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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 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-21970
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MATTSON TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0208119
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2800 Bayview Drive Fremont, California 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-5900
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Number of shares of common stock outstanding as of August 2, 2002: 44,695,962.
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
- --------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 ................................................ 3
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2002 and July 1, 2001 .................. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and July 1, 2001................... 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....... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 30
Item 2. Changes in Securities ............................................ 31
Item 3. Defaults Upon Senior Securities................................... 31
Item 4. Submission of Matters to a Vote of Security Holders............... 31
Item 5. Other Information................................................. 32
Item 6. Exhibits and Reports on Form 8-K ................................. 32
Signatures........................................................ 34
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
June 30, December 31,
2002 2001
--------- ----------
Current assets:
Cash and cash equivalents $ 101,389 $ 64,057
Restricted cash 28,163 27,300
Short-term investments 1,461 5,785
Accounts receivable, net 25,907 38,664
Advance billings 45,835 61,874
Inventories 60,054 65,987
Inventories - delivered systems 56,561 74,002
Prepaid expenses and other current assets 16,153 18,321
--------- ---------
Total current assets 335,523 355,990
Property and equipment, net 26,072 33,508
Goodwill and intangibles 35,511 40,616
Other assets 3,289 2,591
--------- ---------
$ 400,395 $ 432,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - STEAG Electronic Systems AG, a shareholder $ 37,729 $ 44,613
Current portion of long-term debt -- 289
Line of credit -- 4,589
Accounts payable 17,131 14,175
Accrued liabilities 76,079 78,459
Deferred revenue 117,400 136,580
--------- ---------
Total current liabilities 248,339 278,705
--------- ---------
Long-term liabilities:
Long-term debt -- 1,001
Deferred income taxes 8,315 11,261
--------- ---------
Total long-term liabilities 8,315 12,262
--------- ---------
Total liabilities 256,654 290,967
--------- ---------
Stockholders' equity:
Common stock 45 37
Additional paid-in capital 542,004 497,536
Accumulated other comprehensive income (loss) 1,274 (6,553)
Treasury stock (2,987) (2,987)
Accumulated deficit (396,595) (346,295)
--------- ---------
Total stockholders' equity 143,741 141,738
--------- ---------
$ 400,395 $ 432,705
========= =========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 47,263 $ 71,355 $ 93,468 $ 144,854
Cost of sales 37,810 56,190 76,596 106,517
--------- --------- --------- ---------
Gross profit 9,453 15,165 16,872 38,337
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering 9,348 16,108 18,912 35,009
Selling, general and administrative 21,098 23,458 43,195 55,332
In-process research and development -- -- -- 10,100
Amortization of goodwill and intangibles 1,687 9,624 3,374 20,023
--------- --------- --------- ---------
Total operating expenses 32,133 49,190 65,481 120,464
--------- --------- --------- ---------
Loss from operations (22,680) (34,025) (48,609) (82,127)
Interest and other income (expense), net (2,005) 1,307 (2,004) 1,795
--------- --------- --------- ---------
Loss before provision for income taxes (24,685) (32,718) (50,613) (80,332)
Provision for (benefit from) income taxes (162) 397 (313) 2,409
--------- --------- --------- ---------
Net loss $ (24,523) $ (33,115) $ (50,300) $ (82,741)
========= ========= ========= =========
Net loss per share:
Basic $ (0.58) $ (0.90) $ (1.27) $ (2.25)
========= ========= ========= =========
Diluted $ (0.58) $ (0.90) $ (1.27) $ (2.25)
========= ========= ========= =========
Shares used in computing net loss per share:
Basic 42,315 36,804 39,712 36,709
========= ========= ========= =========
Diluted 42,315 36,804 39,712 36,709
========= ========= ========= =========
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
-------------------------
June 30, July 1,
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (50,300) $ (82,741)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 4,855 10,760
Deferred taxes (1,214) (2,208)
Amortization of goodwill and intangibles 3,374 20,023
Loss on disposal of property and equipment 607 --
Stock-based compensation 125 --
Acquired in-process research and development -- 10,100
Changes in assets and liabilities,
net of effect of acquisitions:
Restricted cash (863) --
Accounts receivable 17,527 20,718
Advance billings 20,703 (19,642)
Inventories 9,340 9,402
Inventories - delivered systems 24,572 (44,096)
Prepaid expenses and other current assets 2,400 (2,645)
Other assets (745) 5,700
Accounts payable 2,597 (7,566)
Accrued liabilities (8,759) (37,885)
Deferred revenue (31,381) 63,930
--------- ---------
Net cash used in operating activities (7,162) (56,150)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (652) (10,361)
Proceeds from the sale of equipment 2,939 --
Purchases of investments (5,118) (26,247)
Proceeds from the sale and maturity of investments 9,590 50,737
Net cash acquired from acquisitions -- 38,016
--------- ---------
Net cash provided by investing activities 6,759 52,145
--------- ---------
Cash flows from financing activities:
Payments on line of credit and long-term debt (5,341) (118)
Borrowings against line of credit 194 11,128
Payment on STEAG notes payable (1,204) --
Change in interest accrual on STEAG note 1,255 --
Proceeds from the issuance of common stock, net of costs 34,861 --
Proceeds from the issuance of common stock under stock plans 1,342 3,190
--------- ---------
Net cash provided by financing activities 31,107 14,200
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 6,628 (12,167)
--------- ---------
Net increase (decrease) in cash and cash equivalents 37,332 (1,972)
Cash and cash equivalents, beginning of period 64,057 33,431
--------- ---------
Cash and cash equivalents, end of period $ 101,389 $ 31,459
========= =========
Supplemental disclosures:
Common stock issued for business combination $ -- $ 294,804
========= =========
Stock issued in partial settlement of STEAG note $ 8,140 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The condensed consolidated balance
sheet as of December 31, 2001 has been derived from the audited financial
statements as of that date, but does not include all disclosures required by
generally accepted accounting principles. The financial statements should be
read in conjunction with the audited financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Estimates are used
for, but are not limited to, the accounting for the allowance for doubtful
accounts, inventory reserves, depreciation and amortization periods, sales
returns, warranty costs and income taxes. Actual results could differ from these
estimates.
The condensed consolidated financial statements include the accounts of
Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The results of operations for the three and six months ended June 30, 2002
are not necessarily indicative of results that may be expected for the future
quarters or for the entire year ending December 31, 2002.
Recent Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved
for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a
purchase business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite lives be amortized over their estimated useful lives and reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."
The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and is
no longer amortizing goodwill, thereby eliminating annual goodwill amortization
of approximately $3.9 million, based on anticipated amortization for fiscal year
2002 that would have been incurred under the prior accounting standard. In
accordance with the provisions of SFAS No. 142, the Company reclassified $4.6
million from intangible assets to goodwill relating to the acquired workforce.
The Company completed the first step of the transitional goodwill impairment
test and has determined that no potential impairment exists. As a result, the
Company has recognized no transitional impairment
6
loss in the first six months of 2002 in connection with the adoption of SFAS No.
142. However, no assurances can be given that future evaluations of goodwill
will not result in charges as a result of future impairment. The Company will
evaluate goodwill at least on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable from its
estimated future cash flow. The Company will continue to amortize the identified
intangibles. The amortization expense is estimated to be $6.7 million for fiscal
2002 and each of fiscal years 2003, 2004 and 2005. Amortization of intangibles
for the six months ended June 30, 2002 was approximately $3.4 million.
Net loss on an adjusted basis, excluding goodwill amortization expense, would
have been as follows (unaudited, in thousands):
For the Three Months Ended For the Six Months Ended
---------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net loss, as reported $ (24,523) $ (33,115) $ (50,300) $ (82,741)
Add: goodwill amortization -- 6,055 -- 12,885
---------- ---------- ---------- ----------
Net loss -- as adjusted $ (24,523) $ (27,060) $ (50,300) $ (69,856)
========== ========== ========== ==========
Basic and diluted loss per share, as reported $ (0.58) $ (0.90) $ (1.27) $ (2.25)
Add: goodwill amortization -- 0.16 -- 0.35
---------- ---------- ---------- ----------
Basic and diluted loss per share - as adjusted $ (0.58) $ (0.74) $ (1.27) $ (1.90)
========== ========== ========== ==========
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143"). SFAS 143 addresses accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The liability is accreted to its
present value each period while the cost is depreciated over its useful life.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002, which will be effective for the Company's fiscal year
beginning 2003. The Company believes that the adoption of SFAS 143 will not have
a significant effect on its financial position, results of operations or cash
flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144, which replaces SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires long-lived assets to be measured at the
lower of carrying amount or fair value less the cost to sell. SFAS 144 also
broadens disposal transactions reporting related to discontinued operations.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company adopted SFAS 144 on January 1, 2002 and
this adoption did not have a significant effect on its financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements", as well as SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings,
7
or describe their applicability under changed conditions. The Company will adopt
SFAS No. 145 during fiscal year 2003. We do not anticipate that adoption of this
statement will have a material impact on our consolidated balance sheets or
consolidated statements of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS No.
146 also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. We are
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The provisions of EITF No. 94-3
shall continue to apply for an exit activity initiated under an exit plan that
met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The
adoption of SFAS No. 146 will, on a prospective basis, change the timing of when
restructuring charges are recorded from the commitment date to the date that the
liability is incurred. The Company is currently assessing the impact of SFAS 146
on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial data to conform
with current year presentation.
Note 2 Balance Sheet Detail (in thousands):
June 30, December 31,
2002 2001
--------- ---------
Inventories:
Purchased parts and raw materials $ 73,956 $ 77,399
Work-in-process 25,537 25,480
Finished goods 1,971 5,363
Evaluation systems 3,022 5,734
--------- ---------
104,486 113,976
Less: inventory reserves (44,432) (47,989)
--------- ---------
$ 60,054 $ 65,987
========= =========
Accrued liabilities:
Warranty and installation $ 19,179 $ 19,936
Accrued compensation and benefits 11,116 10,320
Income taxes 5,561 5,165
Commissions 2,826 2,765
Customer deposits 568 686
Other 36,829 39,587
--------- ---------
$ 76,079 $ 78,459
========= =========
Note 3 Acquisitions
On June 27, 2000, the Company entered into a Strategic Business Combination
Agreement, subsequently amended by an Amendment to the Strategic Business
Combination Agreement dated December 15, 2000 ("Combination Agreement"), as
amended on November 5, 2001, to acquire eleven direct and indirect subsidiaries,
comprising the semiconductor equipment division of STEAG Electronic Systems AG
("the STEAG Semiconductor Division"), and simultaneously entered into an
Agreement and Plan of Merger ("Plan of Merger") to acquire CFM Technologies,
Inc. ("CFM"). Both transactions were completed simultaneously on January 1,
2001.
8
STEAG Semiconductor Division
Pursuant to the Combination Agreement, the Company issued to STEAG
Electronic Systems AG ("SES") 11,850,000 shares of common stock valued at
approximately $124 million as of the date of the Combination Agreement, paid SES
$100,000 in cash, assumed certain obligations of SES and STEAG AG, the parent
company of SES, and agreed to repay certain intercompany indebtedness owed by
the acquired subsidiaries to SES, in exchange for which the Company delivered to
SES a secured promissory note in the principal amount of $26.9 million (with an
interest rate of 6% per annum). Under the amendment to the Combination
Agreement, the Company also agreed to pay SES the amount of 19.2 million EUROS.
On April 30, 2002, upon closure of a private placement transaction, the Company
issued approximately 1.3 million shares of common stock to SES in exchange for
the cancellation of $8.1 million (approximately 9.0 million EUROS as of April
30, 2002) of indebtedness. Under these two obligations, as of June 30, 2002, the
Company owed an aggregate amount of approximately $37.7 million to SES
(including accrued interest at 6% per annum). On July 2, 2002, the Company paid
to SES in full its remaining two obligations of $26.9 million and 10.2 million
EUROS and accrued interest thereon, aggregating approximately $37.7 million.
The Company reimbursed SES $3.3 million in acquisition related costs, in
April 2001. The Company also agreed to grant options to purchase 850,000 shares
of common stock to employees of the STEAG Semiconductor Division subsequent to
the closing of the transaction, which is not included in the purchase price of
the STEAG Semiconductor Division. As part of the acquisition transaction, the
Company, SES, and Mr. Mattson (the then chief executive officer and
approximately 17.7% stockholder of the Company, based on shares outstanding
immediately prior to the acquisition) entered into a Stockholder Agreement dated
December 15, 2000, as amended on November 5, 2001, providing for, among other
things, the election of two persons designated by SES to the Company's board of
directors, SES rights to maintain its pro rata share of the outstanding Company
common stock and participate in future stock issuances by the Company, and
registration rights in favor of SES. At June 30, 2002, SES held approximately
29.5% of the Company's common stock, and currently has two representatives on
the Company's board of directors.
The acquisition has been accounted for under the purchase method of
accounting and the results of operations of the STEAG Semiconductor Division are
included in the consolidated statement of operations of the Company from the
date of acquisition. The purchase price of the acquisition of $148.6 million,
which included $6.2 million of direct acquisition related costs (including
amounts reimbursed to SES), was used to acquire the common stock of the eleven
direct and indirect subsidiaries of the STEAG Semiconductor Division. The
allocation of the purchase price to the assets acquired and liabilities assumed,
is as follows (in thousands):
Net tangible assets ........................ $ 114,513
Acquired developed technology .............. 18,100
Acquired workforce ......................... 11,500
Goodwill ................................... 10,291
Acquired in-process research and development 5,400
Deferred tax liability ..................... (11,248)
---------
$ 148,556
=========
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $39.9 million. Goodwill, including workforce, is
no longer amortized under SFAS 142. Developed technology is being amortized over
an estimated useful life of five years.
9
In connection with the acquisition of the STEAG Semiconductor Division, the
Company allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows related to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represented next-generation technologies that
were expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man hours and
technological progress. Due to market conditions the Hybrid tool project has
been redefined as the Kronos II project which is expected to beta in mid-2003.
The Single wafer tool technology development efforts will continue at a pace to
meet market needs.
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from such projects
are based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
During the second half of 2001, the Company performed assessments of the
carrying value of its long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of the STEAG Semiconductor Division. The assessment was
performed pursuant to SFAS No. 121 as a result of deteriorated market conditions
in the semiconductor industry in general, a reduced demand specifically for the
Thermal products acquired in the merger and revised projected cash flows for
these products in the future. As a result of this assessment, the Company
recorded a charge of $3.5 million to reduce the carrying value of certain
intangible assets associated with the acquisition of the STEAG Semiconductor
Division based on the amount by which the carrying value of these assets
exceeded their fair value. Fair value was determined based on valuations
performed by an independent third party. In addition, the Company recorded a
charge of $1.0 million to reduce certain property and equipment purchased from
the STEAG Semiconductor Division to zero as there were no future cash flows
expected from these assets. These charges of $4.5 million relating to the STEAG
Semiconductor Division were recorded as impairment of long-lived assets and
other charges in the third and fourth quarters of 2001.
CFM Technologies
Under the Plan of Merger with CFM, the Company agreed to acquire CFM in a
stock-for-stock merger in which the Company issued 0.5223 shares of its common
stock for each share of CFM common stock outstanding at the closing date. In
addition, the Company agreed to assume all outstanding CFM stock options, based
on the same 0.5223 exchange ratio. The Company also agreed to issue additional
options to purchase 500,000 shares of its common stock to employees of CFM
subsequent to the closing of the transaction, which are not included in the
purchase price of CFM. On January 1, 2001, the Company completed its acquisition
of CFM. The purchase price included 4,234,335 shares of Mattson common stock
valued at approximately $150.2 million and the issuance of 927,457 options to
acquire Mattson common stock for the assumption of outstanding options to
purchase CFM common stock valued at approximately $20.4 million using the
Black-Scholes option pricing model and the following assumptions: risk free
interest rate of 6.5%, average expected life of 2 years, dividend yield of 0%
and volatility of 80%.
10
The merger has been accounted for under the purchase method of accounting
and the results of operations of CFM are included in the consolidated statement
of operations of the Company from the date of acquisition. The purchase price of
the acquisition of CFM was $174.6 million, which included $4.0 million of direct
acquisition related costs. The allocation of the purchase price to the assets
acquired and liabilities assumed, is as follows (in thousands):
Net tangible assets ............................. $ 28,536
Acquired developed technology ................... 50,500
Acquired workforce ............................. 14,700
Goodwill ........................................ 102,216
Acquired in-process research and development .... 4,700
Deferred tax liability .......................... (26,081)
--------
$174,571
========
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $167.4 million. Goodwill, including acquired
workforce, is no longer amortized under SFAS 142. Developed technology is being
amortized over an estimated useful life of five years.
In connection with the acquisition of CFM, the Company allocated
approximately $4.7 million of the purchase price to an in-process research and
development project. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to one incomplete research and development
project. At the date of acquisition, the development of this project had not yet
reached technological feasibility, and the research and development in progress
had no alternative future use. Accordingly, the purchase price allocated to
in-process research and development was expensed as of the acquisition date.
At the acquisition date, CFM was conducting design, development, engineering
and testing activities associated with the completion of the O3Di (Ozonated
Water Module), which is currently in-process as of June 30, 2002. The project
under development currently represents next-generation technology that is
expected to address emerging market demands for more effective, lower cost, and
safer resist and organics residue removal processes. As of June 30, 2002, the
technology under development was approximately 95 percent complete based on
engineering man hours and technological progress. CFM had spent approximately
$0.2 million on the in-process project prior to the merger, and since the
completion of the merger the Company has spent approximately an additional
$50,000 and expected to spend approximately an additional $10,000 in 2002 to
complete all phases of the research and development. Anticipated completion
dates range from 1 to 2 months, with estimated completion in August 2002, at
which time the Company expected to begin benefiting from the developed
technology.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from the project
is based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
11
Aggregate revenues for the developmental CFM product were estimated for the
five to seven years following introduction, assuming the successful completion
and market acceptance of the major research and development programs. At the
time of acquisition, the estimated revenues for the in-process project was
expected to peak within two years of acquisition and then decline sharply as
other new products and technologies are expected to enter the market. This
project was merged into the Kronos II project to be beta tested, estimated in
mid-2003.
The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental project, a discount rate of 23 percent was used to value the
in-process research and development. This discount rate was commensurate with
CFM's stage of development and the uncertainties in the economic estimates
described above.
During the second half of 2001, the Company performed assessments of the
carrying value of the long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of CFM. The assessment was performed pursuant to SFAS No. 121 as
a result of deteriorated market conditions in the semiconductor industry in
general, a reduced demand specifically for the Omni products acquired in the
merger and revised projected cash flows for these products in the future. As a
result of this assessment, the Company recorded a charge of $134.6 million
during 2001 to reduce the carrying value of goodwill, and other intangible
assets, associated with the acquisition of CFM based on the amount by which the
carrying value of these assets exceeded their fair value. Fair value was
determined based on valuations performed by an independent third party. In
addition, the Company recorded a charge of $5.8 million to reduce certain
property and equipment purchased from CFM to zero as there were no future cash
flows expected from these assets. The total charge of $140.4 million relating to
CFM has been recorded as impairment of long-lived assets and other charges in
the third and fourth quarters of 2001.
The following table summarizes the components of gross and net goodwill and
intangible asset balances (in thousands):
June 30, 2002 December 31, 2001
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Goodwill $12,676 $ -- $12,676 $12,610 $(2,759) $ 9,851
Other intangible assets -- -- -- 5,126 (570) 4,556
Developed technology 31,997 (9,162) 22,835 31,997 (5,788) 26,209
------- ------- ------- ------- ------- -------
Total goodwill and intangible assets $44,673 $(9,162) $35,511 $49,733 $(9,117) $40,616
======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (unaudited,
in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- ------- ------- -------
Goodwill amortization $ -- $ 3,799 $ -- $ 8,373
Other intangible assets amortization -- 2,256 -- 4,512
Developed technology amortization 1,687 3,569 3,374 7,138
------- ------- ------- -------
Total amortization $ 1,687 $ 9,624 $ 3,374 $20,023
======= ======= ======= =======
12
Note 4 Net Income (Loss) Per Share
Earnings per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires dual presentation of basic and diluted net
income (loss) per share on the face of the income statement. Basic earnings per
share (EPS) is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. For purposes of computing diluted earnings per
share, weighted average common share equivalents do not include stock options
with an exercise price that exceeded the average market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data.
Three Months Ended Six Months Ended
--------------------------- -------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------- --------- --------- --------
NET LOSS $ (24,523) $ (33,115) $ (50,300) $(82,741)
========== ========= ========= ========
BASIC AND DILUTED LOSS PER SHARE:
Loss available to common stockholders $ (24,523) $ (33,115) $ (50,300) $(82,741)
========== ========= ========= ========
Weighted average common shares outstanding 42,315 36,804 39,712 36,709
========== ========= ========= ========
Basic and diluted loss per share $ (0.58) $ (0.90) $ (1.27) $ (2.25)
========== ========= ========= ========
Total stock options outstanding at June 30, 2002 and July 1, 2001 of
4,548,669 and 1,035,259 shares, respectively, were excluded from the computation
of diluted EPS because the effect of including them would have been
antidilutive.
Note 5 Comprehensive Income (Loss)
SFAS No. 130 establishes standards for disclosure and financial statement
presentation for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources.
The following are the components of comprehensive loss:
Three Months Ended Six Months Ended
-------------------------- ------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Net loss $(24,523) $(33,115) $(50,300) $(82,741)
Cumulative translation adjustments 8,058 (4,702) 7,995 (9,518)
Increase (decrease) in minimum
pension liability - - (36) -
Unrealized investment gain (loss) - (293) (16) 10
Gain (loss) on cash flow hedging
instruments - (62) (116) 270
-------- -------- -------- --------
Comprehensive loss $(16,465) $(38,172) $(42,473) $(91,979)
======== ======== ======== ========
13
The components of accumulated other comprehensive income (loss), net of
related tax are as follows:
(in thousands) June 30, December 31,
2002 2001
------- -------
Cumulative translation adjustments $ 1,274 $(6,721)
Increase (decrease) in minimum pension liability -- 36
Unrealized investment gain (loss) -- 16
Gain on cash flow hedging instruments -- 116
------- -------
$ 1,274 $(6,553)
======= =======
Note 6 Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The chief executive officer of the Company is the Company's chief
decision maker. As the Company's business is completely focused on one industry
segment, design, manufacturing and marketing of advanced fabrication equipment
to the semiconductor manufacturing industry, management believes that the
Company has one reportable segment. The Company's revenues and profits are
generated through the sale and service of products for this one segment. As a
result, no additional operating segment information is required to be disclosed.
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Sales by Geographic Regions
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
-------------- -------------- -------------- --------------
($) (%) ($) (%) ($) (%) ($) (%)
-------- --- -------- --- -------- --- -------- ---
United States $ 15,134 32 $ 15,698 22 $ 22,297 24 $ 37,676 26
Europe 12,232 26 22,120 31 22,747 24 44,236 31
Asia Pacific
(including Korea, Taiwan,
Singapore and China) 17,919 38 23,547 33 42,688 46 44,838 31
Japan 1,978 4 9,990 14 5,736 6 18,104 12
-------- -------- -------- -------
$ 47,263 $ 71,355 $ 93,468 $144,854
======== ======== ======== ========
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 2002, two customers accounted for 18.1% and 13.7% of net
sales. In the second quarter of 2001, 13.0% of net sales was to a single
customer.
Note 7 Debt
The Company had notes payable to STEAG Electronic Systems AG in the
aggregate amount of approximately $37.7 million as of June 30, 2002. The notes
accrued interest at 6% per annum, and were due and paid in full including all
accrued interest on July 2, 2002.
The Company's Japanese subsidiary has a credit line with a Japanese bank in
the amount of 900 million Yen (approximately $7.5 million at June 30, 2002),
secured by the Japanese subsidiary's trade accounts receivable. The line bears
interest at a per annum rate of TIBOR plus 75 basis points. The term of the
line, originally through June 20, 2002, has been extended through June 20, 2003.
The Company has provided a corporate guarantee for this credit line. At June 30,
2002, there was no borrowing on this credit line.
14
On March 29, 2002, the Company entered into a one-year revolving line of
credit with a bank in the amount of $20.0 million. The line of credit will
expire on March 29, 2003, if not extended by then. All borrowings under this
line will bear interest at a per annum rate equal to the bank's prime rate plus
125 basis points. The line of credit is secured by a blanket lien on all
domestic assets including intellectual property. The line of credit requires the
Company to satisfy certain quarterly financial covenants, including a minimum
quick ratio, minimum tangible net worth and minimum revenue. At June 30, 2002,
the Company was in compliance with the covenants. Currently, the Company has no
borrowings under this line of credit.
Note 8 Related Party Transaction
In April 2002, the Company issued unsecured loans to Brad Mattson, a board
member, and Diane Mattson, a shareholder, each in the principal amount of
$700,000. The loans do not bear interest and are due and payable on August 31,
2002. During the term of the notes, Mr. Mattson and Ms. Mattson may not sell,
pledge or otherwise dispose of any common stock of the Company. Any disposition
of common stock of the Company by Mr. Mattson or Ms. Mattson would result in a
default under the notes and all proceeds from such disposition would be applied
to the repayment of the notes. On July 3, 2002, the Company issued additional
loans to Brad Mattson and Diane Mattson, in the principal amounts of $2,600,647
and $1,141,058, respectively. The interest rate on both these loans will be the
greater of the prime rate plus 125 basis points or that interest rate that would
have been charged under the margin agreement the borrowers had previously
maintained with Prudential Securities. Both loans are secured, collateralized,
and are due and payable on December 31, 2002.
Note 9 Other Items
On February 27, 2002, the Company signed an agreement to sell to Metron
Technology N.V. ("Metron") the AG Associates rapid thermal processing (RTP)
product line, which the Company obtained through its acquisition of the STEAG
Semiconductor Division. Upon closing of the transaction in March 2002, Metron
assumed exclusive ownership of the 4000 and 8000 series RTP product line and the
distribution of spare parts for the installed base. The Company recognized an
immaterial loss on this transaction. As part of the agreement, Metron sub-leased
a portion of the San Jose facility from the Company.
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's subsidiary, Mattson Wet Products, Inc. (formerly CFM
Technologies, Inc.), in a patent infringement suit against Dainippon Screen
Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor
wafer processing equipment. In the lawsuit, CFM claimed that six different DNS
wet processing systems infringed two of CFM's patents on drying technology. DNS
denied that its machines infringed and alleged that the CFM patents were
invalid. The jury found that each of the six DNS machines infringed both of the
CFM patents, and that both patents were valid. On June 24, 2002, the Company and
DNS jointly announced that they have amicably resolved their legal disputes with
a comprehensive, global settlement, which includes termination of all
outstanding litigation between the companies and cross-licenses of patents
related to certain aspects of wet immersion processing systems. The Company also
released all DNS customers from any claims of infringement relating to their
purchase and future use of DNS wet processing equipment. In addition, the
Company has agreed to afford DNS a two month period for DNS to evaluate its
interest in discussing the acquisition of intellectual property or assets
relating to wet surface preparation. The settlement agreement calls for DNS to
pay $40 million to the Company for past damages, including partial reimbursement
of legal fees, related to sales of certain wet processing products in the United
States. Of that amount, $22 million is payable in two installments due by
October 22, 2002, $7 million is payable on April 30, 2003, $5 million on
September 1, 2003 and $6 million on December 15, 2003. Under the related license
agreement, DNS and the Company agree to cross-license certain technologies
pertaining to automated batch immersion wet processing systems. DNS has agreed
to pay the Company annual royalties over a five-year period, 2003 through 2007,
based on worldwide sales of certain DNS wet processing systems. Royalties
payable to the Company under the license total a minimum of $30 million and a
maximum of $60 million. Minimum royalties are payable in equal amounts of $6
million due on April 1 of each year. Once total royalty payments equal $30
million, the minimum royalties no longer apply. No further royalties are payable
once total payments reach $60 million. The payment obligations of DNS are
unsecured, and the royalty payment obligations would cease if all four of the
U.S. patents that had been the subject of the lawsuit were to be held invalid
and unenforceable by a competent court.
15
In March 2002, the Company sold its building in West Chester, PA, for $2.3
million in cash, with no contingencies. The Company also paid off the remaining
mortgage on this building, of approximately $0.8 million, thereby reducing its
long-term debt by the same amount. In April 2002, the Company sold its building
in Austin, TX, for $2.0 million. There was no remaining mortgage on this
building. Both buildings were determined to be excess facilities.
On April 30, 2002, the Company issued 7.4 million shares of common stock in
a private placement transaction. Of the 7.4 million shares issued, 1.3 million
shares were issued to Steag Electronic Systems AG upon conversion of $8.1
million of outstanding promissory notes at $6.15 per share. The remaining 6.1
million shares were sold to other investors at $6.15 per share for aggregate
gross cash proceeds of $37.5 million.
Note 10 Commitments and Contingencies
The Company is party to certain claims arising in the ordinary course of
business. While the outcome of these matters is not presently determinable,
management believes that they will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company, at its Exton, Pennsylvania location, leases two buildings to
house its manufacturing and administrative functions related to the Omni
product. The lease for both buildings has approximately 17 years remaining with
an approximate combined rental cost of $1.5 million annually. The lease
agreement for both buildings allows for subleasing the premises without the
approval of the landlord. The administrative building has been sublet for a
period of five years with an option to extend for an additional five years. The
sublease is expected to cover all related costs on the administrative building.
The Company had originally anticipated subletting the manufacturing building in
the second quarter of 2002, but was unable to do so. In the second quarter of
2002, the Company leased space in two new facilities in Malvern, Pennsylvania to
house its administrative functions previously located in Exton, Pennsylvania.
These leases are each for a two year term. In addition, the Company has excess
facilities in San Jose, CA, and has non-cancelable annual lease payment
obligations of approximately $1.0 million over seven months related to this
facility. As of June 30, 2002, there is a remaining lease loss accrual of
approximately $2.4 million related to the excess facilities in Pennsylvania and
California, recorded as accrued liabilities in the accompanying condensed
consolidated balance sheet. In determining the facilities lease loss, net of
cost recovery efforts from expected sublease income, various assumptions were
made, including the time period over which the buildings will be vacant;
expected sublease terms; and expected sublease rates. Should operating lease
rental rates continue to decline in current markets or should it take longer
than expected to find a suitable tenant to sublease any of the facilities,
adjustments to the facilities lease losses accrual will be made in future
periods, if necessary, based upon the then current actual events and
circumstances. The Company has estimated that under certain circumstances the
facilities lease losses could increase approximately $1.5 million for each
additional year that the facilities are not leased and could aggregate $25.5
million under certain circumstances. The Company expects to make payments
related to the above noted facilities lease losses over the next seventeen
years, less any sublet amounts.
As of June 30, 2002, the Company has an accrual for purchase commitments of
$1.3 million for excess inventory component commitments to key component vendors
that it believes may not be realizable during future normal ongoing operations.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
report. In addition to historical information, this discussion contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth or
incorporated by reference under "Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this document.
Overview
We are a leading supplier of semiconductor wafer processing equipment used
in "front-end" fabrication of integrated circuits. Our products include dry
strip equipment, rapid thermal processing ("RTP") equipment, wet surface
preparation equipment, and plasma-enhanced chemical vapor deposition ("PECVD")
equipment. Our integrated circuit manufacturing equipment utilizes innovative
technology to deliver advanced processing capability and high productivity. We
provide our customers with worldwide support through our international technical
support organization, and our comprehensive warranty program.
Our business depends upon capital expenditures by manufacturers of
semiconductor devices. The level of capital expenditures by these manufacturers
depends upon the current and anticipated market demand for such devices. The
semiconductor industry has been experiencing a severe downturn, which has
resulted in capital spending cutbacks by our customers. Semiconductor companies
continue to reevaluate their capital spending, postpone their new capital
equipment purchase decisions, and reschedule or cancel existing orders. Declines
in demand for semiconductors deepened throughout each sequential quarter of
2001. During the first quarter of 2002, the semiconductor industry bookings
began to show some signs of recovery, driven by modestly improving global
economies and consumer-related demand. However, the overall demand outlook is
still uncertain over the intermediate term due to low levels of investment in
corporate infrastructure. Currently there are indications that this recovery in
the second quarter may not be able to maintain its momentum in the next few
quarters. The cyclicality and uncertainties regarding overall market conditions
continue to present significant challenges to us and impair our ability to
forecast near term revenue. Given that many of our costs are fixed in the
short-term, our ability to quickly modify our operations in response to changes
in market conditions is limited.
On January 1, 2001, we acquired the semiconductor equipment division of
STEAG Electronic Systems AG (the "STEAG Semiconductor Division"), which
consisted of a number of entities that became our direct or indirect
wholly-owned subsidiaries. At the same time, we acquired CFM Technologies, Inc.
("CFM"). We refer to these simultaneous acquisitions as "the merger." The merger
substantially changed the size of our company and the nature and breadth of our
product lines. The STEAG Semiconductor Division was a leading supplier of RTP
equipment, and both the STEAG Semiconductor Division and CFM were suppliers of
wet surface preparation equipment. At the time we completed the merger, our
industry was entering an economic slowdown.
On April 30, 2002, we issued 7.4 million shares of common stock in a
private placement transaction. Of the 7.4 million shares issued, 1.3 million
shares were issued to Steag Electronic Systems AG upon conversion of $8.1
million of outstanding promissory notes at $6.15 per share. The remaining 6.1
million shares were sold to other investors at $6.15 per share for aggregate
gross cash proceeds of $37.5 million.
17
On March 5, 2002, a jury rendered a verdict in our favor in a patent
infringement lawsuit with Dainippon Screen Manufacturing Co., Ltd. ("DNS").
Subsequently, on June 24, 2002, we settled the lawsuit. As part of the
settlement, DNS agreed to pay $40 million relating to past damages and partial
reimbursement of our attorneys' fees and costs, payable in installments over the
next 18 months, and DNS agreed to pay royalties during the five years from 2003
to 2007, totaling a minimum of $30 million and a maximum of $60 million, in
return for our granting DNS a worldwide license under the previously infringed
patents.
During the quarter ended June 30, 2002, we had a net loss of $24.5 million.
Future results will depend on a variety of factors, particularly overall market
conditions and the timing of significant orders, our cost reduction efforts, our
ability to bring new systems to market, the timing of new product releases by
our competitors, patterns of capital spending by our customers, market
acceptance of new and/or enhanced versions of our systems, changes in pricing by
us, our competitors, customers, or suppliers and the mix of products sold. We
are dependent upon increases in sales or reductions in our cost structure in
order to achieve and sustain profitability. If our sales do not increase, the
current levels of operating expenses could materially and adversely affect our
financial position and results.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgements, including those related to reserves for
excess and obsolete inventory, warranty obligations, bad debts, investments,
intangible assets, income taxes, restructuring costs, retirement benefits,
contingencies and litigation. Management bases its estimates and judgements on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. These form the basis for making judgements
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We consider certain accounting policies related to revenue recognition,
warranty obligations, inventories, impairment of long-lived assets, and income
taxes as critical to our business operations and an understanding of our results
of operations.
Revenue recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101).
We derive revenue from two primary sources- equipment sales and spare part
sales. We account for equipment sales as follows: 1.) for equipment sales of
existing products with new specifications or to a new customer, for all sales of
new products, and for all sales of our wet surface preparation products, revenue
is recognized upon customer acceptance; 2.) for equipment sales to existing
customers, who have purchased the same equipment with the same specifications
and previously demonstrated acceptance provisions, we recognize revenue on a
multiple element approach in which we bifurcate a sale transaction into two
separate elements. Under this approach, the portion of the invoice price that is
due upon final customer acceptance of the tool, generally 10% of the total
invoice price, is deferred until final customer acceptance of the tool. The
remaining portion of the total invoice price relating to the tool, generally 90%
of the total invoice price, is recognized upon shipment of the tool. From time
to time, however, we allow customers to evaluate systems, and since customers
can return such systems at any time with limited or no penalty, we do not
recognize revenue until these evaluation systems are accepted by the customer.
Revenues associated with sales to customers in Japan are recognized upon
customer acceptance, with the exception of sales of our RTP products through our
distributor in Japan, where revenues are recognized upon title transfer to the
distributor. For spare parts, revenue is recognized upon shipment. Service and
maintenance contract revenue is recognized on a straight-line basis over the
service period of the related contract.
18
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a significant number of our shipments. Any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses.
Warranty. Our warranties require us to repair or replace defective product
or parts, generally at a customer's site, during the warranty period at no cost
to the customer. The warranty offered on our systems ranges from 12 months to 36
months depending on the product. A provision for the estimated cost of warranty
is recorded as a cost of sales based on our historical costs at the time of
revenue recognition. While our warranty costs have historically been within our
expectations and the provisions we have established, we cannot be certain that
we will continue to experience the same warranty repair costs that we have in
the past. A significant increase in the costs to repair our products could have
a material adverse impact on our operating results for the period or periods in
which such additional costs materialize.
Inventories. Due to the changing market conditions, recent economic
downturn and estimated future requirements, we recorded inventory valuation
charges of approximately $26.4 million in the second half of 2001. This reserve
largely covers inventories for Thermal and Omni products that were acquired in
the merger with the Steag Semiconductor Division and CFM. Given the downturn in
the semiconductor industry, the age of the inventories on hand and our
introduction of new products, we wrote down excess inventories to net realizable
value based on forecasted demand and obsolete inventories that are no longer
used in current production. Actual demand may differ from forecasted demand and
such difference may have a material effect on our financial position and results
of operations. In the future, if our inventory is determined to be overvalued,
we would be required to recognize the decline in value in our cost of goods sold
at the time of such determination. Although we attempt to accurately forecast
future product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of our
inventory and our reported operating results.
Goodwill and Other Intangible Assets. We assess the realizability of
goodwill and other intangible assets at least annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." Our judgments regarding the existence of impairment
indicators are based on changes in strategy, market conditions and operational
performance of our business. Future events, including significant negative
industry or economic trends, could cause us to conclude that impairment
indicators exist and that goodwill or other intangible assets are impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. In assessing the recoverability of goodwill
and other intangible assets, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future, we
may be required to record impairment charges for these assets.
Income taxes. We record a valuation allowance to reduce our net deferred
tax asset to the amount that is more likely than not to be realized. In
assessing the need for a valuation allowance, we consider historical levels of
income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and feasible tax planning strategies. In the event we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, we would record an adjustment to the deferred
tax asset valuation allowance. This adjustment would increase income in the
period such determination was made. Likewise, should we determine that we would
not be able to realize all or part of the net deferred tax asset in the future,
an adjustment to increase the deferred tax asset valuation allowance would be
charged to income in the period such determination would be made.
19
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
------------------ -----------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- ------ ------- ------
Net sales 100% 100% 100% 100%
Cost of sales 80% 79% 82% 74%
------ ------ ------ ------
Gross profit 20% 21% 18% 26%
------ ------ ------ ------
Operating expenses:
Research, development and engineering 20% 23% 20% 24%
Selling, general and administrative 45% 33% 46% 38%
In-process research and development - - - 7%
Amortization of goodwill and intangibles 3% 13% 4% 14%
------ ------ ------ ------
Total operating expenses 68% 69% 70% 83%
------ ------ ------ ------
Loss from operations (48)% (48)% (52)% (57)%
Interest and other income, net (4)% 2% (2)% 1%
------ ------ ------ ------
Loss before provision for income taxes (52)% (46)% (54)% (56)%
Provision for (benefit from) income taxes - - - (1)%
------ ------ ------ ------
Net loss (52)% (46)% (54)% (57)%
====== ====== ====== ======
Net Sales
Net sales for the second quarter of 2002 of $47.3 million reflected a
decrease of 33.8% compared to $71.4 million for the second quarter of 2001, and
an increase of 2.3% compared to $46.2 million for the first quarter of 2002. Net
sales for the first six months of 2002 of $93.5 million reflected a decrease of
35.5% compared to $144.9 million for the first six months of 2001. Net sales in
the second quarter of 2002 and the first six months of 2002 decreased, compared
to the same periods of 2001, primarily due to lower demand as a result of the
economic downturn in the semiconductor industry. Net sales increased slightly in
the second quarter of 2002 compared to the first quarter of 2002.
Total deferred revenue at June 30, 2002 was approximately $117.4 million,
down from $124.5 million at the end of the first quarter of 2002, and up from
$107.8 million at the end of the second quarter of 2001. We generally expect
deferred revenue from particular product sales to be recognized as revenue in
our consolidated statement of operations with a time lag of six to twelve months
from product shipment.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea),
accounted for 68.0% and 78.0% of net sales for the second quarter of 2002 and
2001, respectively. We anticipate that international sales will continue to
account for a significant portion of net sales for 2002.
20
Gross Margin
Our gross margin for the second quarter of 2002 was 20.0%, a decrease from
21.3% for the second quarter of 2001. The decrease in gross margin was primarily
due to under absorption of our fixed manufacturing overhead costs because our
production volume was significantly lower than the second quarter of 2001
volume. We also continue to have acquisition-related inventory costs that are
adversely affecting our gross margin. In addition, due to intense competition we
are facing pricing pressure from competitors that is affecting our gross margin.
In light of the economic slowdown in our industry, we have taken steps to
reduce the number of our manufacturing sites. We have closed three manufacturing
sites since the first quarter of 2001. We continue to have excess capacity at
our remaining sites but have reduced costs at those sites in an effort to
improve our gross margin. During the first two quarters of 2002, we sold two of
the manufacturing sites that we closed during fiscal 2001.
Acquisition-related inventory costs, determined in accordance with APB 16,
continue to affect us. The inventory subject to these costs was revalued upward,
to reflect its market value, at the time of the merger. The largest portion of
this revalued inventory was in our Wet Division, where all revenue is deferred
until we obtain customer acceptances of our product. The sold inventory is being
recognized as revenue as it is accepted by customers, and the related costs,
including APB 16 costs, are included in our cost of goods sold with an adverse
effect on our gross margin in the corresponding quarter. For the second quarter
of 2002, these APB 16 costs were $3.2 million. As of June 30, 2002, we have
approximately $3.5 million of APB 16 costs remaining in inventories - delivered
systems that will continue to have a negative impact on our future gross margins
as the relevant systems are accepted.
Our gross margin has varied over the years and will continue to vary based
on many factors, including competitive pressures, product mix, economies of
scale, overhead absorption levels, remaining ABP 16 costs in our inventories and
costs associated with the introduction of new products.
Research, Development and Engineering
Research, development and engineering expenses for the second quarter of
2002 were $9.3 million, or 19.8% of net sales, as compared to $16.1 million, or
22.6% of net sales, for the second quarter of 2001. The decrease in research,
development and engineering expenses in the second quarter of 2002 was due to
the reduction of personnel and associated costs that was implemented during the
second half of 2001, more selective research and development project funding,
and various cost control measures that resulted in reduction in expenses for
outside services, engineering materials, licenses, and professional fees. Total
research, development and engineering expenses decreased slightly from $9.6
million in the first quarter of 2002, as a result of continuing cost controls
during the second quarter of 2002.
Research, development and engineering expenses for the first six months of
2002 were $18.9 million, or 20.2% of net sales, as compared to $35.0 million, or
24.2% of net sales, for the first six months of 2001. The decrease in research,
development and engineering expenses was due to the reduction of personnel and
associated costs that was implemented during the second half of 2001, more
selective research and development project funding, and various cost control
measures that resulted in reduction in expenses for professional fees, outside
services, licenses, and engineering materials.
Selling, General and Administrative
Selling, general and administrative expenses for the second quarter of
2002 were $21.1 million, or 44.6% of net sales, as compared to $23.5 million, or
32.9% of net sales, for the second quarter of 2001. The decrease in selling,
general and administrative expenses is primarily due to a reduction in personnel
and related costs, fewer buildings, lower utilities, lower sales commissions,
lower professional fees, and lower travel expenses partially offset by outside
services. The increase in selling, general and administrative expenses in the
second quarter of 2002, as a percentage of net sales, is due to significantly
lower sales compared to the second quarter of 2001.
21
Selling, general and administrative expenses for the first six months of
2002 were $43.2 million, or 46.2% of net sales, as compared to $55.3 million, or
38.2% of net sales, for the first six months of 2001. The decrease in selling,
general and administrative expenses is primarily due to reduction in personnel
and related expenses, no bonus pay-outs, fewer buildings, lower utilities, lower
sales commissions, lower outside services, lower professional fees, lower repair
& maintenance, and lower travel expenses. The increase in selling, general and
administrative expenses during the first six months of 2002, as a percentage of
net sales, is due to significantly lower sales compared to the same period of
2001.
We had substantial legal expenses in 2002, especially in the first
quarter, due to the DNS lawsuit for patent infringement, which resulted in a
verdict in our favor.
Interest and other income (expense)
The interest and other income (expense) for the first six months of 2002
were $(2.0) million, or (2.1)% of net sales, as compared to $1.8 million, or
1.2% of net sales, for the first six months of 2001. During the first six months
of 2002, interest expense of $1.4 million related to interest on our notes
payable to SES and a foreign exchange loss of $2.3 million, were offset by
interest income of $1.1 million resulting from the investment of our cash
balances. In the same period of 2001, interest expense of $1.0 million was
primarily related to interest on our notes payable to SES, and interest income
of $2.8 million resulting from the investment of our cash balances.
Provision for Income Taxes
We recorded an income tax benefit for the second quarter of 2002 of
approximately $0.1 million, and approximately $0.3 million for the first six
months of 2002, which consisted of foreign taxes incurred by our foreign sales
and service operations of $0.2 million, other foreign taxes of $0.6 million,
state income taxes of $0.1 million, and deferred tax benefit on the amortization
of certain intangible assets of $1.2 million. There is no US or German current
income tax benefit or expense. The effective income tax rate was 0.6% for the
six months ended June 30, 2002.
In-process research and development
In connection with our acquisition of the STEAG Semiconductor Division, we
allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows relating to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
In connection with the acquisition of CFM, we allocated approximately $4.7
million of the purchase price to an in-process research and development project.
This allocation represented the estimated fair value based on risk-adjusted cash
flows related to one incomplete research and development project. At the date of
acquisition, the development of this project had not yet reached technological
feasibility, and the research and development in progress had no alternative
future use. Accordingly, the purchase price allocated to in-process research and
development was expensed as of the acquisition date.
Amortization of Goodwill and Intangibles
We adopted SFAS 142 on January 1, 2002, and no longer amortize goodwill. We
continue to amortize the identified intangibles, in an amount estimated to be
$6.7 million for fiscal 2002, or approximately $1.7 million per quarter.
22
Liquidity and Capital Resources
Our cash and cash equivalents (excluding restricted cash) and short-term
investments were $102.9 million at June 30, 2002, an increase of $26.7 million
from $76.2 million at March 31, 2002. Stockholders' equity at June 30, 2002 was
approximately $143.7 million compared to $116.2 million as of March 31, 2002.
On April 30, 2002, we issued 7.4 million shares of common stock in a
private placement transaction. Of the 7.4 million shares issued, 1.3 million
shares were issued to Steag Electronic Systems AG upon conversion of $8.1
million of outstanding promissory notes at $6.15 per share. The remaining 6.1
million shares were sold to other investors at $6.15 per share for aggregate
gross cash proceeds of $37.5 million.
As a result of our acquisition of the STEAG Semiconductor Division at the
beginning of 2001, as of June 30, 2002 we owed SES a total of approximately
$37.7 million under two promissory notes which bore interest at 6.0% per year
and were due July 2, 2002. One promissory note, in the amount of $26.9 million,
was secured by an irrevocable standby letter of credit issued by Silicon Valley
Bank, which in turn was secured by approximately $26.9 million of restricted
cash. This obligation had originally been due on July 2, 2001. On November 5,
2001, SES agreed to extend the maturity date to July 2, 2002, and the interest
accrued through July 2, 2001 was added to the principal under the extended note.
The second promissory note, originally in the amount of 19.2 million EURO, was
reduced by $8.1 million (approximately $9.0 million EUROS as of April 30, 2002)
to 10.2 million EURO (approximately $9.2 million as of April 30, 2002) upon the
closing of our private placement transaction on April 30, 2002, and was secured
by the accounts receivable of two of our acquired subsidiaries, Mattson Thermal
Products GmbH, Dornstadt, Germany, and Mattson Wet Products GmbH, Pliezhausen,
Germany. This note contained covenants and required us to maintain certain
balances, including a minimum amount of applicable accounts receivable of at
least 17.9 million EURO (approximately $17.7 million as of June 30, 2002) at our
relevant subsidiaries. On July 2, 2002, we retired these two obligations of
$26.9 million and 10.2 million EUROS, including accrued interest thereon, and
made payments to SES in the total amount of approximately $37.7 million.
Our Japanese subsidiary has a credit line with a Japanese bank in the
amount of 900 million Yen (approximately $7.5 million at June 30, 2002), secured
by our Japanese subsidiary's trade accounts receivable. The line bears interest
at a per annum rate of TIBOR plus 75 basis points. The term of the line,
originally through June 20, 2002, has been extended through June 20, 2003. We
have given a corporate guarantee for this credit line. At June 30, 2002, there
were no borrowings under this credit line.
On March 29, 2002 we entered into a one-year revolving line of credit with
a bank in the amount of $20.0 million. The line of credit will expire on March
29, 2003, if not extended by then. All borrowings under this line bear interest
at a per annum rate equal to the bank's prime rate plus 125 basis points. The
line of credit is secured by a blanket lien on all of our domestic assets
including intellectual property. The line of credit requires us to satisfy
certain quarterly financial covenants, including maintaining a minimum quick
ratio, minimum tangible net worth and meeting minimum revenue targets, all of
which we are in compliance with. At June 30, 2002, there were no borrowings
under this credit line.
On June 24, 2002, we entered into a settlement agreement with DNS under
which DNS agreed to pay us $40 million, of which $22 million is payable in two
installments due by October 22, 2002, $7 million is payable on April 30, 2003,
$5 million on September 1, 2003 and $6 million on December 15, 2003. Under a
related license agreement, DNS agreed to pay us annual royalties over a
five-year period, 2003 through 2007, based on worldwide sales of certain DNS wet
processing systems. Minimum royalties are payable in equal amounts of $6 million
due on April 1 of each year. Once total royalty payments equal $30 million, the
minimum royalties no longer apply. No further royalties are payable once total
payments reach $60 million. The payment obligations of DNS are unsecured, and
the royalty payment obligations cease if all four of the U.S. patents that had
been the subject of the lawsuit were to be held invalid and unenforceable by a
competent court.
23
Net cash used in operating activities was $7.2 million during the six
months ended June 30, 2002 as compared to $56.2 million used in operating
activities during the same period in 2001. The net cash used in operating
activities during the six months ended June 30, 2002 was primarily attributable
to a net loss of $50.3 million, a decrease in deferred revenue of $31.4 million,
a decrease in accrued liabilities of $8.8 million, and a decrease in deferred
taxes of $1.2 million. The cash used in operating activities was offset by
non-cash depreciation and amortization of $8.2 million, a decrease in
inventories and inventories-delivered systems of $33.9 million, a decrease in
advance billings of $20.7 million, a decrease in accounts receivable of $17.5
million, and an increase in accounts payable of $2.6 million. Net cash used in
operating activities was $56.2 million during the six months ended July 1, 2001
and was primarily attributable to the net loss of $82.7 million, an increase in
inventories and inventories - delivered systems of $34.7 million, a decrease in
accrued liabilities of $37.9 million and a decrease in accounts payable of $7.6
million. Non-cash items included depreciation and amortization charges of $10.8
million, amortization of goodwill and intangibles of $20.0 million, acquired
in-process research and development of $10.1 million and an increase in deferred
revenue of $63.9 million.
Net cash provided by investing activities was $6.8 million during the
six month ended June 30, 2002 as compared to $52.1 million during the same
period last year. The net cash provided by investing activities during the first
six months of 2002 is attributable to the proceeds from the sale of investments
of $9.6 million and sale of equipment of $2.9 million offset by purchases of
investments of $5.1 million. Net cash provided by investing activities was $52.1
million during the six months ended July 1, 2001 and was attributable to the
sales of investments of $50.7 million, and net cash acquired from the
acquisition of the STEAG Semiconductor Division and CFM of $38.0 million offset
by purchases of investments of $26.2 million, and purchases of property and
equipment of $10.4 million.
Net cash provided by financing activities was $31.1 million during the six
months ended June 30, 2002 as compared to $14.2 million provided by financing
activities during the same period last year. The net cash provided by financing
activities during the first six months of 2002 is primarily attributable to the
net proceeds from the issuance of common stock of $34.9 million, an increase in
the interest accrual on a note payable to SES of $1.3 million, offset by
payments against our Japanese line of credit and long-term debt in the amount of
$5.3 million, and payment on SES notes payable of $1.2 million. Net cash
provided by financing activities was $14.2 million during the six months ended
July 1, 2001 and was primarily attributable to the borrowings, net of
repayments, on a line of credit of $11.0 million, and proceeds from our stock
plans of $3.2 million.
Based on current projections, we believe that our current cash and
investment positions will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. Our
primary source of liquidity is our existing unrestricted cash balance, cash
generated by our operations, and the proceeds from the private placement
transaction. During 2001 and the first six months of 2002, we had operating
losses. Our operating plans are based on and require that we reduce our
operating losses, control our expenses, manage our inventories, and collect our
accounts receivable balances. In this market downturn, we are exposed to a
number of challenges and risks, including delays in payments of our accounts
receivable by our customers, and postponements or cancellations of orders.
Postponed or cancelled orders can cause us to have excess inventory and
underutilized manufacturing capacity. If we are not able to significantly reduce
our present operating losses over the upcoming quarters, our operating losses
could adversely affect our cash and working capital balances, and we may be
required to seek additional sources of financing.
We may need to raise additional funds in future periods through public or
private financing, or other sources, to fund our operations. We may not be able
to obtain adequate or favorable financing when needed. Failure to raise capital
when needed could harm our business. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced, and these equity securities may have rights, preferences or
privileges senior to our common stock. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants on our operations and financial condition.
24
RISK FACTORS:
Factors That May Affect Future Results and Market Price of Stock
In this report and from time to time, we may make forward looking
statements regarding, among other matters, our future strategy, product
development plans, productivity gains of our products, financial performance and
growth. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements address matters which are subject to a number of risks and
uncertainties which could cause actual results to differ materially, including
those set forth in our Annual Report on Form 10-K, all of which are incorporated
here by reference, in addition to the following:
Our Quarterly Operating Results Fluctuate Significantly and Are Difficult to
Predict, and May Fall Short of Anticipated Levels, Which Could Cause Our Stock
Price to Decline.
Our quarterly revenue and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. This fluctuation is
due to a number of factors, including:
o cyclicality of the semiconductor industry;
o delays, cancellations and push-outs of orders by our customers;
o delayed product acceptance or payments of invoices by our customers;
o size and timing of sales, shipments and acceptance of our products;
o entry of new competitors into our market, or the announcement of new
products or product enhancements by competitors;
o sudden changes in component prices or availability;
o variability in the mix of products sold;
o manufacturing inefficiencies caused by uneven or unpredictable order
patterns, reducing our gross margins;
o higher fixed costs due to increased levels of research and development
or patent litigation costs; and
o successful expansion of our worldwide sales and marketing
organization.
A substantial percentage of our operating expenses are fixed in the short
term and we may be unable to adjust spending to compensate for an unexpected
shortfall in revenues. As a result, any delay in generating or recognizing
revenues could cause our operating results to be below the expectations of
market analysts or investors, which could cause the price of our common stock to
decline.
25
The Price of Our Common Stock Has Fluctuated in the Past and May Continue to
Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or
to Securities Litigation.
The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future. We believe that a number of
factors could cause the price of our common stock to fluctuate, perhaps
substantially, including:
o general conditions in the semiconductor industry or in the worldwide
economy;
o announcements of developments related to our business;
o fluctuations in our operating results and order levels;
o announcements of technological innovations by us or by our
competitors;
o new products or product enhancements by us or by our competitors;
o developments in patent litigation or other intellectual property
rights; or
o developments in our relationships with our customers, distributors,
and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of high technology stocks in particular, have experienced extreme
price fluctuations. These fluctuations have frequently been unrelated to the
operating performance of the affected companies. Such fluctuations could
adversely affect the market price of our common stock. In the past, securities
class action litigation has often been instituted against a company following
periods of volatility in its stock price. This type of litigation, if filed
against us, could result in substantial costs and divert our management's
attention and resources.
The Semiconductor Equipment Industry is Cyclical, is Currently Experiencing a
Severe and Prolonged Downturn, and Causes Our Operating Results to Fluctuate
Significantly.
The semiconductor industry is highly cyclical and has historically
experienced periodic downturns, whether the result of general economic changes
or capacity growth temporarily exceeding growth in demand for semiconductor
devices. During periods of declining demand for semiconductor manufacturing
equipment, customers typically reduce purchases, delay delivery of products
and/or cancel orders. Increased price competition may result, causing pressure
on our net sales, gross margin and net income. We have been experiencing
cancellations, delays and push-outs of orders, which reduce our revenues, cause
delays in our ability to recognize revenue on orders and reduce backlog. Further
order cancellations, reductions in order size or delays in orders will
materially adversely affect our business and results of operations.
Following the very strong year in 2000, the semiconductor industry is now
in the midst of a significant and prolonged downturn, and we and other industry
participants are experiencing lower bookings, significant push outs and
cancellations of orders. The severity and duration of the downturn are unknown,
but is impairing our ability to sell our systems and to operate profitably. If
demand for semiconductor devices and our systems remains depressed for an
extended period, it will seriously harm our business.
26
As a result of the acquisition of the STEAG Semiconductor Division and CFM
at the beginning of 2001, we are a larger, more geographically diverse company,
less able to react quickly to the cyclicality of the semiconductor business,
particularly in Europe and other regions where restrictive laws relating to
termination of employees prohibit us from quickly reducing costs in order to
meet the downturn. Accordingly, during this latest downturn we have been unable
to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal
year ended December 31, 2001, our net loss was $336.7 million, compared to net
income of $1.5 million for the year ended December 31, 2000. For the first and
second quarters of 2002 our net losses were $25.8 million and $24.5 million,
respectively. If our actions to date are insufficient to effectively align our
cost structure with prevailing market conditions, we may be required to
undertake additional cost-cutting measures, and may be unable to continue to
invest in marketing, research and development and engineering at the levels we
believe are necessary to maintain our competitive position. Our failure to make
these investments could seriously harm our long-term business prospects.
We are Exposed to the Risks Associated with Industry Overcapacity, Including
Reduced Capital Expenditures, Decreased Demand for Our Products and the
Inability of Many of Our Customers to Pay for Our Products.
As a result of the recent economic downturn, inventory buildups in
telecommunication products and slower than expected personal computer sales have
resulted in overcapacity of semiconductor devices and has caused semiconductor
manufacturers to experience cash flow problems and reduce their capital
spending. As our business depends in significant part upon capital expenditures
by manufacturers of semiconductor devices, including manufacturers that open new
or expand existing facilities, continued overcapacity and reductions in capital
expenditures by our customers could cause further delays or decreased 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.
In addition, many semiconductor manufacturers are continuing to forecast
that revenues in the short-term will remain flat or lower than in previous
high-demand years, and we believe that some customers may experience cash flow
problems. As a result, if customers are not successful generating sufficient
revenue or securing alternative financing arrangements, we may be unable to
close sales or collect accounts receivables from such customers or potential
customers, and may be required to take additional reserves against our accounts
receivables.
We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation,
Reduction or Delay in Purchases By, or Failure to Collect Receivables From,
These Customers Could Harm Our Business.
Currently, we derive most of our revenues from the sale of a relatively
small number of systems to a relatively small number of customers, which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle
for each system, coupled with customers' capital budget considerations, make the
timing of customer orders uneven and difficult to predict. In addition, our
backlog at the beginning of a quarter is not expected to include all orders
required to achieve our sales objectives for that quarter. As a result, our net
sales and operating results for a quarter depend on our ability to ship orders
as scheduled during that quarter as well as obtain new orders for systems to be
shipped in that same quarter. Any delay in scheduled shipments or in acceptances
of shipped products would delay our ability to recognize revenue, collect
outstanding accounts receivable, and would materially adversely affect our
operating results for that quarter. A delay in a shipment or customer acceptance
near the end of a quarter may cause net sales in that quarter to fall below our
expectations and the expectations of market analysts or investors.
Our list of major customers changes substantially from year to year, and we
cannot predict whether a major customer in one year will make significant
purchases from us in future years. Accordingly, it is difficult for us to
accurately forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer, our financial results
will be negatively impacted.
27
Unless We Can Continue To Develop and Introduce New Systems that Compete
Effectively on the Basis of Price and Performance, We May Lose Future Sales and
Customers, Our Business May Suffer, and Our Stock Price May Decline.
Because of continual changes in the markets in which our customers and we
compete, our future success will depend in part upon our ability to continue to
improve our systems and technologies. These markets are characterized by rapidly
changing technology, evolving industry standards, and continuous improvements in
products and services. Due to the continual changes in these markets, our
success will also depend upon our ability to develop new technologies and
systems that compete effectively on the basis of price and performance and that
adequately address customer requirements. In addition, we must adapt our systems
and processes to support emerging target market industry standards.
The success of any new systems we introduce is dependent on a number of
factors, including timely completion of new system designs accepted by the
market, and may be adversely affected by manufacturing inefficiencies and the
challenge of producing systems in volume which meet customer requirements. We
may not be able to improve our existing systems or develop new technologies or
systems in a timely manner. In particular, the transition of the market to 300
mm wafers will present us with both an opportunity and a risk. To the extent
that we are unable to introduce 300mm systems that meet customer requirements on
a timely basis, our business could be harmed. We may exceed the budgeted cost of
reaching our research, development and engineering objectives, and estimated
product development schedules may require extension. Any delays or additional
development costs could have a material adverse effect on our business and
results of operations. Because of the complexity of our systems, significant
delays can occur between the introduction of systems or system enhancements and
the commencement of commercial shipments.
The Timing of the Transition to 300mm Technology is Uncertain and Competition
May Be Intense.
We have invested, and are continuing to invest, substantial resources to
develop new systems and technologies to automate the processing of 300mm wafers.
However, the timing of the industry's transition to 300mm manufacturing
technology is uncertain, partly as a result of the recent period of reduced
demand for semiconductors. Delay in the transition to 300mm manufacturing
technology could adversely affect our potential revenues and opportunities for
future growth. Moreover, delay in the transition to 300mm technology could
permit our competitors to introduce competing or superior 300mm products at more
competitive prices, causing competition to become more vigorous.
We Need to Improve or Implement New Systems, Procedures and Controls.
The integration of STEAG and CFM and their operational and financial
systems and controls has placed a significant strain on our management
information systems and our administrative, operational and financial resources.
To efficiently manage the combined company, we must improve our existing and
implement new operational and financial systems, procedures and controls. Since
the merger, we have commenced integration of the businesses, systems and
controls of the three companies, however, each business has historically used a
different financial system, and the resulting integration and consolidation has
placed and will continue to place substantial demands on our management
resources. Improving or implementing new systems, procedures and controls may be
costly, and may place further burdens on our management and internal resources.
If we are unable to improve our existing or implement new systems, procedures
and controls in a timely manner, our business could be seriously harmed.
Legislative actions, higher insurance cost and potential new accounting
pronouncements are likely to cause our general and administrative expenses to
increase and impact our future financial position and results of operations.
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as
well as proposed changes to listing standards by Nasdaq, and proposed accounting
changes by the Securities and Exchange Commission, we may be required to
increase our internal controls, hire additional personnel and additional outside
legal, accounting and advisory services, all of which will cause our general and
administrative costs to increase. Insurers are also likely to increase premiums
as a result of the high claims rates incurred over the past year, and so our
premiums for our various insurance policies, including our directors' and
officers' insurance policies, are likely to increase. Proposed changes in the
accounting rules, including legislative and other proposals to account for
employee stock options as a compensation expense among others, could materially
increase the expenses that we report under generally accepted accounting
principles and adversely affect our operating results.
28
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Interest Rate Risk.
The Company's exposure to market risk for changes in interest rates relates
to the Company's investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. We have no cash flow exposure due to rate changes for cash
equivalents and short-term investments, as all of these investments are at fixed
interest rates.
The table below presents the fair value of principal amounts and related
weighted average interest rates for the Company's investment portfolio as of
June 30, 2002.
Fair Value
June 30,
2002
--------------
(In thousands)
Assets
Cash and cash equivalents $ 101,389
Average interest rate 1.65%
Restricted cash $ 28,163
Average interest rate 1.00%
Short-term investments $ 1,461
Average interest rate 1.64%
Foreign Currency Risk
The Company transacts business in various foreign countries. We employed a
foreign currency hedging program utilizing foreign currency forward exchange
contracts to hedge foreign currency fluctuations with Japan. The goal of the
hedging program is to lock in exchange rates to minimize the impact of foreign
currency fluctuations. We do not use foreign currency forward exchange contracts
for speculative or trading purposes.
The following table provides information as of June 30, 2002 about our
derivative financial instruments, which are comprised of foreign currency
forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts. 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 exchange contracts:
Japanese Yen................. $ 4,552 126.58 $4,841
The local currency is the functional currency for all foreign sales
operations. Our exposure to foreign currency risk has increased as a result of
our global expansion of business. As of June 30, 2002, the payment obligation to
STEAG Electronic Systems AG (SES) in the amount of approximately 10.2 million
EUROS (approximately $10.1 million as of June 30, 2002) was payable in EUROS
and, accordingly, exposure for exchange rate volatility existed. The exposure
for the exchange rate volatility of the STEAG payment obligation had been mostly
neutralized by using a natural balance sheet hedge and keeping EUROS in a
foreign currency bank account. The balance of this bank account was 13.1 million
EUROS at June 30, 2002. On July 2, 2002, the company paid off the 10.2 million
EUROS payment obligation to SES along with interest payment due in the amount of
approximately 198,000 EUROS from its EUROS foreign currency bank account.
29
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of business, we are subject to claims and
litigation, including claims that we infringe third party patents, trademarks
and other intellectual property rights. Although we believe that it is unlikely
that any current claims or actions will have a material adverse impact on our
operating results or our financial position, given the uncertainty of
litigation, we can not be certain of this. Moreover, the defense of claims or
actions against us, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
On June 26, 2002, the court approved the dismissal of our lawsuit with
Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC ("DNS") in
which we had been both a defendant and a counterclaim plaintiff (this case was
Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc.
and CFM Technologies, Inc., Civil Action No. 97-20270 JW, brought in the United
States District Court for the Northern District of California). On June 24,
2002, DNS and we jointly announced that we had amicably resolved our legal
disputes with a comprehensive, global settlement that included termination of
all outstanding litigation between us and cross-licenses of patents related to
certain aspects of wet immersion processing systems. We also released all DNS
customers from any claims of infringement relating to their purchase and future
use of DNS wet processing equipment. In addition, we agreed to afford DNS a two
month period for DNS to evaluate its interest in discussing the acquisition of
intellectual property or assets relating to wet surface preparation.
The settlement agreement calls for DNS to pay us a total of $40 million, of
which $29 million is attributable to past damages related to sales of certain
wet processing products in the United States, and $11 million is attributable to
reimbursement of a portion of the legal fees we incurred. Of these amounts, $22
million is payable in two installments due by October 22, 2002, $7 million is
payable on April 30, 2003, $5 million on September 1, 2003 and $6 million on
December 15, 2003. Under the related license agreement, we and DNS agreed to
cross-license certain technologies pertaining to automated batch immersion wet
processing systems, and to pay royalties to each other based upon future sales
of products utilizing the cross-licensed technologies. DNS agreed to pay us
annual royalties over a five-year period, 2003 through 2007, based on worldwide
sales of certain DNS wet processing systems. Royalties payable to us under the
license total a minimum of $30 million and a maximum of $60 million. Minimum
royalties are payable in equal amounts of $6 million due on April 1 of each
year. Once total royalty payments equal $30 million, the minimum royalties no
longer apply. No further royalties are payable once total payments reach $60
million.
The payment obligations of DNS are unsecured, and the royalty payment
obligations would cease if all four of the U.S. patents that had been the
subject of the lawsuit were to be held invalid and unenforceable by a competent
court.
We are currently litigating two ongoing cases against one of our
competitors involving our wet surface preparation intellectual property. These
litigation matters were brought by our subsidiary Mattson Wet Products, Inc.,
formerly CFM, and are described under Item 3 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2001. Except as discussed below, there
have been no material developments in these actions during the second quarter of
2002.
30
We have asserted claims relating to our U.S. Patent No. 4,911,761 (the
"`761 patent") against YieldUP International Corp. ("YieldUP"), alleging
infringement, inducement of infringement, and contributory infringement (this
case is CFMT and CFM Technologies, Inc. v. YieldUP International Corp., Civil
Action No. 95-549-RRM). On March 14, 2002, the United States District Court for
the District of Delaware heard oral argument, and on April 15, 2002, issued an
order denying YieldUP's summary judgment motion for non-infringement. On May 1,
2002, we asserted infringement by YieldUP of U.S. Patent No. 4,984,597 (the
"'597 patent"). The discovery schedule for this litigation has been established:
Fact discovery is currently set to end on October 11, 2002, with expert
discovery to be completed by December 20, 2002. A final pre-trial conference is
scheduled for May 29, 2003, although there is no trial date scheduled at this
time.
Our involvement in any patent dispute, or other intellectual property
dispute or action to protect trade secrets and know-how, could result in a
material adverse effect on our business. Adverse determinations in current
litigation or any other litigation in which we may become involved could subject
us to significant liabilities to third parties, require us to grant licenses to
or seek licenses from third parties, and prevent us from manufacturing and
selling our products. Any of these situations could have a material adverse
effect on our business.
Item 2. Changes in Securities and Use of Proceeds.
On April 30, 2002, Mattson sold 6.3 million shares of common
stock at $6.15 per shares in a private placement to
four institutional investors for an aggregate of $37.5
million. In addition, at the same time, Mattson issued 1.3
million shares of common stock to STEAG Electronic Systems AG in
exchange for the cancellation of $8.1 million of existing
indebtedness owed by Mattson to STEAG Electronic Systems, at a
conversion price of $6.15 per share. Bear, Stearns & Co. Inc.
served as the sole placement agent for these transactions. These
securities were issued and sold pursuant to an exemption from
registration under Section 506 of Regulation D under the
Securities Act of 1933, as amended, 17 CFR 230.506.
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 21, 2002.
At the meeting, the stockholders elected Hans-Georg Betz, David Dutton
and Kenneth G Smith as Class II 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
------- --- --------
Hans-Georg Betz 21,669,529 2,004,619
David Dutton 21,712,829 1,961,319
Kenneth G Smith 21,669,529 2,004,619
31
In addition to the nominees above, Dr. Jochen Melchior, Brad Mattson,
Kenneth Kannappan, and Shigeru Nakayama continued to serve their term as
directors.
The stockholders approved a proposal to increase the number of shares
reserved for issuance under the Company's amended and Restated 1989 Stock
Option Plan by 800,000 shares. The proposal received the following votes:
For Against Abstain Broker Non-Vote
---------- ---------- ------- ----------------
12,586,425 11,078,185 9,538 0
The stockholders approved a proposal to increase the number of shares
reserved for issuance under the Company's 1994 Employee Stock Purchase
Plan by 1,000,000 shares. The proposal received the following votes:
For Against Abstain Broker Non-Vote
---------- ---------- ------- ---------------
23,277,478 396,230 440 0
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 Third Amended and Restated Bylaws of the Company
4.1(2) Form of Share Purchase Agreement
4.2(3) Share Purchase Agreement between Mattson
Technology, Inc. and STEAG Electronic Systems AG
dated April 4, 2002.
10.2 Amended and Restated 1989 Stock Option Plan
10.10 Executive Change of Control agreement between Mattson
Technology, Inc. and David Dutton, dated as of March 4,
2002.
10.11 Form of Executive Change of Control agreement between
Mattson Technology, Inc. and its Executive Vice
Presidents and Product Division Presidents
10.12 Promissory Note between Mattson Technology, Inc. and
Brad Mattson, dated April 29, 2002.
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
99.3 Risk Factors incorporated by reference to Annual Report
on Form 10-K.
32
(b) Reports on Form 8-K
Form 8-K filed May 28, 2002 reporting under Item 4 the dismissal
of Arthur Andersen LLP and engagement of PricewaterhouseCoopers
LLP as independent accountants.
Form 8-K filed June 25, 2002 reporting under Item 5 the patent
infringement settlement agreement with DNS.
-----------
(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. registration
statement on Form S-3 filed on April 12, 2002.
(3) Incorporated by reference from Schedule 13 D/A filed by RAG
Aktiengesellschaft on May 8, 2002.
33
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 14, 2002
/s/ David Dutton
------------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
34