UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 28, 2007
OR
|
o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51642
Aviza Technology, Inc.
(Exact Name of Registrant as Specified in its Charter)
|
Delaware |
|
20-1979646 |
|
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification Number) |
440 Kings Village Road
Scotts Valley, California 95066
(Address of Principal Executive Offices including Zip Code)
(831) 438-2100
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
As of February 6, 2008, the registrant had 21,856,473 shares of its common stock, par value $0.0001 per share, outstanding.
Aviza Technology, Inc.
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION |
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Condensed Consolidated Balance Sheets — at December 28, 2007 and September 28, 2007 |
3 |
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4 |
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5 |
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6 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
24 |
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24 |
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24 |
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24 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
35 |
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35 |
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35 |
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35 |
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36 |
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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par amounts and number of shares)
(unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
3
AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
|
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Quarter Ended |
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||||
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December 28, |
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December 29, |
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2007 |
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2006 |
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NET SALES |
|
$ |
34,014 |
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$ |
62,192 |
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COST OF GOODS SOLD |
|
24,283 |
|
43,343 |
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GROSS PROFIT |
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9,731 |
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18,849 |
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OPERATING EXPENSES: |
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Research and development |
|
8,039 |
|
7,703 |
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Selling, general and administrative |
|
9,574 |
|
8,408 |
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|
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|
|
||
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Total operating expenses |
|
17,613 |
|
16,111 |
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||
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INCOME(LOSS) FROM OPERATIONS |
|
(7,882 |
) |
2,738 |
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OTHER INCOME (EXPENSE): |
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Interest income |
|
52 |
|
27 |
|
||
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Interest expense |
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(412 |
) |
(1,251 |
) |
||
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Other income (expense) - net |
|
20 |
|
12 |
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Total other expense - net |
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(340 |
) |
(1,212 |
) |
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INCOME(LOSS) BEFORE INCOME TAXES |
|
(8,222 |
) |
1,526 |
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PROVISION FOR INCOME TAXES |
|
298 |
|
401 |
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NET INCOME(LOSS) |
|
$ |
(8,520 |
) |
$ |
1,125 |
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Net income(loss) per share: |
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|
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Basic |
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$ |
(0.40 |
) |
$ |
0.07 |
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Diluted |
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$ |
(0.40 |
) |
$ |
0.07 |
|
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Weighted average common shares: |
|
|
|
|
|
||
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Basic |
|
21,060,009 |
|
16,150,752 |
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Diluted |
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21,060,009 |
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16,894,582 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
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Quarter Ended |
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||||
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December 28, |
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December 29, |
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2007 |
|
2006 |
|
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CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
|
Net income(loss) |
|
$ |
(8,520 |
) |
$ |
1,125 |
|
|
Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
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Depreciation |
|
1,430 |
|
924 |
|
||
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Amortization |
|
133 |
|
514 |
|
||
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Fair value of common stock issued for prototype materials |
|
125 |
|
— |
|
||
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Stock-based compensation |
|
528 |
|
437 |
|
||
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Gain on disposal of equipment |
|
(303 |
) |
— |
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||
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Provision for allowance for doubtful accounts |
|
115 |
|
67 |
|
||
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Tax benefit from use of acquired net operating losses |
|
— |
|
150 |
|
||
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Changes in assets and liabilities: |
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|
|
|
|
||
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Accounts receivable |
|
2,317 |
|
(3,859 |
) |
||
|
Inventory |
|
(5,360 |
) |
2,447 |
|
||
|
Prepaid expenses and other assets |
|
(163 |
) |
(526 |
) |
||
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Accounts payable |
|
399 |
|
(3,567 |
) |
||
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Warranty liability |
|
(1,384 |
) |
1,218 |
|
||
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Accrued liabilities |
|
(768 |
) |
1,697 |
|
||
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Net cash (used in) provided by operating activities |
|
(11,451 |
) |
627 |
|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
|
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|
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|
Purchases of property, plant and equipment |
|
(1,464 |
) |
(1,279 |
) |
||
|
Purchase of technology license |
|
(48 |
) |
— |
|
||
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Proceeds from sale of equipment |
|
324 |
|
— |
|
||
|
Net cash used in investing activities |
|
(1,188 |
) |
(1,279 |
) |
||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net proceeds from credit lines |
|
10,275 |
|
6,150 |
|
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Proceeds from the issuance of common stock |
|
9 |
|
— |
|
||
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Payments on mortgage loan |
|
(83 |
) |
(70 |
) |
||
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Payments on other borrowings |
|
(256 |
) |
(356 |
) |
||
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Payments on equipment loan |
|
(311 |
) |
— |
|
||
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Payments on capital lease obligations |
|
(70 |
) |
(63 |
) |
||
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Net cash provided by financing activities |
|
9,564 |
|
5,661 |
|
||
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Effect of exchange rates on foreign cash balances |
|
181 |
|
(194 |
) |
||
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
(2,894 |
) |
4,815 |
|
||
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CASH AND CASH EQUIVALENTS: |
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|
|
|
|
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Beginning of period |
|
23,087 |
|
10,722 |
|
||
|
End of period |
|
$ |
20,193 |
|
$ |
15,537 |
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
|
$ |
354 |
|
$ |
875 |
|
|
Income taxes paid |
|
$ |
235 |
|
$ |
180 |
|
|
Noncash investing and financing activities: |
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|
|
|
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Notes payable issued for services to be rendered |
|
$ |
784 |
|
$ |
1,737 |
|
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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 |
|
$ |
6 |
|
$ |
139 |
|
|
Equipment acquired under capital lease |
|
$ |
— |
|
$ |
715 |
|
The accompanying notes are an integral part of these consolidated financial statements
5
AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES
December 28,
2007
(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 28, 2007 are not necessarily indicative of the results that may be expected for future quarters and the fiscal year ending September 26, 2008. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended September 28, 2007, which are included in our Annual Report on Form 10-K and the risk factors contained herein and therein.
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.
Aviza Technology Inc.’s (the “Company” or “Aviza”) current fiscal year will end on September 26, 2008 and includes 52 weeks. We close our fiscal quarters on the last Friday of December, March, June and September.
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. Recent Accounting Pronouncements
During the quarter ended December 28, 2007 the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 141 (revised 2007), Business Combinations (“FASB 141R”). FASB 141R changes the accounting for the acquisition of a business in fiscal years beginning after December 15, 2008. When effective, FASB 141R will replace existing FASB 141 in its entirety. FASB 141R will apply to a broad range of transactions, provides for new measurement and recognition requirements and provides new disclosure requirements for certain elements of an acquisition. FASB 141R will apply prospectively to business combinations with an acquisition date on or after the first annual reporting period beginning after December 15, 2008. Both early adoption and retrospective applications are prohibited.
6
3. Balance Sheet Details
|
|
|
December 28, |
|
September 28, |
|
||
|
|
|
2007 |
|
2007 |
|
||
|
|
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(in thousands) |
|
||||
|
|
|
|
|
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|
||
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Inventory: |
|
|
|
|
|
||
|
Raw materials |
|
$ |
30,977 |
|
$ |
28,667 |
|
|
Work-in-process |
|
13,823 |
|
13,692 |
|
||
|
Finished goods and evaluation systems |
|
5,696 |
|
3,170 |
|
||
|
Total |
|
$ |
50,496 |
|
$ |
45,529 |
|
|
|
|
|
|
|
|
||
|
Prepaid expenses and other current assets: |
|
|
|
|
|
||
|
Insurance |
|
$ |
839 |
|
$ |
96 |
|
|
Deferred installation costs |
|
427 |
|
385 |
|
||
|
Taxes |
|
2,895 |
|
2,621 |
|
||
|
Other |
|
2,204 |
|
2,215 |
|
||
|
Total |
|
$ |
6,365 |
|
$ |
5,317 |
|
|
|
|
|
|
|
|
||
|
Property, plant and equipment - net: |
|
|
|
|
|
||
|
Land |
|
$ |
1,839 |
|
$ |
1,839 |
|
|
Buildings and improvements |
|
12,203 |
|
12,198 |
|
||
|
Machinery and equipment |
|
20,523 |
|
18,659 |
|
||
|
Office furnishings, fixtures and equipment |
|
6,533 |
|
6,564 |
|
||
|
Construction in process |
|
2,631 |
|
3,820 |
|
||
|
Total |
|
43,729 |
|
43,080 |
|
||
|
Accumulated depreciation |
|
(12,432 |
) |
(11,299 |
) |
||
|
Property, plant and equipment |
|
$ |
31,297 |
|
$ |
31,781 |
|
|
|
|
|
|
|
|
||
|
Accrued liabilities: |
|
|
|
|
|
||
|
Accrued payroll and payroll taxes |
|
$ |
5,492 |
|
$ |
5,660 |
|
|
Deferred revenue |
|
630 |
|
1,076 |
|
||
|
Other taxes payable |
|
3,078 |
|
3,557 |
|
||
|
Other |
|
3,246 |
|
3,098 |
|
||
|
Total |
|
$ |
12,446 |
|
$ |
13,391 |
|
4. Stock-Based Compensation
Effective October 1, 2005, 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) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is 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.
7
We adopted the modified prospective application method as provided by SFAS 123(R). Under this method, SFAS 123(R) was applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service had not been rendered, such as unvested stock options, that were outstanding as of the date of adoption are being recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption was based on the grant-date fair value for those awards granted after June 24, 2005, the date of the Company’s initial filing of a Form S-4 registration statement relating to our merger transaction with Trikon Technologies Inc., and based on the intrinsic values as previously recorded under Accounting Principles Board, or APB, Opinion No. 25 for awards granted prior to that date.
The fair value of each option is estimated at the date of grant using the Black-Scholes option valuation model. We estimate the expected stock price volatility and expected life at 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 6,644,000 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 three to five years and generally expire seven to ten years from the date of the grant.
We recognized stock-based compensation expense of $528,000 and $437,000 during the quarters ended December 28, 2007 and December 29, 2006, 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 28, 2007 and December 29, 2006, respectively, as a full valuation allowance has been provided against the deferred tax asset.
The fair value of our stock options granted in the quarters ended December 28, 2007 and December 29, 2006 was estimated at the date of grant using the following weighted average assumptions:
|
|
|
Quarter Ended |
|
||
|
|
|
December 28, |
|
December 29, |
|
|
|
|
2007 |
|
2006 |
|
|
Expected life (years) |
|
4.8 |
|
4.8 |
|
|
Risk-free interest rate |
|
3.4 |
% |
4.6 |
% |
|
Stock price volatility |
|
53.5 |
% |
64.6 |
% |
|
Dividend yield |
|
0.0 |
% |
0.0 |
% |
The following table summarizes our stock option activity under the stock plans during the quarter ended December 28, 2007 :
|
|
|
Number of
|
|
Weighted Average
|
|
Weighted Average
|
|
Aggregate Intrinsic
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Outstanding at September 28, 2007 |
|
4,202,499 |
|
$ |
5.01 |
|
6.51 |
|
$ |
3,496,801 |
|
|
Granted |
|
410,000 |
|
1.78 |
|
|
|
|
|
||
|
Exercised |
|
(9,924 |
) |
0.95 |
|
|
|
|
|
||
|
Forfeited |
|
(35,932 |
) |
12.78 |
|
|
|
|
|
||
|
Outstanding at December 28, 2007 |
|
4,566,643 |
|
4.66 |
|
6.27 |
|
1,266,487 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Options vested and expected to vest at at December 28, 2007 |
|
4,013,236 |
|
4.69 |
|
6.26 |
|
1,249,056 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Options vested at December 28, 2007 |
|
2,582,177 |
|
4.86 |
|
6.18 |
|
1,200,444 |
|
||
8
The aggregate intrinsic value represents total pre-tax intrinsic value based on the closing stock price of $1.81 and $3.45 per share at December 28, 2007 and September 28, 2007 respectively.
As of December 28, 2007, there was $3.8 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 3.2 years.
The following table details total stock-based compensation expense for the quarters ended December 28, 2007 and December 29, 2006:
|
|
|
Quarter Ended |
|
||||||
|
|
|
December 28,
|
|
December 29,
|
|
||||
|
|
|
(in thousands) |
|
||||||
|
|
|
|
|
|
|
|
|
||
|
Cost of goods sold |
|
$ |
51 |
|
$ |
49 |
|
||
|
Research and development |
|
122 |
|
114 |
|
||||
|
Selling, general and administrative |
|
355 |
|
274 |
|
||||
|
|
|
|
|
|
|
||||
|
Pre-tax stock-based compensation expense |
|
528 |
|
437 |
|
||||
|
Income tax benefits |
|
— |
|
— |
|
||||
|
|
|
|
|
|
|
||||
|
Stock-based compensation expense |
|
$ |
528 |
|
$ |
437 |
|
||
The options outstanding and vested at December 28, 2007 were in the following exercise price ranges:
|
|
|
Options Outstanding |
|
Options Vested |
|
||||||||
|
Range of
|
|
Number
|
|
Weighted
|
|
Weighted
|
|
Number
|
|
Weighted
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
$ 0.83 - $0.83 |
|
1,099,071 |
|
6.13 |
|
$ |
0.83 |
|
1,089,182 |
|
$ |
0.83 |
|
|
$ 0.84 -$4.98 |
|
1,859,132 |
|
5.78 |
|
3.65 |
|
625,738 |
|
3.66 |
|
||
|
$ 4.99 - $5.60 |
|
890,110 |
|
7.88 |
|
5.57 |
|
476,976 |
|
5.58 |
|
||
|
$ 5.61 - $87.07 |
|
718,330 |
|
5.77 |
|
12.02 |
|
390,281 |
|
17.14 |
|
||
|
$ 0.83 - $87.07 |
|
4,566,643 |
|
6.27 |
|
4.66 |
|
2,582,177 |
|
4.86 |
|
||
The weighted average fair value of options on the grant date, as determined under SFAS 123(R), granted during the quarters ended December 28, 2007 and December 29, 2006 was $0.87 and $2.62 per share, respectively.
The total intrinsic value of options exercised during the quarters ended December 28, 2007 and December 29, 2006, was $14,000 and $0, respectively. The total cash received from employees as a result of employee stock options exercises during the quarters ended December 28, 2007 and December 29, 2006 was $9,000 and $0, respectively.
9
5. Borrowing Facilities
Borrowings consist of the following (in thousands):
|
|
|
December 28, |
|
September 28, |
|
||
|
|
|
2007 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Bank loan (revolving line of credit) |
|
$ |
23,212 |
|
$ |
12,937 |
|
|
Equipment note payable |
|
3,292 |
|
3,603 |
|
||
|
Mortgage note payable |
|
11,701 |
|
11,785 |
|
||
|
Other notes payable |
|
1,100 |
|
572 |
|
||
|
Capital lease obligations |
|
564 |
|
636 |
|
||
|
Total |
|
39,869 |
|
29,533 |
|
||
|
Less: short-term borrowings and current portion |
|
26,028 |
|
15,043 |
|
||
|
Long term portion |
|
$ |
13,841 |
|
$ |
14,490 |
|
6. Intangible Assets
During the quarter ended December 28, 2007, we acquired prototype materials and a license to certain technology in exchange for 1,000,000 shares of our common stock and potential future royalty payments based on net revenue generated from future sales of products developed utilizing the technology. A summary of the total consideration given at closing is as follows (in thousands):
|
Issuance of common stock (1,000,000 shares at $1.83 per share) |
|
$ |
1,830 |
|
|
Direct acquisition costs |
|
58 |
|
|
|
Total consideration |
|
$ |
1,888 |
|
The price per share used for valuation purposes was the closing price per common share per the NASDAQ Global Market on December 7, 2007, the date the shares were transferred. Direct acquisition costs represent legal costs and use tax liability accrued on the transaction.
The total consideration issued in the transaction was allocated based on the estimated fair values of the assets acquired as of the closing date. The allocation is as follows (in thousands):
|
License |
|
$ |
1,763 |
|
|
Prototype materials |
|
125 |
|
|
|
Total consideration |
|
$ |
1,888 |
|
The prototype materials were expensed as research and development costs during the quarter ended December 28, 2007. The cost of the license will be amortized over a 10-year useful life commencing January 2008.
Intangible assets are recorded at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method. At December 28, 2007 and September 29, 2007 our intangible assets consisted of licenses which we have acquired. The estimated useful lives of the licenses are ten years.
We evaluate intangible assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
10
Amortization expense relating to all intangible assets was $100,000 and $128,000 for the quarters ended December 28, 2007 and December 29, 2006. Based on the intangible assets recorded at December 28, 2007, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining amortization expense is expected to be as follows (in thousands):
|
September 26, 2008 (remaining 9 months) |
|
$ |
432 |
|
|
September 25, 2009 |
|
576 |
|
|
|
September 24, 2010 |
|
576 |
|
|
|
September 30, 2011 |
|
576 |
|
|
|
September 28, 2012 |
|
576 |
|
|
|
Thereafter |
|
2,260 |
|
|
|
Total |
|
$ |
4,996 |
|
7. 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 cost incurred. Systems typically have warranty periods ranging from one to three years. The components of the warranty accrual are as follows:
|
|
|
Quarter Ended |
|
||||
|
|
|
December 28, |
|
December 29, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Beginning warranty accrual |
|
$ |
11,222 |
|
$ |
10,816 |
|
|
Additional accruals for new shipments |
|
625 |
|
3,040 |
|
||
|
Warranty costs incurred |
|
(2,042 |
) |
(1,839 |
) |
||
|
Expiration and change in liability for pre-existing warranties during the period |
|
— |
|
82 |
|
||
|
Ending warranty accrual |
|
$ |
9,805 |
|
$ |
12,099 |
|
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 28, 2007 and September 28, 2007, respectively.
8. Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process requires us to estimate our current income tax provision (benefit) and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet .
We recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and any ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if were to determine that we would not be able to realize all or part of a net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. We have recorded a 100% valuation allowance against our domestic and United Kingdom net deferred tax assets, due to the uncertainty regarding future taxable income.
11
Income tax expense primarily relates to our foreign operations as we continue to incur losses from domestic operations. We recorded income tax expense of $298,000 and $401,000 for the three months ended December 28, 2007 and December 29, 2006, respectively.
We adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes ,” or FIN 48, an interpretation of FASB Statement No. 109, or SFAS 109, on September 29, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of September 29, 2007, we had approximately $3.5 million of unrecognized tax benefits, $ 2.1 million of which would affect our effective tax rate if recognized and $1.4 million would be offset by valuation allowance. At December 28, 2007, we had $3.6 million of unrecognized tax benefits.
In addition, we recognized interest and penalties related to uncertain tax positions in income tax expense. At the adoption date of September 29, 2007, we had approximately $124,000 of accrued interest and penalties for uncertain tax positions primarily from our foreign operations. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations prior to December 26, 2008.
At September 29, 2007, we had approximately $56.6 million and $8.3 million of federal and California net operating loss carryforwards, respectively. We and our subsidiaries have had multiple ownership changes, as defined by Section 382 of the Internal Revenue Code, or IRC, due to significant stock transactions in previous years that will limit the future realization of its net operating loss carryforwards. Section 382 will result in the forfeiture of approximately $24.6 million of net operating loss carryforwards for federal income tax purposes. The net operating loss carryforwards begin to expire in 2014 for federal and 2013 for California income tax purposes.
As of September 29, 2007, we had federal and California research and development tax credit carryforwards of approximately $1.7 million and $1.6 million, respectively. Due to Section 382 ownership changes under IRC Section 383, $1.1 million of the federal research tax credit carryforwards will be subject to forfeiture. Federal research and development tax credit carryforwards will expire beginning in fiscal 2011. California research and development tax credits will carry forward indefinitely.
9. Commitments and Contingencies
On April 11, 2006, IPS, Ltd. filed a lawsuit against us in the United States District Court for the Central District of California. The complaint alleges that we improperly used IPS’s confidential information to develop our Celsior single-wafer processing type atomic layer deposition technology. The complaint is for unspecified monetary damages, injunctive relief and an order rescinding the settlement and distributor agreements that we and IPS entered into in May 2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004 relating to assets that we acquired from ASML in October 2003. In May 2007, we successfully moved the dispute to arbitration. Discovery commenced in June 2007. The arbitration hearing is currently scheduled for October 2008. We intend to contest the lawsuit vigorously. We do not believe that the outcome of this lawsuit will have a material impact on our business, financial condition or results of operations.
Prior to our merger transaction with Trikon Technologies, Inc., Trikon was a party to an employment lawsuit in France. On March 10, 2004, Dr. Jihad Kiwan departed Trikon as Director and Chief Executive Officer. On March 29, 2004 and April 2, 2004, Trikon received letters from a United Kingdom law firm and from a French law firm, respectively, on behalf of Dr. Kiwan, detailing certain monetary claims for severance amounts due to Dr. Kiwan with respect to his employment with Trikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and on June 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwan has subsequently withdrawn the proceedings in the United Kingdom. On January 7, 2008, the French Commercial Court in Grenoble rejected certain of Dr. Kiwan’s claims but ordered us to pay monetary awards with respect to certain other of Dr. Kiwan’s claims. We intend to appeal the decision and do not believe that the outcome of the dispute will have a material impact on our business, financial condition or results of operations .
Our Scotts Valley location is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980’s, and by the late 1980’s Watkins Johnson Corporation (“WJ”) (a previous
12
owner of the Company) had installed a groundwater extraction and treatment system. In 1991, WJ entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, WJ signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty and Miller (“ARCADIS”). Pursuant to this remediation agreement, WJ paid approximately $3 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of WJ’s obligation under the consent decree. The agreement also includes a cost overrun guaranty from ARCADIS up to a total project cost of $15 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to $10 million from American International Specialty (“AIS”), along with a ten-year, claims made $10 million policy to cover unknown pollution conditions at the site.
Failure of WJ, ARCADIS, or AIS to fulfill their obligations may subject the Company to substantial fines, and the Company could be forced to suspend production, alter manufacturing processes or cease business operations, any of which could have a material negative effect on the Company’s sales, income and business operations.
Management believes that the likelihood of the failure of WJ, ARCADIS or AIS is remote and that any remaining or uninsured environmental liabilities will not have a material effect on the Company’s results of operations or financial position.
10. Major Customers
During the quarter ended December 28, 2007 three customers accounted for 17%, 12% and 12% of total net sales, respectively. During the quarter ended December 29, 2006, one customer accounted for 42% of total net sales.
11. Comprehensive Income(Loss)
The components of comprehensive income(loss) are as follows:
|
|
|
Quarter Ended |
|
||||
|
|
|
December 28, |
|
December 29, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
Net income(loss) |
|
$ |
(8,520 |
) |
$ |
1,125 |
|
|
Currency translation adjustment |
|
(444 |
) |
1,006 |
|
||
|
Total comprehensive (loss) income |
|
$ |
(8,964 |
) |
$ |
2,131 |
|
12. Net Income(Loss) Per Share
Basic income(loss) per share has been computed based upon the weighted average number of common shares outstanding for the periods presented. Diluted income(loss) per share is calculated as though all potentially dilutive shares were outstanding during the period, based upon the application of the treasury stock method.
13