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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 28, 2004
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 Parkway, 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 April 29, 2004: 49,804,410.
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 28, 2004
and December 31, 2003 ......................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 28, 2004 and March 30, 2003 ................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 28, 2004 and March 30, 2003 ................ 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 31
Item 4. Controls and Procedures ......................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 33
Item 2. Changes in Securities, Use of Proceeds and Issuer
Repurchase of Equity Securities .............................. 34
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....................................................... 35
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
ASSETS
Mar. 28, Dec. 31,
2004 2003
--------- ---------
Current assets:
Cash and cash equivalents $ 103,085 $ 77,115
Restricted cash 509 509
Accounts receivable, net 50,794 34,260
Advance billings 24,414 20,684
Inventories 35,841 27,430
Inventories - delivered systems 8,540 6,549
Prepaid expenses and other current assets 12,182 12,995
--------- ---------
Total current assets 235,365 179,542
Property and equipment, net 17,058 16,211
Goodwill 8,239 8,239
Intangibles 2,298 2,626
Other assets 1,044 769
--------- ---------
Total assets $ 264,004 $ 207,387
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,076 $ 21,340
Accrued liabilities 59,939 62,608
Deferred revenue 43,555 38,680
--------- ---------
Total current liabilities 129,570 122,628
--------- ---------
Long-term liabilities:
Deferred income taxes 875 1,055
--------- ---------
Total long-term liabilities 875 1,055
--------- ---------
Total liabilities 130,445 123,683
--------- ---------
Commitments and Contingencies (Note 14)
Stockholders' equity:
Common stock 50 45
Additional paid-in capital 592,796 546,099
Accumulated other comprehensive income 9,307 9,468
Treasury stock (2,987) (2,987)
Accumulated deficit (465,607) (468,921)
--------- ---------
Total stockholders' equity 133,559 83,704
--------- ---------
Total liabilities and
stockholders' equity $ 264,004 $ 207,387
========= =========
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. 28, MAR. 30,
2004 2003
-------- --------
Net sales $ 53,125 $ 67,758
Cost of sales 30,717 49,167
-------- --------
Gross profit 22,408 18,591
-------- --------
Operating expenses:
Research, development and engineering 4,896 7,550
Selling, general and administrative 12,947 16,873
Amortization of intangibles 328 1,167
-------- --------
Total operating expenses 18,171 25,590
-------- --------
Income (loss) from operations 4,237 (6,999)
Loss on disposition of Wet Business -- (10,257)
Interest and other income (expense), net (654) 1,203
-------- --------
Income (loss) before benefit from income taxes 3,583 (16,053)
Provision for (benefit from) income taxes 269 (62)
-------- --------
Net income (loss) $ 3,314 $(15,991)
======== ========
Net income (loss) per share:
Basic $ 0.07 $ (0.36)
Diluted $ 0.07 $ (0.36)
Shares used in computing net
income (loss) per share:
Basic 47,463 44,859
Diluted 49,275 44,859
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. 28, MAR. 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 3,314 $ (15,991)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,313 2,389
Deferred taxes (175) (454)
Provision for excess and obsolete inventories 348 --
Amortization of goodwill and intangibles 328 1,167
Loss on disposition of Wet Business -- 10,257
Loss on disposal of property and equipment 77 245
Changes in assets and liabilities:
Accounts receivable (16,525) 10,818
Advance billings (3,732) (1,637)
Inventories (8,785) 2,110
Inventories - delivered systems (2,001) 12,871
Prepaid expenses and other current assets 743 (8,982)
Other assets 84 2,184
Accounts payable 4,749 (1,678)
Accrued liabilities (2,639) 11,291
Deferred revenue 4,878 (33,890)
--------- ---------
Net cash used in operating activities (18,023) (9,300)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (2,545) (731)
Proceeds from disposition of Wet Business -- 2,000
--------- ---------
Net cash provided by (used in) investing activities (2,545) 1,269
--------- ---------
Cash flows from financing activities:
Borrowings against line of credit -- 810
Proceeds from exercise of options 110 20
Proceeds from the issuance of
common stock, net of costs 46,592 --
Restricted cash -- 519
--------- ---------
Net cash provided by financing activities 46,702 1,349
--------- ---------
Effect of exchange rate changes on
cash and cash equivalents (164) 522
--------- ---------
Net increase (decrease) in cash and cash equivalents 25,970 (6,160)
Cash and cash equivalents, beginning of period 77,115 87,879
--------- ---------
Cash and cash equivalents, end of period $ 103,085 $ 81,719
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 28, 2004
(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, 2003 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 accompanying 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, 2003.
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 revenues 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 28, 2004 are not
necessarily indicative of results that may be expected for future quarters or
for the entire year ending December 31, 2004.
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission (or SEC) issued
Staff Accounting Bulletin No. 104 (or SAB 104), "Revenue Recognition", which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind the accounting guidance contained in SAB 101
related to multiple-element revenue arrangements that was superseded as a result
of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's related
"Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers" issued with SAB 101, that had been codified in SEC Topic 13, "Revenue
Recognition." While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104, which was effective upon issuance. The
Company's adoption of SAB 104 did not have a material effect on its financial
position or results of operations.
6
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
income (loss), as all options granted to employees 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 adopted the disclosure provisions of SFAS No. 148 on January 1,
2003.
The following table sets forth the effect on net income (loss) and earnings
(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. 28, MAR.30,
2004 2003
-------- --------
Net income (loss):
As reported $ 3,314 $(15,991)
Add: Total stock-based employee
compensation expense included -- --
in net income (loss)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,270) (473)
-------- --------
Pro forma $ 2,044 $(16,464)
======== ========
Diluted net income (loss) per share:
As reported $ 0.07 $ (0.36)
Pro forma $ 0.04 $ (0.37)
Note 2 Balance Sheet Detail (in thousands):
MAR. 28, DEC. 31,
2004 2003
------- -------
Inventories:
Purchased parts and raw materials $22,195 $18,884
Work-in-process 11,526 5,444
Finished goods 2,120 3,102
------- -------
$35,841 $27,430
======= =======
Accrued liabilities:
Warranty $17,325 $16,508
Accrued compensation and benefits 8,208 6,596
Income taxes 7,230 6,992
Other 27,176 32,512
------- -------
$59,939 $62,608
======= =======
7
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 rights to all the cash from the Wet Business entities, and the Company
retained all rights to payments under the settlement and license agreements with
DNS. See Note 10. 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 was subject to
adjustment based on a number of criteria, including the net working capital of
the Wet Business at closing, to be determined post-closing based on a pro forma
closing date 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. As part of the transaction, the
Company assumed certain real property leases relating to transferred facilities
in Germany, subject to a sublease to SCP. On December 5, 2003, the Company
signed a Second Amendment to Stock and Asset Purchase Agreement for Wet Products
Division (the "Second Amendment") with SCP. Under the terms of the Second
Amendment, the Company paid $4.4 million to SCP in satisfaction of all further
liabilities relating to (i) working capital adjustments, (ii) pension
obligations, (iii) reductions in force in Germany (iv) reimbursement of legal
fees, and (v) reimbursement of amounts necessary to cover specified customer
responsibilities. There has been no earn-out received to date through the period
ended March 28, 2004. As a result of the significant continuing involvement by
the Company subsequent to the disposition, the transaction was accounted for as
a sale of assets and liabilities.
In the first quarter of 2003, the Company recorded a $10.3 million loss on
the disposition of the 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)
========
- ----------
(A) Included in the Other category were cumulative translation adjustments,
estimated future costs associated with reduction in force, working capital
adjustment, indemnification for future legal fees, investment banker's
fees, and legal, accounting and other professional fees directly associated
with the disposition of the Wet Business.
During the first quarter of 2003, as part of the loss on disposition of the
Wet Business, the Company recorded accruals of approximately $11.9 million to
cover the future obligations relating to this transaction. The Company has not
recorded any additional accruals relating to the transaction.
8
During 2003, the Company paid $11.5 million relating to reductions in
force, working capital adjustment, investment banker's fees, legal fees, and
accounting and other professional fees which were charged against accruals
established at the closing of the sale. With the effectiveness of the Second
Amendment on December 5, 2003, the Company has no further obligation to SCP
relating to the sale of the Wet Business.
The Company's Wet Business represented a significant portion of the
Company's net sales and costs in 2001, 2002 and the first quarter of 2003. As a
result, the divestiture of the Wet Business affects the comparability of the
Company's Consolidated Statements of Operations and Balance Sheet for the first
quarter of 2004 to its reported results from those prior periods. For periods
prior to the divestiture of the Wet Business, the Company's net sales were
comprised primarily of sales of Wet Business products, sales of RTP products and
strip products, and royalties received from Dainippon Screen Manufacturing Co.,
Ltd. ("DNS"). (See Note 10). Following the divestiture of the Wet Business, the
Company's net sales are comprised primarily of sales of RTP and strip products,
and royalties received from DNS. In the fourth quarter of 2003, $1.3 million of
revenue was recognized that related to a deferred Wet system that remained the
property of the Company after the divestiture.
Note 4 Goodwill and Intangible Assets
The following table summarizes the components of goodwill, other intangible
asset and related accumulated amortization balances (in thousands):
March 31, 2004 December 31, 2003
------------------------------------- --------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
(unaudited)
Goodwill $ 8,239 $ -- $ 8,239 $ 8,239 $ -- $ 8,239
Developed technology 6,565 (4,267) 2,298 6,565 (3,939) 2,626
------- ------- ------- ------- ------- -------
Total goodwill and intangible assets $14,804 $(4,267) $10,537 $14,804 $(3,939) $10,865
======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows
(unaudited, in thousands):
For the Three Months Ended
----------------------------------
March 28, March 30,
2004 2003
------ ------
Developed technology amortization $ 328 $1,167
------ ------
Total amortization $ 328 $1,167
====== ======
In accordance with SFAS 142, the Company performed an annual goodwill
impairment test as of December 31, 2003 and determined that goodwill was not
impaired. 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.
An intangible asset for workforce was reclassified as goodwill upon
adoption of SFAS 141 on January 1, 2002. The Company continues to amortize
developed technology intangible assets. Amortization expense for developed
technology and other intangible assets was $0.3 million and $1.2 million for the
three months ended March 28, 2004 and March 30, 2003, respectively. The
amortization expense is estimated to be $1.3 million for each of fiscal years
2004 and 2005. In the first quarter of 2003, goodwill and intangible assets
relating to developed technology were reduced by $4.4 million and $10.5 million,
respectively, in connection with the Wet Business divestiture.
9
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.
THREE MONTHS ENDED
----------------------
MAR. 28, MAR. 30,
2004 2003
-------- --------
NET INCOME (LOSS) $ 3,314 $(15,991)
BASIC INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $ 3,314 $(15,991)
Weighted average common shares outstanding 47,463 44,859
-------- --------
Basic earnings (loss) per share $ 0.07 $ (0.36)
======== ========
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $ 3,314 $(15,991)
Weighted average common shares outstanding 47,463 44,859
Diluted potential common shares from stock options 1,812 --
-------- --------
Weighted average common shares and dilutive
potential common shares 49,275 44,859
-------- --------
Diluted income (loss) per share $ 0.07 $ (0.36)
======== ========
Stock options outstanding at March 28, 2004 and March 30, 2003 of 1,472,365
and 5,374,250 shares, respectively, were excluded from the computation of
diluted EPS because the effect of including them would have been antidilutive.
10
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 income (loss):
THREE MONTHS ENDED
------------------------
(in thousands) MAR. 28, MAR. 30,
2004 2003
-------- ----------
Net income (loss) $ 3,314 $(15,991)
Cumulative translation adjustments (169) (129)
Unrealized investment gain (loss) 8 88
Loss on cash flow hedging instruments -- (34)
-------- --------
Comprehensive income (loss) $ 3,153 $(16,066)
======== ========
The components of accumulated other comprehensive income, net of related
tax, are as follows:
(in thousands) MAR. 28, DEC. 31,
2004 2003
-------- --------
Cumulative translation adjustments $ 9,300 $ 9,469
Unrealized investment gain (loss) 7 (1)
Gain on cash flow hedging instruments -- --
------- -------
$ 9,307 $ 9,468
======= =======
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.
11
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Three Months Ended
------------------------------------------------
March 28, 2004 March 30, 2003
-------------------- -------------------
($) (%) ($) (%)
------- ----- -------- -----
United States $ 4,151 8 $ 10,715 16
Germany 5,116 10 8,228 12
Europe - others 871 1 533 1
Japan 10,481 20 2,159 3
Taiwan 19,456 37 19,776 29
Korea 7,616 14 12,769 19
China 4,452 8 13,341 20
Singapore 982 2 237 0
-------- --------
$ 53,125 $ 67,758
======== ========
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 2004, two customers accounted for 13% and 19% of
net sales and in the first quarter of 2003, three customers accounted for 16%,
24% and 25% of net sales.
At March 28, 2004, two customers each accounted for more than 10% of the
Company's accounts receivables, accounting for approximately 11% and 16%,
respectively. At December 31, 2003, two customers each accounted for more than
10% of the Company's accounts receivables, accounting for approximately 14% and
19%, respectively.
Note 8 Debt
The Company's Japanese subsidiary has a credit facility with a Japanese
bank in the amount of 900 million Yen (approximately $8.5 million at March 28,
2004), collateralized by specific trade accounts receivable of the Japanese
subsidiary. At March 28, 2004, there were no borrowings under this credit
facility. The facility bears interest at a per annum rate of TIBOR plus 75 basis
points. The facility expires on June 20, 2004, however the Company intends to
renew it. The Company has given a corporate guarantee for this credit facility.
There are no financial covenant requirements for this credit facility.
The Company has a revolving line of credit with a U.S. bank in the amount
of $20.0 million, which expires on April 26, 2005. At March 28, 2004, the
Company was in compliance with the covenants and there were no borrowings under
this credit line. 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 collateralized 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 balance of unrestricted cash and cash equivalents and a minimum balance
of investment accounts, and not exceeding a maximum net loss limit.
12
Note 9 Related Party Transactions
At March 28, 2004, the Company was owed $76,000 in accrued interest from
Brad Mattson relating to loans issued in 2002. The principal amount of the loans
has been fully repaid by Mr. Mattson. Mr. Mattson resigned as an officer of the
Company in October 2001 and continued to work for the Company as a part time
employee until October 2003. He resigned as a director in November 2002.
On February 17, 2004, Steag Electronic Systems AG ("SES") sold
approximately 4.3 million shares of the Company's common stock in an
underwritten public offering at $11.50 per share. Following that sale, SES
continued to hold approximately 8.9 million shares of common stock of the
Company, or 17.8% of the outstanding shares.
Note 10 DNS Patent Infringement Suit Settlement
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's 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 had amicably resolved their legal disputes with a comprehensive, global
settlement agreement, which included termination of all outstanding litigation
between the companies. 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. The settlement agreement and license
agreement require 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.
As of March 28, 2004, DNS had made payments aggregating $51.0 million under
the settlement and license agreements. Of the $51.0 million paid by DNS as of
March 28, 2004, $4.0 million was subjected to Japanese withholding tax, and the
net amount the Company received was $47.0 million. In future periods, the
Company is scheduled to receive minimum royalty payments as follows:
Future
DNS Payments
Fiscal Period to be received
------------- --------------
(in millions)
April 2004 $ 6.0
April 2005 6.0
April 2006 6.0
April 2007 6.0
-----
$24.0
=====
In April 2004, DNS made a further payment of $6.0 million under the terms
of the settlement and license agreements. Of the $6.0 million paid by DNS in
April 2004, $0.6 million was subjected to Japanese withholding tax, and the net
amount the Company received was $5.4 million. This payment brought the total net
amount the Company has received to $52.4 million.
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 the Company 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 net sales in the income statement
on a straight-line basis over the license term. During the three months ended
March 28, 2004, the Company recognized $3.2 million of royalty income.
13
Note 11 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.
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 product warranty accrual
for the three months ended March 28, 2004 and March 30, 2003:
(in thousands) Three months ended
-------------------------
March 28, March 30,
2004 2003
------------ ----------
Balance at beginning of period $ 16,508 $ 16,486
Accrual for warranties issued during the period 4,338 2,207
Settlements made during the period (3,521) (1,156)
-------- --------
Balance at end of period $ 17,325 $ 17,537
======== ========
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 28, 2004, the maximum potential amount of future payments that the
Company could be required to make under these standby letters of credit is
approximately $1.1 million, representing collateral for corporate credit cards,
certain equipment leases and security deposits. 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.
14
Note 12 Restructuring and Other Charges
During the third quarter of 2003, the company recorded restructuring and
other charges of $489,000 that included $381,000 for workforce reduction and
$108,000 for consolidation of excess facilities. The Company anticipates that
the accrued liabilities at March 28, 2004 for the workforce reduction and the
consolidation of excess facilities will be paid out in the next three months and
the next two years, respectively.
The following is a summary of activities remaining in the
restructuring-related accruals during the three month period ended March 28,
2004:
Liability as of Cash Payments Liability as of
December 31, Three Months Ended March 28,
2003 March 28, 2004 2004
--------------- ------------------ ---------------
Workforce reduction $ 115 $ (20) $ 95
Consolidation of excess facilities 1,175 (77) 1,098
------ ------ ------
Total $1,290 $ (97) $1,193
====== ====== ======
Note 13 Public Offering
On December 23, 2003, the Company filed a shelf registration statement on
Form S-3 that would allow the Company to sell, from time to time, up to $100
million of its common stock or other securities. The shelf registration
statement also covered sales of up to 5.9 million of the already outstanding
shares of Company common stock owned by STEAG Electronic Systems AG ("SES"). The
registration statement was declared effective by the SEC on January 9, 2004.
On February 17, 2004, the Company sold approximately 4.3 million newly
issued shares of common stock, and STEAG sold approximately 4.3 million already
outstanding shares of Company common stock, in an underwritten public offering
priced at $11.50 per share. This resulted in proceeds to the Company, net of
underwriting discounts and transaction expenses, through the first quarter of
2004, of approximately $46.6 million. Out of the gross proceeds from the sale of
common stock by the Company of approximately $49.6 million, approximately $2.5
million represented underwriting discounts and commissions, and there were other
costs and expenses of approximately $0.5 million, primarily for legal,
accounting and printing services, through the first quarter of 2004. The Company
estimates that its net proceeds will be approximately $46.3 million after
payment in future periods of the balance of the transaction costs.
The Company intends to use the net proceeds received from the offering for
general corporate purposes, including working capital requirements and potential
strategic acquisitions or investments. The Company did not receive any proceeds
from the sale of shares by STEAG. STEAG remained the Company's single largest
shareholder, holding approximately 8.9 million, or 17.8%, of the 49.8 million
outstanding shares of Company common stock.
15
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 leases two buildings previously used to house its manufacturing
and administrative functions related to wet surface preparation products in
Exton, Pennsylvania. The lease for both buildings has approximately 15 years
remaining with a combined rental cost of approximately $1.5 million annually.
The lease agreement for both buildings allows for subleasing the premises
without the approval of the landlord. In June 2002, the administrative building
was sublet for a period of approximately five years, until December 2007, with
an option for the subtenant to extend for an additional five years. The
sublease, under which lease payments aggregate approximately $7.2 million, is
expected to cover all related costs on the administrative building during the
sublease period. 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 ending in May 2004. In July 2003, the manufacturing building at the Exton,
Pennsylvania location was sublet for a period of approximately three years,
until September 2006, with an option for the subtenant to renew for a total of
two successive periods, the first for five years and the second for the balance
of the term of the master lease. The sublease, under which lease payments
aggregate approximately $2.1 million, is expected to cover all related costs on
the manufacturing building during the sublease period. In determining the
facilities lease loss, net of cost recovery efforts from expected sublease
income, various assumptions were made, including, the time periods over which
the buildings will be vacant; expected sublease terms; and expected sublease
rates. The Company has estimated that under certain circumstances the facilities
lease losses could be approximately $0.9 million for each additional year that
the facilities are not leased and could aggregate approximately $13.0 million,
net of expected sublease income, under certain circumstances. The Company
expects to make payments related to the above noted facilities lease losses over
the next fifteen years, less any amounts received under subleases. Adjustments
for the facilities leases and subleases will be made in future periods, if
necessary, based upon the then current actual events and circumstances.
In connection with the disposition of the Wet Business, the Company assumed
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 2.5 years remaining, ending
in August 2006, 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. During the first quarter of
2004, the Company received sublease payments of approximately $0.3 million from
SCP. 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 its financial position, given the uncertainty of
litigation, the Company 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.
The Company is currently party to legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these matters is not presently determinable and cannot be
predicted with certainty, management does not believe that the outcome of any of
these matters or any of the above mentioned legal claims will have a material
adverse effect on the Company's financial position, results of operations or
cash flow.
16
Note 15 Income Taxes
In the first quarter of 2004, the Company recorded income tax expense of
approximately $269,000, which consisted of accrued foreign withholding taxes of
$274,000, foreign taxes incurred by its foreign sales and service operations of
$85,000, and federal and state income taxes of approximately $35,000, partially
offset by a deferred tax benefit on the amortization of certain intangible
assets of $125,000. There is no US or German current income tax benefit or
expense. The effective income tax rate was 6.6% for the first quarter of 2004.
At March 28, 2004, the Company has provided a full valuation allowance against
its net deferred tax asset as management believes that sufficient uncertainty
exists with regard to the realizability of tax assets. Factors considered in
providing a valuation allowance include the lack of a significant history of
consistent profits and the lack of carryback capacity to realize these assets.
Based on the absence of objective evidence, management is unable to assert that
it is more likely than not that the Company will generate sufficient taxable
income to realize all the Company's net deferred tax assets.
In the first quarter of 2003, the Company recorded an income tax benefit 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 its 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 was no US or German current
income tax benefit or expense in the first quarter of 2003.
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, and in conjunction with our audited consolidated financial statements
and related notes and other financial information included in our Annual Report
on Form 10-K. 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 fabrication of integrated circuits. Our products include dry strip, rapid
thermal processing ("RTP") and plasma enhanced chemical vapor deposition
("PECVD") equipment. Our manufacturing equipment utilizes innovative technology
to deliver advanced processing capability and high productivity to semiconductor
manufacturers for both 200 mm and 300 mm wafer production at technology nodes at
and below 130 nanometers (nm).
The last three years, 2001 to 2003, were a period of great challenge and
significant change for our Company. The external market environment was
extremely difficult, with the semiconductor industry experiencing a significant
downturn, resulting in severe capital spending cutbacks by our customers. At the
beginning of 2001, we had just completed the simultaneous acquisition of the
semiconductor equipment division of STEAG Electronic Systems AG and CFM
Technologies, Inc. This more than doubled the size of our company and changed
the nature and breadth of our product lines. On top of the many challenges in
integrating multiple merged companies, we were faced with the impact of
dramatically lower sales as a result of the downturn in the industry, that
resulted in excess production capacity. We determined to refocus our business on
our core technologies in dry strip and rapid thermal processing, and in 2002 and
the first quarter of 2003 we took restructuring actions to align our business
with this focus and to reduce our cost structure. As part of this restructuring
effort, we divested a significant line of business, our wet surface preparation
products (the "Wet Business"), in March of 2003.
17
Our Company was very different at the end of 2003 than it was at the
beginning of 2003 or during 2001 and 2002. Because of our significant
restructurings and divestitures during this period, both our revenue sources and
our cost structure have significantly changed. This affects the comparability of
our reported financial information for the annual periods discussed in this
report, and causes our historical information not to be a good indicator or
predictor of results for future periods. Our size, structure and product focus
have been more stable during the last three quarters of 2003 and the first
quarter of 2004.
We had losses from operations in each of fiscal years 2001, 2002 and 2003.
However, as a result of our restructurings and divestitures, we reduced our cost
structure and reduced our rate of losses throughout that period. As we finished
2003, we achieved a profit of $1.1 million from operations for the fourth
quarter. For the first quarter of 2004, we had net income of $3.3 million. We
ended first quarter of 2004 with over $103 million in cash and cash equivalents.
We have no long-term debt. During the first quarter of 2004 we successfully
completed an underwritten public offering of approximately 4.3 million shares of
common stock, with net proceeds of approximately $46.3 million. With the recent
improvements in our operating results and the infusion of additional cash on our
balance sheet, we believe we are in a healthy position in terms of liquidity and
capital resources.
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.
Declines in demand for semiconductors occurred throughout 2001, 2002 and the
first half of 2003. There are recent signs of market improvement, however
semiconductor companies continue to closely monitor their capital equipment
purchase decisions. Our backlog of firm orders was at a relatively low level in
relation to our anticipated sales for much of 2003, but has recently improved.
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. Although we have implemented cost cutting and operational
flexibility measures, we are largely dependent upon increases in sales in order
to improve our profitability.
Going forward, the success of our business will be dependent on numerous
factors, including but not limited to the market demand for semiconductors and
semiconductor wafer processing equipment, and our ability to (a) develop and
bring to market new products that address our customers' needs, (b) grow
customer loyalty through collaboration with and support of our customers, and
(c) create a cost structure which will enable us to operate effectively and
profitably throughout changing industry cycles.
18
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, 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. 104, Revenue Recognition in Financial Statements (SAB
104).
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 the first quarter of 2003 and earlier periods, 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. The two elements are the tool and
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 title transfer, which generally occurs 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 we first recognize revenue for a
system sale, we record a provision for the estimated cost of warranty 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. An 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.
19
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 a minimum 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 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.
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 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 we estimate 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.
20
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. 28, MAR. 30,
2004 2003
------- ---------
Net sales 100.0% 100.0%
Cost of sales 57.8% 72.6%
----- -----
Gross profit 42.2% 27.4%
----- -----
Operating expenses:
Research, development and engineering 9.2% 11.1%
Selling, general and administrative 24.4% 24.9%
Amortization of intangibles 0.6% 1.7%
----- -----
Total operating expenses 34.2% 37.7%
----- -----
Income (loss) from operations 8.0% (10.3)%
Loss on disposition of wet business - (15.2)%
Interest and other income, net (1.3)% 1.8%
----- -----
Income (loss) before benefit from income taxes 6.7% (23.7)%
Provision for (benefit from) income taxes 0.5% (0.1)%
----- -----
Net income (loss) 6.2% (23.6)%
===== =====
The divestiture of our Wet Business on March 17, 2003 has significantly
affected the comparability of our net sales and our costs in the three month
period ended March 28, 2004 to our reported results a year ago for the same
period and to periods prior to that. Our reported results for the first quarter
of 2003 include sales of Wet Business products and related costs, while our
results for the first quarter of 2004 do not. The following table summarizes the
amount of our net sales in each quarter of 2003 and in the first quarter of 2004
attributable to products of the Wet Business, to RTP and strip products, and to
royalties from DNS. We believe this additional information regarding our prior
period sales will facilitate comparison of our current and future results of
operations to our results from prior periods:
Net Sales (in millions) Percent of total net sales
--------------------------------------------- ---------------------------------
Wet RTP and DNS Reported Wet RTP and DNS
Three Months Business Strip Royalty Total Business Strip Royalty
Ended Products Products Revenue Net Sales Products Products Revenue
------------ -------- -------- ------- --------- -------- -------- -------
March 30, 2003 $ 32.3 $ 32.5 $ 3.0 $ 67.8 47.7% 47.9% 4.4%
June 29, 2003 - 27.5 3.0 30.5 - 90.2% 9.8%
September 28, 2003 - 29.6 3.0 32.6 - 90.8% 9.2%
December 31, 2003 1.3 39.1 3.0 43.4 3.0% 90.1% 6.9%
------ ------- ------ ------- ---- ---- ---
$ 33.6 $ 128.7 $ 12.0 $ 174.3 19.3% 73.8% 6.9%
====== ======= ====== ======= ==== ==== ===
March 28, 2004 $ - $ 49.9 $ 3.2 $ 53.1 - 94.0% 6.0%
------ ------- ------ ------- ---- ---- ---
$ - $ 49.9 $ 3.2 $ 53.1 - 94.0% 6.0%
====== ======= ====== ======= ==== ==== ===
21
Net Sales
Net sales for the first quarter of 2004 were $53.1 million. This represents
a decrease of 21.7% compared to $67.8 million of net sales for the first quarter
of 2003, and an increase of 22.4% compared to $43.4 million of net sales for the
fourth quarter of 2003. The decrease in net sales in the first quarter of 2004
compared to the first quarter of 2003 is primarily due to the divestiture of the
Wet Business in March 2003. We anticipate our net sales for the second quarter
of 2004 to range between $57 million and $60 million.
Net sales of RTP and strip products for the first quarter of 2004 were
$49.9 million. This represents an increase of 53.5% compared to $32.5 million of
net sales for such products in the first quarter of 2003, and an increase of
27.6% compared to $39.1 million of net sales for such products in the fourth
quarter of 2003. The increase in net sales in the first quarter of 2004 compared
to the first quarter of 2003 and fourth quarter of 2003 is primarily due to
higher unit sales and improving customer demand since the fourth quarter of
2003. Net sales of these products in the first quarter of 2004 reflects a
smaller proportion of revenue from customer acceptances of systems compared to
the first quarter of 2003 and the fourth quarter of 2003. Units of RTP and strip
products shipped in the first quarter of 2004 increased 47.2% and 32.5% compared
to the first quarter of 2003 and the fourth quarter of 2003, respectively.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore, Korea and China),
accounted for 91.8% and 84.2% of net sales for the first quarter of 2004 and
2003, respectively. We anticipate that international sales will continue to
account for a significant portion of net sales for the remainder of 2004.
Gross Margin
Our gross margin for the first quarter of 2004 was 42.2%, a significant
increase from 27.4% for the first quarter of 2003, and a moderate increase
compared to gross margin of 41.7% for the fourth quarter of 2003. The increase
in gross margin in the first quarter of 2004, compared to the first quarter of
2003, was due to the efficiencies gained from the divestiture of the Wet
business, a greater proportion of RTP and strip products sales, as well as
spares parts and service revenues, with relatively higher margins, better
absorption of our production facilities, and improved manufacturing overhead
efficiencies. We anticipate our gross margin for the second quarter of 2004 to
range between 41% to 44%.
Our RTP and Strip products have relatively higher gross margins than did
the Wet Business products we offered until its divestiture in March 2003. The
divestiture of our Wet Business affects the comparability of our gross margin in
the current period, and will affect the comparability of our gross margins in
future periods, to our historical margins.
Due to intense competition we continue to face pricing pressure from
competitors that can affect our gross margin. In response, we are continuing
with our cost controls and efforts to differentiate our product portfolio. Our
gross margin has varied over the years and will continue to vary based on many
factors, including competitive pressures, product mix, the relative amounts of
customer acceptances in a given quarter, 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
2004 were $4.9 million, or 9.2% of net sales, as compared to $7.6 million, or
11.1% of net sales, for the first quarter of 2003, and $4.3 million, or 9.8% of
net sales, for the fourth quarter of 2003. The decrease in research, development
and engineering expenses in the first quarter of 2004 compared to the same
quarter of 2003 was primarily due to reductions in personnel and associated
costs resulting from the divestiture of our Wet Business in March 2003, more
selective research and development project funding, additional reductions of
personnel, and various cost control measures that resulted in a reduction in
expenses. The increase in research, development and engineering expenses in the
first quarter of 2004 compared to the fourth quarter of 2003 primarily reflects
diminished cost sharing with an alliance partner in connection with an R&D
project that is scheduled for completion this year.
23
Selling, General and Administrative
Selling, general and administrative expenses for the first quarter of 2004
were $12.9 million, or 24.4% of net sales, as compared to $16.9 million, or
24.9% of net sales, for the first quarter of 2003, and $12.0 million, or 27.6%
of net sales, for the fourth quarter of 2003. The decrease in selling, general
and administrative expenses in the first quarter of 2004 compared to the first
quarter of 2003 is primarily due to the divestiture of our Wet Business in March
2003, which included a reduction in personnel and related costs, reduction in
building rent expenses, lower utilities costs, lower sales commissions, and
lower travel expenses. Total selling, general and administrative expenses in the
first quarter of 2004 of $12.9 million increased from $12.0 million in the
fourth quarter of 2003 primarily due to increases in variable compensation
amounts related to improved performance. The decrease in selling, general and
administrative expenses as a percentage of net sales during the first quarter of
2004 compared to the fourth quarter of 2003 is primarily due to the increase in
sales.
Amortization of Intangibles
Upon adoption of SFAS 142 on January 1, 2002, we no longer amortize
goodwill. We continue to amortize the identified intangibles, and our
amortization expense during the first quarter of 2004 was $0.3 million. We
estimate that our amortization expense will be $1.3 million for each of fiscal
years 2004 and 2005.
Interest and Other Income (Expense)
Interest and other expense for the first quarter of 2004 was approximately
$0.7 million, or (1.2)% of net sales, as compared to $1.2 million, or 1.8% of
net sales, for the first quarter of 2003. During the first quarter of 2004,
other expense consisted of net other expense of $1.0 million partially offset by
interest income of $0.2 million resulting from the investment of our cash
balances, a foreign exchange gain of $0.1 million, and a gain on sale of fixed
assets of $0.1 million. In the same period of 2003, interest and 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.
Provision for Income Taxes
In the first quarter of 2004, we recorded income tax expense of
approximately $269,000, which consisted of accrued foreign withholding taxes of
$274,000, foreign taxes incurred by our foreign sales and service operations of
$85,000, and federal and state income taxes of approximately $35,000, partially
offset by a deferred tax benefit on the amortization of certain intangible
assets of $125,000. There is no US or German current income tax benefit or
expense. The effective income tax rate was 6.6% for the first quarter of 2004.
At March 28, 2004, we have provided a full valuation allowance against our net
deferred tax asset as management believes that sufficient uncertainty exists
with regard to the realizability of tax assets. Based on the absence of
objective evidence, management is unable to assert that it is more likely than
not that we will generate sufficient taxable income to realize all our net
deferred tax assets.
In the first quarter of 2003, we recorded an income tax benefit of
approximately $62,000. The benefit consisted 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 was no US or German current
income tax benefit or expense in the first quarter of 2003.
23
Liquidity and Capital Resources
Our cash and cash equivalents, excluding restricted cash, were $103.1
million at March 28, 2004, an increase of $26.0 million from $77.1 million at
December 31, 2003 and an increase of $21.4 million from $81.7 million at March
30, 2003. Stockholders' equity at March 28, 2004 was $133.6 million, compared to
$83.7 million at December 31, 2003, and $85.7 million at March 30, 2003. Working
capital at March 28, 2004 was $105.8 million, compared to $56.9 million at
December 31, 2003, and $59.5 million at March 30, 2003. At March 28, 2004, we
had no long term debt.
On December 23, 2003, we filed a shelf registration statement on Form S-3
that would allow us to sell, from time to time, up to $100 million of our common
stock or other securities. The shelf registration statement also covered sales
of up to 5.9 million of the already outstanding shares of our common stock owned
by STEAG Electronic Systems AG. The registration statement was declared
effective by the SEC on January 9, 2004.
On February 17, 2004, we sold approximately 4.3 million newly issued shares
of common stock, and STEAG sold approximately 4.3 million already outstanding
shares of our common stock, in an underwritten public offering priced at $11.50
per share. This resulted in proceeds to us, net of underwriting discounts and
transaction expenses, through the first quarter of 2004, of approximately $46.6
million. Out of the gross proceeds from the sale of common stock by us of
approximately $49.6 million, approximately $2.5 million represented underwriting
discounts and commissions, and there were other costs and expenses of
approximately $0.5 million, primarily for legal, accounting and printing
services, through the first quarter of 2004. We estimate that our net proceeds
will be approximately $46.3 million after payment in future periods of the
balance of the transaction costs.
We intend to use the net proceeds received from the offering for general
corporate purposes, including working capital requirements and potential
strategic acquisitions or investments. We did not receive any proceeds from the
sale of shares by STEAG. STEAG remained our largest single shareholder, holding
approximately 8.9 million, or 17.8%, of the 49.8 million outstanding shares of
our common stock.
Our Japanese subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen (approximately $8.5 million at March 28, 2004),
collateralized by specific trade accounts receivable of the Japanese subsidiary.
At March 28, 2004, there were no borrowings under this credit facility. The
facility bears interest at a per annum rate of TIBOR plus 75 basis points. The
facility expires on June 20, 2004, however we intend to renew it. We have given
a corporate guarantee for this credit facility. There are no financial covenant
requirements for this credit facility.
We have a revolving line of credit with a U.S. bank in the amount of $20.0
million, which expires on April 26, 2005. At March 28, 2004, we were in
compliance with the covenants and there were no borrowings under this credit
line. 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
collateralized 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 balance of
unrestricted cash and cash equivalents and a minimum balance of investment
accounts, and not exceeding a maximum net loss limit.
We had losses from operations in each of fiscal years 2001, 2002 and 2003.
However, as a result of our restructurings and divestitures, we reduced our cost
structure and our rate of losses decrease over the course of that period. With
the recent improvements in our operating results and the additional cash
provided by the recent stock offering, we believe we have adequate liquidity and
capital resources for our operations.
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 license fees. The license fee
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.
25
As of March 28, 2004, DNS had made payments aggregating $51.0 million under
the terms of the settlement and license agreements. Of the $51.0 million paid by
DNS as of March 28, 2004, $4.0 million was subjected to Japanese withholding
tax, and the net amount we received was $47.0 million. In future periods, we are
scheduled to receive minimum royalty payments as follows:
Future
DNS Payments
Fiscal Period to be received
------------- --------------
(in millions)
April 2004 $ 6.0
April 2005 6.0
April 2006 6.0
April 2007 6.0
------
$ 24.0
======
In April 2004, DNS made a further payment of $6.0 million under the terms
of the settlement and license agreements. Of the $6.0 million paid by DNS in
April 2004, $0.6 million was subjected to Japanese withholding tax, and the net
amount we received was $5.4 million. This payment brought the total net amount
we have received to $52.4 million.
Cash Flows
Net cash used in operating activities was $18.0 million during the first
quarter of 2004 as compared to $9.3 million during the same quarter in 2003.
The increase in net cash used in operating activities during the first
quarter of 2004 was primarily attributable to an increase in accounts
receivable due to an increase in shipments during the last month of the
quarter and an increase in inventories due to ramping up of manufacturing of
products in response to a higher number of systems orders. The cash used in
operating activities was partially offset by an increase in accounts payable
due to timing of payments and build up of inventory.
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 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 $10.8 million, and the non-cash depreciation and amortization of
$2.4 million.
Net cash used in investing activities was $2.5 million during the first
quarter of 2004 as compared to $1.3 million provided by investing activities
during the same quarter last year. The net cash used in investing activities
during the first quarter of 2004 is attributable to purchases of property and
equipment of $2.5 million. Net cash provided by investing activities during the
first quarter of 2003 was $1.3 million and was attributable to the proceeds from
the disposition of the Wet Business of $2.0 million offset by purchases of
property and equipment of $0.7 million.
Net cash provided by financing activities was $46.7 million during the
first quarter of 2004 as compared to $1.3 million during the same quarter last
year. The net cash provided by financing activities during the first quarter of
2004 is primarily attributable to the sale of approximately 4.3 million shares
of our newly issued common stock in an underwritten public offering at $11.50
per share with proceeds, net of expenses through the first quarter of 2004, of
$46.6 million. Net cash provided by financing activities during the first
quarter of 2003 was $1.3 million and was primarily attributable to borrowings
against our Japanese line of credit in the amount of $0.8 million and a decrease
in restricted cash of $0.5 million.
Based on current projections, we believe that our current cash and
investment positions together with cash provided by operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
26
Our operating plans are based on and require us to increase sales, control
expenses, manage inventories, and collect accounts receivable balances. As a
result of the cyclical nature of the semiconductor market, we are exposed to a
number of challenges and risks, including delays in payments of accounts
receivable by customers, and postponements or cancellations of orders. Postponed
or cancelled orders can cause excess inventory and underutilized manufacturing
capacity. If we are not able to sustain profitability over the upcoming
quarters, we could have operating losses that adversely affect our cash and
working capital balances, and we may be required to seek additional sources of
financing through public or private financing, or other sources, to fund
operations. We may not be able to obtain adequate or favorable financing when
needed. Failure to raise capital when needed could harm our business. When
additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders is 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 the Company's operations and
financial condition.
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, 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 that 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, has Recently Been in 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, our customers typically reduce purchases, delay delivery of ordered
products and/or cancel orders. Increased price competition may result, causing
pressure on gross margin and net income. We have at times experienced
cancellations, delays and push-outs of orders, which reduced our revenues,
caused delays in our ability to recognize revenue on the orders and reduced our
backlog, and caused us to have excess inventory. If we have future order
cancellations, reductions in order size or delays in orders, it can materially
adversely affect our business and results of operations.
During the latest downturn, we were unable to reduce our expenses quickly
enough to avoid incurring a loss. For the fiscal years ended December 31, 2001
and 2002 and 2003, our net loss was $336.7 million, $94.3 million and $28.4
million, respectively, compared to net income of $1.5 million for the year ended
December 31, 2000. Our net losses in 2002 and the first three quarters of 2003
primarily reflect the impact of our depressed level of net sales. If our actions
to date are insufficient to effectively align our cost structure with prevailing
market conditions, we may be required to undertake additional cost-cutting
measures, and may be unable to continue to invest in marketing, research and
development and engineering at the levels we believe are necessary to maintain
our competitive position in our remaining core businesses. Our failure to make
these investments could seriously harm our long-term business prospects.
We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation,
Reduction or Delay in Purchases or Acceptances 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. Any delay in
scheduled shipments or in acceptances of shipped products would delay our
ability to recognize revenue and collect outstanding accounts receivable, and
could materially adversely affect our operating results for that quarter. A
delay in a shipment or customer acceptance in any quarter could cause net sales
in that quarter to fall below our expectations and the expectations of market
analysts or investors.
27
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 quarter to quarter
and year to year. If we are unable to collect a receivable from a large
customer, our financial results will be negatively impacted.
We Are Engaged in the Implementation of a New Enterprise Resource Planning
System, Which May Be More Difficult or Costly Than Anticipated, and Could Cause
Disruption to the Management of Our Business and the Preparation of Our
Financial Statements.
We are currently engaged in the implementation of a new enterprise resource
planning, or ERP, system, which is expected to become integral to our ability to
accurately and efficiently maintain our books and records, record our
transactions, provide critical information to our management, and prepare our
financial statements. However, the new ERP system could become more costly,
difficult and time consuming to purchase and implement than we currently
anticipate. In addition, implementation of the new ERP system requires us to
change our internal business practices, transfer records to a new computer
system and train our employees in the correct use of the system. If we fail to
manage these changes effectively, our operations could be disrupted, which could
result in the diversion of management's attention and resources, cause errors or
delays in the reporting of our financial results, materially and adversely
affect our operating results, and impact our ability to manage our business. In
addition, to manage our business effectively, we may need to implement
additional and improved management information systems, further develop our
operating, administrative, financial and accounting systems and controls, add
experienced senior level managers, and maintain closer coordination among our
executive, engineering, accounting, marketing, sales and operations
organizations. We may incur additional unexpected costs and our systems,
procedures or controls may not be adequate to support our operations.
We Have Implemented New Financial Systems, and Will Need to Continue to Improve
or Implement New Systems, Procedures and Controls.
We have implemented 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. These financial systems are
relatively new and we have not had extensive experience with them. We may
encounter unexpected difficulties, costs or other challenges that make use of
these systems more difficult or costly than expected, may cause errors or delays
in the consolidation and reporting of our financial results, and may require
additional management resources before they are fully implemented and operating
smoothly. 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, new requirements adopted by the Securities and Exchange
Commission in response to the passage of the Sarbanes-Oxley Act of 2002, will
require 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 considering 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.
We Are Increasingly Outsourcing Manufacturing and Logistics Activities to Third
Party Service Providers, Which Decreases Our Control Over the Performance of
These Functions.
We have already outsourced certain manufacturing and spare parts logistics
functions to third party service providers, and may outsource further functions
in the future. While we expect to achieve operational flexibility and cost
savings as a result of this outsourcing, outsourcing has a number of risks and
reduces our control over the performance of the outsourced functions.
Significant performance problems by these third party service providers could
result in cost overruns, delayed deliveries, shortages, quality issues or other
problems which could result in significant customer dissatisfaction and could
materially and adversely affect our business, financial condition and results of
operations.
28
If for any reason one or more of these third party service providers
becomes unable or unwilling to continue to provide services of acceptable
quality, at acceptable costs and in a timely manner, our ability to deliver our
products or spare parts to our customers could be severely impaired. We would
quickly need to identify and qualify substitute service providers or increase
our internal capacity, which could be expensive, time consuming and difficult,
and could result in unforeseen operations problems. Substitute service providers
might not be available or, if available, might be unwilling or unable to offer
services on acceptable terms.
If customer demand for our products increases, we may be unable to secure
sufficient additional capacity from our current service providers on
commercially reasonable terms, if at all.
Our requirements are expected to represent a small portion of the total
capacities of our third party service providers, and they may preferentially
allocate capacity to other customers, even during periods of high demand for our
products. In addition, such manufacturers could suffer financial difficulties or
disruptions in their operations due to causes beyond our control.
Unless We Can Continue To Develop and Introduce New Systems that Compete
Effectively On the Basis of Price and Performance, We May Lose Future Sales and
Customers and Our Business May Suffer.
Because of continual changes in the markets in which our customers and we
compete, our future success will depend in part upon our ability to continue to
improve our systems and technologies. These markets are characterized by rapidly
changing technology, evolving industry standards, and continuous improvements in
products and services. Due to the continual changes in these markets, our
success will also depend upon our ability to develop new technologies and
systems that compete effectively on the basis of price and performance and that
adequately address customer requirements. In addition, we must adapt our systems
and processes to support emerging target market industry standards.
The success of any new systems we introduce is dependent on a number of
factors, including timely completion of new system designs accepted by the
market, and may be adversely affected by manufacturing inefficiencies and the
challenge of producing systems in volume which meet customer requirements. We
may not be able to improve our existing systems or develop new technologies or
systems in a timely manner. In particular, the transition of the market to 300
mm wafers will present us with both an opportunity and a risk. To the extent
that we are unable to introduce 300mm systems that meet customer requirements on
a timely basis, our business could be harmed. We may exceed the budgeted cost of
reaching our research, development and engineering objectives, and estimated
product development schedules may require extension. Any delays or additional
development costs could have a material adverse effect on our business and
results of operations. Because of the complexity of our systems, significant
delays can occur between the introduction of systems or system enhancements and
the commencement of commercial shipments.
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;
29
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;
o announcements of technological innovations by us or by our
competitors;
o new products or product enhancements by us or by our competitors; 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.
30
Future Sales of Shares by SES Could Adversely Affect the Market Price of Our
Common Stock.
There are approximately 49.8 million shares of our common stock outstanding as
of March 2004, of which approximately 8.9 million (or 17.8%) are held
beneficially by STEAG Electronic Systems AG ("SES"). SES may sell these shares
in the public markets from time to time, subject to certain limitations on the
timing, amount and method of such sales imposed by SEC regulations. SES has
reduced its ownership in our common stock on February 17, 2004 by selling
approximately 4.3 million shares. We have currently registered approximately 2.9
million additional shares of our common stock for resale by SES. SES has the
contractual right to require us to register for resale all of the shares they
hold. If SES were to sell additional large numbers of shares, the market price
of our common stock could decline. Moreover, the perception in the public
markets that such sales by SES might occur could also adversely affect the
market price of our common stock.
Any Future Business Acquisitions May Disrupt Our Business, Dilute Stockholder
Value, or Distract Management Attention.
As part of our ongoing business strategy, we may consider acquisitions of, or
significant investments in, businesses that offer products, services, and
technologies complementary to our own. Such acquisitions could materially
adversely affect our operating results and/or the price of our common stock.
Acquisitions also entail numerous risks, including:
o difficulty of assimilating the operations, products, and personnel of
the acquired businesses;
o potential disruption of our ongoing business;
o unanticipated costs associated with the acquisition;
o inability of management to manage the financial and strategic position
of acquired or developed products, services, and technologies;
o inability to establish uniform standards, controls, policies, and
procedures; and
o impairment of relationships with employees and customers that may
occur as a result of integration of the acquired business.
To the extent that shares of our stock or other rights to purchase stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate additional revenue or provide any benefit to our
business, and we may not achieve a satisfactory return on our investment in any
acquired businesses.
Item 3. Quantitative and Qualitative Disclosures About 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 market 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 28,
2004.
31
Fair Value
March 28, 2004
--------------
(In thousands)
Assets
Cash and cash equivalents $103,085
Average interest rate 1.30%
Restricted cash $ 509
Average interest rate 0.52%
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. 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. All
foreign currency contracts are marked-to-market and gains and losses on forward
foreign exchange contracts are deferred and recognized in the accompanying
consolidated statements of operations when the related transactions being hedged
are recognized. Gains and losses on unhedged foreign currency transactions are
recognized as incurred.
The following table provides information as of March 28, 2004 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 $ 3,715 111.06 $ 3,873
Mattson Thermal Products GmbH
(Euro equivalent amount)
U.S. Dollar EUR 4,595 1.16 EUR 4,322
$ 5,670 $ 5,334
The local currency is the functional currency for all foreign operations.
Accordingly, all assets and liabilities of these foreign operations are
translated using exchange rates in effect at the end of the period, and revenues
and costs are translated using average exchange rates for the period. Gains or
losses from translation of foreign operations where the local currencies are the
functional currency are included as a component of accumulated other
comprehensive income/(loss). Foreign currency transaction gains and losses are
recognized in the consolidated statements of operations as they are incurred. To
help neutralize our US operation's exposure to exchange rate volatility, we keep
EUROS in a foreign currency bank account. The balance of this bank account was
approximately 1.7 million EUROS at March 28, 2004.
32
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, conducted an evaluation of the effectiveness of our
"disclosure controls and procedures" (as defined in Exchange Act Rule 13a-15(e))
as of the end of the period covered by this report. Based on that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. Our management, with the participation of our chief
executive officer and chief financial officer, also conducted an evaluation of
our internal control over financial reporting to determine whether any change
occurred during the first quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Based on that evaluation, our management concluded that there was no such change
during the first quarter.
Our work to implement and improve new computerized consolidation and
enterprise resource planning systems continues as an active project. It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events.
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 such claims or actions are not meritorious, could result in the
expenditure of significant financial and managerial resources.
Except as reported in our most recent annual report on Form 10-K, there
have been no developments in the pending cases during the first quarter of 2004
that are material to Mattson.
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.
33
Item 2. Changes in Securities, Use of Proceeds and
Issuer Repurchases of Equity Securities.
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
3.1(1) Amended and Restated Certificate of Incorporation of the
Company.
3.2(2) Third Amended and Restated Bylaws of the Company.
31.1 Certification of Chief Executive Officer Pursuant to
Sarbanes-Oxley Act Section 302 (a).
31.2 Certification of Chief Financial Officer Pursuant to
Sarbanes-Oxley Act Section 302 (a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
99.1 Risk Factors incorporated by reference to Annual Report on Form
10-K.
(b) Reports on Form 8-K
Form 8-K furnished January 28, 2004 reporting under Item 5, Item 7 and
Item 12 the issuance of a press release reporting financial results
for the fourth quarter and year ended December 31, 2003.
Form 8-K filed February 10, 2004 reporting under Item 5 and Item 7 the
underwriting agreement.
- -----------
(1) Incorporated by reference from Mattson Technology, Inc. current report on
Form 8-K filed on January 30, 2001.
(2) Incorporated by reference from Mattson Technology, Inc. quarterly report on
Form 10-Q filed on August 14, 2002.
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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 7, 2004
/s/ David Dutton
---------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
35