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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 March 30, 2003
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.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0208119
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
47131 Bayside Drive Fremont, California 94538
---------------------------------------- ----------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Number of shares of common stock outstanding as of May 2, 2003: 44,866,783.
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
---------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 30, 2003
and December 31, 2002 ......................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 30, 2003 and March 31, 2002 ................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 30, 2003 and March 31, 2002 ............... 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 Securities................................. 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
(unaudited)
(in thousands)
ASSETS
Mar. 30, Dec. 31,
2003 2002
--------- ---------
Current assets:
Cash and cash equivalents $ 81,719 $ 87,879
Restricted cash 586 1,105
Accounts receivable, net 21,960 34,834
Advance billings 21,621 27,195
Inventories 28,624 50,826
Inventories - delivered systems 3,692 47,444
Prepaid expenses and other current assets 21,465 13,676
--------- ---------
Total current assets 179,667 262,959
Property and equipment, net 15,591 18,855
Goodwill 8,239 12,675
Intangibles 3,611 15,254
Other assets 144 2,416
--------- ---------
$ 207,252 $ 312,159
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 810 $ --
Accounts payable 12,409 14,346
Accrued liabilities 82,535 77,795
Deferred revenue 24,413 108,698
--------- ---------
Total current liabilities 120,167 200,839
--------- ---------
Long-term liabilities:
Deferred income taxes 1,341 5,215
--------- ---------
Total long-term liabilities 1,341 5,215
--------- ---------
Total liabilities 121,508 206,054
--------- ---------
Stockholders' equity:
Common stock 45 45
Additional paid-in capital 542,502 542,482
Accumulated other comprehensive income 2,741 7,131
Treasury stock (2,987) (2,987)
Accumulated deficit (456,557) (440,566)
--------- ---------
Total stockholders' equity 85,744 106,105
--------- ---------
$ 207,252 $ 312,159
========= =========
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
---------------------------
MAR. 30, MAR. 31,
2003 2002
------------ ----------
Net sales $ 67,758 $ 46,205
Cost of sales 49,167 38,786
--------- ---------
Gross profit 18,591 7,419
--------- ---------
Operating expenses:
Research, development and engineering 7,550 9,564
Selling, general and administrative 16,873 22,097
Amortization of intangibles 1,167 1,687
--------- ---------
Total operating expenses 25,590 33,348
--------- ---------
Loss from operations (6,999) (25,929)
Loss on disposition of Wet Business (10,257) -
Interest and other income, net 1,203 1
--------- ----------
Loss before benefit from income taxes (16,053) (25,928)
Benefit from income taxes (62) (151)
--------- ---------
Net loss $ (15,991) $ (25,777)
========= ==========
Net loss per share:
Basic $ (0.36) $ (0.70)
Diluted $ (0.36) $ (0.70)
Shares used in computing net loss per share:
Basic 44,859 37,079
Diluted 44,859 37,079
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
------------------------
MAR. 30, MAR. 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $(15,991) $(25,777)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 2,389 2,400
Deferred taxes (454) (621)
Provision for allowance for doubtful accounts (585) 277
Provision for excess and obsolete inventories -- 1,216
Amortization of goodwill and intangibles 1,167 1,687
Loss on disposition of Wet Business 10,257 --
Loss on disposal of property and equipment 245 84
Changes in assets and liabilities:
Accounts receivable 11,403 15,327
Advance billings (1,637) 11,311
Inventories 2,110 10,043
Inventories - delivered systems 12,871 9,781
Prepaid expenses and other current assets (8,982) 1,728
Other assets 2,184 (811)
Accounts payable (1,678) (2,567)
Accrued liabilities 11,291 (2,718)
Deferred revenue (33,890) (12,036)
-------- --------
Net cash provided by (used in) operating activities (9,300) 9,324
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (731) (91)
Proceeds from the sale of equipment -- 2,413
Proceeds from disposition of Wet Business 2,000 --
Net proceeds from the sale and maturity (purchases) of investments -- (383)
-------- --------
Net cash provided by investing activities 1,269 1,939
-------- --------
Cash flows from financing activities:
Payments on line of credit and long-term debt -- (5,119)
Borrowings against line of credit 810 177
Proceeds from exercise of options 20 --
Change in interest accrual on STEAG note -- 647
Proceeds from the issuance of common stock, net of costs -- 457
Restricted cash 519 (1,271)
-------- --------
Net cash provided by (used in) financing activities 1,349 (5,109)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 522 (216)
-------- --------
Net increase in cash and cash equivalents (6,160) 5,938
Cash and cash equivalents, beginning of period 87,879 64,057
-------- --------
Cash and cash equivalents, end of period $ 81,719 $ 69,995
======== ========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 2003
(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, 2002 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, 2002.
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 months ended March 30, 2003 are not
necessarily indicative of results that may be expected for the future quarters
or for the entire year ending December 31, 2003.
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on issue 00-21, "Multiple -
Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both which are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal years beginning after June 15,
2003 with early adoption permitted. Additionally, companies will be permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." The Company is assessing the potential impact of this
guidance, but at this point does not believe the adoption of EITF 00-21 will
have a material impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. The statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee
6
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 on January 1, 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 January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company believes
that the adoption of this standard will have no material impact on the
consolidated financial statements.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
loss, as all options granted under those plans had an exercise price equal to
market value of the underlying common stock on the date of grant. In December
2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure." The statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The Company has
adopted the disclosure provisions of SFAS No. 148 on January 1, 2003.
The following table sets forth the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting For Stock-Based Compensation", to stock-based employee compensation
(in thousands, except per share data):
THREE MONTHS ENDED
-------------------------
MAR. 30, MAR. 31,
2003 2002
---------- ----------
Net loss:
As reported $ (15,991) $ (25,777)
Add: Total stock-based employee
compensation expense included in net loss -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards,
net of related tax effects (473) (2,574)
---------- ----------
Pro forma $ (16,464) $ (28,351)
========== ==========
Diluted net loss per share:
As reported $ (0.36) $ (0.70)
Pro forma $ (0.37) $ (0.76)
7
Note 2 Balance Sheet Detail (in thousands):
MAR. 30, DEC. 31,
2003 2002
-------- -------
Inventories:
Purchased parts and raw materials $13,537 $27,085
Work-in-process 14,766 20,492
Finished goods 321 3,249
------- -------
$28,624 $50,826
======= =======
Note 3 Disposition of Wet Business
On March 17, 2003, the Company sold the portion of its business that was
engaged in developing, manufacturing, selling, and servicing wet surface
preparation products for the cleaning and preparation of semiconductor wafers
(the "Wet Business") to SCP Global Technologies, Inc. ("SCP"). The Company had
originally acquired the Wet Business on January 1, 2001, as part of its merger
with the STEAG Semiconductor Division and CFM. As part of this disposition, SCP
acquired certain subsidiaries and assets, and assumed certain contracts relating
to the Wet Business, including the operating assets, customer contracts and
inventory of CFM, all outstanding stock of Mattson Technology IP, Inc. ("Mattson
IP"), a subsidiary that owns various patents relating to the Wet Business, and
all equity ownership interest in Mattson Wet Products GmbH, a subsidiary in
Germany that owned the Company's principal Wet Business operations. The Company
retained all the cash from the Wet Business entities, and the Company retained
all rights to payments under the settlement and license agreements with DNS. SCP
acquired the rights to any damages under pending patent litigation relating to
patents owned by Mattson IP. SCP assumed responsibility for the operations,
sales, marketing and technical support services for the Company's former wet
product lines worldwide. The initial purchase price paid to the Company by SCP
to acquire the Wet Business was $2 million in cash. That initial purchase price
is subject to adjustment based on a number of things, including the net working
capital of the Wet Business at closing, to be determined based on a pro forma
post-closing balance sheet, and an earn-out, up to an aggregate maximum of $5
million, payable to the Company based upon sales by SCP of certain products to
identified customers through December 31, 2004. The Company is obligated to (i)
fund salary and severance costs relating to reductions in force to be
implemented in Germany after the closing, (ii) assume certain real property
leases relating to transferred facilities, subject to a sublease to SCP, (iii)
reimburse SCP for future legal fees, up to a maximum of $1 million, in pending
patent litigations, and (iv) reimburse SCP for amounts necessary to cover
specified customer responsibilities.
In the first quarter of 2003, the Company recorded a $10.3 million loss on
the disposition of its Wet Business, as detailed below (in thousands):
Contractual purchase price payment from SCP $ 2,000
Net book value of assets sold,
including goodwill and intangibles (80,824)
Net book value of liabilities assumed by SCP,
including deferred revenues 76,117
Other (7,550)(A)
--------
Loss on disposition of Wet Business $(10,257)
========
8
(A) Included in other category are cumulative translation adjustments,
costs associated with reduction in force, working capital adjustment,
legal indemnification, investment banker's fees, legal, accounting and
other professional fees directly associated with the disposition of
Wet Business.
Note 4 Goodwill and Intangible Assets
The following table summarizes the components of goodwill, other intangible
assets and related accumulated amortization balances (in thousands):
March 31, 2003 December 31, 2002
----------------------------------------- ------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------------ -------------- ------------ ------------ -------------- -------------
(unaudited)
Goodwill $ 8,239 $ -- $ 8,239 $12,675 $ -- $12,675
Other intangible assets -- -- -- -- -- --
Developed technology 6,565 (2,954) 3,611 24,994 (9,740) 15,254
------- ------- ------- ------- ------- -------
Total goodwill and intangible assets $14,804 $(2,954) $11,850 $37,669 $(9,740) $27,929
======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows
(unaudited, in thousands):
THREE MONTHS ENDED
------------------------
MAR. 30, MAR. 31,
2003 2002
---------- ----------
Developed technology amortization $1,167 $1,687
------ ------
Total amortization $1,167 $1,687
====== ======
The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and
is no longer amortizing goodwill. The Company had completed the annual goodwill
impairment test in the fourth quarter of 2002 and determined no impairment
existed. The Company evaluates 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. No assurances can be given that
future evaluations of goodwill will not result in charges as a result of future
impairment. The Company will continue to amortize the identified intangibles.
The amortization expense is estimated to be $2.2 million for fiscal 2003 and
thereafter $1.3 million for each of fiscal years 2004 and 2005. Amortization of
intangibles for the three months ended March 30, 2003 was approximately $1.2
million. In the first quarter of 2003, the Company sold goodwill amounting to
$4.4 million and intangible assets relating to developed technology with a net
book value of $10.5 million, in connection with the Wet Business divestiture.
Note 5 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.
9
THREE MONTHS ENDED
------------------------
MAR. 30, MAR. 31,
2003 2002
---------- ----------
BASIC AND DILUTED LOSS PER SHARE:
Loss available to common stockholders $ (15,991) $ (25,777)
Weighted average common shares outstanding 44,859 37,079
---------- ----------
Basic and diluted loss per share $ (0.36) $ (0.70)
========== ==========
Total stock options outstanding at March 30, 2003 and March 31, 2002 of
5,374,250 and 4,614,367 shares, respectively, were excluded from the computation
of diluted EPS because the effect of including them would have been
antidilutive.
Note 6 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
-----------------------------
(in thousands) MAR. 30, MAR. 31,
2003 2002
-------- --------
Net loss $(15,991) $(25,777)
Cumulative translation adjustments (129) (66)
Decrease in minimum pension liability -- (36)
Unrealized investment gain (loss) 88 (14)
Loss on cash flow hedging instruments (34) (116)
-------- --------
Comprehensive loss $(16,066) $(26,009)
======== ========
The components of accumulated other comprehensive income (loss), net of
related tax, are as follows:
(in thousands) MAR. 30, DEC. 31,
2003 2002
-------- -------
Cumulative translation adjustments $ 2,404 $ 6,848
Unrealized investment gain (loss) 1 (87)
Gain on cash flow hedging instruments 336 370
------- -------
$ 2,741 $ 7,131
======= =======
10
Note 7 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
-------------------------------------------
March 30, 2003 March 31, 2002
------------------ --------------------
($) (%) ($) (%)
--------- ------ --------- ------
United States $ 10,715 16 $ 7,163 16
Germany 8,228 12 5,857 13
Europe - others 533 1 4,658 10
Taiwan 19,776 29 7,055 15
Asia Pacific (including Korea,
Singapore and China) 26,347 39 17,714 38
Japan 2,159 3 3,758 8
--------- --------
$ 67,758 $ 46,205
========= ========
The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.
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
first quarter of 2003, three customers accounted for 16%, 24% and 25% of net
sales. In the first quarter of 2002, three customers accounted for 11%, 14% and
16% of net sales.
Note 8 Debt
The Company's Japanese subsidiary has a credit facility with a Japanese
bank in the amount of 900 million Yen (approximately $7.5 million at March 30,
2003), 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 given a
corporate guarantee for this credit facility. At March 30, 2003, $0.8 million
has been borrowed under 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 expiration date of the
line of credit has been extended from March 27, 2003 to April 26, 2004. All
borrowings under this credit 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 the Company's domestic assets including intellectual
property. The line of credit requires the Company to satisfy certain quarterly
financial covenants, including maintaining a minimum quick ratio and minimum
tangible net worth, and meeting minimum revenue targets. At March 30, 2003, the
Company was in compliance with the covenants and there were no borrowings under
this credit line.
11
Note 9 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 10 Related Party Transactions
The Company has outstanding three loans to Brad Mattson, who was formerly a
director and the Chief Executive Officer of the Company. Mr. Mattson resigned as
an officer of the Company in October 2001 and resigned as a director in November
2002. In the second quarter of 2000, the Company extended a loan to Mr. Mattson
in the principal amount of $200,000, with interest payable at 6% per annum. The
loan was originally due in the first quarter of 2001, but was subsequently
extended to December 31, 2002. Mr. Mattson is currently in default on the
repayment of this loan. In April 2002, the Company extended a loan to Mr.
Mattson in the principal amount of $700,000. This loan did not bear interest and
was due and payable on August 31, 2002. Mr. Mattson has partially repaid this
loan in the amount of $200,000, and is currently in default as to the balance.
On July 3, 2002, the Company extended an additional loan to Brad Mattson in the
principal amount of $2,600,647. The interest rate on this loan is the greater of
the prime rate plus 125 basis points, or that interest rate that would have been
charged under a margin agreement the borrower had previously maintained with
Prudential Securities. The loan is secured by a pledge of shares of stock of the
Company, and was due and payable on December 31, 2002. In late December 2002,
the Company entered into a Forbearance Agreement with Mr. Mattson in which the
Company agreed to forbear from taking legal action provided that Mr. Mattson
repays the loan in quarterly installments, with final payment due December 31,
2003. On March 28, 2003, Mr. Mattson paid $115,000 towards the installment
payment. Mr. Mattson has acknowledged the amounts due, and has indicated his
intention to repay them as soon as practicable. The Company intends to pursue
the collection of the loan balances.
In April 2002, the Company extended a loan to Diane Mattson, a shareholder,
in the principal amount of $700,000. The loan did not bear interest and was due
and payable on August 31, 2002. On July 3, 2002, the Company issued an
additional loan to Ms. Mattson in the principal amount of $1,141,058. The
Company and Ms. Mattson subsequently agreed to consolidate her loans, such that
she owed the Company $1,841,058 under the terms of the July 3, 2002 loan. The
interest rate on this loan is the greater of the prime rate plus 125 basis
points, or that interest rate that would have been charged under a margin
agreement the borrower had previously maintained with Prudential Securities. The
loan is secured by a pledge of shares of stock of the Company, and was
originally due and payable on December 31, 2002. In November 2002, Ms. Mattson
repaid $90,000 on the loan. Ms. Mattson and the Company subsequently agreed to
payment terms under which her loan is payable in quarterly installments
beginning June 30, 2003 with final payment due June 30, 2004.
Note 11 DNS Patent Infringement Suit Settlement
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's then 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.
12
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
make payments to Mattson totaling between $75 million (minimum) and $105 million
(maximum), relating to past damages, partial reimbursement of attorney's fee and
costs, and royalties. The settlement and minimum royalty payments are 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 March 30, 2003, the Company had received payments aggregating $27.0
million from DNS under the terms of the settlement agreement. Additionally, on
April 1, 2003 and April 30, 2003, the Company received $6.0 million and $7.0
million, respectively, 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 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 March 30, 2003, the
Company recognized approximately $3.0 million of royalty income.
On March 17, 2003, as part of the disposition of the Wet Business, the
Company sold to SCP the subsidiary that owns the patents licensed to DNS.
However, the Company retained all rights to payments under the settlement and
license agreements. See Note 3.
Note 12 Guarantees
The Company adopted Financial Accounting Standards Board Interpretation No.
45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Indebtedness of Others" (FIN 45) during the fourth quarter of 2002. FIN
45 requires disclosures concerning the Company's obligation under certain
guarantees, including its warranty obligations.
The warranty offered by the Company on its 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 when the revenue is recognized.
Under its warranty obligations, the Company is required to repair or
replace defective products or parts, generally at a customer's site, during the
warranty period at no cost to the customer. The warranty offered on the
Company's 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 the historical costs, at the time of revenue recognition. The actual
system performance and/or field expense profiles may differ from historical
experience, and in those cases the Company adjusts its warranty accruals
accordingly. The following table is the detail of the
13
product warranty accrual, for the three months ended March 30, 2003 and March
31, 2002:
(in thousands) Three months ended
-------------------------
March 30, March 31,
2003 2002
-------- --------
Balance at beginning of period $ 16,486 $ 19,936
Accrual for warranties issued during the period 2,207 3,222
Changes in liability related to
pre-existing warranties -- --
Settlements made during the period (1,156) (1,357)
-------- --------
Balance at end of period $ 17,537 $ 21,801
======== ========
During the ordinary course of business, the Company provides standby
letters of credit or other guarantee instruments to certain parties as required.
As of March 30, 2003, the maximum potential amount of future payments that the
Company could be required to make under these guarantee agreements is
approximately $0.8 million. The Company has not recorded any liability in
connection with these guarantee arrangements beyond that required to
appropriately account for the underlying transaction being guaranteed. The
Company does not believe, based on historical experience and information
currently available, that it is probable that any amounts will be required to be
paid under these guarantee arrangements.
The Company is a party to a variety of agreements pursuant to which it may
be obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
the Company, under which the Company may agree to hold the other party harmless
against losses arising from a breach of representations or under which the
Company may have an indemnity obligation to the counterparty with respect to
certain intellectual property matters or certain tax related matters.
Customarily, payment by the Company with respect to such matters is conditioned
on the other party making a claim pursuant to the procedures specified in the
particular contract, which procedures typically allow the Company to challenge
the other party s claims. Further, the Company's obligations under these
agreements may be limited in terms of time and/or amount, and in some instances,
the Company may have recourse against third parties for certain payments made by
the Company. It is not possible to predict the maximum potential amount of
future payments under these or similar agreements due to the conditional nature
of the Company's obligations and the unique facts and circumstances involved in
each particular agreement. Historically, payments made by the Company under
these agreements have not had a material effect on the Company's financial
position or results of operations. The Company believes if it were to incur a
loss in any of these matters, such loss should not have a material effect on the
Company's financial position or results of operations.
Note 13 Non-Recurring, Restructuring and Other Charges
During the third and fourth quarter of 2002, the Company recorded
restructuring and other charges of $17.3 million in connection with the plan to
align its cost structure with projected sales resulting from the unfavorable
economic conditions and to reduce future operating expenses. This restructuring
program included a workforce reduction at certain locations, the shut-down of
its Malvern, Pennsylvania operations, the write-down of certain fixed assets and
intangible assets and the consolidation of excess facilities.
The following is a summary of activities in restructuring related accruals
during the three months ended March 30, 2003:
Liability as of Liability as of
December 31, Cash Payments March 30,
2002 in 2003 2003
--------------- ------------- ---------------
Workforce reduction $ 2,307 $(1,738) $ 569
Consolidation of
excess facilities 2,056 (187) 1,869
------- ------- -------
Total $ 4,363 $(1,925) $ 2,438
======= ======= =======
The Company anticipates that the accrued liabilities at March 30, 2003 for
the workforce reduction and the consolidation of excess facilities will be paid
out in the next three months and the next two to three years, respectively.
14
Note 14 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
previously used to house its manufacturing and administrative functions related
to wet surface preparation products. The lease for both buildings has
approximately 16 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 determining the facilities lease loss,
net of cost recovery efforts from expected sublease income, various assumptions
were made, including, the time period over which the building will be vacant;
expected sublease terms; and expected sublease rates. 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 approximately $24.0 million under certain
circumstances. The Company expects to make payments related to the above noted
facilities lease losses over the next sixteen years, less any sublet amounts.
In connection with the disposition of the Wet Business, the Company agreed
to assume the lease obligations with respect to the facilities used to house the
manufacturing and administrative functions of the transferred Wet Business in
Pliezhausen Germany. That lease has approximately 3 years remaining with an
approximate rental cost of $1.2 million annually. The Company has sublet the
facilities to SCP on terms that cover all rent and costs payable by the Company
under the primary lease. Under its sublease, SCP has the right upon 90 days
notice to partially or completely terminate the sublease, in which case the
Company would become responsible for the lease costs, net of cost recovery
efforts and any sublease income.
In the ordinary course of business, the Company is subject to claims and
litigation, including claims that it infringes third party patents, trademarks
and other intellectual property rights. Although the Company believes that it is
unlikely that any current claims or actions will have a material adverse impact
on its 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 the Company, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
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 unaudited 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.
Overview
We are a leading supplier of semiconductor wafer processing equipment used in
the front-end-of-line fabrication of integrated circuits. Our products include
dry strip, RTP and PECVD equipment. Our manufacturing equipment utilizes
innovative technology to deliver advanced processing capability and high
productivity for both 200 mm and 300 mm wafer production at technology nodes at
and below 130 nm.
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
15
been experiencing a severe downturn since 2001, 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 occurred throughout 2001 and 2002, and have continued into 2003.
Global economic conditions and consumer-related demand have not improved,
resulting in low levels of investment in corporate infrastructure. The overall
demand outlook is still uncertain over the intermediate term. 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. During 2002, we took steps to restructure our operations and reduce our
operating cost levels to align them with expected market conditions. Although we
continue to look for ways to reduce costs, we are largely dependent upon
increases in sales in order to attain profitability. If our sales do not
increase, our current operating expenses could prevent us from attaining
profitability and adversely affect our financial position and results of
operations.
On January 1, 2001, we simultaneously acquired the semiconductor equipment
division of STEAG Electronic Systems AG (the "STEAG Semiconductor Division") and
CFM Technologies, Inc. ("CFM"), which we refer to as "the merger." The merger
substantially changed the size of our company and the nature and breadth of our
product lines. At the time we completed the merger, our industry was entering an
economic downturn that deepened sequentially and still continues. The merger
more than doubled the size of our company, and we faced a number of challenges
in integrating the merged companies, coupled with the impact of lower sales as a
result of the downturn in the industry, that resulted in excess production
capacity. Subsequently, during 2002, we realigned our workforce and production
capacity in light of business levels experienced at that time.
During 2002, we determined to refocus our business on our core technologies
in dry strip and rapid thermal processing. Restructuring actions were taken in
2002 and the first quarter of 2003 to align the company with this focus and to
reduce operational expenses. As part of this restructuring effort, we divested
one significant line of business, our wet surface preparation products business
(our "Wet Business"), which was sold to SCP Global Technologies, Inc. ("SCP") on
March 17, 2003. We had originally acquired the Wet Business on January 1, 2001,
as part of our merger with the STEAG Semiconductor Divison and CFM. We also
narrowed our CVD focus to a limited number of strategic customers, and divested
the subsidiary that had constituted our epi products group. These divestitures
were the last major actions in completing our strategic restructuring plan.
These actions are intended to reduce our cost structure and allow us to
concentrate resources on the development of core products in enabling RTP and
strip solutions. Our wet products business represented a significant portion of
our revenue and our costs in 2001, 2002 and the first quarter of 2003, and the
divestiture of that business will affect the comparability of our financial
statements in future periods to our reported results for 2001, 2002 and the
first quarter of 2003.
As part of our disposition of the Wet Business, SCP acquired the operating
assets, including customer contracts and inventory of one of our subsidiaries
(formerly CFM Technologies, Inc.), all outstanding stock of Mattson Technology
IP, Inc., which is the owner of various patents relating to the Wet Business,
and all equity ownership of Mattson Wet Products GmbH, a German corporation. We
retained all cash in the Wet Business, and all rights to payments under the
settlement and license agreements with DNS, but we transferred all rights to any
damages under pending and future patent litigation to SCP. Upon closing, SCP
assumed responsibility for the operations, sales, marketing and technical
support services for our former wet product lines worldwide. During the first
quarter of 2003, we recorded additional accruals of approximately $11.9 million
to cover certain future obligations relating to this transaction.
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
16
April 1, 2007, in return for our granting DNS a worldwide license under the
previously infringed patents. Depending on the volume of future product sales by
DNS, we could receive up to an additional $30 million in royalty payments. We
determined, 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 our analysis,
which included an independent appraisal, we allocated $15.0 million to past
damages, which we recorded as "other income" during 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 2002 and in the first
quarter of 2003, we recognized royalty revenue of approximately $6.3 million and
$3.0 million, respectively. During 2002, we received payments aggregating $27.0
million and during April 2003, we received additional payments aggregating $13.0
million.
During the quarter ended March 30, 2003, we had a net loss of $16.0 million,
including $10.3 million related to the disposition of the Wet Business. 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, 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, goodwill and other intangible assets,
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 based on objective evidence of fair value of the individual
elements. The two elements are shipment of the tool and
17
installation of the tool. Under this approach, the portion of the invoice price
that is due after installation services have been performed and upon final
customer acceptance of the tool has been obtained, 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 and title transfer 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.
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a portion of our revenues. 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 products
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. At the time of revenue recognition, a
provision for the estimated cost of warranty is recorded as a cost of sales
based on our historical costs. 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 a first-in, first out basis. Due to changing market conditions,
estimated future requirements, age of the inventories on hand and our
introduction of new products, we regularly monitor inventory quantities on hand
and declare obsolete inventories that are no longer used in current production.
Accordingly, we write down our inventories to estimated net realizable value.
Actual demand may differ from forecasted demand and such difference may result
in write downs that 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, given the competitive pressures and cyclicality of the
semiconductor industry there may be significant unanticipated changes in demand
or technological developments that could have a significant impact on the value
of our inventory and our reported operating results.
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." SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
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.
18
Impairment of Long-Lived Assets. We assess the impairment of identified
intangibles, long-lived assets and related goodwill whenever events or changes
in circumstances indicate that the carrying value may not be recoverable, in
accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived 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 long-lived 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 long-lived assets,
we must make assumptions regarding estimated future cash flows and other
factors, including discount rates and probability of cash flow scenarios, 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.
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
-------------------------
MAR. 30, MAR. 31,
2003 2002
--------- --------
Net sales 100% 100%
Cost of sales 73% 84%
---- ----
Gross profit 27% 16%
---- ----
Operating expenses:
Research, development and engineering 11% 21%
Selling, general and administrative 25% 48%
Amortization of intangibles 2% 3%
---- ----
Total operating expenses 38% 72%
---- ----
Loss from operations (11)% (56)%
Loss on disposition of wet business (15)% -
Interest and other income, net 2% -
---- ----
Loss before provision for income taxes (24)% (56)%
Benefit from income taxes - -
---- ----
Net loss (24)% (56)%
==== ====
19
Net Sales
Net sales for the first quarter of 2003 of $67.8 million reflected an
increase of 46.6% compared to $46.2 million for the first quarter of 2002, and
an increase of 37.6% compared to $49.2 million for the fourth quarter of 2002.
Net sales in the first quarter of 2003 increased compared to the same period of
2002 primarily due to increased customer acceptances and resulting recognition
of revenue from wet systems that we delivered in earlier periods, higher
shipments of dry strip and RTP products, and royalty revenue of approximately
$3.0 million. Net sales increased in the first quarter of 2003 compared to the
fourth quarter of 2002 primarily due to increased customer acceptances of wet
systems and higher shipments of dry strip and RTP products.
The divestiture of our Wet Business on March 17, 2003 will reduce our net
sales and affect the comparability of our results from future periods. Net sales
of Wet Business products were $32.3 million in the first quarter of 2003, $23.7
million in the first quarter of 2002 and $23.0 million in the fourth quarter of
2002, or 47.6%, 51.3% and 46.7% of total net sales, respectively. We anticipate
that net sales for the second quarter of 2003 will be in the range of between
$28 million and $33 million.
Total deferred revenue at March 30, 2003 was approximately $24.4
million, down from $124.5 million at the end of the first quarter of 2002, and
down from $108.7 million at the end of the fourth quarter of 2002. The decrease
was primarily due to the elimination of deferred revenue related Wet tools as a
result of the divestiture of our Wet Business on March 17, 2003. Wet Business
product sales accounted for the majority of our deferred revenue. 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
nine 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 84.2% and 84.5% of net sales for the first quarter of 2003
and 2002, respectively. We anticipate that international sales will continue to
account for a significant portion of net sales for 2003.
Gross Margin
Our gross margin for the first quarter of 2003 was 27.4%, an increase from
16.1% for the first quarter of 2002. The increase in gross margin was primarily
due to higher gross margins associated with wet products shipped in earlier
periods for which we received customer acceptance this quarter, better
absorption of our production facilities, improved manufacturing overhead
efficiencies, royalty revenue recognized from DNS with no associated cost of
sales, and a decrease in inventory valuation charges related to the merger that
adversely affected margins in the first quarter of 2002.
The divestiture of our Wet Business on March 17, 2003, will affect the
comparability of our gross margins in future periods to our historical margins.
We anticipate that our gross margin will rise for the second quarter of 2003,
into the mid-30% range.
Due to intense competition we are continuing to face pricing pressure from
competitors that is also affecting our gross margin. In response, we are
continuing with our cost reduction efforts and efforts to differentiate our
product portfolio. We continue to have excess capacity at our remaining
manufacturing sites but have reduced costs at those sites in an effort to
improve our gross margin.
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 and costs associated with the introduction of
new products.
Research, Development and Engineering
Research, development and engineering expenses for the first quarter of
2003 were $7.6 million, or 11.1% of net sales, as compared to $9.6 million, or
20.7% of net
20
sales, for the first quarter of 2002. The decrease in research, development and
engineering expenses in the first quarter of 2003 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. Total research, development and engineering expenses
declined from $8.5 million in the fourth quarter of 2002 as a result of the
reduction of personnel and continuing cost controls during the first quarter of
2003. Our results for the first quarter ending March 30, 2003 reflect research,
development and engineering expenses relating to our Wet Business only until
March 17, 2003, the date the disposition was completed. As a result of the
divestiture, we expect our research, development and engineering expenses to
decrease in future periods, compared to historical expenses.
Selling, General and Administrative
Selling, general and administrative expenses for the first quarter of 2003
were $16.9 million, or 24.9% of net sales, as compared to $22.1 million, or
47.8% of net sales, for the first quarter of 2002. 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,
and lower travel expenses. Total selling, general and administrative expenses
declined from $21.0 million in the fourth quarter of 2002, as a result of the
reduction of personnel and continuing cost controls during the first quarter of
2003. Our results for the first quarter ending March 30, 2003 reflect selling,
general and administrative expenses relating to our Wet Business only until
March 17, 2003, the date disposition was completed. As a result of the
divestiture, we expect our selling, general and administrative expenses to
decrease in future periods, compared to historical expenses.
Amortization of Goodwill and Intangibles
We no longer amortize goodwill following our adoption of SFAS 142 on
January 1, 2002. We continue to amortize the identified intangibles, in an
amount estimated to be $2.2 million for fiscal 2003 and thereafter $1.3 million
for each fiscal years 2004 and 2005.
Interest and Other Income
Interest and other income for the first quarter of 2003 was $1.2 million,
or 1.8% of net sales, as compared to approximately $1,000, for the first quarter
of 2002. During the first quarter of 2003, other income consisted of interest
income of $0.3 million resulting from the investment of our cash balances, a
foreign exchange gain of $0.5 million and other income of $0.4 million. In the
same period of 2002, interest income of $0.5 million primarily related to the
investment of our cash balances, and a foreign exchange gain of $0.9 million
were offset by interest expense of $1.4 million primarily related to interest on
our notes payable to SES.
Provision for Income Taxes
We recorded an income tax benefit for the first quarter of 2003 of
approximately $62,000. The benefit consists of the deferred tax benefit on the
amortization of certain intangible assets of approximately $454,000 offset by
foreign taxes incurred by our foreign sales and service operations of
approximately $67,000, foreign withholding taxes of approximately $300,000, and
state income taxes of approximately $25,000. There is no US or German current
income tax benefit or expense.
In the first quarter of 2002, we recorded an income tax benefit of $0.1
million which primarily related to the reversal of the deferred tax liability
associated with
21
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.
Liquidity and Capital Resources
Our cash and cash equivalents, excluding restricted cash, were $81.7 million
at March 30, 2003, a decrease of $6.2 million from $87.9 million at December 31,
2002. Stockholders' equity at March 30, 2003 was approximately $85.7 million
compared to $106.1 million as of December 31, 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.
Our Japanese subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen (approximately $7.5 million at March 30, 2003),
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 March 30, 2003, the borrowing under this
credit facility is $0.8 million.
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 expiration date of the line of credit
has been extended from March 27, 2003 to April 26, 2004. 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. At March 30, 2003, 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 make payments to us
totaling between $75 million and $105 million, relating to past damages, partial
reimbursement of attorney's fee and costs, and royalties. The settlement and
minimum royalty payments are 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
========
Payments under the cross license agreement total a minimum of $30 million
and a maximum $60 million. Once total license payments equal $30 million, the
minimum payment schedule no longer applies. No further royalties are payable
once total payments reach $60 million. 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. As of March 30, 2003, we had received payments
aggregating $27.0 million ($24.3 million, net, after deducting 10% Japanese
withholding tax) from DNS under the terms of the
22
settlement agreement. Additionally, in April 2003, we received payments
aggregating $13.0 million ($11.7 million, net of withholding tax) from DNS.
Net cash used in operating activities was $9.3 million during the first
quarter of 2003 as compared to $9.3 million provided by operating activities
during the same quarter in 2002.
The net cash used in operating activities during the first quarter of 2003
was primarily attributable to a net loss of $16.0 million, a decrease in
deferred revenue of $33.9 million, a decrease in prepaid expenses and other
current assets of $9.0 million, a decrease in accounts payable of $1.7 million,
and an increase in advanced billings of $1.6 million. The cash used in operating
activities was offset by a net loss attributable to the disposition of the Wet
Business of $10.3 million, a decrease in inventories of $15.0 million, an
increase in accrued liabilities of $11.3 million, a decrease in accounts
receivable of $11.4 million, and the non-cash depreciation and amortization of
$2.4 million.
The net cash provided by operating activities during the first quarter of
2002 was primarily attributable to the non-cash depreciation and amortization of
$2.4 million, a decrease in accounts receivable of $15.3 million, a decrease in
advance billings of $11.3 million and a decrease in inventories of $19.8
million. The cash provided by operating activities was offset by a net loss of
$25.8 million, a decrease in deferred revenue of $12.0 million, a decrease in
accounts payable of $2.6 million, and a decrease in accrued liabilities of $2.7
million.
Net cash provided by investing activities was $1.3 million during the first
quarter of 2003 as compared to $1.9 million during the same quarter last year.
The net cash provided by investing activities during the first quarter of 2003
is attributable to proceeds from the disposition of the Wet Business of $2.0
million offset by purchase of property and equipment of $0.7 million. Net cash
provided by investing activities during the first quarter of 2002 was $1.9
million and was attributable to the proceeds from the sale of investments of
$4.1 million, and sale of equipment of $2.4 million, offset by purchases of
investments of $4.4 million.
Net cash provided by financing activities was $1.3 million during the first
quarter of 2003 as compared $5.1 million used in financing activities during the
same quarter last year. The net cash provided by financing activities during the
first quarter of 2003 is primarily attributable to borrowing against our
Japanese line of credit in the amount of $0.8 million and a decrease in
restricted cash of $0.5 million. Net cash used in financing activities during
the first quarter of 2002 was $5.1 million and was primarily attributable to the
payment against our Japanese line of credit and long-term debt of $5.1 million
and an increase in restricted cash by $1.3 million offset by a reduction in the
interest accrual on a note payable to SES of $0.6 million, borrowings under our
Japanese line of credit in the amount of $0.2 million and proceeds from our
stock plans of $0.5 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, 2002 and the first three months of
2003, 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
23
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.
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 anticipated sales and gross
margins in future periods, changes in our future costs as result of our
disposition of the Wet Business, 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:
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 are experiencing
cancellations, delays and push-outs of orders, which reduce our revenues, cause
delays in our ability to recognize revenue on the 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 year in 2000, the semiconductor industry is now,
since 2001, in the midst of a significant and prolonged downturn, and we and
other industry participants 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 will seriously harm our business.
As a result of the acquisition of the STEAG Semiconductor Division and CFM
at the beginning of 2001, we grew to be 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 prohibited 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, 2002 and 2001, and for the first quarter of
2003, our net loss was $94.3 million, $336.7 million, and $16.0 million,
respectively, compared to net income of $1.5 million for the year ended December
31, 2000. The net loss in 2002 primarily reflected the impact of our continuing
decline in net sales. Subsequent to December 31, 2002, we have sold the Wet
Business to SCP, which business had originally been acquired as part of our
acquisition of the STEAG Semiconductor Division and CFM. If our actions to date,
including our recent sale to SCP of the Wet Business, 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 in our
remaining core businesses. Our failure to make these investments could seriously
harm our long-term business prospects.
24
We Are Implementing New Financial Systems, and Will Need to Continue to Improve
or Implement New Systems, Procedures and Controls.
We are implementing new financial systems used in the consolidation of our
financial results, in order to further automate processes and align the
disparate systems used by our acquired businesses. The integration of the STEAG
Semiconductor Division and CFM and their operational and financial systems and
controls after the merger in 2001 placed a significant strain on our management
information systems and our administrative, operational and financial resources,
requiring us to improve our systems and implement new operational and financial
systems, procedures and controls. Since that acquisition, we have been pursuing
integration of the businesses, systems and controls of the three companies, as
each business historically used a different financial system. We have recently
implemented new financial systems to aid in the consolidation of our financial
reporting operations. These financial systems are new and not yet fully
operational, and we have not had extensive experience with them. We may
encounter unexpected difficulties, costs or other challenges that make
implementation and use of these systems more difficult or costly than expected,
may cause the consolidation and reporting of our financial results to be more
time-consuming than expected, and may require additional management resources
than expected before they are fully implemented and operating smoothly. In
addition, the sale of our Wet Business to SCP will continue to place a
significant strain on our management information systems and our administrative,
operational and financial resources as we separate out the Wet Business as a
discontinued operation from our core businesses. Continued improvement or
implementation of new systems, procedures and controls may be required, and
could cause us to incur additional costs, and place further burdens on our
management and internal resources. If our new financial systems do not result in
the expected improvements, or if we are unable to fully implement these systems,
procedures and controls in a timely manner, our business could be harmed.
In addition, as a result of new requirements proposed by the Securities and
Exchange Commission, in response to the passage of the Sarbanes-Oxley Act of
2002, requiring annual review and evaluation of our internal control systems,
and attestation of these systems by our independent auditors, we are currently
reviewing our internal control procedures, and working with our auditors to
implement any enhancements of such procedures, or further documentation of such
procedures, that may be necessary. Any improvements in our internal control
systems or in documentation of such internal control systems could be costly to
prepare or implement, divert attention of management or finance staff, and may
cause our operating expenses to increase over the ensuing year.
The Sale of Our Wet Business to SCP May Fail to Result in the Benefits We
Anticipate, and May Cause Us to Incur Greater Costs Than Anticipated.
We may not obtain the benefits we expect as a result of the sale of the Wet
Business to SCP, such as greater strategic focus on our core businesses. Our
agreement with SCP may require an adjustment to the initial purchase price, if
the net working capital of the Wet Business after the sale is not within a
specified range, and could result in a reduction of the purchase price to us. We
expect the purchase price adjustment based on the net working capital at closing
to result in a payment to SCP, in an amount approximately $2.0 million. We have
agreed with SCP to (i) fund salary and severance costs for certain reductions in
force to be implemented in Germany after the closing, (ii) assume real property
leases relating to our former Pliezhausen facilities, subject to a sublease of
all or a portion of such facilities to SCP, (iii) pay legal fees up to a maximum
of $1 million in connection with certain pending patent litigation, and (iv)
reimburse SCP for amounts to cover specified arrangements and responsibilities
with customers and other costs. We recorded additional accruals of approximately
$11.9 million to cover certain future obligations relating to this transaction.
However, our actual costs and expenses could be greater or lesser than expected,
and if greater, could materially adversely affect our results of operation in
future periods.
25
In addition, our consolidated financial statements do not reflect what
our financial position, results of operations and cash flows would have been had
the Wet Business been a separate stand-alone entity during the periods
presented. Therefore, we cannot predict with certainty what the effects of the
divestiture might be on ongoing operations and results, and whether the expected
cost savings will materialize, or whether the transaction may have a material
effect on our financial position, results of operations or cash flows taken as a
whole, or whether the transaction will contribute to our financial results
differently from the investment community's expectations. Our divestiture of the
Wet Business may also result in the cancellation of orders by customers who may
be unhappy that we are discontinuing the product line, particularly if the
customer has previously purchased wet processing products from us. We may lose
future orders if customers are wary or unsure of our long-term plans, or become
concerned that we will discontinue other product lines, or they elect to
purchase products from suppliers that appear to have a broader product offering.
Customers of our wet processing products may attempt to return the products if
they fear that ongoing maintenance and support of the product will not be
available.
The divestiture may also prove more costly or difficult than expected,
could cause us to lose key employees, and divert management attention and
resources from our other core businesses, particularly over the next several
quarters. In addition to the employees and facilities transferred to SCP as part
of the divestiture, we are shutting down other facilities in the United States
previously devoted largely to the Wet Business, and terminating additional
employees not hired by SCP who had predominantly worked in the Wet Business. In
order to achieve the desired cost savings from the divestiture, we will need to
incur substantial restructuring costs, including severance costs associated with
headcount reductions, and asset write-offs associated with manufacturing and
facility closures. We may incur additional costs associated with the
discontinued operations, and the dedication of management resources to the sale
has distracted and may continue to distract attention from our remaining core
businesses. We may incur additional costs associated with these activities,
which could materially reduce our short term earnings.
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.
26
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
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;
o announcements of developments related to our business;
o fluctuations in our operating results and order levels;
27
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.
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.
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 March 30,
2003.
28
Fair Value
March 30,
2003
--------------
(In thousands)
Assets
Cash and cash equivalents $ 81,719
Average interest rate 0.83%
Restricted cash $ 586
Average interest rate 1.00%
Foreign Currency Risk
We are primarily a US Dollar functional currency entity. We 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 the 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 March 30, 2003 about us 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.
Average Estimated
Notional Contract Fair
Amount Rate Value
--------- ------------ --------
(In thousands, except for average contract rate)
Foreign currency forward sell exchange contracts:
Mattson Technology Inc. (US Dollar equivalent amount)
Japanese Yen $ 4,100 120.28 $ 4,119
Mattson Thermal Products GmbH (Euro equivalent amount)
U.S. Dollar EUR 8,022 1.04 EUR 7,805
Japanese Yen EUR 1,722 123.17 EUR 1,676
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. To neutralize its US operation's exposure to
exchange rate volatility, the Company keeps EUROS in a foreign currency bank
account. The balance of this bank account was 22.3 million EUROS at March 30,
2003.
29
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 continue to need improvement.
In connection with the audit of our consolidated financial statements as of and
for the year ended December 31, 2002, our independent accountant,
PricewaterhouseCoopers LLP ("PwC") noted as a reportable condition our ongoing
need to improve and automate procedures for our month-end closings. As
previously reported, the same condition had been noted by our former independent
accountants, Arthur Andersen LLP, in connection with the audit of our
consolidated financial statements as of and for the year ended December 31,
2001. Our management did not disagree with the report made by PwC or Andersen.
In the first quarter of 2003, we implemented a new computerized system to
automate these procedures. Our work to implement and improve the new system
continues as an active project.
(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 quarterly evaluation by our senior
management referenced in paragraph (a) above. As noted in paragraph (a) above,
in the first quarter of 2003 we implemented a new computer system to automate
our monthly closing procedures.
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.
As previously reported in our most recent annual report on Form 10-K, we
have been litigating three ongoing cases involving wet surface preparation
intellectual property, all of which were brought in the United States District
Court for the District of Delaware by our subsidiary Mattson Wet Products, Inc.
(formerly CFM Technologies, Inc.) and our former subsidiary Mattson Technology
IP, Inc. (formerly CFMT, Inc.). On March 17, 2003, we divested our wet surface
preparation business. As part of that transaction, we sold the stock of Mattson
Technologies IP, Inc., which is the owner of all the patents at issue in the
three cases, and we sold the operating assets of Mattson Wet Products, Inc.,
including its right to damages in the pending lawsuits, to SCP Global
Technologies, Inc. As a result, we no longer control Mattson Technology IP, Inc.
and its actions in the pending patent litigations, although our subsidiary
Mattson Wet Products, Inc. remains as a nominal co-plaintiff in those actions.
Except as reported in our most recent annual report on Form 10-K, there have
been no material developments in the pending cases during the first quarter of
2003.
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.
30
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.5(1) Stock and Asset Purchase Agreement for Wet Products Division dated as of February 12, 2003, by and
among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a Delaware
corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance,
Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation.
2.6(1) First Amendment to Stock and Asset Purchase Agreement for Wet Products Division dated as of March 17,
2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a
Delaware corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology
Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation.
3.1(2) Amended and Restated Certificate of Incorporation of the Company
3.2(3) Third Amended and Restated Bylaws of the Company
10.15 Sublease agreement dated February 27, 2003, by and between Lam Research Corporation, a Delaware
Corporation, and Mattson Technology, Inc., a Delaware Corporation, for lease of building.
10.16 Lease agreement dated September 2, 2001, by and between RENCO EQUITIES IV, a California
partnership, and Lam Research Corporation, a Delaware Corporation, for lease of building.
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.
99.3 Risk Factors incorporated by reference to Annual Report on Form 10-K.
31
(b) Reports on Form 8-K
None
- -----------
(1) Incorporated by reference from Mattson Technology, Inc. current report on
Form 8-K filed on April 1, 2003.
(2) Incorporated by reference from Mattson Technology, Inc. current report on
Form 8-K filed on January 30, 2001.
(3) Incorporated by reference from Mattson Technology, Inc. quarterly report on
Form 10-Q filed on August 14, 2002.
32
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: May 14, 2003
/s/ David Dutton
---------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
33
CERTIFICATIONS
MATTSON TECHNOLOGY, INC.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
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: May 14, 2003 /S/ DAVID DUTTON
-------------------------------------
David Dutton
President and Chief Executive Officer
34
*************
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: May 14, 2003 /S/ LUDGER VIEFHUES
-------------------------------------
Ludger Viefhues
Executive Vice President-Finance and
Chief Financial Officer
35