Quarterly Report

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

For the transition period from            to            

Commission file number 000-51642

Aviza Technology, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

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                         Accelerated filer     o                         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 1, 2007, the registrant had 16,150,752 shares of its common stock, par value $0.0001 per share, outstanding.

Aviza Technology, Inc.

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets — at December 29, 2006 and September 29, 2006		3
Condensed Consolidated Statements of Operations — for the Three Months Ended December 29, 2006 and December 30, 2005		4
Condensed Consolidated Statements of Cash Flows — for the Three Months Ended December 29, 2006 and December 30, 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3. Defaults Upon Senior Securities		36
Item 4. Submission of Matters to a Vote of Security Holders		36
Item 5. Other Information		36
Item 6. Exhibits		37

 

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ITEM 1. FINANCIAL STATEMENTS

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)  

		December 29, 2006			September 29, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	15,537		$	10,722
Accounts receivable, net of allowance of $340 and $262, respectively		31,100			26,763
Inventory		53,141			54,499
Prepaid expenses and other current assets		8,239			6,638
Total current assets		108,017			98,622
PROPERTY, PLANT AND EQUIPMENT—net		26,134			25,266
INTANGIBLE ASSETS—net		4,524			4,755
OTHER ASSETS		947			463
TOTAL		$	139,622		$	129,106
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short term borrowings and current portion of notes payable		$	41,978		$	28,632
Accounts payable		27,400			30,792
Warranty liability		12,099			10,816
Accrued liabilities		15,653			13,716
Total current liabilities		97,130			83,956
NOTES PAYABLE—Long term		1,030			6,256
Total liabilities		98,160			90,212
COMMITMENTS AND CONTINGENCIES (Note 8)
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; 16,150,752 shares issued and outstanding at December 29, 2006  and September 29, 2006, respectively		2			2
Additional paid-in capital		89,092			88,655
Accumulated other comprehensive income		1,600			594
Accumulated deficit		(49,232		)	(50,357		)
Total stockholders’ equity		41,462			38,894
TOTAL		$	139,622		$	129,106

 

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

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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 29, 2006			December 30, 2005
NET SALES		$	62,192		$	28,943
COST OF GOODS SOLD		43,343			21,808
GROSS PROFIT		18,849			7,135
OPERATING EXPENSES:
Research and development		7,703			4,643
Selling, general and administrative		8,408			5,115
In-process research and development		—			393
Total operating expenses		16,111			10,151
INCOME (LOSS) FROM OPERATIONS		2,738			(3,016		)
OTHER INCOME (EXPENSE):
Interest income		27			40
Interest expense		(1,251		)	(1,386		)
Other income (expense)—net		12			(147		)
Total other expense—net		(1,212		)	(1,493		)
INCOME (LOSS) BEFORE INCOME TAXES		1,526			(4,509		)
INCOME TAXES		401			122
NET INCOME (LOSS)		$	1,125		$	(4,631	)
Income (loss) per share:
Basic		$	0.07		$	(1.25	)
Diluted		$	0.07		$	(1.25	)
Weighted average common shares:
Basic		16,150,752			3,717,898
Diluted		16,894,582			3,717,898

 

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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Quarter Ended
		December 29, 2006			December 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	1,125		$	(4,631	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		924			714
Amortization		514			517
Reduction in acquired intangible assets due to the use of acquired net operating losses		150			—
Fair value of common stock warrants issued for loan guarantee		—			251
Stock based compensation		437			107
Mandatorily redeemable preferred stock dividend accrued		—			219
Provision for allowance for doubtful accounts		67			64
Write off in-process research and development from Trikon		—			393
Changes in assets and liabilities:
Accounts receivable		(3,859		)	8,224
Inventories		2,447			983
Prepaid and other assets		(526		)	4,191
Accounts payable		(3,567		)	(1,304		)
Warranty liability		1,218			(1,204		)
Accrued liabilities		1,697			700
Net cash provided by operating activities		627			9,224
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from Trikon net of direct merger costs		—			7,366
Purchases of property and equipment		(1,279		)	(1,462		)
Net cash (used in) provided by investing activities		(1,279		)	5,904
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit lines		6,150			(3,625		)
Proceeds from the issuance of common stock		—			26
Payments on mortgage loan		(70		)	(70		)
Payments on other short-term borrowings		(356		)	(8,650		)
Payments on capital lease obligations		(63		)	(8		)
Net cash provided by (used in) financing activities		5,661			(12,327		)
Effect of exchange rates on foreign cash balances		(194		)	97
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,815			2,898
CASH AND CASH EQUIVALENTS:
Beginning of period		10,722			7,437
End of period		$	15,537		$	10,335
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	875		$	760
Income taxes paid		$	180		$	31
Noncash investing and financing activities:
Notes payable issued for services to be rendered		$	1,737		$	—
Equipment acquired under capital lease		$	715		$	—
Fair value of common stock, options and warrants issued in the acquisition of Trikon Technologies, Inc.		$	—		$	24,442
Conversion of preferred stock, Series A, to common stock		$	—		$	32,650
Fair value of common stock warrants issued in exchange for loan guarantee		$	—		$	251
Property and equipment included in accounts payable at end of quarter		$	139		$	232

 

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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2006
(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 29, 2006 are not necessarily indicative of the results that may be expected for future quarters and the fiscal year ending September 28, 2007.  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended September 29, 2006, 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 28, 2007 and includes 52 weeks. We close our fiscal quarters on the last Friday of December, March, June and September.

On December 1, 2005, we completed our consolidation through merger with Trikon Technologies, Inc. (“Trikon”).  In connection with the merger transaction, our common stock became publicly traded on the NASDAQ Global Market under the symbol “AVZA (changed to AVZAQ on June 19, 2009).”  The financial information presented in this report represents:

1)               the financial position of the Company and its subsidiaries as of December 29, 2006 and September 29, 2006;

2)               the results of operations and changes in cash flow of the Company and its subsidiaries for the quarter ended December 29, 2006; and

3)               the results of operations and changes in the cash flow of the Company and its subsidiaries for the quarter ended December 30, 2005, including Trikon from December 2, 2005 through December 30, 2005.

See Note 5 for additional information related to the merger transaction.

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 September 29, 2006, the Securities and Exchange Commission released Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements ("SAB 108"), which provides guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 calls for the quantification of errors using both a balance sheet and income statement approach based on the effects of such errors on each of the company's financial statements and the related financial statement disclosures. SAB 108 is effective for financial statements issued for the fiscal year ending after November 15, 2006. Adoption of SAB 108 will not have a significant impact on our results of operations or financial condition.

On December 21, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) Emerging Issues Task Force (“EITF”) 00-19-2, “ Accounting for Registration Payment Arrangements, ” which requires an issuer to account for a contingent obligation to transfer consideration under a registration payment arrangement in accordance with FASB Statement No. 5, Accounting for Contingencies and FASB Interpretation 14, Reasonable Estimation of the Amount of Loss .  Registration payment arrangements are frequently entered into in connection with issuance of unregistered financial instruments, such as equity shares or warrants.  A registration payment arrangement contingently obligates the issuer to make future payments or otherwise transfer consideration to another party if the issuer fails to file a registration statement with

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the SEC for the resale of specified financial instruments or fails to have the registration statement declared effective within a specific period.  The FSP requires issuers to make certain disclosures for each registration payment arrangement or group of similar arrangements.  The FSP is effective immediately for registration payment arrangements and financial instruments entered into or modified after the FSP’s issuance date.  For previously issued registration payment arrangements and financial instruments subject to those arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006.  We do not expect the adoption of this FSP to have a significant impact on our financial condition or results of operations.

3.  Balance Sheet Details

		December 29, 2006			September 29, 2006
		(in thousands)
Inventories:
Raw materials		$	28,628		$	29,414
Work-in-process		21,351			21,337
Finished goods and evaluation systems		3,162			3,748
Total		$	53,141		$	54,499
Prepaid expenses and other current assets:
Deferred installation costs		$	1,511		$	1,301
Taxes		2,828			2,003
Other		3,900			3,334
Total		$	8,239		$	6,638
Property, plant and equipment, net:
Land		$	1,839		$	1,839
Buildings and improvements		12,140			12,047
Machinery and equipment		13,329			12,947
Office furnishings, fixtures and equipment		2,867			2,659
Construction in process		4,090			2,840
Total		34,265			32,332
Accumulated depreciation		(8,131		)	(7,066		)
Net property, plant and equipment		$	26,134		$	25,266
Accrued liabilities:
Accrued payroll and payroll taxes		$	5,991		$	4,584
Deferred revenue		2,855			2,023
Other		6,807			7,109
Total		$	15,653		$	13,716

 

4.  Stock-Based Compensation

Effective October 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“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

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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 period such changes are made. 

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, accordingly prior period amounts have not been restated.  Additionally, compensation cost for the portion of awards for which the requisite service has 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 the merger transaction as discussed in Note 5 and based on the intrinsic values as previously recorded under 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 based on historical volatility within a representative peer group.  We use historical data to estimate expected life and 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 5,644,000 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 four to five years and generally expire seven to ten years from the date of the grant.

We recognized stock-based compensation expense of $437,000 and $107,000 during the quarters ended December 29, 2006 and December 30, 2005 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 operation for the quarters ended December 29, 2006 and December 30, 2005 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 29, 2006 and December 30, 2005 was estimated at the date of grant using the following weighted average assumptions:

		Quarter Ended
		December 29, 2006		December 30, 2005
Expected life (years)		4.8		6.1
Risk-free interest rate		4.6	%	4.4	%
Stock price volatility		64.6	%	76.1	%
Dividend yield		0.0	%	0.0	%

 

The following table summarizes our stock option activity under the stock plans during the quarter ended December 29, 2006 : 

		Number of Shares		Weighted Average Exercise Price
Outstanding at September 29, 2006		3,791,164		$	5.08
Granted		111,500		4.55
Forfeited		(44,433	)	17.23
Outstanding at December 29, 2006		3,858,231		$	4.92

 

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As of December 29, 2006, there was $4.1 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 3.17 years.

The following table details total stock-based compensation expense for the quarters ended December 29, 2006 and December 30, 2005:

		Quarter Ended
		December 29, 2006			December 30, 2005
		(in thousands)
Cost of goods sold		$	49		$	12
Research and development		114			14
Selling, general and administrative		274			81
Pre-tax stock-based compensation expense		437			107
Income tax benefits		—			—
Stock-based compensation expense		$	437		$	107

 

The options outstanding and exercisable at December 29, 2006 were in the following exercise price ranges:

		Options Outstanding							Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price			Number Vested and Exercisable		Weighted Average Exercise Price
$0.83 - $0.83		1,130,218		7.13		$	0.83		849,675		$	0.83
$0.84 -$4.98		1,568,667		6.57		4.12			276,114		2.53
$4.99 - $7.28		968,990		8.88		5.67			338,704		5.85
$7.29 - $87.07		190,356		5.34		32.10			169,731		34.41
$0.83 - $87.07		3,858,231		7.26		$	4.92		1,634,224		$	5.65

 

The aggregate intrinsic value of the options outstanding and the options exercisable at December 29, 2006 was $4,877,000 and $3,462,000 respectively.  The aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing stock price of $4.27 per share at December 29, 2006.  The weighted average remaining contractual life for options exercisable as of December 29, 2006 was 7.27 years.

The weighted average fair value of options on the grant date, as determined under SFAS 123(R), granted during the quarters ended December 29, 2006 and December 30, 2005 was $2.62 and $3.90 per share, respectively.

The total intrinsic value of options exercised during the quarters ended December 29, 2006 and December 30, 2005, was $0 and $68,000, respectively. The total cash received from employees as a result of employee stock options exercises during the quarters ended December 29, 2006 and December 30, 2005 was $0 and $26,000, respectively.

5.  Merger with Trikon Technologies, Inc.

On December 1, 2005, the stockholders of Trikon approved the merger of Trikon with the Company.  Trikon designs, manufactures and services wafer processing semiconductor manufacturing equipment primarily for front end of line applications.  Its products are used for chemical and physical vapor deposition and for etch applications

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and are sold to semiconductor manufacturers worldwide.  In accordance with the provisions of SFAS No. 141, Aviza was treated as the acquirer for financial reporting purposes.  In the merger transaction, a wholly owned subsidiary of the Company was merged with and into Trikon.  Trikon stockholders received 0.29 of a share of Aviza common stock in exchange for each share of Trikon common stock they owned.  A total of 4,568,946 shares of Aviza common stock were issued in exchange for the outstanding common stock of Trikon as of December 1, 2005.  In addition, 629,126 shares of common stock were reserved for issuance upon exercise of Trikon common stock options and warrants assumed at December 1, 2005. The options and warrants were valued using the Black-Scholes option pricing model.

A summary of the total consideration given in the merger with Trikon is as follows (in thousands, except share and per share amounts):

 

Under the purchase method of accounting, the total consideration issued for Trikon common stock, options and warrants as shown in the table above was allocated to the Trikon tangible and intangible assets, and liabilities based on their estimated fair values as of the date of the merger transaction.

Pro Forma Financial Information for the Acquisition of Trikon

The results of operations of Trikon have been included in our results of operations for all the periods subsequent to the December 1, 2005 merger date.  The following pro forma financial information includes adjustments related to amortization of purchased intangibles, depreciation of purchased fixed assets, elimination of deferred rent liability and stock based compensation costs that would have been recorded if the acquisition had occurred at the beginning of the period presented. The pro forma financial information for the combined entities has been prepared for comparative purposes only and is not necessarily indicative of what the actual results may have been if the acquisition had in fact occurred at the beginning of the period presented or to future results. Pro forma results for the quarter ended December 30, 2005 were (in thousands except per share amounts):

		Quarter Ended December 30, 2005
Net sales		$	35,408
Net loss		$	(6,758	)
Net loss per common share:
Basic and diluted		$	(0.66	)
Weighted average common shares:
Basic and diluted		10,284

 

6.  Borrowing Facilities

 

Borrowing consists of the following (in thousands):

 

		December 29,			September 29,
		2006			2006
Bank Loans (revolving line of credit)		$	34,428		$	28,277
Mortgage note payable		6,393			6,463
Other notes payable		1,381			—
Capital lease obligations		806			148
Total		43,008			34,888
Less: current portion		41,978			28,632
Long term portion		$	1,030		$	6,256

 

During the quarter ended December 29, 2006, we entered into agreements to finance a portion of our enterprise resource planning system upgrade.  These obligations are payable in monthly installments through November 2009 and bear interest at 5.1% to 10%.

 

7.  Intangible Assets

Intangible assets are recorded at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method.  The estimated useful lives for our intangibles are as follows:

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Licenses		10 to 15 years
Developed technology		10 years
Brands and trademarks		10 years
Customer relationships		10 years
Patents		10 years

 

We evaluate intangibles for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

Intangible assets at December 29, 2006 and September 29, 2006 consist of the following (in thousands):

		December 29, 2006												September 29, 2006
		Cost			Income Tax Adjustment			Accumulated Amortization			Net Book Value			Cost			Accumulated Amortization			Net Book Value
Licenses		$	4,028		$	(4	)	$	(369	)	$	3,655		$	4,026		$	(268	)	$	3,758
Developed technology		726			(94		)	(78		)	554			694			(58		)	636
Brands and trademarks		101			(13		)	(11		)	77			96			(8		)	88
Customer relationships		230			(29		)	(25		)	176			220			(18		)	202
Patents		81			(10		)	(9		)	62			78			(7		)	71
Total		$	5,166		$	(150	)	$	(492	)	$	4,524		$	5,114		$	(359	)	$	4,755

 

During the quarter ended December 29, 2006, one of the subsidiaries we acquired in connection with the merger transaction with Trikon generated sufficient taxable income to recognize a portion of the net deferred tax assets acquired in the merger transaction related to net operating loss carry forward.  Management had been previously unable to assert that it was more likely than not that the Company would generate sufficient taxable income to realize the net deferred tax assets in excess of the deferred tax liabilities recorded in relation to the write-up of inventory and intangibles to fair value at December 1, 2005, the date of the consummation of the merger transaction.  Accordingly, the net deferred tax assets had been offset in full by a valuation allowance on that date.  In the absence of goodwill, under generally accepted accounting principles, the tax benefit derived from reversal of this valuation allowance must be applied first to reduce non-current intangible assets related to the merger transaction, and second to reduce income tax expense.  Approximately $150,000 of the valuation allowance attributed to net deferred tax assets relating to the net operating loss carry forward acquired in the merger transaction was recognized during the quarter ended December 29, 2006 and the intangible assets acquired in the merger transaction have been reduced accordingly.  The remaining net deferred tax assets have been offset in full by a valuation allowance at December 29, 2006.

Amortization expenses relating to all intangibles, excluding in-process research and development acquired from Trikon (Note 5), was $128,000 and $9,000 for the quarters ended December 29, 2006 and December 30, 2005.  Based on the intangible assets recorded at December 29, 2006, 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 28, 2007 (remaining nine months)		$	376
September 26, 2008		501
September 25, 2009		501
September 24, 2010		501
September 30, 2011		501
Thereafter		2,144
Total		$	4,524

 

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8.  Warranty and Guarantees

Warranty —The Company accrues for the estimated cost of the warranty on its 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 spread over the warranty period on a straight-line basis. Systems typically have warranty periods ranging from one to three years. The components of the warranty accrual are as follows:

		Quarter Ended
		December 29, 2006			December 30, 2005
Beginning warranty accrual		$	10,816		$	13,599
Additional accruals for new shipments		3,040			1,311
Warranty liability assumed in merger		—			1,386
Warranty costs incurred		(1,839		)	(1,286		)
Expiration and change in liability for pre-existing warranties during the period		82			(1,236		)
Ending warranty accrual		$	12,099		$	13,774

 

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 the 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 not made payments under these obligations and no liabilities have been recorded for these obligations on the balance sheet at December 29, 2006 and September 29, 2006, respectively.

9.  Commitments and Contingencies

In November 2006, we discovered that we may have exported certain pressure transducers that are listed on the U.S. Bureau of Industry and Security’s Commerce Control List without proper authorization, either in the form of an export license or pursuant to an exception to the Bureau of Industry and Security’s export license requirements, and on December 20, 2006, we submitted our initial notification of a voluntary self-disclosure of possible export compliance problems to the Office of Export Enforcement in accordance with applicable Export Administration Regulations. We are currently conducting a review of all of our exports of pressure transducers since October 7, 2003, the date on which we commenced operations, in order to determine the nature and scope of the potential issue with respect to those pressure transducers. If, as a result of our review, we determine that we failed to comply with applicable U.S. export regulations, we may be required to pay civil fines and penalties to the U.S. government. Because we have not yet completed our review, we do not know whether we will ultimately have to pay any fines or penalties or, if we do, whether those fines or penalties will be substantial.

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. We have filed an answer denying the claim. The complaint is for unspecified monetary damages, injunctive relief and an order rescinding the settlement and distributor agreements that IPS and Aviza entered into in May 2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and Aviza in March 2004 relating to assets that we acquired from ASML in October 2003. We believe that we have complied with the settlement and distributor agreements and that the allegations contained in IPS’s complaint are without merit. We intend to contest the lawsuit vigorously.

Discovery in the litigation has not yet begun because the parties disagree about the proper forum in which to resolve the claims asserted by IPS. On May 12, 2006, we filed with the United States District Court for the Northern District of California a petition to compel arbitration in Santa Clara County, California. On August 3, 2006, Judge Ware of the Northern District of California found that one or more of the claims asserted by IPS were likely arbitrable and ordered the parties to arbitration to determine which claims were properly subject to arbitration. On October 23, 2006, Judge Cooper of the Central District of California stayed proceedings pending resolution of the question of arbitrability. The parties are currently in the process of filing their pleadings in the arbitration.

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

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proceedings in the United Kingdom. We are in the process of vigorously contesting the French claim and do not believe that the outcome of the claim will be material to 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 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.

Other than operating leases for certain equipment and real assets, we have no significant off-balance sheet transactions or unconditional purchase obligations.

As of December 29, 2006, our cash obligations and commitments relating to our debt obligations and lease payments were as follows:

		Payments due by period
		Total			Less than One Year			One to Three Years			Three to Five Years			Greater Than Five Years
		(in thousands)
Bank loan (revolving line of credit)		$	34,428		$	34,428		$	—		$	—		$	—
Mortgage note payable		6,393			6,393			—			—			—
Other notes payable		1,452			929			523			—			—
Capital lease obligations		861			306			524			31			—
Operating lease obligations		6,793			2,833			3,678			282			—

 

Payments due by period include interest expense on all debt and capital lease obligations with fixed interest rates.  This excludes our revolving line of credit and mortgage note payable.

10.  Major Customers

During the quarters ended December 29, 2006 and December 30, 2005, one customer accounted for 42% and 12% of total net sales, respectively, and during the quarter ended December 30, 2005, two different customers accounted for 34% and 13% of total net sales, respectively.

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11.  Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:

		Quarter Ended
		December 29, 2006			December 30, 2005
Net income (loss)