Quarterly Report

Table of Contents

 

 

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par amounts and number of shares)

(unaudited)  

 

		December 26,				September 26,
		2008				2008 (1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	6,698			$	14,896
Restricted cash			1,040				-
Accounts receivable - net			26,221				31,580
Inventory			28,029				37,662
Prepaid expenses and other current assets			4,445				4,028
Total current assets			66,433				88,166
PROPERTY, PLANT AND EQUIPMENT - net			21,841				24,443
INTANGIBLE ASSETS - net			31				62
OTHER LONG-TERM ASSETS			1,060				1,118
TOTAL ASSETS		$	89,365			$	113,789
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of notes payable		$	25,050			$	31,073
Accounts payable			14,860				22,127
Warranty liability			4,552				6,143
Accrued liabilities			13,163				18,073
Total current liabilities			57,625				77,416
NOTES PAYABLE—Long-term			11,222				11,654
OTHER LIABILITIES - Long-term			175				175
Total liabilities			69,022				89,245
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value - 5,000,000 shares authorized; none outstanding			-				-
Common stock, $0.0001 par value—100,000,000 shares authorized;
21,856,473 shares issued and outstanding at December 26, 2008
and September 26, 2008, respectively			2				2
Additional paid-in capital			122,605				122,128
Accumulated deficit			(96,056	)			(97,338	)
Accumulated other comprehensive loss			(6,208	)			(248	)
Total stockholders’ equity			20,343				24,544
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	89,365			$	113,789

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

(1)     Amounts were derived from our audited consolidated financial statements for the year ended September 2 6 , 20 08 included in our Annual  Report on Form 10-K

 

 

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

		Quarter Ended
		December 26,				December 28,
		2008				2007
NET SALES		$	25,231			$	34,014
COST OF GOODS SOLD:
Cost of goods sold			14,749				24,283
Cost of good sold - restructuring charges			134				-
Total cost of goods sold			14,883				24,283
GROSS PROFIT			10,348				9,731
OPERATING EXPENSES:
Research and development			4,665				8,039
Selling, general and administrative			5,932				9,826
Restructuring charges			1,214				-
Total operating expenses			11,811				17,865
LOSS FROM OPERATIONS			(1,463	)			(8,134	)
OTHER INCOME (EXPENSE):
Interest income			15				52
Interest expense			(667	)			(412	)
Other income (expense) - net			3,561				272
Total other income (expense) - net			2,909				(88	)
INCOME (LOSS) BEFORE INCOME TAXES			1,446				(8,222	)
PROVISION FOR INCOME TAXES			164				298
NET INCOME (LOSS)		$	1,282			$	(8,520	)
Net income (loss) per share:
Basic		$	0.06			$	(0.40	)
Diluted		$	0.06			$	(0.40	)
Weighted average common shares:
Basic			21,856,473				21,060,009
Diluted			22,047,064				21,060,009

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Quarter Ended
		December 26,				December 28,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	1,282			$	(8,520	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			1,009				1,430
Amortization			56				133
Non-cash restructuring			1,153				-
Fair value of common stock issued for prototype materials			-				125
Stock-based compensation			422				528
Gain on disposal of equipment			(10	)			(303	)
Provision for allowance for doubtful accounts			263				115
Changes in assets and liabilities:
Accounts receivable - net			690				2,317
Inventory			6,375				(5,360	)
Prepaid expenses and other current assets, and other long-term assets			63				(163	)
Accounts payable			(4,785	)			399
Warranty liability			(1,100	)			(1,384	)
Accrued liabilities			(4,069	)			(768	)
Net cash  provided by (used in) operating activities			1,349				(11,451	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment			(1,388	)			(1,464	)
Purchase of technology license			-				(48	)
Proceeds from sale of equipment			114				324
Net cash used in investing activities			(1,274	)			(1,188	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on credit lines			(6,380	)			10,275
Proceeds from the issuance of common stock			-				9
Payments on mortgage loan			(110	)			(83	)
Payments on other borrowings			(225	)			(256	)
Payments on equipment loan			(340	)			(311	)
Payments on capital lease obligations			(85	)			(70	)
Net cash  (used in) provided by  operating activities			(7,140	)			9,564
Effect of exchange rates on foreign cash balances			(93	)			181
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH			(7,158	)			(2,894	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period			14,896				23,087
End of period		$	7,738			$	20,193
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	617			$	354
Income taxes paid		$	264			$	235
Noncash investing and financing activities:
Notes payable issued for services to be rendered		$	698			$	784
Fair value of common stock  warrants issued  for services to be rendered		$	55			$	-
Fair value of common stock issued in the acquisition
of technology license		$	-			$	1,715
Property and equipment purchases included in accounts payable at end of period		$	9			$	6

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 26, 2008

(Unaudited)

 

1.  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and applicable regulations of the U.S. Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position and results of operations have been included.  Our operating results for the quarter ended December 26, 2008 are not necessarily indicative of the results that may be expected for future quarters and the fiscal year ending September 25, 2009.  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended September 26, 2008, which are included in our Annual Report on Form 10-K.

 

The preparation of the accompanying unaudited condensed consolidated financial statements requires the use of estimates that affect the reported amounts of assets, liabilities, revenues, expenses and contingencies.  These estimates include, but are not limited to, estimates related to revenue recognition, allowance for doubtful accounts, inventory valuation, tangible and intangible long-term asset valuation, warranty and other obligations, contingent liabilities and litigation.  Estimates are updated on an ongoing basis and are evaluated based on historical experience and current circumstances.  Changes in facts and circumstances in the future may give rise to changes in these estimates which may cause actual results to differ from current estimates.

 

Certain accounts in the December 28, 2007 condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.  Specifically, gains and losses on the remeasurement of receivables and payables in foreign currency, which were previously recorded in selling, general and administrative expenses, have been reclassified to other income (expense)-net.  Gains on the remeasurement of foreign currency were $3.6 million and $0.3 million in the quarters ended December 26, 2008 and December 28, 2007, respectively.

 

Aviza Technology, Inc.’s (the “Company” or “Aviza”) current fiscal year will end on September 25, 2009 and includes 52 weeks. We close our fiscal quarters on the last Friday of December, March, June and September.

 

We operate in the semiconductor industry which, has been experiencing and is expected to continue to experience severe instability.  The National Bureau of Economic Research officially declared that the United States entered into a recession in December 2007 and has remained there since.  The length of the recession and whether the situation worsens even further is yet to be determined.  The U.S. government has taken unprecedented actions attempting to prevent worsening economic conditions, including the passage of the Economic Stabilization Act of 2008.  The results of many of these actions have not been fully realized to date.  Given these events and circumstances, banks and investors have become increasingly cautious regarding financing decisions given the uncertainty around what the future holds for themselves, the counterparty of the transaction and the overall economy.  These circumstances have resulted in the U.S. economy entering a period of significant uncertainty.   Should the economic situation worsen, we could be adversely affected.

 

       The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern.  As reflected in the accompanying condensed consolidated financial statements, we have an accumulated deficit of $96.1 million at December 26, 2008 and a net loss from operations of $1.5 million for the quarter ended December 26, 2008.  Under its current terms, our line of credit, which had a balance of $22.1 million at December 26, 2008, matures in October 2009.  Based on current cash flow projections, we would not be able to repay our line of credit when it matures, which raises substantial doubt as to our ability to continue as a going concern beyond the maturity date of our line of credit.

We have taken certain measures in order to continue as a going concern including implementing a restructuring plan to reduce costs, renegotiate the terms of our line of credit and recently entered into an agreement with Needham & Company, LLC to assist in evaluating current financial and strategic options available.   We may also choose to raise additional capital from the sale of debt or equity securities or from other sources in order to support operations and debt obligations.   However, we may not be able to obtain any additional capital on acceptable terms, if at all.  The unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

 

 

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The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

2.  Balance Sheet Details

 

		December 26,				September 26,
		2008				2008
		(in thousands)
Inventory:
Raw materials		$	18,848			$	22,803
Work-in-process			8,267				12,648
Finished goods and evaluation systems			914				2,211
Total		$	28,029			$	37,662
Prepaid expenses and other current assets:
Deferred installation costs			458			$	394
Insurance			765				100
Taxes			1,207				1,092
Other			2,015				2,442
Total		$	4,445			$	4,028
Property, plant and equipment - net:
Land			1,839			$	1,839
Buildings and improvements			11,981				12,133
Machinery and equipment			18,047				18,553
Office furnishings, fixtures and equipment			5,849				6,388
Construction-in-process			1,355				1,518
Total			39,071				40,431
Accumulated depreciation			(17,230	)			(15,988	)
Property, plant and equipment - net		$	21,841			$	24,443
Accrued liabilities:
Accrued payroll and payroll taxes		$	2,816			$	3,796
Accrued accounting and legal fees			3,846				4,743
Deferred revenue			1,157				2,955
Accrued restructuring charges			972				1,561
Other taxes payable			2,324				2,590
Other			2,048				2,428
Total		$	13,163			$	18,073

 

3.  Stock-Based Compensation

 

We adopted the provisions of Statement of Financial Accounting Standards, or SFAS,  No. 123(R), Share-Based Payment , or SFAS 123(R).  SFAS 123(R) requires stock-based compensation cost to be measured at grant date, based on the fair value of the award, and be recognized as expense over the employee’s requisite service period.  The measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate and award cancellation rate.  The input factors used in the valuation model are based on subjective future expectations combined with management judgment.  If there is a difference between the assumptions used in determining stock-based compensation costs and the actual factors, which become known over time, we may change future input factors used in determining stock-based compensation costs.  These changes may materially impact our results of operations in the periods over which such costs are expensed.

 

 

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The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model.  We estimate the expected stock price volatility and expected life of our options based on historical data and representative peer group data.  We use historical data to estimate forfeiture rates.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield with similar expected life.

 

Under our stock option plans, we may grant options to purchase up to a maximum of 7,729,448 shares of common stock, including outstanding options to employees, directors and consultants at a price not less than the fair market value on the date of the grant. These options generally vest over two to five years and generally expire seven to ten years from the date of the grant.

 

We recognized stock-based compensation expense of $422,000 and $528,000 during the quarters ended December 26, 2008 and December 28, 2007, respectively.  Due to uncertainty surrounding the realization of the income tax benefit related to stock based compensation expense, there is no related income tax benefit recognized in the consolidated statements of operations for the quarters ended December 26, 2008 and December 28, 2007, respectively, as a full valuation allowance has been provided against the deferred tax asset.

 

The fair value of our stock options granted during the quarters ended December 26, 2008 and December 28, 2007 was estimated at the date of grant using the following weighted average assumptions:

 

		Quarter Ended
		December 26,		December 28,
		2008		2007
Expected life (years)		3.0		4.8
Risk-free interest rate		1.9%		3.4%
Stock price volatility		76.4%		53.5%
Dividend yield		0.0%		0.0%

 

The following table summarizes our stock option activity under the stock plans during the quarter ended December 26, 2008 : 

 

						Weighted Average				Weighted Average
		Number of				Exercise Price				Remaining Contractual				Aggregate Intrinsic
		Shares Issuable				Per Share				Term (Years)				Value
Outstanding at September 26, 2008			4,984,066			$	3.86				5.32			$	-
Granted			482,000				0.14
Exercised			-				-
Forfeited			(342,056	)			2.78
Outstanding at December 26, 2008			5,124,010				3.58				5.11				-
Options vested and expected to vest at
at December 26, 2008			4,913,005				3.63				5.11				-
Options vested at December 26, 2008			3,178,283				4.31				5.14				-

 

The aggregate intrinsic value represents total pre-tax intrinsic value based on the closing stock price of $0.08 and $0.47 per share at December 26, 2008 and September 26, 2008, respectively.

 

 

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As of December 26, 2008, there was $2.4 million of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures.  The cost is expected to be recognized over a weighted average period of approximately 2.0 years.  

 

The following table details total stock-based compensation expense for the quarters ended December 26, 2008 and December 28, 2007:

 

		Quarter Ended
		December 26,				December 28,
		2008				2007
		(in thousands)
Cost of goods sold		$	44			$	51
Research and development			94				122
Selling, general and administrative			284				355
Pre-tax stock-based compensation expense			422				528
Income tax benefits			-				-
Stock-based compensation expense		$	422			$	528

 

The options outstanding and vested at December 26, 2008 were in the following exercise price ranges:

 

			Options Outstanding												Options Vested
							Weighted				Weighted								Weighted
Range of							Average				Average				Number				Average
Exercise			Number				Remaining				Exercise				of Shares				Exercise
Prices			of Shares				Contractual				Price				Vested and				Price
Per Share			Outstanding				Life (Years)				Per Share				Exercisable				Per Share
$ 0.14 - $0.54				1,212,414				4.54			$	0.37				260,145			$	0.46
$ 0.55 - $0.83				1,005,390				5.03				0.83				1,005,390				0.83
$ 0.84 - $4.58				770,590				5.32				2.15				435,812				2.06
$ 4.59 - $5.60				1,534,839				5.66				5.31				1,048,595				5.35
$ 5.61 - $87.07				600,777				4.74				12.09				428,341				14.56
$ 0.14 - $87.07				5,124,010				5.11				3.58				3,178,283				4.31

 

The weighted average fair value of options on the grant date, as determined under SFAS 123(R), granted during the quarters ended December 26, 2008 and December 28, 2007 was $0.07 and $0.87 per share, respectively.

 

The total intrinsic value of options exercised during the quarter ended December 28, 2007 was $14,000. The total cash received from employees as a result of employee stock option exercises during the quarter ended December 28, 2007 was $9,000.  There were no stock options exercised during the quarter ended December 26, 2008.

 

4.  Borrowing Facilities

 

Borrowings consist of the following (in thousands):

 

 

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		December 26,				September 26,
		2008				2008
Bank loan (revolving line of credit)		$	22,113			$	28,493
Equipment note payable			1,944				2,284
Mortgage note payable			11,182				11,292
Other notes payable			750				277
Capital lease obligations			283				381
Total			36,272				42,727
Less: short-term borrowings and current portion			(25,050	)			(31,073	)
Long-term portion		$	11,222			$	11,654

 

On September 30, 2008, our credit facility was amended to reduce the maximum available for borrowing under the revolving line of credit, equipment loan and commercial real estate loan to approximately $42.6 million, increase the interest rate on outstanding borrowings to LIBOR plus 4% and amended certain financial and operating covenants.

 

On October 1, 2008, our credit facility was amended to extend the maturity date of the revolving portion of the credit facility from April 13, 2009 to October 13, 2009, provided we achieved certain operating results during the quarter ended December 26, 2008.  If we were unable to achieve the required results, the maturity date for the revolving portion of the credit facility would be April 13, 2009.  We achieved the required operating results during the quarter ended December 26, 2008, and as such, the maturity date on the revolving portion of our credit facility is October 13, 2009.

5.  Warranty and Guarantees

 

Warranty —We accrue for the estimated cost of the warranty on our systems, which includes the cost of the labor and parts necessary to repair systems during the warranty period. The amounts recorded in the warranty accrual are estimated based on actual historical costs incurred and on estimated probable future expenses related to current sales. The warranty accrual is adjusted over the warranty period based on actual costs incurred. Systems typically have warranty periods ranging from one to three years. The components of the warranty accrual are as follows (in thousands):

 

		Quarter Ended
		December 26,				December 28,
		2008				2007
Beginning warranty accrual		$	6,143			$	11,222
Additional accruals for new shipments			434				625
Warranty costs incurred			(1,615	)			(2,042	)
Expiration and change in liability for pre-existing warranties
during the period			(410	)			-
Ending warranty accrual		$	4,552			$	9,805

 

Guarantees —In addition to product warranties, we, from time to time, in the normal course of business, indemnify certain customers against third-party claims that our products, when used for their intended purposes, infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, we have never made payments under these obligations and no liabilities have been recorded for these obligations on the balance sheet at December 26, 2008 and September 26, 2008, respectively.

 

 

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6.  Restructuring and Other Charges

During fiscal 2008, we began implementation of a significant global restructuring based on an analysis of our product strategy, served markets and internal operations.  In order to streamline our operations and align product offerings with the current market conditions, we have and will continue to downsize programs, products and spending related to trench capacitor technology for DRAM and will decrease our overall dependence on the DRAM market.  The restructuring of our global workforce, products and business operations was designed to reduce our overall cost structure, as well as improve operational execution and financial performance.  We have refocused on our core strengths in the ALD, Etch and PVD technologies, while moving away from the development of large batch thermal systems.  We intend to continue to service and support our current global installed base.

As part of our restructuring plans, we executed a global reduction in workforce, divested ourselves of a non-core operation and wrote down assets related to non-core products, which included inventory revaluation, cancellation of purchase commitments and the write-down of impaired machinery and equipment.  Volume manufacturing is no longer being performed at our Scotts Valley headquarters.  In addition, continued research and development of products related to certain licensed technology was discontinued and the license was determined to have been fully impaired.  During the quarter ended December 26, 2008, we incurred additional restructuring charges of approximately $1.1 million related to the impairment of certain demonstration lab equipment that will not be relocated as part of the transfer of research and development activity from Scotts Valley to Newport, Wales.  The remaining restructuring charges for the quarter relate to termination benefits for 45 employees whose positions became redundant as part of our ongoing restructuring plan.   Liabilities for estimated payments related to the restructuring plan were recorded and included in accrued liabilities.  At December 26, 2008 and September 26, 2008, approximately $1.0 million and $1.6 million in accrued liabilities remained unpaid, respectively.  Activity related to these liabilities and additional restructuring costs incurred during the quarter ended December 26, 2008 is summarized as follows:

 

						Loss on
						Non-cancellable				Impairment of
		Reduction in				Purchase				Machinery and
		Work Force				Commitments				Equipment (1)				Other				Total
Balance at September 26, 2008		$	330			$	965			$	200			$	66			$	1,561
Additions:
Restructuring costs - cost of sales			134				-				-				-				134
Restructuring costs - operating expenses			61				-				1,153				-				1,214
			525				965				1,353				66				2,909
Non-cash adjustments			-				-				(1,153	)			-				(1,153	)
Cash payments			(270	)			(502	)			-				(12	)			(784	)
Balance at December 26, 2008		$	255			$	463			$	200			$	54