AVZA Aviza Tech (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 000-51642

Aviza Technology, Inc.

(Exact Name of Registrant as Specified in its Charter)

440 Kings Village Road

Scotts Valley, California   95066

(Address of Principal Executive Offices including Zip Code)

(831) 438-2100

(Registrant’s Telephone Number, Including Area Code)

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

YES    x      NO    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

YES    o      NO    x

As of 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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Aviza Technology, Inc.

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ITEM 1. FINANCIAL STATEMENTS

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(Unaudited)

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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 27, 2008
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and applicable regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position and results of operations have been included. Our operating results for the quarter and nine months ended June 27, 2008 are not necessarily indicative of the results that may be expected for future quarters and the fiscal year ending September 26, 2008. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended September 28, 2007, which are included in our Annual Report on Form 10-K, and the risk factors contained therein.

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

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

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

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2. Balance Sheet Details

3. Stock-Based Compensation

Effective October 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment , or SFAS 123(R). SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period. The measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate and award cancellation rate. The input factors used in the valuation model are based on subjective future expectations combined with management judgment. If there is a difference between the assumptions used in determining stock-based compensation costs and the actual factors, which become known over time, we may change future input factors used

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in determining stock-based compensation costs. These changes may materially impact our results of operations in the periods over which such costs are expensed.

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

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

We recognized stock-based compensation expense of $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 nine months ended June 29, 2007, respectively. Due to uncertainty surrounding the realization of the income tax benefit related to stock based compensation expense, there is no related income tax benefit recognized in the consolidated statements of operations for the quarter and nine months ended June 27, 2008 and June 29, 2007, respectively, as a full valuation allowance has been provided against the deferred tax asset.

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

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

The aggregate intrinsic value represents total 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 million of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures. The cost is expected to be recognized over a weighted average period of approximately 2.4 years.

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

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

The weighted average fair value of options on the grant date, as determined under SFAS 123(R), granted during the quarter and nine 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 months ended June 29, 2007, respectively.

The total intrinsic value of options exercised during the quarter and nine months ended June 27, 2008 was $0 and $14,000 respectively, 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 of employee 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 option exercise was $56,000 and $216,000, respectively.

4. Intangible Assets

 During the quarter ended December 28, 2007, we acquired prototype materials and a license to certain technology in exchange for 1,000,000 shares of our common stock and potential future royalty payments based on net revenue generated from future sales of products developed utilizing the technology. A summary of the total consideration given at closing is as follows (in thousands):

The price per share used for valuation purposes was the closing price per common share per the NASDAQ Global Market on December 7, 2007, the date the shares were transferred. Direct acquisition costs represent legal costs and use tax liability accrued on the transaction.

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

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

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

We evaluate intangible assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. During March 2008, we successfully completed testing of new technology which provides a more efficient and cost-effective solution than certain technology we had previously licensed. As a result, the value of the previously licensed technology became impaired. The previously licensed technology was written down to its fair value at March 28, 2008 based upon an analysis of future cash flows related to the technology. This resulted in an impairment charge to operations of approximately $3.0 million which was included in restructuring and other charges during the quarter ended March 28, 2008. The estimated useful life of 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 on our intangible assets at June 27, 2008 and September 28, 2007 was $3,994,000 and $858,000, respectively.

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

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5. Borrowing Facilities

Borrowings consist of the following (in thousands):

6. Warranty and Guarantees

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

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

7. Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process requires us to estimate our current income tax provision (benefit) and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet .

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We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and any ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if we were to determine that we would not be able to realize all or part of a net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. We have recorded a 100% valuation allowance against our domestic and United Kingdom net deferred tax asset due to the uncertainty regarding future taxable income.

 Income tax expense primarily relates to our foreign operations as we continue to incur losses from domestic operations. We recorded 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 Financial Standards 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 material adjustment in the liability for unrecognized income tax benefits. At the adoption date of September 29, 2007, we had approximately $3.5 million of unrecognized tax benefits, $2.1 million of which would affect our effective tax rate if recognized, and $1.4 million would be offset by valuation allowance. At June 27, 2008, we had $3.6 million of unrecognized tax benefits.

 In addition, we recognized interest and penalties related to uncertain tax positions in income tax expense. At the adoption date of September 29, 2007, we had approximately $124,000 of accrued interest and penalties for uncertain tax positions primarily from our foreign operations. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of the statue of limitations prior to June 26, 2009.

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

 As of September 28, 2007, we had federal and California research and development tax credit carryforwards of approximately $1.7 million and $1.6 million, respectively. Due to Section 382 ownership changes under IRC Section 383, $1.1 million of the federal research tax credit carryforwards will be subject to forfeiture. Federal research and development tax credit carryforwards will expire beginning in fiscal 2011. California research and development tax credits will carry forward indefinitely.

8. Restructuring and Other Charges

Restructuring Charges - During the quarter ended March 28, 2008, we announced our plans for a significant global restructuring based on an analysis of our product strategy, served markets and internal operations. In order to streamline our operations and align product offerings with the current market conditions, we have and will continue to downsize programs, products and spending related to trench capacitor technology for DRAM and will decrease our overall dependence on the DRAM market. The restructuring of our global workforce, products and business operations was designed to reduce our overall cost structure, as well as improve operational execution and financial performance. We have refocused on our core strengths in the ALD, Etch and PVD technologies, while moving away from the development of large batch thermal systems. We will continue to service and support our current global installed base.

As part of our restructuring plans, we executed a global reduction in workforce, divested ourselves of a non-core operation and wrote down assets related to non-core products which included inventory revaluation, cancellation of purchase commitments and the write-down of impaired machinery and equipment. Volume manufacturing will no longer be performed at our Scotts Valley headquarters. Of the restructuring charges, approximately $2.4 million required future cash payments. We estimate these payments will be made throughout fiscal 2009. At June 27, 2008, approximately $1.6 million of these estimated payments remained unpaid and 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., located in Wales, UK, for $600,000 as part of our restructuring plan to refocus on our core strengths. The net book value of the net assets sold, cost of completing the transaction and loss on the sale of the net assets of ET Equipments Ltd. were as follows (in thousands):

Transaction costs related primarily to legal fees incurred.

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

The impact of these restructuring and 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 as follows (in thousands):