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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
OR
[_] 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 0-21970
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MATTSON TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0208119
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(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
2800 Bayview Drive Fremont, California 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-5900
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(Registrant's telephone number, including area code)
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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 ___
Number of shares of common stock outstanding as of November 1, 2002:
44,695,962.
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
---------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
- --------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 29, 2002
and December 31, 2001.............................................. 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 29, 2002 and September 30, 2001.... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 29, 2002 and September 30, 2001............. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 31
Item 4. Controls and Procedures.......................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 33
Item 2. Changes in Securities............................................ 33
Item 3. Defaults Upon Senior ecurities................................... 34
Item 4. Submission of Matters to a Vote of Security Holders.............. 34
Item 5. Other Information................................................ 34
Item 6. Exhibits and Reports on Form 8-K................................. 34
Signatures....................................................... 36
Certifications................................................... 37
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
September 29, December 31,
2002 2001
---------- ----------
Current assets:
Cash and cash equivalents $ 65,830 $ 64,057
Restricted cash 1,330 27,300
Short-term investments 9,917 5,785
Accounts receivable, net 35,713 38,664
Advance billings 44,419 61,874
Inventories 53,707 65,987
Inventories - delivered systems 57,169 74,002
Prepaid expenses and other current assets 20,594 18,321
--------- ---------
Total current assets 288,679 355,990
Property and equipment, net 23,636 33,508
Goodwill and intangibles 32,565 40,616
Other assets 1,713 2,591
--------- ---------
$ 346,593 $ 432,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - STEAG Electronic Systems AG,
a shareholder $ -- $ 44,613
Current portion of long-term debt -- 289
Line of credit -- 4,589
Accounts payable 15,704 14,175
Accrued liabilities 76,461 78,459
Deferred revenue 114,289 136,580
--------- ---------
Total current liabilities 206,454 278,705
--------- ---------
Long-term liabilities:
Long-term debt -- 1,001
Deferred income taxes 7,721 11,261
--------- ---------
Total long-term liabilities 7,721 12,262
--------- ---------
Total liabilities 214,175 290,967
--------- ---------
Stockholders' equity:
Common stock 45 37
Additional paid-in capital 542,004 497,536
Accumulated other comprehensive income (loss) 1,987 (6,553)
Treasury stock (2,987) (2,987)
Accumulated deficit (408,631) (346,295)
--------- ---------
Total stockholders' equity 132,418 141,738
--------- ---------
$ 346,593 $ 432,705
========= =========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
---------------------------- ------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 60,808 $ 36,643 $ 154,276 $ 181,497
Cost of sales (1) 47,307 56,697 123,903 163,214
--------- --------- --------- ---------
Gross profit (loss) 13,501 (20,054) 30,373 18,283
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering 10,003 12,734 28,915 47,743
Selling, general and administrative 22,058 26,196 65,253 81,529
In-process research and development -- -- -- 10,100
Amortization of goodwill and intangibles 1,687 8,730 5,061 28,753
Non-recurring, restructuring and other charges 6,171 127,684 6,171 127,684
--------- --------- --------- ---------
Total operating expenses 39,919 175,344 105,400 295,809
--------- --------- --------- ---------
Loss from operations (26,418) (195,398) (75,027) (277,526)
Interest and other income, net 15,728 2,309 13,724 4,105
--------- --------- --------- ---------
Loss before provision for income taxes (10,690) (193,089) (61,303) (273,421)
Provision for (benefit from) income taxes 1,346 (6,231) 1,033 (3,822)
--------- --------- --------- ---------
Net loss $ (12,036) $(186,858) $ (62,336) $(269,599)
========= ========= ========= =========
Net loss per share:
Basic $ (0.27) $ (5.05) $ (1.51) $ (7.33)
========= ========= ========= =========
Diluted $ (0.27) $ (5.05) $ (1.51) $ (7.33)
========= ========= ========= =========
Shares used in computing net loss per share:
Basic 44,696 36,985 41,379 36,801
========= ========= ========= =========
Diluted 44,696 36,985 41,379 36,801
========= ========= ========= =========
- ----------
(1) Cost of sales for the three and nine months ended September 29, 2002
includes approximately $2.5 million of inventory charges related to
restructuring activities.
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------
September 29, September 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (62,336) $(269,599)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 7,334 14,571
Deferred taxes (1,808) (8,303)
Provision for allowance for doubtful accounts 30 293
Amortization of goodwill and intangibles 5,062 28,753
Non-recurring, restructuring and other charges 6,171 127,684
Loss on disposal of property and equipment 1,258 1,381
Stock-based compensation 125 --
Acquired in-process research and development -- 10,100
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable 7,298 53,083
Advance billings 21,629 (27,755)
Inventories 15,315 35,351
Inventories - delivered systems 23,230 (53,101)
Prepaid expenses and other current assets 2,943 (2,542)
Other assets (4,156) 4,522
Accounts payable 1,216 (17,962)
Accrued liabilities (12,752) (29,647)
Deferred revenue (33,231) 93,124
--------- ---------
Net cash used in operating activities (22,672) (40,047)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (2,144) (12,855)
Proceeds from the sale of equipment 3,439 --
Purchases of investments (14,962) (26,897)
Proceeds from the sale and maturity of investments 10,859 68,007
Net cash acquired from acquisitions -- 37,961
--------- ---------
Net cash provided by (used in) investing activities (2,808) 66,216
--------- ---------
Cash flows from financing activities:
Restricted cash 25,970 --
Payments on line of credit and long-term debt (5,341) (157)
Borrowings against line of credit 194 4,166
Payment on STEAG notes payable (38,775) --
Change in interest accrual on STEAG note 1,292 202
Proceeds from the issuance of common stock,
net of cost 34,861 --
Proceeds from the issuance of common stock
under stock plans 1,342 3,418
--------- ---------
Net cash provided by financing activities 19,543 7,629
--------- ---------
Effect of exchange rate changes on
cash and cash equivalents 7,710 (5,914)
--------- ---------
Net increase in cash and cash equivalents 1,773 27,884
Cash and cash equivalents, beginning of period 64,057 33,431
--------- ---------
Cash and cash equivalents, end of period $ 65,830 $ 61,315
========= =========
Supplemental disclosures:
Common stock issued for business combination $ -- $ 294,804
========= =========
Stock issued in partial settlement of STEAG note $ 8,140 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The condensed consolidated balance
sheet as of December 31, 2001 has been derived from the audited financial
statements as of that date, but does not include all disclosures required by
generally accepted accounting principles. The financial statements should be
read in conjunction with the audited financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Estimates are used
for, but are not limited to, the accounting for the allowance for doubtful
accounts, inventory reserves, depreciation and amortization periods, sales
returns, warranty costs and income taxes. Actual results could differ from these
estimates.
The condensed consolidated financial statements include the accounts of
Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The results of operations for the three and nine months ended September 29,
2002 are not necessarily indicative of results that may be expected for the
future quarters or for the entire year ending December 31, 2002.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143"). SFAS 143 addresses accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The liability is accreted to its
present value each period while the cost is depreciated over its useful life.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002, which will be effective for the Company's fiscal year
beginning 2003. The Company believes that the adoption of SFAS 143 will not have
a significant effect on its financial position, results of operations or cash
flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144, which replaces SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires long-lived assets to be measured at the
lower of carrying amount or fair value less the cost to sell. SFAS 144 also
broadens disposal transactions reporting related to discontinued operations.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company adopted SFAS 144 on January 1, 2002. The
fixed asset impairment charge of $1.7 million was recorded during the three
months ended September 29, 2002 in accordance with the provisions of SFAS 144.
(See Note 11).
6
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements", as well as SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
will adopt SFAS No. 145 during fiscal year 2003. We do not anticipate that
adoption of this statement will have a material impact on our consolidated
balance sheets or consolidated statements of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS No.
146 also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. We are
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The provisions of EITF No. 94-3
shall continue to apply for an exit activity initiated under an exit plan that
met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The
adoption of SFAS No. 146 will, on a prospective basis, change the timing of when
restructuring charges are recorded from the commitment date to the date that the
liability is incurred. The Company is currently assessing the impact of SFAS 146
on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial data to conform
with current year presentation.
7
Note 2 Balance Sheet Detail (in thousands):
September 29, December 31,
2002 2001
--------- -----------
Inventories:
Purchased parts and raw materials $ 71,736 $ 77,399
Work-in-process 25,659 25,480
Finished goods 3,675 5,363
Evaluation systems 1,200 5,734
-------- ----------
102,270 113,976
Less: inventory reserves (48,563) (47,989)
-------- ----------
$ 53,707 $ 65,987
======== ==========
Accrued liabilities:
Warranty and installation $ 18,392 $ 19,936
Accrued compensation and benefits 11,022 10,320
Income taxes 5,073 5,165
Commissions 3,011 2,765
Other 38,962 40,273
-------- ----------
$ 76,461 $ 78,459
======== ==========
Note 3 Acquisitions
On June 27, 2000, the Company entered into a Strategic Business Combination
Agreement, subsequently amended by an Amendment to the Strategic Business
Combination Agreement dated December 15, 2000 ("Combination Agreement"), as
amended on November 5, 2001, to acquire eleven direct and indirect subsidiaries,
comprising the semiconductor equipment division of STEAG Electronic Systems AG
("the STEAG Semiconductor Division"), and simultaneously entered into an
Agreement and Plan of Merger ("Plan of Merger") to acquire CFM Technologies,
Inc. ("CFM"). Both transactions were completed simultaneously on January 1,
2001.
STEAG Semiconductor Division
Pursuant to the Combination Agreement, the Company issued to STEAG Electronic
Systems AG ("SES") 11,850,000 shares of common stock valued at approximately
$124 million as of the date of the Combination Agreement, paid SES $100,000 in
cash, assumed certain obligations of SES and STEAG AG, the parent company of
SES, and agreed to repay certain intercompany indebtedness owed by the acquired
subsidiaries to SES, in exchange for which the Company delivered to SES a
secured promissory note in the principal amount of $26.9 million (with an
interest rate of 6% per annum). Under the amendment to the Combination
Agreement, the Company also agreed to pay SES the amount of 19.2 million EUROS.
On April 30, 2002, upon closure of a private placement transaction, the Company
issued approximately 1.3 million shares of common stock to SES in exchange for
the cancellation of $8.1 million (approximately 9.0 million EUROS as of April
30, 2002) of indebtedness. Under these two obligations, on July 2, 2002, the
Company paid to SES, in full, $26.9 million and 10.2 million EUROS and accrued
interest thereon, aggregating approximately $37.7 million.
The Company reimbursed SES $3.3 million in acquisition related costs, in
April 2001. The Company also agreed to grant options to purchase 850,000 shares
of common stock to employees of the STEAG Semiconductor Division subsequent to
the closing of the transaction, which is not included in the purchase price of
the STEAG Semiconductor Division. As part of the acquisition transaction, the
Company, SES, and Mr. Mattson (the then chief executive officer and
approximately 17.7% stockholder of the Company, based on shares outstanding
immediately prior to the acquisition) entered into a Stockholder Agreement dated
December 15, 2000, as amended on November 5, 2001, providing for, among other
things, the election of two persons designated by SES to the Company's board of
directors, SES rights to maintain its pro rata share of the outstanding Company
common stock and participate in future stock issuances by the Company, and
registration rights in favor of SES. At September 29, 2002, SES held
approximately 29.5% of the Company's common stock, and currently has two
representatives on the Company's board of directors.
8
The acquisition has been accounted for under the purchase method of
accounting and the results of operations of the STEAG Semiconductor Division are
included in the consolidated statement of operations of the Company from the
date of acquisition. The purchase price of the acquisition of $148.6 million,
which included $6.2 million of direct acquisition related costs (including
amounts reimbursed to SES), was used to acquire the common stock of the eleven
direct and indirect subsidiaries of the STEAG Semiconductor Division. The
allocation of the purchase price to the assets acquired and liabilities assumed,
is as follows (in thousands):
Net tangible assets ........................ $ 114,513
Acquired developed technology .............. 18,100
Acquired workforce ......................... 11,500
Goodwill ................................... 10,291
Acquired in-process research and development 5,400
Deferred tax liability ..................... (11,248)
---------
$ 148,556
=========
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $39.9 million. Goodwill, including workforce, is
no longer amortized under SFAS 142. Developed technology is being amortized over
an estimated useful life of five years.
In connection with the acquisition of the STEAG Semiconductor Division, the
Company allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows related to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represented next-generation technologies that
were expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man hours and
technological progress. Due to market conditions the Hybrid tool project has
been redefined as the Kronos II project which is expected to reach beta stage in
mid-2003. The Single wafer tool technology development efforts will continue at
a pace to meet market needs.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are based on
management's estimates of cost of sales, operating expenses, and income taxes
from such projects.
9
During the second half of 2001, the Company performed assessments of the
carrying value of its long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of the STEAG Semiconductor Division. The assessment was
performed pursuant to SFAS No. 121 as a result of deteriorated market conditions
in the semiconductor industry in general, a reduced demand specifically for the
Thermal products acquired in the merger and revised projected cash flows for
these products in the future. As a result of this assessment, the Company
recorded a charge of $3.5 million to reduce the carrying value of certain
intangible assets associated with the acquisition of the STEAG Semiconductor
Division based on the amount by which the carrying value of these assets
exceeded their fair value. Fair value was determined based on valuations
performed by an independent third party. In addition, the Company recorded a
charge of $1.0 million to reduce certain property and equipment purchased from
the STEAG Semiconductor Division to zero as there were no future cash flows
expected from these assets. These charges of $4.5 million relating to the STEAG
Semiconductor Division were recorded as impairment of long-lived assets and
other charges in the third and fourth quarters of 2001.
CFM Technologies
Under the Plan of Merger with CFM, the Company agreed to acquire CFM in a
stock-for-stock merger in which the Company issued 0.5223 shares of its common
stock for each share of CFM common stock outstanding at the closing date. In
addition, the Company agreed to assume all outstanding CFM stock options, based
on the same 0.5223 exchange ratio. The Company also agreed to issue additional
options to purchase 500,000 shares of its common stock to employees of CFM
subsequent to the closing of the transaction, which are not included in the
purchase price of CFM. On January 1, 2001, the Company completed its acquisition
of CFM. The purchase price included 4,234,335 shares of Mattson common stock
valued at approximately $150.2 million and the issuance of 927,457 options to
acquire Mattson common stock for the assumption of outstanding options to
purchase CFM common stock valued at approximately $20.4 million using the
Black-Scholes option pricing model and the following assumptions: risk free
interest rate of 6.5%, average expected life of 2 years, dividend yield of 0%
and volatility of 80%.
The merger has been accounted for under the purchase method of accounting
and the results of operations of CFM are included in the consolidated statement
of operations of the Company from the date of acquisition. The purchase price of
the acquisition of CFM was $174.6 million, which included $4.0 million of direct
acquisition related costs. The allocation of the purchase price to the assets
acquired and liabilities assumed, is as follows (in thousands):
Net tangible assets ............................. $ 28,536
Acquired developed technology ................... 50,500
Acquired workforce ............................. 14,700
Goodwill ........................................ 102,216
Acquired in-process research and development .... 4,700
Deferred tax liability .......................... (26,081)
--------
$174,571
========
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $167.4 million. Goodwill, including acquired
workforce, is no longer amortized under SFAS 142. Developed technology is being
amortized over an estimated useful life of five years.
In connection with the acquisition of CFM, the Company allocated
approximately $4.7 million of the purchase price to an in-process research and
development project. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to one incomplete research and development
project. At the date of acquisition, the development of this project had not yet
reached technological feasibility, and the research and development in progress
had no alternative future use. Accordingly, the purchase price allocated to
in-process research and development was expensed as of the acquisition date.
10
At the acquisition date, CFM was conducting design, development, engineering
and testing activities associated with the O3Di (Ozonated Water Module). The
project was completed in August 2002, and represents next-generation technology
that had been expected to address emerging market demands for more effective,
lower cost, and safer resist and organics residue removal processes. CFM had
spent approximately $0.2 million on the in-process project prior to the merger,
and since the completion of the merger the Company spent approximately an
additional $60,000 to complete the project. The Company has discontinued this as
a regular product and will offer it only as a custom order.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from the project
is based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
Aggregate revenues for the developmental CFM product were estimated for the
five to seven years following introduction, assuming the successful completion
and market acceptance of the major research and development programs. At the
time of acquisition, the estimated revenues for the in-process project was
expected to peak within two years of acquisition and then decline sharply as
other new products and technologies are expected to enter the market. This
project was merged into the Kronos II project to be beta tested, estimated in
mid-2003.
The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental project, a discount rate of 23 percent was used to value the
in-process research and development. This discount rate was commensurate with
CFM's stage of development and the uncertainties in the economic estimates
described above.
During the second half of 2001, the Company performed assessments of the
carrying value of the long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of CFM. The assessment was performed pursuant to SFAS No. 121 as
a result of deteriorated market conditions in the semiconductor industry in
general, a reduced demand specifically for the Omni products acquired in the
merger and revised projected cash flows for these products in the future. As a
result of this assessment, the Company recorded a charge of $134.6 million
during 2001 to reduce the carrying value of goodwill, and other intangible
assets, associated with the acquisition of CFM based on the amount by which the
carrying value of these assets exceeded their fair value. Fair value was
determined based on valuations performed by an independent third party. In
addition, the Company recorded a charge of $5.8 million to reduce certain
property and equipment purchased from CFM to zero as there were no future cash
flows expected from these assets. The total charge of $140.4 million relating to
CFM has been recorded as impairment of long-lived assets and other charges in
the third and fourth quarters of 2001.
11
The following table summarizes the components of goodwill, other intangible
assets and related accumulated amortization balances (in thousands):
September 29, 2002 December 31, 2001
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Goodwill $12,676 $ -- $12,676 $12,610 $(2,759) $ 9,851
Other intangible assets -- -- -- 5,126 (570) 4,556
Developed technology 28,099 (8,210) 19,889 31,997 (5,788) 26,209
------- ------- ------- ------- ------- -------
Total goodwill and intangible assets $40,775 $(8,210) $32,565 $49,733 $(9,117) $40,616
======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (unaudited,
in thousands):
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------- ------- ------- -------
Goodwill amortization $ -- $ 3,169 $ -- $11,542
Other intangible assets amortization -- 2,131 -- 6,643
Developed technology amortization 1,687 3,430 5,061 10,568
------- ------- ------- -------
Total amortization $ 1,687 $ 8,730 $ 5,061 $28,753
======= ======= ======= =======
The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and
is no longer amortizing goodwill, thereby eliminating annual goodwill
amortization of approximately $3.9 million, based on anticipated amortization
for fiscal year 2002 that would have been incurred under the prior accounting
standard. In accordance with the provisions of SFAS No. 142, the Company
reclassified $4.6 million net from intangible assets to goodwill relating to the
acquired workforce. The Company had completed the transitional goodwill
impairment test in the first quarter of 2002 and determined that no potential
impairment existed. However, no assurances can be given that future evaluations
of goodwill will not result in charges as a result of future impairment. The
Company will evaluate goodwill at least on an annual basis and whenever events
and changes in circumstances suggest that the carrying amount may not be
recoverable from its estimated future cash flow. The Company will continue to
amortize the identified intangibles. The amortization expense is estimated to be
$6.6 million for fiscal 2002, and thereafter is estimated to be $6.1 million
each for fiscal years 2003, 2004 and 2005. Amortization of intangibles for the
nine months ended September 29, 2002 was approximately $5.1 million. In the
third quarter of 2002 the Company wrote off an intangible asset for its
developed technology related to the EPI product line. As a result, the Company
has recognized a $1.3 million impairment charge in the third quarter of 2002,
which is included in non-recurring, restructuring and other charges (See Note
11).
Net loss for the three and nine months ended September 30, 2001, on an
adjusted basis, excluding goodwill amortization expense, would have been as
follows (unaudited, in thousands, except per share data):
12
September 30, 2001
------------------------------
Three month Nine months
Ended Ended
------------ ------------
Net loss, as reported $(186,858) $(269,599)
Add: goodwill amortization 5,300 18,185
--------- ---------
Net loss -- as adjusted $(181,558) $(251,414)
========= =========
Basic and diluted loss per share, as reported $ (5.05) $ (7.33)
Add: goodwill amortization 0.14 0.49
--------- ---------
Basic and diluted loss per share -- as adjusted $ (4.91) $ (6.83)
========= =========
Note 4 Net Income (Loss) Per Share
Earnings per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires dual presentation of basic and diluted net
income (loss) per share on the face of the income statement. Basic earnings per
share (EPS) is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. For purposes of computing diluted earnings per
share, weighted average common share equivalents do not include stock options
with an exercise price that exceeded the average market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data.
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------ ---------- ------------
NET LOSS $ (12,036) $ (186,858) $ (62,336) $(269,599)
========== =========== ========== =========
BASIC AND DILUTED LOSS PER SHARE:
Loss available to common stockholders $ (12,036) $ (186,858) $ (62,336) $(269,599)
========== =========== ========== =========
Weighted average common shares outstanding 44,696 36,985 41,379 36,801
========== =========== ========== =========
Basic and diluted loss per share $ (0.27) $ (5.05) $ (1.51) $ (7.33)
========== =========== ========== =========
Total stock options outstanding at September 29, 2002 and September 30,
2001 of 5,917,763 and 2,012,075 shares, respectively, were excluded from the
computation of diluted EPS because the effect of including them would have been
antidilutive.
Note 5 Comprehensive Income (Loss)
SFAS No. 130 establishes standards for disclosure and financial statement
presentation for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources.
The following are the components of comprehensive loss:
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------ ---------- ------------
Net loss $ (12,036) $(186,858) $ (62,336) $(269,599)
Cumulative translation adjustments 719 6,253 8,714 (3,265)
Increase (decrease) in minimum pension liability -- -- (36) --
Unrealized investment gain (loss) -- (12) (16) (2)
Gain (loss) on cash flow hedging instruments (6) (225) (122) 45
--------- --------- --------- ---------
Comprehensive loss $ (11,323) $(180,842) $ (53,796) $(272,821)
========= ========= ========= =========
13
The components of accumulated other comprehensive income (loss), net of
related tax, are as follows:
(in thousands) September 29, December 31,
2002 2001
------- -------
Cumulative translation adjustments $ 1,993 $(6,721)
Increase (decrease) in minimum pension liability -- 36
Unrealized investment gain (loss) -- 16
Gain on cash flow hedging instruments (6) 116
------- -------
$ 1,987 $(6,553)
======= =======
Note 6 Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The chief executive officer of the Company is the Company's chief
decision maker. As the Company's business is completely focused on one industry
segment, design, manufacturing and marketing of advanced fabrication equipment
to the semiconductor manufacturing industry, management believes that the
Company has one reportable segment. The Company's revenues and profits are
generated through the sale and service of products for this one segment. As a
result, no additional operating segment information is required to be disclosed.
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
($) (%) ($) (%) ($) (%) ($) (%)
-------- --- -------- --- -------- --- -------- ---
United States $13,571 22 $11,788 32 $ 35,868 23 $ 49,684 27
Germany 11,514 19 2,816 8 31,583 20 38,635 21
Europe - others 3,299 5 553 1 5,977 4 5,864 3
Taiwan 10,871 18 10,838 30 32,701 21 29,911 17
Asia Pacific (including Korea,
Singapore and China) 17,296 29 2,418 7 38,154 25 24,378 14
Japan 4,257 7 8,230 22 9,993 7 33,025 18
------- ------- -------- --------
$60,808 $36,643 $154,276 $181,497
======= ======= ======== ========
The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.
14
For purposes of determining sales to significant customers, the Company
includes sales to customers through its distributor (at the sales price to the
distributor) and excludes the distributor as a significant customer. In the
third quarter of 2002, one customer accounted for 11.1% of net sales. In the
third quarter of 2001, two customers accounted for 10.0% and 18.0% of net sales.
Note 7 Debt
The Company's Japanese subsidiary has a credit facility with a Japanese
bank in the amount of 900 million Yen (approximately $7.3 million at September
29, 2002), secured by specific trade accounts receivable of the Japanese
subsidiary. The facility bears interest at a per annum rate of TIBOR plus 75
basis points. The term of the facility is through June 20, 2003. The Company has
provided a corporate guarantee for this credit facility. At September 29, 2002,
there was no borrowing on this credit facility.
On March 29, 2002, the Company entered into a one-year revolving line of
credit with a bank in the amount of $20.0 million. The line of credit will
expire on March 27, 2003, if not extended by then. All borrowings under this
line will bear interest at a per annum rate equal to the bank's prime rate plus
125 basis points. The line of credit is secured by a blanket lien on all
domestic assets including intellectual property. The line of credit requires the
Company to satisfy certain quarterly financial covenants, including a minimum
quick ratio, minimum tangible net worth and minimum revenue. On September 23,
2002, the bank issued a modification to the loan agreement reducing the minimum
revenue requirement for the third quarter of 2002. At September 29, 2002, the
Company was in compliance with the covenants. Currently, the Company has no
borrowings under this line of credit.
Pursuant to the acquisition of the STEAG Semiconductor Division, the
Company had assumed certain obligations of STEAG Electronic Systems AG ("SES")
and STEAG AG, the parent company of SES, and agreed to repay certain
intercompany indebtedness owed by the acquired subsidiaries to SES, in exchange
for which the Company delivered to SES a secured promissory note in the
principal amount of $26.9 million (with an interest rate of 6% per annum). Under
the amendment to the Combination Agreement, the Company had also agreed to pay
SES the amount of 19.2 million EUROS. On April 30, 2002, upon closure of a
private placement transaction, the Company issued approximately 1.3 million
shares of common stock to SES in exchange for the cancellation of $8.1 million
(approximately 9.0 million EUROS as of April 30, 2002) of indebtedness. On July
2, 2002, the Company repaid the SES loans in full, in the amounts of $26.9
million and 10.2 million EUROS, and the accrued interest thereon, aggregating
approximately $37.7 million.
Note 8 Private Placement
On April 30, 2002, the Company issued 7.4 million shares of common stock in a
private placement transaction. Of the 7.4 million shares issued, 1.3 million
shares were issued to Steag Electronic Systems AG upon conversion of $8.1
million of outstanding promissory notes at $6.15 per share. The remaining 6.1
million shares were sold to other investors at $6.15 per share for aggregate
gross cash proceeds of $37.5 million.
Note 9 Related Party Transactions
In April 2002, the Company issued unsecured loans to Brad Mattson, then a
board member, and Diane Mattson, a shareholder, each in the principal amount of
$700,000. The loans did not bear interest and were due and payable on August 31,
2002. Mr. Mattson has partially repaid his note in the amount of $200,000, and
is currently in default as to the balance. Mr. Mattson has acknowledged the
amount due and indicated his intention to repay it as soon as practicable. The
Company intends to pursue the collection of the loan balance.
15
On July 3, 2002, the Company issued an additional loan to Brad Mattson in the
principal amount of $2,600,647, and an additional loan to Diane Mattson in the
principal amount of $1,141,058. The Company and Diane Mattson subsequently
agreed to consolidate her loans, such that she now owes the Company $1,841,058
under the terms of the July 3, 2002 loan. The interest rate on these loans is
the greater of the prime rate plus 125 basis points, or that interest rate that
would have been charged under margin agreements the borrowers had previously
maintained with Prudential Securities. Both loans are secured by a pledge of
shares of stock of the Company, and are due and payable on December 31, 2002.
Note 10 DNS Patent Infringement Suit Settlement
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's subsidiary, Mattson Wet Products, Inc. (formally CFM
Technologies, Inc.), in a patent infringement suit against Dainippon Screen
Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor
wafer processing equipment. The jury found that six different DNS wet processing
systems infringed on two of CFM's drying technology patents and that both
patents were valid. On June 24, 2002, the Company and DNS jointly announced that
they have amicably resolved their legal disputes with a comprehensive, global
settlement agreement, which included termination of all outstanding litigation
between the companies. The Company also released all DNS customers from any
claims of infringement relating to their purchase and future use of DNS wet
processing equipment. In addition, DNS and the Company entered into a cross
license agreement pertaining to automated batch immersion wet processing
systems. Under the cross license agreement, the Company and DNS will pay
royalties to each other for future sales of products utilizing the cross
licensed technologies. The settlement agreement and license agreement requires
DNS to pay Mattson a total of $75 million, relating to past damages, partial
reimbursement of attorney's fee and costs, and royalties, payable in varying
amounts at varying dates through April 1, 2007, as follows:
Fiscal Year Ending DNS
December 31, Payments
---------------- -------------
(in thousands)
2002 $ 27,000
2003 24,000
2004 6,000
2005 6,000
2006 6,000
2007 6,000
--------
Total $ 75,000
========
As of September 30, 2002, the Company received payments aggregating $16.0
million from DNS under the terms of the settlement agreement. Additionally, in
October 2002, the Company received $11.0 million from DNS.
The Company has obtained an independent appraisal of the DNS arrangements to
determine, based on relative fair values, how much of the aggregate payments due
to Mattson are attributable to past disputes and how much are attributable to
future royalties on DNS sales of the wet processing products. Based on the
appraisal, the Company allocated $15.0 million to past damages, which was
recorded as "other income" during the three months ended September 29, 2002, and
allocated $60 million to royalty income, which is being recognized in the income
statement on a straight-line basis over the license term. During the three
months ended September 29, 2002, the Company recognized approximately $3.0
million of royalty income.
16
Note 11 Non-Recurring, Restructuring and Other Charges
During the third quarter of 2002, in response to the continued slow-down in
capital spending by semiconductor manufacturers, and to better align the Company
with current industry conditions and its business strategy, the Company took
cost reduction actions and recorded $6.2 million of non-recurring, restructuring
and other charges related to property and equipment, leased facilities,
personnel and an intangible asset.
The following table summarizes the restructuring charges and remaining
accruals for the quarter ended September 29, 2002 (in thousands):
Restructuring
accrual at
Restructuring September 29,
charges 2002
------------- ----------
Property and equipment $1,659 $ --
Leased facilities 2,297 2,297
Personnel 958 958
Write-down of intangible assets 1,257 --
------ ------
Total $6,171 $3,255
====== ======
The following paragraphs describe in more detail the components of the
non-recurring, restructuring and other charges.
Property and equipment
Restructuring costs related to abandoned property and equipment amounted to
$1.7 million, which represented the net book value of fixed assets as of
September 29, 2002 relating to the reorganization of the EPI and CVD product
lines and consolidation of RTP development operations into the Company's
Dornstadt, Germany facility. The fixed assets included in the restructuring
charges were removed from service prior to September 29, 2002.
Leased facilities
The Company incurred a $2.3 million restructuring charge for four excess
leased facilities located in Pennsylvania, as well as several other excess
leased facilities in the US and overseas. The remaining lease obligations on
vacated facilities that are non-cancellable, and the costs to sublease these
facilities, are estimated to be approximately $2.3 million. The costs to
sublease these facilities are estimated based upon current comparable rates for
leases in the respective markets. If facilities rental rates continue to
decrease in these markets, or if it takes longer than expected to sublease these
facilities, the actual loss could exceed this estimate.
Personnel
The Company implemented a reduction in force that affected employees at its
Malvern, Pennsylvania and Fremont, California locations. The individuals at the
Malvern, Pennsylvania location were notified in August 2002 that their
employment would cease on various dates from October 29, 2002 through April 1,
2003 in connection with the planned shutdown of the Company's Malvern
facilities. The individuals at the Fremont, California location were notified in
September 2002 that their employment would cease on September 27, 2002,
primarily in connection with the reorganization of the EPI and CVD product lines
and consolidation of RTP operations into the Company's Dornstadt, Germany
facility. In total, the Company identified 95 persons in connection with the
reduction in force who have left or will be leaving the Company during the next
6 months after the completion of certain projects in which they are involved.
Severance and related employee benefit costs related to the reduction in force
amounted to $1.0 million, which will be paid at the time of their separation.
The amount payable at the time of their separation are not contingent upon their
continued employment with the Company beyond September 29, 2002.
17
Write-down of intangible assets
During the third quarter of 2002, the Company wrote off an intangible asset,
with a remaining net book value of $1.3 million as of September 29, 2002, for
developed technology resulting from the Company's Concept Systems acquisition in
1998. This developed technology specifically related to the Company's EPI
product line, which was reorganized during September 2002.
In the third quarter of 2001, in connection with its acquisitions of the
STEAG Semiconductor Division and CFM, the Company, after performing an
assessment of the carrying value of the long-lived assets recorded a charge of
$124.5 million to reduce goodwill, intangible assets and property and equipment
based on the amount by which the carrying value of the assets exceeded their
fair value. This was as a result of deteriorated market conditions in the
semiconductor industry in general, a reduced demand specifically for the Thermal
and wet surface preparation products acquired in the Merger and revised
projected cash flows for these products in the future.
Note 12 Commitments and Contingencies
The Company is party to certain claims arising in the ordinary course of
business. While the outcome of these matters is not presently determinable,
management believes that they will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company, at its Exton, Pennsylvania location, leases two buildings to
house its manufacturing and administrative functions related to the wet surface
preparation product. The lease for both buildings has approximately 17 years
remaining with an approximate combined rental cost of $1.5 million annually. The
lease agreement for both buildings allows for subleasing the premises without
the approval of the landlord. The administrative building has been sublet for a
period of five years with an option for the tenant to extend for an additional
five years. The sublease is expected to cover all related costs on the
administrative building. In the second quarter of 2002, the Company leased space
in two new facilities in Malvern, Pennsylvania to house its administrative
functions previously located in Exton, Pennsylvania. These leases are each for a
two year term. In addition, the Company has excess facilities in San Jose, CA,
and has non-cancelable annual lease payment obligations of approximately $1.0
million over seven months related to this facility. During the third quarter of
2002, the Company took a charge for the lease loss of approximately $2.0 million
related to the excess facilities in Pennsylvania and the remaining provision of
$0.3 million for California. The Company has estimated that under certain
circumstances the facilities lease losses could increase approximately $1.5
million for each additional year that the facilities are not leased and could
aggregate $25.5 million under certain circumstances. The Company expects to make
payments related to the above noted facilities lease losses over the next
seventeen years, less any sublet amounts.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this report. In
addition to historical information, this discussion contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors including, but not limited to, those set forth or
incorporated by reference under "Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this document.
18
Overview
We are a leading supplier of semiconductor wafer processing equipment used in
"front-end" fabrication of integrated circuits. Our products include dry strip
equipment, rapid thermal processing ("RTP") equipment, wet surface preparation
equipment, and plasma-enhanced chemical vapor deposition ("PECVD") equipment.
Our integrated circuit manufacturing equipment utilizes innovative technology to
deliver advanced processing capability and high productivity. We provide our
customers with worldwide support through our international technical support
organization, and our comprehensive warranty program.
Our business depends upon capital expenditures by manufacturers of
semiconductor devices. The level of capital expenditures by these manufacturers
depends upon the current and anticipated market demand for such devices. The
semiconductor industry has been experiencing a severe downturn, which has
resulted in capital spending cutbacks by our customers. Semiconductor companies
continue to reevaluate their capital spending, postpone their new capital
equipment purchase decisions, and reschedule or cancel existing orders. Declines
in demand for semiconductors deepened throughout each sequential quarter of
2001. During the first quarter of 2002, the semiconductor industry bookings
began to show some signs of recovery, driven by modestly improving global
economies and consumer-related demand. However, this short term indication of
recovery has not been able to maintain its momentum and the overall demand
outlook is still uncertain over the intermediate term due to low levels of
investment in corporate infrastructure. The cyclicality and uncertainties
regarding overall market conditions continue to present significant challenges
to us and impair our ability to forecast near term revenue. Given that many of
our costs are fixed in the short-term, our ability to quickly modify our
operations in response to changes in market conditions is limited.
On January 1, 2001, we acquired the semiconductor equipment division of
STEAG Electronic Systems AG (the "STEAG Semiconductor Division"), which
consisted of a number of entities that became our direct or indirect
wholly-owned subsidiaries. At the same time, we acquired CFM Technologies, Inc.
("CFM"). We refer to these simultaneous acquisitions as "the merger." The merger
substantially changed the size of our company and the nature and breadth of our
product lines. The STEAG Semiconductor Division was a leading supplier of RTP
equipment, and both the STEAG Semiconductor Division and CFM were suppliers of
wet surface preparation equipment. At the time we completed the merger, our
industry was entering an economic slowdown.
On April 30, 2002, we issued 7.4 million shares of common stock in a private
placement transaction. Of the 7.4 million shares issued, 1.3 million shares were
issued to Steag Electronic Systems AG upon conversion of $8.1 million of
outstanding promissory notes at $6.15 per share. The remaining 6.1 million
shares were sold to other investors at $6.15 per share for aggregate gross cash
proceeds of $37.5 million.
On June 24, 2002, we settled a patent infringement lawsuit with Dainippon
Screen Manufacturing Co., Ltd. ("DNS"). As part of the settlement, DNS agreed to
pay us, at minimum, $75 million, relating to past damages, partial reimbursement
of attorney's fees and costs, and royalties, payable in varying amounts at
varying dates through April 1, 2007, in return for our granting DNS a worldwide
license under the previously infringed patents. Based on the volume of sales by
DNS, we could receive up to an additional $30 million in royalty payments.
We obtained an independent appraisal of the DNS arrangements to determine,
based on relative fair values, how much of the aggregate payments due to us are
attributable to past damages and how much are attributable to future royalties
on DNS sales of wet processing products. Based on the appraisal, we allocated
$15.0 million to past damages, which we recorded as other income during the
three months ended September 29, 2002, and we allocated $60 million to royalty
income, which is being recognized in our income statements on a straight-line
basis over the license term. During the three months ended September 29, 2002,
we recognized approximately $3.0 million of royalty income.
19
During the quarter ended September 29, 2002, we had a net loss of $12.0
million. Future results will depend on a variety of factors, particularly
overall market conditions and the timing of significant orders, our cost
reduction efforts, our ability to bring new systems to market, the timing of new
product releases by our competitors, patterns of capital spending by our
customers, market acceptance of new and/or enhanced versions of our systems,
changes in pricing by us, our competitors, customers, or suppliers and the mix
of products sold. We are dependent upon increases in sales or reductions in our
cost structures in order to achieve and sustain profitability. If our sales do
not increase, the current levels of operating expenses could materially and
adversely affect our financial position and results.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgements, including those related to reserves for
excess and obsolete inventory, warranty obligations, bad debts, investments,
intangible assets, income taxes, restructuring costs, retirement benefits,
contingencies and litigation. Management bases its estimates and judgements on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. These form the basis for making judgements
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We consider certain accounting policies related to revenue recognition,
warranty obligations, inventories, impairment of long-lived assets, and income
taxes as critical to our business operations and an understanding of our results
of operations.
Revenue recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101).
We derive revenue from two primary sources- equipment sales and spare part
sales. We account for equipment sales as follows: 1.) for equipment sales of
existing products with new specifications or to a new customer, for all sales of
new products, and for all sales of our wet surface preparation products, revenue
is recognized upon customer acceptance; 2.) for equipment sales to existing
customers, who have purchased the same equipment with the same specifications
and previously demonstrated acceptance provisions, we recognize revenue on a
multiple element approach in which we bifurcate a sale transaction into two
separate elements. Under this approach, the portion of the invoice price that is
due upon final customer acceptance of the tool, generally 10% of the total
invoice price, is deferred until final customer acceptance of the tool. The
remaining portion of the total invoice price relating to the tool, generally 90%
of the total invoice price, is recognized upon shipment of the tool. From time
to time, however, we allow customers to evaluate systems, and since customers
can return such systems at any time with limited or no penalty, we do not
recognize revenue until these evaluation systems are accepted by the customer.
Revenues associated with sales to customers in Japan are recognized upon
customer acceptance, with the exception of sales of our RTP products through our
distributor in Japan, where revenues are recognized upon title transfer to the
distributor. For spare parts, revenue is recognized upon shipment. Service and
maintenance contract revenue is recognized on a straight-line basis over the
service period of the related contract.
20
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a significant number of our shipments. Any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses.
Warranty. Our warranties require us to repair or replace defective product or
parts, generally at a customer's site, during the warranty period at no cost to
the customer. The warranty offered on our systems ranges from 12 months to 36
months depending on the product. A provision for the estimated cost of warranty
is recorded as a cost of sales based on our historical costs at the time of
revenue recognition. While our warranty costs have historically been within our
expectations and the provisions we have established, we cannot be certain that
we will continue to experience the same warranty repair costs that we have in
the past. A significant increase in the costs to repair our products could have
a material adverse impact on our operating results for the period or periods in
which such additional costs materialize.
Inventories. We state inventories at the lower of cost or market, with cost
determined on first-in, first out basis. We amortize spares over five years. Due
to the changing market conditions, current economic conditions, estimated future
requirements, age of the inventories on hand and our introduction of new
products we regularly monitor inventory quantities on hand and obsolete
inventories that are no longer used in current production. Accordingly, we write
down our inventories to net realizable value. Actual demand may differ from
forecasted demand and such difference may have a material effect on our
financial position and results of operations. In the future, if our inventory is
determined to be overvalued, we would be required to recognize the decline in
value in our cost of goods sold at the time of such determination. Although we
attempt to accurately forecast future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results, given the competitive pressures and cyclicality of the semiconductor
industry.
Goodwill and Other Intangible Assets. We assess the realizability of goodwill
and other intangible assets at least annually or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable, in
accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets." Our judgments regarding the existence of impairment indicators are
based on changes in strategy, market conditions and operational performance of
our business. Future events, including significant negative industry or economic
trends, could cause us to conclude that impairment indicators exist and that
goodwill or other intangible assets are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of
operations. In assessing the recoverability of goodwill and other intangible
assets, we must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.
Income taxes. We record a valuation allowance to reduce our net deferred tax
asset to the amount that is more likely than not to be realized. In assessing
the need for a valuation allowance, we consider historical levels of income,
expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In the event we determine
that we would be able to realize deferred tax assets in the future in excess of
the net recorded amount, we would record an adjustment to the deferred tax asset
valuation allowance. This adjustment would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of the net deferred tax asset in the future, an
adjustment to increase the deferred tax asset valuation allowance would be
charged to income in the period such determination was made.
21
Results of Operations
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
---------------------------- ------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales 100% 100% 100% 100%
Cost of sales 78% 155% 80% 90%
---- ---- ---- ----
Gross profit 22% (55)% 20% 10%
---- ---- ---- ----
Operating expenses:
Research, development and engineering 16% 35% 19% 26%
Selling, general and administrative 36% 71% 42% 45%
In-process research and development -- -- -- 6%
Amortization of goodwill and intangibles 3% 24% 3% 16%
Non-recurring, restructuring and other charges 10% 348% 4% 70%
---- ---- ---- ----
Total operating expenses 66% 478% 68% 163%
---- ---- ---- ----
Loss from operations 44% (533)% 48% (153)%
Interest and other income, net 26% 6% 9% 2%
---- ---- ---- ----
Loss before provision for income taxes (18)% (527)% 39% (151)%
Provision for (benefit from) income taxes 2% (17)% 1% (2)%
---- ---- ---- ----
Net loss (20)% (510)% (40)% (149)%
==== ==== ==== ====
Net Sales
Net sales for the third quarter of 2002 of $60.8 million reflected an
increase of 65.9% compared to $36.6 million for the third quarter of 2001, and
an increase of 28.7% compared to $47.3 million for the second quarter of 2002.
Net sales for the first nine months of 2002 of $154.3 million reflected a
decrease of 15.0% compared to $181.5 million for the first nine months of 2001.
Net sales in the third quarter of 2002 increased compared to the same period of
2001, primarily due to increased customer acceptances of systems we delivered in
earlier periods, resulting in revenue recognition in the third quarter, and
realization of revenue for royalties from DNS of approximately $3.0 million. Net
sales increased in the third quarter of 2002 compared to the second quarter of
2002 due to increased customer acceptances, increased shipments resulting from
an improved volume of orders during the second and third quarters of 2002, and
revenue realization from DNS royalties. Net sales during the first nine months
of 2002 decreased, compared to the same periods of 2001, primarily due to the
prolonged lower demand as a result of the economic downturn in the semiconductor
industry.
Total deferred revenue at September 29, 2002 was approximately $114.3
million, down from $136.9 million at the end of the third quarter of 2001, and
down from $117.4 million at the end of the second quarter of 2002. We generally
expect deferred revenue from particular product sales to be recognized as
revenue in our consolidated statement of operations with a time lag of six to
twelve months from product shipment.
International sales, which are predominantly to customers based in
Europe, Japan and the Pacific Rim (which includes Taiwan, Singapore, Korea and
China), accounted for 77.7% and 67.8% of net sales for the third quarter of 2002
and 2001, respectively. International sales for the first nine months of 2002
and 2001 accounted for 76.7% and 72.6% of net sales, respectively. We anticipate
that international sales will continue to account for a significant portion of
net sales for 2002.
22
Gross Margin
Our gross margin for the third quarter of 2002 was 22.2%, an increase from
(54.7%) for the third quarter of 2001. Our gross margin for the first nine
months of 2002 was 19.7%, an increase from 10.1% for the first nine months of
2001. The increase in gross margin was primarily due to the royalties from DNS,
better absorption of our fixed manufacturing overhead costs, and a decrease in
inventory valuation charges related to the merger that adversely affected
margins in the third quarter of 2001. We continue to have merger-related
inventory costs that are adversely affecting our gross margin. In addition, due
to intense competition we are facing pricing pressure from competitors that is
affecting our gross margin. In response, we are continuing with our cost
reduction efforts and efforts to differentiate our product portfolio.
In light of the economic slowdown in our industry, we have taken steps to
reduce the number of our manufacturing sites. We have closed three manufacturing
sites since the first quarter of 2001. We continue to have excess capacity at
our remaining sites but have reduced costs at those sites in an effort to
improve our gross margin. During the first two quarters of 2002, we sold two of
the manufacturing sites that we closed during fiscal 2001. Over the next two
quarters, we plan to cease operations at our Exton and Malvern, PA facilities
and transferring its operations to our existing Wet facility in Pliezhausen,
Germany.
Acquisition-related inventory costs, determined in accordance with APB 16,
continue to affect us. The inventory subject to these costs was revalued upward,
to reflect its market value, at the time of the merger. The difference between
the original cost basis of the inventory and its allocated acquisition costs are
our "APB16 costs." The largest portion of this revalued inventory was in our Wet
Division, where all revenue is deferred until we obtain customer acceptances of
our products. The sold inventory of those wet products is being recognized as
revenue as those products are accepted by customers, and the related costs,
including APB 16 costs, are included in our cost of goods sold with an adverse
effect on our gross margin in the corresponding quarter. For the third quarter
of 2002 and the first nine months of 2002, these APB 16 costs were $0.1 million
and $8.8 million, respectively. As of September 29, 2002, we have approximately
$2.1 million of APB 16 costs remaining in inventories - delivered systems that
will continue to have a negative impact on our future gross margins as the
relevant systems are accepted.
Our gross margin has varied over the years and will continue to vary based
on many factors, including competitive pressures, product mix, economies of
scale, overhead absorption levels, remaining ABP 16 costs in our inventories and
costs associated with the introduction of new products.
Research, Development and Engineering
Research, development and engineering expenses for the third quarter of
2002 were $10.0 million, or 16.4% of net sales, as compared to $12.7 million, or
34.8% of net sales, for the third quarter of 2001. The decrease in research,
development and engineering expenses in the third quarter of 2002 was primarily
due to the reduction of personnel and associated costs, more selective research
and development project funding, and various cost control measures that resulted
in reduction in expenses for outside services, engineering materials, licenses,
and professional fees. Total research, development and engineering expenses
increased slightly from $9.3 million in the second quarter of 2002, due to the
write off of a developement tool and higher patent-related legal expenses in the
third quarter.
Research, development and engineering expenses for the first nine months of
2002 were $28.9 million, or 18.7% of net sales, as compared to $47.7 million, or
26.3% of net sales, for the first nine months of 2001. The decrease in research,
development and engineering expenses was primarily due to the reduction of
personnel and associated costs that was implemented during the second half of
2001, more selective research and development project funding, and various cost
control measures as a result of our post merger product rationalization efforts,
that resulted in reduction in expenses for professional fees, outside services,
licenses, and engineering materials.
23
Selling, General and Administrative
Selling, general and administrative expenses for the third quarter of 2002
were $22.1 million, or 36.3% of net sales, as compared to $26.2 million, or
71.5% of net sales, for the third quarter of 2001. The decrease in selling,
general and administrative expenses is primarily due to a reduction in personnel
and related costs, fewer buildings, lower utilities, lower sales commissions,
release of bad debt allowances, lower professional fees, and lower travel
expenses partially offset by outside services. The decrease in selling, general
and administrative expenses in the third quarter of 2002, as a percentage of net
sales, is primarily due to higher sales compared to the third quarter of 2001.
Selling, general and administrative expenses for the first nine months of
2002 were $65.3 million, or 42.3% of net sales, as compared to $81.5 million, or
44.9% of net sales, for the first nine months of 2001. The decrease in selling,
general and administrative expenses is primarily due to reduction in personnel
and related expenses, lower bonus pay-outs, fewer buildings, lower utilities,
lower sales commissions, lower outside services, lower professional fees, lower
repair & maintenance, and lower travel expenses.
We had substantial legal expenses in 2002, especially in the first
quarter, due to the DNS lawsuit for patent infringement, which resulted in a
verdict in our favor.
In-process Research and Development
In connection with our acquisition of the STEAG Semiconductor Division, we
allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows relating to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
In connection with the acquisition of CFM, we allocated approximately $4.7
million of the purchase price to an in-process research and development project.
This allocation represented the estimated fair value based on risk-adjusted cash
flows related to one incomplete research and development project. At the date of
acquisition, the development of this project had not yet reached technological
feasibility, and the research and development in progress had no alternative
future use. Accordingly, the purchase price allocated to in-process research and
development was expensed as of the acquisition date.
Amortization of Goodwill and Intangibles
We adopted SFAS 142 on January 1, 2002, and no longer amortize goodwill. We
continue to amortize the identified intangibles, in an amount estimated to be
$6.6 million for fiscal 2002, or approximately $1.7 million per quarter until
the third quarter and thereafter approximately $1.5 million per quarter.
Non-Recurring, Restructuring and Other Charges
During the third quarter of 2002, in response to the continued slow-down in
capital spending by semiconductor manufacturers we took cost reduction actions
to better align ourselves to current industry conditions and focus our business
strategy. We recorded $6.2 million of non-recurring, restructuring and other
charges, comprised of the write-off of property and equipment of $1.7 million,
write-down of excess leased facilities obligations of $2.3 million, workforce
reduction expenses of $1.0 million and an intangible asset write-down of $1.3
million.
In the third quarter of 2001, in connection with our acquisitions of the
STEAG Semiconductor Division and CFM, after performing an assessment of the
carrying value of the long-lived assets, we recorded a charge of $124.5 million
to reduce goodwill, intangible assets and property and equipment based on the
amount by which the carrying value of those assets exceeded their fair value.
This was as a result of deteriorated market conditions in the semiconductor
industry in general, a reduced demand specifically for certain thermal and wet
surface preparation products acquired in the Merger and revised projected cash
flows for these products in the future.
24
Interest and Other Income
Interest and other income for the third quarter of 2002 was $15.7 million,
or 25.9% of net sales, as compared to $2.3 million, or 6.3% of net sales, for
the third quarter of 2001. During the third quarter of 2002, this income
consisted of payment from DNS for past patent infringement damages of $15.0
million, interest income of $0.4 million resulting from the investment of our
cash balances and a foreign exchange gain of $0.1 million, offset by interest
expense of $0.4 million primarily related to interest on our notes payable to
SES. In the same period of 2001, interest income of $1.1 million primarily
related to the investment of our cash balances, and a foreign exchange gain of
$1.8 million were offset by interest expense of $0.7 million primarily related
to interest on our notes payable to SES.
Interest and other income for the first nine months of 2002 was $13.7
million, or 8.9% of net sales, as compared to $4.1 million, or 2.3% of net
sales, for the first nine months of 2001. During the first nine months of 2002,
this income consisted of payment from DNS for past patent infringement damages
of $15.0 million and interest income of $1.6 million resulting from the
investment of our cash balances, offset by interest expense of $1.8 million
primarily related to interest on our notes payable to SES, and a foreign
exchange loss of $0.7 million. In the same period of 2001, interest income of
$3.8 million primarily related to the investment of our cash balances, and a
foreign exchange gain of $2.0 million were offset by interest expense of $1.7
million primarily related to interest on our notes payable to SES.
Provision for Income Taxes
We recorded an income tax provision for the third quarter of 2002 of
approximately $1.3 million, and approximately $1.0 million for the first nine
months of 2002. The provision consists of foreign taxes incurred by our foreign
sales and service operations of $0.3 million, other foreign taxes of $0.6
million, foreign withholding taxes of $1.8 million, state income taxes of $0.1
million, and deferred tax benefit on the amortization of certain intangible
assets of $1.8 million. There is no US or German current income tax benefit or
expense. Our effective income tax rate was negative 1.7% for the nine months
ended September 30, 2002.
In the third quarter of 2001, we recorded an income tax benefit of $6.2
million which primarily relates to the reversal of the deferred tax liability
associated with impairment of the related intangible assets. The deferred tax
liability was recorded upon acquisition of CFM and the STEAG Semiconductor
Division and represented the difference between the book and tax basis of
identified intangible assets. For the nine months ended September 30, 2001, we
recorded an income tax benefit of $3.8 million which includes the income tax
benefit discussed above offset by income taxes primarily in foreign
jurisdictions.
Liquidity and Capital Resources
Our cash and cash equivalents (excluding restricted cash) and short-term
investments were $75.7 million at September 29, 2002, a decrease of $27.2
million from $102.9 million at June 30, 2002. Stockholders' equity at September
29, 2002 was approximately $132.4 million compared to $143.7 million as of June
30, 2002.
On April 30, 2002, we issued 7.4 million shares of common stock in a private
placement transaction. Of the 7.4 million shares issued, 1.3 million shares were
issued to Steag Electronic Systems AG upon conversion of $8.1 million of
outstanding promissory notes at $6.15 per share. The remaining 6.1 million
shares were sold to other investors at $6.15 per share for aggregate gross cash
proceeds of $37.5 million.
25
On July 2, 2002, we timely retired two obligations of $26.9 million and 10.2
million EUROS, including accrued interest thereon, and made payments in full to
STEAG Electronic Systems AG ("SES") in the total amount of approximately $37.7
million.
Our Japanese subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen (approximately $7.3 million at September 29, 2002),
secured by specific trade accounts receivable of our Japanese subsidiary. The
facility bears interest at a per annum rate of TIBOR plus 75 basis points. The
term of the facility is through June 20, 2003. We have given a corporate
guarantee for this credit facility. At September 29, 2002, there were no
borrowings under this credit facility.
On March 29, 2002 we entered into a one-year revolving line of credit with a
bank in the amount of $20.0 million. The line of credit will expire on March 27,
2003, if not extended by then. All borrowings under this line bear interest at a
per annum rate equal to the bank's prime rate plus 125 basis points. The line of
credit is secured by a blanket lien on all of our domestic assets including
intellectual property. The line of credit requires us to satisfy certain
quarterly financial covenants, including maintaining a minimum quick ratio,
minimum tangible net worth and meeting minimum revenue targets. On September 23,
2002, the bank issued a modification to the loan agreement reducing the minimum
revenue requirement for the third quarter of 2002. At September 29, 2002, we
were in compliance with the covenants and there were no borrowings under this
credit line.
On June 24, 2002, we entered into a settlement agreement and a cross
license agreement with DNS under which DNS agreed to pay us a total of $75
million, relating to past damages, partial reimbursement of attorney's fee and
costs, and royalties, payable in varying amounts at varying dates through April
1, 2007, as follows:
Fiscal Year Ending DNS
December 31, Payments
---------------- -----------
(in thousands)
2002 $ 27,000
2003 24,000
2004 6,000
2005 6,000
2006 6,000
2007 6,000
--------
Total $ 75,000
========
The royalty obligations of DNS would cease if all four patents that had been
the subject of the lawsuit were to be held invalid by a court. Royalties payable
under the cross license agreement total a minimum of $30 million and a maximum
$60 million. Once total royalty payments equal $30 million, the minimum
royalties no longer apply. No further royalties are payable once total payments
reach $60 million. As of September 30, 2002, we had received payments
aggregating $16.0 million ($14.4 million, net, after deducting 10% Japanese
withholding tax) from DNS under the terms of the settlement agreement.
Additionally, in October 2002, we received $11.0 million ($9.9 million, net of
withholding tax) from DNS.
Net cash used in operating activities was $22.7 million during the nine
months ended September 29, 2002 as compared to $40.0 million used in operating
activities during the same period in 2001. The net cash used in operating
activities during the nine months ended September 29, 2002 was primarily
attributable to a net loss of $62.3 million, a decrease in deferred revenue of
$33.2 million, a decrease in accrued liabilities of $12.8 million, an increase
in other assets of $4.2 million, and a decrease in deferred taxes of $1.8
million. The cash used in operating activities was offset by a decrease in
inventories and inventories - delivered systems of $38.5 million, a decrease in
advance billings of $21.6 million, non-cash depreciation and amortization of
$12.4 million, restructuring and other charges of $6.2 million, a
26
decrease in accounts receivable of $7.3 million, and an increase in accounts
payable of $1.2 million. The net cash used in operating activities was $40.0
million during the nine months ended September 30, 2001 and was primarily
attributable to the net loss of $269.6 million. Additional uses of cash were a
decrease in accrued liabilities of $29.6 million, a decrease in accounts payable
of $18.0 million, and an increase in inventories and inventories - delivered
systems of $17.8 million (net of inventory write-offs of $21.3 million). These
uses of cash were offset by non-cash impairment of long-lived assets of $127.7
million, deferred revenue of $93.1 million, depreciation and amortization
expense of $43.3 million. Net cash was provided by a reduction in accounts
receivable and advance billings of $25.3 million.
Net cash used in investing activities was $2.8 million during the nine
months ended September 29, 2002 as compared to $66.2 million provided by
investing activities during the same period last year. The net cash used in
investing activities during the first nine months of 2002 is attributable to
purchases of investments of $15.0 million and purchase of equipment of $2.1
million offset by proceeds from the sale of investments of $10.9 million and
sale of equipment of $3.4 million. The net cash provided by investing activities
was $66.2 million during the nine months ended September 30, 2001 and was
attributable to the net cash acquired from the acquisition of the STEAG
Semiconductor Division and CFM of $38.0 million, and sales of investments of
$68.0 million, offset by purchases of investments of $26.9 million, and
purchases of property and equipment of $12.9 million.
Net cash provided by financing activities was $19.5 million during the nine
months ended September 29, 2002 as compared to $7.6 million provided by
financing activities during the same period last year. The net cash provided by
financing activities during the first nine months of 2002 is primarily
attributable to the net proceeds from the issuance of common stock of $34.9
million, a decrease in restricted cash of $26.0 million, proceeds from the
issuance of common stock under stock plans of $1.3 million and an increase in
the interest accrual on a note payable to SES of $1.3 million, offset by the
payment of notes payable to SES of $38.8 million, and payments against our
Japanese line of credit and long-term debt in the amount of $5.3 million. Net
cash provided by financing activities was $7.6 million during the nine months
ended September 30, 2001 is primarily attributable to the borrowings, net of
repayments, on a line of credit of $4.0 million, and proceeds from our stock
plans of $3.4 million.
Based on current projections, we believe that our current cash and investment
positions will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Our primary
source of liquidity is our existing unrestricted cash balance, and cash
generated by our operations. During 2001 and the first nine months of 2002, we
had operating losses. Our operating plans are based on and require that we
reduce our operating losses, control our expenses, manage our inventories, and
collect our accounts receivable balances. In this market downturn, we are
exposed to a number of challenges and risks, including delays in payments of our
accounts receivable by our customers, and postponements or cancellations of
orders. Postponed or cancelled orders can cause us to have excess inventory and
underutilized manufacturing capacity. If we are not able to significantly reduce
our present operating losses over the upcoming quarters, our operating losses
could adversely affect our cash and working capital balances, and we may be
required to seek additional sources of financing.
We may need to raise additional funds in future periods through public or
private financing, or other sources, to fund our operations. We may not be able
to obtain adequate or favorable financing when needed. Failure to raise capital
when needed could harm our business. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced, and these equity securities may have rights, preferences or
privileges senior to our common stock. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants on our operations and financial condition.
27
RISK FACTORS:
Factors That May Affect Future Results and Market Price of Stock
In this report and from time to time, we may make forward looking statements
regarding, among other matters, our future strategy, product development plans,
productivity gains of our products, financial performance and growth. The
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
address matters which are subject to a number of risks and uncertainties which
could cause actual results to differ materially, including those set forth in
our Annual Report on Form 10-K, all of which are incorporated here by reference,
in addition to the following:
Our Quarterly Operating Results Fluctuate Significantly and Are
Difficult to Predict, and May Fall Short of Anticipated Levels, Which
Could Cause Our Stock Price to Decline.
Our quarterly revenue and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. This fluctuation is
due to a number of factors, including:
o cyclicality of the semiconductor industry;
o delays, cancellations and push-outs of orders by our customers;
o delayed product acceptance or payments of invoices by our customers;
o size and timing of sales, shipments and acceptance of our products;
o entry of new competitors into our market, or the announcement of new
products or product enhancements by competitors;
o sudden changes in component prices or availability;
o variability in the mix of products sold;
o manufacturing inefficiencies caused by uneven or unpredictable order
patterns, reducing our gross margins;
o higher fixed costs due to increased levels of research and development
or patent litigation costs; and
o successful expansion of our worldwide sales and marketing
organization.
A substantial percentage of our operating expenses are fixed in the short
term and we may be unable to adjust spending to compensate for an unexpected
shortfall in revenues. As a result, any delay in generating or recognizing
revenues could cause our operating results to be below the expectations of
market analysts or investors, which could cause the price of our common stock to
decline.
The Price of Our Common Stock Has Fluctuated in the Past and May Continue to
Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or
to Securities Litigation.
The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future. We believe that a number of
factors could cause the price of our common stock to fluctuate, perhaps
substantially, including:
o general conditions in the semiconductor industry or in the worldwide
economy;
28
o announcements of developments related to our business;
o fluctuations in our operating results and order levels;
o announcements of technological innovations by us or by our
competitors;
o new products or product enhancements by us or by our competitors;
o developments in patent litigation or other intellectual property
rights; or
o developments in our relationships with our customers, distributors,
and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of high technology stocks in particular, have experienced extreme
price fluctuations. These fluctuations have frequently been unrelated to the
operating performance of the affected companies. Such fluctuations could
adversely affect the market price of our common stock. In the past, securities
class action litigation has often been instituted against a company following
periods of volatility in its stock price. This type of litigation, if filed
against us, could result in substantial costs and divert our management's
attention and resources.
The Semiconductor Equipment Industry is Cyclical, is Currently
Experiencing a Severe and Prolonged Downturn, and Causes Our Operating
Results to Fluctuate Significantly.
The semiconductor industry is highly cyclical and has historically
experienced periodic downturns, whether the result of general economic changes
or capacity growth temporarily exceeding growth in demand for semiconductor
devices. During periods of declining demand for semiconductor manufacturing
equipment, customers typically reduce purchases, delay delivery of products
and/or cancel orders. Increased price competition may result, causing pressure
on our net sales, gross margin and net income. We have been experiencing
cancellations, delays and push-outs of orders, which reduce our revenues, cause
delays in our ability to recognize revenue on orders and reduce backlog. Further
order cancellations, reductions in order size or delays in orders will
materially adversely affect our business and results of operations.
Following the very strong growth year in 2000, the semiconductor industry
is now in the midst of a significant and prolonged downturn, and we as well as
the industry are experiencing lower bookings, significant push outs and
cancellations of orders. The severity and duration of the downturn are unknown,
but is impairing our ability to sell our systems and to operate profitably. If
demand for semiconductor devices and our systems remains depressed for an
extended period, it could harm our business.
As a result of the acquisition of the STEAG Semiconductor Division and CFM at
the beginning of 2001, we are a larger, more geographically diverse company,
less able to react quickly to the cyclicality of the semiconductor business,
particularly in Europe and other regions where restrictive laws relating to
termination of employees prohibit us from quickly reducing costs in order to
meet the downturn. Accordingly, during this latest downturn we have been unable
to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal
year ended December 31, 2001, our net loss was $336.7 million, compared to net
income of $1.5 million for the year ended December 31, 2000. For the first,
second and third quarters of 2002 our net losses were $25.8 million, $24.5
million, and $12.0 million respectively. If our actions to date are insufficient
to effectively align our cost structure with prevailing market conditions, we
may be required to undertake additional cost-cutting measures, and may be unable
to continue to invest in marketing, research and development and engineering at
the levels we believe are necessary to maintain our competitive position. Our
failure to make these investments could seriously harm our long-term business
prospects.
29
We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation,
Reduction or Delay in Purchases By, or Failure to Collect Receivables From,
These Customers Could Harm Our Business.
Currently, we derive most of our revenues from the sale of a relatively
small number of systems to a relatively small number of customers, which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle
for each system, coupled with customers' capital budget considerations, make the
timing of customer orders uneven and difficult to predict. In addition, our
backlog at the beginning of a quarter is not expected to include all orders
required to achieve our sales objectives for that quarter. As a result, our net
sales and operating results for a quarter depend on our ability to ship orders
as scheduled during that quarter as well as obtain new orders for systems to be
shipped in that same quarter. Any delay in scheduled shipments or in acceptances
of shipped products would delay our ability to recognize revenue, collect
outstanding accounts receivable, and would materially adversely affect our
operating results for that quarter. A delay in a shipment or customer acceptance
near the end of a quarter may cause net sales in that quarter to fall below our
expectations and the expectations of market analysts or investors.
Our list of major customers changes substantially from year to year, and
we cannot predict whether a major customer in one year will make significant
purchases from us in future years. Accordingly, it is difficult for us to
accurately forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer, our financial results
will be negatively impacted.
We Will Need to Improve or Implement New Systems, Procedures and Controls.
The integration of STEAG and CFM and their operational and financial
systems and controls has placed a significant strain on our management
information systems and our administrative, operational and financial resources.
To efficiently manage the combined company, we have been improving and must
continue to improve our existing systems and implement new operational and
financial systems, procedures and controls. Since the merger, we have been
pursuing integration of the businesses, systems and controls of the three
companies, however, each business has historically used a different financial
system, and the resulting integration and consolidation has placed and will
continue to place substantial demands on our management resources. Improving or
implementing new systems, procedures and controls may be costly, and may place
further burdens on our management and internal resources. If we are unable to
improve our existing or implement new systems, procedures and controls in a
timely manner, our business could be harmed.
Legislative actions, higher insurance cost and potential new accounting
pronouncements are likely to cause our general and administrative expenses to
increase and impact our future financial position and results of operations.
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as
well as proposed changes to listing standards by Nasdaq, and proposed accounting
changes by the Securities and Exchange Commission, we may be required to
increase our internal controls, hire additional personnel and additional outside
legal, accounting and advisory services, all of which will cause our general and
administrative costs to increase. Insurers are also likely to increase premiums
as a result of the high claims rates incurred over the past year, and so our
premiums for our various insurance policies, including our directors' and
officers' insurance policies, are likely to increase. Proposed changes in the
accounting rules, including legislative and other proposals to account for
employee stock options as a compensation expense among others, could materially
increase the expenses that we report under generally accepted accounting
principles and adversely affect our operating results.
30
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Interest Rate Risk.
Our exposure to market risk for changes in interest rates relates to our
investment portfolio. We do not use derivative financial instruments in our
investment portfolio. We place our investments with high credit quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no cash flow exposure due to rate
changes for cash equivalents and short-term investments, as all of these
investments are at fixed interest rates.
The table below presents the fair value of principal amounts and related
weighted average interest rates for our investment portfolio as of September 29,
2002.
Fair Value
September 29,
2002
-------------
(In thousands)
Assets
Cash and cash equivalents $65,830
Average interest rate 1.85%
Restricted cash $1,330
Average interest rate 1.00%
Short-term investments $9,917
Average interest rate 1.78%
Foreign Currency Risk
We are primarily a US Dollar functional currency entity and transact
business in various foreign countries and employ a foreign currency hedging
program utilizing foreign currency forward exchange contracts to hedge foreign
currency fluctuations associated with Japanese Yen, Korean Won, Singapore Dollar
and Taiwan Dollar. Our subsidiaries in Germany are EURO functional currency
entities and they also employ foreign currency hedging programs utilizing
foreign currency forward exchange contracts to hedge foreign currency
fluctuations associated with the US Dollar and Japanese Yen. The goal of the
hedging program is to lock in exchange rates to minimize the impact of foreign
currency fluctuations. We do not use foreign currency forward exchange contracts
for speculative or trading purposes.
The following table provides information as of September 29, 2002 about our
and our subsidiaries' derivative financial instruments, which are comprised of
foreign currency forward exchange contracts. The information is provided in U.S.
dollar and EURO equivalent amounts, as listed below. The table presents the
notional amounts (at the contract exchange rates), the weighted average
contractual foreign currency exchange rates, and the estimated fair value of
those contracts.
31
Average Estimated
Notional Contract Fair
Amount Rate Value
-------- -------- ---------
(In thousands, except for
average contract rate)
Foreign currency forward exchange contracts:
Mattson Technology Inc.
(US Dollar equivalent amount)
Japanese Yen $5,451 125.22 $5,581
Korean Won $ 235 1,187.50 $ 230
Singapore Dol $ 22 1.74 $ 21
Mattson Thermal Products GmbH
(EURO equivalent amount)
U.S. Dollar EUR 10,263 0.96 EUR 10,131
Japanese Yen EUR 3,396 116.86 EUR 3,320
Mattson Wet Products GmbH
(EURO equivalent amount)
U.S. Dollar EUR 25,166 0.98 EUR 25,750
The local currency is the functional currency for all our foreign sales
operations. Our exposure to foreign currency risk has increased as a result of
our global expansion of business. On July 2, 2002, the company paid STEAG
Electronic Systems AG ("SES") its payment obligation amount of approximately
10.2 million EUROS (approximately $10.1 million) plus interest thereon of
approximately 199,000 EUROS that were payable in EUROS and, accordingly,
exposure for exchange rate volatility existed. The exposure for the exchange
rate volatility of the SES payment obligation had been neutralized by using a
natural balance sheet hedge and keeping EUROS in a foreign currency bank
account. The aforesaid payment obligation to SES was paid from this EUROS
foreign currency bank account. The balance of this bank account was 4.5 million
EUROS at September 29, 2002.
Item 4. Controls and Procedures
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our "disclosure controls and procedures" (as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days of
the filing date of this report. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that, although
effective, our disclosure controls and procedures need improvement. As
previously disclosed in our Form 8-K filed on May 28, 2002, our former
independent accountants, Arthur Andersen LLP ("Andersen"), noted four conditions
that it considered to be reportable events in connection with the audit of our
consolidated financial statements as of and for the year ended December 31,
2001. Among them, Andersen suggested that we need to improve and automate
procedures for our month-end closings. Our management did not disagree with the
suggestion made by Andersen, and the Company currently has an active project
underway to implement systems with regard to automating procedures for month-end
closings. Management believes that we have already addressed the other
significant conditions reported by Andersen.
(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the third quarter evaluation by our senior management
referenced in paragraph (a) above.
32
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of business, we are subject to claims and litigation,
including claims that we infringe third party patents, trademarks and other
intellectual property rights. Although we believe that it is unlikely that any
current claims or actions will have a material adverse impact on our operating
results or our financial position, given the uncertainty of litigation, we can
not be certain of this. Moreover, the defense of claims or actions against us,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
We are currently litigating two ongoing cases involving our wet surface
preparation intellectual property against one of our competitors, YieldUP
International Corp. ("YieldUP"). These litigation matters were both brought in
the United States District Court for the District of Delaware by our
subsidiaries Mattson Wet Products, Inc. (formerly CFM Technologies, Inc.) and
Mattson Technology IP, Inc. (formerly CFMT, Inc.), and are described under Item
3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
and under Part II, Item 1 of our subsequent Form 10-Q filings. Except as
discussed below, there have been no material developments in these actions
during the third quarter of 2002.
In the case involving our U.S. Patent No. 4,911,761 (the "`761
patent") against YieldUP (this case is CFMT and CFM Technologies, Inc.
v. YieldUP International Corp., Civil Action No. 95-549-RRM-JJF-MPT),
on May 1, 2002, we asserted infringement by YieldUP of our U.S. Patent
No. 4,984,597, but later we voluntarily dismissed that claim. The
parties are presently engaged in discovery, with a November 22, 2002
fact discovery cut-off date. We have a motion pending to dismiss
and/or strike several counterclaims and defenses by YieldUP, and
YieldUP has a motion pending for summary judgment that the `761 Patent
is unenforceable for inequitable conduct. Both of these motions have
been fully briefed, and oral argument has been requested. Oral argument
on YieldUP's summary judgment motion is scheduled for November 6,
2002. On September 25, 2002, YieldUP filed a motion for summary
judgment that the `761 Patent is invalid for failure to meet the
written description requirements. That motion is currently being
briefed.
In our other case against YieldUP, involving claims of infringement of our
U.S. Patents Nos. 4,778,532 (the "'532 patent") and 4,917,123 (the "'123
patent") by YieldUP, on October 8, 2002, the Court ruled on pending motions by
YieldUP, and declined to exercise jurisdiction to consider claims regarding the
unenforceability of other of our patents since that question is presently
pending in the `761 litigation (see above), and deferred deciding the issue of
whether or not this case is exceptional for purposes of the award of attorneys'
fees, until after any appeal. The parties and the Court also agreed that
YieldUP's state law claims would be dismissed with prejudice. The case now
appears ripe to move forward on appeal.
On November 6, 2002, we filed a lawsuit against Akrion LLC in the United
States District Court for the District of Delaware, asserting claims of
infringement by Akrion's wet surface preparation products of our '761 patent (as
well as our '532 and '123 patents, which claims are stated to be contingent on
our obtaining a reversal or the vacating of rulings by the Court that had found
those patents invalid and unenforceable). During a hearing the same day, we
informed the Court that we intend to file a motion to consolidate the YieldUP
and Akrion cases.
Our involvement in any patent dispute, or other intellectual property dispute
or action to protect trade secrets and know-how, could result in a material
adverse effect on our business. Adverse determinations in current litigation or
any other litigation in which we may become involved could subject us to
significant liabilities to third parties, require us to grant licenses to or
seek licenses from third parties, and prevent us from manufacturing and selling
our products. Any of these situations could have a material adverse effect on
our business.
Item 2. Changes in Securities and Use of Proceeds.
None
33
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
On November 7, 2002, Brad Mattson resigned from our Board of Directors. On
the same day, Bill Turner was elected as a member of our Board of Directors and
as a member of the Audit Committee. Subsequently, the Audit Committee elected
Mr. Turner to be its Chairman. Mr. Turner is an independent director, and he has
a background and experience that our Board believes satisfies the "financial
expert" criteria under proposed SEC rules. From 1983 to 1997, Mr. Turner was
employed by KLA-Tencor Corporation ("KLA"), the world's leading supplier of
process control and yield management solutions for the semiconductor and related
microelectronics industries. Mr. Turner was the Vice President, Finance of KLA
from 1996 to 1997, and was the Corporate Controller of KLA from 1989 to 1996.
One of the members of the Audit Committee of our Board of Directors, Dr.
Hans Betz, is not considered to be an "independent director" under current
NASDAQ corporate governance rules because he had been formerly employed as a
member of the management of STEAG Electronic Systems AG, which owns more than
20% of our stock. The NASDAQ corporate governance rules permit an audit
committee to include one member who is not independent, under exceptional and
limited circumstances, where the company's board of directors determines that
his membership on the audit committee is required by the best interests of the
corporation and its shareholders. Our Board determined that it is in the best
interest of our company and our shareholders for Dr. Betz to continue to serve
on our Audit Committee due to his strong contributions on the Committee, his
familiarity with our industry, and the value of continuity on the Audit
Committee as it oversees our efforts to improve and integrate our financial
systems.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1(1) Amended and Restated Certificate of Incorporation of the Company
3.2(2) Third Amended and Restated Bylaws of the Company
10.13 Promissory Note between Mattson Technology, Inc. and Brad
Mattson, dated July 3, 2002.
10.14 Term Loan and Security Agreement between Mattson Technology,
Inc. and Brad Mattson, dated July 3, 2002.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
34
99.3 Risk Factors incorporated by reference to Annual Report on Form
10-K.
(b) Reports on Form 8-K
None
- -----------
(1) Incorporated by reference from Mattson Technology, Inc. current report on
Form 8-K filed on January 30, 2001.
(2) Incorporated by reference from Mattson Technology, Inc. quarterly report on
Form 10-Q filed on August 14, 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
Date: November 13, 2002
/s/ David Dutton
------------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
36
CERTIFICATIONS
I, David Dutton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mattson
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /S/ DAVID DUTTON
--------------------------------------
David Dutton
President and Chief Executive Officer
*************
37
I, Ludger Viefhues, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mattson
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /S/ LUDGER VIEFHUES
---------------------------------
Ludger Viefhues
Executive Vice President-Finance
and Chief Financial Officer
38