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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 June 27, 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.
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(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 August 2, 2004: 49,943,183.
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
---------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 27, 2004
and December 31, 2003 .......................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 27, 2004 and June 29, 2003 ........... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 27, 2004 and June 29, 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........ 36
Item 4. Controls and Procedures .......................................... 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 38
Item 2. Changes in Securities, Use of Proceeds and Issuer
Repurchases of Equity Securities ............................... 38
Item 3. Defaults Upon Senior Securities................................... 38
Item 4. Submission of Matters to a Vote of Security Holders............... 38
Item 5. Other Information................................................. 39
Item 6. Exhibits and Reports on Form 8-K ................................. 39
Signatures.................................................................. 40
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
ASSETS
Jun. 27, Dec. 31,
2004 2003
---------- ----------
Current assets:
Cash and cash equivalents $ 98,029 $ 77,115
Restricted cash 510 509
Accounts receivable, net 49,158 34,260
Advance billings 21,658 20,684
Inventories 42,845 27,430
Inventories - delivered systems 7,708 6,549
Prepaid expenses and other current assets 13,698 12,995
----------- ----------
Total current assets 233,606 179,542
Property and equipment, net 20,824 16,211
Goodwill 8,239 8,239
Intangibles 1,970 2,626
Other assets 1,058 769
----------- ---------
Total assets $ 265,697 $ 207,387
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,170 $ 21,340
Accrued liabilities 61,332 62,608
Deferred revenue 43,659 38,680
--------- ---------
Total current liabilities 125,161 122,628
--------- ---------
Long-term liabilities:
Deferred income taxes 750 1,055
--------- ---------
Total long-term liabilities 750 1,055
--------- ---------
Total liabilities 125,911 123,683
--------- ---------
Commitments and Contingencies (Note 14)
Stockholders' equity:
Common stock 50 45
Additional paid-in capital 592,941 546,099
Accumulated other comprehensive income 8,028 9,468
Treasury stock (2,987) (2,987)
Accumulated deficit (458,246) (468,921)
--------- ---------
Total stockholders' equity 139,786 83,704
--------- ---------
Total liabilities and stockholders' equity $ 265,697 $ 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 SIX MONTHS ENDED
---------------------- ----------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 60,151 $ 30,535 $113,276 $ 98,293
Cost of sales 34,148 18,442 64,865 67,609
--------- --------- --------- ---------
Gross profit 26,003 12,093 48,411 30,684
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering 5,458 6,683 10,354 14,233
Selling, general and administrative 13,396 12,798 26,343 29,671
Amortization of intangibles 329 328 657 1,495
--------- --------- --------- ---------
Total operating expenses 19,183 19,809 37,354 45,399
--------- --------- --------- ---------
Income (loss) from operations 6,820 (7,716) 11,057 (14,715)
Loss on disposition of Wet Business - - - (10,257)
Interest and other income (expense), net 579 (1,605) (75) (402)
--------- --------- --------- ---------
Income (loss) before benefit from income taxes 7,399 (9,321) 10,982 (25,374)
Provision for income taxes 38 225 307 163
--------- --------- --------- ---------
Net income (loss) $ 7,361 $ (9,546) $ 10,675 $ (25,537)
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.15 $ (0.21) $ 0.22 $ (0.57)
Diluted $ 0.14 $ (0.21) $ 0.21 $ (0.57)
Shares used in computing net income (loss) per share:
Basic 49,817 44,897 48,660 44,878
Diluted 51,441 44,897 50,388 44,878
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
----------------------
Jun. 27, Jun. 29,
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 10,675 $(25,537)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 2,575 3,248
Deferred taxes (278) 578
Provision for excess and obsolete inventories (161) -
Amortization of intangibles 657 1,496
Loss on disposition of Wet Business - 10,257
Loss on disposal of property and equipment 75 651
Changes in assets and liabilities:
Accounts receivable (15,068) 11,841
Advance billings (1,166) 3,172
Inventories (15,464) 3,852
Inventories - delivered systems (1,238) 14,059
Prepaid expenses and other current assets (831) (6,431)
Other assets (132) 897
Accounts payable (1,053) (3,207)
Accrued liabilities (1,066) 1,550
Deferred revenue 5,174 (28,143)
--------- --------
Net cash used in operating activities (17,301) (11,717)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (7,499) (891)
Proceeds from disposition of Wet Business - 2,000
-------- --------
Net cash provided by (used in) investing activities (7,499) 1,109
-------- --------
Cash flows from financing activities:
Payments on line of credit and long-term debt - (475)
Borrowings against line of credit - 810
Proceeds from exercise of options 325 325
Proceeds from the issuance of common stock, net of costs 46,522 -
Restricted cash (1) 512
-------- --------
Net cash provided by financing activities 46,846 1,172
-------- --------
Effect of exchange rate changes on cash and cash equivalents (1,132) 5,720
-------- --------
Net increase (decrease) in cash and cash equivalents 20,914 (3,716)
Cash and cash equivalents, beginning of period 77,115 87,879
-------- --------
Cash and cash equivalents, end of period $ 98,029 $ 84,163
======== ========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 27, 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
the Company's 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 and six months ended June 27, 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
Share-Based Payments
On March 31, 2004, the FASB issued a proposed Statement, "Share-Based
Payment, an amendment of FASB Statements No. 123 and 95," that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic value method as prescribed by
Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock
Issued to Employees," and generally would require that such transactions be
accounted for using a fair-value-based method and recognized as expenses in our
consolidated statement of income. The proposed standard would require that the
modified prospective method be used, which requires that the fair value of new
awards granted from the beginning of the year of adoption (plus unvested awards
at the date of adoption) be expensed over the vesting period. In addition, the
proposed statement encourages the use of the "binomial" approach to value stock
options, which differs from the Black-Scholes option pricing model that we
currently use. The recommended effective date of the proposed standard for
public companies is currently for fiscal years beginning after December 15,
2004.
Should this proposed statement be finalized in its current form, it will
have a significant impact on the Company's consolidated statement of income as
the Company will be required to expense the fair value of our stock option
grants and stock purchases under its employee stock purchase plan rather than
disclose the impact on its consolidated net income within the footnotes, as is
our current practice. In addition, the proposed standard may have a significant
impact on the Company's consolidated cash flows from operations as, under this
proposed standard, the Company will be required to reclassify a portion of its
tax benefit on the exercise of employee stock options from cash flows from
operating activities to cash flows from financing activities. Any
reclassification of future cash flow statements would be limited to the amount,
if any, by which the Company's actual tax benefit on the exercise of employee
stock options, determined on an individual employee basis, exceeds the tax
benefit that the Company would have received based on the employee gains
determined under the binomial method and recorded as expenses within our income
statement. There are a number of implementation issues that have not been
resolved in the proposed statement, including timing of the recognition of the
tax benefit.
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 Financial Accounting Standard Board (or FASB)
issued Statement of Financial Accounting standard (or 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 SIX MONTHS ENDED
--------------------- --------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
------- --------- -------- --------
Net income (loss):
As reported $ 7,361 $ (9,546) $10,675 $(25,537)
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 (1,158) (685) (2,428) (1,158)
------- -------- ------- --------
Pro forma $ 6,203 $(10,231) $ 8,247 $(26,695)
======= ======== ======= ========
Diluted net income (loss) per share:
As reported $ 0.14 $ (0.21) $ 0.21 $ (0.57)
Pro forma $ 0.12 $ (0.23) $ 0.16 $ (0.59)
Note 2 Balance Sheet Detail (in thousands):
Jun. 27, Dec. 31,
2004 2003
------- --------
Inventories:
Purchased parts and raw materials $26,882 $ 18,884
Work-in-process 13,672 5,444
Finished goods 2,291 3,102
------- --------
$42,845 $ 27,430
======= ========
Accrued liabilities:
Warranty $16,773 $ 16,508
Accrued compensation and benefits 10,190 6,596
Income taxes 6,916 6,992
Other 27,453 32,512
------- --------
$61,332 $ 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. 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. 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 June 27, 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
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
six months 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"). 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):
June 27, 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 (4,595) 1,970 6,565 (3,939) 2,626
--------- --------- -------- -------- -------- --------
Total goodwill and intangible assets $ 14,804 $ (4,595) $ 10,209 $ 14,804 $ (3,939) $ 10,865
========= ========= ======== ======== ======== ========
Amortization expense related to intangible assets was as follows
(unaudited, in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
------ ------ ------ -------
Developed technology amortization 329 328 657 1,495
----- ----- ----- -------
Total amortization $ 329 $ 328 $ 657 $ 1,495
===== ===== ===== =======
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.
9
An intangible asset for workforce was reclassified to 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 $0.7 million and $1.5 million for the
six months ended June 27, 2004 and June 29, 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.
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 SIX MONTHS ENDED
----------------------- ------------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
------- -------- -------- --------
NET INCOME (LOSS) $ 7,361 $ (9,546) $ 10,675 $(25,537)
BASIC INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $ 7,361 $ (9,546) $ 10,675 $(25,537)
Weighted average common shares outstanding 49,817 44,897 48,660 44,878
------- -------- -------- --------
Basic earnings (loss) per share $ 0.15 $ (0.21) $ 0.22 $ (0.57)
======= ======== ======== ========
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $ 7,361 $ (9,546) $ 10,675 $(25,537)
Weighted average common shares outstanding 49,817 44,897 48,660 44,878
Diluted potential common shares from stock options 1,624 - 1,728 -
------- -------- -------- --------
Weighted average common shares and dilutive
potential common shares 51,441 44,897 50,388 44,878
------- -------- -------- --------
Diluted income (loss) per share $ 0.14 $ (0.21) $ 0.21 $ (0.57)
======= ======== ======== ========
Stock options outstanding at June 27, 2004 and June 29, 2003 of 1,530,721
and 5,145,898 shares, respectively, were excluded from the computation of
diluted EPS because the effect of including them would have been antidilutive.
Note 6 Comprehensive Income (Loss)
SFAS No. 130 establishes standards for disclosure and financial statement
presentation for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources.
10
The following are the components of comprehensive income (loss):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
(in thousands) ------- -------- -------- --------
Net income (loss)................................ $ 7,361 $ (9,546) $ 10,675 $(25,537)
Cumulative translation adjustments............... (1,282) 429 (1,451) 300
Unrealized investment gain (loss)............... 3 (1) 11 87
Loss on cash flow hedging instruments............ - (175) - (209)
------- -------- -------- --------
Comprehensive income (loss)...................... $ 6,082 $ (9,293) $ 9,235 $(25,359)
======= ======== ======== ========
The components of accumulated other comprehensive income, net of related
tax, are as follows:
(in thousands) Jun. 27, Dec. 31,
2004 2003
------- -------
Cumulative translation adjustments...... $ 8,018 $ 9,469
Unrealized investment gain (loss)...... 10 (1)
Gain on cash flow hedging instruments... - -
------- -------
$ 8,028 $ 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.
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Three Months Ended Six Months Ended
------------------------------------------- -------------------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------------- ------------------- ------------------- -------------------
($) (%) ($) (%) ($) (%) ($) (%)
-------- ------ -------- ------ -------- ------ -------- ------
United States $ 8,097 13 $ 5,811 19 $ 12,248 11 $ 16,526 17
Germany 2,837 5 7,532 25 7,953 7 15,760 16
Europe - others 1,174 1 3 0 2,045 2 536 1
Japan 10,668 18 11,286 37 21,149 19 13,445 14
Taiwan 23,766 40 4,606 15 43,222 38 24,382 25
Korea 3,748 6 88 0 11,364 10 12,857 13
China 8,258 14 535 2 12,710 11 13,876 14
Singapore 1,603 3 674 2 2,585 2 911 1
-------- -------- --------- --------
$ 60,151 $ 30,535 $ 113,276 $ 98,293
======== ======== ========= ========
11
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 second quarter of 2004, one customer accounted for 15% of net sales
and in the second quarter of 2003, two customers accounted for 15% and 22% of
net sales.
At June 27, 2004, two customers each accounted for more than 10% of the
Company's accounts receivables, accounting for approximately 13% 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 $8.2 million at June 27,
2004), collateralized by specific trade accounts receivable of the Japanese
subsidiary. At June 27, 2004, approximately $0.9 million was borrowed under this
credit facility, and is included in the accrued liabilities in the condensed
consolidated balance sheets. This borrowing was subsequently repaid early in the
third quarter of 2004. The facility bears interest at a per annum rate of TIBOR
plus 75 basis points. The facility expires on June 20, 2005. 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 June 27, 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.
Note 9 Related Party Transactions
At June 27, 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
have 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.
12
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 June 27, 2004, DNS had made payments aggregating $57.0 million under
the settlement and license agreements. Of the $57.0 million paid by DNS as of
June 27, 2004, $4.6 million was withheld towards the Japanese withholding tax,
and the net amount the Company received was $52.4 million. In future periods,
the Company is scheduled to receive minimum royalty payments as follows:
Future
DNS minimum
Payments
Fiscal Period to be received
------------- ----------------
(in millions)
April 2005 6.0
April 2006 6.0
April 2007 6.0
------
$ 18.0
======
During July 2004, DNS made an additional royalty payment of approximately
$370,000, beyond the minimum royalty payment of $6.0 million made in April 2004,
based on their actual sales. This payment brought the total amount paid by DNS
to $57.4 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 and six months
ended June 27, 2004, the Company recognized royalty income of $3.2 million and
$6.4 million, respectively.
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.
13
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 and six months periods ended June 27, 2004 and June 29, 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
(in thousands) ------- -------- -------- --------
Balance at beginning of period $ 17,325 $ 17,537 $ 16,508 $ 16,486
Accrual for warranties issued during the period 3,235 1,947 7,573 4,154
Settlements made during the period (3,787) (2,047) (7,308) (3,203)
-------- -------- -------- --------
Balance at end of period $ 16,773 $ 17,437 $ 16,773 $ 17,437
======== ======== ======== ========
During the ordinary course of business, the Company provides standby
letters of credit or other guarantee instruments to certain parties as required.
As of June 27, 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.
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 June 27, 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.
14
The following is a summary of activities in the restructuring-related
accruals during the six month period ended June 27, 2004:
Liability as of Cash Payments Liability as of
December 31, Six Months Ended June 27,
2003 June 27, 2004 2004
--------------- ---------------- ---------------
Workforce reduction $ 115 $ (35) $ 80
Consolidation of excess facilities 1,175 (140) 1,035
------- ------ -------
Total $ 1,290 $ (175) $ 1,115
======= ====== =======
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. 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 second quarter of
2004, of approximately $46.5 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 second 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.
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 July 2003, the manufacturing building at the Exton,
Pennsylvania location was sublet for a period of approximately three years,
15
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 $0.8 million for each additional year that
the facilities are not leased and could aggregate approximately $12.6 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 years remaining, ending in
August 2006, with an approximate rental cost of $1.2 million annually. The
Company had sublet the facilities to SCP on terms that cover all rent and costs
payable by the Company under the primary lease. During the second quarter of
2004 and the first six months of 2004, the Company received sublease payments of
approximately $0.3 million and $0.6 million, respectively, from SCP. Under its
sublease, SCP has the right upon 90 days notice to partially or completely
terminate the sublease. In the second quarter of 2004, SCP cancelled the
sublease completely. The Company is responsible for the future lease costs of
approximately $2.5 million through August 2006, net of cost recovery efforts and
any sublease income. The Company has fully accrued for the costs related to this
lease, as part of restructuring.
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.
Note 15 Income Taxes
In the second quarter of 2004, the Company recorded income tax expense of
approximately $38,000 which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $108,000, and federal and state
income taxes of approximately $55,000, partially offset by a deferred tax
benefit on the amortization of certain intangible assets of $125,000. The
effective income tax rate was 0.5% for the second quarter of 2004. In the first
six months of 2004, the Company recorded income tax expense of approximately
$307,000 which consisted of foreign taxes of approximately $467,000, and federal
and state income taxes of approximately $90,000, partially offset by a deferred
tax benefit on the amortization of certain intangible assets of $250,000. The
effective income tax rate was 2.8% for the six months ended June 27, 2004. At
June 27, 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.
16
In the second quarter of 2003, the Company had recorded an income tax
provision of approximately $0.2 million, and approximately $0.2 million for the
first six months of 2003, which consisted of foreign withholding taxes of $0.6
million, foreign taxes incurred by it's foreign sales and service operations of
$0.1 million, and state income taxes of approximately $0.1 million, partially
offset by a deferred tax benefit on the amortization of certain intangible
assets of $0.6 million. There was no US or German current income tax benefit or
expense. The effective income tax rate was a negative 0.6% for the six months
ended June 29, 2003.
Note 16 Subsequent Event
On June 28, 2004, the Company announced the signing of a definitive
agreement to acquire Vortek Industries Ltd, a privately held developer of
millisecond flash annealing technology based in Vancouver, Canada. The
transaction will be accomplished through the exchange of stock. The acquisition,
which is subject to the approval of Vortek's securityholders and a Canadian
court, and to customary closing conditions, is expected to be completed by the
end of the third quarter of 2004.
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 more recently reported financial information to our results from these
earlier periods, 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 two quarters 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 and second quarter of 2004, we had
net income of $3.3 million and $7.4 million, respectively.
Our net income in the second quarter of 2004 more than doubled in
comparison to the first quarter, on a 13.2% increase in net sales. This reflects
the improvements in the efficiency and flexibility of our manufacturing cost
structure, which utilizes both internal and outsourced manufacturing and allows
us to increase production without the need to increase internal headcount. We
ended the second quarter of 2004 with over $98 million in cash and cash
equivalents. We have no long-term debt. With the recent improvements in our
operating results and the infusion of additional cash on our balance sheet from
a public offering in the first quarter of 2004, 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. Market
conditions have improved significantly in recent quarters. However, the
cyclicality and uncertainties regarding overall market conditions continue to
present significant challenges to us and limit 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) manage 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 (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 SIX MONTHS ENDED
----------------------- -----------------------
Jun. 27, Jun. 29, Jun. 27, Jun. 29,
2004 2003 2004 2003
(in thousands) ------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.8% 60.4% 57.3% 68.8%
------ ------ ------ ------
Gross profit 43.2% 39.6% 42.7% 31.2%
------ ------ ------ ------
Operating expenses:
Research, development and engineering 9.1% 21.9% 9.1% 14.5%
Selling, general and administrative 22.3% 41.9% 23.3% 30.2%
Amortization of intangibles 0.5% 1.1% 0.6% 1.5%
------ ------ ------ ------
Total operating expenses 31.9% 64.9% 33.0% 46.2%
------ ------ ------ ------
Income (loss) from operations 11.3% (25.3)% 9.8% (15.0)%
Loss on disposition of wet business -- -- -- (10.4)%
Interest and other income, net 1.0% (5.3)% (0.1)% (0.4)%
------ ------ ------ ------
Income (loss) before benefit from income taxes 12.3% (30.6)% 9.7% (25.8)%
Provision for income taxes 0.1% 0.7% 0.3% 0.2%
------ ------ ------ ------
Net income (loss) 12.2% (31.3)% 9.4% (26.0)%
====== ====== ====== ======
The divestiture of our Wet Business on March 17, 2003 has significantly
affected the comparability of our net sales and our costs in the six month
period ended June 27, 2004 to our reported results a year ago for the same
period and to periods prior to that. Our reported results for the first six
months of 2003 include sales of Wet Business products and related costs, while
our results for the first six months of 2004 do not. The following table
summarizes the amount of our net sales in each quarter of 2003 and in the first
two quarters 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%
June 27, 2004 - 57.0 3.2 60.2 - 94.7% 5.3%
------ ------- ------ ------- ------ ------ -----
$ - $ 106.9 $ 6.4 $ 113.3 - 94.4% 5.6%
====== ======= ====== ======= ====== ====== =====
21
Net Sales
Net sales for the second quarter of 2004 were $60.2 million. This
represents an increase of 97.0% compared to $30.5 million of net sales for the
second quarter of 2003, and an increase of 13.2% compared to $53.1 million of
net sales for the first quarter of 2004. The increase in net sales in the second
quarter of 2004 compared to the second quarter of 2003 and the first quarter of
2004 is primarily due to increased average selling prices and higher unit sales
resulting from sequential improvement in customer demand for our products. We
anticipate our net sales for the third quarter of 2004 to range between $66
million and $69 million.
Net sales of RTP and strip products for the second quarter of 2004 were
$57.0 million. This represents an increase of 107.3% compared to $27.5 million
of net sales for such products in the second quarter of 2003, and an increase of
14.2% compared to $49.9 million of net sales for such products in the first
quarter of 2004. The increase in net sales in the second quarter of 2004
compared to the second quarter of 2003 and the first quarter of 2004 is
primarily due to increased average selling prices and higher unit sales as a
result of improving customer demand. Units of RTP and strip products shipped in
the second quarter of 2004 increased 116.0% and 1.9% compared to the second
quarter of 2003 and the first quarter of 2004, respectively.
Net sales for the first six months of 2004 were $113.3 million,
representing an increase of 15.2% compared to net sales of $98.3 million for the
first six months of 2003. This increase was primarily due to higher shipments
resulting from improvement in demand for our products. Net sales for the first
six months of 2003 included $32.3 million in net sales from the divested Wet
Business, whereas net sales for the first six months of 2004 include no sales of
Wet Business products. Net sales of RTP and strip products for the first six
months of 2004 were $106.9 million, representing an increase of 78.2% compared
to net sales of such products of $60.0 million for the first six months of 2003.
This increase was primarily due to higher unit sales reflecting increased
customer demand as a result of the improving trend in the semiconductor industry
during that period. Units of RTP and strip products shipped in the first six
months of 2004 increased 75.4% compared to the first six months of 2003.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore, Korea and China),
accounted for 86.5% and 81.0% of net sales for the second quarter of 2004 and
2003, respectively. International sales accounted for 89.2% and 83.2% of net
sales for the first six months 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 second quarter of 2004 was 43.2%, an increase from
39.6% for the second quarter of 2003, and from 42.2% for the first quarter of
2004. The increase in gross margin in the second quarter of 2004, was due to
increased sales, a greater proportion of 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 third quarter of 2004 to range between 43% to 46%.
Our gross margin for the first six months of 2004 was 42.7%, a increase
from 31.2% for the first six months of 2003. The increase in gross margin in the
first six months of 2004, was due to increased sales, a greater proportion of
spares parts and service revenues, with relatively higher margins, better
absorption of our production facilities, and improved manufacturing overhead
efficiencies.
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 six month period, and will affect the comparability of our gross
margins in future periods, to our historical margins.
22
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 second quarter of
2004 were $5.5 million, or 9.1% of net sales, as compared to $6.7 million, or
21.9% of net sales, for the second quarter of 2003, and $4.9 million, or 9.2% of
net sales, for the first quarter of 2004. The decrease in research, development
and engineering expenses in the second quarter of 2004 compared to the same
quarter of 2003 was primarily due to reductions in personnel, more selective
research and development project funding, and various cost control measures that
resulted in a reduction in expenses. The increase in research, development and
engineering expenses, in absolute dollars, in the second quarter of 2004
compared to the first quarter of 2004 was primarily due to cessation of the cost
sharing benefit with an alliance partner in connection with an R&D project that
was completed in the first quarter of 2004.
Research, development and engineering expenses for the first six months of
2004 were $10.4 million, or 9.1% of net sales, as compared to $14.2 million, or
14.5% of net sales, for the first six months of 2003. The decrease in research,
development and engineering expenses in the first six months of 2004 compared to
the first six months 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, and various cost
control measures that resulted in a reduction in expenses.
Selling, General and Administrative
Selling, general and administrative expenses for the second quarter of 2004
were $13.4 million, or 22.3% of net sales, as compared to $12.8 million, or
41.9% of net sales, for the second quarter of 2003, and $12.9 million, or 24.4%
of net sales, for the first quarter of 2004. The increase in selling, general
and administrative expenses in the second quarter of 2004 in absolute dollars is
primarily due to higher variable expenses and variable compensation related to
increased net sales and improved performance. The decrease in selling, general
and administrative expenses, as a percentage of net sales, was favorably
affected by the increase in net sales and by continuing reduction in personnel
and related costs, reduction in building rent expenses, lower utilities costs,
lower sales commissions, and lower travel expenses.
Selling, general and administrative expenses for the first six months of
2004 were $26.3 million, or 23.3% of net sales, as compared to $29.7 million, or
30.2% of net sales, for the first six months of 2003. The decrease in selling,
general and administrative expenses in the first six months of 2004 compared to
the first six months 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.
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 second quarter of 2004 and first six months of
2004 were $0.3 million and $0.7 million, respectively. We estimate that our
amortization expense will be $1.3 million for each of fiscal years 2004 and
2005.
23
Interest and Other Income (Expense)
Interest and other income for the second quarter of 2004 was approximately
$0.6 million, or 1.0% of net sales, as compared to interest and other expense of
$1.6 million, or (5.3)% of net sales, for the second quarter of 2003. During the
second quarter of 2004, other income consisted of interest income of $0.3
million resulting from the investment of our cash balances and a foreign
exchange gain of $0.7 million, partially offset by net other expense of $0.4
million. During the second quarter of 2003, other expense consisted of a foreign
exchange loss of $1.1 million, loss on sale of fixed assets of $0.2 million,
interest expense of $0.1 million and other expense of $0.5 million, partially
offset by interest income of $0.3 million resulting from the investment of our
cash balances.
Interest and other expense for the first six months of 2004 was
approximately $0.1 million, or (0.1)% of net sales, as compared to $0.4 million,
or (0.4)% of net sales, for the first six months of 2003. During the first six
months of 2004, other expense consisted of other expense of $1.1 million,
partially offset by interest income of $0.5 million resulting from the
investment of our cash balances, a foreign exchange gain of $0.4 million and
gain on sale of fixed assets of $0.1 million. In the same period of 2003, other
expense consisted of a foreign exchange loss of $0.7 million, loss on sale of
fixed assets of $0.6 million and interest expense of $0.2 million, partially
offset by interest income of $0.7 million resulting from the investment of our
cash balances and other income of $0.4 million.
Provision for Income Taxes
In the second quarter of 2004, we recorded income tax expense of
approximately $38,000 which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $108,000, and federal and state
income taxes of approximately $55,000, partially offset by a deferred tax
benefit on the amortization of certain intangible assets of $125,000. The
effective income tax rate was 0.5% for the second quarter of 2004. In the first
six months of 2004, we recorded income tax expense of approximately $307,000
which consisted of foreign taxes of approximately $467,000, and federal and
state income taxes of approximately $90,000, partially offset by a deferred tax
benefit on the amortization of certain intangible assets of $250,000. The
effective income tax rate was 2.8% for the six months ended June 27, 2004. At
June 27, 2004, we have 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 we will generate sufficient taxable income to realize all
of our net deferred tax assets.
In the second quarter of 2003, we recorded an income tax provision of
approximately $0.2 million, and approximately $0.2 million for the first six
months of 2003, which consisted of foreign withholding taxes of $0.6 million,
foreign taxes incurred by our foreign sales and service operations of $0.1
million, and state income taxes of approximately $0.1 million, partially offset
by a deferred tax benefit on the amortization of certain intangible assets of
$0.6 million. There was no US or German current income tax benefit or expense.
The effective income tax rate was a negative 0.6% for the six months ended June
29, 2003.
Liquidity and Capital Resources
Our cash and cash equivalents, excluding restricted cash, were $98.0 million
at June 27, 2004, an increase of $20.9 million from $77.1 million at December
31, 2003 and an increase of $13.8 million from $84.2 million at June 29, 2003.
Stockholders' equity at June 27, 2004 was $139.8 million, compared to $83.7
million at December 31, 2003, and $81.1 million at June 29, 2003. Working
capital at June 27, 2004 was $108.4 million, compared to $56.9 million at
December 31, 2003, and $54.2 million at June 29, 2003. At June 27, 2004, we had
no long term debt.
24
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 second quarter of 2004, of approximately $46.5
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 second 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 $8.2 million at June 27, 2004),
collateralized by specific trade accounts receivable of the Japanese subsidiary.
At June 27, 2004, approximately $0.9 million was borrowed under this credit
facility, and is included in the accrued liabilities in the condensed
consolidated balance sheets. This borrowing was repaid early in the third
quarter of 2004. The facility bears interest at a per annum rate of TIBOR plus
75 basis points. The facility expires on June 20, 2005. 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 June 27, 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. During
the fourth quarter of 2003 and during the first two quarters of 2004, we have
been operationally profitable. With the recent improvements in our operating
results and the additional cash provided by the stock offering in the first
quarter of 2004, 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 June 27, 2004, DNS had made payments aggregating $57.0 million under
the terms of the settlement and license agreements. Of the $57.0 million paid by
DNS as of June 27, 2004, $4.6 million was withheld towards the Japanese
withholding tax, and the net amount we received was $52.4 million. In future
periods, we are scheduled to receive minimum royalty payments as follows:
Future
DNS minimum
Payments
Fiscal Period to be received
------------- ----------------
(in millions)
April 2005 6.0
April 2006 6.0
April 2007 6.0
------
$ 18.0
======
During July 2004, DNS made an additional royalty payment of approximately
$370,000, beyond the minimum royalty payment of $6.0 million made in April 2004,
based on their actual sales. This payment brought the total amount paid by DNS
to $57.4 million.
Cash Flows
Net cash used in operating activities was $17.3 million during the second
quarter of 2004 as compared to $11.7 million during the same quarter in 2003.
The net cash used in operating activities during the six months ended June
27, 2004 was primarily attributable to an increase in accounts receivable of
$15.1 million, an increase in inventories and inventories - delivered systems of
$16.7 million, an increase in advanced billings of $1.2 million, a decrease in
accounts payable of $1.1 million and a decrease in accrued liabilities of $1.1
million. The cash used in operating activities was offset by net income of $10.7
million, an increase in deferred revenues of $5.2 million, and non-cash
depreciation and amortization of $3.2 million.
The net cash used in operating activities during the six months ended June
29, 2003 was primarily attributable to a net loss of $25.5 million, a decrease
in deferred revenue of $28.1 million, a decrease in prepaid expenses and other
current assets of $6.4 million, and a decrease in accounts payable of $3.2
million. The cash used in operating activities was offset by a net loss
attributable to a decrease in inventories and inventories - delivered systems of
$17.9 million, a decrease in accounts receivable and advance billing of $15.0
million, the loss on disposition of Wet Business of $10.3 million, and the
non-cash depreciation and amortization of $4.7 million.
Net cash used in investing activities was $7.5 million during the six months
ended June 27, 2004 as compared to $1.1 million provided by investing activities
during the same period last year. The net cash used in investing activities
during the six months ended June 27, 2004 is attributable to purchase of
property and equipment of $7.5 million. Net cash provided by investing
activities was $1.1 million during the six months ended June 27, 2004 as
compared to $6.8 million during the same period last year. The net cash provided
by investing activities during the six months ended June 29, 2003 is
attributable to proceeds from the disposition of the Wet Business of $2.0
million offset by purchase of property and equipment of $0.9 million.
Net cash provided by financing activities was $46.8 million during the six
months ended June 27, 2004 as compared $1.2 million during the same period last
year. The net cash provided by financing activities during the six months ended
June 27, 2004 is primarily attributable to the sale of approximately 4.3 million
shares of the company's newly issued common stock in an underwritten public
offering at $11.50 per share with proceeds, net of expenses till the second
quarter of 2004, of $46.5 million. The net cash provided by financing activities
during the six months ended June 29, 2003 is primarily attributable to borrowing
against our Japanese line of credit in the amount of net $0.3 million and
proceeds from the issuance of common stock under stock plans of $0.3 million.
26
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.
Our operating plans are based on and require us to improve our operating
profits, control expenses, manage inventories, and collect accounts receivable
balances. As a result of the cyclical nature of the semiconductor industry, 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, the operating losses could adversely affect 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 which are subject to a number of risks and uncertainties which
could cause actual results to differ materially, including those set forth in
our Annual Report on Form 10-K, all of which are incorporated here by reference,
in addition to the following:
The semiconductor equipment industry is highly cyclical, periodically has severe
and prolonged downturns, and causes our operating results to fluctuate
significantly. We are exposed to the risks associated with industry
overcapacity, including reduced capital expenditures, decreased demand for our
products, increased price competition and delays by our customers in paying for
our products.
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. Our business depends in significant part upon capital expenditures by
manufacturers of semiconductor devices, including manufacturers that open new or
expand existing facilities. Periods of overcapacity and reductions in capital
expenditures by our customers cause decreases in demand for our products. If
existing fabrication facilities are not expanded or new facilities are not
built, demand for our systems may not develop or increase, and we may be unable
to generate significant new orders for our systems. If we are unable to develop
new orders for our systems, we will not achieve anticipated net sales levels.
During periods of declining demand for semiconductor manufacturing equipment,
our customers typically reduce purchases, delay delivery of ordered products
and/or cancel orders, resulting in reduced revenues and backlog, delays in
revenue recognition, and excess inventory. Increased price competition may
result, causing pressure on gross margin and net income.
27
The onset of another market downturn is difficult to predict and may occur
suddenly. During the latest downturn, we were unable to reduce our expenses
quickly enough to avoid incurring losses. 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. In the event of a future downturn, if we are unable to
effectively align our cost structure with prevailing market conditions, we could
again experience losses, and may be required to undertake additional
cost-cutting measures, and 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 cancellation,
reduction or delay of purchases by, or failure to collect receivables from,
these customers could harm our business.
Currently, we derive most of our revenues from the sale of a relatively
small number of systems to a relatively small number of customers, which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2 million. Consequently, any order
cancellations, delays in scheduled shipments, delays in customer acceptances or
delays in collection of accounts receivable could materially adversely affect
our operating results and cause such results to fall below our expectations and
the expectations of market analysts or investors.
Our list of major customers changes substantially from year to year, and we
cannot predict whether a major customer in one year will make significant
purchases from us in future years. Additionally, our customers' capital budget
considerations and our lengthy sales cycle make the timing of customer orders
uneven and difficult to predict. Accordingly, it is difficult for us to
accurately forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer, our financial results
will be negatively impacted.
Our backlog orders are subject to cancellation or delay.
Although we maintain a backlog of customer orders expected to be filled
within 12 months, customers may request cancellations or delivery delays. As a
result, our backlog may not be a reliable indication of our future revenues. If
shipments of orders in backlog are cancelled or delayed, our revenues could fall
below our expectations and the expectations of market analysts and investors.
Delays or technical and manufacturing difficulties incurred in the introduction
of new products could be costly and adversely affect our customer relationships.
Our success depends in part on the continual introduction of new and
improved systems and processes. Our products are complex, and we may experience
delays and technical or manufacturing difficulties in the prototype introduction
of new systems and enhancements, or in volume production of new systems or
enhancements. Our inability to overcome such difficulties, or to meet the
technical specifications of any new systems or enhancements, or to manufacture
and ship these systems or enhancements in volume and in a timely manner, would
materially adversely affect our business and results of operations, as well as
our customer relationships. We may from time to time incur unanticipated costs
to ensure the functionality and reliability of our products early in their life
cycles, which costs can be substantial. If we encounter reliability or quality
problems with our new products or enhancements, we could face a number of
difficulties, including reduced orders, higher manufacturing costs, delays in
collection of accounts receivable, and additional service and warranty expenses,
all of which could materially adversely affect our business and results of
operations.
We may not achieve anticipated revenue growth if we are not selected as "vendor
of choice" for new or expanded fabrication facilities or if our systems and
products do not achieve broader market acceptance.
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility, and
proven financial performance.
28
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this "vendor of choice" for the specific production line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital equipment requirements with the same vendor.
Accordingly, we may face narrow windows of opportunity to be selected as the
"vendor of choice" by substantial new customers. It may be difficult for us to
sell to a particular customer for a significant period of time once that
customer selects a competitor's product, and we may not be successful in
obtaining broader acceptance of our systems and technology. If we are unable to
achieve broader market acceptance of our systems and technology, we may be
unable to grow our business and our operating results and financial condition
will be adversely affected.
We must continually anticipate technology trends, improve our existing products
and develop new products in order to be competitive, and the development of new
or enhanced products involves significant risk and cost.
The markets in which we and our customers compete are characterized by
rapidly changing technology, evolving industry standards, and continuous
improvements in products and services. Consequently, our success depends upon
our ability to anticipate future customer needs, to develop new systems and
processes that meet customer requirements and industry standards and that
compete effectively on the basis of price and performance, and to continually
improve our existing systems and processes.
The development and manufacture of new products involves significant risk,
since the products are very complex and the development cycle is long and
expensive. The success of any new systems we develop and introduce is dependent
on a number of factors, including our ability to correctly predict customer
requirements for new processes, assess and select alternative technologies for
research and development and timely complete new system designs that are
acceptable to the market. We may make substantial investments in new
technologies before we can know whether they are technically or commercially
feasible or advantageous, and without any assurance that revenue from future
products or product enhancements will be sufficient to recover the associated
development costs. Not all development activities result in commercially viable
products. We may be adversely affected by manufacturing inefficiencies and the
challenge of producing innovative 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. We may exceed the budgeted cost of
reaching our research, development and engineering objectives, and planned
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.
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 be 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 and input of data into the
system, which could result in disruption of our procedures and controls and
difficulties achieving accuracy in the conversion of data. 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 us to improperly
state or delay 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.
29
We need to continue to improve or implement new systems, procedures and
controls.
We have recently 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 new and we do not have extensive experience with them. We may
encounter unexpected difficulties, costs or other challenges that make
implementation and use of these systems more difficult or costly than expected,
may cause the consolidation and reporting of our financial results to be more
time-consuming than expected, and may require additional management resources
than expected before they are fully implemented and operating smoothly.
Continued improvement or implementation of new systems, procedures and controls
will 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. It is uncertain whether we will be
able to meet all of the new requirements in a timely manner. 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.
Our results of operations may suffer if we do not effectively manage our
inventory.
We need to manage our inventory of component parts and finished goods
effectively to meet customer delivery demands at an acceptable risk and cost.
Customers are increasingly requiring very short lead times for delivery, which
may require us to purchase and carry additional inventory. For both the
inventories that support manufacture of our products and our spare parts
inventories, if anticipated customer demand does not materialize in a timely
manner, we will incur increased carrying costs and some inventory could become
unsaleable or obsolete, resulting in writeoffs which would adversely affect the
results of our operations.
Warranty claims in excess of our projections could seriously harm our business.
We offer a warranty on our products. The cost associated with our warranty
is significant, and in the event our projections and estimates of this cost are
inaccurate our financial performance could be seriously harmed. In addition, if
we experienced product failures at an unexpectedly high level, our reputation in
the marketplace could be damaged, customers may decline to place new or
additional orders with us, and our business would suffer.
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 more of those
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.
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.
30
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.
We may not be able to continue to successfully compete in the highly competitive
semiconductor equipment industry.
The semiconductor equipment industry is both highly competitive and subject
to rapid technological change. Significant competitive factors include the
following:
o system performance;
o cost of ownership;
o size of installed base;
o breadth of product line;
o delivery availability; and
o customer support.
Competitive pressure has been increasing in several areas. In particular,
there is increased price competition, and customers are delaying purchase
commitments, which are then placed with demands for rapid delivery dates and
increased product support.
Our major competitors are larger than we are, have greater capital
resources, and may have a competitive advantage over us by virtue of having:
o broader product lines;
o longer operating history;
o greater experience with high volume manufacturing;
o substantially larger customer bases;
o the ability to reduce price through product bundling;
o substantially greater customer support resources; and
o substantially greater financial, technical, and marketing resources.
In addition, to expand our sales we must often replace the systems of our
competitors or sell new systems to customers of our competitors. Our competitors
may develop new or enhanced competitive products that will offer price or
performance features that are superior to our systems. Our competitors may also
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, sale and on-site customer support of their product lines. We may not
be able to maintain or expand our sales if competition increases and we are
unable to respond effectively.
Our lengthy sales cycle increases our costs and reduces the predictability of
our revenue.
Sales of our systems depend upon the decision of a prospective customer to
increase or replace manufacturing capacity, typically involving a significant
capital commitment. Accordingly, the decision to purchase our systems requires
time consuming internal procedures associated with the evaluation, testing,
implementation, and introduction of new technologies into our customers'
manufacturing facilities. Even after the customer determines that our systems
meet their qualification criteria, we experience delays finalizing system sales
while the customer obtains approval for the purchase and constructs new
facilities or expands its existing facilities. Consequently, the time between
our first contact with a customer regarding a specific potential purchase and
the customer's placing its first order may last from nine to twelve months or
longer. We may incur significant sales and marketing expenses during this
evaluation period. In addition, the length of this period makes it difficult to
accurately forecast future sales. If sales forecasted from a specific customer
are not realized, we may experience an unplanned shortfall in revenues and our
quarterly and annual revenue and operating results may fluctuate significantly
from period to period.
31
We are highly dependent on international sales, and face significant economic
and regulatory risks because a majority of our net sales are from outside the
United States.
Our international sales accounted for 87% of our total net sales in 2003,
74% in 2002 and 78% in 2001 and we anticipate international sales will continue
to account for a significant portion of our future net sales. Asia has been a
particularly important region for our business, and we anticipate that it will
continue to be important as we expand our sales and marketing efforts by opening
an office in China. Our sales to customers located in Taiwan, Japan, other Asian
countries and recently China accounted for 71% of our total sales in 2003, 47%
in 2002 and 47% in 2001. Because of our continuing dependence upon international
sales, we are subject to a number of risks associated with international
business activities, including:
o unexpected changes in law or regulations resulting in more burdensome
governmental controls, tariffs, restrictions, embargoes, or export
license requirements;
o exchange rate volatility;
o the need to comply with a wide variety of foreign and U.S. export
laws;
o political and economic instability, particularly in Asia;
o differing labor regulations;
o reduced protection for intellectual property;
o difficulties in accounts receivable collections;
o difficulties in managing distributors or representatives;
o difficulties in staffing and managing foreign subsidiary operations;
and
o changes in tariffs or taxes.
In the U.S., our sales to date have been denominated primarily in U.S.
dollars, while our sales in Japan are usually denominated in Japanese Yen. Our
sales to date in Europe have been denominated in various currencies, currently
primarily U.S. dollars and the Euro. Our sales in foreign currencies are subject
to risks of currency fluctuation. For U.S. dollar sales in foreign countries,
our products become less price-competitive where the local currency is declining
in value compared to the dollar. This could cause us to lose sales or force us
to lower our prices, which would reduce our gross margins.
In addition, the expenses of our German manufacturing operation are
primarily incurred in euros. If the euro were to appreciate in relation to the
U.S. dollar, our operating expenses would increase.
We depend upon a limited number of suppliers for some components and
subassemblies, and supply shortages or the loss of these suppliers could result
in increased cost or delays in manufacture and sale of our products.
We rely to a substantial extent on outside vendors to provide many of the
components and subassemblies of our systems. We obtain some of these components
and subassemblies from a sole source or a limited group of suppliers. Because of
our anticipated reliance on outside vendors generally, and on a sole or a
limited group of suppliers in particular, we may be unable to obtain an adequate
supply of required components. Although we currently experience minimal delays
in receiving goods from our suppliers, when demand for semiconductor equipment
is strong, our suppliers may have difficulty providing components on a timely
basis.
In addition, during periods of shortages of components, we may have reduced
control over pricing and timely delivery of components. We often quote prices to
our customers and accept customer orders for our products prior to purchasing
components and subassemblies from our suppliers. If our suppliers increase the
cost of components or subassemblies, we may not have alternative sources of
supply and may no longer be able to increase the cost of the system being
evaluated by our customers to cover all or part of the increased cost of
components.
The manufacture of some of these components and subassemblies is an
extremely complex process and requires long lead times. If we are unable to
obtain adequate and timely deliveries of our required components or
subassemblies, we may have to seek alternative sources of supply or manufacture
such components internally. This could delay our ability to manufacture or
timely ship our systems, causing us to lose sales, incur additional costs, delay
new product introductions, and harm our reputation.
32
We manufacture many of our products at two primary manufacturing facilities and
are thus subject to risk of disruption.
Although we outsource the manufacturing for certain of our products to
third parties, we continue to produce our latest generation products at our two
principal manufacturing plants in Fremont, California and Dornstadt, Germany. We
have limited ability to interchangeably produce our products at either facility,
and in the event of a disruption of operations at one facility, our other
facility would not be able to make up the capacity loss. Our operations are
subject to disruption for a variety of reasons, including, but not limited to
natural disasters, work stoppages, operational facility constraints and
terrorism. Such disruption thus could cause delays in shipments of products to
our customers, result in cancellation of orders or loss of customers and
seriously harm our business.
Because of competition for qualified personnel, we may not be able to recruit or
retain necessary personnel, which could impede development or sales of our
products.
Our growth will depend on our ability to attract and retain qualified,
experienced employees. There is substantial competition for experienced
engineering, technical, financial, sales, and marketing personnel in our
industry. In particular, we must attract and retain highly skilled design and
process engineers. Historically, competition for such personnel has been intense
in all of our locations, but particularly in the San Francisco Bay Area where
our headquarters is located. If we are unable to retain existing key personnel,
or attract and retain additional qualified personnel, we may from time to time
experience inadequate levels of staffing to develop and market our products and
perform services for our customers. As a result, our growth could be limited due
to our lack of capacity to develop and market our products to our customers, or
we could fail to meet our delivery commitments or experience deterioration in
service levels or decreased customer satisfaction.
If we are unable to protect our intellectual property, we may lose a valuable
asset and experience reduced market share. Efforts to protect our intellectual
property may require additional costly litigation.
We rely on a combination of patents, copyrights, trademark and trade secret
laws, non-disclosure agreements, and other intellectual property protection
methods to protect our proprietary technology. Despite our efforts to protect
our intellectual property, our competitors may be able to legitimately ascertain
the non-patented proprietary technology embedded in our systems. If this occurs,
we may not be able to prevent the use of such technology. Our means of
protecting our proprietary rights may not be adequate and our patents may not be
sufficiently broad to protect our technology. Any patents owned by us could be
challenged, invalidated, or circumvented and any rights granted under any patent
may not provide adequate protection to us. Furthermore, we may not have
sufficient resources to protect our rights. Our competitors may independently
develop similar technology, or design around patents that may be issued to us.
In addition, the laws of some foreign countries may not protect our proprietary
rights to as great an extent as do the laws of the United States and it may be
more difficult to monitor the use of our products in such foreign countries. As
a result of these threats to our proprietary technology, we may have to resort
to costly litigation to enforce our intellectual property rights.
We might face patent infringement or other intellectual property infringement
claims that may be costly to resolve and could divert management attention.
We may from time to time be subject to claims of infringement of other
parties' patents or other proprietary rights. In addition, we on occasion
receive notification from customers who believe that we owe them indemnification
or other obligations related to infringement claims made against the customers
by third parties. Our involvement in any patent dispute or other intellectual
property dispute or action to protect trade secrets, even if the claims are
without merit, could be very expensive to defend and could divert the attention
of our management. Adverse determinations in any litigation could subject us to
significant liabilities to third parties, require us to seek costly licenses
from third parties, and prevent us from manufacturing and selling our products.
Royalty or license agreements, if required, may not be available on terms
acceptable to us or at all. Any of these situations could have a material
adverse effect on our business and operating results in one or more countries.
33
Our failure to comply with environmental regulations could result in substantial
liability.
We are subject to a variety of federal, state, local, and foreign laws,
rules, and regulations relating to environmental protection. These laws, rules,
and regulations govern the use, storage, discharge, and disposal of hazardous
chemicals during manufacturing, research and development and sales
demonstrations. If we fail to comply with present or future regulations,
especially in our Fremont, California and Dornstadt, Germany manufacturing
facilities, we could be subject to substantial liability for clean up efforts,
personal injury, and fines or suspension or cessation of our operations. We may
be subject to liability if our acquired companies have past violations.
Restrictions on our ability to expand or continue to operate our present
locations could be imposed upon us or we could be required to acquire costly
remediation equipment or incur other significant expenses.
Future sales of shares by STEAG could adversely affect the market price of our
common stock.
There are approximately 49.9 million shares of our common stock outstanding
as of August 2, 2004, of which approximately 8.9 million (or 17.7%) are held
beneficially by STEAG Electronic Systems AG. STEAG has indicated that it plans
to reduce its ownership in our common stock over time. If STEAG were to sell a
large number of shares, the market price of our common stock may decline.
Moreover, the perception in the public markets that such sales by STEAG might
occur could also adversely affect the market price of our common stock.
We incurred net operating losses for the fiscal years 2001 through 2003. We may
not achieve or maintain profitability on an annual basis.
We incurred net losses of approximately $336.7 million for the year ended
December 31, 2001, $94.3 million for the year ended December 31, 2002 and $28.4
million for the year ended December 31, 2003. Although we have been profitable
for the first half of 2004, we expect to continue to incur significant research
and development and selling, general and administrative expenses. We may not
achieve profitability in 2004 or future years. We will need to continue to
generate significant net sales to achieve and maintain profitability on an
annual basis, and we may not be able to do so.
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. 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. For example, as of August 2,
2004, the 52-week price range for our common stock was $ 3.87 to $ 16.59 per
share.
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.
34
Accounting requirements under SAB 104 may result in wide fluctuation in our
revenue.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition." SAB 104
supersedes SAB 101, and provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
Among other things, SAB 104 requires delaying revenue recognition in part or
totally until the time of customer acceptance, instead of recognizing revenue at
the time of product shipment. In some situations, application of this accounting
guidance delays the recognition of revenue that would otherwise have been
recognized in earlier periods. As a result, our reported revenue may fluctuate
more widely and reported revenue for a particular fiscal period might not meet
the expectations of financial analysts or investors. A delay in recognition of
revenue resulting from application of this guidance, while not affecting our
cash flow, could adversely affect our results of operations, which could cause
the value of our common stock to fall.
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 maintain 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.
Compliance with new regulatory and accounting requirements will be challenging
and is likely to cause our general and administrative expenses to increase and
impact our future financial position and results of operations.
In order to comply with the Sarbanes-Oxley Act of 2002, as well as changes
to listing standards recently adopted by NASDAQ, and proposed attestation and
accounting changes required by the Securities and Exchange Commission, we will
be required to increase our internal controls, hire additional personnel and
additional outside legal, accounting and advisory services, all of which will
cause our general and administrative costs to increase. Insurers are also likely
to increase premiums as a result of the high claims rates incurred in recent
periods, and so our premiums for our various insurance policies, including our
directors' and officers' insurance policies, are likely to increase. Proposed
changes in the accounting rules, including legislative and other proposals to
account for employee stock options as a compensation expense among others, could
materially increase the expenses that we report under generally accepted
accounting principles and adversely affect our operating results.
35
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 June 27,
2004.
Fair Value
Jun. 27,
2004
--------------
(In thousands)
Assets
Cash and cash equivalents $ 98,029
Average interest rate 0.79%
Restricted cash $ 510
Average interest rate 0.49%
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 June 27, 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 $ 2,382 106.43 $ 2,332
Mattson Thermal Products GmbH (Euro equivalent amount)
U.S. Dollar EUR 4,907 1.16 EUR 4,720
$ 5,987 $ 5,758
36
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 3.7 million EUROS at June 27, 2004.
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 second 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 second 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.
37
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.
There have been no developments in the pending cases during the second
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.
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.
Our annual meeting of stockholders was held on May 19, 2004.
At the meeting, the stockholders elected Kenneth Kannappan and William
Turner as Class I directors to hold office for a three-year term and until their
successors are elected and qualified. The nominees received the following votes:
Nominee For Withheld
------- --- --------
Kenneth Kannappan 40,249,136 7,881,627
William Turner 40,250,145 7,880,618
Our stockholders approved a proposal to amend and restate the
Company's 1994 Employee Stock Purchase Plan to renew the plan term by ten years
with an expiration date of May 19, 2014 and to approve an increase in the number
of shares reserved for issuance thereunder by 1,500,000 shares. The proposal
received the following votes:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
35,390,945 4,261,625 60,096 -0-
Our stockholders approved a proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the year ending December 31, 2004. The proposal received the following votes:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
41,553,596 6,566,867 10,300 -0-
38
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.
10.14 1994 Employee Stock Purchase Plan, as amended
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.
(b) Reports on Form 8-K
Form 8-K furnished April 21, 2004 reporting under Item 7 and Item 12 the
issuance of a press release regarding financial results for the quarter
ended March 28, 2004.
Form 8-K filed June 29, 2004 reporting under Item 9 the pending acquisition
of Vortek Industries Ltd.
- -----------
(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.
39
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: August 6, 2004
/s/ David Dutton
---------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
40