| These are the factors that we believe could cause actual results to be different from expected and historical results |
| Other sections of this report include additional factors that could have an effect on our business and financial performance |
| The markets in which we compete are very competitive and change rapidly |
| Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements |
| You should not rely upon forward-looking statements as a prediction of future results |
| A halt in economic growth or a slowdown will put pressure on our ability to meet anticipated revenue levels |
| A large portion of our sales is dependent on the need for increased capacity or replacement of inefficient manufacturing processes, because of the capital-intensive nature of our customers’ businesses |
| These also tend to lag behind in an economic recovery longer than other businesses |
| We have a history of operating losses and may not be able to sustain or grow the current level of profitability |
| Beginning in the second half of 2003, we have generated profits from operations |
| For the years ended December 31, 2005 and December 31, 2004, we generated net income of dlra9dtta7 million and dlra41dtta5 million, respectively |
| No assurances can be given that we will sustain or increase the level of profitability in the future and the market price of our common shares may decline as a result |
| Our inability to remain profitable may result in the loss of significant deferred tax assets |
| In determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets requires subjective judgment and analysis |
| While we recovered a portion of our current deferred tax assets based on profitability in 2005 and planned profits for 2006 and beyond, we are consistently evaluating our deferred tax assets based on current year performance |
| Our ability to maintain our deferred tax assets at December 31, 2005 depends upon our ability to continue to generate future profits in the 10 ______________________________________________________________________ [38]Table of Contents United States, Canada, Japan and United Kingdom tax jurisdictions |
| If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by taking a charge to the Statement of Operations, which may have a material negative result on our operations |
| Our business depends significantly upon capital expenditures, including those by manufacturers in the semiconductor, electronics, machine tool and automotive industries, each of which are subject to cyclical fluctuations |
| The semiconductor and electronics, machine tool and automotive industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market |
| The timing, length and severity of these cycles, and their impact on our business, are difficult to predict |
| For the foreseeable future, our operations will continue to depend upon capital expenditures in these industries, which, in turn, depend upon the market demand for their products |
| The cyclical variations in these industries have the most pronounced effect on our Laser Systems Group, due in large measure to that segment’s historical focus on the semiconductor and electronics industries and our need to support and maintain a comparatively larger global infrastructure (and, therefore, lesser ability to reduce fixed costs) in that segment than in our other segments |
| There is no assurance that we will not continue to be impacted from the slowdown as we were in 2005, that we will benefit in the future to the same extent as we did in 2004, or that we will not be materially adversely affected by future downturns or slowdowns in the semiconductor and electronics, and other industries that we serve |
| The success of our business is dependent upon our ability to respond to fluctuations in demand for our products |
| During a period of declining demand, we must be able to quickly and effectively reduce expenses while continuing to motivate and retain key employees |
| Our ability to reduce expenses in response to any downturn is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements |
| In addition, the long lead-time for production and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products which we cannot sell |
| We attempt to manage this risk by employing inventory management practices such as outsourcing portions of the development and manufacturing processes, limiting our purchase commitments and focusing on production to order rather than to stock, but no assurances can be given that our efforts in this regard will be successful in mitigating this risk or that our financial condition or results of operations will not be materially adversely affected thereby |
| During a period of increasing demand and rapid growth, we must be able to increase manufacturing capacity quickly to meet customer demand and hire and assimilate a sufficient number of qualified personnel |
| Our inability to ramp up in times of increased demand could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than with us |
| Fluctuations in our customers’ businesses, timing and recognition of revenues from customer orders and other factors beyond our control may cause our results of operations quarter over quarter to fluctuate, perhaps substantially |
| Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period |
| Factors contributing to these fluctuations, some of which are beyond our control, include: • fluctuations in our customers’ businesses; • timing and recognition of revenues from customer orders; • timing and market acceptance of new products or enhancements introduced by us or our competitors; • availability of components from our suppliers and the manufacturing capacity of our subcontractors; • timing and level of expenditures for sales, marketing and product development; • changes in the prices of our products or of our competitors’ products; and • fluctuations in exchange rates for foreign currency |
| 11 ______________________________________________________________________ [39]Table of Contents We derive a substantial portion of our sales from products that have a high average selling price and significant lead times between the initial order and delivery of the product, which, on average, can range from five to eleven weeks, although it will vary by product |
| We may receive one or more large orders in one quarter from a customer and then receive no orders from that customer in the next quarter |
| As a result, the timing and recognition of sales from customer orders can cause significant fluctuations in our operating results from quarter to quarter |
| If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, our common share price may decline as a result |
| Gross profits realized on product sales vary depending upon a variety of factors, including production volumes, the mix of products sold during a particular period, negotiated selling prices, the timing of new product introductions and enhancements, inventory provisions, warranty costs, foreign exchange rates and manufacturing costs |
| A delay in a shipment, or failure to meet our revenue recognition criteria, near the end of a fiscal quarter or year, due, for example, to rescheduling or cancellations by customers or to unexpected difficulties experienced by us, may cause sales in a particular period to fall significantly below our expectations and may materially adversely affect our operations for that period |
| Our inability to adjust spending quickly enough to compensate for any sales shortfall would magnify the adverse impact of that sales shortfall on gross profits and on our results of operations |
| As a result of these factors, our results of operations for any quarter are not necessarily indicative of results to be expected in future periods |
| We believe that fluctuations in quarterly results may cause the market prices of our common shares on The NASDAQ Stock Market to fluctuate, perhaps substantially |
| Our reliance upon third party distribution channels subjects us to credit, inventory, business concentration and business failure risks beyond our control |
| We sell products through resellers (which include OEMs, systems integrators and distributors) |
| Reliance upon third party distribution sources subjects us to risks of business failure by these individual resellers, distributors and OEMs, and credit, inventory and business concentration risks |
| In addition, our net sales depend in part upon the ability of our OEM customers to develop and sell systems that incorporate our products |
| Adverse economic conditions, large inventory positions, limited marketing resources and other factors influencing these OEM customers could have a substantial impact upon our financial results |
| No assurances can be given that our OEM customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our financial condition or results of operations |
| The steps we take to protect our intellectual property may not be adequate to prevent misappropriation or the development of competitive technologies or products by others that could harm our competitive position and materially adversely affect our results of operations |
| Our future success depends in part upon our intellectual property rights, including trade secrets, know-how and continuing technological innovation |
| There can be no assurance that the steps we take to protect our intellectual property rights will be adequate to prevent misappropriation, or that others will not develop competitive technologies or products |
| As of February 2006, we held 172 United States and 107 foreign patents; in addition, applications were pending for 89 United States and 114 foreign patents |
| There can be no assurance that other companies are not investigating or developing other technologies that are similar to ours, that any patents will issue from any application filed by us or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products |
| In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights there under will provide a competitive advantage to us |
| Our success depends upon our ability to protect our intellectual property and to successfully defend against claims of infringement by third parties |
| From time to time we receive notices from third parties alleging that our products infringe such parties’ patent or other proprietary rights |
| While these notices are common in the laser industry and we have in the past been able to develop non-infringing technology or license necessary patents or technology on commercially reasonable terms, there can be no assurance that we would in the future prevail in 12 ______________________________________________________________________ [40]Table of Contents any litigation seeking damages or expenses from us or seeking to enjoin us from selling our products on the basis of such alleged infringement, or that we would be able to develop any non-infringing technology or license any valid and infringed patents on commercially reasonable terms |
| In the event any third party makes a valid claim against us or our customers for which a license was not available to us on commercially reasonable terms, we would be adversely affected |
| Our failure to avoid litigation for infringement or misappropriation of propriety rights of third parties or to protect our propriety technology could result in a loss of revenues and profits or force us to settle with these other parties |
| The industries in which we operate are highly competitive and competition in our markets could intensify, or our technological advantages may be reduced or lost, as a result of technological advances by our competitors |
| The industries in which we operate are highly competitive |
| We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do |
| Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products |
| There can be no assurance that we will successfully differentiate our current and proposed products from the products of our competitors, or that the market place will consider our products to be superior to competing products |
| To maintain our competitive position, we believe that we will be required to continue a high level of investment in engineering, research and development, marketing and customer service and support |
| There can be no assurance that we will have sufficient resources to continue to make these investments, that we will be able to make the technological advances necessary to maintain our competitive position, or that our products will receive market acceptance |
| We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development of new products |
| Our operations in foreign countries subject us to risks not faced by companies operating exclusively in the United States |
| In addition to operating in the United States, Canada, the United Kingdom and the People’s Republic of China (“PRC”), we currently have sales and service offices in Germany, Switzerland, Japan, Korea, Singapore, Taiwan and the PRC We may in the future expand into other international regions |
| During 2003, we closed our offices in France, Italy, Hong Kong, Malaysia and the Philippines, but we may in the future expand into other international regions |
| During the year ended December 31, 2005, approximately 60prca of our revenue was derived from operations outside North America |
| International operations are an expanding part of our business both from a sales focus and an operating base |
| We are also extending further production capabilities in the PRC Because of the scope of our international operations, we are subject to risks, which could materially impact our results of operations, including: • foreign exchange rate fluctuations; • longer payment cycles; • greater difficulty in collecting accounts receivable; • use of different systems and equipment; • difficulties in staffing and managing foreign operations and diverse cultures; • protective tariffs; • trade barriers and export/import controls; • transportation delays and interruptions; • reduced protection for intellectual property rights in some countries; and • the impact of recessionary foreign economies |
| 13 ______________________________________________________________________ [41]Table of Contents We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of our products or supplies or gauge the effect that new barriers would have on our financial position or results of operations |
| We do not believe that travel advisories or health concerns have had a material effect on our business to date |
| However, no assurances can be given that future travel advisories or health concerns will not have an impact on our business |
| We may not be able to find suitable targets or consummate acquisitions in the future, and there can be no assurance that the acquisitions we have made and do in the future make will provide expected benefits |
| In 2003 and 2004, we consummated four strategic acquisitions and may in the future continue to pursue other strategic acquisitions of businesses, technologies and products complementary to our own |
| Our identification of suitable acquisition candidates involves risks inherent in assessing the values, strengths, weaknesses, risks, synergy and profitability of acquisition candidates, including the effects of the possible acquisition on our business, diversion of management’s attention from our core businesses and risks associated with unanticipated problems or liabilities |
| No assurances can be given that management’s efforts in this regard will be sufficient, or that identified acquisition candidates will be receptive to our advances or, consistent with our acquisition strategy, be accretive to earnings |
| Should we acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties or additional expenses and may require the allocation of significant financial or other resources such as personnel and management that would otherwise be available for the ongoing development or expansion of our existing business |
| We attempt to mitigate these risks by focusing our attention on the acquisition of businesses, technologies and products that have current relevancy to our existing lines of business and that are complementary to our existing product lines |
| Other difficulties we may encounter, and which we may or may not be successful in addressing, include those risks associated with the potential entrance into markets in which we have limited or no prior experience and the potential loss of key employees, particularly those of the acquired business |
| Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed |
| Our business and future operating results depend in part upon our ability to attract, groom and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis |
| The loss of key personnel could negatively impact our operations |
| Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract, train and retain qualified personnel |
| There is no assurance that the transition will not have an adverse impact in the Company’s operations or financial performance |
| Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees |
| We have historically used stock options and other forms of equity-related compensation as key components of our total rewards employee compensation program in order to align employees’ interests with the interests of our shareholders, encourage employee retention, and provide competitive compensation packages |
| In recent periods, many of our employee stock options have had exercise prices in excess of our stock price, which reduces their value to employees and could affect our ability to retain or attract present and prospective employees |
| Changes in accounting for equity compensation could adversely affect earnings |
| The Financial Accounting Standards Board has issued changes to US generally accepted accounting principles requiring us and other companies to record a charge to earnings for employee stock option grants and other equity incentives |
| Moreover, applicable stock exchange listing standards relating to obtaining shareholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future |
| As a result, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially adversely affect our business |
| 14 ______________________________________________________________________ [42]Table of Contents Integrating acquisitions into our enterprise resource planning (ERP) system could have a material adverse effect on our business |
| We are highly dependent on our systems infrastructure in order to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers and otherwise carry on our business in the ordinary course |
| Key to the success of our strategy to drive greater productivity and cost savings is our drive to standardize recent acquisitions on our ERP and reporting systems |
| If we experience problems with integration, the resulting disruption could adversely affect our business, sales, results of operations and financial condition |
| The transition involves numerous risks, including: • difficulties in integrating systems with our current operations; • initial dependence on an unfamiliar system while training personnel in its use; • increased demand on our support operations; and • potential delay in the processing of customer orders for shipment of products |
| Further, we may experience difficulties in the transition to the new software that could affect our internal control systems, processes, procedures and related documentation |
| There can be no assurances that the evaluation required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting subsequent to the transition to our ERP system |
| We document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments |
| If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information |
| We may not develop, introduce or manage the transition to new products as successfully as our competitors |
| The markets for our products experience rapidly changing technologies, evolving industry standards, frequent new product introductions, changes in customer requirements and short product life cycles |
| To compete effectively we must continually introduce new products that achieve market acceptance |
| Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements |
| Developing new technology is a complex and uncertain process requiring us to be innovative and to accurately anticipate technological and market trends |
| We may have to manage the transition from older products to minimize disruption in customer ordering patterns, avoid excess inventory and ensure adequate supplies of new products |
| The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results |
| Failed market acceptance of new products or problems associated with new product transitions could harm our business |
| Delays or deficiencies in research, development, manufacturing, delivery of or demand for new products or of higher cost targets could have a negative impact on our business, operating results or financial condition |
| We are active in the research and development of new products and technologies |
| Our research and development efforts may not lead to the successful introduction of new or improved products |
| The development by others of new or improved products, processes or technologies may make our current or proposed products obsolete or less competitive |
| Our ability to control costs is limited by our need to invest in research and development |
| Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers and our business and financial condition could be materially and adversely affected |
| As a result of our need to maintain our spending levels in 15 ______________________________________________________________________ [43]Table of Contents this area, our operating results could be materially harmed if our net sales fall below expectations |
| In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales |
| In addition, we may encounter delays or problems in connection with our research and development efforts |
| Product development delays may result from numerous factors, including: • changing product specifications and customer requirements; • difficulties in hiring and retaining necessary technical personnel; • difficulties in reallocating engineering resources and overcoming resource limitations; • changing market or competitive product requirements; and • unanticipated engineering complexities |
| New products often take longer to develop, have fewer features than originally considered desirable and achieve higher cost targets than initially estimated |
| There may be delays in starting volume production of new products and new products may not be commercially successful |
| Products under development are often announced before introduction and these announcements may cause customers to delay purchases of existing products until the new or improved versions of those products are available |
| Products as complex as ours may contain known and undetected errors or performance problems |
| Defects can be found in any period immediately following introduction and initial implementation of new products or enhancements to existing products |
| Although we attempt to resolve all errors that we believe would be considered serious by our customers before implementation, our products are not error-free |
| These errors or performance problems could result in lost revenues or customer relationships or require us to incur additional costs to correct product problems and could be detrimental to our business and reputation generally |
| In addition, our customers generally use our products together with their own products and products from other vendors |
| As a result, when problems occur in a combined environment, it may be difficult to identify the source of the problem |
| These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems |
| To date, defects in our products or those of other vendors’ products with which ours are used by our customers have not had a material negative effect on our business |
| However, we cannot be certain that a material negative impact will not occur in the future |
| We depend on limited source suppliers that could cause substantial manufacturing delays and additional cost if a disruption in supply occurs |
| While we attempt to mitigate risks associated with our reliance on single suppliers by actively managing our supply chain, we do obtain some components used in our business segments from a single source |
| We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products, particularly in our Laser Systems Group |
| Despite our and their best efforts, there can be no assurance that our current or alternative sources will be able to continue to meet all of our demands on a timely basis |
| If suppliers or subcontractors experience difficulties that result in a reduction or interruption in supply to us, or fail to meet any of our manufacturing requirements, our business would be harmed until we are able to secure alternative sources, if any, on commercially reasonable terms |
| Each of our suppliers can be replaced, either by contracting with another supplier or through internal production of the part or parts previously purchased in the market, but no assurances can be given that we would be able to do so quickly enough to avoid an interruption or delay in delivery of our products to our customers and any associated harm to our reputation and customer relationships |
| Unavailability of necessary parts or components, or suppliers of the same, could require us to reengineer our products to accommodate available substitutions |
| Any such actions would likely increase our costs and could have a material adverse effect on 16 ______________________________________________________________________ [44]Table of Contents manufacturing schedules, product performance and market acceptance, each or all of which could be expected to have a material adverse effect on our financial condition or results of operations |
| Economic, political or trade problems with foreign countries could negatively impact our business |
| We are increasingly outsourcing the manufacture of sub assemblies to suppliers based in the PRC and elsewhere overseas |
| Economic, political or trade problems with foreign countries could substantially impact our ability to obtain critical parts needed in the manufacture of our products |
| Production difficulties and product delivery delays could materially adversely affect our business, operating results or financial condition |
| We assemble our products at our facilities in the United States, the United Kingdom and the PRC If use of any of our manufacturing facilities was interrupted by natural disaster or otherwise, our operations could be negatively impacted until we could establish alternative production and service operations |
| In addition, we may experience production difficulties and product delivery delays in the future as a result of: • changing process technologies; • ramping production; • installing new equipment at our manufacturing facilities; and • shortage of key components |
| Our business is subject to the effects of general economic and political conditions globally |
| While there have been improvements in the general economy since late 2003, our revenues and operating results are subject to fluctuations from unfavorable economic conditions as well as uncertainties arising out of the threatened terrorist attacks on the United States and throughout the world, including the economic consequences of protracted military action or additional terrorist activities and associated political instability and the impact of heightened security concerns on domestic and international travel and commerce |
| In particular, due to these uncertainties we are subject to: • the risk that future tightening of immigration controls may adversely affect the residence status of non-United States engineers and other key technical employees in our United States facilities or our ability to hire new non-United States employees in such facilities; and • the risk of more frequent instances of shipping delays |
| Increased governmental regulation of our business could materially adversely affect our business, operating results and financial condition |
| We are subject to many governmental regulations, including but not limited to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the United States Food and Drug Administration |
| Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users) |
| Various warning labels must be affixed and certain protective devices installed depending on the class of product |
| The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements |
| We are subject to similar regulatory oversight, including comparable enforcement remedies, in the European markets we serve |
| Changes in governmental regulations may reduce demand for our products or increase our expenses |
| We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety and food and drug regulations |
| We develop, configure and market our products to meet customer needs created by those regulations |
| Any significant change in regulations could reduce demand for our products, which in turn could materially adversely affect our business, operating results and financial condition |