income (expense), net in 2005, 2004 and 2003 includes the following currency related gains and losses (in thousands): Year Ended December 31, 2005 2004 2003 Gains related to foreign currency hedges $ 151cmam000 $ 74cmam000 $ 49cmam000 Remeasurement related foreign currency gains (losses) (34cmam000 ) 132cmam000 318cmam000 $ 117cmam000 $ 206cmam000 $ 367cmam000 We rely on independent manufacturers’ representatives and distributors for a significant portion of our revenue, and a disruption in our relationship with our manufacturers’ representatives or distributors would have a material adverse effect on our revenue |
| Approximately 72prca of our revenue for 2005 was generated through independent manufacturers’ representatives and distributors, whose activities are not within our direct control |
| In addition, in some locations, our manufacturers’ representatives and distributors provide field service to our customers |
| A reduction in the sales efforts or financial viability of these manufacturers’ representatives or distributors, or a termination of our relationship with these representatives or distributors, would have a material adverse effect on our sales, financial results and ability to support our customers |
| Our manufacturers representatives and distributors are not obligated to continue selling our products, and they may terminate their arrangements with us at any time with limited or no prior notice |
| If we make the business decision to terminate or modify our relationships with one or more of our independent manufacturers’ representatives, or if a manufacturers’ representative decides to disengage from us, 17 ______________________________________________________________________ and we do not effectively and efficiently manage such a change, we could lose sales to existing customers and fail to obtain new customers |
| Establishing alternative sales channels would consume substantial time and resources, decrease our revenue and increase our expenses |
| If semiconductor manufacturers do not convert to 300mm wafers, or do not convert at the rate we anticipate, our growth and profitability could be harmed |
| The 2001 to 2003 downturn in the semiconductor industry caused various chip manufacturers to readdress their respective strategies for converting existing 200mm wafer fabrication facilities to 300mm wafer fabrication or for building new 300mm wafer fabrication facilities |
| Some manufacturers, including some of our customers such as Texas Instruments, Motorola and ST Microelectronics delayed, cancelled or postponed previously announced plans to convert to 300mm wafer fabrication |
| While we have since then seen an increase in these conversion efforts, these delays have impacted demand for our 300mm probe stations |
| We believe that the decision to convert to a 300mm wafer fabrication facility is made by each manufacturer based upon both internal and external factors, such as: • current and projected prices for semiconductors; • projected price erosion for the manufacturer’s particular semiconductors; • supply and demand levels for semiconductors; • overall manufacturing capacity within the manufacturer’s target market(s); • the availability of funds to the manufacturer; • the technology roadmap of the manufacturer; and • the price and availability of equipment needed within the 300mm fabrication facility |
| One or more of these internal and external factors, as well as other factors, including factors that a manufacturer may choose not to disclose publicly, could impact the decision to maintain a 300mm conversion schedule, to delay the conversion schedule for a period of time or to cancel the conversion |
| We have invested significant resources to develop technology that addresses the market for 300mm wafers |
| Beginning in 2003 and continuing into early 2005, we saw an acceleration in the transition from 200mm to 300mm technology but since then the rate of acceleration has declined |
| If manufacturers delay or discontinue the transition to 300mm wafers, or make the transition more slowly than we currently expect, our growth and profitability could be affected |
| Failure to retain key managerial, technical, and sales and marketing personnel or to attract new key personnel could harm our business |
| Our success depends on the continued services of our executive officers and other key management, technical, and sales and marketing personnel and on our ability to continue to attract, retain and motivate qualified personnel |
| Currently, our key personnel include Eric Strid, our Chairman, President and Chief Executive Officer, Bruce McFadden, our Vice President and General Manager, Pyramid Probe Division, Steven Sipowicz, our Chief Financial Officer, John Pence, our Vice President and General Manager, Engineering Products Division and K Reed Gleason, our Vice President of Advanced Technology |
| Our executive officers and other key employees are able to exercise stock options and sell the underlying stock, which may reduce their incentive to continue their employment with us |
| The loss of key personnel could limit our ability to develop new products and adapt existing products to our customers’ evolving requirements and may result in lost sales and a diversion of management resources |
| Furthermore, much of our competitive advantage and intellectual property is based on the expertise, experience and know-how of our key personnel |
| We do not have employment agreements or non-competition agreements with any of our employees except for an employment agreement with our Chief Financial Officer |
| To support our future growth, we will need to attract and retain additional qualified management, technical, and sales and marketing employees |
| Competition for such personnel in our industry is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel |
| 18 ______________________________________________________________________ Our customers’ evaluation processes can lead to lengthy sales cycles, during which we may incur significant costs that may not result in sales |
| Our customers typically expend significant efforts in evaluating and qualifying our products prior to placing an order, particularly for orders of engineering probe stations and production probe cards |
| This evaluation and qualification process frequently results in a lengthy sales cycle, typically ranging from three to 12 months and sometimes longer |
| During the period in which our customers are evaluating our products, we incur substantial sales, marketing, research and development expenses and expend significant management efforts |
| After completing this evaluation process, a potential customer may elect not to purchase our products |
| In addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for which our products represent a very small percentage of their overall purchase activity |
| Additional factors, some of which are partially or completely outside our control, that affect the length of time it takes us to complete a sale, include: • the efforts of our sales force; • the history of previous sales to the customer; • the complexity of the customer’s engineering or production processes; • the internal technical capabilities and sophistication of the customer; and • the capital expenditure budgets of the customer |
| The lengthy and unpredictable nature of our sales cycle could result in fluctuations in our operating results, which could fall below the expectations of analysts and investors for any particular period of time, and result in a decline in the price of our common stock |
| If our products contain defects, our reputation would be damaged, and we could lose customers and revenue and incur warranty expenses |
| The complexity and ongoing development of our products, as well as the inclusion in our products of components purchased from third parties, could lead to design, manufacturing or performance problems |
| Our products may contain defects which could cause our sales to decline, our reputation to be significantly damaged and our customers to be reluctant to buy our products, any or all of which could result in a decline in revenue, an increase in product returns, higher field service costs, the loss of existing customers or the failure to attract new customers |
| Our warranty expense totaled dlra624cmam000, dlra639cmam000 and dlra679cmam000, for 2005, 2004 and 2003, respectively |
| Although we are not currently seeking reimbursement from any vendors related to our warranty expense, we have in the past, and may again in the future, seek reimbursement from certain vendors |
| To the extent that we experience additional failures of purchased components that increase our warranty expenses that are not reimbursed by the vendor, our results of operations will be adversely affected |
| If we fail to protect our proprietary technology and rights, competitors may be able to use our technologies, which would weaken our competitive position and could reduce our sales |
| Our success and competitive position depend in significant part on the technically innovative features of our products, and, if we fail to protect our proprietary rights, our competitors might gain access to our technology |
| Although we rely in part on patent, trade secret and trademark laws to protect the proprietary technology used in our products, our patents may be challenged by third parties and held invalid, and any of our pending patent applications may not be approved |
| Additionally, we may not be able to develop additional proprietary technology that is patentable |
| Policing unauthorized use of our products is difficult, and we may not be able to prevent the misappropriation and unauthorized use of our technologies |
| Furthermore, our existing and future patents may not be sufficiently broad to protect our proprietary technologies, may not provide us with competitive advantages and may be circumvented by the designs of third parties |
| 19 ______________________________________________________________________ Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary |
| Others may independently develop or otherwise acquire similar or competing technologies or methods or design around our patents |
| Additionally, some of our proprietary technology cannot be effectively protected by patents |
| In these cases, we rely on trade secret laws and confidentiality agreements to protect our confidential and proprietary information, processes and technology |
| However, our confidential and proprietary information, processes and technology could be independently developed by, or otherwise become known to, third parties, which would weaken our competitive position and might reduce our sales |
| Since 1997, we have derived more than 50prca of our annual revenue from products sold to customers outside of North America |
| The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and many companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries |
| The manner in which we protect our proprietary rights may not be adequate in some foreign countries |
| Our failure to adequately protect our intellectual property in foreign countries would make it easier for competitors to copy or circumvent our product designs and sell competing products in those countries, which could adversely affect our revenue and cause us to lose customers |
| Intellectual property infringement claims by or against us may result in litigation, the cost of which could be substantial and could prevent us from selling our products |
| The semiconductor industry is characterized by uncertain and conflicting intellectual property claims, frequent litigation regarding patent and other intellectual property rights and vigorous protection and pursuit of these rights |
| Questions of infringement in the semiconductor industry involve highly technical and subjective analyses |
| Litigation may be necessary to determine the validity and scope of our proprietary rights or to defend against claims of infringement or invalidity by third parties, and we may not prevail in any litigation |
| Any such litigation, whether or not determined in our favor or settled, might be costly, could harm our reputation, could cause product shipment delays and could divert the efforts and attention of our management and technical personnel from our normal business operations |
| We are not currently involved in any such litigation |
| However, an adverse outcome in any intellectual property litigation might result in the loss of our proprietary rights, subject us to significant liabilities, require us to spend significant resources to develop non-infringing technology, require us to seek licenses from third parties, prevent us from manufacturing and selling our products or require us to discontinue the use of certain technology in our products, any of which could have an adverse effect on our business, financial condition and results of operations |
| License agreements, if required, might not be available on terms acceptable to us or at all |
| Our growth could strain our personnel and infrastructure resources, and, if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan |
| Our growth has placed and will continue to place significant demands on our management, operational, financial and technical resources and on our internal control, management information and reporting systems |
| Our success will depend, in part, upon the ability of our senior management to manage this growth effectively |
| To manage the expected growth of our operations and personnel, we will need to: • continue to improve our operational, financial and management controls and our reporting systems and procedures; • manage the growth of different product lines with different cost structures; and • recruit, train, manage and motivate our employees to support our expanded operations |
| 20 ______________________________________________________________________ Our success depends on our continued investment in research and development, the level and effectiveness of which could reduce our profitability |
| We will continue to make investments in research and development to sustain and improve our competitive position and meet our customers’ needs |
| These investments currently include refining Pyramid Probe fabrication processes, developing higher performance Pyramid Probe cards and enhancing engineering probe stations for both 300mm and sub-300mm wafers |
| To maintain our competitive position, we may need to increase our research and development investment, which could reduce our profitability |
| In addition, we cannot assure you that we will achieve a return on these investments, nor can we assure you that these investments will improve our competitive position and meet our customers’ needs |
| We manufacture nearly all of our products at our Oregon facilities, and any disruption in the operations of these facilities could harm our business |
| We manufacture almost all of our products in our facilities located in Beaverton, Oregon |
| Our manufacturing processes are complex and require sophisticated and costly equipment and specially designed facilities |
| As a result, any prolonged disruption in the operations of our facilities, whether due to technical or labor difficulties or destruction of or damage to the facilities as a result of an earthquake, fire or any other reason, could materially and adversely affect our business, financial condition and results of operations |
| A disruption in our strategic relationship with Agilent Technologies could have a negative effect on our ability to market our products and could result in a decline in the price of our common stock |
| We have a longstanding relationship with Agilent Technologies in which we jointly market selected probing solutions, comprised of products from both companies |
| Consequently, our relationship with Agilent is an important factor in our ability to market our products |
| Our joint marketing relationship with Agilent is not governed by a contract |
| Therefore, Agilent could terminate its relationship with us or announce a strategic relationship with one of our competitors at any time |
| While we do not track the portion of our revenue that is attributable to our joint marketing relationship with Agilent, we believe that a termination of our relationship with Agilent could harm our ability to market our products and could result in a decline in the price of our common stock |
| Furthermore, in those situations in which a customer purchases our products alongside Agilent’s products, we depend on Agilent’s ability to timely deliver its products to complete the installation of our product |
| To the extent that there is a delay in the shipment of Agilent’s products, the timing of our revenue could be adversely affected, which could cause us to miss the earnings expectations of analysts and investors and result in a decline in the price of our common stock |
| We may fail to comply with environmental regulations, which could result in significant costs and harm our business |
| We are subject to a variety of federal, state and local laws, rules and regulations relating to the storage, use, discharge, disposal and human exposure to hazardous and toxic materials used in our thin-film fabrication facility and other manufacturing operations |
| The risk of a release of hazardous or toxic materials cannot be completely eliminated, and if such a release occurs, we could be held financially responsible for the cleanup or other consequences of the release |
| We are not aware of any releases at any of our facilities that could reasonably be expected to result in any material liabilities to us |
| Our past, present or future failure to comply with environmental laws and regulations could result in enforcement actions, substantial liabilities and suspension of production or cessation of operations in extreme situations |
| Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or build new facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other substantial expenses which could harm our business, financial condition and results of operation |
| For example, the European 21 ______________________________________________________________________ Parliament has finalized the Restriction on Use of Hazardous Substances Directive, or RoHS Directive, which restricts the sale of new electrical and electronic equipment containing certain hazardous substances, including lead, which is currently used in some of the products we manufacture |
| We are working to modify our manufacturing processes to eliminate lead from products we put on the market by July 1, 2006 as required by the RoHS Directive |
| We are working with our suppliers to redesign or reformulate their components containing lead to reduce or eliminate lead in our products |
| Further, we are working with selected customers who specify and/or provide specific components used in some of our products to choose components that comply with the RoHS Directive |
| For some of our products, substitutions of lead-free components or processes may be difficult or costly, or redesign efforts could result in production delays |
| The European Parliament has also recently finalized the Waste Electrical and Electronic Equipment Directive, or WEEE Directive, which makes producers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products |
| As a producer of industrial electronic equipment, we may incur financial responsibility for the collection, recycling, treatment or disposal of products covered under the WEEE Directive |
| These environmental laws and regulations could become more stringent over time, imposing even greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our business, financial condition and results of operation |
| There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes |
| Product liability claims may be asserted against us, resulting in costly litigation for which we may not have sufficient liability insurance |
| Our customers may use our products in the testing of high reliability semiconductors for critical applications such as telecommunications infrastructure, military, medical and aerospace equipment |
| Defects or other problems with the performance of our products could result in financial or other damages to our customers |
| In addition, some of our engineering probe stations that use high powered lasers or operate at high voltage or extreme temperatures may cause death or injury to persons utilizing such equipment due to undetected design or manufacturing defects or due to improper use or maintenance by our customers |
| Although our product invoices and sales contracts generally contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these provisions |
| Product liability litigation against us, even if it were unsuccessful, could be time consuming and costly to defend |
| Additionally, although we carry product liability insurance, in some circumstances it may not cover certain claims or be adequate to cover all claims |
| We rely on a small number of customers for a significant portion of our revenue, and the termination of any of these relationships would adversely affect our business |
| Our top four customers accounted for 16prca and 18prca of our revenue in 2005 and 2004, respectively |
| Our customers are not obligated by long-term contracts to purchase our products and may discontinue purchasing our products at any time |
| The semiconductor industry is highly concentrated and a small number of semiconductor manufacturers generally account for a substantial portion of the purchases of semiconductor test equipment, including our products |
| Consequently, our business and operating results would be materially, adversely affected by the loss of any of our significant customers |
| In addition, our ability to increase our revenue will depend in part upon our ability to obtain orders from new customers, particularly customers of our production probe cards |
| Obtaining orders from new customers is difficult because semiconductor manufacturers typically select one vendor’s products for testing a particular new generation of chips |
| Once a manufacturer has selected a vendor, that manufacturer is more likely to continue to purchase products from that vendor for that generation of chips, as well as subsequent generations of chips |
| We therefore place great emphasis on relationships with our current customers because these customers are difficult to replace |
| In addition, we focus on leveraging our relationships with current customers to sell into additional engineering labs 22 ______________________________________________________________________ and production lines in the same company and similar groups in other companies |
| If we are unable to maintain our relationships with our existing significant customers or to obtain new customers that adopt and implement our products and technology, we will not be able to meet our revenue and growth targets, which could result in a decline in the price of our common stock |
| Our employment costs in the short-term are, to a large extent, fixed, and therefore, any shortfall in sales would harm our operating results |
| Our operating expense levels are based, in significant part, on our headcount |
| For a variety of reasons, particularly the high cost and disruption of layoffs, the costs of recruiting and training new personnel and product delivery and service commitments to our customers, our headcount in the short-term is, to a large extent, fixed |
| Accordingly, we may be unable to reduce employment costs in a timely manner to compensate for any shortfall in our sales or gross margins, which could materially harm our operating results |
| The additional costs that we incur as a result of being a public company will affect our operating results |
| We incurred incremental costs as a public company for additional expenses such as increased auditing and legal fees and director and officer liability insurance, which increased our operating expenses and make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short-term |
| In addition, the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently enacted by the Securities and Exchange Commission, or the SEC, and the Nasdaq National Market have imposed new corporate governance requirements for listed companies |
| We expect these rules to increase our legal and financial compliance costs and to make some activities more difficult, time consuming and costly |
| We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers |
| Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability |
| We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in different jurisdictions |
| Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, including pending tax law changes, such as the benefit from export sales and the research and development credit by material audit assessments |
| In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States |
| In addition, the amount of income taxes we pay could be subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability |
| Our officers and directors and their affiliates will control the outcome of matters requiring shareholder approval |
| Our executive officers and directors and their affiliates beneficially own approximately 32prca of our outstanding shares of common stock |
| Consequently, these shareholders will have substantial influence over the election of our directors and the outcome of corporate actions requiring shareholder approval, such as a merger or a sale of our company or a sale of all or substantially all of our assets |
| This concentration of voting power and control could have a significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other shareholders and be disadvantageous to our shareholders with interests different from those of our officers, directors and affiliates |
| These shareholders will also have significant control over our business, policies and affairs |
| 23 ______________________________________________________________________ Additionally, this significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling shareholders |
| The anti-takeover provisions of our charter documents and Oregon law may inhibit a takeover or change in our control that shareholders may consider beneficial |
| Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the effect of delaying or preventing a merger or acquisition of us, making a merger or acquisition of us less desirable to a potential acquirer or preventing a change in our management, even if the shareholders consider the merger or acquisition favorable or if doing so would benefit our shareholders |
| In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock |
| The following are examples of such provisions in our articles of incorporation or bylaws: • We have a staggered board of directors, which will make it more difficult for a group of shareholders to quickly change the composition of our board |
| • Our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control, commonly referred to as “blank check” preferred stock |
| • Members of our board of directors can only be removed for cause |
| • The board of directors may alter our bylaws without obtaining shareholder approval |
| • Shareholders are required to provide advance notice for nominations for election to the board of directors or for proposing matters to be acted upon at a shareholder meeting |
| • Any action that is taken by written consent of shareholders must be unanimous |
| We are also subject to the provisions of the Oregon Control Share Act and the Oregon Business Combination Act, each of which may have certain anti-takeover effects |
| If our stock price is volatile, securities class action litigation may be brought against us, which could result in substantial costs |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities, and newly public companies tend to experience more volatility in their stock price |
| We may be the target of such litigation in the future |
| Securities litigation may result in substantial costs and divert management’s attention and resources, which may seriously harm our business |