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 July 1, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-21970
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MATTSON TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0208119
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2800 Bayview Drive Fremont, California 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-5900
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Number of shares of common stock outstanding as of July 31, 2001: 37,745,124
1
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements .............................................. 3
Condensed Consolidated Balance Sheets
at July 1, 2001 and December 31, 2000.............................. 3
Condensed Consolidated Statements of Operations
for the three and six months ended July 1, 2001 and June 25, 2000.. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended July 1, 2001 and June 25, 2000 ........... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 29
Item 2. Changes in Securities ............................................ 29
Item 3. Defaults Upon Senior Securities................................... 29
Item 4. Submission of Matters to a Vote of Security Holders............... 29
Item 5. Other Information................................................. 30
Item 6. Exhibits and Reports on Form 8-K ................................. 30
Signatures........................................................ 31
2
PART I -- FINANCIAL INFORMATION
1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
Jul. 1, Dec. 31,
2001 2000
---------- ---------
Current assets:
Cash and cash equivalents $ 31,459 $ 33,431
Restricted cash 31,995 31,995
Short-term investments 21,584 38,814
Accounts receivable, net 75,217 20,425
Advance billings 60,346 40,704
Inventories, net 143,667 43,905
Finished goods inventories shipped and 55,624 11,528
awaiting customer acceptance
Deferred tax assets - 4,010
Prepaid expenses and other current assets 14,983 8,963
---------- ---------
Total current assets 434,875 233,775
Property and equipment, net 45,454 15,953
Long-term investments 2,036 9,287
Deferred tax assets - 2,403
Goodwill, intangibles and other assets 184,003 8,250
---------- ---------
Total assets $ 666,368 $ 269,668
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - STEAG AG, a shareholder $ 44,555 $ -
Current portion of long-term debt 899 -
Line of credit 10,908 -
Accounts payable 27,099 15,091
Accrued liabilities 65,457 27,746
Deferred revenue 107,752 40,704
Deferred income taxes 4,205 -
---------- ---------
Total current liabilities 260,875 83,541
---------- ---------
Long-term liabilities:
Long-term debt 1,945 -
Deferred income taxes 11,406 -
---------- ---------
Total long-term liabilities 13,351 -
---------- ---------
Total liabilities 274,226 83,541
========= =========
Stockholders' equity:
Common stock 37 20
Additional paid-in capital 496,812 198,835
Accumulated other comprehensive loss (9,419) (181)
Treasury stock (2,987) (2,987)
Retained deficit (92,301) (9,560)
---------- ---------
Total stockholders' equity 392,142 186,127
---------- ---------
$ 666,368 $ 269,668
========== =========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
JUL. 1, JUN. 25, JUL. 1, JUN. 25,
2001 2000 2001 2000
------- -------- -------- --------
Net sales $ 81,992 $ 44,484 $155,491 $ 84,441
Cost of sales 60,483 23,048 110,810 44,654
-------- -------- -------- --------
Gross profit 21,509 21,436 44,681 39,787
-------- -------- -------- --------
Operating expenses:
Research, development and engineering 16,108 6,867 35,009 13,165
Selling, general and administrative 29,802 12,907 61,676 23,465
In-process research and development (Note 3) - - 10,100 -
Amortization of goodwill and intangibles 9,624 - 20,023 -
-------- -------- -------- --------
Total operating expenses 55,534 19,774 126,808 36,630
-------- -------- -------- --------
Income (loss) from operations (34,025) 1,662 (82,127) 3,157
Interest and other income, net 1,307 1,511 1,795 1,909
-------- -------- -------- --------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle (32,718) 3,173 (80,332) 5,066
Provision for income taxes 397 317 2,409 506
-------- -------- -------- --------
Income (loss) before cumulative effect of change in (33,115) 2,856 (82,741) 4,560
accounting principle
Cumulative effect of change in accounting principle,
net of tax - - - (8,080)
-------- -------- -------- --------
Net income (loss) $(33,115) $ 2,856 $(82,741) $ (3,520)
======== ======== ======== ========
Income (loss) per share before cumulative effect
of a change in accounting principle:
Basic $ (0.90) $ 0.14 $ (2.25) $ 0.25
Diluted $ (0.90) $ 0.13 $ (2.25) $ 0.22
Cumulative effect of change in accounting principle
Basic $ - $ - $ - $ (0.44)
Diluted $ - $ - $ - $ (0.39)
Net income (loss) per share:
Basic $ (0.90) $ 0.14 $ (2.25) $ (0.19)
Diluted $ (0.90) $ 0.13 $ (2.25) $ (0.17)
Shares used in computing net income (loss) per share:
Basic 36,804 19,877 36,709 18,370
Diluted 36,804 21,929 36,709 20,422
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
----------------------
JUL. 1, JUN. 25,
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $ (82,741) $ (3,520)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of accounting change, net of tax - 8,080
Depreciation and amortization 10,760 2,264
Deferred tax assets (2,208) -
Allowance for doubtful accounts 339 -
Amortization of goodwill and intangibles 20,023 451
Acquired in-process research and development 10,100 -
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable 20,379 (11,662)
Advance billings (19,642) (8,270)
Inventories 9,402 (11,142)
Inventories awaiting customer acceptance (44,096) (1,470)
Prepaid expenses and other current assets (2,645) (97)
Other assets 5,700 (622)
Accounts payable (7,566) 1,699
Accrued liabilities (37,885) 4,383
Deferred revenue 63,930 6,962
-------- --------
Net cash used in operating activities (56,150) (12,944)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (10,361) (2,454)
Purchases and sales of investments, net 24,490 -
Net cash acquired from acquisitions 38,016 -
-------- --------
Net cash provided by (used in) investing activities 52,145 (2,454)
-------- --------
Cash flows from financing activities:
Draws and repayment on line of credit, net 11,010 (3,000)
Payment of offering costs - (8,536)
Proceeds from the issuance of common stock 3,190 135,495
-------- --------
Net cash provided by financing activities 14,200 123,959
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (12,167) (33)
-------- --------
Net increase in cash and cash equivalents (1,972) 108,528
Cash and cash equivalents, beginning of period 33,431 16,965
-------- --------
Cash and cash equivalents $ 31,459 $125,493
======== ========
Supplemental disclosure of non-cash transactions:
Common stock issued for businesses $294,804 $ -
======== ========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 1, 2001
(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 condensed consolidated balance sheet as of December 31,
2000 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Estimates are used for, but are not
limited to, the accounting for doubtful accounts, inventory reserves,
depreciation and amortization, sales returns, warranty costs and income taxes.
Actual results could differ from these estimates.
These condensed consolidated financial statements include the accounts of
Mattson Technology and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The financial statements
should be read in conjunction with the audited financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2000.
The results of operations for the three and six months ended July 1, 2001
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 2001.
Note 2 Balance Sheet Detail (in thousands):
JUL. 1, DEC. 31,
2001 2000
-------- --------
Inventories:
Purchased parts and raw materials $ 66,229 $ 25,108
Work-in-process 40,489 14,241
Finished goods 36,949 4,556
-------- --------
$143,667 $ 43,905
======== ========
Accrued liabilities:
Warranty and installation reserve $ 21,687 $ 10,540
Accrued compensation and benefits 11,525 6,415
Income taxes 9,429 2,105
Commissions 4,389 2,130
Other 18,427 6,556
-------- --------
$ 65,457 $ 27,746
======== ========
6
Note 3 Acquisitions
On June 27, 2000, the Company entered into a definitive Strategic Business
Combination Agreement, subsequently amended by an Amendment to the Strategic
Business Combination Agreement dated December 15, 2000 ("Combination Agreement")
to acquire eleven direct and indirect subsidiaries, comprising the semiconductor
equipment division of STEAG Electronic Systems AG ("the STEAG Semiconductor
Division"), and entered into an Agreement and Plan of Merger ("Plan of Merger")
to acquire CFM Technologies, Inc ("CFM"). Both transactions were completed
simultaneously on January 1, 2001.
STEAG Semiconductor Division
Pursuant to the Combination Agreement, the Company issued to STEAG
Electronic Systems AG ("SES") 11,850,000 shares of common stock valued at
approximately $124 million as of the date of the amended Combination Agreement,
obligation to pay SES $100,000 in cash, assumed certain obligations of SES and
STEAG AG, the parent company of SES, including certain intercompany indebtedness
owed by the acquired subsidiaries to SES in exchange for a secured promissory
note in the principal amount of $26.1 million (with an interest rate of 6%),
which was payable to SES, a shareholder, on July 2, 2001, for which the Company
is currently re-negotiating the terms of the obligation. Under the Combination
Agreement, the Company is also obligated to cause two acquired subsidiaries to
pay certain amounts based on profits for 2000 to SES, in an amount estimated to
be 37.6 million Deutsche Marks (approximately $18.1 million as of January 1,
2001 and $16.3 million as of July 1, 2001). The actual amount to be paid is
subject to adjustment based on an audit of the profits of the relevant
subsidiaries for 2000. This portion of the amount due to SES is payable in
Deutsche Marks and, accordingly, the Company has exposure for exchange rate
volatility. The Company reimbursed SES $3.3 million in acquisition related
costs, in April 2001. The Company also agreed to grant options to purchase
850,000 shares of common stock to employees of the STEAG Semiconductor Division
subsequent to the closing of the transaction, which is not included in the
purchase price of the STEAG Semiconductor Division. As part of the acquisition
transaction, the Company, SES, and Mr. Mattson entered into a Stockholder
Agreement dated December 15, 2000, providing for, among other things, the
election of two persons designated by SES to the Company's board of directors,
restrictions on future acquisitions or dispositions of Company common stock by
SES, and registration rights in favor of SES. The Company also entered into
several transition services agreements with SES, under which SES agreed to
provide specified payroll, communications, accounting information and
intellectual property administration services to certain German subsidiaries of
the Company for a term of one year. In fiscal year 2001, the Company estimates
that it will pay to SES approximately $700,000 in connection with the purchase
of services or supplies pursuant to the transition services agreements. In
addition, the Company entered into a manufacturing supply contract with a
company affiliated with SES, under which the Company has the right to utilize
manufacturing and assembly services based on an hourly rate. For fiscal 2001,
the Company is obligated to purchase at least $2.1 million worth of such
services. SES holds approximately 32% of the Company's common stock and
currently has two representatives on the Company's board of directors.
The acquisition has been accounted for under the purchase method of
accounting and the results of operations of the STEAG Semiconductor Division
were included in the condensed consolidated statement of operations of the
Company from the date of acquisition. The purchase price of the acquisition of
$148.5 million, which included $6.1 million of estimated direct acquisition
related costs, was used to acquire the common stock of the eleven direct and
indirect subsidiaries of the STEAG Semiconductor Division. The allocation of the
purchase price to the assets acquired and liabilities assumed based on
preliminary estimates of fair value, which are subject to final adjustment, is
as follows (in thousands):
Net tangible assets ........................ $ 109,054
Acquired developed technology .............. 18,100
Acquired workforce ......................... 11,500
Goodwill ................................... 11,766
Acquired in-process research and development 5,400
Deferred tax liability ..................... (7,273)
---------
$ 148,547
=========
7
Purchased intangible assets, including goodwill, workforce and developed
technology of approximately $41.4 million, are being amortized over their
estimated useful lives of seven, three and five years, respectively. The Company
attributed $5.4 million to in-process research and development which was
expensed immediately.
In connection with the acquisition of the STEAG Semiconductor Division, the
Company allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows related to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represent next-generation technologies that
are expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man-month data and
technological progress. The STEAG Semiconductor Division had spent approximately
$3.3 million on the in-process projects, and expected to spend approximately an
additional $2.4 million to complete all phases of the R&D. Anticipated
completion dates ranged from 10 to 18 months, at which times the Company expects
to begin benefiting from the developed technologies.
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from such projects
are based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
Aggregate revenues for the developmental STEAG Semiconductor Division
products were estimated to grow at a compounded annual growth rate of
approximately 41 percent for the seven years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 23 percent was used to value the
in-process R&D. This discount rate was commensurate with the STEAG Semiconductor
Division stage of development and the uncertainties in the economic estimates
described above.
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
8
CFM Technologies
Under the Plan of Merger with CFM, the Company agreed to acquire CFM in a
stock-for-stock merger in which the Company issued 0.5223 shares of its common
stock for each share of CFM common stock outstanding at the closing date. In
addition, the Company agreed to assume all outstanding CFM stock options, based
on the same 0.5223 exchange ratio. The Company also agreed to issue additional
options to purchase 500,000 shares of its common stock to employees of CFM
subsequent to the closing of the transaction. On January 1, 2001, the Company
completed its acquisition of CFM. The purchase price included 4,234,335 shares
of Mattson common stock valued at approximately $150.2 million and the issuance
of 1,763,678 options to acquire Mattson common stock for the assumption of
outstanding options to purchase CFM common stock valued at approximately $20.4
million using the Black Scholes option pricing model and the following
assumptions: risk free interest rate of 6.5%, average expected life of 2 years,
dividend yield of 0% and volatility of 80%.
The merger has been accounted for under the purchase method of accounting
and the results of operations of CFM were included in the consolidated statement
of operations of the Company from the date of acquisition. The purchase price of
the acquisition of CFM was $175 million, which included $3.9 million of
estimated direct acquisition related costs. The allocation of the purchase price
to the assets acquired and liabilities assumed based on preliminary estimates of
fair value, which are subject to final adjustment, is as follows (in thousands):
Net tangible assets ............................. $ 30,347
Acquired developed technology ................... 50,500
Acquired workforce ............................. 14,700
Goodwill ........................................ 91,188
Acquired in-process research and development .... 4,700
Deferred tax liability .......................... (16,864)
--------
$174,571
========
Purchased intangible assets, including goodwill, workforce and developed
technology of approximately $156.4 million are being amortized over their
estimated useful lives of seven, three and five years, respectively. The Company
attributed $4.7 million to in-process research and development which was
expensed immediately.
In connection with the acquisition of CFM, the Company allocated
approximately $4.7 million of the purchase price to an in-process research and
development project. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to one incomplete research and development
project. At the date of acquisition, the development of this project had not yet
reached technological feasibility, and the research and development in progress
had no alternative future use. Accordingly, the purchase allocated to in-process
research and development was expensed as of the acquisition date.
At the acquisition date, CFM was conducting design, development,
engineering and testing activities associated with the completion of the O3Di
(Ozonated Water Module). The project under development at the valuation date
represents next- generation technology that is expected to address emerging
market demands for more effective, lower cost, and safer resist and oxide
removal processes. At the acquisition date, the technology under development was
approximately 80 percent complete based on engineering man-month data and
technological progress. CFM had spent approximately $0.2 million on the
in-process project, and expected to spend approximately an additional $50,000 to
complete all phases of the research and development. Anticipated completion
dates ranged from 2 to 3 months, at which times the Company expects to begin
benefiting from the developed technology.
9
In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from the project
is based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
Aggregate revenues for the developmental CFM product were estimated for the
five to seven years following introduction, assuming the successful completion
and market acceptance of the major research and development programs. The
estimated revenues for the in-process project was expected to peak within two
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental project, a discount rate of 23 percent was used to value the
in-process research and development. This discount rate was commensurate with
CFM's stage of development and the uncertainties in the economic estimates
described above.
If this project is not successfully developed, the sales and profitability
of the combined company may be adversely affected in future periods.
Additionally, the value of other acquired intangible assets may become impaired.
In light of the current industry slowdown and the declining bookings of the
acquired entities, the Company is monitoring the possibility of impairment of
the acquired goodwill and intangible assets related to the acquisitions. If
bookings and the economic outlook do not improve, the Company is faced with the
risk of impairment of the acquired goodwill and intangible assets.
The following table presents the unaudited pro forma results for the three
and six months ended June 25, 2000 assuming that the Company acquired the STEAG
Semiconductor Division and CFM on January 1, 2000. The pro forma information
does not purport to be indicative of what would have occurred had the
acquisitions been made as of January 1, 2000 or of the results that may occur in
the future. Net loss excludes the write-off of acquired-in-process research and
development of $10.1 million and includes amortization of goodwill and
intangibles related to these acquisitions of $20.0 million for the six months
ended June 25, 2000. The unaudited pro forma information is as follows (in
thousands, except net loss per share):
Three Months Six Months
Ended Ended
JUNE 25, 2000 JUNE 25, 2000
------------- -------------
Net sales $ 116,904 $ 199,721
Net loss $ (38,717) $ (76,661)
Net loss per share $ (1.02) $ (2.10)
10
Note 4 Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001 the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities", as amended. Prior to this the Company did not employ hedge
accounting and therefore all hedging contracts were measured at fair value. As a
result, the Company did not have a transition adjustment related to the fair
value of derivatives upon adoption, and the impact of adoption of this standard
was immaterial to the Company.
The Company maintains a foreign currency risk management strategy that uses
derivative instruments to protect it from unanticipated fluctuations in earnings
and cash flows caused by volatility in currency exchange rates. The Company uses
forward foreign exchange contracts to hedge forecasted intercompany Yen sales by
matching terms of currency, amount and maturity based on purchase orders. The
Company also hedges existing foreign intercompany receivables until collections
are received. The maximum time horizon the Company hedges its exposure to the
variability in future cash flows for forecasted transactions or receivables is
less than one year.
Certain hedging instruments have been designated as cash flow hedges under
SFAS No. 133. The Company formally documents all designated hedging instruments
and their relationship to respective hedged items, including its risk management
strategy, hedged risk, assessment of hedge effectiveness and method for
recognizing hedge results in earnings. The Company assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in the cash flow
of hedged items. In situations where the Company is hedging existing foreign
currency receivables, the Company has decided not to designate the contracts in
hedging relationships. Although the hedges will be economically effective at
offsetting changing cash flows from collecting the foreign receivables, the
Company believes that the financial reporting results will be similar as if they
designated the contracts.
The Company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value of a hedged item; (2) the derivative expires, is terminated or
exercised, or (3) the derivative is discontinued as a hedge instrument, because
it is unlikely that a transaction will occur. As of July 1, 2001, the Company
has not discontinued any cash flow hedges.
The Company records the foreign currency forward contracts as either an
asset/liability on the balance sheet at fair value. If the contract has been
designated and is effective as a cash flow hedge, the change in fair value is
recorded to accumulated other comprehensive income. The Company immediately
recognizes into earnings any hedge ineffectiveness. In the same period that the
hedged item affects earnings, the Company reclassifies the results of the hedge
from accumulated other comprehensive income into earnings. For the six months
ended July 1, 2001, the Company recorded changes in the fair value of the
derivatives of approximately $270,000 as in increase to other assets and
accumulated other comprehensive income, respectively. For undesignated forward
foreign exchange contracts, the change in fair value is recorded in other
expense every period. Generally, this had the effect of offsetting the losses
recognized from remeasuring foreign currency denominated receivables for the
period.
The Company anticipates shipment of the open purchase orders during fiscal
2001 to its Japanese subsidiary for which it designated cash flow hedges. When
these sales are recognized, it will result in a reclassification of the balance
in accumulated other comprehensive income, which is currently $270,000. This is
anticipated to occur within the next twelve months.
11
Note 5 Net Loss Per Share
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share on the face of the income statement. Basic EPS is computed by dividing
income (loss) 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. All amounts in the following table are in thousands except
per share data.
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUL. 1, JUN. 25, JUL. 1, JUN. 25,
2001 2000 2001 2000
-------- ------- -------- --------
NET INCOME (LOSS) $(33,115) $ 2,856 $(82,741) $ (3,520)
BASIC INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $(33,115) $ 2,856 $(82,741) $ (3,520)
Weighted average common shares outstanding 36,804 19,877 36,709 18,370
-------- ------- -------- --------
Basic income (loss) per share $ (0.90) $ 0.14 $ (2.25) $ (0.19)
======== ======= ======== ========
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders $(33,115) $ 2,856 $(82,741) $ (3,520)
Weighted average common shares outstanding 36,804 19,877 36,709 18,370
Diluted potential common shares from stock options - 2,052 - 2,052
-------- ------- -------- --------
Weighted average common shares and dilutive
potential common shares 36,804 21,929 36,709 20,422
-------- ------- -------- --------
Diluted income (loss) per share $ (0.90) $ 0.13 $ (2.25) $ (0.17)
======== ======= ======== ========
Total stock options outstanding at July 1, 2001 and June 25, 2000 of
1,035,259 and 101,725, respectively, were excluded from the computation of
diluted EPS because the effect of including them would have been anitdilutive
due to the loss available to common stockholders.
12
Note 6 Comprehensive Income (Loss)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." 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 Company's comprehensive
income includes net income, foreign currency translation adjustments and
unrealized gains and losses on investments and foreign currency hedges, and is
presented in the statement of stockholders' equity.
The following are the components of comprehensive income (loss):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUL. 1, JUN. 25, JUL. 1, JUN. 25,
(in thousands) 2001 2000 2001 2000
-------- ------- -------- --------
Net income (loss) $(33,115) $ 2,856 $(82,741) $ (3,520)
Foreign currency translation adjustments (5,034) (26) (9,518) (33)
Unrealized investment gain (loss) (293) - 10 -
Gain (loss) on cash flow hedging instruments (62) - 270 -
-------- ------- -------- --------
Comprehensive income (loss) $(38,504) $ 2,830 $(91,979) $ (3,553)
======== ======= ======== ========
The components of accumulated other comprehensive loss, net of related tax
are as follows:
JUL. 1, DEC. 31,
(in thousands) 2001 2000
--------- --------
Cumulative translation adjustments $ (9,776) $ (258)
Unrealized investment gain 87 77
Gain on cash flow hedging instruments 270 -
-------- -------
$ (9,419) $ (181)
======== =======
Note 7 Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" approach with the
"management" approach. SFAS No. 131 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. Brad Mattson, Chief Executive Officer of
the Company, is the Company's chief operating 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. International sales, which are
predominantly to customers based in Europe, Japan and the Pacific Rim (which
includes Taiwan, Singapore and Korea), accounted for 87.8% and 66.3% of net
sales for the second quarter of 2001 and 2000, respectively, before the effects
of SAB 101.
13
Note 8 Line of Credit
During fiscal 2000, one of the subsidiaries that the Company acquired as
part of the acquisition of the STEAG Semiconductor Division entered into a
two-year revolving line of credit with a bank in Japan in the amount of 500
million Yen (approximately $4.0 million), expiring in September 2002. Under this
line of credit, the current borrowing is 450 million Yen (approximately $3.6
million) and bears interest at a per annum rate equal to 1.96% through March
2001 and thereafter bears an interest rate of 1.75%. The line of credit is
secured by a letter of credit.
Additionally, a Japanese subsidiary entered into a credit line with Bank of
Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $7.3 million)
secured by trade accounts receivable. The line bears interest at a per annum
rate of TIBOR plus 75 basis points which is currently 0.81%. The term of the
line is valid through December 28, 2001. It is guaranteed by the Company.
Note 9 Revenue Recognition
Mattson derives revenue from two primary sources- equipment sales and spare
part sales. In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company implemented the provisions of SAB 101 in the fourth
quarter of 2000, retroactive to January 1, 2000. The Company previously
recognized revenue from the sales of its products generally upon shipment.
Effective January 1, 2000, the Company changed its method of accounting for
equipment sales to recognize the corresponding revenues as follows: 1) for
equipment sales of existing products with new specifications or acceptance
clauses to a new customer, and for all sales of new products, revenue is
recognized upon customer acceptance; 2) for equipment sales to existing
customers, who have purchased the same equipment with the same customer
specified and previously demonstrated acceptance provisions, the lesser of the
fair value of the equipment or the contractual amount billable upon shipment is
recorded as revenue upon title transfer. The remainder is recorded as advance
billings and deferred revenue and recognized as revenue upon customer
acceptance. From time to time, however, the Company allows customers to evaluate
systems, and since customers can return such systems at any time with limited or
no penalty, the Company does not recognize revenues until these evaluation
systems are accepted by the customer. Revenues associated with equipment sales
to customers in Japan are generally deferred until customer acceptance unless
sold through the Company's Japanese distributor. Revenue recognition for spare
part sales is recognized upon shipment and has generally not changed under the
provisions of SAB 101. In all cases, revenue is only recognized when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the seller's price is fixed or determinable and collectibility is
reasonably assured. The cumulative effect of the change in accounting principle
of $8.1 million is reported as a loss in the first quarter of 2000. The
cumulative effect of the change in accounting principle includes system revenue
net of cost of sales and certain expenses, including warranty and commission
expenses, that will be recognized when the conditions for revenue recognition
are met. We restated our operating results for the first three quarters of the
year ended December 31, 2000, as reflected in the Quarterly Results of
Operations reported in our Form 10-K for the year ended December 31, 2000.
Service and maintenance contract revenue, which to date has been
insignificant, is recognized on a straight-line basis over the service period of
the related contract.
14
Note 10 Other Items
In February 2001, the Company announced plans to divest or shut-down its
single-wafer RT-CVD business unit, previously known as STEAG CVD Systems. The
business unit, which was acquired as part of the STEAG Semiconductor Division,
included lamp-based RT-CVD tools that do not fit with its strategic roadmap for
thermal and CVD products.
During the second fiscal quarter of 2001, in response to continued
reductions in capital spending by semiconductor manufacturers, the Company took
actions to reduce headcount. In connection with these actions, the Company
reduced its workforce by 172 employees, or approximately 9 percent. The affected
employees were based in the US and Asia, and represented multiple company
activities and functions.
A major restructuring project was initiated May 2001 to reduce costs.
Twelve key areas have been identified and are being implemented. The cost
cutting measures included a significant headcount reduction, shorter workweek
and a 10% pay cut for executives. With the continuing down-turn in the
semiconductor industry and the economy, the Company will be enforcing further
cost-cutting measures including further headcount reduction, shutdown weeks,
shorter workweek, and consolidation of facilities. These additional
restructuring measures will be recorded as expenses in the third quarter of
2001.
Note 11 Business Combinations, Goodwill and Intangibles
On June 29, 2001, the Financial Accounting Standard Board (FASB) approved
for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". Major provisions of these Statements are as
follows: all business combinations initiated after June 30, 2001 must use the
purchase method of accounting; the pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001; intangible
assets acquired in a business combination must be recorded separately from
goodwill if they arise from contractual or other legal rights or are separable
from the acquired entity and can be sold, transferred, licensed, rented or
exchanged, either individually or as part of a related contract, asset or
liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment annually using a fair value approach,
except in certain circumstances, and whenever there is an impairment indicator;
other intangible assets will continue to be valued and amortized over their
estimated lives; in-process research and development will continue to be written
off immediately; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting; effective January 1, 2002,
existing goodwill will no longer be subject to amortization. Goodwill arising
between June 29, 2001 and December 31, 2001 will not be subject to amortization.
The Company is currently reviewing goodwill and other intangible assets to
determine whether recent economic events and the Company's recently announced
restructuring plans have resulted in impairment.
Upon adoption of SFAS No. 142, on January 1, 2002, the Company will no
longer amortize goodwill, thereby eliminating annual goodwill amortization of
approximately $14.0 million, based on anticipated amortization for 2002.
Amortization of goodwill for the six months ended July 1, 2001 was approximately
$7.0 million.
Note 12 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.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
report. In addition to historical information, this discussion contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth or
incorporated by reference under "Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this report.
Overview
We are a leading supplier of advanced, high productivity semiconductor
processing equipment used in the fabrication of integrated circuits. We provide
our customers with semiconductor manufacturing equipment that delivers high
productivity and advanced process capability. In addition, through our
international technical support organization and comprehensive warranty program,
we provide global customer support.
We began operations in 1989 and in 1991 we shipped our first product, the
Aspen Strip, a photoresist removal system. Our Aspen Strip, CVD, RTP and
LiteEtch product lines are based on a common Aspen platform with a modular,
multi-station, multi-chamber architecture, designed to deliver high
productivity, low cost of ownership and savings of cleanroom space. On January
1, 2001 we completed a business combination under the purchase method of
accounting with the semiconductor equipment division of STEAG Electronic Systems
AG ("the STEAG Semiconductor Division") and a merger with CFM Technologies, Inc.
("CFM") (we refer to these related acquisitions together as "the Merger"). The
three combined companies had pro forma 2000 revenues in excess of $500 million,
which made us the 14th largest semiconductor processing equipment supplier. As a
result of the merger, we offer industry-leading products and technologies in
multiple product lines, and we employ approximately 1,800 people worldwide.
Before the merger, we were already the world leader in dry strip process
equipment market share. With the addition of the RTP product line from the STEAG
Semiconductor Division and the combination of CFM and STEAG Semiconductor
Division wet technology tools, we are now second in rapid thermal processing
("RTP") market share and among the top five providers of wet processing
equipment. Our products now include strip, etch, deposition, rapid thermal
processing, wet and Epi systems. Our customers include nine of the top ten
semiconductor manufacturers worldwide.
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 had one of its best years ever in 2000, but signs of a
downturn became apparent towards the end of that year and have resulted in
significantly lower predictions for 2001. The cyclicality and uncertainties
regarding overall market conditions continue to present significant challenges
to us and impair our ability to forecast near term revenue. Our ability to
quickly modify our operations in response to changes in market conditions is
limited.
During the second quarter ended July 1, 2001, we had a net loss of $33.1
million. Future results will depend on a variety of factors, particularly
overall market conditions and timing of significant orders, 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 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 results.
16
Results of Operations
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the period indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
JUL. 1, JUN. 25, JUL. 1, JUN. 25,
(in thousands) 2001 2000 2001 2000
-------- ------- -------- --------
Net sales 100% 100% 100% 100%
Cost of sales 74% 52% 71% 53%
-------- -------- -------- --------
Gross profit 26% 48% 29% 47%
-------- -------- -------- --------
Operating expenses:
Research, development and engineering 20% 15% 23% 16%
Selling, general and administrative 36% 29% 40% 28%
In-process research and development - - 6% -
Amortization of goodwill and intangibles 12% - 13% -
-------- -------- -------- --------
Total operating expenses 68% 44% 82% 43%
-------- -------- -------- --------
Income (loss) from operations (41)% 4% (53)% 4%
Interest and other income, net 2% 3% 1% 2%
-------- -------- -------- --------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting
principle (40)% 7% (52)% 6%
Provision for income taxes - (1)% (1)% (1)%
-------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle (40)% - (53)% 5%
-------- -------- -------- --------
Cumulative effect of change in accounting principle,
net of tax - - - (10)%
-------- -------- -------- --------
Net income (loss) (40)% 6% (53)% (4)%
======== ======== ======== ========
17
Net Sales
Net sales for the second quarter of 2001 were $82.0 million. We estimate
that on a pro forma basis for the three months ended June 25, 2000, assuming
that we had acquired the STEAG Semiconductor Division and CFM on January 1,
2000, the combined company would have had net sales of $116.9 million, so that
net sales in the second quarter of 2001 would reflect a decrease of 29.9%.
Net sales for the first six months of 2001 were $155.5 million on a
consolidated basis. We estimate that on a pro forma basis for the first six
months ended June 25, 2000, assuming that we had acquired the STEAG
Semiconductor Division and CFM on January 1, 2000, the combined company would
have had net sales of $199.7 million, so that net sales in the first six months
of 2001 would reflect a decrease of 22.1%.
The decrease in the three and six months net sales is due to the economic
downturn in the semiconductor industry and also the timing effects of revenue
recognition based on our shipments to Japan effected by SAB 101, where the
time-lag between shipment and customer acceptance can exceed one year. Until the
second quarter of 2000 sales to Japan were made through our distributor in Japan
and revenue was recognized upon shipment. Approximately 8.0% of our shipments in
the second quarter of 2001 were to Japan-based customers and corresponding net
sales were deferred in accordance with our revenue recognition policy.
In addition, a significant amount of net sales by the STEAG Semiconductor
Division and CFM in the first and second quarters of 2001 were deferred due to
the complexities of the equipment shipped and the associated acceptance clauses
in accordance with our revenue recognition policy. Our deferred revenue at the
end of the second quarter of 2001 was approximately $107.8 million, up from
$93.5 million at the end of the first quarter of 2001. We expect these deferred
revenues to be recognized as revenue in our consolidated statement of operations
in the next six to twelve months. Under the rules of the purchase method of
accounting, no deferred revenues relating to sales by the acquired entities are
carried over-through the acquisition. As a result, it will take several quarters
of combined operations before our net sales results normalize and our prior
periods can be compared across reporting periods.
Second quarter bookings were $45.8 million, a decrease of 30.3% compared to
bookings of $65.7 million in the second quarter of 2000, resulting in a book to
bill ratio of 0.50 to 1.0. Backlog decreased 60.1% to $34.5 million in the
second quarter of 2001 compared to $86.5 million in the second quarter of 2000.
These decreases are attributed to the slow-down in the semiconductor industry.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea),
accounted for 87.8% and 66.3% of net sales for the second quarter of 2001 and
2000, respectively, before the effects of SAB 101. In the second quarter of
2000, we shifted our strategy in Japan to a direct sales model and terminated
our distributor relationship with Marubeni. We anticipate that international
sales will continue to account for a significant portion of net sales for 2001.
Gross Margin
Our gross margin for the second quarter of 2001 decreased to 26.2% from
48.2% for the second quarter of 2000. Our gross margin for the first six months
of 2001 decreased to 28.7% from 47.1% for the first six months of 2000. The
decrease in gross margins was principally due to the under absorption of our
production facilities. We currently have excess production capacity as a result
of the drop in sales and bookings combined with our recent acquisition of
additional production capacity at STEAG and CFM.
Our gross margins for the six months ended July 1, 2001 were also adversely
affected by the write-up of inventory to fair value as a part of the acquisition
Accounting Principles Board Opinion No. 16 "Business Combinations". The effect
of this write-up is expected to continue into future quarters since many of the
systems that were written up are now being deferred under SAB 101 revenue
recognition rules.
18
Our gross margin has varied over the years and will continue to vary based
on multiple factors including effects of revenue recognition under SAB 101, our
product mix, economies of scale, overhead absorption levels, and costs
associated with the introduction of new products. Although we have not offered
substantial discounts on our systems to date, with the downturn in the
semiconductor industry we are experiencing pricing pressures. Our gross margin,
for each of our product divisions, on international sales is substantially the
same as domestic sales.
We believe that our inventories will be realized at our current level of
sales. Any further reductions in our bookings may cause us to record a charge
for excess inventory.
Research, Development and Engineering
Research, development and engineering expenses for the second quarter of
2001 were $16.1 million, or 19.6% of net sales, as compared to $6.9 million, or
15.4% of net sales, for the second quarter of 2000. The increase was due to
additional personnel and spending resulting from the merger. Total research,
development and engineering expenses declined from $18.9 million for the first
three months ended April 1, 2001, as a result of reductions in workforce and
cost controls put in place during the second quarter. The increase in research,
development and engineering expenses, as a percentage of net sales during the
second quarter of 2001 compared to the same period last year is due to the
decrease in sales.
Research, development and engineering expenses for the six months ended
July 1, 2001 were $35.0 million, or 22.5% of net sales, compared to $13.2
million, or 15.6% of net sales. The increase in expenses was the result of the
additional research, development and engineering resources added by the STEAG
and CFM merger.
Selling, General and Administrative
Selling, general and administrative expenses for the second quarter of 2001
were $29.8 million, or 36.3% of net sales, as compared to $12.9 million, or
29.0% of net sales, for the second quarter of 2000. The increase was due to
additional personnel, spending and professional expenses for integration
resulting from the merger. The increase in selling, general and administrative
expenses as a percentage of net sales during the second quarter of 2001 as
compared to the same period last year is due to the decrease in sales during the
second quarter of 2001, and higher expenses related to the integration of the
acquisitions. Total selling, general and administrative expenses decreased from
$31.9 million in the first three months ended April 1, 2001, as a result of
reductions in workforce and cost controls put in place during the second
quarter.
For the six months ended July 1, 2001, the selling, general and
administrative expenses were $61.7 million, or 39.7% of net sales, as compared
to $23.5 million, or 27.8% of net sales for the same period in fiscal 2000. The
increase in expenses for the six month period of 2001 over 2000 was the result
of the additional selling, general and administrative resources added by the
STEAG and CFM merger.
STEAG Semiconductor Division's In-Process Research and Development
In connection with the acquisition of the STEAG Semiconductor Division, we
allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows related to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represent next-generation technologies that
are expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man-month data and
technological progress. The STEAG Semiconductor Division had spent approximately
$3.3 million on the in-process projects, and expected to spend approximately an
additional $2.4 million to complete all phases of the R&D. Anticipated
completion dates ranged from 10 to 18 months, at which times we expect to begin
benefiting from the developed technologies.
19
In making our purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects are based on our
management's estimates of cost of sales, operating expenses, and income taxes
from such projects.
Aggregate revenues for the developmental STEAG Semiconductor Division
products were estimated to grow at a compounded annual growth rate of
approximately 41 percent for the seven years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 23 percent was used to value the
in-process R&D. This discount rate was commensurate with the STEAG Semiconductor
Division stage of development and the uncertainties in the economic estimates
described above.
If these projects are not successfully developed, our sales and profitability
may be adversely affected in future periods. Additionally, the value of other
acquired intangible assets may become impaired.
CFM's In-Process Research and Development
In connection with the acquisition of CFM we allocated approximately $4.7
million of the purchase price to the in-process research and development
project. This allocation represented the estimated fair value based on risk-
adjusted cash flows related to the incomplete research and development project.
At the date of acquisition, the development of this project had not yet reached
technological feasibility, and the research and development in progress had no
alternative future use. Accordingly, the purchase price allocated to in-process
research and development was expensed as of the acquisition date.
At the acquisition date, CFM was conducting design, development,
engineering and testing activities associated with the completion of the O3Di
(Ozonated Water Module). The project under development at the valuation date
represents next- generation technology that is expected to address emerging
market demands for more effective, lower cost, and safer resist and oxide
removal processes. At the acquisition date, the technology under development was
approximately 80 percent complete based on engineering man-month data and
technological progress. CFM had spent approximately $0.2 million on the
in-process project, and expected to spend approximately an additional $0.05
million to complete all phases of the research and development. Anticipated
completion dates ranged from 2 to 3 months, at which times we expect to begin
benefiting from the developed technology.
In making our purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
us and our competitors. The resulting net cash flows from such projects are
based on management's estimates of cost of sales, operating expenses, and income
taxes from such projects.
Aggregate revenues for the developmental CFM product were estimated for the
five to seven years following introduction, assuming the successful completion
and market acceptance of the major R&D programs. The estimated revenues for the
in-process projects were expected to peak within two years of acquisition and
then decline sharply as other new products and technologies are expected to
enter the market.
20
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental project, a discount rate of 23 percent was used to value the
in-process research and development. This discount rate was commensurate with
CFM's stage of development and the uncertainties in the economic estimates
described above.
If this project is not successfully developed, our sales and profitability
may be adversely affected in future periods. Additionally, the value of other
acquired intangible assets may become impaired. In light of the current industry
slowdown and the disappointing bookings of the acquired CFM entities in the
first and second quarters of fiscal 2001, we are monitoring the possibility of
goodwill impairment related to the CFM acquisition. We expect to reach a
decision on impairment based on bookings results of the third quarter of 2001.
Amortization of Goodwill and Intangibles
Goodwill and intangibles represent the purchase price of the STEAG
Semiconductor Division and CFM in excess of identified tangible assets. In
connection with the Merger effective January 1, 2001, we recorded $197.8 million
of goodwill and intangibles which are being amortized on a straight-line basis
over three to seven years. The allocation of total purchase price to assets
acquired and liabilities assumed are based on preliminary estimates of fair
value which are subject to final adjustment. We recorded amortization expense of
$20.0 million for the six months ended July 1, 2001. We are evaluating the
carrying value of the goodwill and identifiable intangibles for impairment, to
determine if events and circumstances indicate if the values have been impaired.
There can be no assurance that the value of the goodwill and intangible assets
may not become impaired prior to being fully amortized. Upon adoption of SFAS
142 on January 1, 2002, we will no longer amortize goodwill. We are currently
reviewing goodwill and other intangible assets to determine whether recent
economic events and our recently announced restructuring plans have resulted in
impairment.
Provision for Income Taxes
We recorded a provision for income taxes for the quarter ended July 1, 2001
of approximately $0.4 million, and approximately $2.4 million for the six months
ended July 1, 2001 which consisted primarily of income taxes in foreign
jurisdictions. We believe, based on recent tax research that were completed,
that we were able to allocate certain costs to some of our foreign production
facilities. The costs will include certain administrative expenses and expenses
related to intellectual property. As a result of this allocation, the foreign
tax provision has been reduced to reflect the cost allocations.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash and short-term investments
were $85.0 million at July 1, 2001, a decrease of $19.2 million from $104.2
million at December 31, 2000. Stockholders' equity at July 1, 2001 was
approximately $392.1 million.
During fiscal 2000, one of the subsidiaries that we acquired as part of the
STEAG Semiconductor Division entered into a two-year revolving line of credit
with a bank in Japan in the amount of 500 million Yen (approximately $4.0
million), expiring in September 2002. Under this line of credit, the current
borrowing is 450 million Yen (approximately $3.6 million) which bears interest
at a per annum rate equal to 1.96% through March 2001 and thereafter bears an
interest rate of 1.75%. The line of credit is secured by a letter of credit.
Additionally, a Japanese subsidiary entered in to a credit line with Bank
of Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $7.3M)
secured by trade accounts receivable. The line bears interest at a per annum
rate of TIBOR plus 75 basis points which is currently 0.81%. The term of the
line is valid through December 28, 2001. It is guaranteed by the Company.
Net cash used in operating activities was $56.2 million during the six
months ended July 1, 2001 as compared to $12.9 million during the same period
last year. The net cash used in operating activities during the six months ended
July 1, 2001 was primarily attributable to the net loss of $82.7 million, an
increase in inventories and inventories awaiting customer acceptance of $34.7
million, a decrease in accrued liabilities of $37.9 million and a decrease in
accounts payable of $7.6 million. Non-cash items included depreciation and
amortization charges of $10.8 million, amortization of goodwill and intangibles
of $20.0 million, acquired in-process research and development of $10.1 million
and an increase in deferred revenue of $63.9 million. Net cash used in operating
activities was $12.9 million during the six months ended June 25, 2000 and was
primarily due to an increase in accounts receivable and advance billings of
$19.9 million, inventories of $11.1 million and a net loss of $3.5 million. The
increases were offset by the cumulative effect of accounting change of $8.1
million, the net income of $3.5 million and depreciation and amortization
expense of $2.7 million.
21
Net cash provided by investing activities was $52.1 million during the six
months ended July 1, 2001 as compared to net cash used in investing activities
of $2.5 million during the same period last year. The net cash provided by
investing activities during the six months ended July 1, 2001 is attributable to
the net cash acquired from the acquisition of the STEAG Semiconductor Division
and CFM of $38.0 million, sales of investments of $24.5 million, offset by
purchases of property and equipment of $10.4 million. Net cash used in investing
activities of $2.5 million during the six months ended June 25, 2000 was
attributable to the purchase of property and equipment of $2.5 million.
Net cash provided by financing activities was $14.2 million during the six
months ended July 1, 2001 as compared to $124 million during the same period
last year. The net cash provided by financing activities during the six months
ended July 1, 2001 is primarily attributable to the borrowings, net of
repayments, on a line of credit of $11.0 million, and proceeds from our stock
plans of $3.2 million. Net cash provided by financing activities was $124
million during the six months ended June 25, 2000 and was primarily attributable
to the completion of our follow on public offering of 3,000,000 shares of common
stock on March 8, 2000. The public offering price was $42.50 per share before
offering costs. This increase was offset by a $3.0 million repayment against our
line of credit.
Upon the closing of the acquisition of the STEAG Semiconductor Division on
January 1, 2001, Mattson issued to STEAG Electronic Systems AG ("SES") a secured
promissory note, due July 2, 2001, in the principal amount of $26.1 million, to
offset the amount of outstanding working capital loans from SES to the STEAG
Semiconductor Division at the time of closing. Our restricted cash balance at
July 1, 2001 is intended to cover the full obligation for this payment. In
accordance with the Combination Agreement to acquire the STEAG Semiconductor
Division, we are also required to make a payment, estimated to be 37.6 million
Deutsche Marks (approximately $18.1 million as of January 1, 2001, and $16.3
million as of July 1, 2001) to SES to satisfy an obligation to cause two
acquired subsidiaries to pay certain amounts based on their profits for 2000 to
SES. Both obligations were expected to be settled in the second quarter of 2001,
however, we are re-negotiating the terms of the obligations with SES. In April
2001 we reimbursed SES $3.3 million in acquisition related costs.
Based on current projections, we believe that our current cash and
investments positions will be sufficient to meet our anticipated cash needs for
the remainder of 2001. However, it is possible that we may require additional
financing within this period, particularly if the general economic downturn
continues to negatively affect our revenues, or if we elect to acquire
complementary businesses. Management's projections are based on the ability to
manage inventories, collect our accounts receivable balances in this market
downturn, and to obtain a favorable outcome of the re-negotiation of the terms
of the obligations with SES. If we are unable to manage our inventory or
accounts receivable balances or obtain a favorable outcome of the re-negotiation
of the terms of the obligations with SES, we may be required to seek alternative
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 also, these equity
securities may have rights, preferences or privileges senior to our common
stock. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants on our operations and financial condition.
Mergers and Acquisitions
On January 1, 2001, we completed the acquisition of the STEAG Semiconductor
Division for a total purchase price of $148.5 million. We were obligated to make
additional cash payments of approximately $42.5 million by July 2001, for which
we are currently renegotiating the terms of the obligation, with Steag AG, a
shareholder.
On January 1, 2001, we also completed the acquisition of CFM for a total
purchase price of $174.6 million.
In April 2001, we acquired 97% of the outstanding shares of R.F. Services,
Inc. for a cash price of $928,800 (including acquisition related costs of
$41,500). Brad Mattson, Chief Executive Officer of the Company, owned a majority
of the outstanding shares of R.F. Services, Inc. and served as a director of
that company.
22
Factors That May Affect Future Results and Market Price of Stock
In this report and from time to time, we may make forward looking
statements regarding, among other matters, our future strategy, product
development plans, productivity gains of our products, financial performance and
growth. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements address matters which are subject to a number of risks and
uncertainties, including those set forth in our Annual Report on Form 10-K, and
Exhibit 99.1 hereto, all of which are incorporated here by reference, and the
following:
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY WHICH CAN
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US
TO FAIL TO ACHIEVE ANTICIPATED SALES.
Our business, including the recently acquired businesses of the STEAG
Semiconductor Division and CFM, have depended in significant part upon capital
expenditures by manufacturers of semiconductor devices, including manufacturers
that are opening new or expanding existing fabrication facilities. The level of
capital expenditures by these manufacturers of semiconductor devices depends
upon the current and anticipated market demand for such devices and the products
utilizing such devices. The semiconductor industry is highly cyclical. Following
the very strong year in 2000, the semiconductor industry now faces a significant
downturn in 2001, and we and other industry participants are experiencing
significant order delays and cancellations. The severity and duration of the
downturn are unknown. When these downturns occur, we may experience reduced or
delayed sales and our operating results and financial condition may be adversely
affected. We anticipate that a significant portion of new orders will continue
to depend upon demand from semiconductor manufacturers and independent foundries
that build or expand large fabrication facilities. If existing fabrication
facilities are not expanded or new facilities are not built, demand for our
systems may not develop or increase, and we may be unable to generate
significant new orders for our systems. If we are unable to develop new orders
for our systems, we will not achieve anticipated net sales levels. Any future
downturns or slowdowns in the semiconductor industry will materially and
adversely affect our net sales and operating results. Following the acquisition
of the STEAG Semiconductor Division and CFM, we are a larger, more
geographically diverse company and may be less able to react quickly to the
cyclicality of the semiconductor business, particularly in Europe and in other
regions with restrictive laws relating to termination of employees.
OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT
OF ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
We intend to base our operating expenses on anticipated revenue levels, and
a substantial percentage of our expenses may be fixed in the short term. 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. Our quarterly
revenue and operating results have varied significantly in the past and may vary
significantly in the future due to a number of factors, including:
. difficulty of assimilating the operations, products and personnel of
the acquired businesses, particularly where these involve
international operations;
. market acceptance of our systems and the products of our customers;
. substantial changes in revenues from significant customers;
. increased manufacturing overhead expenses due to reductions in the
number of systems manufactured;
. timing of announcement and introduction of new systems by us and our
competitors;
. sudden changes in component prices or availability;
. changes in product mix;
. delays in orders due to customer financial difficulties;
. manufacturing inefficiencies caused by uneven or unpredictable order
patterns, reducing our gross margins; and
. higher fixed costs due to increased levels of research and development
or patent litigation costs and expansion of our worldwide sales and
marketing organization.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.
23
WE MAY BE REQUIRED TO TAKE A CHARGE TO EARNINGS AS A RESULT OF THE
IMPAIRMENT OF GOODWILL ACQUIRED THROUGH THE TRANSACTIONS WITH CFM.
In light of the current industry slowdown and disappointing bookings of the
acquired entities, we are evaluating the carrying value of the goodwill and
intangible assets for impairment to determine if events and circumstances
indicate that the values have been impaired.
WE MAY NEED ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE, AND WHICH COULD
BE DILUTIVE TO EXISTING STOCKHOLDERS.
Based on current projections, we believe that our current cash and
investments positions along with cash generated through operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least 12 months. However, it is possible that we may require
additional financing within this period, particularly if the general economic
downturn continues to negatively affect our revenues, of if the elect to acquire
complementary businesses. Management's projections are based on the ability to
manage inventories, collect our accounts receivable balances in this market
downturn, (and obtain extension for the payment obligations to SES,) we may be
required to seek alternative 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. In
addition, these equity securities may have rights, preferences or privileges
senior to our common stock. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants on our operations and financial condition.
GIVEN THE RECENT ECONOMIC DOWNTURN, WE ARE EXPOSED TO THE RISKS ASSOCIATED
WITH INDUSTRY OVERCAPACITY, INCLUDING DECREASED DEMAND FOR OUR PRODUCTS AND
THE INABILITY OF MANY OF OUR CUSTOMERS TO PAY FOR OUR PRODUCTS.
As a result pf the recent economic downturn, inventory buildups in
telecommunication products and slower than expected personal computer sales have
resulted in over capacity for semiconductor manufacturers and have caused them
to experience cash flow problems and, thus, reevaluate their capital spending
plans. Continued overcapacity could cause further delays or decreased demand for
our products. In addition, many of these parties are forecasting that their
revenues for the forseeable future will generally be lower than anticipated and
that some of these parties are experiencing or are likely to experience serious
cash flow problems. As a result, if some of these parties are not successful in
generating sufficient revenue or securing alternative financing arrangements, we
may not be able to collect our receivables from those parties. The inability of
some of our potential customers to pay us for our products may adversely affect
our timing of revenue recognition, which may cause our stock price to decline
and materially and adversely affect our business, financial condition and
results of operations.
THE TRANSACTIONS WITH STEAG SEMICONDUCTOR DIVISION AND CFM MAY FAIL TO
ACHIEVE BENEFICIAL SYNERGIES.
We entered into the Merger with the expectation that it would result in
beneficial synergies between and among the semiconductor equipment businesses of
the three combining companies. Achieving these anticipated synergies and their
potential benefits will depend on a number of factors, some of which include:
. our ability to timely develop new products and integrate the products
and sales efforts of the combined company;
. the risk that our customers, CFM's customers and the customers of the
STEAG Semiconductor Division may defer purchasing decisions;
. the risk that it may be more difficult to retain key management,
marketing, and technical personnel after the consummation of the
transactions; and
. competitive conditions and cyclicality in the semiconductor
manufacturing process equipment market.
Even if we are able to integrate operations, there can be no assurance that
the anticipated synergies will be achieved. The failure to achieve such
synergies could have a material adverse effect on our business, results of
operations, and financial condition.
24
TO EFFECTIVELY MANAGE OUR GROWTH AND GREATLY EXPANDED OPERATIONS FOLLOWING
THE COMPLETION OF THE MERGER. WE WILL NEED TO IMPROVE EXISTING AND
IMPLEMENT NEW SYSTEMS, PROCEDURES, AND CONTROLS.
Following consummation of the Merger, we are responsible for integrating
and managing expanded operations, including operations in new geographic
locations, that may place a significant strain on our management information
systems and our administrative, financial, and operational resources. We are
making additional significant investments in research and development to support
product development. We have grown from 349 employees at December 31, 1998, to
443 at December 31, 1999, to 641 employees at December 31, 2000, to over 1,800
employees world-wide on January 1, 2001, following consummation of the Merger.
This expansion will continue to result in substantial demands on our management
resources. To accommodate continued anticipated growth and expansion following
completion of the transactions, we will be required to:
. improve existing, and implement new, operational and financial
systems, procedures, and controls;
. manage the financial and strategic position of the acquired and
developed products, services and technologies;
. hire, train, manage, retain, and motivate qualified personnel;
. and obtain additional facilities and suppliers.
These measures may place additional burdens on our management and internal
resources.
THE STEAG SEMICONDUCTOR DIVISION AND CFM HAVE EXPERIENCED FINANCIAL LOSSES
AND MAY REQUIRE SIGNIFICANT FINANCIAL SUPPORT FROM US.
The STEAG Semiconductor Division and CFM have suffered losses from
operations in recent periods. These acquired businesses may experience further
losses that affect our financial results, reduce our earnings per share, and
require us to fund those businesses to sustain their operations. In addition,
the acquisition of these new businesses could reduce cost efficiencies or
profitability, or result in unanticipated costs. If losses continue at historic
levels for the STEAG Semiconductor Division and CFM, we may be required to use a
significant portion of our cash balances.
OUR REPORTED FINANCIAL RESULTS WILL SUFFER AS A RESULT OF PURCHASE
ACCOUNTING TREATMENT AND THE IMPACT OF AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLES, AND RESTRUCTURING CHARGES RELATING TO THE TRANSACTIONS.
We have accounted for our acquisition of the STEAG Semiconductor Division
and CFM under the purchase method of accounting. Under purchase accounting, we
have recorded the fair value of the consideration given to SES in exchange for
the stock of the subsidiaries comprising the STEAG Semiconductor Division, as
well as the fair value of the consideration given in exchange for the
outstanding CFM common stock and for the outstanding options to purchase CFM
common stock assumed by us, plus the amount of direct acquisition costs, as the
purchase price of STEAG Semiconductor Division and CFM. We allocated the
purchase price to the individual assets and liabilities of the companies being
acquired, including various identifiable intangible assets such as acquired
technology, acquired trademarks and trade names and acquired workforce, and to
in-process research and development, based on their respective fair values.
Intangible assets, including goodwill, will be generally amortized over a three-
to seven- year period. The current allocation of the purchase price to the
assets acquired and liabilities assumed is based on preliminary estimates of
fair value which are subject to final adjustment.
The amount of purchase price allocated to goodwill and other intangibles is
approximately $197.8 million. The goodwill and other intangible assets will be
amortized over 3-7 years and the accounting charge attributable to these items
will be approximately $10 million per quarter or $40 million for the year ending
December 31, 2001. As a result, purchase accounting treatment of the
transactions could have a material adverse effect on the market value of our
common stock following completion of the transactions.
In light of the current industry slowdown and the disappointing bookings of
the acquired CFM entity, the Company is monitoring the possibility of goodwill
impairment related to the CFM entity. The Company expects to reach a decision on
impairment based on bookings results of the third quarter of 2001.
25
A major restructuring project has been initiated in order to improve
internal processes and cut costs. Twelve key areas have been identified and the
implementation has started. The cost cutting measures include a significant
headcount reduction, shorter work week and a 10% pay cut for executives.
We will incur restructuring costs in order to achieve desired synergies
after the transactions, which will adversely impact future financial results.
These restructuring costs could be a result of, but not limited to, the
following:
. severance costs associated with possible headcount reductions due to
duplication; and
. asset write-offs associated with manufacturing and facility
consolidations.
THE TRANSACTIONS WITH STEAG SEMICONDUCTOR DIVISION AND CFM COULD ADVERSELY
AFFECT COMBINED FINANCIAL RESULTS.
The direct transaction costs of approximately $10.1 million were incurred
in connection with the merger. If the benefits of the merger do not exceed the
costs associated with the transactions, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
transactions, our financial results, including earnings per share, could be
adversely affected.
ANY FUTURE BUSINESS ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE, OR DISTRACT MANAGEMENT ATTENTION.
As part of our ongoing business strategy, we may consider additional
acquisitions of, or significant investments in, businesses that offer products,
services, and technologies complementary to our own. Such acquisitions could
materially adversely affect our operating results and/or the price of our common
stock. Acquisitions also entail numerous risks, including:
. difficulty of assimilating the operations, products, and personnel of
the acquired businesses;
. potential disruption of our ongoing business;
. unanticipated costs associated with the acquisition;
. inability of management to manage the financial and strategic position
of acquired or developed products, services, and technologies;
. inability to maintain uniform standards, controls, policies, and
procedures; and
. impairment of relationships with employees and customers which may
occur as a result of integration of the acquired business.
To the extent that shares of our stock or other rights to purchase stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate additional revenue or provide any benefit to our
business, and we may not achieve a satisfactory return on our investment in any
acquired businesses.
MOST OF OUR REVENUE COMES FROM A SMALL NUMBER OF LARGE SALES, AND ANY DELAY
IN THE TIMING OF INDIVIDUAL SALES COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE FROM QUARTER TO QUARTER.
A delay in a shipment or a customer acceptance event near the end of a
quarter may cause net sales in that quarter to fall below our expectations and
the expectations of market analysts or investors. Currently, we derive most of
our revenues from the sale of a relatively small number of high dollar value
systems. The list prices on these systems range from $500,000 to over $2.2
million. Each sale, or failure to make a sale, could have a material effect on
us. Our lengthy sales cycle for each of our systems, coupled with customers'
competing capital budget considerations, make the timing of customer orders
uneven and difficult to predict. In addition, our backlog at the beginning of a
quarter is not expected to include all orders required to achieve our sales
objectives for that quarter. As a result, our net sales and operating results
for a quarter depend on our shipping orders as scheduled during that quarter as
well as obtaining new orders for systems to be shipped in that same quarter. Any
delay in scheduled shipments or acceptances or in shipments or acceptances from
new orders would materially adversely affect our operating results for that
quarter, which could cause our stock price to decline.
26
In the past, we have experienced cancellation of orders, and with the
current decline in the overall economic environment, we are experiencing
increased delays and cancellations of orders and we expect to continue to
experience further order cancellations or reductions in order growth or the
level of overall orders for semiconductor capital equipment may have a further
material adverse effect upon our business or results of operations. The need for
continued investment in research, development and engineering, marketing, and
customer satisfaction activities may limit our ability to reduce expenses in
response to continued or future downturns in the semiconductor industry. Our net
sales and results of operations could be materially adversely affected when
downturns or slowdowns in the semiconductor markets occur in the future.
WE AND MANUFACTURERS OF OUR PRODUCTS RELY ON A CONTINUOUS POWER SUPPLY TO
CONDUCT OPERATIONS, AND CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT
OUR BUSINESS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We have significant
operations located in California. We currently do not have backup generators or
alternate sources of power in the event of a blackout. If blackouts interrupt
our power supply, we would be temporarily unable to continue operations at our
California facilities. The recent bankruptcy filing by one of California's major
public utilities may increase the number and severity of blackouts. These
blackouts, blackouts in other regions or procedures implemented to avert
blackouts could cause disruptions to our operations and the operations of our
customers. Any such interruption in our ability to continue operations at our
facilities could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operation.
BECAUSE OF COMPETITION FOR ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT BE
ALE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD IMPEDE
DEVELOPMENT OR SALES OF OUR PRODUCTS.
Our growth will depend on our ability to attract and retain qualified,
experienced employees. The is substantial competition for experienced
engineering, technical, financial, sales, and marketing personnel in our
industry. In particular, we must attract and retain highly skilled design and
process engineers. Competition for such personnel is intense in all of our
locations, but particularly in the San Francisco Bay Area where our headquarters
is locatated. In May of 2001, we implemented a workforce reduction that reduced
our total number of employees by approximately 180. We may face greater
difficulty attracting qualified personnel in light of these recent workforce
reductions, which may adversely affect the morale of, and our ability to retain,
those employees who have not been terminated. Our restructuring may also yield
unanticipated consequences, such as attrition beyond our planned reduction in
workforce and loss of employee moreale and decreased performance. If we are
unable to retain existing key personnel, or attract and retain additional
qualified personnel, we may from time to time experience inadequate levels of
staffing to develop and market our products and perform services for our
customers. As a result, our growth could be limited due to our lack of capacity
to develop and market our products to customers, or we could fail to meet our
delivery commitments or experience deterioration in service levels or decreased
customer satisfaction.
WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH INDUSTRY OVERCAPACITY.
Inventory buildups in telecommunication products, slower than expected
personal computer sales and slower global economic growth have resulted in
overcapacity for semiconductor manufacturers and have caused them to reevaluate
their capital spending plans. Continued overcapacity could cause further delays
or decreased demand for our products and materially and adversely affect our
business, financial condition and results of operations.
27
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Interest Rate Risk.
The Company's exposure to market risk for changes in interest rates relates
to the Company's investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. We have no cash flow exposure due to rate changes for cash
equivalents and short-term investments, as all of these investments are at fixed
interest rates.
The table below presents principal amounts and related weighted average
interest rates for the Company's investment portfolio and the fair value of each
as of July 1, 2001.
Fair Value
July 1, 2001
--------------
(In thousands)
Assets
Cash and cash equivalents ............................. $31,459
Average interest rate ................................. 2.40%
Restricted cash ....................................... $31,995
Average interest rate ................................. 3.67%
Short-term investments ................................ $21,584
Average interest rate ................................. 5.76%
Long-term investments ................................. $ 2,036
Average interest rate ................................. 5.89%
Foreign Currency Risk
The Company transacts business in various foreign countries. Our primary
foreign currency cash flows are in Japan and Germany. During the first quarter
of 2001, we employed a foreign currency hedging program utilizing foreign
currency forward exchange contracts. The goal of the hedging program is to lock
in exchange rates to minimize the impact to us of foreign currency fluctuations.
We do not use foreign currency forward exchange contracts for speculative or
trading purposes.
The following table provides information as of July 1, 2001 about our
derivative financial instruments, which are comprised of foreign currency
forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at the contract
exchange rates), the weighted average contractual foreign currency exchange
rates, and the estimated fair value of those contracts.
Average Estimated
Notional Contract Fair
Amount Rate Value
-------- -------- ---------
(In thousands, except for
average contract rate)
Foreign currency forward exchange contracts:
Japanese Yen...................... $ 15,855 115.38 $ 850
Germany Mark...................... $ 12,650 2.32 $( 54)
The local currency is the functional currency for all foreign sales
operations. To date, our exposure related to exchange rate volatility has not
been significant. Our exposure to foreign currency risk has increased as a
result of our acquisition of the STEAG Semiconductor Division and CFM. In
addition, a payment obligation to STEAG AG in the amount estimated to be 37.6
million Deutsche Marks is payable in Deutsche Marks and, accordingly, there
exits exposure for exchange rate volatility.
28
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
there can no assurance. Moreover, the defense of claims or actions, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
We are currently involved in several actions brought by or against our
subsidiary CFM that are described under Item 3 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2000. There have been no material
developments in such actions during the quarter. With respect to our action
involving Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC, the trial date
for such action has been delayed with no new trial date set at this time.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held on May 16, 2001.
The stockholders approved a proposal to elect Brad Mattson and Kenneth
Kannappan as Class I Directors to hold office for a three-year term and until
their successors are elected and qualified. The proposal received the following
votes:
Nominee For Withheld
------- ---------- ---------
Brad Mattson 30,511,119 1,296,961
Kenneth Kannappan 30,511,076 1,297,004
The stockholders approved a proposal to increase the number of shares
reserved for issuance under the Company's amended and Restated 1989 Stock Option
Plan by 1,000,000 shares. The proposal received the following votes:
For Against Abstain Broker Non-Vote
---------- ---------- ------- ---------------
25,164,455 6,643,061 1,664 0
The stockholders approved a proposal to increase the number of shares
reserved for issuance under the Company's 1994 Employee Stock Purchase Plan by
800,000 shares. The proposal received the following votes:
For Against Abstain Broker Non-Vote
---------- ---------- ------- ---------------
31,407,154 398,456 2,470 0
29
The stockholders approved a proposal to ratify the selection of Arthur
Andersen LLP as the independent public accountant of the Company for the year
ending December 31, 2001. The proposal received the following votes:
For Against Abstain
---------- ---------- -------
30,690,750 1,110,958 6,372
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1* Restated Articles of Incorporation of the Company
3.2* Bylaws of the Registrant
99.1 Risk Factors incorporated by reference to Annual Report
on Form 10-K.
(b) Reports on Form 8-K
None.
- --------------
* Incorporated by reference
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
Date: August 15, 2001 /s/ Ludger Viefhues
---------------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
31