UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 12, 2001: 37,792,420
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 September 30, 2001 and December 31, 2000 ........................ 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2001 and September 24, 2000 ........ 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and September 24, 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
Sept. 30, Dec. 31,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 61,315 $ 33,431
Restricted cash 31,995 31,995
Short-term investments 5,861 38,814
Accounts receivable, net 42,559 20,425
Advance billings 68,459 40,704
Inventories, net 117,718 43,905
Finished goods inventories shipped and 64,629 11,528
awaiting customer acceptance
Deferred tax assets -- 4,010
Prepaid expenses and other current assets 14,875 8,963
--------- ---------
Total current assets 407,411 233,775
Property and equipment, net 33,194 15,953
Long-term investments 1,030 9,287
Deferred tax assets -- 2,403
Goodwill, intangibles and other assets 65,423 8,250
--------- ---------
Total assets $ 507,058 $ 269,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - STEAG AG, a shareholder $ 44,827 $ --
Current portion of long-term debt 853 --
Line of credit 3,878 --
Accounts payable 16,703 15,091
Accrued liabilities 81,134 27,746
Deferred revenue 136,946 40,704
Deferred income taxes 2,726 --
--------- ---------
Total current liabilities 287,067 83,541
========= =========
Long-term liabilities:
Long-term debt 1,808 --
Deferred income taxes 6,655 --
--------- ---------
Total long-term liabilities 8,463 --
--------- ---------
Total liabilities 295,530 83,541
========= =========
Stockholders' equity:
Common stock 37 20
Additional paid-in capital 497,040 198,835
Accumulated other comprehensive loss (3,403) (181)
Treasury stock (2,987) (2,987)
Retained deficit (279,159) (9,560)
--------- ---------
Total stockholders' equity 211,528 186,127
--------- ---------
$ 507,058 $ 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 NINE MONTHS ENDED
------------------ -----------------
SEP. 30, SEP. 24, SEP. 30, SEP. 24,
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 36,643 $ 48,310 $ 181,497 $ 132,751
Cost of sales 35,356 24,318 141,873 68,972
Inventory valuation charges 21,341 -- 21,341 --
--------- --------- --------- ---------
Gross margin (20,054) 23,992 18,283 63,779
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering 12,734 7,356 47,743 20,521
Selling, general and administrative 26,196 14,310 81,529 37,325
In-process research and development -- -- 10,100 --
Amortization of goodwill, intangibles
and other charges 8,730 225 28,753 675
Impairment of long-lived assets 127,684 -- 127,684 --
--------- --------- --------- ---------
Total operating expenses 175,344 21,891 295,809 58,521
--------- --------- --------- ---------
Income (loss) from operations (195,398) 2,101 (277,526) 5,258
Interest and other income, net 2,309 2,267 4,105 4,176
--------- --------- --------- ---------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle (193,089) 4,368 (273,421) 9,434
Provision (benefit) for income taxes (6,231) 437 (3,822) 943
--------- --------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle (186,858) 3,931 (269,599) 8,491
Cumulative effect of change in accounting principle,
net of tax benefit -- -- -- (8,080)
--------- --------- --------- ---------
Net income (loss) $(186,858) $ 3,931 $(269,599) $ 411
========= ========= ========= =========
Net income (loss) per share before
cumulative effect of a change in
accounting principle:
Basic $ (5.05) $ 0.20 $ (7.33) $ 0.45
Diluted $ (5.05) $ 0.18 $ (7.33) $ 0.40
Cumulative effect of change in accounting principle:
Basic $ -- $ -- $ -- $ (0.43)
Diluted $ -- $ -- $ -- $ (0.38)
Net income (loss) per share:
Basic $ (5.05) $ 0.20 $ (7.33) $ 0.02
Diluted $ (5.05) $ 0.18 $ (7.33) $ 0.02
Shares used in computing net income (loss) per share:
Basic 36,985 20,152 36,801 18,964
Diluted 36,985 21,704 36,801 20,981
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
---------------------------
SEP. 30, SEP. 24,
2001 2000
----------- ---------
Cash flows from operating activities:
Net income (loss) $(269,599) $ 411
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 14,571 3,487
Deferred taxes (8,303) --
Provision for allowance for doubtful accounts 293 --
Inventory valuation charges 21,341 --
Amortization of goodwill and intangibles 28,753 675
Impairment of long-lived assets 127,684 --
Loss on disposal of fixed assets 1,381 --
Acquired in-process research and development 10,100 --
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable 53,083 (4,626)
Advance billings (27,755) (26,231)
Inventories 14,010 (15,063)
Inventories shipped and awaiting customer acceptance (53,101) (5,817)
Prepaid expenses and other current assets (2,542) (720)
Other assets 4,522 (1,793)
Accounts payable (17,962) 1,034
Accrued liabilities (29,647) 7,123
Deferred revenue 93,124 16,843
--------- ---------
Net cash used in operating activities (40,047) (16,597)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (12,855) (4,053)
Purchases and sales of investments, net 41,110 (47,412)
Net cash acquired from acquisitions 37,961 --
--------- ---------
Net cash provided by (used in) investing activities 66,216 (51,465)
--------- ---------
Cash flows from financing activities:
Draws and repayment on line of credit, net 4,009 (3,000)
Proceeds from the issuance of common stock, net of offering costs 3,418 127,355
Interest expense on STEAG note 202 --
--------- ---------
Net cash provided by financing activities 7,629 124,355
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (5,914) (109)
--------- ---------
Net increase in cash and cash equivalents 27,884 56,184
Cash and cash equivalents, beginning of period 33,431 16,965
--------- ---------
Cash and cash equivalents, end of period $ 61,315 $ 73,149
========= =========
Supplemental disclosure of non-cash transactions:
Common stock issued for acquisitions $ 294,804 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 the allowance for the doubtful accounts,
inventory reserves, depreciation and amortization periods, 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 nine months ended September 30,
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):
SEP. 30, DEC. 31,
2001 2000
--------- --------
Inventories:
Purchased parts and raw materials $ 77,293 $ 25,108
Work-in-process 20,287 14,241
Finished goods 20,138 4,556
--------- --------
$ 117,718 $ 43,905
========= ========
Accrued liabilities:
Warranty and installation reserve $ 20,234 $ 10,540
Accrued compensation and benefits 10,424 6,415
Income taxes 7,704 2,105
Commissions 5,499 2,130
Other 37,273 6,556
--------- --------
$ 81,134 $ 27,746
========= ========
In the third quarter of fiscal 2001 we recorded an expense of $21.3
million to reserve for excess inventories that we do not believe will be
realized based on our current bookings or forecasted levels of sales. This
reserve largely covers inventories for Thermal and Omni products that were
acquired in the merger with Steag and CFM. In the event that bookings continue
to decline, we may need to increase this reserve for excess inventories.
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,
paid SES $100,000 in cash, and 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 $26.9 million (with an interest rate of 6%). Under the
Combination Agreement, the Company is also obligated to cause two acquired
subsidiaries to pay certain amounts based on profits for the year 2000 to SES,
in an amount estimated to be 37.6 million Deutsche Marks (approximately $18.1
million as of January 1, 2001 and $17.5 million as of September 30, 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. Including the promissory note, the Company has
approximately a $44.8 million obligation to SES, including accrued interest at
6%, which was originally payable on July 2, 2001. As of November 7, 2001 the
Company and SES reached an agreement to extend the terms of the notes until
July 2, 2002.
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 manufacturing and
assembly 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 are
included in the condensed consolidated statement of operations of the Company
from the date of acquisition. The purchase price of the acquisition of $148.6
million, which included $6.2 million of estimated direct acquisition related
costs (including the amount reimbursed to SES), was used to acquire the common
stock of the eleven direct and indirect subsidiaries of the STEAG Semiconductor
Division. The allocation of the purchase price to the assets acquired and
liabilities assumed based on preliminary estimates of fair value, which are
subject to final adjustment, is as follows (in thousands):
Net tangible assets ........................ $ 107,018
Acquired developed technology .............. 18,100
Acquired workforce ......................... 11,500
Goodwill ................................... 13,857
Acquired in-process research and development 5,400
Deferred tax liability ..................... (7,273)
---------
$ 148,602
=========
7
Purchased intangible assets, including goodwill, workforce and developed
technology of approximately $43.5 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 the third quarter of 2001, the Company performed an assessment of the
carrying value of its long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of the STEAG Semiconductor Division. The assessment was
performed pursuant to SFAS No. 121 as a result of deteriorated market conditions
in the semiconductor industry in general, a reduced demand specifically for the
Thermal products acquired in the merger and revised projected cash flows for
these products in the future. As a result of this assessment, the Company
recorded a charge of $3.5 million in the third quarter of 2001 to reduce the
carrying value of certain intangible assets associated with the acquisition of
the STEAG Semiconductor Division based on the amount by which the carrying value
of these assets exceeded their fair value. Fair value was determined based on a
valuation performed by an independent third party. In addition, the Company
recorded a charge of $5.1 million to reduce certain property and equipment
purchased from the STEAG Semiconductor Division to zero as there are no future
cash flows expected from these assets. The charge of $8.6 million relating to
the STEAG Semiconductor Division has been recorded as impairment of long-lived
assets and other charges in the accompanying statements of operations.
At the time of acquisition, management formulated a plan to exit certain
operations of the STEAG Semiconductor Division including its single-wafer RT-CVD
business unit, previously known as STEAG CVD Systems. The business unit included
lamp-based RT-CVD tools that do not fit with its strategic roadmap for thermal
and CVD products. Currently, the Company is in the process of liquidating the
assets of this business unit. Management has made an estimate of the costs
associated with exiting these operations and this accrual was included in the
liabilities assumed from the STEAG Semiconductor Division as part of the
purchase price allocation.
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 research and development.
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.
8
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 research and
development 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.
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 are included in the consolidated statement
of operations of the Company from the date of acquisition. The purchase price of
the acquisition of CFM was $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 ............................. $ 28,536
Acquired developed technology ................... 50,500
Acquired workforce ............................. 14,700
Goodwill ........................................ 92,999
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 $158.2 million were previously being amortized over
their initial 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.
9
In the third quarter of 2001, the Company performed an assessment of the
carrying value of the long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of CFM. The assessment was performed pursuant to SFAS No. 121 as
a result of deteriorated market conditions in the semiconductor industry in
general, a reduced demand specifically for the Omni products acquired in the
merger and revised projected cash flows for these products in the future. As a
result of this assessment, the Company recorded charges of $82.9 million and
$27.2 million in the third quarter of 2001 to reduce the carrying value of
goodwill and other intangible assets, respectively, associated with the
acquisition of CFM based on the amount by which the carrying value of these
assets exceeded their fair value. Fair value was determined based on discounted
future cash flows, as part of an assessment performed by an independent third
party. In addition, the Company recorded a charge of $5.8 million to reduce
certain property and equipment purchased from CFM to zero as there are no future
cash flows expected from these assets. The total charge of $115.9 million
relating to CFM has been recorded as impairment of long-lived assets and other
charges in the accompanying statements of operations.
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.
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.
10
The following table presents the unaudited pro forma results for the three
and nine months ended September 24, 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 $28.1 million for the nine
months ended September 24, 2000. The unaudited pro forma information is as
follows (in thousands, except net loss per share):
Three Months Nine Months
Ended Ended
SEP. 24, 2000 SEP. 24, 2000
------------- -------------
Net sales $ 75,617 $ 275,338
Net loss $(22,428) $ (99,089)
Net loss per share $ (0.59) $ (2.67)
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 to the
results 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 September 30, 2001, the
Company has not discontinued any cash flow hedges.
The Company records the foreign currency forward contracts as either an
asset or a 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 nine months
ended September 30, 2001, the Company recorded changes in the fair value of the
derivatives of approximately $44,647 as an 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.
11
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, a portion of the balance in accumulated other
comprehensive income (loss), which is currently $44,647 will be recognized as
interest and other income, net. This is anticipated to occur within the next
twelve months.
Note 5 Net Income (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 NINE MONTHS ENDED
------------------ -------------------
SEP. 30, SEP. 24, SEP. 30, SEP. 24,
2001 2000 2001 2000
--------- ------- --------- --------
NET INCOME (LOSS) $(186,858) $ 3,931 $(269,599) $ 411
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) available to
common stockholders $(186,858) $ 3,931 $(269,599) $ 411
Weighted average common shares
outstanding 36,985 20,152 36,801 18,964
--------- ------- --------- ------
Basic net income (loss)
per share $ (5.05) $ 0.20 $ (7.33) $ 0.02
========= ======= ========= ======
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) available to
common stockholders $(186,858) $ 3,931 $(269,599) $ 411
Weighted average common shares
outstanding 36,985 20,152 36,801 18,964
Diluted potential common shares
from stock options - 1,552 - 2,017
--------- ------- --------- ------
Weighted average common shares and
dilutive potential common shares 36,985 21,704 36,801 20,981
--------- ------- --------- ------
Diluted net income (loss)
per share $ (5.05) $ 0.18 $ (7.33) $ 0.02
========= ======= ========= =======
Total stock options outstanding at September 30, 2001 and September 24,
2000 of 2,012,075 and 155,958, respectively, were excluded from the computation
of diluted EPS because the effect of including them would have been
anitdilutive.
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.
12
The following are the components of comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -------------------
(in thousands) SEP. 30, SEP. 24, SEP. 30, SEP. 24,
2001 2000 2001 2000
--------- ------- --------- --------
Net income (loss)................... $(186,858) $ 3,931 $(269,599) $ 411
Foreign currency translation
adjustments...................... 6,253 (24) (3,265) (74)
Unrealized investment loss.......... (12) - (2) -
Gain (loss) on cash flow
hedging instruments.............. (225) - 45 -
--------- ------- --------- -----
Comprehensive income (loss)......... $(180,842) $ 3,907 $(272,821) $ 337
========= ======= ========= =====
The components of accumulated other comprehensive loss, net of related tax
are as follows:
(in thousands) SEP. 30, DEC. 31,
2001 2000
-------- -------
Cumulative translation adjustments................ $ (3,523) $ (258)
Unrealized investment gain........................ 75 77
Gain on cash flow hedging instruments............. 45 -
-------- -------
$ (3,403) $ (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. 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 88.1% and 54.8% of net sales for the third quarter of 2001 and
2000, respectively, before the effects of SAB 101.
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 $4.2 million), expiring in September 2002. Under this
line of credit, the current borrowing is 450 million Yen (approximately $3.9
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 in the amount of $5.1 million.
Additionally, a Japanese subsidiary entered into a credit line with Bank of
Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $7.5 million)
secured by trade accounts receivable. The line bears interest at a per annum
rate of LIBOR plus 75 basis points which is currently 0.81%. The term of the
line is through December 28, 2001 and is guaranteed by the Company. There are no
borrowings on this line of credit.
13
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.
Note 10 Provision (benefit) for Income Taxes
In the third quarter of 2001, the Company recorded an income tax benefit of $6.2
million which primarily relates to the reversal of the deferred tax liability
associated with impairment of the related intangible assets. The deferred tax
liability was recorded upon acquisition of CFM and the STEAG Semiconductor
Division and represented the difference between the book and tax basis of
identified intangible assets.
For the nine months ended September 30, 2001, the Company recorded an income tax
benefit of $3.8 million which includes the income tax benefit discussed above
offset by income taxes primarily in foreign jurisdictions. The Company believes,
based on tax research, that we are 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.
Note 11 Other Items
During the second and third fiscal quarters of 2001, in response to
continued reductions in capital spending by semiconductor manufacturers, the
Company took cost reduction actions by reducing its workforce on two separate
occasions by 172 employees in the second quarter of 2001 and then by 160
employees in the third quarter of 2001, or approximately 9 percent and 10
percent of the workforce, respectively. The affected employees were based in the
US and Asia, and were involved in multiple company activities and functions.
Further workforce reduction of employees is in progress.
14
A cost cutting project was initiated in May 2001 to reduce costs. Twelve
key areas were identified and have been implemented. The cost cutting measures
included a significant headcount reduction, shorter workweek, shutdown weeks, a
10% pay cut for executives, and consolidation of facilities. With the continuing
down-turn in the semiconductor industry and the economy, the Company is further
continuing with these cost-cutting measures.
On October 8, 2001, Mattson Technology (the "Company") issued a press
release announcing that its founder, Brad Mattson, is retiring and has resigned
as Chief Executive Officer of the Company. Brad Mattson relinquished his
operating responsibilities but remains as Vice Chairman of the Company's Board
of Directors and will continue to work with the Company on strategic issues. The
Board of Directors appointed David Dutton, President of the Company's Plasma
Division, as acting CEO until the Board appoints Mr. Mattson's successor.
On October 15, 2001, James J. Kim, member of the Company's Board
of Directors announced his resignation from the Board. Mr. Kim served
as the Company's Director since January of 2001.
Note 12 Recent Accounting Pronouncements
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.
Upon adoption of SFAS No. 142, on January 1, 2002, the Company will no
longer amortize goodwill, thereby eliminating annual goodwill amortization of
approximately $2.2 million, based on anticipated amortization for 2002.
Amortization of goodwill for the nine months ended September 30, 2001 was
approximately $12.2 million including amounts related to the amortization of
goodwill and intangibles of CFM and the STEAG Semiconductor Division which
became impaired.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143").
SFAS 143 addresses accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
The liability is accreted to its present value each period while the cost is
depreciated over its useful life. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company has not yet
determined the effects SFAS 143 will have on its financial position, results of
operations or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144"). SFAS 144, which replaces SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires long-lived assets to be measured at the lower of carrying amount or
fair value less the cost to sell. SFAS 144 also broadens disposal transactions
reporting related to discontinued operations. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company has not yet determined the effects SFAS 144 will have on its
financial position, results of operations or cash flows but does not anticipate
that the impact will be significant.
15
Note 13 Commitments and Contingencies
The Company is party to certain claims arising in the ordinary course of
business. While the outcome of these matters is not presently determinable,
management believes that they will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company, at its Exton, Pennsylvania location, leases two buildings to
house its manufacturing and administrative functions related to the Omni
product. The two buildings have leases of 17 years remaining on them with an
approximate combined rental cost of $1.5 million annually. The leases for these
two buildings allow for subleasing the premises without the approval of the
landlord. In addition, the Company has excess facilities in San Jose, CA, and
has non-cancelable annual lease payments of approximately $1 million over one
year related to this facility. The Company has recorded a charge of
approximately $3.2 million related to these excess facilities which has been
recorded as impairment of long-lived assets and other charges in the
accompanying statement of operations. The accrual for these non-cancelable lease
payments includes management's estimates of the time taken to sublet the
facilities and estimates of sublease income. These estimates are subject to
change based on actual events.
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"). As a
result of the Merger, we offer industry-leading products and technologies in
multiple product lines, and we employ approximately 1,590 people worldwide.
Before the Merger, we were 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 among the top five providers of rapid
thermal processing ("RTP") and 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. The severe downturn has
resulted in significantly lower revenues achieved so far in 2001 with lower
predictions for the remainder of 2001. Many of our customers have cancelled or
pushed out various orders due to the current market conditions. 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.
16
On October 8, 2001, our founder and CEO, Brad Mattson, announced his
retirement and resigned as Chief Executive Officer of the Company. Mr. Mattson
relinquished his operating responsibilities but remains as Vice Chairman of our
Board of Directors and will continue to work with the Company on strategic
issues. The Board of Directors has appointed seven-year Mattson veteran David
Dutton, President of our Plasma Division, as acting CEO until the Board appoints
Mr. Mattson's successor. Mr. Dutton was Chief Operating Officer of pre-merger
Mattson Technology and has served as acting President during Brad Mattson's
recent sabbatical.
On October 15, 2001, James J. Kim, member of our Board of
Directors announced his resignation from the Board. Mr. Kim served as
our Director since January of 2001.
During the quarter ended September 30, 2001, we had a net loss of $186.9
million, including the $127.7 million of impairment charges related to assets
acquired in our merger with CFM and Steag. Future results will depend on a
variety of factors, particularly overall market conditions and the timing of
significant orders, our cost reduction efforts, our ability to bring new systems
to market, the timing of new product releases by our competitors, patterns of
capital spending by our customers, market acceptance of new and/or enhanced
versions of our systems, changes in pricing by us, our competitors, customers,
or suppliers and the mix of products sold. We are dependent upon increases in
sales 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.
Results of Operations
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEP. 30, SEP. 24, SEP. 30, SEP. 24,
2001 2000 2001 2000
-------- -------- ------- -------
Net sales 100% 100% 100% 100%
Cost of sales 97% 50% 78% 52%
Inventory valuation charges 58% - 12% -
----- ---- ----- ----
Gross margin (55)% 50% 10% 48%
----- ---- ----- ----
Operating expenses:
Research, development and engineering 35% 16% 26% 16%
Selling, general and administrative 71% 30% 45% 28%
In-process research and development - - 6% -
Amortization of goodwill and
intangibles 24% - 16% -
Impairment of long-lived assets 348% - 70% -
----- ---- ----- ----
Total operating expenses 478% 46% 163% 44%
----- ---- ----- ----
Income (loss) from operations (533)% 4% (153)% 4%
Interest and other income, net 6% 5% 2% 3%
----- ---- ----- ----
Income (loss) before provision for
income taxes and cumulative effect (527)% 9% (151)% 7%
of change in accounting principle
Provision (benefit) for income taxes (17)% 1% (2)% 1%
----- ---- ----- ----
Income (loss) before cumulative effect
of change in accounting principle (510)% 8% (149)% 6%
----- ---- ----- ----
Cumulative effect of change in accounting
principle, net of tax benefit - - - (6)%
----- ---- ----- ----
Net income (loss) (510)% 8% (149)% 0%
===== ==== ===== ====
17
Net Sales
Net sales for the third quarter of 2001 were $36.6 million. We estimate
that on a pro forma basis for the three months ended September 24, 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 $75.6 million,
so that net sales in the third quarter of 2001 would reflect a decrease of
51.6%.
Net sales for the first nine months of 2001 were $181.5 million on a
consolidated basis. We estimate that on a pro forma basis for the first nine
months ended September 24, 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 $275.3 million, so that net sales in the first nine months
of 2001 would reflect a decrease of 34.1%.
The decrease in the net sales for both the three and nine month periods
ended September 30, 2001, is primarily due to the economic downturn in the
semiconductor industry and also the timing effects of revenue recognition
effected by SAB 101, where the time-lag between product shipment and customer
acceptance can exceed one year. A significant proportion of products shipped
during these periods from our Thermal and Wet product divisions (operations
acquired from the STEAG Semiconductor Division and CFM) resulted in deferred
revenue in accordance with our revenue recognition policy due to the
complexities of the equipment shipped and the associated acceptance clauses. Our
deferred revenue at the end of the third quarter of 2001 was approximately
$136.9 million, up from $107.8 million at the end of the second 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, deferred revenues relating to sales
by the acquired operations were generally not carried over through the
acquisition. As a result, it will take several quarters of combined operations
before our net sales results normalize and can be compared across reporting
periods.
The decrease is also due in part to the timing effects of revenue
recognition under SAB 101 on our shipments to Japan, 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 7.1% of our shipments in the third
quarter of 2001 were to Japan-based customers, and corresponding net sales were
deferred in accordance with our revenue recognition policy.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea),
accounted for 88.1% and 54.8% of products shipped for the third quarter of 2001
and 2000, respectively. We anticipate that international sales will continue to
account for a significant portion of net sales for 2001.
Third quarter bookings were $25.0 million, a decrease of 67.4% compared to
bookings of $76.6 million in the third quarter of 2000, resulting in a book to
bill ratio of 0.37 to 1.0. This decrease is attributed to the slow-down in the
semiconductor industry and a lack of market acceptance of our acquired Omni and
Thermal products. Backlog increased 8.2% to $113.5 million in the third quarter
of 2001 compared to $104.9 million in the third quarter of 2000. This increase
is attributed to the inclusion of 2001 backlog from operations acquired in the
Merger.
Gross Margin
Our gross margin for the third quarter of 2001 was (54.7%), a decrease from
gross margin of 49.7% for the third quarter of 2000. The decrease in gross
margin was due to a number of causes. In the third quarter of fiscal 2001 we
recorded an expense of $21.3 million to reserve for excess inventories that we
do not believe will be realized based on our current bookings or forecasted
levels of sales. This reserve largely covers inventories for Thermal and Omni
products that were acquired in the Merger with STEAG and CFM. In the event that
bookings continue to decline, we may need to increase this reserve for excess
inventories. In addition, our costs were adversely affected by 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
acquisition of additional production capacity in Germany and Exton, PA as a
result of the Merger. We are also facing pricing pressure from competitors that
is affecting our gross margin.
18
Our gross margin for the first nine months of 2001 decreased to 10.1% from
48.0% for the first nine months of 2000 for the same reasons as above. In
addition, our gross margin was adversely affected by the write-up of inventory
to fair value as required by Accounting Principles Board Opinion No. 16
"Business Combinations". The effect of this write-up is expected to continue, to
a lesser extent, into future quarters since revenues relating to many of the
systems that were written up are now being deferred under SAB 101 revenue
recognition rules.
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. We are currently experiencing
pricing pressures that are also affecting our gross margin. For each of our
product divisions our gross margin, on international sales is substantially the
same as domestic sales.
Research, Development and Engineering
Research, development and engineering expenses for the third quarter of
2001 were $12.7 million, or 34.8% of net sales, as compared to $7.4 million, or
15.2% of net sales, for the third quarter of 2000. The increase in absolute
dollars was due to additional personnel and spending resulting from the Merger.
Total research, development and engineering expenses declined from $16.1 million
in the second quarter of 2001, as a result of reductions in workforce and cost
controls put in place during the third quarter. The increase in research,
development and engineering expenses as a percentage of net sales during the
third quarter of 2001 compared to the same period last year is primarily due to
the decrease in sales.
Research, development and engineering expenses for the nine months ended
September 30, 2001 were $47.7 million, or 26.3% of net sales, compared to $20.5
million, or 15.5% of net sales, for the same period in fiscal 2000. The increase
in absolute expenses was the result of the additional research, development and
engineering personnel and other resources added by the merger, and the
percentage increase was primarily due to decrease in sales.
Selling, General and Administrative
Selling, general and administrative expenses for the third quarter of 2001
were $26.2 million, or 71.5% of net sales, as compared to $14.3 million, or
29.6% of net sales, for the third quarter of 2000. The increase in absolute
dollars was due to additional personnel and spending added by the merger. The
increase in selling, general and administrative expenses as a percentage of net
sales during the third quarter of 2001 as compared to the same period last year
is due to the decrease in sales during the third quarter of 2001. Total selling,
general and administrative expenses decreased from $23.5 million in the second
quarter of 2001, as a result of reductions in workforce and cost controls put in
place during the third quarter.
For the nine months ended September 30, 2001, the selling, general and
administrative expenses were $81.5 million, or 44.9% of net sales, as compared
to $37.3 million, or 28.1% of net sales for the same period in fiscal 2000. The
increase in absolute expenses for the nine month period of 2001 over 2000 was
the result of the additional selling, general and administrative personnel and
other resources added by the merger and the expenses incurred, primarily in the
first quarter of fiscal 2001, for integration activities associated with the
Merger.
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 $201.7
million of goodwill and intangible assets which were being amortized on a
straight-line basis over three to seven years. The allocations 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 $28.8 million for the nine months ended September 30,
2001. Upon adoption of SFAS 142 on January 1, 2002, we will no longer amortize
goodwill, thereby eliminating annual goodwill amortization of approximately
$2.2 million.
19
Impairment of Long-Lived Assets
In the third quarter of 2001, the Company performed an assessment of the
carrying value of the long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisitions of the STEAG Semiconductor Division and CFM. The assessment was
performed pursuant to SFAS No. 121 as a result of deteriorated market conditions
in the semiconductor industry in general, a reduced demand specifically for the
Thermal and Omni products acquired in the Merger and revised projected cash
flows for these products in the future. As a result of this assessment, the
Company recorded a charge of $124.5 million to reduce goodwill, intangible
assets and property and equipment based on the amount by which the carrying
value of these assets exceeded their fair value. Fair value was determined based
on discounted future cash flows.
Provision for Income Taxes
In the third quarter of 2001, we recorded an income tax benefit of $6.2 million
which primarily relates to the reversal of the deferred tax liability associated
with impairment of the related intangible assets. The deferred tax liability was
recorded upon acquisition of CFM and the STEAG Semiconductor Division and
represented the difference between the book and tax basis of identified
intangible assets.
For the nine months ended September 30, 2001, we recorded an income tax benefit
of $3.8 million which includes the income tax benefit discussed above offset by
income taxes primarily in foreign jurisdictions. We believe, based on tax
research that has been completed, that we are 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 $99.2 million at September 30, 2001, a decrease of $5.1 million from $104.2
million at December 31, 2000. Stockholders' equity at September 30, 2001 was
approximately $211.5 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 $4.2
million), expiring in September 2002. Under this line of credit, the current
borrowing is 450 million Yen (approximately $3.8 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 in
the amount of $5.1 million.
Additionally, a Japanese subsidiary entered in to a credit line with Bank
of Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $7.5
million) secured by trade accounts receivable. The line bears interest at a per
annum rate of LIBOR 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.
Currently, we do not have any borrowing against this credit line.
Net cash used in operating activities was $40.0 million during the nine
months ended September 30, 2001 as compared to $16.6 million during the same
period last year. The net cash used in operating activities during the nine
months ended September 30, 2001 was primarily attributable to the net loss of
$269.6 million. Additional uses of cash were a decrease in accrued liabilities
of $29.6 million and a decrease in accounts payable of $18.0 million. These uses
of cash were offset by non-cash impairment of long-lived assets of $127.7
million, deferred revenue of $93.1 million, depreciation and amortization
expense of $43.3 million and inventory write-offs of $21.3 million. Net cash was
provided by a reduction in accounts receivable and advance billings of $25.3
million.
20
Net cash used in operating activities was $16.6 million during the nine
months ended September 24, 2000 and was primarily due to an increase in accounts
receivable and advanced billings of $30.9 million and increase in inventories
and inventories awaiting customer acceptances of $20.9 million. The increase in
accounts receivable and inventories was partially offset by the increase in
deferred revenue of $16.8 million, cumulative effect of accounting change of
$8.1 million, the net income of $0.4 million, depreciation and amortization
expense of $4.2 million, and an increase in accrued liabilities of $7.1 million.
Net cash provided by investing activities was $66.2 million during the nine
months ended September 30, 2001 as compared to net cash used in investing
activities of $51.5 million during the same period last year. The net cash
provided by investing activities during the nine months ended September 30, 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 $41.1
million, offset by purchases of property and equipment of $12.9 million. Net
cash used in investing activities of $51.5 million during the nine months ended
September 24, 2000 was attributable to the purchase of property and equipment of
$4.0 million, short term investments of $34.5 million, and long term investments
of $12.9 million.
Net cash provided by financing activities was $7.6 million during the nine
months ended September 30, 2001 as compared to $124.4 million during the same
period last year.
The net cash provided by financing activities during the nine months ended
September 30, 2001 is primarily attributable to the borrowings, net of
repayments, on a line of credit of $4.0 million, and proceeds from our stock
plans of $3.4 million. Net cash provided by financing activities was $124.4
million during the nine months ended September 24, 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, with net proceeds from issuance of
$127.4 million. 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, we issued to STEAG Electronic Systems AG ("SES") a secured
promissory note, due July 2, 2001, in the principal amount of $26.9 million, to
offset the amount of outstanding working capital loans from SES to the STEAG
Semiconductor Division at the time of closing. As of November 7, 2001, we and
SES reached an agreement to extended the terms until July 2, 2002. Our
restricted cash balance at September 30, 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 $17.5 million as of September 30, 2001) to
SES to satisfy an obligation to cause two acquired subsidiaries to pay certain
amounts based on their profits for 2000 to SES. We are currently re-negotiating
the terms of our remaining obligations to 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, if we are not able to significantly reduce our
present operating losses over the upcoming quarters, our operating losses could
adversely affect our cash and working capital balances.
We are currently looking into external financing by establishing a line of
credit with a bank for future needs that may arise, particularly in light of the
continuing general economic downturn that is negatively affecting our revenues.
Our operating plans are based on the ability to manage inventories, and collect
our accounts receivable balances in this market downturn. If we are unable to
manage our inventory or accounts receivable balances, we may be required to seek
additional sources of financing. We may need to raise additional funds in future
periods through public or private financing, or other sources, to fund our
operations. We may not be able to obtain adequate or favorable financing when
needed. Failure to raise capital when needed could harm our business. If we
raise additional funds through the issuance of equity securities, the percentage
ownership of our stockholders would be reduced, and these equity securities may
have rights, preferences or privileges senior to our common stock. Any debt
financing, if available, may involve restrictive covenants on our operations and
financial condition.
21
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 are obligated to make
cash payments of approximately $45.0 million by July 2001, for which we have
renegotiated the terms of the obligation, with Steag AG, a shareholder. The
$45.0 million obligation has been extended until July 2, 2002. Our restricted
cash will be used to pay this promissory note.
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, former 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.
RISK FACTORS:
Factors That May Affect Future Results and Market Price of Stock
In this report and from time to time, we may make forward looking
statements regarding, among other matters, our future strategy, product
development plans, productivity gains of our products, financial performance and
growth. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements address matters which are subject to a number of risks and
uncertainties, including those set forth in our Annual Report on Form 10-K, 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 acquired businesses of the STEAG
Semiconductor Division and CFM, depend 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 is now in the midst of a significant
downturn and reduction in demand 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 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.
The current and 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.
22
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.
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 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, of 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 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.
23
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 of 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.
In the third quarter of 2001, we recorded an impairment charge of
$127.7 million related to the write-down of assets acquired in the CFM and
Steag merger for excess facilities. The impairment charge is the result of
deteriorated market conditions in the semiconductor industry in general, a
reduced demand specifically for the Omni and Thermal products acquired in
the merger and a reduced forecast for these products in the future.
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 2,000 employees world-wide on
January 1, 2001, following consummation of the Merger, and currently are
at approximately 1,600 employees. 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:
24
. 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 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 $201.7 million. The goodwill and other
intangible assets will be amortized over 3-7 years and the accounting
charge attributable to these items has been approximately $10 million per
quarter or $28.8 million for the first three quarters of 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.
We did an analysis of the purchased intangible assets and goodwill and
determined that an impairment of the assets has taken place in the nine
months since the inception of the merger. An impairment charge of $127.7
million has been recorded in the third quarter of fiscal year 2001 as a
result of the impairment analysis. The impairment is the result of
deteriorated market conditions in the semiconductor industry in general, a
reduced demand specifically for the Omni and Thermal products acquired in
the merger and a reduced forecast for these products in the future.
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 workweek, shutdown weeks, a 10%
pay cut for executives, and consolidation of facilities.
25
We will incur restructuring costs in order to achieve desired
synergies after the transactions. These restructuring costs will be
comprised of 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.
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.
BECAUSE OF COMPETITION FOR ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT
BE ABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD IMPEDE
DEVELOPMENT OR SALES OF OUR PRODUCTS.
Our growth will depend on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales, and marketing
personnel in our industry. In particular, we must attract and retain
highly skilled design and process engineers. 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 and August
of 2001, we implemented workforce reductions that reduced our total number
of employees by approximately 180 and 160, respectively. 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 morale 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.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY
CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO
LOSSES BY INVESTORS OR TO SECURITIES LITIGATION.
The market price of our common stock has been highly volatile in the
past, and our stock price may decline in the future. We believe that a
number of factors could cause the price of our common stock to fluctuate,
perhaps substantially, including:
. general conditions in the semiconductor industry or in the
worldwide economy;
. announcements of developments related to our business;
. fluctuations in our operating results and order levels;
. announcements of technological innovations by us or by our
competitors;
27
. new products or product enhancements by us or by our competitors;
. developments in patent litigation or other intellectual property
rights; or
. developments in our relationships with our customers,
distributors, and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of high technology stocks in particular, have experienced
extreme price fluctuations. These fluctuations have frequently been
unrelated to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in its stock price. This
type of litigation, if filed against us, could result in substantial costs
and divert our management's attention and resources.
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 September 30, 2001.
Fair Value
September 30, 2001
------------------
(In thousands)
Assets
Cash and cash equivalents ............................. $61,315
Average interest rate ................................. 2.10%
Restricted cash ....................................... $31,995
Average interest rate ................................. 3.67%
Short-term investments ................................ $ 5,861
Average interest rate ................................. 6.38%
Long-term investments ................................. $ 1,030
Average interest rate ................................. 5.45%
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 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 September 30, 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.
28
Average Estimated
Notional Contract Fair
Amount Rate Value
-------- -------- ---------
(In thousands, except for
average contract rate)
Foreign currency forward exchange contracts:
Japanese Yen...................... $ 11,489 119.04 $ 155
Germany Mark...................... $ 13,631 2.15 $(114)
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
exists exposure for exchange rate volatility.
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 set at January 22, 2002.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
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Item 5. Other Information.
On October 15, 2001, James J. Kim, member of the Company's Board of
Directors announced his resignation from the Board. Mr. Kim served as
the Company's Director since January of 2001.
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
Form 8-K filed October 18, 2001 reporting under Item 5.
- --------------
* Incorporated by reference
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
Date: November 14, 2001
/s/ David Dutton
----------------------------------
David Dutton
Acting Chief Executive Officer
/s/ Ludger Viefhues
----------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
31