| THERMA WAVE INC Item 1A Risk Factors Factors Affecting Future Results The following factors should be carefully considered in addition to the other information set forth in this annual report on Form 10-K for the fiscal year ended March 31, 2006 and other reports and filings made with the Securities and Exchange Commission |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also adversely impact our business operations |
| If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer |
| In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock |
| This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties |
| Actual results could differ 11 _________________________________________________________________ [61]Table of Contents materially from those discussed herein |
| Factors that could cause or contribute to such differences include, but are not limited to, those identified below as well as those discussed elsewhere in this annual report on Form 10-K WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE; OUR PLANS TO MAINTAIN AND INCREASE LIQUIDITY MAY NOT BE SUCCESSFUL; THE REPORT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM INCLUDES A GOING CONCERN UNCERTAINTY EXPLANATORY PARAGRAPH We reported operating losses of dlra17dtta5 million for the fiscal year ended March 31, 2006, and an operating loss of dlra6dtta5 million for our fiscal year ended March 31, 2005 |
| We have an accumulated deficit of dlra317dtta0 million at March 31, 2006 |
| We used dlra16dtta2 million of cash in operations during the fiscal year ended March 31, 2006 |
| Due to our history of losses and operating cash consumption, and uncertain macro-economic conditions worldwide, and other industry and sector factors, we cannot predict how long we will incur further losses, or whether we will become profitable again or whether the Company’s business will not continue to decline or if its performance will improve |
| These factors raise substantial doubt as to our ability to continue as a going concern, and our independent registered public accounting firm has included a going concern uncertainty explanatory paragraph in its report, which is included elsewhere in this Form 10-K WE NEED TO HAVE SUFFICIENT CASH TO OPERATE IF OUR BUSINESS IS TO SUCCEED Our principal sources of funds have been and are anticipated to be cash on hand (dlra20dtta6 million unrestricted as of March 31, 2006), cash flows from operating activities (if any), borrowings under our bank credit facility (which are restricted to dlra5 million in total borrowings without prior written consent from the Series B redeemable convertible preferred stockholders pursuant to the terms of our recent financing and includes a Material Adverse Change clause) and proceeds from sales of our capital stock and other sources |
| Through our ongoing efforts to decouple our breakeven point from the influence of general market conditions, we have and continue to examine all aspects of our business for areas of improvement and continue to focus on reducing our fixed cost base and improving our working capital position to better align our operations with market demand and current sales levels |
| As part of our fiscal 2006 initiative to achieve our key strategic and financial objectives of driving towards long-term sustainable profitability, improving cash balances and cash flows and reducing our overall fixed cost structure, we restructured our Asian, North American, and European operations through workforce reductions and consolidation of excess facilities |
| As a result, we recorded restructuring expenses for fiscal 2006 of dlra4dtta6 million, as discussed below in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this report on Form 10-K We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development activities |
| If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations |
| The sale of equity securities or debt financing could result in substantial dilution to our current stockholders |
| Failure to raise additional funds may adversely affect our ability to achieve our intended business objectives |
| There can be no assurance that additional financing will be available, if required, or, if available, will be on terms satisfactory to us |
| OUR QUARTERLY OPERATING RESULTS HAVE HISTORICALLY AND MAY, IN THE FUTURE, VARY SIGNIFICANTLY THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR OUR SHARES Our quarterly operating results have historically and may, in the future, vary significantly |
| Some of the factors that may influence our operating results and that could cause trading in our shares to be subject to extreme price and volume fluctuations in a given quarter include: • customer demand, which is influenced by economic conditions in the semiconductor industry, demand for products that use semiconductors, market acceptance of our products and those of our customers, seasonality, changes in product mix, and the timing, cancellation or delay of customer orders and shipments; • competition, such as competitive pressures on the prices of our products, the introduction or announcement of new products by us or our competitors and discounts that may be granted to customers; 12 _________________________________________________________________ [62]Table of Contents • fluctuations in the availability and cost of components, subassemblies and production capacity; • expenses incurred in connection with litigation; • product development costs, such as increased research, development, engineering and marketing expenses associated with new products or product enhancements, and the effect of transitioning to new or enhanced products; • delays in manufacturing or product shipments or contractual terms that require a delay between when our products are shipped and when we can recognize revenue in connection with such shipments; and • levels of fixed expenses relative to revenue levels, including research and development costs associated with product development |
| During a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems |
| Accordingly, a small change in the number of systems actually shipped may cause significant changes in operating results |
| In addition, because of the significantly different gross margins attributable to our different product lines, changes in product mix may cause fluctuations in operating results |
| WE COMPLETED A PRIVATE PLACEMENT TRANSACTION IN NOVEMBER 2005, PURSUANT TO WHICH CERTAIN OF OUR STOCKHOLDERS HAVE PROTECTIVE RIGHTS THAT MAY LIMIT OUR ACCESS TO ADDITIONAL DEBT OR EQUITY CAPITAL AND OTHERWISE SIGNIFICANTLY IMPACT OUR LIQUIDITY, FINANCIAL POSITION AND EARNINGS We issued and sold shares of our Series B Preferred Stock, and issued warrants exercisable for shares of our common stock, in a private placement transaction on November 22, 2005 |
| Consent of the majority of our Series B Preferred stock (for so long as any shares of the Series B Preferred stock remain outstanding), voting together as a single class, would be necessary in connection with the issuance of any debt securities that are convertible into common stock or the issuance of any preferred stock |
| Accordingly, our ability to raise capital through certain issuances of debt, or through a private placement of our preferred stock, will be dependent on the prior approval of the holders of our Series B Preferred Stock |
| This could limit or delay our ability to raise capital in a timely manner |
| In addition, as further described in the Note 10 of the Notes to Consolidated Financial Statements titled “Mandatorily Redeemable Convertible Preferred Stock” the Series B Preferred stockholders have certain rights upon change in control, liquidation, dilution and other factors that could require us to redeem such stock at a date prior to the scheduled redemption in November 2010 |
| The impact on our liquidity, financial position and earnings from such redemption could be significant |
| WE MAY INCUR INDEBTEDNESS IN THE FUTURE UNDER OUR BANK CREDIT FACILITIES OR OTHERWISE, WHICH COULD REQUIRE THE USE OF A PORTION OF OUR CASH FLOWS AND MAY LIMIT OUR ACCESS TO ADDITIONAL CAPITAL As of March 31, 2006, we had dlra5dtta0 million in outstanding borrowings under our credit facility with Silicon Valley Bank |
| We may incur further indebtedness to finance acquisitions, capital expenditures and working capital, or for other purposes |
| We are limited, however, to no more than dlra5dtta0 million of indebtedness pursuant to the terms of our recent private placement transaction, unless we obtain the consent of the Series B Redeemable Convertible Preferred stockholders |
| The level of our indebtedness could have important consequences for us such as the following: • a substantial portion of our cash flow from operations, if any, would be required to be dedicated to the repayment of indebtedness and would not be available for other purposes; • our future ability to obtain additional debt financing for working capital, capital expenditures, acquisitions or other purposes may be limited; and • our level of indebtedness has in the past, and could in the future, limit our flexibility in reacting to changes in the industry, general economic conditions and our ability to withstand a prolonged downturn in the semiconductor and/or semiconductor capital equipment industries |
| 13 _________________________________________________________________ [63]Table of Contents OUR PERFORMANCE IS AFFECTED BY THE CYCLICALITY OF THE SEMICONDUCTOR DEVICE INDUSTRY, WHICH MAY, FROM TIME TO TIME, LEAD TO DECREASED DEMAND FOR OUR PRODUCTS The semiconductor industry is cyclical and has historically experienced periodic downturns, which have often resulted in a decrease in the semiconductor industry’s demand for capital equipment, including process control metrology systems |
| Our business depends upon the capital expenditures of semiconductor manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products utilizing semiconductors |
| We are currently experiencing a period of increased demand for process control metrology systems, but cannot be sure how long this periodic increase will continue |
| We also cannot be sure that this is indicative of a recovery in the semiconductor industry that will result in increased demand for our capital equipment in future periods |
| IF WE FAIL TO REMEDIATE THE MATERIAL WEAKNESS AND CONTROL DEFICIENCY IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING WE MAY BE UNABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS AND OUR STOCK PRICE Effective internal control over financial reporting is essential for us to produce reliable financial reports and prevent fraud |
| If we cannot provide reliable financial information or prevent fraud, our business and operating results, as well as our stock price, could be harmed |
| We have in the past discovered, and may in the future discover, deficiencies in our internal control over financial reporting |
| In connection with our management’s evaluation of our internal control over financial reporting as of April 2, 2006, management identified a control deficiency related to the review and approval of the recording of journal entries pertaining to certain inventory balances and warranty accruals that constituted a material weakness |
| In management’s judgment, this control deficiency resulted in more than a remote likelihood that a misstatement of the Company’s financial statement accounts would not be prevented or detected for interim or annual periods |
| Because of this material weakness, management has concluded that the Company did not maintain effective control over financial reporting as of April 2, 2006, based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission |
| The material weakness in our internal control over financial reporting that we identified as of April 2, 2006, as well as our remediation efforts to date, are more fully discussed under Item 9A “Controls and Procedures” of this Form 10-K While we have taken steps to remediate the identified material weakness, there is no guarantee that these remediation steps will be sufficient to remediate the identified material weakness and control deficiency or to prevent additional material weaknesses or control deficiencies |
| A failure to implement and maintain effective internal control over financial reporting, including a failure to remediate the material weakness identified above, could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud |
| This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price |
| OUR BANK CREDIT FACILITY IS SUBJECT TO A BORROWING BASE CALCULATION AND CONTAINS A MATERIAL ADVERSE CHANGE CLAUSE We have access to dlra15dtta0 million in credit facilities (which are restricted to dlra5 million in total borrowings without prior written consent from the Series B redeemable convertible preferred stockholders pursuant to the terms of our November 22, 2005 financing) |
| However, the amount available under our credit facilities is determined using a borrowing base formula, which considers amounts in our trade accounts receivable and inventory, excluding certain aged and past due accounts receivable and inventory at locations outside of the United States, and there can be no assurance that any amount will be available for borrowing under this facility |
| This facility also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in our business, operations, or financial or other condition, or a material impairment of the prospect of repayment of any portion of 14 _________________________________________________________________ [64]Table of Contents outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral |
| If the bank invokes the Material Adverse Change clause, we could lose access to the credit facility, which is an important factor for our liquidity and for us to maintain adequate capital resources to fund our operations |
| As a result of the Material Adverse Change clause, all of our outstanding debt with Silicon Valley Bank is currently classified as current |
| OUR RESTRUCTURING ACTIVITIES COULD RESULT IN MANAGEMENT DISTRACTIONS, OPERATIONAL DISRUPTIONS AND OTHER DIFFICULTIES Our restructuring activities have taken significant management time and resources and have distracted our employees, even if they were not directly affected by the restructurings |
| Employees directly affected by our previous restructuring plans may seek future employment with our customers or competitors |
| Although all employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment |
| Any additional restructuring efforts could further divert the attention of our management away from our operations, harm our reputation and increase our expenses |
| We may undertake additional restructuring activities and future restructuring efforts may not achieve the desired result |
| In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any future growth opportunities |
| OUR LARGEST CUSTOMERS HAVE HISTORICALLY ACCOUNTED FOR A SIGNIFICANT PORTION OF OUR REVENUES ACCORDINGLY, OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE LOSS OF, OR REDUCED PURCHASES BY, ONE OR MORE OF OUR LARGE CUSTOMERS Two customers accounted for 23prca and 12prca of our net revenues for the fiscal year ended March 31, 2006 and three customers accounted for 15prca, 12prca and 10prca of our net revenues for the fiscal year ended a March 31, 2005 |
| One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise may choose to discontinue purchasing our products |
| Reductions, delays and cancellations of orders from our key customers or the loss of one or more key customers could significantly reduce our revenues and profits |
| We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers |
| If, for any reason, any of our key customers were to purchase significantly less of our products in the future, such decreased level of purchases could have a material adverse effect on our business, financial condition and results of operations |
| ANY SIGNIFICANT ORDER CANCELLATIONS OR ORDER DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty |
| Any significant deferrals or cancellations in the future could materially and adversely affect our business, financial condition and results of operations |
| Deferrals or cancellations could cause us to hold excess inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations |
| We generally recognize revenue upon shipment of products to a customer |
| If a customer refuses to accept shipped products or does not pay for these products, we could miss future revenue projections or incur significant charges against our income, which could have a material adverse affect on our operating results |
| OUR PRODUCTS TYPICALLY HAVE LENGTHY DESIGN CYCLES DURING WHICH A CUSTOMER MAY DECIDE TO CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED SALES After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product |
| Our customers may need at least three to six months to test, evaluate and adopt our product and at least an additional three to nine months to begin volume production that incorporates our product |
| Due to this lengthy design cycle, we may experience significant delays from the time we incur operating expenses and make investments in inventory until the time that we generate 15 _________________________________________________________________ [65]Table of Contents revenue from these products |
| It is possible that we may never generate any revenue from these products after incurring such expenditures |
| Even if a customer selects our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its products or that such efforts by our customer will be successful |
| The delays inherent in our lengthy design cycle increase the risk that a customer will decide to cancel or change its product plans |
| Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated |
| Additionally, if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products anticipated sales could be materially adversely effected |
| While our design cycles can be long and depend on market demand and our product roadmap, some of our product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate |
| If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected |
| In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed |
| IF ANY OF OUR SYSTEMS FAIL TO MEET OR EXCEED OUR INTERNAL QUALITY SPECIFICATIONS, WE CANNOT SHIP THEM UNTIL SUCH TIME AS THEY HAVE MET SUCH SPECIFICATIONS IF WE EXPERIENCE SIGNIFICANT DELAYS OR ARE UNABLE TO SHIP OUR PRODUCTS TO OUR CUSTOMERS AS A RESULT OF OUR INTERNAL PROCESSES, OR FOR ANY OTHER REASON, OUR BUSINESS AND REPUTATION MAY SUFFER Our products are complex and require technical expertise to design and manufacture properly |
| Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality |
| We must actively monitor our manufacturing processes to ensure that our products meet our internal quality specifications |
| Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other reasons, would delay our shipments |
| Shipment delays could harm our business and reputation in the industry |
| OUR CUSTOMERS FREQUENTLY REQUEST US TO PROVIDE LONG SUPPORT PERIODS THAT CAN RESULT IN EXCESS OR OBSOLETE INVENTORY Due to the unique nature of the products developed and delivered to our customers, long support periods are often required by our customers that can lead to increased inventory levels |
| If our inventories are not properly managed to ensure effective and efficient use of existing and future inventory levels, potentially significant excess and obsolete inventory write-offs could occur that would have a direct impact on our earnings |
| OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR IF WE INFRINGE THE PROPRIETARY TECHNOLOGY OF OTHERS Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology used in our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology |
| We have obtained a number of patents relating to each of our products and have filed applications for additional patents |
| There can be no assurance that any of our pending patent applications will be allowed, that we will develop additional proprietary technology that is patentable, that any patents owned by us will provide us with competitive advantages that we will be able to successfully enforce our patents internationally, or that these patents will not be challenged by third parties |
| Furthermore, there can be no assurance that third parties will not design around our patents |
| Any of the foregoing results could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| IN ADDITION TO PATENT PROTECTION, WE RELY UPON TRADE SECRET PROTECTION FOR OUR CONFIDENTIAL AND PROPRIETARY INFORMATION AND TECHNOLOGY WE ROUTINELY ENTER INTO CONFIDENTIALITY AGREEMENTS WITH OUR EMPLOYEES AND CUSTOMERS 16 _________________________________________________________________ [66]Table of Contents HOWEVER, THERE CAN BE NO ASSURANCE THAT THESE AGREEMENTS WILL NOT BE BREACHED, THAT WE WILL HAVE ADEQUATE REMEDIES FOR ANY BREACH OR THAT OUR CONFIDENTIAL AND PROPRIETARY INFORMATION AND TECHNOLOGY WILL NOT BE INDEPENDENTLY DEVELOPED BY, OR BECOME OTHERWISE KNOWN TO, THIRD PARTIES We license and will continue to license certain technology used in our products from third parties |
| Our inability to acquire any third-party licenses, or integrate the related third-party technologies into our products, could result in delays in our product developments and enhancements until equivalent technologies can be identified, licensed or integrated |
| We may also require new licenses in the future as our business grows and our technology evolves |
| We cannot be certain that these licenses will be available to us on commercially reasonable terms, if at all |
| Our commercial success will also depend, in part, on our ability to avoid infringing or misappropriating any patents or other proprietary rights owned by third parties |
| If we are found to infringe or misappropriate a third party’s patent or other proprietary rights, we could be required to pay damages to such third party, alter our products or processes, obtain a license from the third party or cease activities utilizing such proprietary rights, including making or selling certain products |
| If we are required to do any of the foregoing, there can be no assurance that we will be able to do so on commercially favorable terms, if at all |
| Our inability to do any of the foregoing on commercially favorable terms could have a material adverse impact on our business, financial condition, results of operations or cash flows |
| PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, OR THIRD PARTIES SEEKING TO ENFORCE THEIR OWN INTELLECTUAL PROPERTY RIGHTS AGAINST US, MAY RESULT IN LITIGATION, THE COST OF WHICH COULD BE SUBSTANTIAL There are currently no material legal proceedings pending against us, though we have received threatening letters on occasion |
| We may be required to initiate litigation in order to enforce any patents owned by or licensed to us, or to determine the scope and/or validity of a third party’s patent or other proprietary rights |
| In addition, we have from time to time received letters from third parties threatening to file lawsuits to enforce their intellectual property rights |
| Any litigation resulting from these letters or otherwise, regardless of outcome, could be expensive and time consuming and, as discussed above in the prior risk factor, could subject us to significant liabilities or require us to cease using proprietary third party technology and, consequently, could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| WE OPERATE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR CAPITAL EQUIPMENT INDUSTRY AND COMPETE AGAINST SIGNIFICANTLY LARGER COMPANIES We operate in the highly competitive semiconductor capital equipment industry and face competition from a number of competitors, some of which have significantly greater financial, engineering, manufacturing and marketing resources and broader product offerings than Therma-Wave |
| We cannot assure you that our products will be able to compete successfully with the products of our competitors |
| Many of our competitors, who have significantly greater resources than us, are investing heavily in the development of new products aimed at applications we currently serve |
| Our competitors in each product area can be expected to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics |
| In addition, we believe that our competitors sometimes provide demonstration systems to semiconductor manufacturers at no cost |
| We are required to employ similar promotions in order to remain competitive and this practice may become more pervasive in the industry |
| COMPETITIVE CONDITIONS IN OUR INDUSTRY MAY REQUIRE US TO REDUCE OUR PRICES Due to competitive conditions in our industry, we have at times selectively reduced prices on our products in order to maintain or grow our market share |
| There can be no assurance that competitive pressures will not necessitate further price reductions |
| Maintaining technological advantages to mitigate the adverse effect of pricing pressures will require a continued high level of investment by us in research and development and sales and marketing |
| There can be no assurance that we will have sufficient resources to continue to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantages |
| To the 17 _________________________________________________________________ [67]Table of Contents extent our products do not provide technological advantages over products offered by our competitors, we are likely to experience increased price competition or loss of market share with respect to such products |
| WE ENCOUNTER DIFFICULTIES IN SOLICITING CUSTOMERS OF OUR COMPETITORS BECAUSE OF HIGH SWITCHING COSTS IN THE MARKETS IN WHICH WE OPERATE We believe that once a device manufacturer has selected a particular vendor’s capital equipment, that manufacturer generally relies upon that vendor’s equipment for that specific production line application and, to the extent possible, subsequent generations of that vendor’s systems |
| Accordingly, it may be difficult to achieve significant sales to a particular customer once another vendor’s capital equipment has been selected by that customer unless there are compelling reasons to do so, such as significant performance or cost advantages |
| OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS FOR THE SEMICONDUCTOR INDUSTRY WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN OUR PRODUCT DEVELOPMENT EFFORTS OR THAT OUR NEW PRODUCTS WILL GAIN GENERAL MARKET ACCEPTANCE Our future growth will depend, in part, on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis |
| Our failure to successfully identify new product opportunities or to develop, manufacture, assemble or introduce new products could have a material adverse effect on our growth prospects |
| For example, we expect our product development efforts to include continuing to combine separate metrology systems into one tool |
| We cannot assure you that we will not experience difficulties or delays in our development efforts with respect to these products or that we will be successful in developing these products |
| In addition, we cannot assure you that these products will gain market acceptance or that we will not experience reliability or quality problems |
| OUR OPERATIONS ARE CHARACTERIZED BY THE NEED FOR CONTINUED INVESTMENT IN RESEARCH AND DEVELOPMENT AND, AS A RESULT, OUR ABILITY TO REDUCE COSTS IS LIMITED Our operations are characterized by the need for continued investment in research and development and extensive ongoing customer service and support capability |
| As a result, our operating results could be materially adversely affected if our revenue level is below expectations |
| In addition, because of our emphasis on research and development and technological innovation, there can be no assurance that our operating costs will not increase in the future |
| RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY WILL REQUIRE US TO CONTINUALLY DEVELOP NEW AND ENHANCED PRODUCTS Any failure by us to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction could result in a loss of competitiveness and could materially adversely affect our operating results |
| There can be no assurance 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 noncompetitive |
| A fundamental shift in technology in our product markets could have a material adverse effect on us, particularly in light of the fact that we currently derive a major portion of our revenues from sales of our two major product families, the Opti-Probe (including Opti-Probe CD) and Therma-Probe |
| 18 _________________________________________________________________ [68]Table of Contents WE WILL NEED TO BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL WITH KNOWLEDGE OF INSTRUMENTS USED IN SEMICONDUCTOR MANUFACTURING PROCESSES TO HELP SUPPORT OUR FUTURE GROWTH COMPETITION FOR SUCH PERSONNEL IN OUR INDUSTRY IS INTENSE Our success depends to a significant degree upon the continued contributions of key management, engineering, sales and marketing, customer support, finance and manufacturing personnel |
| The loss of the services of key personnel, who would be extremely difficult to replace, could have a material adverse effect on us |
| There can be no assurance that the services of such personnel will continue to be available to us |
| We have employment agreements with some key members of our senior management team, including Messrs |
| To support our future growth, we will need to attract and retain additional qualified employees |
| Competition for such personnel in our industry and in the Silicon Valley is high, and we cannot assure you that we will be successful in attracting and retaining such personnel |
| WE OBTAIN SOME OF THE COMPONENTS AND SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR LIMITED GROUP OF SUPPLIERS, THE PARTIAL OR COMPLETE LOSS OF WHICH COULD HAVE AT LEAST A TEMPORARY ADVERSE EFFECT ON OUR OPERATIONS Some of the components and subassemblies included in our systems are obtained from a single source or a limited group of suppliers |
| From time to time, we have experienced temporary difficulties in receiving orders from some of these suppliers |
| Although we seek to reduce dependence on these sole and limited source suppliers, the partial or complete loss of these sources could have an adverse effect on our results of operations, our ability to ship product on time and damage customer relationships |
| Further, a significant increase in the price of one or more of these components or subassemblies could materially adversely affect our results of operations |
| WE ARE SUBJECT TO RISKS ASSOCIATED WITH MANUFACTURING ALL OF OUR PRODUCTS AT A SINGLE FACILITY ANY PROLONGED DISRUPTION IN THE OPERATIONS OF THAT FACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS We produce all of our products in our manufacturing facility located in Fremont, California |
| Our manufacturing processes are highly complex, requiring sophisticated and costly equipment and a specially designed facility |
| As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to this facility as a result of an earthquake, fire or any other reason, could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| WE RELY UPON MANUFACTURERS’ SALES REPRESENTATIVES FOR A SIGNIFICANT PORTION OF OUR SALES A DISRUPTION IN OUR RELATIONSHIP WITH ANY SALES REPRESENTATIVE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS A significant portion of our sales have historically been made through manufacturers’ sales representatives, and we expect this percentage to increase since establishing Hermes-Epitek Corporation as our exclusive representative in Taiwan, China, Singapore and Malaysia |
| We also signed an exclusive representative agreement with TelTec Semiconductor Technic to be our representative in Europe, including the United Kingdom, Italy, Spain, France, Portugal, Belgium, Holland, Switzerland, Germany, Austria, Poland, Russia and Eastern Europe |
| The activities of these representatives are not completely within our control, and they may sell products manufactured by other manufacturers |
| In addition, in some locations our manufacturing sales representatives also provide field service and support to our customers |
| A reduction in the sales efforts or financial viability of such manufacturers’ sales representatives, or a termination of our relationship with such representatives, could have a material adverse effect on our sales, financial results and ability to support our customers |
| Although we believe that we maintain good relations with our sales representatives, there can be no assurance that such good relationships will continue |
| 19 _________________________________________________________________ [69]Table of Contents OUR NET SALES AND RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED BY THE INSTABILITY OF ASIAN ECONOMIES, FROM WHICH WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES Our sales to customers in Asian markets represented approximately 43prca, 60prca and 58prca for the fiscal years ended March 31, 2006, 2005 and 2004, respectively |
| Companies in the Asia Pacific region, including Japan and Taiwan, each of which accounts for a significant portion of our business in that region, continue to experience uncertainties in their currency, banking and equity markets |
| These instabilities may adversely affect our sales to semiconductor device and capital equipment manufacturers located in these regions in the coming quarters and fiscal years |
| WE RECENTLY BEGAN CHANGING THE WAY WE MARKET AND SELL OUR PRODUCTS IN CERTAIN COUNTRIES IN ASIA, ONE OF OUR LARGEST MARKETS AS A RESULT, WE CANNOT BE ASSURED THAT OUR SALES IN THAT REGION WILL BE IN LINE WITH HISTORICAL TRENDS Our new relationship with Hermes-Epitek changes the way we sell our products in Taiwan, China, Singapore and Malaysia |
| Previously, we had sales facilities and staff in Taiwan, China and Singapore who covered these countries for us |
| We have now closed our facilities in Taiwan and Singapore and initiated the closing of our facilities in China |
| We intend to use Hermes-Epitek exclusively to market and service our products there |
| We expect that our relationship with Hermes-Epitek will improve our sales and service while simultaneously adding flexibility to our cost structure and decreasing difficulties in managing staffing and other elements of foreign subsidiary and branch operations, but there is no guarantee that this will occur |
| Since sales to customers in these countries represent such a large percentage of net revenues for the last three years, any reduction in our sales in these countries as a result of the new arrangement with Hermes-Epitek could have a significant impact on our financial condition, results of operations or cash flows |
| WE ARE SUBJECT TO OPERATIONAL, FINANCIAL, POLITICAL AND FOREIGN EXCHANGE RISKS DUE TO OUR SIGNIFICANT LEVEL OF INTERNATIONAL SALES Our export sales to customers outside of the United States accounted for approximately 69prca, 71prca and 72prca of the total revenues for the fiscal years ended March 31, 2006, 2005 and 2004, respectively |
| We anticipate that export sales will continue to account for a significant portion of our revenues in the foreseeable future |
| Due to the significant level of our export sales, we are subject to material risks, which include: • unexpected changes in regulatory requirements; • tariffs and other market barriers; • foreign currency exchange fluctuations; • political and economic instability; • potentially adverse tax consequences; • outbreaks of hostilities; • difficulties in accounts receivable collection; • reduced or uncertain protection for intellectual property rights in some countries; • extended payment terms; • difficulties in managing foreign sales representatives; and • difficulties in managing staffing and other elements of foreign subsidiary and branch operations |
| We are subject to risks associated with the imposition of legislation and regulations relating to the import or export of high technology products |
| We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries |
| Because sales of our products have been denominated to date primarily in United States dollars, increases in the 20 _________________________________________________________________ [70]Table of Contents value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country |
| Future international activity may result in increased foreign currency denominated sales |
| Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations |
| Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws |
| We may be limited in our ability to enforce our rights under such agreements |
| FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS OR PRACTICES OR EXISTING TAXATION RULES OR PRACTICES MAY CAUSE ADVERSE UNEXPECTED REVENUE FLUCTUATIONS AND AFFECT OUR REPORTED RESULTS OF OPERATIONS A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future |
| Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, in December 2004, the FASB issued SFAS 123(R) (revised 2004), “Share Based Payment |
| SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity’s equity instruments |
| SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions |
| SFAS 123(R) requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair market value of the award over the period during which an employee is required to provide service for the award |
| The grant-date fair market value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available |
| In addition, SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair market value and that the fair market value of that award will be remeasured subsequently at each reporting date through the settlement date |
| The effective date of SFAS 123(R) for us is for the first annual period beginning after June 15, 2005, ie the Company’s fiscal year ending March 31, 2007 |
| The change in accounting treatment resulting from SFAS 123(R) will materially adversely affect our reported results of operations as following its implementation, our stock-based compensation expense will be charged directly against our reported earnings |
| PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE POTENTIAL ACQUISITION PROPOSALS AND COULD DELAY, DETER OR PREVENT A CHANGE IN CONTROL Provisions of our Certificate of Incorporation and by-laws may inhibit changes in control of Therma-Wave not approved by our board of directors and could limit the circumstances in which a premium would be paid for our common stock in any proposed transaction, or a proxy contest for control of the board of directors might be initiated |
| These provisions provide for: • a classified board of directors; • a prohibition on stockholder action through written consents; • a requirement that special meetings of stockholders be called only by our chief executive officer or the board of directors; • advance notice requirements for stockholder proposals and nominations; • limitations on the ability of stockholders to amend, alter or repeal our bylaws; and 21 _________________________________________________________________ [71]Table of Contents • the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board may determine, which could have a dilutive effect on our stockholders; In addition, the terms of our Series B Preferred Stock contain provisions that might inhibit a change in control |
| We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects |
| Additionally, we have entered into change of control severance agreements with certain of our executive officers and management |
| These provisions, including items such as the immediate vesting of all stock options held by the executive officer prior to the change of control, when triggered could lead to a material stock-based compensation expense charged directly against our earnings and could adversely affect our reported results of operations |
| IF WE ISSUE ADDITIONAL SHARES OF STOCK IN THE FUTURE, IT MAY HAVE A DILUTIVE EFFECT ON OUR STOCKHOLDERS We have a significant number of authorized and unissued shares of both our common and preferred stock available |
| These shares will provide us with the flexibility to issue our common or preferred stock for certain corporate purposes, which may include making acquisitions through the use of stock, adopting additional equity incentive plans and raising capital through the issuance of equity |
| In addition, if the outstanding shares of common stock increase (by stock split, stock dividend, or otherwise) or decrease (by reclassification or otherwise), the conversion price of the Series B Preferred in effect immediately prior to the change can be proportionately adjusted |
| These changes in the conversion price and any issuance of our common or preferred stock may result in immediate and significant dilution to our stockholders |
| WE HAVE RECEIVED A NUMBER OF INQUIRIES FROM ONE OF OUR STOCKHOLDERS, WHICH MAY BE A PRECURSOR TO LITIGATION Beginning in May of 2005, we have received a number of written inquiries from one of our stockholders |
| In the event that such stockholder brings legal action against us and the members of our board of directors, the costs related to the defense of such action would be difficult to predict, but could be substantial and would likely have an adverse effect on our financial condition and results of operations |
| Whether or not litigation arises from such correspondence, our management team and our board of directors may be required to spend significant time and expense responding to these requests, which could have an adverse effect on our financial condition and results of operations |
| WE ARE NOT CERTIFIED UNDER THE INTERNATIONAL ORGANIZATION FOR STANDARDIZATION We are currently not certified under the International Organization for Standardization (ISO) |
| This may lead certain of our current and potential customers to purchase products and enter into agreements with our competitors that have ISO certification |
| A loss of our current or potential future customers could have a material adverse effect on our business, financial condition and results of operations |