UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(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 26, 1999
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
---------------------------
MATTSON TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0208119
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3550 WEST WARREN AVENUE
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
--- ---
Number of shares of common stock outstanding as of October 27, 1999: 15,492,000
1
PART I -- FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS
MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
ASSETS
SEPT. 26, DEC. 31,
1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 6,429 $ 11,863
Short-term investments - 8,128
Accounts receivable, net 28,699 9,614
Inventories 19,595 10,924
Prepaid expenses and other current assets 5,082 8,745
-------- --------
Total current assets 59,805 49,274
Property and equipment, net 10,190 12,090
Other assets 3,975 6,756
-------- --------
$ 73,970 $ 68,120
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit 3,000 -
Accounts payable $ 5,558 $ 3,399
Accrued liabilities 16,753 14,841
-------- --------
Total current liabilities 25,311 18,240
-------- --------
Stockholders' equity:
Common stock 16 16
Additional paid in capital 64,403 63,239
Retained earnings (deficit) (12,561) (10,250)
Treasury stock (2,987) (2,987)
Other (212) (138)
-------- --------
Total stockholders' equity 48,659 49,880
-------- --------
$ 73,970 $ 68,120
======== ========
See accompanying notes to condensed consolidated financial statements.
2
MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 29,189 $ 9,420 $ 67,637 $ 45,317
Cost of sales 15,171 8,920 34,995 28,541
-------- -------- -------- --------
Gross profit 14,018 500 32,642 16,776
-------- -------- -------- --------
Operating expenses:
Research, development and engineering 5,297 4,107 13,720 12,378
Selling, general and administrative 8,567 6,294 21,704 18,662
Acquired in-process research and development - 4,220 - 4,220
-------- -------- -------- --------
Total operating expenses 13,864 14,621 35,424 35,260
-------- -------- -------- --------
Income (loss) from operations 154 (14,121) (2,782) (18,484)
Interest and other income (expense), net 221 431 647 1,420
-------- -------- -------- --------
Income (loss) before income taxes 375 (13,690) (2,135) (17,064)
Provision for income taxes 59 1,109 176 200
-------- -------- -------- --------
Net income (loss) $ 316 $(14,799) $ (2,311) $(17,264)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.02 $ (1.00) $ (0.15) $ (1.19)
======== ======== ======== ========
Diluted $ 0.02 $ (1.00) $ (0.15) $ (1.19)
======== ======== ======== ========
Shares used to calculate net income (loss) per share:
Basic 15,887 14,839 15,637 14,522
======== ======== ======== ========
Diluted 17,191 14,839 15,637 14,522
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
-----------------
SEPT. 26, SEPT. 27,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (2,311) $(17,264)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation 3,479 2,517
In-process research and development - 4,220
Amortization of intangibles 246 241
Deferred taxes - 4,222
Changes in assets and liabilities:
Accounts receivable (19,085) 5,877
Inventories (9,043) 9,900
Income tax receivable - (2,778)
Prepaid expenses and other assets 4,245 (296)
Accounts payable 2,159 (3,230)
Accrued liabilities 4,533 431
-------- --------
Net cash provided by (used in) operating activities (15,777) 3,840
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (1,875) (1,224)
Notes receivable stockholder - (3,129)
Purchases of short-term investments - (40,676)
Sales and maturities of short-term investments 8,128 42,126
-------- --------
Net cash provided by (used in) investing activities 6,253 (2,903)
-------- --------
Cash flows from financing activities:
Increase in borrowings against line of credit 3,000 -
Retirement of debt acquired in Concept acquisition - (4,000)
Proceeds from the issuance of Common Stock, net 1,164 1,065
Repurchase of Common Stock - (1,912)
-------- --------
Net cash provided by (used in) financing activities 4,164 (4,847)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (74) 43
-------- --------
Net decrease in cash and cash equivalents (5,434) (3,867)
Cash and cash equivalents, beginning of period 11,863 25,583
-------- --------
Cash and cash equivalents, end of period $ 6,429 $ 21,716
======== ========
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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 financial statements should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
The results of operations for the three months and nine month periods ended
September 26, 1999 are not necessarily indicative of results that may be
expected for the entire year ending December 31, 1999.
NOTE 2 BALANCE SHEET DETAIL (IN THOUSANDS):
SEPT. 26, DEC. 31,
1999 1998
---- ----
Inventories:
Purchased parts and raw materials $12,090 $ 7,128
Work-in-process 7,368 2,586
Finished goods 137 1,210
------- -------
$19,595 $10,924
======= =======
Accrued liabilities:
Warranty, installation and retrofit reserve $ 6,868 $ 5,820
Accrued compensation and benefits 4,073 1,214
Income taxes 1,166 1,131
Commissions 997 539
Deferred income 2,286 1,437
Customer deposits 81 2,690
Other 1,282 2,010
------- -------
$16,753 $14,841
======= =======
NOTE 3 ACQUISITION OF CONCEPT SYSTEMS DESIGN, INC.
On July 24, 1998, the Company acquired Concept Systems Design, Inc.
("Concept"), a supplier of expitaxial (EPI) systems. In connection with the
merger, the Company has issued 795,138 shares of Mattson Common Stock to the
former shareholders of Concept. The former shareholders of Concept also may
acquire up to 547,569 additional shares of Mattson Common Stock in connection
with the merger if certain conditions are met prior to the end of the first
twenty-four full calendar months following the closing of the transaction. In
July 1999, 447,569 shares of Mattson Common Stock were released from the
original contingency as certain conditions were satisfied. As of September
26, 1999, 100,000 shares may be issued to the former shareholders if certain
conditions are met prior to July 24, 2000. The transaction has been accounted
for as a purchase.
In the first quarter of 1999, a preacquisition contingency was resolved which
reduced the liabilities assumed from Concept by approximately $2.2 million.
Under the provisions of Statement of Financial Accounting Standards No. 38, this
has been recorded by the Company in the first quarter of 1999 on a prospective
basis as an elimination
5
of previously recorded goodwill and a pro-rata reduction of the balance to
the acquired developed technology, workforce and property and equipment.
NOTE 4 NET INCOME (LOSS) PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) for the period. Diluted EPS gives effect to
all dilutive potential common shares outstanding during the period. The
computation of diluted EPS uses the average market prices during the period.
During the quarter ended September 26, 1999 the basic earnings per share and
diluted earnings per share were each $0.02. The number of basic and diluted
shares used to calculate EPS for the quarter ended September 26, 1999 was
15,887,000 and 17,191,000, respectively. The number of shares used to
calculate the basic and diluted EPS for the nine months ended September 26,
1999 was 15,637,000.
Total stock options outstanding at September 26, 1999 and September 27, 1998
were 2,994,333 and 2,696,416, respectively.
NOTE 5 COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components.
The following are the components of comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousands) SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ 316 $(14,799) $(2,311) $(17,264)
Foreign currency translation adjustments (24) 36 (74) $ 64
------- -------- ------- --------
Comprehensive income (loss) $ 292 $(14,763) $(2,385) $(17,200)
======= ======== ======= ========
The components of accumulated other comprehensive income, net of related tax
are as follows:
SEPT. 26, DEC 31,
(in thousands) 1999 1998
---- ----
Cumulative translation adjustments $(212) $(138)
----- -----
$(212) $(138)
===== =====
NOTE 6 REPORTABLE SEGMENTS
The Company is organized on the basis of products and services. All of the
Company's business units have been aggregated into one operating segment. The
Company's service business is a separate operating segment; however, this
segment does not meet the quantitative threshold as prescribed in FAS 131. As
a result, no operating segment information is required to be disclosed.
NOTE 7 LINE OF CREDIT
The Company has a one-year revolving line of credit that expires in July 2000
in the amount of $15 million with Silicon Valley Bank. Under the revolving
line of credit, all borrowings bear interest at either a per annum rate of
200 percentage points above the LIBOR Rate, or a per annum rate equal to
Prime Rate. The line of credit contains
6
both affirmative and negative covenants. As of September 26, 1999, $3.0
million was drawn against the revolving line of credit and the Company was in
compliance with all its bank covenants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Mattson Technology, Inc. ("Mattson" or the "Company") designs, manufactures
and markets advanced fabrication equipment to semiconductor manufacturers
worldwide. The Company's product line is based on the Company's modular
"Aspen" platform, which accommodates two process chambers supporting
increased throughput. The Company currently offers Aspen Strip, CVD, RTP,
LiteEtch, and EPI products. To date, the Company has derived a substantial
majority of its sales from Aspen Strip systems. In addition, the Company
derives sales from spare parts and maintenance services.
As a result of the semiconductor industry slowdown in the last year, the
Company did not return to profitability until the current quarter ended
September 26, 1999. Although the Company's incoming orders and net sales are
improving, there can be no assurance that the Company will be able to sustain
or increase sales growth or profitability in the future. Future results will
depend on a variety of factors, particularly overall market conditions and
timing of significant orders, the ability of the Company to bring new systems
to market, the timing of new product releases by the Company's competitors,
patterns of capital spending by the Company's customers, market acceptance of
new and/or enhanced versions of Company systems, changes in pricing by the
Company, its competitors, customers, or suppliers and the mix of products
sold. The Company is increasing its expense levels to support long term
growth in its business. As a result, the Company is dependent upon increases
in sales in order to sustain profitability. If the Company's sales do not
increase, the current levels of operating expenses could materially and
adversely affect the financial results of the Company.
The cyclicality and uncertainties regarding overall market conditions
continue to present significant challenges to the Company and may continue to
have a significant adverse impact on the Company's ability to forecast near
term revenue expectations. Current market conditions and the assessment of
short-term prospects for the Company and the industry as a whole have
improved in recent months. The ability of the Company to respond to these
improvements is potentially limited by its ability to increase production
with its key suppliers and its labor force in the short term.
The Company generally recognizes a sale upon shipment of a system. However,
from time to time, the Company allows customers to evaluate systems. The
Company does not recognize the associated sale until and unless a customer
accepts the evaluation system.
IMPACT OF YEAR 2000
The following statement is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act of 1998. Some of the Company's
older computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs have
time-sensitive software that may recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has commenced a Year 2000 date conversion project to address
necessary changes and an implementation strategy. The "Year 2000 Computer
Problem" creates risks for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on
financial transactions. The Company does not anticipate that it will incur
material expenditures for the resolution of any Year 2000 issues related
either to its own information systems, databases and programs, or its
products. However, there can be no assurance that the Company will not
experience serious unanticipated negative consequences or material costs
caused by undetected errors. In addition, the Company could be adversely
impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts.
7
Management is in the process of determining the impact, if any, that third
parties who are not Year 2000 compliant may have on the operations of the
Company. The Company is engaged in a comprehensive program to assess the
Company's Year 2000 risk exposure and to plan and implement remedial and
corrective action where necessary. The Company reviewed all of its major
internal systems, including financial and manufacturing systems, to assess
Year 2000 readiness and to identify critical systems that require correction
or remediation. The Company believes that its existing financial and
manufacturing systems are Year 2000 ready. There cannot be any assurance,
however, that integration and testing of new, corrected or updated programs
or systems with which they interface will not result in necessary corrective
action to one or more critical systems. A significant disruption of the
Company's financial or manufacturing systems would adversely impact its
ability to process orders, manage production and issue and pay invoices. The
Company's inability to perform these functions for a long period of time
could result in a material impact on its results of operations and financial
condition.
The assessment of the Year 2000 readiness of the Company's manufacturing
system is complete. Based on information currently available, the Company
believes that its systems will not be materially impacted by Year 2000
issues. However, there cannot be assurance that a significant disruption in
systems resulting from a Year 2000 problem will not occur. If the computer
system fails for this or any other reason, there could be a material adverse
impact on the Company's operating results and financial condition.
The Company is working with suppliers of products and services to assess
their Year 2000 readiness with respect to their operations and the products
and services they supply. All major suppliers have responded that they are
compliant. Less critical suppliers have responded compliant or have not
responded at all. The assessment program also has encompassed the Company's
own product offerings. The Company has completed the assessment of the Year
2000 readiness of these products, and the Company does not believe that Year
2000 issues will have a material impact on sales or functionality of our
standard product offerings. Customers are seeking assurances of our Year 2000
readiness with increasing frequency, and the Company is endeavoring promptly
to address their concerns. However, the Company has no control over a
customer's Year 2000 readiness. The potential ramifications of a Year 2000
type failure are potentially far-reaching and largely unknown. The Company
cannot make assurances that a contingency plan in effect at the time of a
system failure will adequately address the immediate or long term effects of
a failure, or that such a failure would not have a material adverse impact on
the Company's operations or financial results in spite of prudent planning.
The costs to date related to the Year 2000 issue consist primarily of
reallocation of internal resources to evaluate and assess systems and
products as described above and to plan our remediation and testing efforts.
The Company has not maintained detailed accounting records of these costs,
but based on the review of department budgets and staff allocations, the
Company believes these costs to be immaterial.
The Company cannot make any assurances that remediation and testing will
identify issues which will require additional expenditure of material amounts
and which could result in an adverse impact on financial results in future
reporting periods. Based on currently available information, management does
not believe that the Year 2000 issues discussed above related to internal
systems or products sold to customers will have a material adverse impact on
our financial condition or overall trends in results of operations. However,
the Company is uncertain to what extent they may be affected by such matters.
In addition, the Company cannot make assurances that the failure to ensure
Year 2000 capability by a supplier not considered critical or another third
party would not have a material adverse effect on the Company.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward looking statements regarding, among
other matters, the Company's future strategy, product development plans, and
productivity gains and growth. The forward looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements address matters that are
subject to a number of risks and uncertainties. In addition to the general
risks associated with the development of complex technology, future results
of the Company will depend on a variety of factors as described herein and in
other filings made by the Company with the Securities and Exchange Commission.
8
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of the
Company expressed as a percentage of net sales for the period indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 52% 95% 52% 63%
--- --- --- ---
Gross margin 48% 5% 48% 37%
--- ---- --- ---
Operating expenses:
Research, development and engineering 18% 44% 20% 27%
Selling, general and administrative 29% 67% 32% 41%
Acquired in process research and development - 45% - 9%
Total operating expenses 47% 155% 52% 78%
Income (loss) from operations 1% (150)% (4)% (41)%
Income (loss) before income taxes 1% (145)% (3)% (38)%
Net income (loss) 1% (157)% (3)% (38)%
NET SALES
Net sales for the third quarter of 1999 increased 211% to $29.2 million from
$9.4 million for the third quarter of 1998. Average selling prices (ASP's)
increased 14% for the third quarter of 1999 compared to the third quarter of
1998. The increase in ASP's was due to a higher demand for the Company's CVD
and EPI products which generally carry higher ASP's than the Strip products.
Net sales for the first nine months of 1999 increased 49% to $67.6 million
from $45.3 million in the first nine months of 1998. The increase in net
sales reflects a 33% increase in ASP's and a 12% increase in unit sales
during the first nine months of 1999 compared to the first nine months of
1998.
Third quarter bookings were $35.6 million, an increase of 224% compared to
bookings of $11.0 million in the third quarter of 1998, resulting in a book
to bill ratio of 1.2 to 1.0 in the third quarter of 1999. The increase in
bookings is primarily due to a higher demand for the Company's Strip products
in the current quarter. Backlog increased 89% to $41.4 million, compared to
$21.9 million at the end of the third quarter of 1998.
International sales in Europe, Japan and the Pacific Rim (which includes
Taiwan, Singapore and Korea) accounted for 54% and 62% of net sales for the
third quarter of 1999 and 1998, respectively. International sales for the
first nine months of 1999 and 1998 were 62% and 72% of net sales,
respectively. All sales are denominated in U.S. dollars. The Company's
operating results could be materially and adversely affected by any loss of
business from, the cancellation of orders by, or decreases in prices of
systems sold through Marubeni, the Company's distributor in Japan. The
Company anticipates that international sales will continue to account for a
significant portion of 1999 total net sales.
GROSS MARGIN
The Company's gross margin for the third quarter of 1999 increased to 48%
from 5% for the third quarter of 1998, and for the first nine months of 1999
increased to 48% from 37% for the first nine months of 1998. The increase in
margins during the current year was significantly affected by an increase in
sales volume and manufacturing
9
efficiencies. In addition, during the third quarter of 1998, there was a
one-time $2.6 million write down of inventory related to the Company's 300mm
program.
The Company's gross margin may continue to be affected by a variety of
factors. There can be no assurance that the Company will not continue to
experience pricing pressures in the future. The Company's gross margin on
international sales, other than sales through Marubeni, is substantially the
same as domestic sales. Sales to Marubeni typically carry a lower gross
margin, as Marubeni is primarily responsible for sales and support costs in
Japan.
The Company's reliance on outside vendors generally, and a sole or a limited
group of suppliers in particular, involves several risks, including a
potential inability to obtain an adequate supply of required components and
reduced control over pricing and timely delivery of components. Any inability
to obtain adequate deliveries or any other circumstance that would require
the Company to seek alternative sources of supply or to manufacture such
components internally could delay the Company's ability to ship its systems
and could have a material adverse effect on the Company, including an
increase in the Company's cost of sales and therefore an adverse impact on
gross margin. In addition, new system introductions and enhancements and
rapid growth may also have an adverse effect on gross margin due to the
inefficiencies associated with manufacturing of new product lines and rapid
expansion, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses for the third quarter of 1999
were $5.3 million, or 18% of net sales, as compared to $4.1 million, or 44%
of net sales, for the third quarter of 1998. The increase in expenses during
the third quarter of 1999 as compared to the third quarter of 1998 is
primarily due to a $0.9 million increase in compensation and related
expenses. During the third quarter of 1999, the Company recorded a $1.3
million bonus expense that was allocated amongst the Company's departments.
Research, development and engineering expenses for the first nine months of
1999 were $13.7 million, or 20% of net sales, as compared to $12.4 million,
or 27% of net sales, for the first nine months of 1998. The increase in
expenses for the first nine months of 1999 as compared to the first nine
months of 1998 was due to compensation and related expenses which increased
to $6.9 million from $6.5 million and depreciation expense which increased to
$1.7 million from $1.3 million. The increase in compensation and related
expenses is primarily due to the Company recording a bonus accrual of $0.7
million during the second quarter of 1999 and $1.3 million bonus accrual
during the third quarter of 1999. As mentioned above, the $0.7 million and
$1.3 million bonus expense was allocated amongst the Company's departments.
The Company believes that continued investment in research and development,
including its multi-product strategy is critical to maintaining a strong
technological position in the industry.
The loss in the third quarter of 1998 included a one-time charge of $4.2
million for the write-down of certain in-process technology which were
incurred as part of the Company's acquisition of Concept Systems Design, Inc.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the third quarter of 1999
were $8.6 million, or 29% of net sales, as compared to $6.3 million, or 67%
of net sales, for the third quarter of 1998. Compensation and related
expenses during the third quarter of 1999 increased to $6.2 million from $3.4
million in the third quarter of 1998. The increase in compensation and
related expenses is primarily attributable to the Company's bonus accrual
recorded in the third quarter of 1999 as mentioned in the research,
development and engineering expenses paragraph above. The remaining increase
in compensation and related expenses is due to salary increases during July
1999, an increase in headcount and an increase in net sales which directly
increases commission expense. The increase in compensation and related
expenses was offset by a $0.6 million non-recurring restructuring expense
recorded in prior year. The restructuring expense was related to the
acquisition of Concept during the third quarter of 1998.
Selling, general and administrative expenses for the nine months of 1999 were
$21.7 million, or 32% of net sales, as compared to $18.7 million, or 41% of
net sales, for the nine months of 1998. The $3.0 million increase in selling,
10
general and administrative expenses was primarily due to a $3.7 million
increase in compensation and related expenses offset by a $0.6 million
non-recurring restructuring expense discussed above. The increase in
compensation and related expenses is primarily due to the Company's bonus
accrual recorded in the second and third quarter of 1999.
PROVISION FOR INCOME TAXES
The 1999 provision for income taxes reflects fully reserved deferred tax
assets due to the uncertainty of their realization and recording a tax
liability related to the anticipated income of the Company's foreign
operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September 26,
1999 was $15.8 million, compared to $3.8 million of net cash provided by
operations for the nine months ended September 27, 1998. Net cash used by
operations during the nine months ended September 26, 1999 was primarily
attributable to a net operating loss of $2.3 million, an increase in the
accounts receivable and inventory balances of $19.1 million and $9.0 million,
respectively, offset by non-cash depreciation and amortization, a decrease in
prepaid expenses and other assets of $4.2 million and an increase in the
accounts payable and accrued liabilities balances of $2.2 million and $4.5
million, respectively.
The Board of Directors has authorized the Company to repurchase up to
1,000,000 shares of the Company's Common Stock in the open market up through
the year 2000. As of September 26, 1999, 274,800 shares had been repurchased
by the Company. The purpose of the repurchase program is to acquire shares to
fund the Company's stock based employee benefit programs, including the
employee stock purchase plan and the stock option plan.
The Company has a one-year revolving line of credit which expires in July
2000 in the amount of $15 million with Silicon Valley Bank. Under the
revolving line of credit, all borrowings bear interest at either a per annum
rate of 200 percentage points above the LIBOR Rate, or a per annum rate equal
to Prime Rate. The line of credit contains both affirmative and negative
covenants. As of September 26, 1999, $3.0 million was drawn against the
revolving line of credit and the Company was in compliance with all its bank
covenants.
During the third quarter of 1998 the Company extended a loan to the Chief
Executive Officer of the Company for $3.1 million. The loan was
collateralized by 2.2 million shares of the Company's Common Stock and was a
full recourse note bearing interest at 8%. The Company agreed to extend the
note for an additional six months and increase the note amount to $3.7
million. The $3.7 million includes accrued interest of $0.3 million and an
additional $0.3 million loaned to the Chief Executive Officer. The terms on
the note otherwise remain unchanged with the exception that the principal and
accrued interest are now due on February 28, 2000. The note is included in
other current assets.
The Company believes anticipated cash flows from operations, funds available
under the revolving line of credit and existing cash and cash equivalents
will be sufficient to meet the Company's cash requirements for the near term.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
THE COMPANY'S QUARTERLY RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND
MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE. The Company derives most of its
net sales from the sale of a relatively small number of systems. The list
prices on these range from $375,000 to over $1,000,000. At its current
revenue level, each sale, or failure to make a sale, can have a material
effect on the Company. The Company's backlog at the beginning of a quarter
typically does not include all sales required to achieve its sales objectives
for that quarter. Consequently, the Company's net sales and operating results
for a quarter depend on its shipping orders scheduled to be sold during that
quarter and obtaining orders for systems to be shipped in that same quarter.
A delay in a shipment near the end of a quarter may cause net sales in that
quarter to fall significantly below its expectations. Such a delay may
materially and adversely affect the Company's operating results for that
quarter.
Unpredictable order patterns often cause the Company's manufacturing
efficiency to vary significantly from quarter to quarter. Any variation in
the Company's manufacturing efficiency can adversely affect gross margins and
net
11
operating results. The time lag between the Company's first contact with a
customer and the customer placing its first order typically lasts from nine
to twelve months. This lag is often even longer. The Company's customers
often face competing capital budget considerations. Time lags between first
customer contact and the customer placing its first order, coupled with the
customer's competing capital budget considerations, make the timing of
customer orders uneven and difficult to predict.
THE COMPANY'S FUTURE SUCCESS DEPENDS UPON ITS ABILITY TO DEVELOP ITS SYSTEMS
AND PRODUCTS AND THE MARKET'S ACCEPTANCE OF THEM. The Company's systems
represent alternatives to the conventional equipment currently marketed by
its competitors. As a result, the Company believes that its growth prospects
depend in large part upon its ability to gain acceptance by a broader group
of customers.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the Company believes that the manufacturer generally relies upon
that equipment for the specific production line application. In addition, the
semiconductor manufacturer frequently will attempt to consolidate its other
capital equipment requirements with the same vendor. Given these factors,
there can be no assurance that the Company will be successful in obtaining
broader acceptance of its systems and technology. The transition of the
market to 300mm wafers will present both an opportunity and a risk. The
Company must introduce 300mm systems on a timely basis and which meet
customer requirements. To the extent that the Company is unable to do this,
its business, results of operations and financial condition could be
materially and adversely affected.
THE COMPANY'S REVENUES ARE SIGNIFICANTLY DEPENDENT ON INDIVIDUAL CUSTOMERS
MAKING PURCHASES. The Company sells its products to leading integrated
circuit manufacturers located in the United States, Europe, Japan and the
rest of the Pacific Rim. While the Company actively pursues new customers,
there can be no assurance that it will be successful in its efforts. Any
significant weakening in customer demand would have a material adverse effect
on the Company.
THE COMPANY'S REVENUES ARE DEPENDENT ON ITS JAPANESE DISTRIBUTOR, MARUBENI,
AND THE ASIAN MARKET IN GENERAL. The Company believes that strong sales in
the Japanese market as well as the Asia market will be essential to its
future financial performance. As part of its strategy for penetrating the
Japanese market, the Company established a distributor relationship with
Marubeni. The Company is substantially dependent upon Marubeni to address the
Japanese market. Although management believes that it maintains a good
relationship with Marubeni, there can be no assurance that the relationship
will continue. In the event of a termination of its distribution agreement
with Marubeni, the Company's strategy to increase its sales in Japan would be
adversely affected. In addition, upon termination of this relationship with
Marubeni, the Company would have the obligation to repurchase up to $1
million of inventory related to its sales to Marubeni. Although the Company
intends to continue to invest significant resources in Japan, there can be no
assurance that the Company will be able to maintain or increase its sales to
the Japanese semiconductor industry.
The Company is also substantially dependent upon sales to Pacific Rim
countries generally. As such, the Company is particularly at risk with
respect to effects from developments such as the Asian economic problems. In
addition, because all of its foreign sales are denominated in U.S. dollars,
the Company's products become less price competitive in countries with
currencies that are declining in value in comparison with the dollar.
THE COMPANY'S SALES CYCLE IS LENGTHY BECAUSE SALES OF ITS SYSTEMS DEPEND UPON
THE DECISIONS OF PROSPECTIVE CUSTOMERS TO MAKE SIGNIFICANT CAPITAL COMMITMENTS.
Sales of the Company's systems depend, in significant part, upon the decision of
a prospective customer to increase manufacturing capacity or to expand current
manufacturing capacity. Both decisions typically involve a significant capital
commitment. The Company's ability to receive orders from potential customers may
depend upon such customers undertaking an evaluation for new equipment. For many
potential customers, such an evaluation may occur infrequently.
The Company also believes it must significantly increase its inventory
investment in evaluation systems because many customers use these systems in
their evaluation processes. Due to these factors, the sale of the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort. There can be no assurance that any of
its efforts will succeed.
THE COMPANY'S SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY.
The Company's business depends in significant part upon capital expenditures
by manufacturers of semiconductor devices, including manufacturers that
12
are opening new or expanding existing fabrication facilities. The level of
capital expenditures by these manufacturers of semiconductor devices depend
upon the current and anticipated market demand for such devices and the
products utilizing such devices. The semiconductor industry is highly
cyclical. The industry historically experiences periods of oversupply that
result in significantly reduced demand for capital equipment, including the
systems manufactured and marketed by the Company. The Company anticipates
that a significant portion of new orders will depend upon demand from
semiconductor manufacturers who build or expand large fabrication facilities.
There can be no assurance that such demand will exist. Any future downturns
or slowdowns in the semiconductor market will materially and adversely affect
the Company's net sales and operating results.
ACQUISITIONS, WHICH ARE INHERENTLY RISKY, ARE PART OF THE COMPANY'S BUSINESS
STRATEGY. As part of the Company's business strategy, subject to certain
regulatory approvals and other conditions, the Company may make additional
acquisitions of, or significant investments in, businesses that offer
complementary products, services and technologies. The risks commonly
encountered in acquisitions of businesses will accompany any acquisitions or
investments. Consideration paid for future acquisitions, if any, could be in
the form of cash, stock, rights to purchase stock or a combination of cash,
stock and rights to acquire stock. To the extent that shares of stock or
other rights to purchase stock are issued in connection with any such future
acquisitions, dilution to existing stockholders and to earnings per share may
result.
THE COMPANY'S FUTURE SUCCESS DEPENDS UPON ITS CONTINUING TO DEVELOP AND
INTRODUCE NEW SYSTEMS WHICH COMPETE EFFECTIVELY ON THE BASIS OF PRICE AND
PERFORMANCE. The Company and its customers compete in markets characterized
by rapidly changing technology, evolving industry standards, and continuous
improvements in products and services.
Because of continual changes in these markets, the Company believes that its
future success will depend, in part, upon its ability to continue to improve
its systems and its process technologies. Due to the continual change in
these markets, the Company's success will also depend upon its ability to
develop new technologies and systems which compete effectively on the basis
of price and performance and adequately address customer requirements. In
addition, the Company must adapt its systems and processes to technological
changes and to support emerging target market industry standards. The success
of new system introductions is dependent on a number of factors. These
factors include timely completion of new system designs and market
acceptance. There can be no assurance that the Company will be able to
improve its existing systems or develop new technologies or systems in a
timely manner. In particular, the transition of the market to 300mm wafers
will present the Company with both an opportunity and a risk. To the extent
that the Company is unable to introduce 300mm systems on a timely basis and
which meet customer requirements, its business, results of operations and
financial condition could be materially and adversely affected.
THE COMPANY'S SUBSTANTIAL DEPENDENCE UPON A LIMITED NUMBER OF SUPPLIERS FOR
SOME COMPONENTS AND SUBASSEMBLIES REDUCES ITS CONTROL OVER THE TERMS OF THEIR
DELIVERIES. The Company relies to a substantial extent on outside vendors to
manufacture many of the Aspen systems' components and subassemblies. The
Company obtains certain of these components and subassemblies from a supplier
or a limited group of suppliers. The Company's reliance on outside vendors
generally, and a sole or a limited group of suppliers in particular, involves
several risks. These risks include a potential inability to obtain an
adequate supply of required components, reduced control over pricing of
components, and reduced control over timely delivery of components.
The manufacture of certain of these components and subassemblies is an
extremely complex process and requires long lead times. As a result, there
can be no assurance that delays or shortages caused by suppliers will not
occur. Any inability to obtain adequate deliveries or any other circumstance
that would require the Company to seek alternative sources of supply or to
manufacture such components internally could delay its ability to ship its
systems. Any such delay could have a material adverse effect on the Company.
THE COMPANY IS HIGHLY DEPENDENT ON ITS KEY PERSONNEL. The Company's success
depends to a large extent upon the efforts and abilities of Brad Mattson,
Chairman and Chief Executive Officer, and other key managerial and technical
employees. The loss of Mr. Mattson or other key employees could have a
material adverse effect on the Company. The Company does not enter into
written employment agreements with any of its executive officers. The success
of its business will also depend upon its ability to continue to attract and
retain qualified employees. In particular, the Company must attract and
retain highly skilled design and process engineers to manufacture existing
systems and develop new systems and processes. The competition for such
personnel is intense.
13
THE COMPANY IS HIGHLY DEPENDENT ON ITS SALES OVERSEAS, PARTICULARLY TO JAPAN
AND OTHER PACIFIC RIM COUNTRIES. The Company anticipates that international
sales will continue to account for a significant portion of net sales.
Because of its dependence upon international sales in general, and on sales
to Japan and Pacific Rim countries in particular, the Company is particularly
at risk to effects from developments such as the Asian economic problems. The
Company's international sales are also subject to certain governmental
restrictions, including the Export Administration Act and the regulations
promulgated under that act. The Company's sales to date have been denominated
in U.S. dollars. As a result, there have been no losses related to currency
fluctuations on sales. There can be no assurance that any of these factors
will not have a material adverse effect on the Company.
THE COMPANY RELIES ON ITS INTELLECTUAL PROPERTY RIGHTS TO PROTECT ITS
PROPRIETARY TECHNOLOGY. The Company relies on a combination of patents,
copyrights, trademark and trade secret laws, non-disclosure agreements, and
other intellectual property protection methods to protect its proprietary
technology. The Company believes that patents are of less significance in
this industry than such factors as innovative skills, technical expertise and
know-how of its personnel. There can be no assurance that the Company's
competitors will not be able to legitimately ascertain the non-patented
proprietary information embedded in its systems. If this occurs, the Company
may be precluded from preventing the use of such information. To the extent
the Company wishes to assert its patent rights, there can be no assurance
that any claims of its patents will be sufficiently broad to protect its
technology.
THE COMPANY'S FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL
REGULATIONS COULD RESULT IN SUBSTANTIAL LIABILITY TO THE COMPANY. The Company
is subject to a variety of federal, state and local laws, rules and
regulations. These laws, rules and regulations pertain to the use, storage,
discharge and disposal of hazardous chemicals during sales demonstrations and
research and development. In recent years the Company has seen an increase in
the amount of public attention focused on the environmental impact of
operations which use hazardous materials. To the best of its knowledge, the
Company is in compliance with all federal, state and local environmental
regulations. However, failure to comply with present or future regulations
could result in substantial liability to the Company, suspension or cessation
of its operations, restrictions on its ability to expand at its present
locations, requirements for the acquisition of significant equipment, or
other significant expense.
THE PRICE OF THE COMPANY'S COMMON STOCK HAS IN THE PAST AND MAY IN THE FUTURE
FLUCTUATE SIGNIFICANTLY. Significant volatility characterized the market
price of the Company's common stock in the past. The Company's stock price
declined substantially from its highs. There can be no assurance that the
market price of its common stock will not decline in the future. In addition,
in recent years the stock market in general, and the market for shares of
small capitalization stocks in particular, experienced extreme price
fluctuations. These fluctuations were often unrelated to the operating
performance of the affected companies. Such fluctuations could adversely
affect the market price of the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
The Company has exposure to the impact of foreign currency fluctuations. The
Company has foreign subsidiaries which operate and sell its products in
various global markets; however, all of its sales are denominated in U.S.
dollars, and therefore the Company's foreign currency risk is reduced. The
Company also has some monetary assets, particularly in Japan, where the
Company attempts to limit its foreign currency risk through the use of
financial market instruments. The Company uses currency swap contracts with
maturities generally less than three months to manage its exposure on these
assets. To date, the Company's exposure related to exchange rate volatility
has not been significant. There can be no assurance that there will not be a
material impact in the future.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 (Electronic filing only)
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
Date: November 9, 1999 /s/ Brian R. McDonald
---------------------------------
Brian R. McDonald
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)
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