Exhibit 99.1
AXCELIS TECHNOLOGIES, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
FACTORS AFFECTING FUTURE OPERATING RESULTS
From time to time, we may make forward-looking public statements, such
as statements concerning our then expected future revenues or earnings or
concerning the prospects for our markets or our product development, projected
plans, performance, order procurement as well as other estimates relating to
future operations. Forward-looking statements may be in reports filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
registration statements filed under the Securities Act of 1933, as amended (the
"Securities Act"), in press releases or informal statements made with the
approval of an authorized executive officer. The words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act, as enacted by the Private Securities Litigation
Reform Act of 1995.
We wish to caution you not to place undue reliance on these
forward-looking statements. These statements speak only as of the date on which
they are made and represent management's expectations based on information
available to them at that time. The factors listed below, as well as other
factors that we may or may not have not currently identified, could affect our
financial or other performance and could cause our actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods or events in any current statement.
We will not undertake and specifically decline any obligation to
publicly release revisions to these forward-looking statements to reflect either
circumstances after the date of the statements or the occurrence of events that
may cause us to re-evaluate our forward-looking statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act, we are hereby filing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements made by us or on
our behalf.
IF SEMICONDUCTOR MANUFACTURERS DO NOT MAKE SUFFICIENT CAPITAL EXPENDITURES, OUR
SALES AND PROFITABILITY WILL BE HARMED.
Almost all of our new orders will depend upon demand from semiconductor
manufacturers who build or expand fabrication facilities. If the rate of
construction or expansion of fabrication facilities declines, demand for our
systems will decline, reducing our revenues. This would also hurt our
profitability, because of our high fixed cost structure and our continued
investments in engineering, research and development and marketing necessary to
develop new products and to maintain extensive customer service and support
capabilities limit our ability to reduce expenses in proportion to declining
sales.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We derive most of our revenues from the sale of a relatively small
number of expensive products to a small number of customers. The list prices on
these products range from $200,000 to over $4.0 million. At our current sales
level, each sale, or failure to make a sale, could have a material effect on us
in a particular quarter. In a given quarter, a number of factors can adversely
affect our revenues and results, including changes in our product mix, increased
fixed expenses per unit due to reductions in the number of products
manufactured, and higher fixed costs due to increased levels of research and
development and expansion of our worldwide sales and marketing organization.
Axcelis' financial results also fluctuate based on gross profit realized on
sales. Gross profit as a percentage of revenue may vary based on a variety of
factors, including the mix and average selling prices of products sold, costs to
manufacture and customize systems and warranty costs. Our gross margins also may
be affected by the introduction of new products. Due to the foregoing factors,
we believe that period-to-period comparisons of our operating results should not
be relied upon as an indicator of our future performance.
OUR QUARTERLY FINANCIAL RESULTS MAY FALL SHORT OF ANTICIPATED LEVELS;
FORECASTING QUARTERLY REVENUES AND PROFITABILITY IS COMPLEX AND MAY BE
INACCURATE.
Management typically provides financial forecasts for the subsequent
quarter in the earnings release for each quarter. These forecasts are based on
assumptions believed to be reasonable when made of shipment timing and contract
terms, but in some cases, at the time the forecast is made the final customer
terms may not have been agreed and documented, so the level of revenues
recognizable in a particular quarter may vary from the forecast. Our lengthy
sales cycle, coupled with customers' competing capital budget considerations,
make the timing of customer orders uneven and difficult to predict. In addition,
our backlog at the beginning of a quarter typically does not include all orders
required to achieve our sales objectives for that quarter and is not a reliable
indicator of our future sales. As a result, our revenues and operating results
for a quarter depend on our shipping orders as scheduled during that quarter as
well as obtaining new orders for products to be shipped in that same quarter.
Any delay in, or cancellation of, scheduled shipments or in shipments from new
orders could materially and adversely affect our financial results.
The SEC's Staff Accounting Bulletin 104, addressing revenue
recognition, has added additional complexity in forecasting quarterly revenues
and profitability. Orders for our products usually contain multiple delivery
elements that result in revenue deferral under generally accepted accounting
principles. Due to the foregoing factors, investors should understand that our
actual financial results for a quarter may vary significantly from our forecasts
of financial performance for that quarter. Failure to meet forecast financial
performance may have an adverse effect on the price of our common stock.
THE SEMICONDUCTOR INDUSTRY IS HIGHLY CYCLICAL AND WE EXPECT THAT DEMAND FOR OUR
PRODUCTS WILL REGULARLY INCREASE AND DECREASE, MAKING IT DIFFICULT TO MANAGE THE
BUSINESS AND POTENTIALLY CAUSING HARM TO OUR SALES AND PROFITABILITY.
The semiconductor business is highly cyclical, experiencing upturns
where the demand for our products is high and downturns where our customers are
not investing in new or expanded fabrication facilities. Our revenues can vary
significantly from one point in the cycle to another, making it difficult to
manage the business, both when revenues are increasing and when they are
decreasing. In addition, a substantial portion of the Company's operating
expenses are fixed and do not fluctuate with changes in volume. Significant
decreases in revenues can therefore have a disproportionate effect on
profitability.
2
OVERSUPPLY IN THE SEMICONDUCTOR INDUSTRY REDUCES DEMAND FOR CAPITAL EQUIPMENT,
INCLUDING OUR PRODUCTS.
From time to time, inventory buildups in the semiconductor industry,
resulting in part from the down cycle, produce an oversupply of semiconductors.
This will cause semiconductor manufacturers to revise capital spending plans,
resulting in reduced demand for capital equipment such as our products. If an
oversupply is not reduced by increasing demand from the various electronics
industries that use semiconductors, which we cannot accurately predict, our
sales and profitability will be harmed.
IF WE FAIL TO DEVELOP AND INTRODUCE RELIABLE NEW OR ENHANCED PRODUCTS AND
SERVICES THAT MEET THE NEEDS OF SEMICONDUCTOR MANUFACTURERS, OUR RESULTS WILL
SUFFER.
Rapid technological changes in semiconductor manufacturing processes
require us to respond quickly to changing customer requirements. Our future
success will depend in part upon our ability to develop, manufacture and
successfully introduce new systems and product lines with improved capabilities
and to continue to enhance existing products, including products that process
300 millimeter wafers using a single wafer platform. This will depend upon a
variety of factors, including new product selection, timely and efficient
completion of product design and development and of manufacturing and assembly
processes, product performance in the field and effective sales and marketing.
In particular:
o We must develop the technical specifications of competitive
new systems, or enhancements to our existing systems, and
manufacture and ship these systems or enhancements in volume
in a timely manner.
o We will need to accurately predict the schedule on which our
customers will be ready to transition to new products, in
order to accurately forecast demand for new products while
managing the transition from older products.
o We will need to effectively manage product reliability or
quality problems that often exist with new systems, in order
to avoid reduced orders, higher manufacturing costs, delays in
acceptance and payment and additional service and warranty
expenses.
o Our new products must be accepted in the marketplace.
Our failure to meet any of these requirements will have a material
adverse effect on our operating results and profitability.
3
IF WE FAIL TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE SEMICONDUCTOR
EQUIPMENT INDUSTRY, OUR SALES AND PROFITABILITY WILL DECLINE.
The market for semiconductor manufacturing equipment is highly
competitive and includes companies with substantially greater financial,
engineering, manufacturing, marketing and customer service and support resources
than we have that may be better positioned to compete successfully in the
industry. In addition, there are smaller, emerging semiconductor equipment
companies that provide innovative systems with technology that may have
performance advantages over our systems. Competitors are expected to continue to
improve the design and performance of their existing products and processes and
to introduce new products and processes with improved price and performance
characteristics. If we are unable to improve or introduce competing products
when demanded by the markets, our business will be harmed. In addition, if
competitors enter into strategic relationships with leading semiconductor
manufacturers covering products similar to those sold or being developed by us,
our ability to sell products to those manufacturers may be adversely affected.
Finally, if we must lower prices to maintain competitive without commensurate
cost of goods savings, our gross margins and profitability will be adversely
affected.
WE HAVE BEEN DEPENDENT ON SALES TO A LIMITED NUMBER OF LARGE CUSTOMERS; THE LOSS
OF ANY OF THESE CUSTOMERS OR ANY REDUCTION IN ORDERS FROM THEM COULD MATERIALLY
AFFECT OUR SALES.
Historically, we have sold a significant proportion of our products and
services to a limited number of fabricators of semiconductor products. For
example, in 2004,our customer, ST Microelectronics accounted for 14.9% of our
net sales. Also, in 2004, our top ten customers accounted for 61% of our net
sales. None of our customers has entered into a long-term agreement requiring it
to purchase our products. Although the composition of the group comprising our
largest customers has varied from year to year, the loss of a significant
customer or any reduction or delays in orders from any significant customer,
including reductions or delays due to customer departures from recent buying
patterns, or market, economic or competitive conditions in the semiconductor
industry, could adversely affect us. The ongoing consolidation of semiconductor
manufacturers may also increase the harmful effect of losing one or more
significant customers.
WE ACCESS THE IMPORTANT JAPANESE MARKET FOR ION IMPLANT THROUGH A JOINT VENTURE
THAT WE DO NOT CONTROL.
We own 50% of the equity of a Japanese corporation called Sumitomo
Eaton Nova Corporation or SEN, to which we have granted an exclusive license to
manufacture and sell ion implanters in Japan. Historically, Japan has
represented approximately 20% of the annual worldwide market for ion implanters.
Sumitomo Heavy Industries, Ltd., a Japanese manufacturer of industrial machinery
and ships, owns the remaining 50% of the equity. Neither Axcelis nor Sumitomo
has the right to buy out the other's interest in SEN and the SEN joint venture
is perpetual (although SEN's license to use our technology could be terminated,
as described below). Our joint venture agreement with Sumitomo gives both owners
veto rights, so that neither of us alone can effectively control SEN. SEN's
business is subject to the same risks as our business. Royalties and income from
SEN have been a substantial contribution to our earnings, and a substantial
decline in SEN's sales and net income could have a material adverse effect on
our net income. As a result of this joint venture structure, we have less
control over SEN management than over our own management. In addition, given the
equal balance of ownership, it is possible that the SEN Board may be unable to
reach consensus from time to time, which could delay important decisions.
4
Although SEN and Axcelis triggered a provision requiring good faith
negotiations on modifications to the license agreement, during 2004, no
modifications were reached. The license agreement will continue in its existing
form on a year-to-year basis, subject to the right of either party to terminate.
Under the SEN bylaws, termination of the license agreement by SEN would be an
important matter requiring approval of a majority of the SEN directors. Given
Axcelis' 50% representation on the SEN Board, the license agreement will be
perpetual until such time as Axcelis deems a termination to be in its interest.
Axcelis does not expect to terminate the SEN license agreement. During 2005,
Axcelis intends to continue to pursue agreement with SEN on amendments to the
license agreement to add additional licensed products and related royalty terms.
We may occasionally allow SEN to sell implanters outside of Japan. We
allow these sales when they are consistent with Axcelis' marketing policies and
procedures. When these sales are allowed, we receive commissions in addition to
royalties from SEN on these extra-territorial sales and assume most of the
post-installation warranty responsibility. However, the financial benefit to
Axcelis from the sale of a SEN implanter is less than the financial benefit of a
sale of an Axcelis implanter, so such extra-territorial sales may have an
adverse effect on the Company's revenues.
AXCELIS IS SUBJECT TO THE RISKS OF OPERATING INTERNATIONALLY AND WE DERIVE A
SUBSTANTIAL PORTION OF OUR REVENUES FROM OUTSIDE THE UNITED STATES, ESPECIALLY
FROM ASIA.
We are substantially dependent on sales of our products and services to
customers outside the United States. International sales, including export sales
from our U.S. manufacturing facilities to non-U.S. customers and sales by our
non-U.S. subsidiaries and branches, accounted for 77.0% of total revenue in
2004, 65.3% in 2003, and 53.3% in 2002. In recent years, the percentage of
shipments to Asia has been increasing. System shipments to Asian customers
represented 74% of total shipment dollars in 2004 in comparison to 60% of total
shipment dollars in 2003. We anticipate that international sales will continue
to account for a significant portion of our revenue. Because of our dependence
upon international sales, our results and prospects may be adversely affected by
a number of factors, including:
o unexpected changes in laws or regulations resulting in more
burdensome governmental controls, tariffs, restrictions,
embargoes or export license requirements;
o difficulties in obtaining required export licenses;
o volatility in currency exchange rates;
o political and economic instability, particularly in Asia;
o difficulties in accounts receivable collections;
o extended payment terms beyond those customarily offered in the
United States;
o difficulties in managing distributors or representatives
outside the United States;
o difficulties in staffing and managing foreign subsidiary and
branch operations; and
o potentially adverse tax consequences.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
HIRE, RETAIN AND INTEGRATE QUALIFIED PERSONNEL.
Our business depends on our ability to attract and retain qualified,
experienced employees. There is substantial competition for experienced
engineering, technical, financial, sales and marketing personnel in our
industry. In particular, we must attract and retain highly skilled design and
process engineers. Competition for such personnel is intense, particularly in
the Boston metropolitan area, as well as in
5
other locations around the world. In 2004, we announced the relocation of our
Rockville, Maryland operations into our Beverly, Massachusetts headquarters.
Although a number of employees will be relocating, we will need to hire to fill
open positions in Beverly. If we are unable to retain our existing key
personnel, or attract and retain additional qualified personnel, we may from
time to time experience levels of staffing inadequate to develop, manufacture
and market our products and perform services for our customers. As a result, our
growth could be limited or we could fail to meet our delivery commitments or
experience deterioration in service levels or decreased customer satisfaction,
all of which could adversely affect our financial results.
OUR DEPENDENCE UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUB-ASSEMBLIES COULD RESULT IN INCREASED COSTS OR DELAYS IN THE MANUFACTURE AND
SALE OF OUR PRODUCTS.
We rely to a substantial extent on outside vendors to manufacture many
of the components and subassemblies of our products. We obtain many of these
components and sub-assemblies from either a sole source or a limited group of
suppliers. Because of our reliance on outside vendors generally, and on a
limited group of suppliers in particular, we may be unable to obtain an adequate
supply of required components on a timely basis, on price and other terms
acceptable to us, or at all.
In addition, we often quote prices to our customers and accept customer
orders for our products before purchasing components and subassemblies from our
suppliers. If our suppliers increase the cost of components or subassemblies, we
may not have alternative sources of supply and may not be able to raise the
price of our products to cover all or part of the increased cost of components.
The manufacture of some of these components and subassemblies is an
extremely complex process and requires long lead times. As a result, we have in
the past and may in the future experience delays or shortages. If we are unable
to obtain adequate and timely deliveries of our required components or
subassemblies, we may have to seek alternative sources of supply or manufacture
these components internally. This could delay our ability to manufacture or to
ship our systems on a timely basis, causing us to lose sales, incur additional
costs, delay new product introductions and suffer harm to our reputation.
OUR INTERNATIONAL OPERATIONS INVOLVE CURRENCY RISK.
Substantially all of our sales are billed in U.S. dollars, thereby
reducing the impact of fluctuations in foreign exchange rates on our results.
Operating margins of certain foreign operations can fluctuate with changes in
foreign exchange rates to the extent revenues are billed in U.S. dollars and
operating expenses are incurred in the local functional currency. During the
year ended December 31, 2004, approximately 13% of the Company's revenues were
derived from foreign operations with this inherent risk. In addition, at
December 31, 2004, the Company's operations outside of the United States
accounted for approximately 29% of the Company's total assets, the majority of
which was denominated in currencies other than the U.S. dollar. Our investment
in SEN and our royalty and equity income from SEN are subject to foreign
currency exchange risks. The Company uses forward contracts to hedge the risk of
currency fluctuation with respect to SEN royalties for which payment is received
in Japanese yen.
IN CERTAIN CIRCUMSTANCES, WE MAY NEED ADDITIONAL CAPITAL.
Our capital requirements may vary widely from quarter to quarter,
depending on, among other things, capital expenditures, fluctuations in our
operating results, financing activities, acquisitions and investments and
inventory and receivables management. Our outstanding convertible debt in the
6
principal amount of $125 million becomes due in January 2007. We believe that
our exiting cash and cash equivalents will be sufficient to satisfy our
anticipated cash requirements for at least the next twelve months. This, of
course, depends on the accuracy of our assumptions about levels of sales and
expenses, and a number of factors, including those described in these "Risk
Factors," could cause us to require additional capital from external sources. In
addition, in the future, we may require or choose to obtain additional debt or
equity financing in order to finance acquisitions or other investments in our
business. Depending on market conditions, future debt or equity financings may
not be possible on attractive terms or at all. In addition, future debt or
equity financings could be dilutive to the existing holders of our common stock
and convertible notes. Moreover, our existing credit agreement contains
restrictive covenants limiting our ability to engage in additional debt
financings without the permission of the banks..
OUR STOCK PRICE COULD BE VOLATILE AND YOU COULD LOSE THE VALUE OF YOUR
INVESTMENT.
Our stock price has been volatile and has fluctuated significantly to date. The
trading price of our stock is likely to continue to be highly volatile and
subject to wide fluctuations. Your investment in our stock could lose value.
Some of the factors that could significantly affect the market price of our
stock include:
o actual or anticipated variations in results;
o analyst reports or recommendations;
o changes in interest rates; and
o other events and factors, many of which are beyond our
control.
The stock market in general and Nasdaq and technology companies in particular
have experienced extreme price fluctuations.
7
WE SEEK TO PROTECT OUR PROPRIETARY TECHNOLOGY THROUGH PATENTS AND TRADE SECRETS
THAT MAY BE VULNERABLE TO EFFORTS BY COMPETITORS TO CHALLENGE OR DESIGN AROUND,
POTENTIALLY REDUCING OUR MARKET SHARE.
We rely on a combination of patents, copyrights, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect our proprietary technology. Despite our efforts to
protect our intellectual property, our competitors may be able to legitimately
ascertain the non-patented proprietary technology embedded in our systems. If
this occurs, we may not be able to prevent their use of this technology. Our
means of protecting our proprietary rights may not be adequate and our patents
may not be sufficiently broad to prevent others from using technology that is
similar to or the same as our technology. In addition, patents issued to us have
been, or might be challenged, and might be invalidated or circumvented and any
rights granted under our patents may not provide adequate protection to us. Our
competitors may independently develop similar technology, duplicate features of
our products or design around patents that may be issued to us. As a result of
these threats to our proprietary technology, we may have to resort to costly
litigation to enforce or defend our intellectual property rights. Finally, all
patents expire after a period of time (in the U.S., patents expire 20 years from
the date of filing of the patent application). Our market share could be
negatively impacted by the expiration of a patent which had created a barrier
for our competitors.
Axcelis also has agreements with third parties for licensing of
patented or proprietary technology, both where Axcelis is the licensor and the
licensee. These agreements include royalty-bearing licenses and technology
cross-licenses. Termination of license agreements could have an adverse impact
on our financial performance or ability to ship products with existing
configurations.
WE OR CUSTOMERS THAT WE INDEMNIFY MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS OR PATENT DISPUTES THAT MAY BE COSTLY TO RESOLVE AND, IF RESOLVED AGAINST
US, COULD BE VERY COSTLY TO US AND PREVENT US FROM MAKING AND SELLING OUR
SYSTEMS.
From time to time, claims and proceedings have been or may be asserted
against us relative to patent validity or infringement matters. Our system sales
documentation typically includes an indemnification by Axcelis of our customers
from liability to third parties for intellectual property infringement arising
from the use of our products in their intended manner. Therefore, Axcelis on
occasion receives notification from customers who believe that Axcelis owes them
indemnification or other obligations related to infringement claims made against
the customers by third parties. Our involvement in any patent dispute or other
intellectual property dispute or action to protect trade secrets, even if the
claims are without merit, could be very expensive to defend and could divert the
attention of our management. Adverse determinations in any litigation could
subject us to significant liabilities to third parties, require us to seek
costly licenses from third parties and prevent us from manufacturing and selling
our systems. In addition, infringement indemnification clauses in system sale
agreements may require us to take other actions or require us to provide certain
remedies to customers who are exposed to indemnified liabilities. Any of these
situations could have a material adverse effect on our business results.
IF OPERATIONS WERE DISRUPTED AT AXCELIS' PRIMARY MANUFACTURING FACILITY IT WOULD
HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We have one primary manufacturing facility, located in Massachusetts,
and its operations are subject to disruption for a variety of reasons,
including, but not limited to natural disasters, work
8
stoppages, operational facility constraints and terrorism. Such disruption could
cause delays in shipments of products to our customers and could result in
cancellation of orders or loss of customers and could seriously harm our
business.
9