| IBIS TECHNOLOGY CORP Item 1A RISK FACTORS The Commercial Market for SIMOX-SOI Technology is Still Developing and May Never Fully Develop |
| The sources of our revenue have shifted from primarily research and development contracts and sales of SIMOX-SOI wafers for commercial applications to sales and support of oxygen implantation equipment |
| We are aware of only a few commercial manufacturers that are using SIMOX-SOI wafers in low volume production for a limited number of products |
| The performance advantages of SIMOX-SOI wafers may never be realized commercially and a commercial market for SIMOX-SOI wafers may never fully develop which in 11 ______________________________________________________________________ turn would adversely affect the sales of our oxygen implanters |
| The failure of major semiconductor manufacturers and /or major silicon wafer manufacturers to adopt SIMOX-SOI technology would adversely affect, and may prevent, the adoption of this technology by others |
| As of December 31, 2005, we had an accumulated deficit of dlra82dtta0 million |
| Net losses may continue for the foreseeable future |
| Although we have had profitable quarterly operating results from time to time, we may not be able to achieve sustained profitability |
| The Company’s management believes that it will have sufficient cash resources including the cash on hand expected to be received from final customer acceptance of the SUMCO implanter which was received in March 2006 for the implanter shipped in June 2005 to support current operations for the next twelve months |
| With the receipt of the order received from SUMCO in October 2005, which the Company believes it can ship during the second quarter of 2006, and presuming that customer acceptance and full payment of that order occurs during 2006, the Company believes it will have sufficient cash to support current operating levels through at least the next eighteen months from the date of this filing |
| However, this expectation is based on our current operating plan and general sales outlook, each of which may change rapidly |
| We intend to continue to invest in our research, development and manufacturing capabilities |
| The Company expects to continue to explore equity offerings and other forms of financing and anticipate that we may be required to raise additional capital in the future in order to finance future growth and our research and development programs |
| Changes in technology or sales growth beyond currently established capabilities may require further investment |
| As a result, we may need to raise substantial additional capital in the future |
| We have previously financed our working capital requirements through: • equity financings, including warrant and option exercises, • equipment lines of credit, • a working capital line of credit, • a term loan, • sale-leaseback arrangements, • collaborative relationships, • wafer product and equipment sales, and • government contracts |
| There can be no assurance, however, that our actual needs will not exceed expectations or that we will be able to fund our operations on a long-term basis in the absence of other sources |
| There also can be no assurance that any additional required longer term financing will be available through additional bank borrowings, debt or equity offerings or otherwise, or that if such financing is available, that it will be available on terms acceptable to us |
| If future financing is not available or is not available on a timely basis or on acceptable terms, we may not be able to fund our future needs, which would seriously harm our business and results of operations and our ability to continue as a going concern |
| In addition, if we raise additional funds through the sale of equity or convertible debt securities, the value of our common stock outstanding may be diluted |
| We may also have to issue securities that have rights, preferences and privileges senior to our common stock |
| Currently, We Rely on Sales to a Limited Number of Customers |
| Ibis expects that we will continue to rely on a relatively small number of customers as sources of revenue in the foreseeable future |
| The loss of one or more of these major customers and our failure to obtain other sources of offsetting revenue would have a material adverse impact on our business and hinder our ability to continue as a going concern |
| In addition, any downturn in these customers’ business or the industry 12 ______________________________________________________________________ in which these customers operate could result in a significant decrease in any sales of our implanters to these customers, which would have an adverse effect on our business |
| Revenue Recognition and Cash Payments from Customers Depend on a Manufacturing and Customer Qualification and Acceptance Process that is Complex, Lengthy and Costly |
| In the semiconductor industry customers regularly require equipment manufacturers to qualify the equipment at the customer’s site |
| The time required to customer-qualify an implanter at a customer’s site is very difficult to predict because the qualification process for each of our implanters is complex, lengthy and costly and varies depending on the customer’s varying specifications |
| The manufacturing and qualification process for each implanter requires us to construct and customer qualify the machine at our premises, disassemble the machine for transportation, and reassemble and re-qualify it at the customer’s premises |
| During this qualification period, we invest significant resources and dedicate substantial production and technical personnel to achieve acceptance of the implanter |
| A customer will not accept the implanter until it has successfully produced wafers to exact specifications at the customer’s premises |
| Even very small differences in the customer’s environment or initially imperceptible changes that may occur to the implanter during the transportation to and reassembly of the implanter at the customer’s site can cause a large percentage of wafers produced by the implanter to be rejected, which would delay the acceptance of the implanter by the customer |
| Historically, we have experienced delays in achieving customer acceptance |
| Delays or difficulties in our manufacturing and qualification process could increase manufacturing and warranty costs and adversely affect our relationships with our customers |
| In addition, because we do not recognize revenue on the sale of an implanter until it is delivered and qualified by the customer, any delay in qualification would result in a delay in our ability to recognize revenue from the sale and receipt of final payment |
| Historically it has taken approximately nine to eighteen months from our receipt of our order to build, ship and obtain customer acceptance of our implanters |
| We Rely Heavily on Sales to a Small Number of Significant Customers, Which May Cause Sales to Vary Significantly from Quarter to Quarter Causing Our Operating Results to Fluctuate |
| We derive a large portion of our sales of wafer manufacturing equipment from a small number of significant customers |
| The following table sets forth, in thousands of dollars, the amount of revenue derived from our significant customers during the fiscal years ended December 31, 2003, 2004 and 2005, as well as the percent of our revenue represented by these customers’ purchases (in thousands): 2003 2004 2005 Customer Dollars Percent Dollars Percent Dollars Percent IBM $ 8cmam564 91 % $ 384 5 % $ 74 12 % Simgui $ 526 6 % $ 5 — — — SEH — — $ 7cmam000 88 % — — Nissin Electric — — — — $ 279 46 % Tokyo Iovenus — — — — $ 162 27 % Revenue from IBM in 2005 is for service and parts |
| The revenue from Nissin in 2005 was from license royalties and the revenue from Tokyo Iovenus in 2005 was from the sale of parts |
| Revenues from Simgui in 2003 represent the sale of license technology and certain parts |
| We anticipate that our revenue and operating results are likely to vary significantly from quarter to quarter in the foreseeable future, and it is likely that in future quarters our operating results may from time to time be below the expectations of public market analysts or investors |
| Our stock price has been volatile and if we fail to meet expectations of public market analysts or investors, the price of our common stock would likely 13 ______________________________________________________________________ decrease |
| Further, customers may cancel or revise orders at any time prior to delivery |
| These ordering patterns most likely will result in significant quarterly fluctuations in our revenue and operating results, and accordingly in our share price |
| In addition, because we have only sold a limited number of implanters to date on an irregular basis, the recognition of revenue from the sale of even one implanter is likely to result in a significant increase in the revenue for that quarter |
| A number of other factors, many of which are discussed in more detail in other risk factors, may also cause variations in our results of operations and share price, including: • lack of orders, • cancellations of orders and shipment delays and rescheduling, • new product introductions, which often result in a mismatching of research and development expenses and recognition of revenue, and • economic conditions and capital spending in the semiconductor industry and in other industries in which our customers operate |
| A high percentage of our expenses are essentially fixed in the short term |
| As a result, if we experience delays in generating and recognizing revenue, our quarterly operating results are likely to be seriously harmed |
| Due to this, as well as to the cyclicality of the semiconductor industry and other factors, we believe that quarter-to-quarter comparisons of our operating results will not be meaningful |
| You should not rely on our results for one quarter as any indication of our future performance |
| Competitors and Competing Technologies May Render Some or All of Our Products or Future Products Noncompetitive or Obsolete; Potential Write-down for Impaired or Obsolete Assets |
| The semiconductor industry is highly competitive and has been characterized by rapid and significant technological advances |
| A number of established semiconductor and materials manufacturers, including certain of our customers, have expended significant resources in developing improved wafer substrates |
| Our competitors or others, many of which have substantially greater financial, technical and other resources than we do, may succeed in developing technologies and products that are equal to or more effective than any which we are developing, which could render our technology obsolete or noncompetitive |
| In addition to competition from other manufacturers of SOI wafers, we face competition from manufacturers using bulk silicon and epitaxial wafer technology, and compound materials technology such as silicon-germanium, gallium-arsenide and indium phosphide and SOI technology |
| Although we believe that SIMOX-SOI wafers offer integrated circuit performance advantages, semiconductor manufacturers may develop improvements to existing bulk silicon, epitaxial or strained silicon wafer technology, and competing compound materials or SOI technologies may be more successfully developed, which would eliminate or diminish the performance advantages of SIMOX-SOI wafers which in turn would diminish the demand for our oxygen implanters |
| Further, in addition to the SIMOX implanter other equipment must be purchased and implemented in order to complete the SIMOX wafer manufacturing process |
| During the fiscal year ended December 31, 2004, we discontinued our wafer manufacturing business and incurred charges for severance and equipment disposition of dlra2dtta1 million, contributing to the loss from discontinued operations of dlra5dtta3 million |
| During the fiscal year ended December 31, 2003, we recognized an impairment loss of dlra11dtta1 million for our 200 mm and smaller SIMOX wafer production line which has subsequently been recorded as part of the loss from discontinued operations in 2003 of dlra17dtta6 million |
| In addition, if semiconductor manufacturers fail to adopt SIMOX technology during the current or subsequent process cycle (such cycles typically last two to three years), widespread adoption of SIMOX technology may never materialize, our technology may become obsolete and we may be required to recognize an additional material impairment loss in the future |
| In addition, although we are aware of no other company manufacturing oxygen implant equipment, other major semiconductor implant equipment manufacturers could develop a less expensive oxygen implanter with superior technology |
| Our ability to compete with other manufacturers of semiconductor implanters, 14 ______________________________________________________________________ manufacturers of competing SOI wafers, as well as with bulk silicon, epitaxial, strained silicon and compound materials wafer manufacturers, will depend on numerous factors within and outside our control, including: • the success and timing of our product introductions and those of our competitors, • product distribution, • customer support, • sufficiency of funding available to us, and • the price, quality and performance of competing products and technologies |
| The semiconductor industry is characterized by rapid technological change, evolving industry standards and continuous improvements in products and required customer specifications |
| Due to the constant changes in our markets, our future success depends on our ability to improve our manufacturing processes, improve existing products and develop new products |
| For example, our oxygen implanters must remain competitive on the basis of cost of ownership, process performance and evolving customer needs |
| To remain competitive we must continually introduce oxygen implanters with higher capacity, better production yields and the ability to process larger wafer sizes |
| The commercialization of new products involves, among other requirements, substantial expenditures in research and development, production and marketing |
| We may be unable to successfully design or manufacture these new products and may have difficulty penetrating new markets |
| Because it is generally not possible to predict the amount of time required and the costs involved in achieving certain research, development and engineering objectives, actual development costs may exceed budgeted amounts and estimated product development schedules may be extended |
| Our business may be materially and adversely affected if: • we are unable to improve our existing products on a timely basis, • our new products are not introduced on a timely basis, • we incur budget overruns or delays in our research and development efforts, or • our new products experience reliability or quality problems |
| The Sales Cycle for Our Oxygen Implanter Equipment is Lengthy and Complex and We Have Only Received Limited Orders for Our Oxygen Implanter Equipment |
| Our customers expend significant efforts in evaluating and qualifying our implanters before they place orders with us |
| Since we began selling implanters in 1996, we have only sold a total of eight Ibis 1000 oxygen implanters at an average sale price of approximately dlra4dtta0 million each and four i2000 oxygen implanters (including the order received in October 2005) at a selling price between dlra6dtta0 and dlra8dtta0 million |
| The sales cycle typically goes from equipment demonstration, equipment specification negotiations, formal quotation, contract negotiations and receipt of order and could take up to one year or longer |
| In addition, our potential equipment customers that would like to use the MLD process, owned by IBM, to manufacture SIMOX-SOI wafers using our implanters would be required to license this technology directly from IBM We believe two silicon wafer manufacturers have already licensed this technology from IBM and others have developed their own SIMOX processes |
| Our potential equipment customers may wish to secure this license prior to giving us an order for equipment and these negotiations between IBM and our customer are beyond our control and no assurances are given that our customers and IBM would come to terms acceptable to both parties in a timely manner, or at all |
| These MLD process license issues may effect the timing of placement of customer orders in the future if customers plan to license this technology |
| We do not expect to sell more than a limited number of implanters in the near future |
| The sale of one implanter would generally represent a substantial portion of our annual revenue |
| Accordingly, the delay in the receipt of orders, manufacture or delivery of even one unit or the 15 ______________________________________________________________________ modification, change or cancellation of any such order would have a material adverse effect on our quarterly and annual results of operations |
| Our Implanters and Associated Technology are Subject to Export Regulations, Which Could Prevent or Delay the Sale of Such Products in Foreign Countries |
| Certain technologies associated with our implanters are subject to export regulations administered by the US Department of Commerce |
| Accordingly, we may be required to secure US export licenses with respect to sales of implanters or transfers of technologies to end users in certain foreign countries |
| This requirement could result in significant delays in, or the prevention of, sales of implanters or transfers of technology or other such technical data to customers in certain foreign countries |
| For example, the sale of an Ibis 1000 implanter and the corresponding transfer of technology to Simgui required an export license which took approximately one year to secure |
| There can be no assurance that if necessary, we will be able to secure such licenses in the future in a timely manner, or at all |
| Our Chief Executive Officer, Martin J Reid, our Executive Vice President, and Chief Operating Officer, Charles McKenna and other current officers and key members of our scientific staff are responsible for areas such as product development and improvements, and process improvements research, which are important to our specialized scientific business |
| The loss of, and failure to promptly replace, any member of this group could significantly delay and may prevent the achievement of our research, development and business objectives |
| While we have entered into an employment agreement with our Chief Executive Officer, under certain circumstances he may be able to terminate his employment with us |
| Furthermore, although our employees are subject to certain confidentiality and non-competition obligations, our key personnel may terminate their employment at any time and may become employed by a competitor |
| The current composition of Ibis management and of its board of directors is subject to change and should not be unduly relied upon |
| On December 2004, the Financial Accounting Standards Board issued FASB Statement Nodtta 123R, Share Based Payment, which requires all companies to treat the fair value of stock options granted to employees as an expense |
| As a result of this standard, effective for periods beginning after January 1, 2006, we and other companies are required to record a compensation expense equal to the fair value of each stock option granted |
| We are currently assessing our valuation options allowed in this standard |
| This change in accounting standards reduces the attractiveness of granting stock options because of the additional expense associated with these grants, which would negatively impact our results of operations |
| Nevertheless, stock options are an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program |
| Accordingly, even though we have not quantified the impact of the implementation of this standard will have on our financial condition and results of operations at this time, the result will have a negative impact on our earnings starting with the accounting period beginning January 1, 2006 |
| In addition, the new standard could negatively impact our ability to use stock options as an employee recruitment and retention tool in the future |
| We have limited manufacturing experience and have only manufactured limited quantities of oxygen implanters |
| To be successful, our products must be manufactured in commercial quantities, at acceptable costs |
| We may not be able to make the transition to high volume commercial production successfully |
| Future 16 ______________________________________________________________________ production in commercial quantities may create technical and financial challenges for us |
| Any difficulty or delay in constructing additional implanters, if needed, could have a material adverse effect on our business |
| Our Latest Products Have Not Been Used in Large-Scale Long-Term Production and They May Not Be Able to Perform at the Availability Levels Expected for Continuous (7 Days per Week / 24 Hours per Day) Operation |
| Semiconductor equipment is subject to stringent mean time between failure (MBTF) and similar quality and reliability requirements |
| Although our equipment has previously been used in our own production environment for manufacturing SIMOX SOI wafers, and has been used in limited manufacturing runs in our customers sites, as our equipment is exposed to long-term extended production processing on an automated basis, previously unknown and undetected hardware or software failures or combinations thereof may occur |
| Such failures could adversely affect our relationship with our customers |
| We May Not Be Able to Use All of Our Existing or Future Manufacturing Capacity at a Profitable Level |
| At times we may have the capacity to produce more oxygen implantation machines than we have orders for at such times |
| During such idle time we would continue to be responsible for the fixed costs of our facility and maintaining personnel, which could have a material adverse effect on our business |
| We believe we will need to form or maintain alliances with strategic partners for the manufacturing, marketing and distribution of our products |
| We may enter into these strategic alliances to satisfy customer demand and to address possible customer concerns regarding our being a sole source supplier |
| The limited number of reliable sources of supply other than Ibis may adversely affect or delay the integration of SIMOX-SOI wafers in mainstream commercial applications |
| We may not be successful in maintaining alliances or in forming and maintaining other alliances, including satisfying our contractual obligations with our strategic partners, and our partners may not devote adequate resources to manufacture, market and distribute these products successfully or may attempt to compete with us |
| We May Have Difficulty Obtaining the Materials and Components Needed to Produce Our Products |
| At Least One Major Component Has Only One Source |
| Ibis manufactures its oxygen implanters from standard components and from components manufactured in-house or by other vendors according to our design specifications |
| Most raw materials and components not produced by us are available from more than one supplier |
| However, certain raw materials, components and subassemblies are obtained from a limited group of suppliers and at least one major component has a sole source |
| If we are unable to obtain such materials and components on a timely basis, or at all, our ability to complete orders could be significantly delayed and our business and results from operations could be materially and adversely affected |
| Semiconductor equipment is a growth industry and is very cyclical in nature, so if our suppliers experience an increase in demand from other semiconductor equipment manufacturers with much higher volumes than us, the lead-time and/or price for some of our components may increase |
| Although we have sought to reduce our dependence on these limited source suppliers and we have not experienced significant production delays due to unavailability or delay in procurement of component parts or raw materials to date, increased market demand for materials from, or disruption or termination of, certain of these sources could occur and such increased demand, disruptions, or termination could have a material adverse effect on our business and results of operations |
| Our ability to compete effectively with other companies will depend, in part, on our ability to maintain the proprietary nature of our technology |
| Although we have been awarded or have filed applications for a number of patents in the US and foreign countries, those patents may not provide meaningful protection, or 17 ______________________________________________________________________ pending patents may not be issued |
| Our competitors in both the US and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make and sell our products or intentionally infringe on our patents |
| The defense and prosecution of patent suits is both costly and time-consuming, even if the outcome is favorable to us |
| In addition, there is an inherent unpredictability regarding obtaining and enforcing patents |
| An adverse outcome in the defense of a patent suit could: • subject us to significant liabilities to third parties, • require disputed rights to be licensed from third parties, or • require us to cease selling our products |
| We also rely in large part on unpatented proprietary technology and others, including strategic partners, may independently develop the same or similar technology or otherwise obtain access to our proprietary technology |
| To protect our rights in these areas, we currently require all of our employees to enter into confidentiality agreements |
| However, these agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information |
| Others may claim that our technology infringes on their proprietary rights |
| Any infringement claims, even if without merit, can be time consuming and expensive to defend and may divert management’s attention and resources |
| If successful, they could also require us to enter into costly royalty or licensing agreements |
| A successful claim of product infringement against us and our inability to license the infringed or similar technology could adversely affect our business |
| If We Do Not Comply With All Applicable Environmental Regulations, We Could be Subject to Fines and Other Sanctions |
| We are subject to a variety of federal, state and local environmental regulations related to the storage, treatment, discharge or disposal of chemicals used in our operations and to the exposure of our personnel to occupational hazards |
| Although we believe that we have all permits necessary to conduct our business, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production or a cessation of operations |
| Our future activities may result in our being subject to additional regulations |
| Such regulations could require us to acquire significant equipment or to incur other substantial expenses to comply with regulations |
| Our failure to control the use of, or to restrict adequately the discharge of, hazardous substances or properly control other occupational hazards could subject us to substantial financial liabilities |
| Our Stock Price is Highly Volatile |
| The market prices for securities of high tech companies have been volatile |
| This volatility has significantly affected the market prices for these securities for reasons frequently unrelated to the operating performance of the specific companies |
| These broad market fluctuations may adversely affect the market price of our common stock |
| The market price for our common stock has fluctuated significantly |
| Since January 1, 1999, our stock price has fluctuated from a high of dlra135dtta00 to a low of dlra1dtta14 |
| It is likely that the market price of our stock will continue to fluctuate in the future |
| Events or factors that may have a significant impact on our business and on the market price of our common stock include the following: • quarterly fluctuations in operating results, • difficulty in forecasting future results, • announcements by us or our present or potential competitors, • technological innovations or new commercial products or services by us or our competitors, • the timing of receipt of orders and / or customer acceptance from major customers, • product mix, • product obsolescence, 18 ______________________________________________________________________ • shifts in customer demand, • our ability to manufacture and ship products on a cost-effective and timely basis, • market acceptance of new and enhanced versions of our implanters, • the evolving and unpredictable nature of the markets for the products incorporating SIMOX-SOI wafers, • the amount of research and development expenses associated with new or enhanced products or implanters • the cyclical nature of the semiconductor industry, and • general market conditions |
| Concentrated Ownership of Shares by One Shareholder Could Affect the Price of Our Common Stock |
| As of February 28, 2006, our largest known shareholder, Intrinsic Value Asset Management, Inc |
| (“IVAM”) owns 2cmam305cmam389 shares, or approximately 21dtta5prca of our outstanding shares |
| At present, IVAM’s ownership may have the effect of delaying, deferring or preventing a change in control of our company, or may directly or indirectly effect a change in control of our company |
| Moreover, the disposition by IVAM of a substantial amount of its shares of our common stock in the open market could have an adverse impact on the market for our common stock |
| Five class action securities lawsuits have been filed in the United States District Court in the District of Massachusetts against Ibis and its President and CEO: Martin Smolowitz v |
| Ibis Technology Corporation, et al, Civ |
| ); Weinstein v |
| Ibis Technology Corporation, et al, Civ |
| ); and Eleanor Pitzer v |
| On June 4, 2004, the Court entered an order consolidating these actions under the caption In re Ibis Technology Securities Litigation, CA 04-10446 RCL On July 6, 2004, a consolidated amended class action complaint was filed which alleges, among other things, that the Company violated federal securities laws by allegedly making misstatements to the investing public relating to demand for certain Ibis products and intellectual property issues relating to the sale of the i2000 oxygen implanter |
| The plaintiffs are seeking unspecified damages |
| On August 5, 2004, we filed a motion to dismiss the consolidated amended complaint on the grounds, among others, that it failed to state a claim on which the relief could be granted |
| On September 25, 2005 the Magistrate Judge issued a report and recommendation that our motion be granted in part and denied in part |
| We and the plaintiffs have both filed partial objections to the report and recommendation with Court, and after briefing of these objections is complete, the Court will determine whether to adopt the report and recommendation in whole or in part |
| While we believe that the plaintiffs’ allegations are without merit, and we intend to vigorously defend against the suits, there can be no guarantee as to how they ultimately will be resolved |
| In addition, Ibis has been named as a nominal defendant in a shareholder derivative action filed in February 2004 against certain of its directors and officers: Louis F Matheson, Jr |
| Martin J Reid et al, Civ |
| The complaint alleges, among other things, that the alleged conduct challenged in the securities cases pending against Ibis in Massachusetts (described above) constitutes a breach of the defendants’ fiduciary duties to Ibis |
| The complaint seeks unspecified money damages and other relief ostensibly on behalf of Ibis |
| On June 4, 2004, the Court entered an order staying this matter pending the entry of a final order on any motion filed by the Company to dismiss the consolidated class action complaint referenced above |
| 19 ______________________________________________________________________ Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict |
| An unfavorable resolution of these litigation matters could have a material adverse effect on our business, results of operations and financial condition |
| Our board of directors has the authority to approve the issue of up to 2dtta0 million shares of preferred stock and to determine the price, rights, privileges and other terms of these shares |
| The board of directors may exercise this authority without the approval of the stockholders |
| The rights of the holders of common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future |
| Our restated articles of organization, as amended, and restated bylaws and the Massachusetts Business Corporation Law contain certain provisions that may make a third-party acquisition of us difficult, including: • a classified board of directors, with three classes of directors each serving a staggered three-year term, • the ability of the board of directors to issue preferred stock, and • a 75prca super-majority shareholder vote to amend certain provisions of our articles of organization and bylaws |
| Limitations on Effectiveness of Controls |
| The Company’s management, including the Chief Executive Officer and President and the Chief Financial Officer, does not expect that our internal controls will prevent all errors and intentional misrepresentations |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake |
| Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and no assurance can be given that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate |
| Because of the inherent limitations in a cost-effective control system, misstatements due to error or intentional conduct may occur and not be detected |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations as well as the listing standards of the Nasdaq Stock Market, are creating uncertainty for public companies |
| We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs |
| These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing 20 ______________________________________________________________________ bodies |
| This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we have invested resources to comply with evolving laws, regulations and standards |
| This investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed |