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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-21970
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MATTSON TECHNOLOGY, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0208119
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
47131 Bayside Parkway, Fremont, California 94538
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(510) 657-5900
--------------
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Number of shares of common stock outstanding as of October 31, 2003: 45,180,070.
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
---------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 28, 2003
and December 31, 2002 ......................................... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 28, 2003 and September 29, 2002 ... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 28, 2003 and September 29, 2002 ........ 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 34
Item 4. Controls and Procedures ........................................ 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 36
Item 2. Changes in Securities and Use of Proceeds ........................ 36
Item 3. Defaults Upon Senior Securities................................... 36
Item 4. Submission of Matters to a Vote of Security Holders............... 36
Item 5. Other Information................................................. 36
Item 6. Exhibits and Reports on Form 8-K ................................. 36
Signatures........................................................ 38
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
September 28, December 31,
2003 2002
------------- ------------
Current assets:
Cash and cash equivalents $ 82,996 $ 87,879
Restricted cash 508 1,105
Accounts receivable, net 18,787 34,834
Advance billings 12,286 27,195
Inventories 24,588 50,826
Inventories - delivered systems 2,229 47,444
Prepaid expenses and other current assets 12,809 13,676
--------- ---------
Total current assets 154,203 262,959
Property and equipment, net 15,843 18,855
Goodwill 8,239 12,675
Intangibles, net 2,955 15,254
Other assets 1,346 2,416
--------- ---------
$ 182,586 $ 312,159
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,227 $ 14,346
Accrued liabilities 68,659 77,795
Deferred revenue 28,458 108,698
--------- ---------
Total current liabilities 105,344 200,839
--------- ---------
Long-term liabilities:
Deferred income taxes 1,146 5,215
--------- ---------
Total long-term liabilities 1,146 5,215
--------- ---------
Total liabilities 106,490 206,054
--------- ---------
Commitments and contingencies (Note 11 and 13)
Stockholders' equity:
Common stock 45 45
Additional paid-in capital 542,878 542,482
Accumulated other comprehensive income 6,166 7,131
Treasury stock (2,987) (2,987)
Accumulated deficit (470,006) (440,566)
--------- ---------
Total stockholders' equity 76,096 106,105
--------- ---------
$ 182,586 $ 312,159
========= =========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 32,633 $ 60,808 $ 130,926 $ 154,276
Cost of sales 19,886 47,307 87,495 123,903
-------- -------- --------- ---------
Gross profit 12,747 13,501 43,431 30,373
-------- --------- --------- ---------
Operating expenses:
Research, development and engineering 4,483 10,003 18,716 28,915
Selling, general and administrative 12,638 22,058 42,309 65,253
Amortization of intangibles 328 1,687 1,823 5,061
Restructuring and other charges 489 6,171 489 6,171
-------- -------- --------- ---------
Total operating expenses 17,938 39,919 63,337 105,400
-------- -------- --------- ---------
Loss from operations (5,191) (26,418) (19,906) (75,027)
Loss on disposition of Wet Business - - (10,257) -
Interest and other income, net 1,267 15,728 865 13,724
-------- -------- --------- ---------
Loss before provision for (benefit from) income taxes (3,924) (10,690) (29,298) (61,303)
Provision for (benefit from) income taxes (21) 1,346 142 1,033
-------- -------- --------- ---------
Net loss $ (3,903) $(12,036) $ (29,440) $ (62,336)
======== ======== ========= =========
Net loss per share:
Basic $ (0.09) $ (0.27) $ (0.66) $ (1.51)
======== ======== ========= =========
Diluted $ (0.09) $ (0.27) $ (0.66) $ (1.51)
======== ======== ========= =========
Shares used in computing net loss per share:
Basic 44,975 44,696 44,911 41,379
======== ======== ========= =========
Diluted 44,975 44,696 44,911 41,379
======== ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------
September 28, September 29,
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (29,440) $ (62,336)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 4,820 7,334
Deferred taxes 477 (1,808)
Amortization of intangibles 1,823 5,062
Restructuring and other charges 489 6,171
Loss on disposal of the Wet Business 10,257 -
Loss on disposal of property and equipment 1,206 1,258
Stock-based compensation - 125
Changes in assets and liabilities, net of effect of
disposition of the Wet Business:
Accounts receivable 15,396 7,328
Advance billings 8,281 21,629
Inventories 7,421 15,315
Inventories - delivered systems 14,473 23,230
Prepaid expenses and other current assets (1,501) 2,943
Other assets 1,108 (4,156)
Accounts payable (6,044) 1,216
Accrued liabilities (6,020) (12,752)
Deferred revenue (32,076) (33,231)
--------- ---------
Net cash used in operating activities (9,330) (22,672)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (3,880) (2,144)
Proceeds from the sale of equipment - 3,439
Proceeds from the disposition of Wet Business 2,000 -
Purchases of investments - (14,962)
Proceeds from the sale and maturity of investments - 10,859
--------- ---------
Net cash used in investing activities (1,880) (2,808)
--------- ---------
Cash flows from financing activities:
Restricted cash 597 25,970
Payments on line of credit and long-term debt (335) (5,341)
Borrowings against line of credit 1,397 194
Payment on STEAG notes payable - (38,775)
Change in interest accrual on STEAG note - 1,292
Proceeds from the issuance of common stock, net of costs 91 34,861
Proceeds from the issuance of common stock under stock plans 305 1,342
--------- ---------
Net cash provided by financing activities 2,055 19,543
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 4,272 7,710
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,883) 1,773
Cash and cash equivalents, beginning of period 87,879 64,057
--------- ---------
Cash and cash equivalents, end of period $ 82,996 $ 65,830
========== =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003
(unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The condensed consolidated balance
sheet as of December 31, 2002 has been derived from the audited financial
statements as of that date, but does not include all disclosures required by
generally accepted accounting principles. The accompanying financial statements
should be read in conjunction with the audited financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Estimates are
used for, but are not limited to, the accounting for the allowance for doubtful
accounts, inventory reserves, depreciation and amortization periods, sales
returns, warranty costs and income taxes. Actual results could differ from these
estimates.
The condensed consolidated financial statements include the accounts of
Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The results of operations for the three and nine months ended September 28,
2003 are not necessarily indicative of results that may be expected for future
quarters or for the entire year ending December 31, 2003.
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on issue 00-21, "Multiple -
Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both which are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal years beginning after June 15,
2003 with early adoption permitted. Additionally, companies will be permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." The Company does not believe that EITF 00-21 will have
a material impact on its financial position or results of operations.
6
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 were initially required to be applied
for the first interim or annual period beginning after June 15, 2003. At its
meeting on October 8, 2003, the FASB deferred the latest date by which all
public entities must apply FIN 46 to the first reporting period ending after
December 15, 2003. This deferral applies to all variable interest entities
(VIEs) and potential VIEs, both financial and non-financial in nature. The
Company believes that this standard will have no material impact on its
consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends SFAS 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. SFAS 149 was effective for contracts entered into or
modified after June 30, 2003, and the Company does not expect it to have a
material effect on its financial condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes standards
on the classification and measurement of financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003. While the
effective date of certain elements of SFAS 150 have been deferred, the adoption
of SFAS 150 when finalized is not expected to have a material effect on the
Company's financial condition, results of operations or cash flows.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
loss, as all options granted to employees under those plans had an exercise
price equal to market value of the underlying common stock on the date of grant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure." The statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003.
7
The following table sets forth the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting For Stock-Based Compensation", to stock-based employee compensation
(in thousands, except per share data):
Three Months ended Nine Months Ended
------------------------------ -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss:
As reported $ (3,903) $ (12,036) $ (29,440) $ (62,336)
Add: Total stock-based employee compensation expense
included in net loss - - - -
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (685) (1,332) (1,843) (5,649)
-------- --------- --------- ---------
Pro forma $ (4,588) $ (13,368) $ (31,283) $ (67,985)
======== ========= ========= =========
Diluted net loss per share:
As reported $ (0.09) $ (0.27) $ (0.66) $ (1.51)
Pro forma $ (0.10) $ (0.30) $ (0.70) $ (1.64)
Note 2 Balance Sheet Detail (in thousands):
September 28, December 31,
2003 2002
------------- ------------
Inventories:
Purchased parts and raw materials $ 9,667 $27,085
Work-in-process 12,778 20,492
Finished goods 2,143 3,249
------- -------
$24,588 $50,826
======= =======
Accrued liabilities:
Warranty and installation $17,007 $16,486
Accrued compensation and benefits 7,706 11,140
Income taxes 6,832 5,797
Commissions 575 2,273
Line of credit 1,062 -
Other 35,477 42,099
------- -------
$68,659 $77,795
======= =======
Note 3 Disposition of Wet Business
On March 17, 2003, the Company sold the portion of its business that was
engaged in developing, manufacturing, selling, and servicing wet surface
preparation products for the cleaning and preparation of semiconductor wafers
(the "Wet Business") to SCP Global Technologies, Inc. ("SCP"). The Company had
originally acquired the Wet Business on January 1, 2001, as part of its merger
with the STEAG Semiconductor Division and CFM. As part of this disposition, SCP
acquired certain subsidiaries and assets, and assumed certain contracts relating
to the Wet Business, including the operating assets, customer contracts and
inventory of CFM, all outstanding stock of Mattson Technology IP, Inc. ("Mattson
IP"), a subsidiary that owns various patents relating to the Wet Business, and
all equity ownership interest in Mattson Wet Products GmbH, a subsidiary in
Germany that owned the Company's principal Wet Business operations. The Company
retained rights to all the cash from the Wet Business entities, and the Company
retained all rights to payments under the settlement and license agreements with
DNS. See Note 10. SCP acquired the rights to any damages under pending patent
litigation relating to patents owned by Mattson IP. SCP assumed responsibility
for the operations, sales, marketing and technical support services for the
Company's former wet product lines worldwide. The initial purchase price paid to
8
the Company by SCP to acquire the Wet Business was $2 million in cash. That
initial purchase price is subject to adjustment based on a number of things,
including the net working capital of the Wet Business at closing, to be
determined post-closing based on a pro forma closing date balance sheet, and an
earn-out, up to an aggregate maximum of $5 million, payable to the Company based
upon sales by SCP of certain products to identified customers through December
31, 2004. There has been no earn-out earned during the nine months ended
September 28, 2003. The amount of the Company's obligation relating to the net
working capital adjustment is still subject to determination. Pending final
determination, the Company anticipates that its obligation will not exceed $2
million. The Company made payments of $1 million towards the net working capital
adjustment during the third quarter of 2003. The Company is obligated to (i)
fund salary and severance costs relating to reductions in force to be
implemented in Germany after the closing, (ii) assume certain real property
leases relating to transferred facilities, subject to a sublease to SCP, (iii)
reimburse SCP for future legal fees, up to a maximum of $1 million, in pending
patent litigations, and (iv) reimburse SCP for amounts necessary to cover
specified customer responsibilities. During the first quarter of 2003, as part
of the loss on disposition of the Wet Business, the Company recorded accruals of
approximately $11.9 million to cover the future obligations relating to this
transaction. The Company did not record any additional accrual for this
transaction during the third quarter of 2003.
In the first quarter of 2003, the Company recorded a $10.3 million loss on
the disposition of its Wet Business, as detailed below (in thousands):
Contractual purchase price payment from SCP $ 2,000
Net book value of assets sold, including goodwill
and intangibles (80,824)
Net book value of liabilities assumed by SCP,
including deferred revenues 76,117
Other (7,550)(A)
---------
Loss on disposition of Wet Business $(10,257)
=========
(A) Included in the Other category are cumulative translation adjustments,
estimated future costs associated with reduction in force, working
capital adjustment, indemnification for future legal fees, investment
banker's fees, and legal, accounting and other professional fees
directly associated with the disposition of Wet Business.
As of September 28, 2003, the Company had paid $3.5 million relating to
reductions in force, $1.0 million for working capital adjustment, $1.5 million
for investment banker's fees, $0.7 million for legal fees, and $0.4 million for
accounting and other professional fees which were charged against accruals
established at the closing of the sale (and included in the "other" category of
the loss on disposition of the Wet Business).
Over the next two or more quarters, the Company expects to make cash
payments as a result of the post-closing obligations related to the disposition
of the Wet Business in an amount estimated to be approximately $9 million.
During the first quarter of 2003, as part of the loss on disposition of the Wet
Business, the Company recorded accruals for the estimated amount of these
obligations, and no additional accruals are anticipated. The actual amount to be
paid is uncertain, and could be more or less than the estimate.
The Company's Wet Business represented a significant portion of the
Company's net sales and costs in 2001, 2002 and first quarter of 2003. As a
result, the divestiture of the Wet Business affects the comparability of the
Company's Condensed Consolidated Statements of Operations for the three and nine
months ended September 28, 2003, to its reported results from prior periods.
9
For periods prior to the divestiture of the Wet Business, the Company's net
sales were comprised primarily of sales of Wet Business products, sales of RTP
products and strip products, and royalties received from Dainippon Screen
Manufacturing Co., Ltd. ("DNS"). (See Note 10). Following the divestiture of the
Wet Business, the Company's net sales are comprised primarily of sales of RTP
and strip products, and royalties received from DNS. The following table
summarizes the Company's net sales for the four quarters of 2002 and the first
three quarters of 2003 attributable to Wet Business products, RTP and strip
products, and royalties from DNS:
Net Sales (in millions)
------------------------------------------
Wet RTP and DNS Reported
Three Months Business Strip Royalty Total
Ended Products Products Revenue Net Sales
----------------- -------- -------- -------- ---------
March 31, 2002 $ 23.7 $ 22.5 $ - $ 46.2
June 30, 2002 15.3 32.0 - 47.3
September 29, 2002 15.5 42.3 3.0 60.8
December 31, 2002 23.0 22.9 3.3 49.2
------ ------ ---- -------
$ 77.5 $119.7 $6.3 $ 203.5
====== ====== ==== =======
March 30, 2003 $ 32.3 $ 32.5 $3.0 $ 67.8
June 29, 2003 - 27.5 3.0 30.5
September 28, 2003 - 29.6 3.0 32.6
------ ------ ---- -------
$ 32.3 $ 89.6 $9.0 $ 130.9
====== ====== ==== =======
Note 4 Goodwill and Intangible Assets
The following table summarizes the components of goodwill, other intangible
asset and related accumulated amortization balances (in thousands):
September 28, 2003 December 31, 2002
------------------------------------ ------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
--------- ------------ -------- --------- ------------ --------
Goodwill $ 8,239 $ - $ 8,239 $ 12,675 $ - $ 12,675
Developed technology 6,565 (3,610) 2,955 24,994 (9,740) 15,254
-------- -------- -------- -------- -------- --------
Total goodwill and intangible assets $ 14,804 $ (3,610) $ 11,194 $ 37,669 $ (9,740) $ 27,929
======== ======== ======== ======== ======== ========
Amortization expense related to intangible assets was as follows
(unaudited, in thousands):
For the Three Months Ended For the Nine Months Ended
----------------------------- ----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------- ------- ------- -------
Developed technology amortization $ 328 $ 1,687 $ 1,823 $ 5,061
===== ======= ======= =======
10
The Company adopted SFAS No. 142 on January 1, 2002 and is no longer
amortizing goodwill. The Company completed the annual goodwill impairment test
in the fourth quarter of 2002 and determined no impairment existed. The Company
evaluates goodwill at least on an annual basis and whenever events and changes
in circumstances suggest that the carrying amount may not be recoverable from
its estimated future cash flow. No assurances can be given that future
evaluations of goodwill will not result in charges as a result of future
impairment. The Company will continue to amortize the identified intangibles.
The amortization expense is estimated to be $0.3 million for the remainder of
fiscal 2003 and thereafter $1.3 million for each of fiscal years 2004 and 2005.
In the first quarter of 2003, goodwill and intangible assets relating to
developed technology were reduced by $4.4 million and $10.5 million,
respectively, in connection with the Wet Business divestiture.
Note 5 Net Income (Loss) Per Share
Earnings per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires dual presentation of basic and diluted net
income (loss) per share on the face of the income statement. Basic earnings per
share (EPS) is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. For purposes of computing diluted earnings per
share, weighted average common share equivalents do not include stock options
with an exercise price that exceeded the average market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data.
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------ ------------ ------------- -------------
BASIC AND DILUTED LOSS PER SHARE:
Loss available to common stockholders $ (3,903) $ (12,036) $ (29,440) $ (62,336)
======== ========= ========= =========
Weighted average common shares outstanding 44,975 44,696 44,911 41,379
======== ========= ========= =========
Basic and diluted loss per share $ (0.09) $ (0.27) $ (0.66) $ (1.51)
======== ========= ========= =========
Total stock options outstanding at September 28, 2003 and September 29,
2002 of 4,638,889 and 5,917,763 shares, respectively, were excluded from the
computation of diluted EPS because the effect of including them would have been
antidilutive.
Note 6 Comprehensive Income (Loss)
SFAS No. 130 establishes standards for disclosure and financial statement
presentation for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources.
The following are the components of comprehensive loss:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
(in thousands) September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss $ (3,903) $ (12,036) $ (29,440) $ (62,336)
Cumulative translation adjustments (1,150) 719 (850) 8,714
Decrease in minimum pension liability - - - (36)
Unrealized investment gain (loss) - - 87 (16)
Gain (loss) on cash flow hedging instruments 7 (6) (202) (122)
-------- --------- --------- ---------
Comprehensive loss $ (5,046) $ (11,323) $ (30,405) $ (53,796)
======== ========= ========= =========
11
The components of accumulated other comprehensive income, net of related
tax, are as follows:
(in thousands) September 28, December 31,
2003 2002
------------- ------------
Cumulative translation adjustments $ 5,998 $ 6,848
Unrealized investment loss - (87)
Gain on cash flow hedging instruments 168 370
------- -------
$ 6,166 $ 7,131
======= =======
Note 7 Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The chief executive officer of the Company is the Company's chief
decision maker. As the Company's business is completely focused on one industry
segment - design, manufacturing and marketing of advanced fabrication equipment
to the semiconductor manufacturing industry - management believes that the
Company has one reportable segment. The Company's revenues and profits are
generated through the sale and service of products for this one segment. As a
result, no additional operating segment information is required to be disclosed.
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Three Months Ended Nine Months Ended
----------------------------------------- ----------------------------------------
September 28, 2003 September 29, 2002 September 28, 2003 September 29, 2002
------------------ ------------------ ------------------ ------------------
($) (%) ($) (%) ($) (%) ($) (%)
------- --- -------- --- -------- --- -------- ---
United States $ 3,832 12 $ 13,571 22 $ 20,358 16 $ 35,868 23
Germany 1,641 5 11,514 19 17,401 13 31,583 20
Europe - others 1,899 6 3,299 5 2,435 2 5,977 4
Taiwan 5,699 17 10,871 18 30,081 23 32,701 21
Korea 4,571 14 5,499 9 17,428 13 17,158 11
China 3,666 11 3,934 7 13,598 11 6,782 5
Asia Pacific - others 650 2 7,863 13 5,505 4 14,214 9
Japan 10,675 33 4,257 7 24,120 18 9,993 7
-------- -------- -------- --------
$ 32,633 $ 60,808 $130,926 $154,276
======== ======== ======== ========
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 third quarter of 2003, three customers accounted for 10%, 13% and
15% of net sales and in the third quarter of 2002, one customer accounted for
11% of net sales. During the first nine months of 2003, two customers accounted
for 13% and 21% of net sales and during the first nine months of 2002, two
customers each accounted for 12% of net sales.
12
At September 28, 2003, two customers each accounted for more than 10% of
the Company's accounts receivables, accounting for approximately 10% and 16%,
respectively. At December 31, 2002, two customers each accounted for more than
10% of the Company's accounts receivables, accounting for approximately 17% and
14%, respectively.
Note 8 Debt
The Company's Japanese subsidiary has a credit facility with a Japanese
bank in the amount of 900 million Yen (approximately $8.1 million at September
28, 2003), secured by specific trade accounts receivable of the Japanese
subsidiary. The facility bears interest at a per annum rate of TIBOR plus 75
basis points. The facility will expire on June 20, 2004. The Company has given a
corporate guarantee for this credit facility. There are no financial covenant
requirements for this credit facility. At September 28, 2003, $1.1 million was
outstanding under this credit facility, which is included in accrued liabilities
in the Condensed Consolidated Balance Sheet.
The Company has a revolving line of credit with a bank in the amount of
$20.0 million, which will expire on April 26, 2004. All borrowings under this
credit line bear interest at a per annum rate equal to the bank's prime rate
plus 125 basis points. The line of credit is secured by a blanket lien on all of
the Company's domestic assets including intellectual property. The line of
credit requires the Company to satisfy certain quarterly financial covenants,
including maintaining a minimum balance of unrestricted cash and cash
equivalents and a minimum balance of investment accounts, and not exceeding a
maximum net loss limit. At September 28, 2003, the Company was in compliance
with the covenants and there were no borrowings under this credit line.
Note 9 Related Party Notes Receivable
At September 28, 2003, the Company had two loans outstanding to Brad
Mattson, who was formerly a director and the Chief Executive Officer of the
Company. At September 28, 2003, a total of $569,521 was outstanding under these
loans. During the third quarter of 2003, Mr. Mattson repaid a total of $2.6
million on his loans from the Company.
Mr. Mattson originally had three loans from the Company. In the second
quarter of 2000, the Company loaned Mr. Mattson the principal amount of
$200,000, with interest payable at 6% per annum. Mr. Mattson repaid in full the
outstanding principal and interest under this first loan in July 2003.
In April 2002, the Company made a second loan to Mr. Mattson, in the
principal amount of $700,000. This loan did not bear interest and was due and
payable on August 31, 2002. Mr. Mattson has partially repaid this loan, in the
amount of $200,000. As of September 28, 2003, there is a remaining balance due
of $500,000 under this second loan. The Company has entered into a Forbearance
Agreement with Mr. Mattson in which the Company agreed to forbear from taking
legal action on the second loan provided that Mr. Mattson fully repays the
balance remaining in January 2004.
On July 3, 2002, the Company extended a third loan to Mr. Mattson, in the
principal amount of $2.6 million. The interest rate on this loan was the prime
rate plus 125 basis points. This loan was secured by a pledge of shares of stock
of the Company owned by Mr. Mattson, and was due and payable on December 31,
2002. In December 2002, the Company entered into a Forbearance Agreement with
Mr. Mattson in which the Company agreed to forbear from taking legal action
provided that Mr. Mattson repays the Company in quarterly installments, with
final payment due December 31, 2003. During the third quarter of 2003, Mr.
Mattson repaid in full the principal balance of this loan. Interest in the
amount of $69,521 remained outstanding on the third loan at September 28, 2003.
Mr. Mattson resigned as an officer of the Company in October 2001 and resigned
as a director in November 2002.
13
During the third quarter of 2003, Diane Mattson, a shareholder, repaid a
total of $1,293,669 toward loans to her from the Company, and the Company has no
outstanding loans to her. Ms. Mattson originally had two loans from the Company.
In April 2002, the Company loaned Ms. Mattson the principal amount of $700,000.
This first loan did not bear interest and was due and payable on August 31,
2002. On July 3, 2002, the Company extended a second loan to Ms. Mattson, in the
principal amount of $1,141,058. The Company and Ms. Mattson subsequently agreed
to consolidate her loans, such that she owed the Company $1,841,058 under the
terms of the July 3, 2002 loan. The interest rate on this loan was the prime
rate plus 125 basis points, and the loan was secured by a pledge of shares of
stock of the Company owned by Ms. Mattson. Ms. Mattson and the Company later
agreed to revised payment terms under which her loan was payable in quarterly
installments beginning June 30, 2003, with final payment due June 30, 2004.
During the third quarter of 2003, Ms. Mattson repaid in full the principal and
interest on this loan.
Note 10 DNS Patent Infringement Suit Settlement
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's then subsidiary, Mattson Wet Products, Inc. (formally CFM
Technologies, Inc.), in a patent infringement suit against Dainippon Screen
Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor
wafer processing equipment. The jury found that six different DNS wet processing
systems infringed on two of CFM's drying technology patents and that both
patents were valid. On June 24, 2002, the Company and DNS jointly announced that
they had amicably resolved their legal disputes with a comprehensive, global
settlement agreement, which included termination of all outstanding litigation
between the companies. On March 17, 2003, as part of the disposition of the Wet
Business, the Company sold to SCP the subsidiary that owns the patents licensed
to DNS. However, the Company retained all rights to payments under the
settlement and license agreements. The settlement agreement and license
agreement require DNS to make payments to Mattson totaling between $75 million
(minimum) and $105 million (maximum), relating to past damages, partial
reimbursement of attorney's fee and costs, and royalties.
During the third quarter of 2003, the Company received $5.0 million from
DNS. As of September 28, 2003, DNS has made payments aggregating $45.0 million
under the terms of the settlement and license agreements. Of the $45.0 million
paid by DNS as of September 28, 2003, $4.0 million was subjected to Japanese
withholding tax, and the net amount the Company received was $41.0 million. In
future periods, the Company is scheduled to receive minimum royalty payments as
follows:
Future
Fiscal Year Ending DNS Payments
December 31, to be received
------------------ ------------------
(in thousands)
2003 $ 6,000
2004 6,000
2005 6,000
2006 6,000
2007 6,000
--------
$ 30,000
========
The Company has obtained an independent appraisal of the DNS arrangements
to determine, based on relative fair values, how much of the aggregate payments
due to Mattson are attributable to past disputes and how much are attributable
to future royalties on DNS sales of the wet processing products. Based on the
appraisal, the Company allocated $15.0 million to past damages, which was
recorded as "other income" during 2002, and allocated $60 million to royalty
income, which is being recognized in net sales in the income statement on a
straight-line basis over the license term. During the three and nine months
ended September 28, 2003, the Company recognized $3.0 million and $9.0 million,
respectively, of royalty income.
14
Note 11 Guarantees
The Company adopted Financial Accounting Standards Board Interpretation No.
45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Indebtedness of Others" (FIN 45) during the fourth quarter of 2002. FIN
45 requires disclosures concerning the Company's obligation under certain
guarantees, including its warranty obligations.
Under its warranty obligations, the Company is required to repair or
replace defective products or parts, generally at a customer's site, during the
warranty period at no cost to the customer. The warranty offered on the
Company's systems ranges from 12 months to 36 months depending on the product. A
provision for the estimated cost of warranty is recorded as a cost of sales,
based on the historical costs, at the time of revenue recognition. The actual
system performance and/or field expense profiles may differ from historical
experience, and in those cases the Company adjusts its warranty accruals
accordingly. The following table is the detail of the product warranty accrual
for the three and nine months ended September 28, 2003 and September 29, 2002:
(in thousands) Three months ended Nine months ended
---------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Balance at beginning of period $ 17,437 $ 19,179 $ 16,486 $ 19,936
Accrual for warranties issued during the period 1,567 2,530 5,721 8,538
Changes in liability related to pre-existing warranties (1,079) (531) (1,079) (3,041)
Settlements made during the period (918) (2,786) (4,121) (7,041)
-------- -------- -------- --------
Balance at end of period $ 17,007 $ 18,392 $ 17,007 $ 18,392
======== ======== ======== ========
During the ordinary course of business, the Company provides standby
letters of credit or other guarantee instruments to certain parties as required.
As of September 28, 2003, the maximum potential amount of future payments that
the Company could be required to make under these standby letters of credit is
approximately $1.1 million, representing collateral for corporate credit cards,
certain equipment leases and security deposits. The Company has not recorded any
liability in connection with these guarantee arrangements beyond that required
to appropriately account for the underlying transaction being guaranteed. The
Company does not believe, based on historical experience and information
currently available, that it is probable that any amounts will be required to be
paid under these guarantee arrangements.
The Company is a party to a variety of agreements pursuant to which it may
be obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
the Company, under which the Company may agree to hold the other party harmless
against losses arising from a breach of representations or under which the
Company may have an indemnity obligation to the counterparty with respect to
certain intellectual property matters or certain tax related matters.
Customarily, payment by the Company with respect to such matters is conditioned
on the other party making a claim pursuant to the procedures specified in the
particular contract, which procedures typically allow the Company to challenge
the other party's claims. Further, the Company's obligations under these
agreements may be limited in terms of time and/or amount, and in some instances,
the Company may have recourse against third parties for certain payments made by
the Company. It is not possible to predict the maximum potential amount of
future payments under these or similar agreements due to the conditional nature
of the Company s obligations and the unique facts and circumstances involved in
each particular agreement. Historically, payments made by the Company under
these agreements have not had a material effect on the Company's financial
position or results of operations. The Company believes if it were to incur a
loss in any of these matters, such loss should not have a material effect on the
Company's financial position or results of operations.
15
Note 12 Restructuring and Other Charges
During the second half of 2002, the Company recorded restructuring and
other charges of $17.3 million in connection with plans to align its cost
structure with projected sales resulting from the unfavorable economic
conditions and to reduce future operating expenses. The $17.3 million
restructuring and other charges for this restructuring program included a
workforce reduction at certain locations of $3.4 million, the shut-down of the
Malvern, Pennsylvania operations and the consolidation of other excess
facilities of $2.3 million, the write-down of certain fixed assets of $6.5
million, the write-down of certain intangible assets of $4.4 million, and the
write-down of certain other long-term assets of $0.7 million.
During the third quarter of 2003, the company recorded restructuring and
other charges of $489,000 that included $381,000 for workforce reduction and
$108,000 for consolidation of excess facilities. The Company anticipates that
the accrued liabilities at September 28, 2003 for the workforce reduction and
the consolidation of excess facilities will be paid out in the next three months
and the next two to three years, respectively.
The following is a summary of activities remaining in the
restructuring-related accruals during the nine month period ended September 28,
2003:
Restructuring Cash Payments
charges during during
Liability as of Nine Months Nine Months Liability as of
December 31, Ended Ended September 28,
2002 September 28, 2003 September 28, 2003 2003
--------------- ------------------ ------------------ ---------------
Workforce reduction $ 2,307 $ 381 $ (2,148) $ 540
Consolidation of excess facilities 2,056 108 (592) 1,572
------- ----- -------- -------
Total $ 4,363 $ 489 $ (2,740) $ 2,112
======= ===== ======== =======
Note 13 Commitments and Contingencies
The Company is party to certain claims arising in the ordinary course of
business. While the outcome of these matters is not presently determinable,
management believes that they will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company leases two buildings previously used to house its manufacturing
and administrative functions related to wet surface preparation products in
Exton, Pennsylvania. The lease for both buildings has approximately 16 years
remaining with a combined rental cost of approximately $1.5 million annually.
The lease agreement for both buildings allows for subleasing the premises
without the approval of the landlord. In June 2002, the administrative building
was sublet for a period of approximately five years, until December 2007, with
an option for the subtenant to extend for an additional five years. The
sublease, aggregating to approximately $7.2 million lease payments, is expected
to cover all related costs on the administrative building during the sublease
period. In the second quarter of 2002, the Company leased space in two new
facilities in Malvern, Pennsylvania to house its administrative functions
previously located in Exton, Pennsylvania. These leases are each for a two year
term. In July 2003, the manufacturing building at the Exton, Pennsylvania
location was sublet for a period of approximately three years, until September
2006, with an option for the subtenant to renew for a total of two successive
periods, the first for five years and the second for the balance of the term of
16
the master lease. The sublease, aggregating to approximately $2.1 million lease
payments, is expected to cover all related costs on the manufacturing building
during the sublease period. In determining the facilities lease loss, net of
cost recovery efforts from expected sublease income, various assumptions were
made, including, the time period over which the building will be vacant;
expected sublease terms; and expected sublease rates. The Company has estimated
that under certain circumstances the facilities lease losses could increase
approximately $0.9 million for each additional year that the facilities are not
leased and could aggregate approximately $13.9 million, net of expected sublease
income, under certain circumstances. The Company expects to make payments
related to the above noted facilities lease losses over the next sixteen years,
less any sublet amounts.
In connection with the disposition of the Wet Business, the Company agreed
to assume the lease obligations with respect to the facilities used to house the
manufacturing and administrative functions of the transferred Wet Business in
Pliezhausen, Germany. That lease has approximately 3 years remaining, until
August 2006, with an approximate rental cost of $1.2 million annually. The
Company has sublet the facilities to SCP on terms that cover all rent and costs
payable by the Company under the primary lease. During the third quarter of
2003, the Company received sublease payments of approximately $380,000 from SCP.
Under its sublease, SCP has the right upon 90 days notice to partially or
completely terminate the sublease, in which case the Company would become
responsible for the lease costs, net of cost recovery efforts and any sublease
income.
In the ordinary course of business, the Company is subject to claims and
litigation, including claims that it infringes third party patents, trademarks
and other intellectual property rights. Although the Company believes that it is
unlikely that any current claims or actions will have a material adverse impact
on its operating results or our financial position, given the uncertainty of
litigation, we can not be certain of this. Moreover, the defense of claims or
actions against the Company, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Note 14 Income Taxes
In the third quarter of 2003, the Company recorded an income tax benefit of
approximately $21,000, and an income tax provision of approximately $142,000 for
the first nine months of 2003, which consisted of foreign withholding taxes of
$0.6 million, foreign taxes incurred by our foreign sales and service operations
of $0.1 million, and state income taxes of approximately $0.1 million, partially
offset by a deferred tax benefit on the amortization of certain intangible
assets of $0.7 million. There is no US or German current income tax benefit or
expense. The effective income tax rate was a negative 0.6% for the nine months
ended September 28, 2003. At September 28, 2003, the Company has provided a full
valuation allowance against its net deferred tax asset as management believes
that sufficient uncertainty exists with regard to the realizability of tax
assets. Factors considered in providing a valuation allowance include the lack
of a significant history of consistent profits and the lack of carryback
capacity to realize these assets. Based on the absence of objective evidence,
management is unable to assert that it is more likely than not that the Company
will generate sufficient taxable income to realize all the Company's net
deferred tax assets.
In the third quarter of 2002, the Company recorded an income tax provision
of approximately $1.3 million, and approximately $1.0 million for the first nine
months of 2002. The provision consists of foreign taxes incurred by the
Company's foreign sales and service operations of $0.3 million, other foreign
taxes of $0.6 million, foreign withholding taxes of $1.8 million, and state
income taxes of $0.1 million, partially offset by a deferred tax benefit on the
amortization of certain intangible assets of $1.8 million. There was no US or
German current income tax benefit or expense. The effective income tax rate was
negative 1.7% for the nine months ended September 29, 2002.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report. In addition to historical information, this discussion contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors including, but not limited to, those set forth or
incorporated by reference under "Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this document.
Overview
We are a leading supplier of semiconductor wafer processing equipment used in
the front-end-of-line fabrication of integrated circuits. Our products include
dry strip, rapid thermal processing ("RTP") and plasma enhanced chemical vapor
deposition ("PECVD") equipment. Our manufacturing equipment utilizes innovative
technology to deliver advanced processing capability and high productivity to
semiconductor manufacturers for both 200 mm and 300 mm wafer production at
technology nodes at and below 130 nm.
Our business depends upon capital expenditures by manufacturers of
semiconductor devices. The level of capital expenditures by these manufacturers
depends upon the current and anticipated market demand for such devices. The
semiconductor industry has been experiencing a severe downturn since 2001, which
has resulted in capital spending cutbacks by our customers. Semiconductor
companies continue to reevaluate their capital spending, postpone their new
capital equipment purchase decisions, and reschedule or cancel existing orders.
Declines in demand for semiconductors occurred throughout 2001 and 2002, and
have continued through 2003. Global economic conditions and consumer-related
demand have not improved, resulting in low levels of investment in manufacturing
capacity and corporate infrastructure. The overall demand outlook is still
uncertain over the intermediate term and our backlog of firm orders is at a
relatively low level in relation to our anticipated sales. The cyclicality and
uncertainties regarding overall market conditions continue to present
significant challenges to us and impair our ability to forecast near term
revenue. Given that many of our costs are fixed in the short-term, our ability
to quickly modify our operations in response to changes in market conditions is
limited. During 2002 and first quarter of 2003, we took steps to restructure our
operations and reduce our operating cost levels to align them with expected
market conditions. Although we continue to implement cost cutting measures,
through headcount reductions and other cost controls, we are largely dependent
upon increases in sales in order to attain profitability. If our sales do not
increase, our current operating expenses could prevent us from attaining
profitability and adversely affect our financial position and results of
operations.
On January 1, 2001, we simultaneously acquired the semiconductor equipment
division of STEAG Electronic Systems AG (the "STEAG Semiconductor Division") and
CFM Technologies, Inc. ("CFM"), which we refer to as "the merger." The merger
substantially changed the size of our company and the nature and breadth of our
product lines. At the time we completed the merger, our industry was entering an
economic downturn that deepened sequentially and still continues. The merger
more than doubled the size of our company, and we faced a number of challenges
in integrating the merged companies, coupled with the impact of lower sales as a
result of the downturn in the industry, that resulted in excess production
capacity. Subsequently, during 2002, we took steps to realign our workforce and
production capacity in light of business levels experienced at that time.
18
During 2002, we determined to refocus our business on our core technologies
in dry strip and rapid thermal processing. Restructuring actions were taken in
2002 and the first quarter of 2003 to align our business with this focus and to
reduce operational expenses. As part of this restructuring effort, we divested
one significant line of business, our wet surface preparation products business
(our "Wet Business"), which was sold to SCP Global Technologies, Inc. ("SCP") on
March 17, 2003. We had originally acquired the Wet Business on January 1, 2001,
as part of our merger with the STEAG Semiconductor Division and CFM. We also
narrowed our CVD focus to a limited number of strategic customers, and divested
the subsidiary that had constituted our epi products group. These divestitures
were the last major actions in completing our strategic restructuring plan.
These actions are intended to reduce our cost structure and allow us to
concentrate resources on the development of core products in enabling RTP and
strip solutions. Our Wet Business represented a significant portion of our
revenues and our costs in 2001, 2002 and the first quarter of 2003, and the
divestiture of that business affects the comparability of our financial
statements in the current and future periods to our reported results for 2001,
2002 and the first quarter of 2003.
As part of our disposition of the Wet Business, SCP acquired the operating
assets, including customer contracts and inventory, of one of our subsidiaries
(formerly CFM Technologies, Inc.), all outstanding stock of Mattson Technology
IP, Inc., which is the owner of various patents relating to the Wet Business,
and all equity ownership of Mattson Wet Products GmbH, a German corporation that
owned the principal Wet Business operations. We retained rights to all cash in
the Wet Business, and all rights to payments under the settlement and license
agreements with DNS, but we transferred all rights to any damages under pending
Wet Business patent litigation to SCP. Upon closing, SCP assumed responsibility
for the operations, sales, marketing and technical support services for our
former wet product lines worldwide. During the first quarter of 2003, we
recorded accruals of approximately $11.9 million to cover certain future
obligations relating to this transaction. We did not record any additional
accruals for this transaction during the second or third quarter of 2003.
On June 24, 2002, we settled a patent infringement lawsuit with Dainippon
Screen Manufacturing Co., Ltd. ("DNS"). As part of the settlement, DNS agreed to
pay us, at minimum, $75 million, relating to past damages, partial reimbursement
of attorney's fees and costs, and royalties, payable in varying amounts at
varying dates through April 1, 2007, in return for our granting DNS a worldwide
license under the previously infringed patents. Depending on the volume of
future product sales by DNS, we could receive up to an additional $30 million in
royalty payments. We determined, based on relative fair values, how much of the
aggregate payments due to us are attributable to past damages and how much are
attributable to future royalties on DNS sales of wet processing products. Based
on our analysis, which included an independent appraisal, we allocated $15.0
million to past damages, which we recorded as "other income" during 2002, and we
allocated $60 million to royalty income, which is being recognized in our income
statements on a straight-line basis over the license term. During 2002 and in
the first nine months of 2003, we recognized royalty revenue of approximately
$6.3 million and $9.0 million, respectively. During 2002, DNS made payments of
$27.0 million and during the first nine months of 2003 DNS made payments of
$18.0 million, aggregating to $45.0 million.
During the three and nine month periods ended September 28, 2003, we had
net losses of $3.9 million and $29.4 million, respectively. Future results will
depend on a variety of factors, particularly overall market conditions and the
timing of significant orders, our cost reduction efforts, our ability to bring
new systems to market, the timing of new product releases by our competitors,
patterns of capital spending by our customers, market acceptance of new and/or
enhanced versions of our systems, changes in pricing by us, our competitors,
customers, or suppliers and the mix of products sold. We are dependent upon
increases in sales or reductions in our cost structures in order to achieve and
sustain profitability. If our sales do not increase, the current levels of
operating expenses could materially and adversely affect our financial position
and results.
19
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgements, including those related to reserves for
excess and obsolete inventory, warranty obligations, bad debts, intangible
assets, income taxes, restructuring costs, contingencies and litigation.
Management bases its estimates and judgements on historical experience and on
various other factors that are believed to be reasonable under the
circumstances. These form the basis for making judgements about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We consider certain accounting policies related to revenue recognition,
warranty obligations, inventories, goodwill and other intangible assets,
impairment of long-lived assets, and income taxes as critical to our business
operations and an understanding of our results of operations.
Revenue recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 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 the first quarter of 2003 and earlier periods, for all
sales of our wet surface preparation products), revenue is recognized upon
customer acceptance; 2) for equipment sales to existing customers, who have
purchased the same equipment with the same specifications and previously
demonstrated acceptance provisions, we recognize revenue on a multiple element
approach in which we bifurcate a sale transaction into two separate elements
based on objective evidence of fair value. The two elements are the tool and
installation of the tool. Under this approach, the portion of the invoice price
that is due after installation services have been performed and upon final
customer acceptance of the tool has been obtained, generally 10% of the total
invoice price, is deferred until final customer acceptance of the tool. The
remaining portion of the total invoice price relating to the tool, generally 90%
of the total invoice price, is recognized upon shipment and title transfer of
the tool. From time to time, however, we allow customers to evaluate systems,
and since customers can return such systems at any time with limited or no
penalty, we do not recognize revenue until these evaluation systems are accepted
by the customer. Revenues associated with sales to customers in Japan are
recognized upon title transfer, which generally occurs upon customer acceptance,
with the exception of sales of our RTP products through our distributor in
Japan, where revenues are recognized upon title transfer to the distributor. For
spare parts, revenue is recognized upon shipment. Service and maintenance
contract revenue is recognized on a straight-line basis over the service period
of the related contract.
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a portion of our revenues. Any shortfall in revenue or
delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses.
Warranty. Our warranties require us to repair or replace defective products
or parts, generally at a customer's site, during the warranty period at no cost
to the customer. The warranty offered on our systems ranges from 12 months to 36
months, depending on the product. At the time we first recognize revenue for a
system sale, we record a provision for the estimated cost of warranty as a cost
of sales based on our historical costs. While our warranty costs have
historically been within our expectations and the provisions we have
established, we cannot be certain that we will continue to experience the same
warranty repair costs that we have in the past. 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.
20
Inventories. We state inventories at the lower of cost or market, with cost
determined on a first-in, first out basis. Due to changing market conditions,
estimated future requirements, age of the inventories on hand and our
introduction of new products, we regularly monitor inventory quantities on hand
and declare obsolete inventories that are no longer used in current production.
Accordingly, we write down our inventories to estimated net realizable value.
Actual demand may differ from forecasted demand and such difference may result
in write downs that have a material effect on our financial position and results
of operations. In the future, if our inventory is determined to be overvalued,
we would be required to recognize the decline in value in our cost of goods sold
at the time of such determination. Although we attempt to accurately forecast
future product demand, given the competitive pressures and cyclicality of the
semiconductor industry there may be significant unanticipated changes in demand
or technological developments that could have a significant impact on the value
of our inventory and our reported operating results.
Goodwill and Other Intangible Assets. We assess the realizability of
goodwill and other intangible assets at least annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Our judgments regarding the existence of impairment indicators are
based on changes in strategy, market conditions and operational performance of
our business. Future events, including significant negative industry or economic
trends, could cause us to conclude that impairment indicators exist and that
goodwill or other intangible assets are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of
operations. In assessing the recoverability of goodwill and other intangible
assets, we must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.
Impairment of Long-Lived Assets. We assess the impairment of identified
intangibles, long-lived assets and related goodwill whenever events or changes
in circumstances indicate that the carrying value may not be recoverable, in
accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Our judgments regarding the existence of
impairment indicators are based on changes in strategy, market conditions and
operational performance of our business. Future events, including significant
negative industry or economic trends, could cause us to conclude that impairment
indicators exist and that long-lived assets are impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations. In assessing the recoverability of long-lived assets,
we must make assumptions regarding estimated future cash flows and other
factors, including discount rates and probability of cash flow scenarios, to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets.
Income taxes. We record a valuation allowance to reduce our net deferred
tax asset to the amount that is more likely than not to be realized. In
assessing the need for a valuation allowance, we consider historical levels of
income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and feasible tax planning strategies. In the event we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, we would record an adjustment to the deferred
tax asset valuation allowance. This adjustment would increase income in the
period such determination was made.
21
Results of Operations
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 60.9 % 77.8 % 66.8 % 80.3 %
------ ------ ------ ------
Gross profit 39.1 % 22.2 % 33.2 % 19.7 %
------ ------ ------ ------
Operating expenses:
Research, development and engineering 13.7 % 16.4 % 14.3 % 18.7 %
Selling, general and administrative 38.7 % 36.3 % 32.3 % 42.3 %
Amortization of intangibles 1.0 % 2.8 % 1.4 % 3.3 %
Restructuring and other charges 1.6 % 10.1 % 0.4 % 4.0 %
------ ------ ------ ------
Total operating expenses 55.0 % 65.6 % 48.4 % 68.3 %
------ ------ ------ ------
Loss from operations (15.9)% (43.4)% (15.2)% (48.6)%
Loss on disposition of Wet Business -- -- (7.8)% --
Interest and other income, net 3.9 % 25.8 % 0.6 % 8.9 %
------ ------ ------ ------
Loss before provision for (benefit from) income taxes (12.0)% (17.6)% (22.4)% (39.7)%
Provision for (benefit from) income taxes -- 2.2 % 0.1 % 0.7 %
------ ------ ------ ------
Net loss (12.0)% (19.8)% (22.5)% (40.4)%
====== ====== ====== ======
The divestiture of our Wet Business on March 17, 2003 has significantly
affected the comparability of our net sales and our costs in the three and nine
month periods ended September 28, 2003 to our reported results for prior
periods. Our reported results for 2002 and the first quarter of 2003 include
sales of Wet Business products and related costs, while our results for the
second and third quarters of 2003 do not. The following table summarizes the
amount of our net sales in each quarter of 2002 and in the first three quarters
of 2003 attributable to products of the Wet Business, to RTP and strip products,
and to royalties from DNS. We believe this additional information regarding our
prior period sales will facilitate comparison of our current and future results
of operations to our results from prior periods:
Net Sales (in millions) Percent of total net sales
------------------------------------------------ --------------------------------
Wet RTP and DNS Reported Wet RTP and DNS
Three Months Business Strip Royalty Total Business Strip Royalty
Ended Products Products Revenue Net Sales Products Products Revenue
------------------ -------- -------- ------- --------- -------- -------- -------
March 31, 2002 $ 23.7 $ 22.5 $ - $ 46.2 51.3% 48.7% -
June 30, 2002 15.3 32.0 - 47.3 32.3% 67.7% -
September 29, 2002 15.5 42.3 3.0 60.8 25.6% 69.5% 4.9%
December 31, 2002 23.0 22.9 3.3 49.2 46.8% 46.5% 6.7%
------ ------- ----- ------- ----- ----- ----
$ 77.5 $ 119.7 $ 6.3 $ 203.5 38.1% 58.8% 3.1%
====== ======= ===== ======= ===== ===== ====
March 30, 2003 $ 32.3 $ 32.5 $ 3.0 $ 67.8 47.7% 47.9% 4.4%
June 29, 2003 - 27.5 3.0 30.5 - 90.2% 9.8%
September 28, 2003 - 29.6 3.0 32.6 - 90.8% 9.2%
------ ------- ----- ------- ----- ----- ----
$ 32.3 $ 89.6 $ 9.0 $ 130.9 24.7% 68.4% 6.9%
====== ======= ===== ======= ===== ===== ====
Net Sales
The divestiture of our Wet Business in March 2003 has reduced our net sales
in the second and third quarters of 2003, and affects the comparability of the
results from the third quarter of 2003 and from the first nine months of 2003 to
results from prior periods.
22
Net sales for the third quarter of 2003 were $32.6 million. This represents
a decrease of 46.3% compared to $60.8 million of net sales for the third quarter
of 2002, and an increase of 6.9% compared to $30.5 million of net sales for the
second quarter of 2003. The decrease in net sales in the third quarter of 2003
compared to the third quarter of 2002 is primarily due to the divestiture of the
Wet Business in March 2003 and lower net sales of our RTP and strip products in
the third quarter of 2003. We anticipate our net sales for the fourth quarter of
2003 to range between $37 million and $41 million.
Net sales of RTP and strip products for the third quarter of 2003 were
$29.6 million. This represents a decrease of 30.0% compared to $42.3 million of
net sales for such products in the third quarter of 2002, and an increase of
7.6% compared to $27.5 million of net sales for such products in the second
quarter of 2003. The decrease in net sales in the third quarter of 2003 compared
to the third quarter of 2002 is primarily due to lower unit sales and reduced
customer demand as a result of the continuing downturn in the semiconductor
industry. Although net sales of RTP and strip products increased in the third
quarter of 2003 compared to the second quarter of 2003, net sales of those
products for the second quarter of 2003 reflects a reduction of $3.3 million as
a result of returns from product sales that occurred in 2001. In addition, net
sales of these products in the third quarter of 2003 were favorably impacted by
an increase in customer acceptances of systems. Units of RTP and strip products
shipped in the third quarter of 2003 decreased 37.8% and 8.0% compared to the
third quarter of 2002 and the second quarter of 2003, respectively.
Net sales for the first nine months of 2003 were $130.9 million,
representing a decrease of 15.1% compared to net sales of $154.3 million for the
first nine months of 2002. This decrease was primarily due to the divestiture of
the Wet Business in March 2003. Net sales of RTP and strip products for the
first nine months of 2003 were $89.6 million, representing a decrease of 7.4%
compared to net sales of such products of $96.8 million for the first nine
months of 2002 This decrease was primarily due to lower unit sales reflecting
reduced customer demand as a result of the continuing downturn in the
semiconductor industry. Net sales for the first nine months of 2003 also
reflects a reduction of $3.3 million as a result of returns from product sales
that occurred in 2001. The decrease in product sales in the first nine months of
2003 was partially offset by increased royalty revenue of $6.0 million compared
to the first nine months of 2002. Units of RTP and strip products shipped in the
first nine months of 2003 decreased 8.7% compared to the first nine months of
2002.
Total deferred revenue at September 28, 2003 was approximately $28.5
million, a decrease from $114.3 million at the end of the third quarter of 2002,
a decrease from $108.7 million at the end of the fourth quarter of 2002, and a
decrease from $32.2 million at the end of the second quarter of 2003. The
decrease from 2002 was primarily due to the elimination of deferred revenue
related to Wet Business products as a result of the divestiture of our Wet
Business on March 17, 2003. Wet Business product sales previously accounted for
the majority of our deferred revenue. The deferred revenue at the end of the
third quarter of 2003 decreased compared to the second quarter of 2003 primarily
due to increased acceptances of systems we sold in prior periods, partially
offset by $2.0 million in net pre-paid royalties we received from DNS during the
third quarter of 2003. Our deferred revenue at September 28, 2003 of $28.5
million consists of $14.7 million related to advanced royalty payments by DNS
and $13.8 million related to tools shipped that are awaiting customer
acceptance. 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 three to ten months from product shipment.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore, Korea and China),
accounted for 88.3% and 77.7% of net sales for the third quarter of 2003 and
2002, respectively, and 84.5% and 76.7% of net sales for the first nine months
of 2003 and 2002, respectively. We anticipate that international sales will
continue to account for a significant portion of net sales for the remainder of
2003.
23
Gross Margin
Our gross margin for the third quarter of 2003 was 39.1%, an increase from
22.2% for the third quarter of 2002, and essentially flat compared to gross
margin of 39.5% for the second quarter of 2003. Our gross margin for the first
nine months of 2003 was 33.2%, an increase from 19.7% for the first nine months
of 2002. The increase in our gross margin in the third quarter of 2003 and for
the first nine months of 2003 compared to the same periods in 2002, was
primarily due to the relatively higher margin profile associated with our
ongoing core businesses, resulting from the divestiture of the Wet Business, and
also reflects a decrease in inventory valuation charges related to the merger
that adversely affected margins in the third quarter and first nine months of
2002. In addition, the increase in our gross margin for the first nine months of
2003 is due to higher royalty revenue by $6.0 million from DNS, with no
associated cost of sales, compared to the first nine months of 2002. Our gross
margin for the third quarter of 2003, when compared to both the third quarter of
2002 and the second quarter of 2003, benefited from our ability to better
control unfavorable manufacturing variances due to improved visibility in our
plants. This also accounts for some of the improvement in our margin in the
first nine months of 2003 compared to the same period in 2002. In addition, our
gross margin in the third quarter of 2003 was favorably affected by a product
mix with a higher proportion of revenue recognized at the time of shipment, and
by an increase in the proportion of revenue from customer acceptances (with no
associated cost of sales, because costs for the accepted systems were recorded
in prior quarters), when compared to the second quarter of 2003. We also
continue to see improved gross margin contribution from our spare parts and
service operations. We anticipate our gross margin for the fourth quarter of
2003 to be approximately equal our gross margin for the third quarter of 2003.
The divestiture of our Wet Business in March 2003 affects the comparability
of our gross margin in the current period, and will affect the comparability of
our gross margins in future periods, to our historical margins.
Due to intense competition we are continuing to face pricing pressure from
competitors that is also affecting our gross margin. In response, we are
continuing with our cost controls and efforts to differentiate our product
portfolio. We continue to have excess capacity at our remaining manufacturing
sites, but have reduced costs at those sites in an effort to improve our gross
margin.
Our gross margin has varied over the years and will continue to vary based
on many factors, including competitive pressures, product mix, the relative
amounts of customer acceptances in a given quarter, economies of scale, overhead
absorption levels and costs associated with the introduction of new products.
Research, Development and Engineering
Research, development and engineering expenses for the third quarter of
2003 were $4.5 million, or 13.7% of net sales, as compared to $10.0 million, or
16.4% of net sales, for the third quarter of 2002, and $6.7 million, or 21.9% of
net sales, for the second quarter of 2003. The decrease in research, development
and engineering expenses in the third quarter of 2003 was primarily due to
reductions in personnel and associated costs resulting from the divestiture of
our Wet Business in March 2003, more selective research and development project
funding, additional reductions of personnel, a $0.7 million credit for cost
sharing with an alliance partner in connection with an R&D project, and various
cost control measures that resulted in a reduction in expenses. We anticipate
that research, development and engineering expenses for the fourth quarter of
2003 will be approximately $5.5 million.
Research, development and engineering expenses for the first nine months of
2003 were $18.7 million, or 14.3% of net sales, as compared to $28.9 million, or
18.7% of net sales, for the first nine months of 2002. The decrease in research,
development and engineering expenses was primarily due to the divestiture of our
Wet Business in March 2003, reductions of personnel and associated costs, more
selective research and development project funding, a $0.7 million credit for
cost sharing with an alliance partner in connection with an R&D project, and
various cost control measures that resulted in a reduction in expenses.
24
Selling, General and Administrative
Selling, general and administrative expenses for the third quarter of 2003
were $12.6 million, or 38.7% of net sales, as compared to $22.1 million, or
36.3% of net sales, for the third quarter of 2002. The decrease in selling,
general and administrative expenses in absolute dollars in the third quarter of
2003 compared to the third quarter of 2002 is primarily due to the divestiture
of our Wet Business in March 2003, which included a reduction in personnel and
related costs, reduction in building rent expenses, lower utilities costs, lower
sales commissions, and lower travel expenses. Total selling, general and
administrative expenses in the third quarter of 2003 declined from $12.8
million, or 41.9% of net sales, in the second quarter of 2003, as a result of
reduction of personnel and continuing cost controls during the third quarter of
2003. The increase in selling, general and administrative expenses as a
percentage of net sales during the third quarter of 2003 compared to the same
period last year is primarily due to the decrease in sales.
Selling, general and administrative expenses for the first nine months of
2003 were $42.3 million, or 32.3% of net sales, as compared to $65.3 million, or
42.3% of net sales, for the first nine months of 2002. The decrease in selling,
general and administrative expenses is primarily due to the divestiture of our
Wet Business in March 2003, which included a reduction in personnel and related
costs, reduction in building rent expenses, lower utilities, lower sales
commissions, and lower travel expenses.
Amortization of Intangibles
We no longer amortize goodwill following our adoption of SFAS 142 on
January 1, 2002. We continue to amortize the identified intangibles, in an
amount estimated to be $0.3 million for the remainder of fiscal 2003 and
thereafter $1.3 million for each of fiscal years 2004 and 2005.
Interest and Other Income (Expense)
Interest and other income for the third quarter of 2003 was $1.3 million,
or 3.9% of net sales, as compared to $15.7 million, or 25.9% of net sales, for
the third quarter of 2002. During the third quarter of 2003, other income
consisted of interest income of $0.3 million resulting from the investment of
our cash balances, a foreign exchange gain of $0.9 million, and net other income
of $0.5 million, partially offset by a loss on sale of fixed assets of $0.4
million. In the same period of 2002, interest and other income consisted of
payments from DNS for past patent infringement damages of $15.0 million,
interest income of $0.4 million resulting from the investment of our cash
balances, and a foreign exchange gain of $0.1 million, offset by interest
expense of $0.4 million primarily related to interest on our notes payable to
STEAG Electronics Systems AG ("SES").
Interest and other income for the first nine months of 2003 was $0.9
million, or 0.7% of net sales, as compared to interest and other income of $13.7
million, or 8.9% of net sales, for the first nine months of 2002. During the
first nine months of 2003, other income consisted of interest income of $0.9
million resulting from the investment of our cash balances, a foreign exchange
gain of $0.1 million and net other income of $0.9 million, partially offset by
interest expense of $0.1 million and a loss on sale of fixed assets of $1.0
million. In the same period of 2002, interest and other income consisted of
payments from DNS for past patent infringement damages of $15.0 million and
interest income of $1.6 million resulting from the investment of our cash
balances, offset by interest expense of $1.8 million primarily related to
interest on our notes payable to SES, and a foreign exchange loss of $0.7
million.
25
Provision for Income Taxes
In the third quarter of 2003, we recorded an income tax benefit of
approximately $21,000, and an income tax provision of approximately $142,000 for
the first nine months of 2003, which consisted of foreign withholding taxes of
$0.6 million, foreign taxes incurred by our foreign sales and service operations
of $0.1 million, and state income taxes of approximately $0.1 million, partially
offset by a deferred tax benefit on the amortization of certain intangible
assets of $0.7 million. We had no US or German current income tax benefit or
expense. Our effective income tax rate was a negative 0.6% for the nine months
ended September 28, 2003. At September 28, 2003, we have provided a full
valuation allowance against our net deferred tax asset as management believes
that sufficient uncertainty exists with regard to the realizability of tax
assets. Factors considered in providing a valuation allowance include the lack
of a significant history of consistent profits and the lack of carryback
capacity to realize these assets. Based on the absence of objective evidence,
management is unable to assert that it is more likely than not that we will
generate sufficient taxable income to realize all the Company's net deferred tax
assets.
In the third quarter of 2002, we recorded an income tax provision of
approximately $1.3 million, and approximately $1.0 million for the first nine
months of 2002. The provision consists of foreign taxes incurred by our foreign
sales and service operations of $0.3 million, other foreign taxes of $0.6
million, foreign withholding taxes of $1.8 million, and state income taxes of
$0.1 million, partially offset by deferred tax benefit on the amortization of
certain intangible assets of $1.8 million. We had no US or German current income
tax benefit or expense. Our effective income tax rate was negative 1.7% for the
nine months ended September 29, 2002.
Liquidity and Capital Resources
Our cash and cash equivalents, excluding restricted cash, were $83.0 million
at September 28, 2003, a decrease of $4.9 million from $87.9 million at December
31, 2002 and a decrease of $1.2 million from $84.2 million at June 29, 2003.
During the third quarter of 2003, we received a $5.0 million payment from DNS.
Stockholders' equity at September 28, 2003 was $76.1 million, compared to $106.1
million at December 31, 2002.
Over the next two or more quarters, we expect to make cash payments as a
result of post-closing obligations related to the disposition of our Wet
Business in an amount estimated to be approximately $9 million. The actual
amount to be paid is uncertain, and could be more or less than our estimate.
During the fourth quarter of 2003, we expect to receive a payment of $6.0
million from DNS.
Our Japanese subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen (approximately $8.1 million at September 28, 2003),
secured by specific trade accounts receivable of our Japanese subsidiary. The
facility bears interest at a per annum rate of TIBOR plus 75 basis points. The
facility expires on June 20, 2004. We have given a corporate guarantee for this
credit facility. There are no financial covenant requirements for this credit
facility. At September 28, 2003, the borrowing under this credit facility was
$1.1 million, which is included in accrued liabilities in our Condensed
Consolidated Balance Sheet.
We have a revolving line of credit with a US bank in the amount of $20.0
million, which will expire on April 26, 2004. All borrowings under this line
bear interest at a per annum rate equal to the bank's prime rate plus 125 basis
points. The line of credit is secured by a blanket lien on all of our domestic
assets including intellectual property. The line of credit requires us to
satisfy certain quarterly financial covenants, including maintaining a minimum
balance of unrestricted cash and cash equivalents and a minimum balance of
investment accounts, and not exceeding a maximum net loss limit. At September
28, 2003, we were in compliance with the covenants and there were no borrowings
under this credit line.
26
On June 24, 2002, we entered into a settlement agreement and a cross
license agreement with DNS under which DNS agreed to make payments to us
totaling between $75 million and $105 million, relating to past damages, partial
reimbursement of attorney's fee and costs, and license fees. The license fee
obligations of DNS would cease if all four patents that had been the subject of
the lawsuit were to be held invalid by a court.
During the third quarter of 2003, we received a payment of $5.0 million
from DNS. As of September 28, 2003, DNS had made payments aggregating $45.0
million under the terms of the settlement agreement and cross license agreement.
Of the $45.0 million paid as of September 28, 2003, $4.0 million was subjected
to Japanese withholding tax, and the net amount we received was $41.0 million.
The payments we received are being utilized in our operating activities. In
future periods, we are scheduled to receive the settlement and minimum royalty
payments as follows:
Future
Fiscal Year Ending DNS Payments
December 31, to be received
------------------ --------------
(in thousands)
2003 $ 6,000
2004 6,000
2005 6,000
2006 6,000
2007 6,000
-------
$30,000
=======
Net cash used in operating activities was $9.3 million during the nine
months ended September 28, 2003 as compared to $22.7 million during the same
period in 2002.
The net cash used in operating activities during the nine months ended
September 28, 2003 was primarily attributable to a net loss of $29.4 million, a
decrease in deferred revenue of $32.1 million, a decrease in accrued liabilities
of $6.0 million, and a decrease in accounts payable of $6.0 million. The cash
used in operating activities was offset by a decrease in inventories and
inventories - delivered systems of $21.9 million, a decrease in accounts
receivable and advance billing of $23.7 million, the loss on disposition of Wet
Business of $10.3 million, the non-cash depreciation and amortization of
intangibles of $6.6 million and a decrease in prepaid expenses and other current
assets of $1.5 million.
The net cash used in operating activities during the nine months ended
September 29, 2002 of $22.7 million was primarily attributable to a net loss of
$62.3 million, a decrease in deferred revenue of $33.2 million, a decrease in
accrued liabilities of $12.8 million, an increase in other assets of $4.2
million, and a decrease in deferred taxes of $1.8 million. The cash used in
operating activities was offset by a decrease in inventories and inventories -
delivered systems of $38.5 million, a decrease in advance billings of $21.6
million, non-cash depreciation and amortization of $12.4 million, restructuring
and other charges of $6.2 million, a decrease in accounts receivable of $7.3
million, and an increase in accounts payable of $1.2 million.
Net cash used in investing activities was $1.9 million during the nine months
ended September 28, 2003 as compared to $2.8 million during the same period last
year. The net cash used in investing activities during the nine months ended
September 28, 2003 is attributable to the purchase of property and equipment of
$3.9 million offset by proceeds from the disposition of the Wet Business of $2.0
million. The net cash used in investing activities during the first nine months
of 2002 was attributable to purchases of investments of $15.0 million and
purchase of equipment of $2.1 million offset by proceeds from the sale of
investments of $10.9 million and sale of equipment of $3.4 million.
27
Net cash provided by financing activities was $2.1 million during the nine
months ended September 28, 2003 as compared to $19.5 million during the same
period last year. The net cash provided by financing activities during the nine
months ended September 28, 2003 is primarily attributable to net borrowing
against our Japanese line of credit in the amount of net $1.1 million,
restricted cash of $0.6 million, and proceeds from the issuance of common stock
of $0.4 million. The net cash provided by financing activities during the first
nine months of 2002 was primarily attributable to the net proceeds from the
issuance of common stock of $34.9 million, a decrease in restricted cash of
$26.0 million, proceeds from the issuance of common stock under stock plans of
$1.3 million and an increase in the interest accrual on a note payable to SES of
$1.3 million, offset by the payment of notes payable to SES of $38.8 million,
and payments against our Japanese line of credit and long-term debt in the
amount of $5.3 million.
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 sources of liquidity are our existing unrestricted cash balance and cash
generated by our operations. During 2001, 2002 and the first nine months of
2003, we had operating losses. Our operating plans are based on and require that
we reduce our operating losses, control our expenses, manage our inventories,
and collect our accounts receivable balances. In this market downturn, we are
exposed to a number of challenges and risks, including delays in payments of our
accounts receivable by our customers, and postponements or cancellations of
orders. Postponed or cancelled orders can cause us to have excess inventory and
underutilized manufacturing capacity. If we are not able to significantly reduce
our present operating losses over the upcoming quarters, our operating losses
could adversely affect our cash and working capital balances, and we may be
required to seek additional sources of financing.
We may need to raise additional funds in future periods through public or
private financing, or other sources, to fund our operations. We may not be able
to obtain adequate or favorable financing when needed. Failure to raise capital
when needed 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
In this report and from time to time, we may make forward looking statements
regarding, among other matters, our anticipated sales and gross margins in
future periods, changes in our future costs as result of our disposition of the
Wet Business, our future strategy, product development plans, productivity gains
of our products, financial performance and growth. The forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements address
matters which are subject to a number of risks and uncertainties which could
cause actual results to differ materially, including those set forth in our
Annual Report on Form 10-K, all of which are incorporated here by reference, in
addition to the following:
The Semiconductor Equipment Industry is Cyclical, is Currently Experiencing a
Severe and Prolonged Downturn, and Causes Our Operating Results to Fluctuate
Significantly.
The semiconductor industry is highly cyclical and has historically
experienced periodic downturns, whether the result of general economic changes
or capacity growth temporarily exceeding growth in demand for semiconductor
devices. During periods of declining demand for semiconductor manufacturing
equipment, customers typically reduce purchases, delay delivery of products
and/or cancel orders. Increased price competition may result, causing pressure
on our net sales, gross margin and net income. We are experiencing
cancellations, delays and push-outs of orders, which reduce our revenues, cause
delays in our ability to recognize revenue on the orders and reduce backlog.
Further order cancellations, reductions in order size or delays in orders will
materially adversely affect our business and results of operations.
28
Following the very strong year in 2000, the semiconductor industry is now,
since 2001, in the midst of a significant and prolonged downturn, and we and
other industry participants are experiencing lower bookings, significant push
outs and cancellations of orders. The severity and duration of the downturn are
unknown, but is impairing our ability to sell our systems and to operate
profitably. If demand for semiconductor devices and our systems remains
depressed for an extended period, it will seriously harm our business.
As a result of the acquisition of the STEAG Semiconductor Division and CFM
at the beginning of 2001, we grew to be a larger, more geographically diverse
company, less able to react quickly to the cyclicality of the semiconductor
business, particularly in Europe and other regions where restrictive laws
relating to termination of employees prohibited us from quickly reducing costs
in order to meet the downturn. Accordingly, during this latest downturn we have
been unable to reduce our expenses quickly enough to avoid incurring a loss. For
the fiscal years ended December 31, 2002 and 2001, and for the first nine months
of 2003, our net loss was $94.3 million, $336.7 million, and $29.4 million,
respectively, compared to net income of $1.5 million for the year ended December
31, 2000. The net loss in 2002 and the first half of 2003 primarily reflects the
impact of our continuing decline in net sales. In the first quarter of 2003, we
sold the Wet Business to SCP, which business had originally been acquired as
part of our acquisition of the STEAG Semiconductor Division and CFM. If our
actions to date, including our recent sale to SCP of the Wet Business, are
insufficient to effectively align our cost structure with prevailing market
conditions, we may be required to undertake additional cost-cutting measures,
and may be unable to continue to invest in marketing, research and development
and engineering at the levels we believe are necessary to maintain our
competitive position in our remaining core businesses. Our failure to make these
investments could seriously harm our long-term business prospects.
The Sale of Our Wet Business to SCP May Fail to Result in the Benefits We
Anticipate, and May Cause Us to Incur Greater Costs Than Anticipated.
We may not obtain the benefits we expect as a result of the sale of the Wet
Business to SCP, such as greater strategic focus on our core businesses. Our
agreement with SCP may require an adjustment to the initial purchase price, if
the net working capital of the Wet Business after the sale is not within a
specified range, and could result in a reduction of the purchase price to us. We
expect the purchase price adjustment based on the net working capital at closing
to result in a payment to SCP, in an amount approximately $2.0 million. We have
agreed with SCP to (i) fund salary and severance costs for certain reductions in
force to be implemented in Germany after the closing, (ii) assume real property
leases relating to our former Pliezhausen facilities, subject to a sublease of
all or a portion of such facilities to SCP, (iii) pay legal fees up to a maximum
of $1 million in connection with certain pending patent litigation, and (iv)
reimburse SCP for amounts to cover specified arrangements and responsibilities
with customers and other costs. We recorded additional accruals of approximately
$11.9 million to cover certain future obligations relating to this transaction.
Over the next two quarters or more, we expect to make cash payments relating to
these obligations and other costs of ending our wet business operations in an
amount estimated to be approximately $9 million. However, our actual costs and
expenses could be higher or lower than expected, and if higher, could materially
adversely affect our results of operation in future periods.
29
In addition, our consolidated financial statements do not reflect what our
financial position, results of operations and cash flows would have been had the
Wet Business been a separate stand-alone entity during the periods presented.
Therefore, we cannot predict with certainty what the effects of the divestiture
might be on ongoing operations and results, and whether the expected cost
savings will materialize, or whether the transaction may have a material effect
on our financial position, results of operations or cash flows taken as a whole,
or whether the transaction will contribute to our financial results differently
from the investment community's expectations. Our divestiture of the Wet
Business may also result in the cancellation of orders by customers who may be
unhappy that we are discontinuing the product line, particularly if the customer
has previously purchased wet processing products from us. We may lose future
orders if customers are wary or unsure of our long-term plans, or become
concerned that we will discontinue other product lines, or they elect to
purchase products from suppliers that appear to have a broader product offering.
Customers of our wet processing products may attempt to return the products if
they fear that ongoing maintenance and support of the product will not be
available.
The divestiture may also prove more costly or difficult than expected,
could cause us to lose key employees, and divert management attention and
resources from our other core businesses, particularly over the next several
quarters. In addition to the employees and facilities transferred to SCP as part
of the divestiture, we are shutting down other facilities in the United States
previously devoted largely to the Wet Business, and terminating additional
employees not hired by SCP who had predominantly worked in the Wet Business. In
order to achieve the desired cost savings from the divestiture, we will need to
incur substantial restructuring costs, including severance costs associated with
headcount reductions, and asset write-offs associated with manufacturing and
facility closures. We may incur additional costs associated with the
discontinued operations, and the dedication of management resources to the sale
has distracted and may continue to distract attention from our remaining core
businesses. We may incur additional costs associated with these activities,
which could materially reduce our short term earnings.
We Are Implementing New Financial Systems, and Will Need to Continue to Improve
or Implement New Systems, Procedures and Controls.
We are implementing new financial systems used in the consolidation of our
financial results, in order to further automate processes and align the
disparate systems used by our acquired businesses. The integration of the STEAG
Semiconductor Division and CFM and their operational and financial systems and
controls after the merger in 2001 placed a significant strain on our management
information systems and our administrative, operational and financial resources,
requiring us to improve our systems and implement new operational and financial
systems, procedures and controls. Since that acquisition, we have been pursuing
integration of the businesses, systems and controls of the three companies, as
each business historically used a different financial system. We have recently
implemented new financial systems to aid in the consolidation of our financial
reporting operations. These financial systems are new and we have not had
extensive experience with them. We may encounter unexpected difficulties, costs
or other challenges that make implementation and use of these systems more
difficult or costly than expected, may cause the consolidation and reporting of
our financial results to be more time-consuming than expected, and may require
additional management resources than expected before they are fully implemented
and operating smoothly. In addition, the sale of our Wet Business to SCP will
continue to place a significant strain on our management information systems and
our administrative, operational and financial resources as we separate out the
Wet Business as a discontinued operation from our core businesses. Continued
improvement or implementation of new systems, procedures and controls may be
required, and could cause us to incur additional costs, and place further
burdens on our management and internal resources. If our new financial systems
do not result in the expected improvements, or if we are unable to fully
implement these systems, procedures and controls in a timely manner, our
business could be harmed.
In addition, as a result of new requirements proposed by the Securities and
Exchange Commission, in response to the passage of the Sarbanes-Oxley Act of
2002, requiring annual review and evaluation of our internal control systems,
and attestation of these systems by our independent auditors, we are currently
reviewing our internal control procedures and considering further documentation
of such procedures, that may be necessary. Any improvements in our internal
control systems or in documentation of such internal control systems could be
costly to prepare or implement, divert attention of management or finance staff,
and may cause our operating expenses to increase over the ensuing year.
30
We Are Beginning the Implementation of a New Enterprise Resource Planning
System, Which May Be More Difficult or Costly Than Anticipated, and Could Cause
Disruption to the Management of Our Business and the Preparation of Our
Financial Statements.
We are currently beginning the implementation of a new enterprise resource
planning, or ERP, system, which is expected to become integral to our ability to
accurately and efficiently maintain our books and records, record our
transactions, provide critical information to our management, and prepare our
financial statements. However, the new ERP system could eventually become more
costly, difficult and time consuming to purchase and implement than we currently
anticipate. In addition, implementation of the new ERP system requires us to
change our internal business practices, transfer records to a new computer
system and train our employees in the correct use of and input of data into the
system, which could result in disruption of our procedures and controls and
difficulties achieving accuracy in the conversion of data. If we fail to manage
these changes effectively, our operations could be disrupted, which could result
in the diversion of management's attention and resources, cause us to improperly
state or delay reporting of our financial results, materially and adversely
affect our operating results, and impact our ability to manage our business. In
addition, to manage our business effectively, we may need to implement
additional and improved management information systems, further develop our
operating, administrative, financial and accounting systems and controls, add
experienced senior level managers, and maintain closer coordination among our
executive, engineering, accounting, marketing, sales and operations
organizations. We may incur additional unexpected costs and our systems,
procedures or controls may not be adequate to support our operations.
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. Any delay in
scheduled shipments or in acceptances of shipped products would delay our
ability to recognize revenue and collect outstanding accounts receivable, and
could materially adversely affect our operating results for that quarter. A
delay in a shipment or customer acceptance near the end of a quarter could 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.
Our Backlog Orders are Subject to Cancellation or Delay, and Our Current Backlog
is Relatively Low in Relation to Our Projected Revenues, so that we Must Book
and Ship Significant Orders Within the Same Quarter to Achieve Our Revenue
Goals.
Although we maintain a backlog of customer orders expected to be filled
within 12 months, customers may request cancellations or delivery delays. As a
result, our backlog may not be a reliable indication of our future revenues. In
addition, our backlog is relatively low in relation to our projected quarterly
revenues, so meeting our revenue goals requires that we book and ship
significant orders in the same quarter, in addition to shipping orders out of
backlog on schedule. Given our current limited bookings visibility, this makes
predicting revenues increasingly difficult. If we do not receive sufficient
orders that can be shipped within a relatively short time-frame, or if shipments
of such orders or of previously scheduled orders in backlog are cancelled or
delayed, our revenues could fall below our expectations and the expectations of
market analysts and investors.
31
We Are Increasingly Outsourcing Manufacturing and Logistics Activities to Third
Party Service Providers, Which Decreases Our Control Over the Performance of
These Functions.
We have already outsourced certain manufacturing and logistics functions to
third party service providers, and may outsource more of those functions in the
future. While we expect to achieve operational flexibility and cost savings as a
result of this outsourcing, outsourcing has a number of risks and reduces our
control over the performance of the outsourced functions. Significant
performance problems by these third party service providers could result in cost
overruns, delayed deliveries, shortages, quality issues or other problems which
could materially and adversely affect our business, financial condition and
results of operations.
If for any reason one or more of these third party service providers
becomes unable or unwilling to continue to provide services of acceptable
quality, at acceptable costs and in a timely manner, our ability to deliver our
products to our customers could be severely impaired. We would quickly have to
identify and qualify substitute service providers or increase our internal
capacity, which could be expensive, time consuming and difficult and could
result in unforeseen operations problems. Substitute service providers might not
be available or, if available, might be unwilling or unable to offer services on
acceptable terms.
If customer demand for our products increases, we may be unable to secure
sufficient additional capacity from our current service providers on
commercially reasonable terms, if at all.
Our requirements are expected to represent a small portion of the total
capacities of our third party service providers, and they may preferentially
allocate capacity to other customers, even during periods of high demand for our
products. In addition, such manufacturers could suffer financial difficulties or
disruptions in their operations due to causes beyond our control.
Our Quarterly Operating Results Fluctuate Significantly and Are Difficult to
Predict, and May Fall Short of Anticipated Levels, Which Could Cause Our Stock
Price to Decline.
Our quarterly revenue and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. This fluctuation is
due to a number of factors, including:
o cyclicality of the semiconductor industry;
o delays, cancellations and push-outs of orders by our customers;
o delayed product acceptance or payments of invoices by our customers;
o size and timing of sales, shipments and acceptance of our products;
o entry of new competitors into our market, or the announcement of new
products or product enhancements by competitors;
o sudden changes in component prices or availability;
o variability in the mix of products sold;
o manufacturing inefficiencies caused by uneven or unpredictable order
patterns, reducing our gross margins;
o higher fixed costs due to increased levels of research and development
costs; and
o successful expansion of our worldwide sales and marketing
organization.
32
A substantial percentage of our operating expenses are fixed in the short
term and we may be unable to adjust spending to compensate for an unexpected
shortfall in revenues. As a result, any delay in generating or recognizing
revenues could cause our operating results to be below the expectations of
market analysts or investors, which could cause the price of our common stock to
decline.
The Price of Our Common Stock Has Fluctuated in the Past and May Continue to
Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or
to Securities Litigation.
The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future. We believe that a number of
factors could cause the price of our common stock to fluctuate, perhaps
substantially, including:
o general conditions in the semiconductor industry or in the worldwide
economy;
o announcements of developments related to our business;
o fluctuations in our operating results and order levels;
o announcements of technological innovations by us or by our
competitors;
o new products or product enhancements by us or by our competitors;
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.
33
Legislative actions, higher insurance cost and potential new accounting
pronouncements are likely to cause our general and administrative expenses to
increase and impact our future financial position and results of operations.
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as
well as proposed changes to listing standards by Nasdaq, and proposed accounting
changes by the Securities and Exchange Commission, we may be required to
increase our internal controls, hire additional personnel and additional outside
legal, accounting and advisory services, all of which will cause our general and
administrative costs to increase. Insurers are also likely to increase premiums
as a result of the high claims rates incurred over the past year, and so our
premiums for our various insurance policies, including our directors' and
officers' insurance policies, are likely to increase. Proposed changes in the
accounting rules, including legislative and other proposals to account for
employee stock options as a compensation expense among others, could materially
increase the expenses that we report under generally accepted accounting
principles and adversely affect our operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk.
Our exposure to market risk for changes in interest rates relates to our
investment portfolio. We do not use derivative financial instruments in our
investment portfolio. We place our investments with high credit quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no cash flow exposure due to rate
changes for cash equivalents and short-term investments, as all of these
investments are at market interest rates.
The table below presents the fair value of principal amounts and related
weighted average interest rates for our investment portfolio as of September 28,
2003.
Fair Value
September 28,
2003
-------------
(In thousands)
Assets
Cash and cash equivalents $ 82,996
Average interest rate 0.7%
Restricted cash $ 508
Average interest rate 0.8%
Foreign Currency Risk
We are primarily a US Dollar functional currency entity. We transact
business in various foreign countries and employ a foreign currency hedging
program, utilizing foreign currency forward exchange contracts, to hedge foreign
currency fluctuations associated with the Japanese Yen. Our subsidiaries in
Germany are EURO functional currency entities and they also employ foreign
currency hedging programs, utilizing foreign currency forward exchange
contracts, to hedge foreign currency fluctuations associated with the US Dollar
and Japanese Yen. The goal of the hedging program is to lock in exchange rates
to minimize the impact of foreign currency fluctuations. We do not use foreign
currency forward exchange contracts for speculative or trading purposes.
34
The following table provides information as of September 28, 2003 about us
and our subsidiaries' derivative financial instruments, which are comprised of
foreign currency forward exchange contracts. The information is provided in U.S.
dollar and EURO equivalent amounts, as listed below. The table presents the
notional amounts (at the contract exchange rates), the weighted average
contractual foreign currency exchange rates, and the estimated fair value of
those contracts.
Average Estimated
Notional Contract Fair
Amount Rate Value
--------- --------- --------
(In thousands, except for average contract rate)
Foreign currency forward sell exchange contracts:
Mattson Technology Inc. (US Dollar equivalent amount)
Japanese Yen $ 735 118.41 $ 781
Mattson Thermal Products GmbH (Euro equivalent amount)
U.S. Dollar EUR 7,540 1.10 EUR 7,236
$ 8,668 $ 8,319
The local currency is the functional currency for all our foreign sales
operations. Our exposure to foreign currency risk has increased as a result of
our global expansion of business. To neutralize our US operation's exposure to
exchange rate volatility, we keep EUROS in a foreign currency bank account. The
balance of this bank account was 2.8 million EUROS at September 28, 2003.
Item 4. Controls and Procedures
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our "disclosure controls and procedures" (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on the
evaluation, our principal executive officer and principal accounting officer
concluded that, although effective, our disclosure controls and procedures
continued to need improvement as of the end of the period covered by this
quarterly report. In connection with the audit of our consolidated financial
statements as of and for the year ended December 31, 2002, our independent
accountant, PricewaterhouseCoopers LLP ("PwC") noted as a reportable condition
our ongoing need to improve and automate procedures for our month-end closings.
As previously reported, the same condition had been noted by our former
independent accountants, Arthur Andersen LLP, in connection with the audit of
our consolidated financial statements as of and for the year ended December 31,
2001. Our management did not disagree with the report made by PwC or Andersen.
In the first quarter of 2003, we implemented a new computerized system to
automate these procedures. Our work to implement and improve the new system
continues as an active project.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the quarterly evaluation by our senior management
referenced in paragraph (a) above. As noted in paragraph (a) above, in the first
quarter of 2003 we implemented a new computer system to automate our monthly
closing procedures.
35
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of business, we are subject to claims and litigation,
including claims that we infringe third party patents, trademarks and other
intellectual property rights. Although we believe that it is unlikely that any
current claims or actions will have a material adverse impact on our operating
results or our financial position, given the uncertainty of litigation, we can
not be certain of this. Moreover, the defense of claims or actions against us,
even if such claims or actions are not meritorious, could result in the
expenditure of significant financial and managerial resources.
Except as reported in our most recent annual report on Form 10-K and our
quarterly report on Form 10-Q for the quarter ended March 30, 2003, there have
been no developments in the pending cases during the third quarter of 2003 that
are material to Mattson.
Our involvement in any patent dispute, or other intellectual property dispute
or action to protect trade secrets and know-how, could result in a material
adverse effect on our business. Adverse determinations in current litigation or
any other litigation in which we may become involved could subject us to
significant liabilities to third parties, require us to grant licenses to or
seek licenses from third parties, and prevent us from manufacturing and selling
our products. Any of these situations could have a material adverse effect on
our business.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1(1) Amended and Restated Certificate of Incorporation of the Company.
3.2(2) Third Amended and Restated Bylaws of the Company.
10.4 (3) Form of Indemnity Agreement.
31.1 Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley
Act Section 302 (a).
31.2 Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley
Act Section 302 (a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350.
36
99.1 Risk Factors incorporated by reference to Annual Report on Form 10-K.
(b) Reports on Form 8-K
Form 8-K furnished July 30, 2003 reporting under Item 7 and Item 12 the
issuance of a press release reporting financial results for the second
quarter of 2003.
- -----------
(1) Incorporated by reference from Mattson Technology, Inc. current report on
Form 8-K filed on January 30, 2001.
(2) Incorporated by reference from Mattson Technology, Inc. quarterly report on
Form 10-Q filed on August 14, 2002.
(3) Incorporated by reference from Appendix B to the Mattson Technology, Inc.
Proxy Statement filed on June 20, 1997.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
Date: November 11, 2003
/s/ David Dutton
---------------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
38