Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**x****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 27, 2008**

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from                 to                 **

 

**Commissionfile number 000-51642**

 

**AvizaTechnology, Inc.**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                    | ** ** | **20-1979646**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |

 

**440Kings Village Road**

**ScottsValley, California   95066**

(Address ofPrincipal Executive Offices including Zip Code)

 

**(831)438-2100**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES   x     NO   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):
|   | Large accelerated filer    o | Accelerated filer   o          |
|--------|--------------------------------------------------|-----------------------------------------------|
|   |                                             |                                          |
|   | Non-accelerated filer   o         | Smaller reporting  company   x |
|   | (Do not check if a  smaller reporting company)   |                                          |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES   o     NO   x

 

As of August 6,2008, the registrant had 21,856,473 shares of its common stock, par value$0.0001 per share, outstanding.

 

 

 

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Table of Contents

 

**AvizaTechnology, Inc.**

 

**Tableof Contents**

 
| ** **                                                                                                                            | ** ** | **Page****No.** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| **PART I.  FINANCIAL INFORMATION**                                                                                               |       |            |
| Item 1. Financial Statements  (unaudited):                                                                                            |       |            |
| Condensed Consolidated  Balance Sheets — at June 27, 2008 and September 28, 2007                                       |       | 1               |
| Condensed Consolidated Statements  of Operations —for the Three and Nine Months Ended June 27, 2008 and  June 29, 2007 |       | 2               |
| Condensed Consolidated  Statements of Cash Flows — for the Nine Months Ended June 27, 2008 and  June 29, 2007          |       | 3               |
| Notes to Condensed  Consolidated Financial Statements                                                                                 |       | 4               |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                  |       | 16              |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                   |       | 25              |
| Item 4. Controls  and Procedures                                                                                                      |       | 25              |
|                                                                                                                                  |       |            |
| **PART II. OTHER  INFORMATION**                                                                                                  |       |            |
| Item 1. Legal  Proceedings                                                                                                            |       | 26              |
| Item 1A. Risk Factors                                                                                                                 |       | 26              |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                                  |       | 26              |
| Item 3.  Defaults Upon Senior Securities                                                                                              |       | 26              |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                          |       | 26              |
| Item 5. Other Information                                                                                                             |       | 27              |
| Item 6. Exhibits                                                                                                                      |       | 27              |

 

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Table of Contents

 

**ITEM1. FINANCIAL STATEMENTS**

 

**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except par amounts and number of shares)**

** **
| ** **                                                                                                                                                                                     | ** ** | **June 27,** | ** ** | **September 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2008**          | ** ** | **2007 (1)**      | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **(Unaudited)**   | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **        | ** ** | ** **             | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                |       |              |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                     |       | $                 | 11,824     |                   | $          | 23,087 |   |
| Accounts  receivable - net                                                                                                                                                                     |       | 27,526            |       | 37,202                 |       |
| Inventory                                                                                                                                                                                      |       | 45,941            |       | 45,529                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                     |       | 5,128             |       | 5,317                  |       |
| Total current  assets                                                                                                                                                                          |       | 90,419            |       | 111,135                |       |
|                                                                                                                                                                                           |       |              |       |                   |       |
| PROPERTY, PLANT  AND EQUIPMENT - net                                                                                                                                                           |       | 25,408            |       | 31,781                 |       |
| INTANGIBLE  ASSETS - net                                                                                                                                                                       |       | 1,769             |       | 3,333                  |       |
| OTHER ASSETS                                                                                                                                                                                   |       | 1,511             |       | 1,831                  |       |
| TOTAL                                                                                                                                                                                          |       | $                 | 119,107    |                   | $          | 148,080 |   |
|                                                                                                                                                                                           |       |              |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                 |       |              |       |                   |       |
|                                                                                                                                                                                           |       |              |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                                                                                          |       |              |       |                   |       |
| Short term  borrowings and current portion of notes payable                                                                                                                                    |       | $                 | 28,643     |                   | $          | 15,043 |   |
| Accounts payable                                                                                                                                                                               |       | 21,320            |       | 22,536                 |       |
| Warranty  liability                                                                                                                                                                            |       | 7,593             |       | 11,222                 |       |
| Accrued  liabilities                                                                                                                                                                           |       | 18,729            |       | 13,391                 |       |
| Total current  liabilities                                                                                                                                                                     |       | 76,285            |       | 62,192                 |       |
| NOTES PAYABLE -  Long term                                                                                                                                                                     |       | 12,295            |       | 14,490                 |       |
| OTHER  LIABILITIES - Long term                                                                                                                                                                 |       | 175               |       | —                 |       |
| Total  liabilities                                                                                                                                                                             |       | 88,755            |       | 76,682                 |       |
|                                                                                                                                                                                           |       |              |       |                   |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                 |       |              |       |                   |       |
|                                                                                                                                                                                           |       |              |       |                   |       |
| 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 and 20,846,549  shares issued and outstanding at June 27, 2008 and September 28,  2007, respectively |       | 2                 |       | 2                      |       |
| Additional  paid-in capital                                                                                                                                                                    |       | 121,690           |       | 118,400                |       |
| Accumulated  deficit                                                                                                                                                                           |       | (94,225           | )          | (49,974                | )          |
| Accumulated  other comprehensive income                                                                                                                                                        |       | 2,885             |       | 2,970                  |       |
| Total  stockholders’ equity                                                                                                                                                               |       | 30,352            |       | 71,398                 |       |
| TOTAL                                                                                                                                                                                          |       | $                 | 119,107    |                   | $          | 148,080 |   |

 

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(1)   Amounts were derived from our audited consolidated financialstatements for the year ended September 28, 2007 included in our AnnualReport on Form 10-K.

 

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

 

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                                  | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                                   |       | $                      | 33,505     |                            | $          | 57,421 |   | $ | 97,693 |   | $ | 181,251 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| COST OF GOODS  SOLD:                        |       |                   |       |                            |       |   |   |   |   |
| Cost of goods  sold                         |       | 22,490                 |       | 39,246                          |       | 67,808 |   | 125,304 |   |
| Cost of goods  sold - restructuring charges |       | —                 |       | —                          |       | 13,029 |   | — |   |
| Total cost of  goods sold                   |       | 22,490                 |       | 39,246                          |       | 80,837 |   | 125,304 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| GROSS PROFIT                                |       | 11,015                 |       | 18,175                          |       | 16,856 |   | 55,947 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| OPERATING  EXPENSES:                        |       |                   |       |                            |       |   |   |   |   |
| Research and  development                   |       | 7,337                  |       | 8,101                           |       | 23,357 |   | 23,815 |   |
| Selling, general  and administrative        |       | 9,001                  |       | 8,217                           |       | 28,084 |   | 24,846 |   |
| Restructuring  and other charges            |       | —                 |       | —                          |       | 7,792 |   | — |   |
| Total operating  expenses                   |       | 16,338                 |       | 16,318                          |       | 59,233 |   | 48,661 |   |
| INCOME (LOSS)  FROM OPERATIONS              |       | (5,323                 | )          | 1,857                           |       | (42,377 | ) | 7,286 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                    |       |                   |       |                            |       |   |   |   |   |
| Interest income                             |       | 22                     |       | 146                             |       | 106 |   | 283 |   |
| Interest expense                            |       | (487                   | )          | (663                            | )          | (1,435 | ) | (2,978 | ) |
| Other income -  net                         |       | 15                     |       | (449                            | )          | 49 |   | (425 | ) |
|                                        |       |                   |       |                            |       |   |   |   |   |
| Total other  expense - net                  |       | (450                   | )          | (966                            | )          | (1,280 | ) | (3,120 | ) |
|                                        |       |                   |       |                            |       |   |   |   |   |
| INCOME (LOSS)  BEFORE INCOME TAXES          |       | (5,773                 | )          | 891                             |       | (43,657 | ) | 4,166 |   |
| PROVISION FOR  (BENEFIT FROM) INCOME TAXES  |       | (128                   | )          | 382                             |       | 594 |   | 1,178 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| NET INCOME  (LOSS)                          |       | $                      | (5,645     | )                               | $          | 509 |   | $ | (44,251 | ) | $ | 2,988 |   |
|                                        |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss) per share:               |       |                   |       |                            |       |   |   |   |   |
| Basic                                       |       | $                      | (0.26      | )                               | $          | 0.02 |   | $ | (2.05 | ) | $ | 0.16 |   |
| Diluted                                     |       | $                      | (0.26      | )                               | $          | 0.02 |   | $ | (2.05 | ) | $ | 0.16 |   |
| Weighted average  common shares:            |       |                   |       |                            |       |   |   |   |   |
| Basic                                       |       | 21,856,473             |       | 20,763,221                      |       | 21,590,985 |   | 18,150,976 |   |
| Diluted                                     |       | 21,856,473             |       | 21,607,161                      |       | 21,590,985 |   | 18,964,575 |   |

 

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

 

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**AVIZA TECHNOLOGY, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(inthousands)(Unaudited)**

 
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **June 27,**               | ** ** | **June 29,** | ** ** |
| ** **                                                                               | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                   |       |                            |       |   |   |
| Net income  (loss)                                                                       |       | $                               | (44,251    | ) | $ | 2,988 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:    |       |                            |       |   |   |
| Depreciation                                                                             |       | 4,045                           |       | 2,908 |   |
| Amortization                                                                             |       | 420                             |       | 945 |   |
| Non-cash  restructuring and other charges                                                |       | 17,676                          |       | — |   |
| Fair value of  common stock issued for prototype materials                               |       | 125                             |       | — |   |
| Stock-based  compensation                                                                |       | 1,451                           |       | 1,530 |   |
| Gain on disposal  of equipment                                                           |       | (296                            | )          | — |   |
| Provision for allowance  for doubtful accounts                                           |       | 141                             |       | (19 | ) |
| Write-off costs  of prior financing agreements                                           |       | —                          |       | 176 |   |
| Reduction in  acquired intangible assets due to the use of acquired net operating losses |       | —                          |       | 509 |   |
| Changes in  assets and liabilities:                                                      |       |                            |       |   |   |
| Accounts receivable                                                                      |       | 9,494                           |       | (13,936 | ) |
| Inventory                                                                                |       | (10,902                         | )          | 8,829 |   |
| Prepaid expenses  and other assets                                                       |       | 1,175                           |       | 104 |   |
| Accounts payable                                                                         |       | (772                            | )          | (11,199 | ) |
| Warranty  liability                                                                      |       | (3,593                          | )          | 1,104 |   |
| Accrued  liabilities                                                                     |       | 5,438                           |       | 1,609 |   |
| Net cash used in  operating activities                                                   |       | (19,849                         | )          | (4,452 | ) |
|                                                                                     |       |                            |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                   |       |                            |       |   |   |
| Purchases of  property, plant and equipment                                              |       | (2,511                          | )          | (7,479 | ) |
| Purchase of  technology license                                                          |       | (48                             | )          | — |   |
| Proceeds from  sale of equipment                                                         |       | 324                             |       | — |   |
| Proceeds from  sale of the net assets of ET Equipments Ltd.                              |       | 600                             |       | — |   |
| Net cash used in  investing activities                                                   |       | (1,635                          | )          | (7,479 | ) |
|                                                                                     |       |                            |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                   |       |                            |       |   |   |
| Net proceeds  (repayments) on credit lines                                               |       | 13,075                          |       | (12,341 | ) |
| Proceeds from  the issuance of common stock                                              |       | 9                               |       | 27,689 |   |
| Net proceeds on  refinancing of mortgage loan                                            |       | —                          |       | 5,635 |   |
| Proceeds from  equipment loan                                                            |       | —                          |       | 4,000 |   |
| Payments on  mortgage loan                                                               |       | (333                            | )          | (253 | ) |
| Payments on  other borrowings                                                            |       | (985                            | )          | (958 | ) |
| Payments on  equipment loan                                                              |       | (973                            | )          | (95 | ) |
| Payments on  capital lease obligations                                                   |       | (234                            | )          | (195 | ) |
| Net cash  provided by financing activities                                               |       | 10,559                          |       | 23,482 |   |
| Effect of  exchange rates on foreign cash balances                                       |       | (338                            | )          | (281 | ) |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                    |       | (11,263                         | )          | 11,270 |   |
| CASH AND CASH  EQUIVALENTS:                                                              |       |                            |       |   |   |
| Beginning of  period                                                                     |       | 23,087                          |       | 10,722 |   |
| End of period                                                                            |       | $                               | 11,824     |   | $ | 21,992 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                       |       |                            |       |   |   |
| Cash paid for  interest                                                                  |       | $                               | 1,320      |   | $ | 2,560 |   |
| Cash paid for  income taxes                                                              |       | $                               | 629        |   | $ | 353 |   |
| NONCASH  INVESTING AND FINANCING ACTIVITIES:                                             |       |                            |       |   |   |
| 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          |       | $                               | 129        |   | $ | 537 |   |
| Equipment  acquired under capital lease                                                  |       | $                               | 71         |   | $ | 715 |   |
| Notes payable  issued for services to be rendered                                        |       | $                               | —     |   | $ | 1,737 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements

 

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**AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**June 27,2008*(Unaudited)***

 

**1. Basis of Presentation**

** **

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates (U.S.) generally accepted accounting principles for interim financialinformation and applicable regulations of the U.S. Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the U.S. have been condensed or omitted pursuant to such rules andregulations. In the opinion of management, all adjustments (consisting only ofnormal recurring adjustments) considered necessary for a fair statement offinancial position and results of operations have been included. Our operatingresults for the quarter and nine months ended June 27, 2008 are notnecessarily indicative of the results that may be expected for future quartersand the fiscal year ending September 26, 2008. The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withour audited consolidated financial statements for the year ended September 28,2007, which are included in our Annual Report on Form 10-K, and the riskfactors contained therein.

 

The preparation of the accompanying unauditedcondensed consolidated financial statements requires the use of estimates thataffect the reported amounts of assets, liabilities, revenues, expenses andcontingencies. These estimates include, but are not limited to, estimatesrelated to revenue recognition, allowance for doubtful accounts, inventoryvaluation, tangible and intangible long-lived asset valuation, warranty andother obligations, contingent liabilities and litigation. Estimates are updatedon an ongoing basis and are evaluated based on historical experience and currentcircumstances. Changes in facts and circumstances in the future may give riseto changes in these estimates which may cause actual results to differ fromcurrent estimates.

 

Aviza Technology, Inc.’s (the “Company”or “Aviza”) current fiscal year will end on September 26, 2008 andincludes 52 weeks. We close our fiscal quarters on the last Friday ofDecember, March, June and September.

 

The condensed consolidated financialstatements include the accounts of the Company and its subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

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**2. Balance Sheet Details**

 

| ** **                                      | ** ** | **June 27,**       | ** ** | **September 28,** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2008**                | ** ** | **2007**               | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| **Inventory:**                                  |       |                    |       |                   |       |
| Raw materials                                   |       | $                       | 28,985     |                   | $          | 28,667 |   |
| Work-in-process                                 |       | 12,636                  |       | 13,692                 |       |
| Finished goods  and evaluation systems          |       | 4,320                   |       | 3,170                  |       |
| Total                                           |       | $                       | 45,941     |                   | $          | 45,529 |   |
|                                            |       |                    |       |                   |       |
| **Prepaid  expenses and other current assets:** |       |                    |       |                   |       |
| Insurance                                       |       | $                       | 375        |                   | $          | 96 |   |
| Deferred  installation costs                    |       | 249                     |       | 385                    |       |
| Taxes                                           |       | 2,055                   |       | 2,621                  |       |
| Other                                           |       | 2,449                   |       | 2,215                  |       |
| Total                                           |       | $                       | 5,128      |                   | $          | 5,317 |   |
|                                            |       |                    |       |                   |       |
| **Property,  plant and equipment - net:**       |       |                    |       |                   |       |
| Land                                            |       | $                       | 1,839      |                   | $          | 1,839 |   |
| Buildings and  improvements                     |       | 12,217                  |       | 12,198                 |       |
| Machinery and  equipment                        |       | 18,964                  |       | 18,659                 |       |
| Office  furnishings, fixtures and equipment     |       | 6,672                   |       | 6,564                  |       |
| Construction-in-process                         |       | 758                     |       | 3,820                  |       |
| Total                                           |       | 40,450                  |       | 43,080                 |       |
| Accumulated  depreciation                       |       | (15,042                 | )          | (11,299                | )          |
| Property, plant  and equipment - net            |       | $                       | 25,408     |                   | $          | 31,781 |   |
|                                            |       |                    |       |                   |       |
| **Accrued  liabilities:**                       |       |                    |       |                   |       |
| Accrued payroll  and payroll taxes              |       | $                       | 5,190      |                   | $          | 5,660 |   |
| Accrued legal  and accounting fees              |       | 4,618                   |       | 1,643                  |       |
| Deferred revenue                                |       | 974                     |       | 1,076                  |       |
| Accrued  restructuring charges                  |       | 1,646                   |       | —                 |       |
| Other taxes  payable                            |       | 3,455                   |       | 3,557                  |       |
| Other                                           |       | 2,846                   |       | 1,455                  |       |
| Total                                           |       | $                       | 18,729     |                   | $          | 13,391 |   |

 

**3. Stock-Based Compensation**

 

Effective October 1, 2005, we adoptedthe provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R),*Share-Based Payment*, or SFAS 123(R). SFAS 123(R) establishesstandards for the accounting for transactions in which an entity exchanges itsequity instruments for goods or services. It also addresses transactions inwhich an entity incurs liabilities in exchange for goods or services that arebased on the fair value of the entity’s equity instruments or that may besettled by the issuance of those equity instruments. Accordingly, stock-basedcompensation cost is measured at grant date, based on the fair value of theaward, and is recognized as expense over the employee’s requisite serviceperiod. The measurement of stock-based compensation cost is based on severalcriteria including, but not limited to, the valuation model used and associatedinput factors such as expected term of the award, stock price volatility,dividend rate, risk-free interest rate and award cancellation rate. The inputfactors used in the valuation model are based on subjective future expectationscombined with management judgment. If there is a difference between theassumptions used in determining stock-based compensation costs and the actualfactors, which become known over time, we may change future input factors used

 

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in determiningstock-based compensation costs. These changes may materially impact our resultsof operations in the periods over which such costs are expensed.

 

The fair value of each option is estimated atthe date of grant using the Black-Scholes option valuation model. We estimatethe expected stock price volatility and expected life of our options based onhistorical data and representative peer group data. We use historical data toestimate forfeiture rates. The risk-free interest rate for periods within thecontractual life of the option is based on the U.S. Treasury yield with similarexpected life.

 

Under our stock option plans, we may grant optionsto purchase up to a maximum of 6,644,000 shares of common stock, includingoutstanding options to employees, directors and consultants at a price not lessthan the fair market value on the date of the grant. These options generallyvest over two to five years and generally expire seven to ten years from thedate of the grant.

 

We recognized stock-based compensation expenseof $456,000 and $1,451,000 during the quarter and nine months ended June 27,2008, respectively, and $616,000 and $1,530,000 during the quarter and ninemonths ended June 29, 2007, respectively. Due to uncertainty surroundingthe realization of the income tax benefit related to stock based compensationexpense, there is no related income tax benefit recognized in the consolidatedstatements of operations for the quarter and nine months ended June 27,2008 and June 29, 2007, respectively, as a full valuation allowance hasbeen provided against the deferred tax asset.

 

The fair value of our stock options grantedin the quarter and nine months ended June 27, 2008 and June 29, 2007,respectively, was estimated at the date of grant using the following weightedaverage assumptions:

 
| ** **               | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **               | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected life  (years)   |       | 3.0                    |       | 4.8                             |       | 3.6 |   | 4.6 |   |
| Risk-free  interest rate |       | 2.6%                   |       | 4.6%                            |       | 2.8% |   | 4.7% |   |
| Stock price  volatility  |       | 58.0%                  |       | 60.1%                           |       | 56.3% |   | 60.8% |   |
| Dividend yield           |       | 0.0%                   |       | 0.0%                            |       | 0.0% |   | 0.0% |   |

 

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The following table summarizes our stock optionactivity under the stock plans during the quarter and nine months ended June 27,2008:

 
| ** **                                                 | ** ** | ** **         | ** ** | ** **                | ** ** | **Weighted Average**      | ** ** | ** **                   | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** | **Remaining Contractual** | ** ** | **Aggregate Intrinsic** | ** ** |
| ** **                                                 | ** ** | **Shares**         | ** ** | **Exercise Price**   | ** ** | **Term (Years)**          | ** ** | **Value**                    | ** ** |
|                                                       |       |               |       |                      |       |                           |       |                         |       |   |   |
| 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                    |       |
| Granted                                                    |       | 100,000            |       | 1.10                      |       |                           |       |                         |       |
| Exercised                                                  |       | —             |       | —                    |       |                           |       |                         |       |
| Forfeited                                                  |       | (78,540            | )          | 9.55                      |       |                           |       |                         |       |
| Outstanding at  March 28, 2008                        |       | 4,588,103          |       | 4.50                      |       | 6.01                           |       | —                       |       |
| Granted                                                    |       | 883,500            |       | 0.52                      |       |                           |       |                         |       |
| Exercised                                                  |       | —             |       | —                    |       |                           |       |                         |       |
| Forfeited                                                  |       | (232,346           | )          | 4.52                      |       |                           |       |                         |       |
| Outstanding at  June 27, 2008                         |       | 5,239,257          |       | 3.83                      |       | 5.57                           |       | —                       |       |
|                                                       |       |               |       |                      |       |                           |       |                         |       |
| Options vested  and expected to vest at June 27, 2008 |       | 4,948,238          |       | 3.87                      |       | 5.57                           |       | —                       |       |
|                                                       |       |               |       |                      |       |                           |       |                         |       |
| Options vested  at June 27, 2008                      |       | 2,904,720          |       | 4.55                      |       | 5.55                           |       | —                       |       |

 

The aggregate intrinsic value representstotal pre-tax intrinsic value based on the closing stock price of $0.52, $0.50,$1.81 and $3.45 per share at June 27, 2008, March 28, 2008, December 28,2007 and September 28, 2007, respectively.

 

As of June 27, 2008, there was $3.2 millionof unrecognized compensation cost related to unvested stock options granted andoutstanding, net of estimated forfeitures. The cost is expected to berecognized over a weighted average period of approximately 2.4 years.

 

The following table details total stock-basedcompensation expense for the quarters and nine months ended June 27, 2008and June 29, 2007, respectively:

 
| ** **                                | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **June 27,**       | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                | ** ** | **2008**                | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Cost of goods  sold                       |       | $                       | 50         |                            | $          | 58 |   | $ | 152 |   | $ | 159 |   |
| Research and  development                 |       | 110                     |       | 140                             |       | 350 |   | 363 |   |
| Selling, general  and administrative      |       | 296                     |       | 418                             |       | 949 |   | 1,008 |   |
|                                      |       |                    |       |                            |       |   |   |   |   |
| Pre-tax  stock-based compensation expense |       | 456                     |       | 616                             |       | 1,451 |   | 1,530 |   |
| Income tax benefits                       |       | —                  |       | —                          |       | — |   | — |   |
| Stock-based  compensation expense         |       | $                       | 456        |                            | $          | 616 |   | $ | 1,451 |   | $ | 1,530 |   |

 

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The options outstanding and vested at June 27,2008 were in the following exercise price ranges:

 
| ** **        | ** ** | **Options Outstanding** | ** ** | **Options Vested** | ** ** |
|-------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **        | ** ** | ** **                   | ** ** | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **                   | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of** | ** ** | ** **                   | ** ** | **Remaining**           | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise**      | ** ** | **Number**                   | ** ** | **Contractual**         | ** ** | **Exercise** | ** ** | **Vested and** | ** ** | **Exercise** | ** ** |
| **Prices**        | ** ** | **Outstanding**              | ** ** | **Life (Years)**   | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| ** **        | ** ** | ** **                   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $0.52 - $0.54     |       | 849,541                      |       | 4.86                    |       | $ | 0.52 |   | 33,571 |   | $ | 0.52 |   |
| $0.55 - $0.83     |       | 1,091,868                    |       | 5.52                    |       | 0.83 |   | 1,091,830 |   | 0.83 |   |
| $0.84 - $4.98     |       | 1,746,589                    |       | 5.13                    |       | 3.49 |   | 776,000 |   | 3.59 |   |
| $4.99 - $87.07    |       | 1,551,259                    |       | 6.48                    |       | 8.14 |   | 1,003,319 |   | 9.47 |   |
| $0.52 - $87.07    |       | 5,239,257                    |       | 5.57                    |       | 3.83 |   | 2,904,720 |   | 4.55 |   |
|                   |            |                              |            |                         |            |  |  |  |  |  |  |  |  |

 

The weighted average fair value of options onthe grant date, as determined under SFAS 123(R), granted during the quarter andnine months ended June 27, 2008 was $0.21 and $0.42 per share,respectively, and $3.21 and $3.07 per share for the quarter and nine monthsended June 29, 2007, respectively.

 

The total intrinsic value of options exercisedduring the quarter and nine months ended June 27, 2008 was $0 and $14,000respectively, and $129,000 and $419,000 for the quarter and nine months ended June 29,2007, respectively. The total cash received from employees as a result ofemployee stock options exercises during the quarter and nine months ended June 27,2008 was $0 and $9,000, respectively. For the quarter and nine months ended June 29,2007, the total cash received from employees as a result of stock optionexercise was $56,000 and $216,000, respectively.

 

**4. Intangible Assets**

 

 Duringthe quarter ended December 28, 2007, we acquired prototype materials and alicense to certain technology in exchange for 1,000,000 shares of our commonstock and potential future royalty payments based on net revenue generated fromfuture sales of products developed utilizing the technology. A summary of thetotal 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 valuationpurposes was the closing price per common share per the NASDAQ Global Market onDecember 7, 2007, the date the shares were transferred. Direct acquisitioncosts represent legal costs and use tax liability accrued on the transaction.

 

The total consideration issued in thetransaction was allocated based on the estimated fair values of the assetsacquired as of the closing date. The allocation is as follows (in thousands):

 
| License              |   | $   | 1,763  |   |
|----------------------|--------|-----|--------|--------|
| Prototype  materials |   | 125 |   |
| Total  consideration |   | $   | 1,888  |   |

 

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The prototype materials were expensed asresearch and development costs during the quarter ended December 28, 2007.The cost of the license is being amortized over its estimated 10-year usefullife commencing January 2008.

 

Intangible assets are recorded at cost, netof accumulated amortization, and are amortized over their estimated usefullives using the straight-line method. At June 27, 2008 and September 28,2007 our intangible assets consisted of licenses which we have acquired.

 

We evaluate intangible assets for indicatorsof possible impairment when events or changes in circumstances indicate thecarrying amount of the asset may not be recoverable. During March 2008, wesuccessfully completed testing of new technology which provides a moreefficient and cost-effective solution than certain technology we had previouslylicensed. As a result, the value of the previously licensed technology becameimpaired. The previously licensed technology was written down to its fair valueat March 28, 2008 based upon an analysis of future cash flows related tothe technology. This resulted in an impairment charge to operations ofapproximately $3.0 million which was included in restructuring and othercharges during the quarter ended March 28, 2008. The estimated useful lifeof the previously licensed technology was reduced to one year from March 28,2008 based on our analysis. The net book value of this license at June 27,2008 was $94,000, which reflects the write-down.

 

Accumulated amortization and impairment onour intangible assets at June 27, 2008 and September 28, 2007 was$3,994,000 and $858,000, respectively.

 

Amortization expense relating to allintangible assets was $75,000 and $319,000 for the quarter and nine monthsended June 27, 2008, respectively, and $116,000 and $369,000 for thequarter and nine months ended June 29, 2007, respectively. Based on theintangible assets recorded at June 27, 2008, and assuming no subsequentadditions to or impairment of the underlying assets, the remaining amortizationexpense is expected to be as follows (in thousands):

 
| September 26,  2008 (remaining 3 months) |   | $   | 75     |   |
|-----------------------------------------------|--------|-----|--------|--------|
| September 25,  2009                      |   | 239 |   |
| September 24,  2010                      |   | 176 |   |
| September 30,  2011                      |   | 176 |   |
| September 28,  2012                      |   | 176 |   |
| Thereafter                                    |   | 927 |   |
| Total                                         |   | $   | 1,769  |   |

 

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**5. Borrowing Facilities**

** **

Borrowings consist of the following (inthousands):

 
| ** **                                                    | ** ** | **June 27,** | ** ** | **September 28,** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2008**          | ** ** | **2007**               | ** ** |
| Bank loan  (revolving line of credit)                         |       | $                 | 26,012     |                   | $          | 12,937 |   |
| Equipment note  payable                                       |       | 2,630             |       | 3,603                  |       |
| Mortgage note  payable                                        |       | 11,452            |       | 11,785                 |       |
| Other notes  payable                                          |       | 371               |       | 572                    |       |
| Capital lease  obligations                                    |       | 473               |       | 636                    |       |
| Total                                                         |       | 40,938            |       | 29,533                 |       |
| Less: short-term  and current portion of long-term borrowings |       | 28,643            |       | 15,043                 |       |
| Long-term  portion                                            |       | $                 | 12,295     |                   | $          | 14,490 |   |

 

**6. Warranty and Guarantees**

 

***Warranty***—Weaccrue for the estimated cost of the warranty on our systems, which includesthe cost of the labor and parts necessary to repair systems during the warrantyperiod. The amounts recorded in the warranty accrual are estimated based onactual historical costs incurred and on estimated probable future expensesrelated to current sales. The warranty accrual is adjusted over the warrantyperiod based on actual cost incurred. Systems typically have warranty periodsranging from one to three years. The components of the warranty accrual are asfollows:

 
| ** **                                                                        | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **June 27,**       | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                                                        | ** ** | **2008**                | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)** | ** ** |
| Beginning  warranty accrual                                                       |       | $                       | 8,575      |                            | $          | 12,903 |   | $ | 11,222 |   | $ | 10,816 |   |
| Additional  accruals for new shipments                                            |       | 890                     |       | 2,484                           |       | 2,058 |   | 8,248 |   |
| Warranty costs  incurred                                                          |       | (1,317                  | )          | (2,806                          | )          | (5,314 | ) | (6,560 | ) |
| Expiration and  change in liability for pre-existing warranties during the period |       | (555                    | )          | (556                            | )          | (373 | ) | (479 | ) |
| Ending warranty  accrual                                                          |       | $                       | 7,593      |                            | $          | 12,025 |   | $ | 7,593 |   | $ | 12,025 |   |

 

***Guarantees***—In addition to productwarranties, we, from time to time, in the normal course of business, indemnifycertain customers against third-party claims that our products, when used fortheir intended purposes, infringe the intellectual property rights of suchthird party or other claims made against certain parties. It is not possible todetermine the maximum potential amount of liability under these indemnificationobligations due to the limited history of prior indemnification claims and theunique facts and circumstances that are likely to be involved in eachparticular claim. Historically, we have never made payments under theseobligations, accordingly no liabilities have been recorded for theseobligations on the balance sheet at June 27, 2008 and September 28,2007, respectively.

 

**7. Income Taxes**

 

Aspart of the process of preparing our financial statements, we are required toestimate our income tax provision (benefit) in each of the jurisdictions inwhich we operate. This process requires us to estimate our current income taxprovision (benefit) and assess temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in our balance sheet**.**

 

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Werecord a valuation allowance to reduce our deferred tax assets to the amountthat is more likely than not to be realized. While we have considered futuretaxable income and any ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, if we were to determine that wewould be able to realize our deferred tax assets in the future in excess of ournet recorded amount, an adjustment to the deferred tax asset would increaseincome in the period such determination was made. Likewise, if we****were to determine that we would not beable to realize all or part of a net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made. We have recorded a 100% valuation allowanceagainst our domestic and United Kingdom net deferred tax asset due to theuncertainty regarding future taxable income.

 

 Income tax expense primarily relates to ourforeign operations as we continue to incur losses from domestic operations. Werecorded an income tax benefit of $128,000 during the quarter ended June 27,2008 and income tax expense of $594,000 during the nine months ended June 27,2008. We recorded income tax expense of $382,000 and $1,178,000****for the quarter and nine months ended June 29, 2007,respectively.

 

 We adopted the provisions of FinancialStandards Accounting Board Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*”(“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”) on September 29,2007. As a result of the implementation of FIN 48, we recognized no materialadjustment in the liability for unrecognized income tax benefits. At theadoption date of September 29, 2007, we had approximately$3.5 million of unrecognized tax benefits, $2.1 million of which wouldaffect our effective tax rate if recognized, and $1.4 million would be offsetby valuation allowance. At June 27, 2008, we had $3.6 million ofunrecognized tax benefits.

 

 In addition, we recognized interest andpenalties related to uncertain tax positions in income tax expense. At theadoption date of September 29, 2007, we had approximately $124,000 ofaccrued interest and penalties for uncertain tax positions primarily from ourforeign operations. We do not anticipate that total unrecognized tax benefitswill significantly change due****to thesettlement of audits and the expiration of the statue of limitations prior to June 26,2009.

 

 At September 28, 2007, we hadapproximately $56.6 million and $8.3 million of federal andCalifornia net operating loss carryforwards, respectively. We and oursubsidiaries have had multiple ownership changes, as defined by Section 382of the Internal Revenue Code (IRC), due to significant stock transactions inprevious years that will limit the future realization of our net operating losscarryforwards. Section 382 will result in the forfeiture of approximately$24.6 million of net operating loss carryforwards for federal income taxpurposes. The net operating loss carryforwards begin to expire in 2014 forfederal and 2013 for California purposes.

 

 As of September 28, 2007, we had federaland California research and development tax credit carryforwards of approximately$1.7 million and $1.6 million, respectively. Due to Section 382ownership changes under IRC Section 383, $1.1 million of the federalresearch tax credit carryforwards will be subject to forfeiture. Federalresearch and development tax credit carryforwards will expire beginning infiscal 2011. California research and development tax credits will carry forwardindefinitely.

 

**8. Restructuring and OtherCharges**

 

***RestructuringCharges -*****During thequarter ended March 28, 2008, we announced our plans for a significantglobal restructuring based on an analysis of our product strategy, servedmarkets and internal operations. In order to streamline our operations andalign product offerings with the current market conditions, we have and willcontinue to downsize programs, products and spending related to trenchcapacitor technology for DRAM and will decrease our overall dependence on theDRAM market. The restructuring of our global workforce, products and businessoperations was designed to reduce our overall cost structure, as well asimprove operational execution and financial performance. We have refocused onour core strengths in the ALD, Etch and PVD technologies, while moving awayfrom the development of large batch thermal systems. We will continue toservice and support our current global installed base.

 

As part of ourrestructuring plans, we executed a global reduction in workforce, divestedourselves of a non-core operation and wrote down assets related to non-coreproducts which included inventory revaluation, cancellation of purchasecommitments and the write-down of impaired machinery and equipment. Volumemanufacturing will no longer be performed at our Scotts Valley headquarters. Ofthe restructuring charges, approximately $2.4 million required future cashpayments. We estimate these payments will be made throughout fiscal 2009. At June 27,2008, approximately $1.6 million of these estimated payments remained unpaidand are included in accrued liabilities.

 

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During the quarter ended March 28,2008, we sold the net assets of our machine shop, ET Equipments Ltd., locatedin Wales, UK, for $600,000 as part of our restructuring plan to refocus on ourcore strengths. The net book value of the net assets sold, cost of completingthe transaction and loss on the sale of the net assets of ET Equipments Ltd.were as follows (in thousands):

 
| Assets:                                               |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|
| Inventory                                             |   | $      | 1,143  |   |   |   |
| Equipment                                             |   | 148    |   |   |   |
|                                                  |   |   |   | $      | 1,291  |   |
| Liabilities:                                          |   |   |   |   |   |
| Accounts payable                                      |   | (19    | )      |   |   |
| Accrued  liabilities                                  |   | (233   | )      |   |   |
|                                                  |   |   |   | (252   | )      |
| Net assets sold                                       |   |   |   | 1,039  |   |
| Transaction  costs                                    |   |   |   | 104    |   |
|                                                  |   |   |   | 1,143  |   |
| Less: Purchase  price                                 |   |   |   | (600   | )      |
| Net loss on sale  of net assets of ET Equipments Ltd. |   |   |   | $      | 543    |   |
|                                                       |        |        |        |        |        |  |  |

 

Transaction costs relatedprimarily to legal fees incurred.

 

***Other Charges -*** During the quarter ended March 28, 2008, we recognized impairmentof an intangible asset related to a license we had acquired (see Note 4).Completion of successful testing of a new technology, which provides a moreefficient and cost-effective solution, lead to the impairment of the license,resulting in a charge of approximately $3.0 million to operations during the quarterended March 28, 2008.

 

**The impact of these restructuringand other charges on the operating results for the nine months ended June 27,2008, and the remaining liability as of June 27, 2008, is summarized asfollows (in thousands):**

 
| ** **                                            | ** ** | ** **            | ** ** | **Loss on**              | ** ** | ** **      | ** ** | **Sale of Net**        | ** ** | **Impairment of** | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------|------------|----------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                            | ** ** | **Reduction in** | ** ** | **Non-cancellable**           | ** ** | **Inventory**   | ** ** | **Assets of**               | ** ** | **Machinery and** | ** ** | **Impairment of** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Work Force**   | ** ** | **Purchase Commitments** | ** ** | **Revaluation** | ** ** | **ET Equipments Ltd.** | ** ** | **Equipment (1)** | ** ** | **Intangible**         | ** ** | **Total**  | ** ** |
|                                                  |       |                  |       |                          |       |            |       |                             |       |                   |       |                   |       |       |       |
| Restructuring  costs - cost of goods sold             |       | $                     | 380        |                          | $          | 2,178           |       | $                                | 10,471     |                   | $          | —                 |       | $          | —     |   | $ | — |   | $ | 13,029 |   |
| Restructuring and  other charges - operating expenses |       | 387                   |       | —                        |       | -               |       | 543                              |       | 3,854                  |       | 3,008                  |       | 7,792      |       |
| Total  restructuring and other charges                |       | 767                   |       | 2,178                         |       | 10,471          |       | 543                              |       | 3,854                  |       | 3,008                  |       | 20,821     |       |
| Non-cash  adjustments                                 |       | —                |       | —                        |       | (10,471         | )          | (543                             | )          | (3,654                 | )          | (3,008                 | )          | (17,676    | )          |
| Cash payments                                         |       | (589                  | )          | (149                          | )          | —          |       | —                           |       | —                 |       | —                 |       | (738       | )          |
| Balance at  March 28, 2008                       |       | 178                   |       | 2,029                         |       | —          |       | —                           |       | 200                    |       | —                 |       | 2,407      |       |
| Cash payments                                         |       | (174                  | )          | (587                          | )          | —          |       | —                           |       | —                 |       | —                 |       | (761       | )          |
| Balance at  June 27, 2008                        |       | $                     | 4          |                          | $          | 1,442           |       | $                                | —     |                   | $          | —                 |       | $          | 200        |   | $ | — |   | $ | 1,646 |   |

 

----

(1) Includes$200,000 of disposal costs accrued as of June 27, 2008

 

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**9. Commitments and Contingencies**

 

On April 11, 2006, IPS, Ltd. filed a lawsuitagainst us in the United States District Court for the Central District ofCalifornia. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that we and IPS entered into in May 2004 in settlement of aprior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating 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 March 2009. We intendto contest the lawsuit vigorously. We do not believe that the outcome ofthis lawsuit will have a material impact on our business, financial conditionor results of operations.

 

Prior to our merger transaction with TrikonTechnologies, Inc., Trikon was a party to an employment lawsuit in France.On March 10, 2004, Dr. Jihad Kiwan departed Trikon as Director andChief Executive Officer. On March 29, 2004 and April 2, 2004, Trikonreceived letters from a United Kingdom law firm and from a French law firm,respectively, on behalf of Dr. Kiwan, detailing certain monetary claimsfor severance amounts due to Dr. Kiwan with respect to his employment withTrikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and onJune 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwanhas subsequently withdrawn the proceedings in the United Kingdom. On January 7,2008, the French Commercial Court in Grenoble rejected certain of Dr. Kiwan’sclaims but ordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We intend to appeal the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations. We have accrued our estimate of the costs to settle theclaims at June 27, 2008.

 

On December 1, 2006, we filed anarbitration demand against ASML U.S., Inc., and related entities,asserting claims of fraud, negligent misrepresentation, fraud in the inducementand breach of the covenant of good faith and fair dealing arising out of ourpurchase of ASML’s Thermal Division in October 2003. Following discoveryand an unsuccessful motion for summary judgment filed by ASML, the matter wasarbitrated in December 2007 and January 2008. The arbitrator issued apreliminary judgment in favor of ASML. Based on a provision in the governingcontract providing that the party prevailing in the arbitration may recover itsattorneys’ fees and costs from the opposing party, the arbitrator has orderedbriefings by both parties with regard to any fee request by ASML. On April 17,2008, ASML submitted a petition seeking approximately $2.5 million in attorneys’fees and costs incurred in connection with this matter. Following full briefingby both parties, the arbitrator issued a final award of approximately $1.4million in attorneys’ fees and costs to ASML. We have accrued ourestimate of the cost to settle the claims at June 27, 2008.

 

Our Scotts Valley location is a federalSuperfund site. Chlorinated solvent and other contamination was identified atthe site in the early 1980’s, and by the late 1980’s Watkins JohnsonCorporation (“WJ”) (a previous owner of the Company) had installed agroundwater extraction and treatment system. In 1991, WJ entered into a consentdecree with the United States Environmental Protection Agency providingfor remediation of the site. In July 1999, WJ signed a remediation agreementwith an environmental consulting firm, ARCADIS Geraghty and Miller (“ARCADIS”).Pursuant to this remediation agreement, WJ paid approximately $3 millionin exchange for which ARCADIS agreed to perform the work necessary to assuresatisfactory completion of WJ’s obligation under the consent decree. Theagreement also includes a cost overrun guaranty from ARCADIS up to a totalproject cost of $15 million. In addition, the agreement includedprocurement of a ten-year, claims-made insurance policy to cover overruns of upto $10 million from American International Specialty (“AIS”), along with aten-year, claims made $10 million policy to cover unknown pollutionconditions at the site.

 

Failureof WJ, ARCADIS, or AIS to fulfill their obligations may subject the Company tosubstantial fines, and the Company could be forced to suspend production, altermanufacturing processes or cease business operations, any of which could have amaterial negative effect on the Company’s business, financial condition or resultsof operations.

 

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Managementbelieves that the likelihood of the failure of WJ, ARCADIS or AIS is remote andthat any remaining or uninsured environmental liabilities will not have amaterial impact on the Company’s business, financial condition or results ofoperations.

 

**10. Major Customers**

 

The following chart illustrates thepercentages of our net sales accounted for by our largest customers for theperiods indicated:

 
| ** **    | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| **Customers** | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|          |       |                   |       |                            |       |   |   |   |   |
| A             |       | 33                     | %          | 20                              | %          | 16 | % | 35 | % |
| B             |       | 11                     | %          | 27                              | %          | — |   | — |   |
| C             |       | —                 |       | —                          |       | 10 | % | — |   |

 

**11. Comprehensive Income (Loss)**

 

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

 
| ** **                         | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                         | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income  (loss)                 |       | $                      | (5,645     | )                               | $          | 509 |   | $ | (44,251 | ) | $ | 2,988 |   |
| Currency  translation adjustment   |       | (37                    | )          | 404                             |       | (85 | ) | 1,613 |   |
|                               |       |                   |       |                            |       |   |   |   |   |
| Total  comprehensive (loss) income |       | $                      | (5,682     | )                               | $          | 913 |   | $ | (44,336 | ) | $ | 4,601 |   |

 

**12. Net Income (Loss) Per Share**

 

Basic income (loss) per share has beencomputed based upon the weighted average number of common shares outstandingfor the periods presented. Diluted income (loss) per share is calculated asthough all potentially dilutive shares were outstanding during the period,based upon the application of the treasury stock method. The following detailsthe calculation of the net income (loss) per share for the periods presented(in thousands, except share and per share data):

 

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| ** **                                    | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                    | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator:                                    |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss)                            |       | $                      | (5,645     | )                               | $          | 509 |   | $ | (44,251 | ) | $ | 2,988 |   |
|                                          |       |                   |       |                            |       |   |   |   |   |
| Denominator:                                  |       |                   |       |                            |       |   |   |   |   |
| Basic weighted  average shares outstanding    |       | 21,856,473             |       | 20,763,221                      |       | 21,590,985 |   | 18,150,976 |   |
| Effect of  potentially dilutive securities:   |       |                   |       |                            |       |   |   |   |   |
| Stock options                                 |       | —                 |       | 843,940                         |       | — |   | 813,599 |   |
| Dilutive  weighted average shares outstanding |       | 21,856,473             |       | 21,607,161                      |       | 21,590,985 |   | 18,964,575 |   |
|                                          |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss) per share - basic          |       | $                      | (0.26      | )                               | $          | 0.02 |   | $ | (2.05 | ) | $ | 0.16 |   |
|                                          |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss) per share - diluted        |       | $                      | (0.26      | )                               | $          | 0.02 |   | $ | (2.05 | ) | $ | 0.16 |   |

 

For the nine months ended June 27, 2008and June 29, 2007, we had securities outstanding that could potentiallydilute basic earnings per share in the future, but were excluded from thecomputation of diluted net income (loss) per share in the periods presented astheir effect would have been anti-dilutive. The weighted average shares ofcommon stock issuable upon conversion or exercise of such outstandingsecurities consist of the following:

 
| ** **                                                                                                                                                                                                                             | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                                                                                                                                                                                                             | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                                                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Options that  would have been included in the computation of dilutive shares outstanding  had the Company reported net income from continuing operations because the exercise  price of such options exceeded the average stock price. |       | —                 |       | —                          |       | 1,486,416 |   | — |   |
|                                                                                                                                                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Options that  were excluded from the computation of dilutive shares outstanding because the  total assumed proceeds exceeded the average market value of the Company’s  common stock during the period                            |       | 4,998,451              |       | 2,261,110                       |       | 3,141,570 |   | 2,413,741 |   |
|                                                                                                                                                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Shares issuable  upon exercise of common stock warrants                                                                                                                                                                                |       | 290,000                |       | 406,725                         |       | 300,262 |   | 406,725 |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Cautionary Statement RegardingForward-Looking Statements**

** **

*The statements in this report includeforward-looking statements. These forward-looking statements are based on ourmanagement’s current expectations and beliefs and involve numerous risks anduncertainties that could cause actual results to differ materially fromexpectations. You should not rely upon these forward-looking statements aspredictions of future events because we cannot assure you that the events orcircumstances reflected in these statements will be achieved or will occur. Youcan identify forward-looking statements by the use of forward-lookingterminology, including the words “believes,” “expects,” “may,” “will,” “should,”“seeks,” “intends,” “plans,” “estimates” or “anticipates” or the negative ofthese words and phrases or other variations of these words and phrases orcomparable terminology. These forward-looking statements relate to, among otherthings: our sales, results of operations and anticipated cash flows; capitalexpenditures; depreciation and amortization expenses; research and developmentexpenses; sales, general and administrative expenses; the development andtiming of the introduction of new products and technologies; our ability tomaintain and develop relationships with our existing and potential futurecustomers and our ability to maintain the level of investment in research anddevelopment and capacity that is required to remain competitive. Many factorscould cause our actual results to differ materially from those projected inthese forward-looking statements, including, but not limited to: variability ofour revenues and financial performance; risks associated with productdevelopment and technological changes; the acceptance of our products in themarketplace by existing and potential future customers; disruption of operationsor increases in expenses due to our involvement in litigation or caused bycivil or political unrest or other catastrophic events; general economicconditions and conditions in the semiconductor industry in particular; thecontinued employment of our key personnel and risks associated withcompetition.*

 

*For a discussion of the factors that couldcause actual results to differ materially from the forward-looking statements,see the “Liquidity and Capital Resources” section under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis item of this report and the other risks and uncertainties that are setforth elsewhere in this report or detailed in our other Securities and ExchangeCommission reports and filings. We assume no obligation to update theseforward-looking statements.*

 

**Overview**

** **

We design, manufacture, sell and supportadvanced semiconductor capital equipment and process technologies for theglobal semiconductor industry and related markets. We offer both front-end-of-lineand back-end-of-line systems and process technologies used in a variety ofsegments of the semiconductor market using critical thin film formationtechnologies, including ALD, PVD, CVD, Etch and thermal processing systems.

 

Our customer base is geographically diverseand includes both integrated device manufacturers and foundry-basedmanufacturers. We have a broad installed base, with approximately2,500 systems in active operation for which we are providing ongoing partsand services worldwide. We sell our systems globally primarily through a directsales force and in some instances through local independent salesrepresentatives. Our largest customers may vary from year to year dependingupon, among other things, the customer’s annual budget for capitalexpenditures, plans for new fabrication facilities and expansions and newsystem introductions by us.

 

Aviza Technology, Inc. was incorporatedon December 8, 2004 to facilitate the merger transaction of oursubsidiaries, Aviza, Inc. and Trikon Technologies, Inc. Aviza, Inc.was incorporated on September 18, 2003 by affiliates of VantagePointVenture Partners, or VantagePoint, as Thermal Acquisition Corporation, aDelaware corporation, for the purpose of acquiring the business of the ThermalDivision of ASML Holding, N.V., a Netherlands corporation, which divisionof ASML is referred to in this discussion as the Predecessor. On October 10,2003, Thermal Acquisition Corporation acquired the business of the Predecessorand changed its name to Aviza Technology, Inc., which name wassubsequently changed to Aviza, Inc. in connection with the mergertransaction with Trikon.

 

On December 1, 2005, we completed themerger transaction with Trikon, and our common stock is publicly traded on theNasdaq Global Market under the symbol “AVZA.”

 

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We are often required to develop systems inadvance of our customers’ demand for those systems, and we undertakesignificant system development efforts in advance of any of our customersexpressly indicating demand for our systems. Our system development effortstypically span six months to two years.

 

During the quarter ended March 28, 2008,we announced plans for a global restructuring based upon an analysis of ourproduct strategy, served markets and internal operations. The restructuringallows us to refocus our attention on our core strengths in the ALD, Etch andPVD market segments. We have and will continue to downsizeprograms, products and spending related to trench capacitor technology for DRAMand will decrease our overall dependence on the DRAM market. The restructuringof our global workforce, products and business operations was designed toreduce our cost structure as well as improve operational execution andfinancial performance. We will continue to support our current global installedbase and maintain the ability to manufacture additional systems as may berequired by customers. During the quarter ended March 28, 2008, werecorded approximately $17.8 million in costs associated with therestructuring. These charges were primarily attributable to a global reductionin force of approximately 15% of employees and contractors and the write-downof assets relating to non-core products or processes which include inventoryrevaluation, cancellation of purchase commitments and the write-down ofequipment. Annualized savings as a result of our restructuring related to loweremployee costs and lower depreciation expenses will be approximately $8.0million.

 

On March 28, 2008, we receivednotification from Nasdaq informing us that the bid price of our common stockclosed below the minimum $1.00 per share requirement for continued inclusionunder the Market place Rule 4450(a)(5). We have until September 24,2008 to regain compliance.

 

**Critical Accounting Policies**

 

There are no material changes to the criticalaccounting policies described in the section entitled “Critical AccountingPolices” under Item 7 in our Annual Report on Form 10-K for the fiscalyear ended September 28, 2007.

 

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**Results of Operations**

 

The information in the table below presentsour statements of operations data as a percentage of net sales for the quartersand nine months ended June 27, 2008 and June 29, 2007.

 
| ** **                                  | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **June 27,**      | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                   |       | 100                    | %          | 100                             | %          | 100 | % | 100 | % |
| Cost of goods  sold                         |       |                   |       |                            |       |   |   |   |   |
| Cost of goods  sold                         |       | 67                     | %          | 68                              | %          | 70 | % | 69 | % |
| Cost of goods  sold - restructuring charges |       | 0                      | %          | 0                               | %          | 13 | % | 0 | % |
| Total cost of  sales                        |       | 67                     | %          | 68                              | %          | 83 | % | 69 | % |
| Gross margin                                |       | 33                     | %          | 32                              | %          | 17 | % | 31 | % |
|                                        |       |                   |       |                            |       |   |   |   |   |
| Operating expenses:                         |       |                   |       |                            |       |   |   |   |   |
| Research and  development                   |       | 22                     | %          | 14                              | %          | 24 | % | 13 | % |
| Selling, general  and administrative        |       | 27                     | %          | 15                              | %          | 28 | % | 14 | % |
| Restructuring  and other charges            |       | 0                      | %          | 0                               | %          | 8 | % | 0 | % |
| Total operating  expenses                   |       | 49                     | %          | 29                              | %          | 60 | % | 27 | % |
| Income (loss)  from operations              |       | (16                    | )%         | 3                               | %          | (43 | )% | 4 | % |
| Other income  (expense):                    |       |                   |       |                            |       |   |   |   |   |
| Interest income                             |       | 0                      | %          | 0                               | %          | 0 | % | 0 | % |
| Interest expense                            |       | (1                     | )%         | (1                              | )%         | (1 | )% | (2 | )% |
| Other income -  net                         |       | 0                      | %          | 0                               | %          | 0 | % | 0 | % |
| Total other  expense - net                  |       | (1                     | )%         | (1                              | )%         | (1 | )% | (2 | )% |
| Income (loss)  before income taxes          |       | (17                    | )%         | 2                               | %          | (44 | )% | 2 | % |
| Provision for  income taxes                 |       | 0                      | %          | 1                               | %          | 1 | % | 1 | % |
| Net income  (loss)                          |       | (17                    | )%         | 1                               | %          | (45 | )% | 1 | % |

 

**Net Sales**

 
| ** ** | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|------------|------------|-------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **June 27,**       | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** ** | ** ** | **2008**                | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| Net sales  |       | $                       | 33,505     |                            | $          | 57,421 |   | $ | 97,693 |   | $ | 181,251 |   |
|            |            |                         |            |                                 |            |  |  |  |  |  |  |  |  |

 

Net sales for the quarter ended June 27,2008 decreased by $23.9 million, or 42%, from the quarter ended June 29,2007. The decrease was due primarily to the following:

 

·      An approximate $33.4 milliondecrease in net sales of our deposition and thermal processing systems. Salesrecognized on shipment decreased by $28.2 million as unit shipments decreasedby 96% during the quarter ended June 27, 2008 from the quarter ended June 29,2007. Net sales recognized upon customer acceptance decreased by $5.2 millionprimarily due to a $3.9 million reduction in RVP-300*plus*system acceptances, which reflects fewer systems in the field underinstallation. The overall decrease is the result of changes within our DRAMcustomers, relating primarily to trench capacitor technology.

 

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·      The decrease in ourdeposition and thermal processing systems net sales was partially offset by a$7.7 million (68%) increase in net sales of our PVD, Etch and CVD systems dueto higher unit volume through market penetration in the Asia Pacific market.

 

·      Service and spare partssales increased by approximately $1.7 million during the quarter ended June 27,2008 due primarily to higher field option sales.

 

Net sales for the ninemonths ended June 27, 2008 decreased by $83.6 million, or 46%, from thenine months ended June 29, 2007. The decrease was due primarily to thefollowing:

 

·      An approximate $91.9 milliondecrease in net sales of our deposition and thermal processing systems. Salesrecognized on shipment decreased by $81.4 million as unit shipments decreasedby 88% during the nine months ended June 27, 2008 as compared to the ninemonths ended June 27, 2007. Net sales recognized upon customer acceptancedecreased by $10.5 million primarily due to an $8.2 million reduction inRVP-300plus system acceptances, which reflect lower unit shipments andcompleted installation during the period. The decrease was due primarily tomarket pricing pressures for our DRAM customers and changes relating to trenchcapacitor technology within our customer group.

 

·      The decrease in the netsales of our deposition and thermal processing systems was partially offset bya $9.4 million increase in net sales of our PVD, Etch, and CVD systems.

 

·      Service and spares saleswere approximately 3% less during the nine months ended June 27, 2008 dueprimarily to lower equipment utilization at our customer sites.

 

During the quarter ended June 27, 2008,Triquent Semiconductor, Inc. accounted for 11% of our net sales. Duringthe quarter and nine months ended June 27, 2008, Win SemiconductorCorporation accounted for 33% and 16% of our net sales, respectively. Duringthe nine months ended June 27, 2008, Qimonda A.G. accounted for 10% of ournet sales.

 

During the quarter ended June 29, 2007,Nan Ya Technology Corporation accounted for 27% of our net sales. During thequarter and nine months ended June 29, 2007, Inotera Memories, Inc.accounted for 20% and 35% of our net sales, respectively.

 

**Gross Profit and Gross Margin**

 

Gross profit is the difference between netsales and cost of goods sold. Cost of goods sold consists of purchasedmaterial, labor and overhead to manufacture equipment or spare parts and thecost of service and factory and field support to customers for warranty,installation and paid service calls. In addition, the cost of outsourcing theassembly or manufacturing of systems and subsystems to third parties isincluded in cost of goods sold. Gross margin is gross profit expressed as apercentage of net sales.

 
| ** **   | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|--------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **   | ** ** | **June 27,**                    | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **   | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 11,015     |                            | $          | 18,175 |   | $ | 16,856 |   | $ | 55,947 |   |
| Gross margin |       | 33                                   | %          | 32                              | %          | 17 | % | 31 | % |
|              |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

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Gross margin increased by approximately 1%during the quarter ended June 27, 2008 as compared to the quarter ended June 29,2007. This increase was primarily the result of the following:

 

·      A shift in the systemproduct mix away from our deposition and thermal processing systems tohigher-gross margin PVD, Etch, and CVD systems. During the quarter ended June 27,2008, PVD, Etch, and CVD systems accounted for approximately 58% of systemsales as compared to 20% during the quarter ended June 29, 2007.

 

·      A decrease in unabsorbedmanufacturing costs as reductions in manufacturing costs due to implementationof cost cutting measures more than offset lower manufacturing cost absorptiondue to lower unit volume.

 

These positive impacts on gross margin were partiallyoffset by an 8% reduction in overall service gross margin, which was dueprimarily to lower installation and warranty activity related to deposition andthermal product lines.

 

The decrease in gross margin of 14% duringthe nine months ended June 27, 2008 as compared to the nine months ended June 29,2007 was primarily due to the restructuring charges of approximately $13.0million recorded during the nine months ended June 27, 2008.

 

Excluding the impact of restructuringcharges, gross margin for the nine months ended June 27, 2008 wasconsistent with gross margin for the nine months ended June 29, 2007.While gross margin was consistent from period to period the changes impactinggross margin during the nine months ended June 27, 2008 as compared to thenine months ended June 29, 2007 were as follows:

 

·      Gross margin recognized onshipment of our systems was approximately 8% higher during the nine monthsended June 27, 2008 due to changes in the product mix, with a higherproportion of PVD, Etch, and CVD shipments and a lower proportion of thermalprocessing systems.

 

·      Gross margin onservice-related activities decreased by approximately 10% due to lower spareparts sales, a higher proportion of field option sales during the nine monthsended June 27, 2008 and lower demand for installation and warranty servicescreated by lower shipments during the nine months ended June 27, 2008.

 

·      Reductions in manufacturingcost of approximately $6.0 million were more than offset by lower manufacturingcost absorption of $8.5 million due to a decrease in the number of systemsproduced during the nine months ended June 27, 2008 primarily in relationto an 88% decrease in deposition and thermal system shipments.

 

**Research and Development**

** **

Research and development expense consists ofemployment costs attributable to employees, consultants and contractors whoprimarily spend their time on system design, engineering and processdevelopment; materials and supplies used in system prototyping, includingwafers, chemicals and process gases; depreciation and amortization expense allocableto research and development activities and facilities; direct charges forrepairs to research equipment and laboratories; costs of outside services forfacilities; and process engineering support and wafer analytical services. Wealso include in research and development expenses associated with thepreparation, filing and prosecution of patents and other intellectual property.

 
| ** **                | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **June 27,**                    | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                                    | 7,337      |                            | $          | 8,101 |   | $ | 23,357 |   | $ | 23,815 |   |
| Percent of net  sales     |       | 22                                   | %          | 14                              | %          | 24 | % | 13 | % |
|                           |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

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Research and development costs decreased byapproximately $0.8 million, or 9%, during the quarter ended June 27, 2008as compared to the quarter ended June 29, 2007 due primarily to thefollowing:

 
| · |   | A 19%  reduction in head count contributed to a net decrease of approximately $0.5  million in salaries and benefits.                                                                                                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | A $0.3  million reduction in net prototype supplies related primarily to a  next-generation product development project that was in process during the  quarter ended June 29, 2007.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | As part of  our restructuring plan implemented during fiscal 2008, we deemphasized  research and development activity related to thermal products. As a result,  our development lab-related costs for supplies, chemicals, gases and  prototype supplies related to the thermal products decreased by approximately  $0.6 million. |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | Increased  travel expenses of approximately $0.2 million related to increased PVD, Etch,  and CVD opportunities in the Asia Pacific region.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | Approximately  $0.2 million increase in depreciation expense and lab equipment rentals.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | An  approximate $0.1 million increase in patent-related costs.                                                                                                                                                                                                                                                                      |

 

The net decrease in research and developmentcosts of approximately $0.5 million, or 2%, during the nine months ended June 27,2008 as compared to the nine months ended June 29, 2007 was primarily dueto the following:

 
| · |   | A $0.5  million decrease in salaries and benefits related primarily to a reduction in  workforce associated with our restructuring plan implemented during the nine  months ended June 29, 2008.                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                              |
| · |   | As part of  our restructuring plan implemented during fiscal 2008, we deemphasized  continued research and development activity related to our thermal product  lines. As a result, we reduced costs by approximately $1.4 million through  decreased development lab activities. |
|   |   |                                                                                                                                                                                                                                                                              |
| · |   | Increased  depreciation, amortization, and equipment rental expense of approximately  $1.0 million related primarily to equipment installed in our development  laboratories and amortization of a technology license acquired during  December 2007.                        |
|   |   |                                                                                                                                                                                                                                                                              |
| · |   | Increased  travel expense of approximately $0.3 million related primarily to increased  PVD, Etch, and CVD business opportunities in Asia Pacific region.                                                                                                                         |

 

**Selling, General and Administrative**

 

Selling, general and administrative expenseconsists of employment costs attributable to employees, consultants andcontractors who primarily spend their time on sales, marketing and orderadministration and corporate administrative services; occupancy costsattributable to employees performing these functions; sales commissions;promotional marketing expenses; and legal and accounting expenses.

 
| ** **                           | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **June 27,**                    | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                           | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                                    | 9,001      |                            | $          | 8,217 |   | $ | 28,084 |   | $ | 24,846 |   |
| Percent of net  sales                |       | 27                                   | %          | 15                              | %          | 28 | % | 14 | % |
|                                      |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

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The increase in selling, general andadministrative expense of approximately $0.8 million, or 10%, during thequarter ended June 27, 2008, as compared to the quarter ended June 29,2007, was primarily due to the following:

 

·      A $1.0 million increase inlegal costs associated with pending legal matters.

 

·      An approximate $0.2 millionincrease in third-party commissions due to increased system shipments tocertain customers in Taiwan.

 

·      An approximate $0.5 millionincrease in depreciation expense and license fees.

 

·      Increased currency exchangelosses of approximately $0.2 million.

 

These cost increases were partially offsetby:

 

·      A $0.6 million decrease insalaries and benefits related to lower headcount and stock compensation costs.

 

·      Lower consulting costs ofapproximately $0.2 million.

 

·      Lower travel and supplycosts of approximately $0.4 million related primarily to the implementation ofOracle 11i during fiscal 2007.

 

The increase in selling, general andadministrative expense of approximately $3.2 million, or 13%, during the ninemonths ended June 27, 2008 over the nine months ended June 29, 2007was primarily due to the following:

 

·      A $5.2 million increase incosts associated with pending legal matters.

 

·      Increases in costsassociated with our international infrastructure build-up of $0.5 million.

 

·      A $0.4 million increase indepreciation expense related to the implementation of Oracle 11i, which wascompleted at the end of fiscal 2007.

 

·      A $0.2 million increase inbad debt expense.

 

These increases were partially offset by:

 

·      Lower salary, wages andemployee benefits of approximately $1.3 million due primarily to lowerheadcount.

 

·      Approximately $0.2 millionin reduced commission expenses related to lower system sales during the ninemonths ended June 27, 2008.

 

·      Lower travel costs ofapproximately $0.3 million due primarily to the implementation of Oracle 11i in2007 and lower thermal system business levels in fiscal 2008.

 

·      A $0.4 million increase incurrency transaction gains.

 

·      Approximately $0.3 millionin reduced supplies expense due to the Oracle 11i implementation in fiscal2007.

 

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**Restructuring and Other Charges**

** **
| ** **                       | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **June 27,**                    | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                       | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Restructuring  and Other Charges |       | $                                    | —     |                            | $          | — |   | $ | 7,792 |   | $ | — |   |
| Percent of net  sales            |       | 0                                    | %          | 0                               | %          | 8 | % | 0 | % |
|                                  |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

**During the quarter ended March 28,2008, we implemented restructuring plans to align operations with our corestrength products in the ALD, Etch and PVD market segments. This entailed adownsizing of activities related to lower performing, less profitable productsresulting in a global reduction in force, the write-down of impaired machineryand equipment and the divestiture of the net assets of ET Equipments Ltd., amachine shop located in Wales, U.K. During the quarter ended March 28,2008, we also wrote down an intangible asset related to a license of certaintechnology. We have developed and successfully tested a more efficient andcost-effective technology thus impairing the asset.**

 

The breakdown of restructuring and other chargesincluded in operating expenses for the nine months ended June 27, 2008 areas follows (in thousands):

 
| Impairment of  machinery and equipment           |   | $     | 3,854  |   |
|--------------------------------------------------|--------|-------|--------|--------|
| Impairment of  intagible asset                   |   | 3,008 |   |
| Loss on sale of  net assets of ET Equipments LTD |   | 543   |   |
| Reduction in  work force                         |   | 387   |   |
|                                             |   | $     | 7,792  |   |

 

**Interest Expense**

 
| ** **            | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **June 27,**                    | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **            | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense      |       | $                                    | 487        |                            | $          | 663 |   | $ | 1,435 |   | $ | 2,978 |   |
| Percent of net  sales |       | 1                                    | %          | 1                               | %          | 1 | % | 2 | % |
|                       |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

Our interest expense for the quarters andnine months ended June 27, 2008 and June 29, 2007 consisted primarilyof interest incurred on our revolving line of credit, equipment term loan andcommercial real estate loan. In addition, amortization of debt issuance costsimpacted both quarters. During the nine months ended June 29, 2007,interest expense included the amortization of the fair value of warrants issuedto affiliates of VantagePoint in consideration of VantagePoint’s agreement toguarantee a portion of our prior revolving line of credit. During April 2007,we entered into a new financing agreement that did not require furtherguarantees. Unamortized debt issuance costs and warrant amortization related tothe prior financing agreements were written off when the transaction for ournew financing closed.

 

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Aggregate borrowings under our currentrevolving line of credit, equipment term loan and commercial real estate loanwere $40.1 million at June 27, 2008 and $31.7 million at June 29,2007.

 

During the quarter ended June 27, 2008,interest expense decreased by approximately $0.2 million from the quarter endedJune 29, 2007, due primarily to lower average interest rates on ourcurrent credit facility. Interest rates on our current credit facility averaged5.0% during the quarter ended June 27, 2008. Interest rates on ourfacilities in place during the quarter ended June 29, 2007 ranged from7.75% to 10.625%.

 

During the nine months ended June 27,2008, interest expense decreased by approximately $1.5 million from the ninemonths ended June 29, 2007 primarily due to lower average borrowings($28.8 million average borrowings on our credit facility during the nine monthsended June 27, 2008 as compared to $33.6 million average borrowings on ourcredit facilities in place during the nine months ended June 29, 2007), alower average interest rate (6.0% as compared to 8.4%) and lower amortizationof debt issuance costs ($0.1 million as compared to $0.6 million).

 

**Income Taxes**

 

Because we have incurred significantoperating losses during prior periods, no material federal or state incometaxes have been recorded. We recorded income taxes relating to certainprofitable international subsidiaries and provided a full valuation allowanceon our net tax benefits generated in all other jurisdictions during therespective periods.

 

**Liquidity and Capital Resources**

 

At June 27, 2008, our cash and cashequivalents were $11.8 million as compared to $23.1 million at September 28,2007. This $11.3 million decrease in cash and cash equivalents isprimarily attributable to cash used to fund operations ($19.8 million) andcapital expenditures ($2.5 million) during the nine months ended June 29,2008, which was partially offset by increased borrowings under our revolvingline of credit.

 

We anticipate that our existing cash balancesand available borrowings under our credit facility will be sufficient to meetour anticipated cash needs for at least the next 12 months. However, we mayneed to raise additional capital from the sale of debt or equity securities orfrom other sources in order to support our operations. We may not be able toobtain any additional capital on acceptable terms, if at all.

 

***Cash Flows from OperatingActivities***

 

Operating activities used $19.8 million ofcash in the nine months ended June 27, 2008. Cash was used to fundoperating losses of $44.3 million during the nine months ended June 27,2008. Non-cash operating costs totaling $23.6 million, consisting primarily ofdepreciation and amortization, restructuring and other charges and stock-basedcompensation, were included in the operating loss for the period. Cash providedby a decrease of $9.5 million in accounts receivable primarily due tocollections of retentions due on shipments, a decrease of $1.2 million inprepaid expenses and other current assets and a $5.4 million increase inaccrued liabilities primarily related to increased legal costs andrestructuring charges was partially offset by cash used to fund increases ininventory of $10.9 million primarily related to increased PVD, Etch and CVDbusiness opportunities, a decrease of $3.6 million in warranty liabilitiesprimarily due to lower system shipments during the nine months ended June 27,2008 and a decrease in accounts payable of $0.8 million due to the timing ofinventory purchases.

 

***Cash Flows from InvestingActivities***

 

Cash used in investing activities for thenine months ended June 27, 2008 was $1.6 million. Cash used in investingactivities during the quarter primarily consisted of purchasing equipment to beused in our development and demonstration laboratories ($2.5 million), whichwas partially offset by proceeds received from the sale of equipment ($0.3million) and the sale of the net assets of ET Equipments Ltd. ($0.6 million),our machine shop located in Wales, U.K.

 

***Cash Flows from FinancingActivities***

 

Net cash generated by financing activitiesfor the nine months ended June 27, 2008 was $10.6 million. Incrementalbank borrowings under our revolving line of credit generated $13.1 million incash. Payments on our equipment and mortgage lines of credit, short-termborrowings and capital lease obligations were the primary offsets to theseborrowings.

 

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During April 2007, we entered into acredit facility with a syndicate of banks to refinance our previous line ofcredit and mortgage line of credit. Our credit facility includes a two-yearrevolving line of credit, an equipment term loan and a four-year commercialreal estate term loan. We may borrow up to $55.0 million under our creditfacility. Borrowings under the credit facility bear interest at the LondonInter Bank Offering Rate, or LIBOR, plus 2.18% (4.64% at June 27, 2008).The terms of the credit agreement prohibits us from paying cash dividends onour common stock. The credit agreement contains certain financial and operatingcovenants.

 

Maximum borrowings available under therevolving line of credit are $44.0 million and are secured by our accountsreceivable and inventory. Outstanding borrowings under the revolving line ofcredit were $26.0 million at June 27, 2008.

 

Maximum borrowings under the equipment termloan are $4.0 million and are secured by a lien on our equipment. Ourequipment term loan has a three-year amortization period with monthly paymentsof principal and accrued interest. Outstanding borrowings under the equipmentterm loan were $2.6 million at June 27, 2008. As principal is paiddown under the equipment portion of the facility, additional borrowingavailability will be created under the revolving portion of the creditfacility.

 

Maximum borrowings under the commercial realestate term loan are $13.0 million or 70% of the appraised value of thereal estate, whichever is lower, and are secured by a deed of trust on ourScotts Valley facility. Monthly payments of principal and accrued interest willbe based on a 20-year amortization period of the loan principal. Outstandingborrowings under the commercial real estate term loan were $11.5 millionat June 27, 2008. As principal is paid down under the commercial realestate portion of the facility, additional borrowing availability will becreated under the revolving portion of the credit facility.

 

A subsidiary of ours has a revolving line ofcredit for 200,000,000 Japanese Yen (approximately $1.9 million, at theexchange rate on June 27, 2008) under which there were no borrowings at June 27,2008. The credit line bears interest at 1.875% per annum.

 

**Off-Balance Sheet Arrangements**

 

At June 27, 2008, we had no off-balancesheet arrangements as defined in Item 303(a)(4) of Regulation S-Kpromulgated by the Securities and Exchange Commission.

 

**Contractual Obligations**

 

Other than operating leases for certainequipment and real estate and certain vendor commitments, we have nosignificant off-balance sheet transactions or unconditional purchaseobligations. As a “smaller reporting company,” we are not required to provide tabulardisclosure of contractual obligations.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

As a “smaller reporting company,” we are notrequired to provide the information required by this Item.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

An evaluation was performed under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this quarterly report. Based on that evaluation, ourmanagement, including our chief executive officer and chief financial officer,concluded that, as of June 27, 2008, our disclosure controls andprocedures were effective. During the nine months ended June 27, 2008,there were no changes in our internal control over financial reporting thatmaterially affected, or were reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS**

 

On April 11, 2006, IPS, Ltd. filed a lawsuitagainst us in the United States District Court for the Central District ofCalifornia. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that we and IPS entered into in May 2004 in settlement of aprior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating 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 March 2009. We intendto contest the lawsuit vigorously. We do not believe that the outcome ofthis lawsuit will have a material impact on our business, financial conditionor results of operations.

 

Prior to our merger transaction with TrikonTechnologies, Inc., Trikon was a party to an employment lawsuit in France.On March 10, 2004, Dr. Jihad Kiwan departed Trikon as Director andChief Executive Officer. On March 29, 2004 and April 2, 2004, Trikonreceived letters from a United Kingdom law firm and from a French law firm,respectively, on behalf of Dr. Kiwan, detailing certain monetary claimsfor severance amounts due to Dr. Kiwan with respect to his employment withTrikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and onJune 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwanhas subsequently withdrawn the proceedings in the United Kingdom. On January 7,2008, the French Commercial Court in Grenoble rejected certain of Dr. Kiwan’sclaims but ordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We have appealed the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations. Wehave accrued our estimate of the cost to settle the claims at June 27,2008.

 

On December 1, 2006, we filed anarbitration demand against ASML U.S., Inc., and related entities,asserting claims of fraud, negligent misrepresentation, fraud in the inducementand breach of the covenant of good faith and fair dealing arising out of ourpurchase of ASML’s Thermal Division in October 2003. Following discoveryand an unsuccessful motion for summary judgment filed by ASML, the matter wasarbitrated in December 2007 and January 2008. The arbitrator issued apreliminary judgment in favor of ASML. Based on a provision in the governingcontract providing that the party prevailing in the arbitration may recover itsattorneys’ fees and costs from the opposing party, the arbitrator has orderedbriefing by both parties with regard to any fee request by ASML. On April 17,2008, ASML submitted a petition seeking approximately $2.5 million in attorneys’fees and costs incurred in connection with this matter. Following full briefingby both parties, the arbitrator issued a final award of approximately $1.4million in attorneys’ fees and costs to ASML. We have accrued ourestimate of the cost to settle the claims at June 27, 2008.

 

**ITEM 1A. RISK FACTORS**

 

As a “smaller reporting company,” we are notrequired to provide the information required by this Item.

 

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None

 

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**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6.EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                           |
| 31.1                |       | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 31.2                |       | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 32.1                |       | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 32.2                |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

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**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                        | Aviza  Technology, Inc.                    |
|-----------------------------|-------------------------------------------------|
| * *                    | *(Registrant)*                                  |
|                        |                                            |
| Dated: August 6,  2008 |                                            |
|                        | By:                                             | **/s/  PATRICK C. O’CONNOR** |
|                        |                                            |
| ** **                  | **Patrick  C. O’Connor**                   |
| * *                    | *Executive  Vice President and Chief Financial* |
| * *                    | *Officer*                                       |
| * *                    | *(Principal  Financial and Accounting Officer)* |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                           |
| 31.1                |       | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 31.2                |       | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 32.1                |       | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|                |       |                                                                                                           |
| 32.2                |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

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