| INTEVAC INC Item 1A Risk Factors Our operating results fluctuate significantly from quarter to quarter, which may cause the price of our stock to decline |
| Over the same period our operating income (loss) as a percentage of revenues has fluctuated between approximately 18prca 11 _________________________________________________________________ [50]Table of Contents and (56prca) of revenues |
| We anticipate that our revenues and operating margins will continue to fluctuate |
| We expect this fluctuation to continue for a variety of reasons, including: • delays or problems in the introduction and acceptance of our new products, or delivery of existing products; • changes in the demand, due to seasonality, cyclicality and other factors, for the computer systems, storage subsystems and consumer electronics containing disks our customers produce with our systems; and • announcements of new products, services or technological innovations by us or our competitors |
| Additionally, because our systems are priced in the millions of dollars and we sell a relatively small number of systems, our business is inherently subject to fluctuations in revenue from quarter to quarter due to factors such as timing of orders, acceptance of new systems by our customers or cancellation of those orders |
| As a result, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and that these comparisons may not be an accurate indicator of our future performance |
| Our operating results in one or more future quarters may fail to meet the expectations of investment research analysts or investors, which could cause an immediate and significant decline in the trading price of our common shares |
| We are exposed to risks associated with a highly concentrated customer base |
| Historically, a significant portion of our revenue in any particular period has been attributable to sales of our disk sputtering systems to a limited number of customers |
| In 2005, one of our customers accounted for 41prca of our revenues and four customers, in the aggregate, accounted for 90prca of our revenues |
| These same four customers, in the aggregate, accounted for 93prca of our net accounts receivable at December 31, 2005 |
| During 2005, Seagate announced its acquisition of Maxtor |
| This acquisition will further consolidate our customer base as they both are included in the four customers with whom our revenues and accounts receivable were heavily concentrated in 2005 |
| Orders from a relatively limited number of magnetic disk manufacturers have accounted for, and likely will continue to account for, a substantial portion of our revenues |
| The loss of, or delays in purchasing by, any one of our large customers would significantly reduce potential future revenues |
| The concentration of our customer base may enable customers to demand pricing and other terms unfavorable to us |
| Furthermore, the concentration of customers can lead to extreme variability in revenue and financial results from period to period |
| For example, during 2005 revenues ranged between dlra10dtta6 million in the first quarter and dlra52dtta7 million in the fourth quarter |
| These factors could have a material adverse effect on our business, financial condition and results of operations |
| Our long term revenue growth is dependent on new products |
| If these new products are not successful, then our results of operations will be adversely affected |
| We have invested heavily, and continue to invest, in the development of new products |
| Our success in developing and selling new products depends upon a variety of factors, including our ability to predict future customer requirements accurately, technological advances, total cost of ownership of our systems, our introduction of new products on schedule, our ability to manufacture our products cost-effectively and the performance of our products in the field |
| Our new product decisions and development commitments must anticipate continuously evolving industry requirements significantly in advance of sales |
| The majority of our revenues in the twelve months ended December 31, 2005 were from sale of our 200 Lean disk sputtering system, which was first delivered in December 2003 |
| When first introduced, advanced vacuum manufacturing equipment, such as the 200 Lean, is subject to extensive customer acceptance tests after installation at the customer’s factory |
| These acceptance tests are designed to validate reliable operation to specification in areas such as throughput, vacuum level, robotics, process performance and software features and functionality |
| These tests are generally more comprehensive for new systems, than for mature systems, and are designed to highlight problems encountered with early versions of the equipment |
| For example, initial builds of the 200 Lean experienced high production and warranty costs in comparison to our more established product lines |
| Failure to promptly address any of the problems uncovered in these tests could have adverse effects on our business, including rescheduling of backlog, failure to achieve customer acceptance and therefore revenue recognition as anticipated, unanticipated product, rework and warranty costs, penalties for non-performance, cancellation of orders, or return of products for credit |
| 12 _________________________________________________________________ [51]Table of Contents We are making a substantial investment to develop a new manufacturing system to address applications other than magnetic media manufacturing |
| We have not yet completed a fully functional production system, and do not expect to generate revenue from this product in the next twelve months |
| We spent dlra6dtta4 million, or 44prca of our research and development costs on this new product in 2005 and expect to significantly increase our level of spending on this project in 2006 |
| We have not developed or sold products for this market previously and our knowledge of the market and its needs is limited |
| Failure to correctly assess the size of the market, or to successfully develop a product to cost effectively address the market, or to establish effective sales and support of the new product would have a material adverse effect on our future revenues and profits, including loss of the Company’s entire investment in the project |
| We are jointly developing a next generation head mounted night-vision system with another defense contractor |
| This system is planned for sale to the US military and will compete with head-mounted systems developed by our competitors |
| The US military does not intend to initiate production of this system until 2010 |
| We plan to make a significant investment in this product and cannot be assured when, or if, we will be awarded any production contracts for these night vision systems Our LIVAR target identification and low light level camera technologies are designed to offer significantly improved capability to military customers |
| We are also developing commercial products based on the technology we have developed in our Imaging business |
| None of our Imaging products are currently being manufactured in high volume, and we may encounter unforeseen difficulties when we commence volume production of these products |
| Our Imaging business will require substantial further investment in sales and marketing, in product development and in additional production facilities in order to expand our operations |
| We may not succeed in these activities or generate significant sales of these new products |
| To date, commercial sales of our commercial Imaging products have not been significant, and we do not expect to collect significant revenues in 2006 from deployment of LIVAR or our other Imaging products |
| Failure of any of these new products to perform as intended, to penetrate their markets and develop into profitable product lines or to achieve their production cost objectives, would have a material adverse effect on our business |
| Demand for capital equipment is cyclical, which subjects our business to long periods of depressed revenues interspersed with periods of unusually high revenues |
| Our Equipment business sells equipment to capital intensive industries, which sell commodity products such as disk drives |
| When demand for these commodity products exceeds capacity, demand for new capital equipment such as ours tends to be amplified |
| Conversely, when supply of these commodity products exceeds demand, the demand for new capital equipment such as ours tends to be depressed |
| The hard disk drive industry has historically been subject to multi-year cycles because of the long lead times and high costs involved in adding capacity, and to seasonal cycles driven by consumer purchasing patterns, which tend to be heaviest in the third and fourth quarters of each year |
| The cyclical nature of the capital equipment industry means that in some years we will have unusually high sales of new systems, and that in other years our sales of new systems will be severely depressed |
| The timing, length and volatility of these cycles are difficult to predict |
| These cycles have affected the timing and amounts of our customers’ capital equipment purchases and investments in new technology |
| For example, sales of systems for magnetic disk production were severely depressed from the middle of 1998 until mid-2003 |
| We believe we are currently in a strong upswing in a cycle, but we cannot predict with any certainty how long such an upswing might last |
| If the projected growth in demand for hard disk drives does not materialize and our customers do not replace or upgrade their installed base of disk sputtering systems, then future sales of our disk sputtering systems will suffer |
| From the middle of 1998 until mid-2003, there was very little demand for new disk sputtering systems, as magnetic disk manufacturers were burdened with over-capacity and were not investing in new disk sputtering equipment |
| 13 _________________________________________________________________ [52]Table of Contents Sales of our equipment for capacity expansions are dependent on the capacity expansion plans of our customers and upon whether our customers select our equipment for their capacity expansions |
| We have no control over our customers’ expansion plans, and we cannot assure you that they will select our equipment if they do expand their capacity |
| Our customers may not implement capacity expansion plans, or we may fail to win orders for equipment for those capacity expansions, which could have a material adverse effect on our business and our operating results |
| In addition, some manufacturers may choose to purchase used systems from other manufacturers or customers rather than purchasing new systems from us |
| Furthermore, if hard disk drives were to be replaced by an alternative technology as a primary method of digital storage, demand for our products would decrease |
| Sales of our new 200 Lean disk sputtering systems are also dependent on obsolescence and replacement of the installed base of disk sputtering equipment |
| If technological advancements are developed that extend the useful life of the installed base of systems, then sales of our 200 Lean will be limited to the capacity expansion needs of our customers, which would significantly decrease our revenue |
| Our products are complex, constantly evolving and often must be customized to individual customer requirements |
| The systems we manufacture and sell in our Equipment business have a large number of components and are complex, which require us to make substantial investments in research and development |
| If we were to fail to develop, manufacture and market new systems or to enhance existing systems, that failure would have an adverse effect on our business |
| We may experience delays and technical and manufacturing difficulties in future introduction, volume production and acceptance of new systems or enhancements |
| In addition, some of the systems that we manufacture must be customized to meet individual customer site or operating requirements |
| In some cases, we market and commit to deliver new systems, modules and components with advanced features and capabilities that we are still in the process of designing |
| We have limited manufacturing capacity and engineering resources and may be unable to complete the development, manufacture and shipment of these products, or to meet the required technical specifications for these products, in a timely manner |
| Failure to deliver these products on time, or failure to deliver products that perform to all contractually committed specifications, could have adverse effects on our business, including rescheduling of backlog, failure to achieve customer acceptance and therefore revenue recognition as anticipated, unanticipated rework and warranty costs, penalties for non-performance, cancellation of orders, or return of products for credit |
| In addition, we may incur substantial unanticipated costs early in a product’s life cycle, such as increased engineering, manufacturing, installation and support costs, that we may be unable to pass on to the customer and that may affect our gross margins |
| Sometimes we work closely with our customers to develop new features and products |
| In connection with these transactions, we sometimes offer a period of exclusivity to these customers |
| Our sales cycle is long and unpredictable, which requires us to incur high sales and marketing expenses with no assurance that a sale will result |
| The sales cycle for our equipment systems can be a year or longer, involving individuals from many different areas of our company and numerous product presentations and demonstrations for our prospective customers |
| Our sales process for these systems also includes the production of samples and customization of products for our prospective customers |
| We do not enter into long-term contracts with our customers and therefore until an order is actually submitted by a customer there is no binding commitment to purchase our systems |
| Our Imaging business is also subject to long sales cycles because many of our products, such as our LIVAR system, often must be designed into our customers products, which are often complex state-of-the-art products |
| These development cycles are often multi-year, and our sales are contingent on our customer successfully integrating our product into their product, completing development of their product and then obtaining production orders for their product from the US Government or its allies |
| As a result, we may not recognize revenue from our products for extended periods of time after we have completed development, and made initial shipments of, our products, during which time we may expend substantial funds and management time and effort with no assurance that a sale will result |
| 14 _________________________________________________________________ [53]Table of Contents We operate in an intensely competitive marketplace, and our competitors have greater resources than we do |
| In the market for our disk sputtering systems, we have experienced competition from competitors such as Anelva Corporation, which is a subsidiary of Canon, and Unaxis Holdings, Ltd, each of which has sold substantial numbers of systems worldwide |
| In the market for our Imaging products, we experience competition from companies such as ITT Industries, Inc |
| and Northrop Grumman Corporation, the primary US manufacturers of Generation-III night vision devices and their derivative products |
| Our competitors have substantially greater financial, technical, marketing, manufacturing and other resources than we do |
| We cannot assure you that our competitors will not develop enhancements to, or future generations of, competitive products that offer superior price or performance features |
| Likewise, we cannot assure you that new competitors will not enter our markets and develop such enhanced products |
| Moreover, competition for our customers is intense, and our competitors have historically offered substantial pricing concessions and incentives to attract our customers or retain their existing customers |
| We experienced significant growth in our business and operations and if we do not appropriately manage this growth and any future growth, our operating results will be negatively affected |
| Our business has grown significantly in recent years in both operations and headcount, and continued growth may cause a significant strain on our infrastructure, internal systems and managerial resources |
| To manage our growth effectively, we must continue to improve and expand our infrastructure, including information technology and financial operating and administrative systems and controls, and continue managing headcount, capital and processes in an efficient manner |
| Our productivity and the quality of our products may be adversely affected if we do not integrate and train our new employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization and increase our operating expenses |
| We also may be less able to predict and effectively control our operating expenses due to the growth and increasing complexity of our business |
| In addition, our information technology systems may not grow at a sufficient rate to keep up with the processing and information demands placed on them by a much larger company |
| The efforts to continue to expand our information technology systems or our inability to do so could harm our business |
| Further, revenues may not grow at a sufficient rate to absorb the costs associated with a larger overall headcount |
| Our future growth may require significant additional resources given that, as we increase our business operations in complexity and scale, we may have insufficient management capabilities and internal bandwidth to manage our growth and business effectively |
| We cannot assure you that resources will be available when we need them or that we will have sufficient capital to fund these potential resource needs |
| Also, growth in the number of orders received in our Equipment business may require additional physical space and headcount, and our ability to fulfill such orders may be constrained if we are unable to effectively grow our business |
| If we are unable to manage our growth effectively or if we experience a shortfall in resources, our results of operations will be harmed |
| Our Imaging business depends heavily on government contracts, which are subject to immediate termination and are funded in increments |
| The termination of or failure to fund one or more of these contracts could have a negative impact on our operations |
| We sell many of our Imaging products and services directly to the US government, as well as to prime contractors for various US government programs |
| Generally, government contracts are subject to oversight audits by government representatives and contain provisions permitting termination, in whole or in part, without prior notice at the government’s convenience upon the payment of compensation only for work done and commitments made at the time of termination |
| We cannot assure you that one or more of the government contracts under which we or our customers operate will not be terminated under these circumstances |
| Also, we cannot assure you that we or our customers would be able to procure new government contracts to offset the revenues lost as a result of any termination of existing contracts, nor can we assure you that we or our customers will continue to remain in good standing as federal contractors |
| 15 _________________________________________________________________ [54]Table of Contents Furthermore, the funding of multi-year government programs is subject to congressional appropriations, and there is no guarantee that the US government will make further appropriations |
| The loss of funding for a government program would result in a loss of anticipated future revenues attributable to that program |
| That could increase our overall costs of doing business |
| In addition, sales to the US government and its prime contractors may be affected by changes in procurement policies, budget considerations and political developments in the United States or abroad |
| The influence of any of these factors, which are beyond our control, could also negatively impact our financial condition |
| We also may experience problems associated with advanced designs required by the government, which may result in unforeseen technological difficulties and cost overruns |
| Failure to overcome these technological difficulties and the occurrence of cost overruns would have a material adverse effect on our business |
| We may not be successful in maintaining and obtaining the necessary export licenses to conduct operations abroad, and the United States government may prevent proposed sales to foreign customers |
| Many of our Imaging products require export licenses from United States Government agencies under the Export Administration Act, the Trading with the Enemy Act of 1917, the Arms Export Act of 1976 and the International Trading in Arms Regulations |
| This limits the potential market for our products |
| We can give no assurance that we will be successful in obtaining all the licenses necessary to export our products |
| Recently, heightened government scrutiny of export licenses for products in our market has resulted in lengthened review periods for our license applications |
| Export to countries which are not considered by the United States Government to be allies is likely to be prohibited, and even sales to US allies may be limited |
| Failure to obtain, or delays in obtaining, or revocation of previously issued licenses would prevent us from selling our products outside the United States, may subject us to fines or other penalties, and would have a material adverse effect on our business, financial condition and results of operations |
| Our sales of disk sputtering systems are dependent on substantial capital investment by our customers, far in excess of the cost of our products |
| Our customers must make extremely large capital expenditures in order to purchase our systems and other related equipment and facilities |
| These costs are far in excess of the cost of our systems alone |
| The magnitude of such capital expenditures requires that our customers have access to large amounts of capital and that they be willing to invest that capital over long periods of time to be able to purchase our equipment |
| The magnetic disk manufacturing industry has not made significant additions to its production capacity until recently |
| Some of our potential customers may not be willing or able to make the magnitude of capital investment required, especially during a downturn in either the overall economy or the hard disk drive industry |
| The market price and trading volume of our common stock has been subject to significant volatility, and this trend may continue |
| During 2005, the closing price of our common stock, as traded on The Nasdaq National Market, fluctuated from a low of dlra7dtta06 to a high of dlra14dtta94 per share, and is currently trading at over dlra20 per share |
| The value of our common stock may decline regardless of our operating performance or prospects |
| Factors affecting our market price include: • our perceived prospects; • hard disk drive market expectations; • variations in our operating results and whether we achieve our key business targets; • sales or purchases of large blocks of our stock; • changes in, or our failure to meet, our revenue and earnings estimates; • changes in securities analysts’ buy or sell recommendations; • differences between our reported results and those expected by investors and securities analysts; 16 _________________________________________________________________ [55]Table of Contents • announcements of new contracts, products or technological innovations by us or our competitors; • market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; • our high fixed operating expenses, including research and development expenses; • developments in the financial markets; and • general economic, political or stock market conditions in the United States and other major regions in which we do business |
| For example, in July 2004 when we announced that our gross margin and gross revenue for the year would be under the expectations of investment analysts, our stock price dropped by approximately half |
| In addition, the general economic, political, stock market and hard drive industry conditions that may affect the market price of our common stock are beyond our control |
| The market price of our common stock at any particular time may not remain the market price in the future |
| In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities |
| Any such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources |
| Changes in tax rates or tax liabilities could affect future results |
| As a global company, we are subject to taxation in the United States and various other countries |
| Significant judgment is required to determine and estimate worldwide tax liabilities |
| Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws |
| Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations |
| At December 31, 2005, due to a history of net operating losses prior to 2005, dlra15 million of deferred tax assets have been fully reserved by a valuation allowance |
| As a result, we are projecting an effective tax rate for 2006 of 3prca |
| Once we determine that conclusive evidence exists to support an adjustment to the valuation allowance, or we can reasonably forecast sufficient income to utilize the deferred tax assets, our effective tax rate will likely increase significantly |
| Our future success depends on international sales and the management of global operations In 2005, approximately 71prca of our revenues came from regions outside the United States |
| We currently have international customer support offices in Singapore, China and Japan |
| We expect that international sales will continue to account for a significant portion of our total revenue in future years |
| Certain manufacturing facilities and suppliers are also located outside the United States |
| Managing our global operations presents challenges including, but not limited to, those arising from: • varying regional and geopolitical business conditions and demands; • global trade issues; • variations in protection of intellectual property and other legal rights in different countries; • rising raw material and energy costs; • variations in the ability to develop relationships with suppliers and other local businesses; • changes in laws and regulations of the United States (including export restrictions) and other countries, as well as their interpretation and application; • fluctuations in interest rates and currency exchange rates; • the need to provide sufficient levels of technical support in different locations; 17 _________________________________________________________________ [56]Table of Contents • political instability, natural disasters (such as earthquakes, hurricanes or floods), pandemics, terrorism or acts of war where we have operations, suppliers or sales; • cultural differences; and • shipping delays |
| Changes in existing financial accounting standards or practices or taxation rules or practices may adversely affect our results of operations |
| Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business |
| Further, such changes could potentially affect our reporting of transactions completed before such changes are effective |
| For example, in December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123 (Revised 2004) (“SFAS 123R”), “Share-Based Payment,” which replaces SFAS Nodtta 123 (“SFAS 123”), “Accounting for Stock-Based Compensation |
| ” SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such compensation expense in our statements of income |
| We are required to adopt SFAS 123R in the first quarter of fiscal year 2006 |
| The pro forma disclosures, previously permitted under SFAS 123 and adopted by us, no longer will be an alternative to financial statement recognition |
| We have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, but we expect the adoption to increase our cost of revenues and operating expenses, and the adoption of SFAS 123R could make our net income less predictable in any given reporting period, and could change the way we compensate our employees |
| We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management must perform evaluations of our internal control over financial reporting |
| Beginning in 2004, our Form 10-K has included a report by management of their assessment of the adequacy of such internal control |
| Additionally, our independent registered public accounting firm must publicly attest to the adequacy of management’s assessment and the effectiveness of our internal control |
| Ongoing compliance with these requirements is complex, costly and time-consuming |
| In 2004, we were not able to assert, in our management certifications filed with our Annual Report on Form 10-K, that our internal control over financial reporting was effective as of December 31, 2004, as our management identified three material weaknesses in our internal control over financial reporting |
| This or any future inability to assert that our internal controls over financial reporting are effective for any given reporting period (or if our auditors are unable to attest that our management’s report is fairly stated or if they are unable to express an opinion on the effectiveness of our internal controls), could cause us to lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price |
| We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement |
| During the 2004 audit, our external auditors brought to our attention a need to increase the internal controls in certain areas of our operation, including revenue calculations in the Imaging business, determination of inventory reserve requirements, approval of changes to the perpetual inventory and segregation of duties |
| In 2005, we devoted significant resources to remediation of these and other findings and to improvement of our internal controls |
| Although we believe that these efforts have strengthened our internal controls and addressed the concerns that gave rise to the material weaknesses previously reported by us, we are continuing to work to improve our internal controls |
| 18 _________________________________________________________________ [57]Table of Contents Our dependence on suppliers for certain parts, some of them sole-sourced, makes us vulnerable to manufacturing interruptions and delays, which could affect our ability to meet customer demand |
| We are a manufacturing business |
| Purchased parts constitute the largest component of our product cost |
| Our ability to manufacture depends on the timely delivery of parts, components, and subassemblies from suppliers |
| We obtain some of the key components and sub-assemblies used in our products from a single supplier or a limited group of suppliers |
| If any of our suppliers fail to deliver quality parts on a timely basis, we may experience delays in manufacturing, which could result in delayed product deliveries or increased costs to expedite deliveries or develop alternative suppliers |
| Development of alternative suppliers could require redesign of our products |
| Our business depends on the integrity of our intellectual property rights |
| The success of our business depends upon integrity of our intellectual property rights and we cannot assure you that: • any of our pending or future patent applications will be allowed or that any of the allowed applications will be issued as patents or will issue with claims of the scope we sought; • any of our patents will not be invalidated, deemed unenforceable, circumvented or challenged; • the rights granted under our patents will provide competitive advantages to us; • other parties will not develop similar products, duplicate our products or design around our patents; or • our patent rights, intellectual property laws or our agreements will adequately protect our intellectual property or competitive position |
| Failure to protect our intellectual property rights adequately could have a material adverse effect on our business |
| We provide products that are expected to have long useful lives and that are critical to our customers’ operations |
| From time to time, as part of business agreements, we place portions of our intellectual property into escrow to provide assurance to our customers that our technology will be available to them in the event that we are unable to support them at some point in the future |
| From time to time, we have received claims that we are infringing third parties’ intellectual property rights |
| We cannot assure you that third parties will not in the future claim that we have infringed current or future patents, trademarks or other proprietary rights relating to our products |
| Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements |
| Such royalty or licensing agreements, if required, may not be available on terms acceptable to us |
| Our success is dependent on recruiting and retaining a highly talented work force |
| Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace |
| We generally do not have employment contracts with our key employees |
| Further, we do not maintain key person life insurance on any of our employees |
| The expansion of high technology companies worldwide has increased demand and competition for qualified personnel, and has made companies increasingly protective of prior employees |
| It may be difficult for us to locate employees who are not subject to non-competition and other restrictions |
| Our US operations are located in Santa Clara, California and Fremont, California, where the cost of living and recruiting employees is high |
| Additionally, our operating results depend, in large part, upon our ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel |
| Furthermore, we compete with similar industries, such as the semiconductor industry, for the same pool of skilled employees |
| If we are unable to retain key personnel, or if we are not able to attract, assimilate or retain additional highly qualified employees to meet our needs in the future, our business and operations could be harmed |
| Changes we make to our business in response to the adoption of 123R may make this more difficult |
| 19 _________________________________________________________________ [58]Table of Contents Changes in demand caused by fluctuations in interest and currency exchange rates may reduce our international sales |
| Sales and operating activities outside of the United States are subject to inherent risks, including fluctuations in the value of the US dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences |
| We earn a significant portion of our revenue from international sales, and there can be no assurance that any of these factors will not have an adverse effect on our ability to sell our products or operate outside the United States |
| We currently quote and sell the majority of our products in US dollars |
| From time to time, we may enter into foreign currency contracts in an effort to reduce the overall risk of currency fluctuations to our business |
| However, there can be no assurance that the offer and sale of products denominated in foreign currencies, and the related foreign currency hedging activities, will not adversely affect our business |
| Our principal competitor for disk sputtering equipment is based in Japan and has a cost structure based on the Japanese yen |
| Accordingly, currency fluctuations could cause the price of our products to be more or less competitive than our principal competitor’s products |
| Currency fluctuations will decrease or increase our cost structure relative to those of our competitors, which could lessen the demand for our products and affect our competitive position |
| We may evaluate acquisition candidates and other diversification strategies |
| In the past we have engaged in acquisitions as part of our efforts to expand and diversify our business |
| For example, our business was initially acquired from Varian Associates in 1991 |
| We also acquired our gravity lubrication and rapid thermal processing product lines in two acquisitions |
| We sold the rapid thermal processing product line in November 2002 |
| We also acquired our RPC electron beam processing business in late 1997, and subsequently closed this business |
| We intend to continue to evaluate new acquisition candidates, divestiture and diversification strategies |
| Any acquisition involves numerous risks, including difficulties in the assimilation of the acquired company’s employees, operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquired company’s key employees |
| Additionally, unanticipated expenses, difficulties and consequences may be incurred relating to the integration of technologies, research and development, and administrative and other functions |
| Any future acquisitions may also result in potentially dilutive issuance of equity securities, acquisition- or divestiture-related write-offs or the assumption of debt and contingent liabilities |
| We use hazardous materials and are subject to risks of non-compliance with environmental and safety regulations |
| We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or otherwise hazardous substances, chemicals, materials or waste |
| If we fail to comply with current or future regulations, such failure could result in suspension of our operations, alteration of our manufacturing process, or substantial civil penalties or criminal fines against us or our officers, directors or employees |
| Additionally, these regulations could require us to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with them |
| Failure to properly manage the use, disposal or storage of, or adequately restrict the release of, hazardous or toxic substances could subject us to significant liabilities |
| Future sales of shares of our common stock by our officers, directors and affiliates could cause our stock price to decline |
| Substantially all of our common stock may be sold without restriction in the public markets, although shares held by our directors, executive officers and affiliates may be subject to volume and manner of sale restrictions |
| As of January 19, 2006, 1cmam968cmam774 of these shares had been sold by Redemco LLC and Redemco LLC and its affiliates still owned 1cmam860cmam226 shares |
| Sales of a substantial number of shares of common 20 _________________________________________________________________ [59]Table of Contents stock in the public market by our officers, directors or affiliates or the perception that these sales could occur could materially and adversely affect our stock price and make it more difficult for us to sell equity securities in the future at a time and price we deem appropriate |
| Anti-takeover provisions in our charter documents and under California law could prevent or delay a change in control, which could negatively impact the value of our common stock by discouraging a favorable merger or acquisition of us |
| Our articles of incorporation authorize our board of directors to issue up to 10cmam000cmam000 shares of preferred stock and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions of those shares, without any further vote or action by the shareholders |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future |
| The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control and could adversely affect the voting power of your shares |
| In addition, provisions of California law and our bylaws could make it more difficult for a third party to acquire a majority of our outstanding voting stock by discouraging a hostile bid, or delaying or deterring a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares or a proxy contest for control of our company or other changes in our management |
| We could be involved in litigation From time to time we may be involved in litigation of various types, including litigation alleging infringement of intellectual property rights and other claims |
| Litigation tends to be expensive and requires significant management time and attention and could have a negative effect on our results of operations or business if we lose or have to settle a case on significantly adverse terms |
| Business interruptions could adversely affect our operations |
| Our operations are vulnerable to interruption by fire, earthquake, or other natural disaster, quarantines or other disruptions associated with infectious diseases, national catastrophe, terrorist activities, war, disruptions in our computing and communications infrastructure due to power loss, telecommunications failure, human error, physical or electronic security breaches and computer viruses, and other events beyond our control |
| We do not have a fully implemented detailed disaster recovery plan |
| Despite our implementation of network security measures, our tools and servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems and tools located at customer sites |
| Political instability could cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs, and cause international currency markets to fluctuate |
| This same instability could have the same effects on our suppliers and their ability to timely deliver their products |
| In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business and results of operations |
| For example, we self insure earthquake risks because we believe this is the prudent financial decision based on the high cost of limited coverage available in the earthquake insurance market |
| An earthquake could significantly disrupt our operations, most of which are conducted in California |
| It could also significantly delay our research and engineering effort on new products, most of which is also conducted in California |
| We take steps to minimize the damage that would be caused by an earthquake, but there is no certainty that our efforts will prove successful in the event of an earthquake |