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 March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-21970
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MATTSON TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0208119
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(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
2800 Bayview Drive Fremont, California 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-5900
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Number of shares of common stock outstanding as of May 8, 2002: 44,544,979.
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 March 31, 2002 and December 31, 2001 .................. 3
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 2002 and April 1, 2001.......................... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and April 1, 2001........ 5
Notes to Condensed Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 30
Item 2. Changes in Securities......................................... 30
Item 3. Defaults Upon Senior Securities............................... 30
Item 4. Submission of Matters to a Vote of Security Holders........... 30
Item 5. Other Information............................................. 30
Item 6. Exhibits and Reports on Form 8-K.............................. 30
Signatures.................................................... 31
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Mar. 31, Dec. 31,
2002 2001
(unaudited)
----------- ---------
Current assets:
Cash and cash equivalents $ 69,995 $ 64,057
Restricted cash 28,571 27,300
Short-term investments 6,216 5,785
Accounts receivable, net 23,061 38,664
Advance billings 50,563 61,874
Inventories 54,728 65,987
Inventories - delivered systems 64,221 74,002
Prepaid expenses and other current assets 16,595 18,321
--------- ---------
Total current assets 313,950 355,990
Property and equipment, net 28,540 33,508
Goodwill, intangibles and other assets 40,373 43,207
--------- ---------
$ 382,863 $ 432,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - STEAG Electronic
Systems AG, a shareholder $ 44,490 $ 44,613
Current portion of long-term debt 106 289
Line of credit 704 4,589
Accounts payable 11,607 14,175
Accrued liabilities 76,223 78,459
Deferred revenue 124,544 136,580
Deferred income taxes 2,487 3,241
--------- ---------
Total current liabilities 260,161 281,946
--------- ---------
Long-term liabilities:
Long-term debt 93 1,001
Deferred income taxes 6,422 8,020
--------- ---------
Total long-term liabilities 6,515 9,021
--------- ---------
Total liabilities 266,676 290,967
--------- ---------
Stockholders' equity:
Common stock 37 37
Additional paid-in capital 497,993 497,536
Accumulated other comprehensive loss (6,784) (6,553)
Treasury stock (2,987) (2,987)
Retained deficit (372,072) (346,295)
--------- ---------
Total stockholders' equity 116,187 141,738
--------- ---------
$ 382,863 $ 432,705
========= =========
See accompanying notes to condensed consolidated financial statements.
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
-------------------------
MAR. 31, APR. 1,
2002 2001
-------- --------
Net sales $ 46,205 $ 73,499
Cost of sales 38,786 50,327
-------- --------
Gross profit 7,419 23,172
-------- --------
Operating expenses:
Research, development and engineering 9,564 18,901
Selling, general and administrative 22,097 31,874
In-process research and development -- 10,100
Amortization of goodwill and intangibles 1,687 10,399
-------- --------
Total operating expenses 33,348 71,274
-------- --------
Loss from operations (25,929) (48,102)
Interest and other income, net 1 488
-------- --------
Loss before provision for income taxes (25,928) (47,614)
Provision for (benefit from) income taxes (151) 2,012
-------- --------
Net loss $(25,777) $(49,626)
======== ========
Net loss per share:
Basic $ (0.70) $ (1.36)
Diluted $ (0.70) $ (1.36)
Shares used in computing net loss per share:
Basic 37,079 36,613
Diluted 37,079 36,613
See accompanying notes to condensed consolidated financial statements.
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
---------------------------
MAR. 31, APR. 1,
2002 2001
-------- ----------
Cash flows from operating activities:
Net loss $ (25,777) $ (49,626)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 2,400 5,073
Deferred taxes (621) (2,208)
Provision for allowance for doubtful accounts 277 339
Provision for excess and obsolete inventories 1,216 --
Amortization of goodwill and intangibles 1,687 10,399
Loss on disposal of property and equipment 84 --
Acquired in-process research and development -- 10,100
Changes in assets and liabilities,
net of effect of acquisitions:
Restricted cash (1,271) --
Accounts receivable 15,327 38,101
Advance billings 11,311 (35,234)
Inventories 10,043 (767)
Inventories - delivered systems 9,781 (35,574)
Prepaid expenses and other current assets 1,728 239
Other assets (811) 4,996
Accounts payable (2,567) 2,411
Accrued liabilities (2,718) (31,110)
Deferred revenue (12,036) 49,657
--------- ---------
Net cash provided by (used in) operating activities 8,053 (33,204)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (91) (4,070)
Proceeds from the sale of equipment 2,413 --
Net proceeds from the sale and maturity
(purchases) of investments (383) 8,018
Net cash acquired from acquisitions -- 39,075
--------- ---------
Net cash provided by investing activities 1,939 43,023
--------- ---------
Cash flows from financing activities:
Payments on line of credit and long-term debt (5,119) (118)
Borrowings against line of credit 177 4,166
Change in interest accrual on STEAG note 647 --
Proceeds from the issuance of common stock,
net of costs 457 961
--------- ---------
Net cash provided by (used in) financing activities (3,838) 5,009
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (216) (4,815)
--------- ---------
Net increase in cash and cash equivalents 5,938 10,013
Cash and cash equivalents, beginning of period 64,057 33,431
--------- ---------
Cash and cash equivalents, end of period $ 69,995 $ 43,444
========= =========
Supplemental disclosures:
Common stock issued for business -- $ 294,804
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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,
2001 has been derived from the audited financial statements as of that date, but
does not include all disclosures required by generally accepted accounting
principles. The financial statements should be read in conjunction with the
audited financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Estimates are used for, but
are not limited to, the accounting for the allowance for the doubtful accounts,
inventory reserves, depreciation and amortization periods, sales returns,
warranty costs and income taxes. Actual results could differ from these
estimates.
The condensed consolidated financial statements include the accounts of
Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The results of operations for the three months ended March 31, 2002 are not
necessarily indicative of results that may be expected for the future quarters
or for the entire year ending December 31, 2002.
Revenue Recognition
Mattson derives revenue from two primary sources - equipment sales and spare
part sales. Mattson's revenue recognition policy follows SEC Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." Under
SAB 101, on equipment sales (a) of existing products where the arrangement
includes new specifications, (b) where the sale is to a new customer and
includes acceptance clauses, (c) on all sales of new products, or (d) on all
sales of wet surface preparation products, revenue is recognized on customer
acceptance. For equipment sales to existing customers of products of a type
previously sold to such customer, under an arrangement that includes customer
specified acceptance provisions that Mattson has previously demonstrated, the
lesser of the fair value of the equipment or the contractual amount billable
upon shipment is recorded as revenue upon transfer of title, which usually
occurs upon delivery of the product. Revenue not recognized at the time of
shipment is recorded as 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 evaluation systems at any time with
limited or no penalty, the Company does not recognize revenues on these products
until the evaluation systems are accepted by the customer. Revenues related to
direct sales in Japan are recognized upon customer acceptance. Thermal products
sold through a distributor in Japan are recognized upon transfer of title to the
distributor. Equipment that has been delivered to customers but has not been
accepted is classified as "Inventories - delivered systems" in the accompanying
condensed consolidated balance sheets. Receivables for which revenue has not
been recognized are classified as "Advance billings" in the accompanying
condensed consolidated balance sheets. Deferred revenue was $124.5 million as of
March 31, 2002 and $136.6 million as of December 31, 2001. These amounts
represent equipment that was shipped for which amounts were billed per the
contractual terms but have not been recognized as revenue in accordance with SAB
101.
6
Revenue for spare parts is recognized upon shipment of the spare parts. In
all cases, revenue is only recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed and determinable and
collectibility is reasonably assured.
Service and maintenance contract revenue is recognized on a straight-line
basis over the service period of the related contract.
Goodwill and Intangible Assets
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved
for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a
purchase business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite lives be amortized over their estimated useful lives and reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and is
no longer amortizing goodwill, thereby eliminating annual goodwill amortization
of approximately $3.9 million, based on anticipated amortization for fiscal year
2002 that would have been incurred under the prior accounting standard. In
accordance with the provisions of SFAS No. 142, the Company reclassified $4.6
million from intangible assets to goodwill relating to the acquired workforce.
The Company completed the first step of the transitional goodwill impairment
test and has determined that no potential impairment exists. As a result, the
Company has recognized no transitional impairment loss in the first quarter of
2002 in connection with the adoption of SFAS No. 142. However, no assurances can
be given that future evaluations of goodwill will not result in charges as a
result of future impairment. The Company will evaluate goodwill at least on an
annual basis and whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable from its estimated future cash flow. The
Company will continue to amortize the identified intangibles. The amortization
expense is estimated to be $6.7 million for fiscal 2002 and each of fiscal years
2003, 2004 and 2005. Amortization of intangibles for the first quarter ended
March 31, 2002 was approximately $1.7 million.
The following table summarizes the components of gross and net goodwill and
intangible asset balances (in thousands):
March 31, 2002 December 31, 2001
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
(unaudited)
Goodwill $ 16,005 $ (3,329) $ 12,676 $ 12,610 $ (2,759) $ 9,851
Other intangible assets -- -- -- 5,126 (570) 4,556
Developed technology 31,997 (7,475) 24,522 31,997 (5,788) 26,209
-------- -------- -------- -------- -------- --------
Total goodwill and intangibe assets $ 48,002 $(10,804) $ 37,198 $ 49,733 $ (9,117) $ 40,616
======== ======== ======== ======== ======== ========
7
Amortization expense related to intangible assets was as follows (unaudited, in
thousands):
For the Three Months Ended
--------------------------
March 31, April 1,
2002 2001
------- -------
Goodwill amortization $ -- $ 4,574
Other intangible assets amortization -- 2,256
Developed technology amortization 1,687 3,569
------- -------
Total amortization $ 1,687 $10,399
======= =======
Net loss on a pro forma basis, excluding goodwill amortization expense, would
have been as follows (unaudited, in thousands):
For the Three Months Ended
--------------------------
March 31, April 1,
2002 2001
---------- ----------
Net loss, as reported $ (25,777) $ (49,626)
Add: goodwill amortization -- 6,830
---------- ----------
Net loss -- pro forma $ (25,777) $ (42,796)
========== ==========
Basic and diluted loss per share, as reported $ (0.70) $ (1.36)
Add: goodwill amortization -- 0.19
---------- ----------
Basic and diluted loss per share -- pro forma $ (0.70) $ (1.17)
========== ==========
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143"). SFAS 143 addresses accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The liability is accreted to its
present value each period while the cost is depreciated over its useful life.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company believes that the adoption of SFAS 143 will not
have a significant effect on its financial position, results of operations or
cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144, which replaces SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires long-lived assets to be measured at the
lower of carrying amount or fair value less the cost to sell. SFAS 144 also
broadens disposal transactions reporting related to discontinued operations.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company adopted SFAS 144 on January 1, 2002 and
this adoption did not have a significant effect on its financial position,
results of operations or cash flows.
Reclassifications
Certain reclassifications were made to prior year financial data to conform with
current year presentation.
8
Note 2 Balance Sheet Detail (in thousands):
MAR. 31, DEC. 31,
2002 2001
--------- ---------
(unaudited)
Inventories:
Purchased parts and raw materials $ 67,344 $ 77,399
Work-in-process 21,395 25,480
Finished goods 3,278 5,363
Evaluation systems 5,734 5,734
--------- ---------
97,751 113,976
Less: inventory reserves (43,023) (47,989)
--------- ---------
$ 54,728 $ 65,987
========= =========
Accrued liabilities:
Warranty and installation reserve $ 21,801 $ 19,936
Accrued compensation and benefits 9,856 10,320
Income taxes 5,276 5,165
Commissions 2,184 2,765
Customer deposits 1,378 686
Other 35,728 39,587
--------- ---------
$ 76,223 $ 78,459
========= =========
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"), as amended on November 5, 2001, to acquire eleven direct and
indirect subsidiaries, comprising the semiconductor equipment division of STEAG
Electronic Systems AG ("the STEAG Semiconductor Division"), and 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 an
amendment to the Combination Agreement, the Company also agreed to pay SES the
amount of 19.2 million EUROS (approximately $16.7 million as of March 31, 2002).
Under both of these obligations, as of March 31, 2002, the Company owed an
aggregate amount of approximately $44.5 million to SES (including accrued
interest at 6% per annum) which is due and payable on July 2, 2002. On April 30,
2002, upon closure of a private placement transaction (see Note 10), the Company
issued approximately 1.3 million shares of common stock to SES in exchange for
the cancellation of $8.1 million of indebtedness, thereby reducing the
outstanding principal amount of the notes to approximately $35.5 million.
The Company reimbursed SES $3.3 million in acquisition related costs, in
April 2001. The Company also agreed to grant options to purchase 850,000 shares
of common stock to employees of the STEAG Semiconductor Division subsequent to
the closing of the transaction, which is not included in the purchase price of
the STEAG Semiconductor Division. As part of the acquisition transaction, the
Company, SES, and Mr. Mattson (the then chief executive officer and
approximately 17.7% stockholder of the Company, based on shares outstanding
immediately prior to the acquisition) entered into a Stockholder Agreement dated
December 15, 2000, as amended on November 5, 2001, providing for, among other
things, the election of two persons designated by SES to the Company's board of
directors, SES rights to maintain its pro rata share of the outstanding Company
common stock and participate in future stock issuances by the Company, and
registration rights in favor of SES. At March 31, 2002, SES held approximately
31.9% of the Company's common stock, and currently has two representatives on
the Company's board of directors. On April 30, 2002, upon closure of the private
placement transaction (see Note 10), SES held approximately 29.6% of the
Company's common stock.
9
The acquisition has been accounted for under the purchase method of
accounting and the results of operations of the STEAG Semiconductor Division are
included in the consolidated statement of operations of the Company from the
date of acquisition. The purchase price of the acquisition of $148.6 million,
which included $6.2 million of direct acquisition related costs (including
amounts reimbursed to SES), was used to acquire the common stock of the eleven
direct and indirect subsidiaries of the STEAG Semiconductor Division. The
allocation of the purchase price to the assets acquired and liabilities assumed,
is as follows (in thousands):
Net tangible assets ........................ $ 114,513
Acquired developed technology .............. 18,100
Acquired workforce ......................... 11,500
Goodwill ................................... 10,291
Acquired in-process research and development 5,400
Deferred tax liability ..................... (11,248)
---------
$ 148,556
=========
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $39.9 million. Goodwill, including workforce, is
no longer amortized under SFAS 142. Developed technology is being amortized over
an estimated useful life of five years. The Company attributed $5.4 million to
in-process research and development which was expensed immediately.
In connection with the acquisition of the STEAG Semiconductor Division, the
Company allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows related to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represent next-generation technologies that
are expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man-month data and
technological progress. The STEAG Semiconductor Division had spent approximately
$3.3 million on the in-process projects, and expected to spend approximately an
additional $2.4 million to complete all phases of the R&D. Anticipated
completion dates ranged from 10 to 18 months, at which times the Company
expected to begin benefiting from the developed technologies.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are based on
management's estimates of cost of sales, operating expenses, and income taxes
from such projects.
Aggregate revenues for the developmental STEAG Semiconductor Division
products were estimated to grow at a compounded annual growth rate of
approximately 41 percent for the seven years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies were expected to enter the market.
10
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.
During the second half of 2001, the Company performed assessments of the
carrying value of its long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of the STEAG Semiconductor Division. The assessment was
performed pursuant to SFAS No. 121 as a result of deteriorated market conditions
in the semiconductor industry in general, a reduced demand specifically for the
Thermal products acquired in the merger and revised projected cash flows for
these products in the future. As a result of this assessment, the Company
recorded a charge of $3.5 million to reduce the carrying value of certain
intangible assets associated with the acquisition of the STEAG Semiconductor
Division based on the amount by which the carrying value of these assets
exceeded their fair value. Fair value was determined based on valuations
performed by an independent third party. In addition, the Company recorded a
charge of $1.0 million to reduce certain property and equipment purchased from
the STEAG Semiconductor Division to zero as there were no future cash flows
expected from these assets. These charges of $4.5 million relating to the STEAG
Semiconductor Division were recorded as impairment of long-lived assets and
other charges in 2001.
CFM Technologies
Under the Plan of Merger with CFM, the Company agreed to acquire CFM in a
stock-for-stock merger in which the Company issued 0.5223 shares of its common
stock for each share of CFM common stock outstanding at the closing date. In
addition, the Company agreed to assume all outstanding CFM stock options, based
on the same 0.5223 exchange ratio. The Company also agreed to issue additional
options to purchase 500,000 shares of its common stock to employees of CFM
subsequent to the closing of the transaction. On January 1, 2001, the Company
completed its acquisition of CFM. The purchase price included 4,234,335 shares
of Mattson common stock valued at approximately $150.2 million and the issuance
of 927,457 options to acquire Mattson common stock for the assumption of
outstanding options to purchase CFM common stock valued at approximately $20.4
million using the Black Scholes option pricing model and the following
assumptions: risk free interest rate of 6.5%, average expected life of 2 years,
dividend yield of 0% and volatility of 80%.
The merger has been accounted for under the purchase method of accounting
and the results of operations of CFM are included in the consolidated statement
of operations of the Company from the date of acquisition. The purchase price of
the acquisition of CFM was $174.6 million, which included $4.0 million of direct
acquisition related costs. The allocation of the purchase price to the assets
acquired and liabilities assumed, is as follows (in thousands):
Net tangible assets ............................. $ 28,536
Acquired developed technology ................... 50,500
Acquired workforce ............................. 14,700
Goodwill ........................................ 102,216
Acquired in-process research and development .... 4,700
Deferred tax liability .......................... (26,081)
--------
$174,571
========
11
Purchased intangible assets, including goodwill, workforce and developed
technology were approximately $167.4 million. Goodwill, including workforce, is
no longer amortized under SFAS 142. Developed technology is being amortized over
an estimated useful life of five years. The Company attributed $4.7 million to
in-process research and development which was expensed immediately.
In connection with the acquisition of CFM, the Company allocated
approximately $4.7 million of the purchase price to an in-process research and
development project. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to one incomplete research and development
project. At the date of acquisition, the development of this project had not yet
reached technological feasibility, and the research and development in progress
had no alternative future use. Accordingly, the purchase price allocated to
in-process research and development was expensed as of the acquisition date.
At the acquisition date, CFM was conducting design, development,
engineering and testing activities associated with the completion of the O3Di
(Ozonated Water Module). The project under development at the valuation date
represents next-generation technology that is expected to address emerging
market demands for more effective, lower cost, and safer resist and oxide
removal processes. At the acquisition date, the technology under development was
approximately 80 percent complete based on engineering man-month data and
technological progress. CFM had spent approximately $0.2 million on the
in-process project, and expected to spend approximately an additional $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 expected to begin
benefiting from the developed technology.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from the project
is based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
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.
During the second half of 2001, the Company performed assessments of the
carrying value of the long-lived assets to be held and used including goodwill,
other intangible assets and property and equipment recorded in connection with
its acquisition of CFM. The assessment was performed pursuant to SFAS No. 121 as
a result of deteriorated market conditions in the semiconductor industry in
general, a reduced demand specifically for the Omni products acquired in the
merger and revised projected cash flows for these products in the future. As a
result of this assessment, the Company recorded a charge of $134.6 million
during 2001 to reduce the carrying value of goodwill, and other intangible
assets, associated with the acquisition of CFM based on the amount by which the
carrying value of these assets exceeded their fair value. Fair value was
determined based on valuations performed by an independent third party. In
addition, the Company recorded a charge of $5.8 million to reduce certain
property and equipment purchased from CFM to zero as there were no future cash
flows expected from these assets. The total charge of $140.4 million relating to
CFM has been recorded as impairment of long-lived assets and other charges in
2001.
12
Note 4 Net Income (Loss) Per Share
Earnings per share is calculated in accordance with SFAS No. 128, "Earning
Per Share." SFAS No. 128 requires dual presentation of basic and diluted net
income (loss) per share on the face of the income statement. Basic earnings per
share (EPS) is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. For purposes of computing diluted earnings per
share, weighted average common share equivalents do not include stock options
with an exercise price that exceeded the average market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data.
THREE MONTHS ENDED
--------------------------
MAR. 31, APR. 1,
2002 2001
--------- ----------
(Unaudited)
BASIC AND DILUTED LOSS PER SHARE:
Loss available to common stockholders $ (25,777) $ (49,626)
Weighted average common shares outstanding 37,079 36,613
--------- ---------
Basic and diluted loss per share $ (0.70) $ (1.36)
========== =========
For the three month periods ended March 31, 2002 and April 1, 2001,
outstanding stock options of 4,614,367 and 4,989,244 shares, respectively, were
excluded from the computation of diluted EPS because the effect of including
them would have been antidilutive.
Note 5 Comprehensive Income (Loss)
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.
For the three month periods ended March 31, 2002 and April 1, 2001, the
unaudited comprehensive loss was $26.0 million and $53.8 million, respectively,
consisting primarily of foreign currency translation adjustments, unrealized
investment gain (loss) and gain (loss) on cash flow hedging instruments.
Note 6 Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The chief executive officer of the Company is the Company's chief
decision maker. As the Company's business is completely focused on one industry
segment, design, manufacturing and marketing of advanced fabrication equipment
to the semiconductor manufacturing industry, management believes that the
Company has one reportable segment. The Company's revenues and profits are
generated through the sale and service of products for this one segment. As a
result, no additional operating segment information is required to be disclosed.
The following is net sales information by geographic area for the three
month periods ended (in thousands, unaudited):
March 31, April 1,
2002 2001
-------- --------
United States $ 7,163 $ 21,978
Europe 10,515 22,116
Asia Pacific (including Korea,
Taiwan, Singapore and China) 24,769 21,291
Japan 3,758 8,114
-------- --------
$ 46,205 $ 73,499
======== ========
The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.
For purposes of determining sales to significant customers, the Company
includes sales to customers through its distributor (at the sales price to the
distributor) and excludes the distributor as a significant customer. In the
first quarter of 2002, three customers accounted for 16%, 14% and 11% of net
sales. In the first quarter of 2001, 14% of net sales were to a single customer.
13
Note 7 Debt
As discussed in Note 3, the Company has notes payable to STEAG Electronic
Systems AG in the aggregate amount of $44.5 million as of March 31, 2002. The
notes accrue interest at 6% per annum and are due July 2, 2002. The notes
contain certain covenants including maintaining a minimum accounts receivable
balance of $15.6 million at the Company's Thermal and Wet subsidiaries in
Germany. At March 31, 2002, the Company was in compliance with the covenants.
The Company's Japanese subsidiary entered into a credit line with Bank of
Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $6.8 million),
secured by trade accounts receivable. The line bears interest at a per annum
rate of TIBOR plus 75 basis points, which is currently approximately 0.81%. The
term of the line is through June 20, 2002. The Company has guaranteed the line.
At March 31, 2002, the borrowing on this line was 93.0 million Yen
(approximately $704,000).
On March 29, 2002, the Company entered into a one-year revolving line of
credit with a bank in the amount of $20.0 million. The line of credit will
expire on March 29, 2003, if not extended by then. All borrowings under this
line will bear interest at a per annum rate equal to the bank's prime rate plus
125 basis points. The line of credit is secured by a blanket lien on all
domestic assets including intellectual property. The line of credit requires the
Company to satisfy certain quarterly financial covenants, including a minimum
quick ratio, minimum tangible net worth and minimum revenue. At March 31, 2002,
the Company was in compliance with the covenants. Currently, the Company has no
borrowings against this line of credit.
Note 8 Other Items
On February 27, 2002, the Company signed an agreement to sell to Metron
Technology N.V. ("Metron") the AG Associates rapid thermal processing (RTP)
product line, which the Company obtained through its acquisition of the of STEAG
Semiconductor Division. Upon closing in March 2002, Metron assumed exclusive
ownership of the 4000 and 8000 series RTP product line and the distribution of
spare parts for the installed base. The Company recognized an immaterial loss on
this transaction. As part of the agreement, Metron sub-leased a portion of the
San Jose facility from the Company.
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's subsidiary, Mattson Wet Products, Inc., formerly CFM
Technologies, Inc., in a patent infringement suit against Dainippon Screen
Manufacturing Co., Ltd. (DNS), a large Japanese manufacturer of semiconductor
wafer processing equipment. In the lawsuit, CFM claimed that six different DNS
wet processing systems infringed two of CFM's patents on drying technology. DNS
denied that its machines infringed and alleged that the CFM patents were
invalid. The jury found that each of the six DNS machines infringed both of the
CFM patents, and that both patents were valid. The Company plans to seek damages
for DNS' past infringements and to request an injunction against future
shipments by DNS of infringing products into the United States market.
In March 2002, the Company sold its building in West Chester, PA, for
$2,315,000 in cash, with no contingencies. The Company also paid off the
remaining mortgage on this building, of approximately $0.8 million, thereby
reducing its long-term debt by the like amount. In April 2002, the Company sold
its building in Austin, TX, for $1,950,000. There was no remaining mortgage on
this building. Both buildings were determined as excess facilities.
Note 9 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.
14
The Company, at its Exton, Pennsylvania location, leases two buildings to
house its manufacturing and administrative functions related to the Omni
product. The two leases have approximately 17 years remaining with an
approximate combined rental cost of $1.5 million annually. The leases for both
buildings allow for subleasing the premises without the approval of the
landlord. One of the two Exton Pennsylvania buildings has been sublet for a
period of five years with an additional extension of five years. The sublease is
expected to cover all related costs on this building. In addition, the Company
has excess facilities in San Jose, CA, and has non-cancelable annual lease
payment obligations of approximately $1.0 million over seven months related to
this facility. As of March 31, 2002, there is a remaining lease loss accrual of
approximately $3.4 million related to these facilities, recorded as accrued
liabilities in the accompanying condensed consolidated balance sheet. In
determining the facilities lease loss, net of cost recovery efforts from
expected sublease income, various assumptions were made, including the time
period over which the building will be vacant; expected sublease terms; and
expected sublease rates. The facilities lease losses and related asset
impairment charges are estimates in accordance with SFAS No. 5, "Accounting for
Contingencies," and represent the low-end of an estimated range that may be
adjusted upon the occurrence of future triggering events. Triggering events may
include, but are not limited to, changes in estimated time to sublease, sublease
terms, and sublease rates. Should operating lease rental rates continue to
decline in current markets or should it take longer than expected to find a
suitable tenant to sublease the facilities, adjustments to the facilities lease
losses accrual will be made in future periods, if necessary, based upon the then
current actual events and circumstances. The Company has estimated that under
certain circumstances the facilities lease losses could increase approximately
$1.5 million for each additional year that the facilities are not leased and
could aggregate $25.5 million under certain circumstances. The Company expects
to make payments related to the above noted facilities lease losses over the
next seventeen years, less any sublet amounts.
As of March 31, 2002, the Company has established an accrual for purchase
commitments of $1.0 million for excess inventory component commitments to key
component vendors that it believes may not be realizable during future normal
ongoing operations.
Note 10 Subsequent Events
On April 30, 2002, the Company completed the closing of its previously
announced private placement transaction in the amount of $45.6 million. As a
result, the Company issued approximately 7.4 million shares of its common stock
at a price of $6.15 per share, received net cash proceeds of $37.5 million, and
converted into common stock portion of its outstanding promissory notes to STEAG
Electronic Systems AG, Mattson's largest shareholder, in the amount of $8.1
million. The transaction included 5.1 million shares sold to the State of
Wisconsin Investment Board and 1.3 million shares sold to STEAG Electronic
Systems AG, as well as 1.0 million shares to another investor.
In April 2002, the Company agreed to extend loans to Brad Mattson and Diane
Mattson, each in the principal amount of $700,000. The loans are unsecured, not
collateralized, do not bear interest and are due and payable on August 31, 2002.
During the term of the notes, Mr. Mattson and Ms. Mattson may not sell, pledge
or otherwise dispose of any common stock of the Company. Any disposition of
common stock of the Company by Mr. Mattson or Ms. Mattson would be a default
under the notes and all proceeds from such disposition would be applied to the
repayment of the notes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this report. In
addition to historical information, this discussion contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth or
incorporated by reference under "Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this document.
Overview
We are a leading supplier of semiconductor wafer processing equipment used in
"front-end" fabrication of integrated circuits. Our products include dry strip
equipment, rapid thermal processing ("RTP") equipment, wet surface preparation
equipment, and plasma-enhanced chemical vapor deposition ("PECVD") equipment.
Our integrated circuit manufacturing equipment utilizes innovative technology to
deliver advanced processing capability and high productivity. We provide our
customers with worldwide support through our international technical support
organization, and our comprehensive warranty program.
15
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 is currently experiencing a severe downturn, which has
resulted in drastic capital spending cutbacks by our customers. Semiconductor
companies continue to reevaluate their capital spending, postpone their new
purchase decisions, and reschedule or cancel existing orders. Declines in demand
for semiconductors deepened throughout each sequential quarter of 2001, and
continuing in 2002. 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.
On January 1, 2001, we acquired the semiconductor equipment division of
STEAG Electronic Systems AG (the "STEAG Semiconductor Division"), which
consisted of a number of entities that became our direct or indirect
wholly-owned subsidiaries. At the same time, we acquired CFM Technologies, Inc.
("CFM"). We refer to these simultaneous acquisitions as "the merger." The merger
substantially changed the size of our company and the nature and breadth of our
product lines. The STEAG Semiconductor Division was a leading supplier of RTP
equipment, and both the STEAG Semiconductor Division and CFM were suppliers of
wet surface preparation equipment. At the time we completed the merger, our
industry was entering an economic slowdown.
During the first quarter ended March 31, 2002, we had a net loss of $25.8
million. Future results will depend on a variety of factors, particularly
overall market conditions and the timing of significant orders, our cost
reduction efforts, our ability to bring new systems to market, the timing of new
product releases by our competitors, patterns of capital spending by our
customers, market acceptance of new and/or enhanced versions of our systems,
changes in pricing by us, our competitors, customers, or suppliers and the mix
of products sold. We are dependent upon increases in sales 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.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgements, including those related to inventories, warranty
obligations, bad debts, investments, intangible assets, income taxes,
restructuring costs, retirement benefits, contingencies and litigation.
Management bases its estimates and judgements on historical experience and on
various other factors that are believed to be reasonable under the
circumstances. These form the basis for making judgements about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We consider certain accounting policies related to revenue recognition,
warranty obligations, inventories, and impairment of long-lived assets as
critical to our business operations and an understanding of our results of
operations. See Note 1 of Notes to the Condensed Consolidated Financial
Statements for a summary of our significant accounting policies.
Revenue recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101).
16
We derive revenue from two primary sources- equipment sales and spare part
sales. We account for equipment sales as follows: 1.) for equipment sales of
existing products with new specifications or acceptance clauses or to a new
customer, for all sales of new products, and for all sales of our wet surface
preparation products, revenue is recognized upon customer acceptance; 2.) for
equipment sales to existing customers, who have purchased the same equipment
with the same specifications and previously demonstrated acceptance provisions,
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 deferred revenue and recognized as revenue upon customer acceptance.
From time to time, however, we allow customers to evaluate systems, and since
customers can return such systems at any time with limited or no penalty, we do
not recognize revenue until these evaluation systems are accepted by the
customer. Revenues associated with sales to customers in Japan are recognized
upon customer acceptance, with the exception of sales of our RTP products
through our distributor in Japan, where revenues are recognized upon title
transfer to the distributor. For spare parts, revenue is recognized upon
shipment. Service and maintenance contract revenue is recognized on a
straight-line basis over the service period of the related contract.
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a significant number of our shipments. Any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses.
Warranty. Our warranties require us to repair or replace defective product
or parts, generally at a customer's site, during the warranty period at no cost
to the customer. The warranty offered on our systems ranges from 12 months to 36
months depending on the product. A provision for the estimated cost of warranty
is recorded as a cost of sales based on our historical costs at the time of
revenue recognition. While our warranty costs have historically been within our
expectations and the provisions we have established, we cannot be certain that
we will continue to experience the same warranty repair costs that we have in
the past. A significant increase in the costs to repair our products could have
a material adverse impact on our operating results for the period or periods in
which such additional costs materialize.
Inventories. Due to the changing market conditions, recent economic
downturn and estimated future requirements, inventory valuation charges of
approximately $26.4 million were recorded in the second half of 2001. This
reserve largely covers inventories for Thermal and Omni products that were
acquired in the merger with the Steag Semiconductor Division and CFM. Given the
downturn in the semiconductor industry, the age of the inventories on hand and
the introduction of new products, we wrote down excess inventories to net
realizable value based on forecasted demand and obsolete inventories that are no
longer used in current production. Actual demand may differ from forecasted
demand and such difference may have a material effect on our financial position
and results of operations. In the future, if our inventory is determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of such determination. Although we attempt to accurately
forecast future product demand, any significant unanticipated changes in demand
or technological developments could have a significant impact on the value of
our inventory and our reported operating results. As of March 31, 2002, there
was an allowance for excess and obsolete inventory of approximately $43.0
million.
Goodwill and Other Intangible Assets. We assess the realizability of
goodwill and other intangible assets at least annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." Our judgments regarding the existence of impairment
indicators are based on changes in strategy, market conditions and operational
performance of our business. Future events, including significant negative
industry or economic trends, could cause us to conclude that impairment
indicators exist and that goodwill and other intangibles assets are impaired.
Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations. In assessing the recoverability
of goodwill and other intangible assets, we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for these assets.
17
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
------------------------
MAR. 31, APR. 1,
2002 2001
-------- --------
Net sales 100% 100%
Cost of sales 84% 68%
---- ----
Gross profit 16% 32%
---- ----
Operating expenses:
Research, development and engineering 21% 26%
Selling, general and administrative 48% 43%
In-process research and development -- 14%
Amortization of goodwill and intangibles 4% 14%
---- ----
Total operating expenses 72% 97%
---- ----
Loss from operations (56)% (65)%
Interest and other income, net -- 1%
---- ----
Loss before provision for income taxes (56)% (65)%
Provision for (benefit from) income taxes -- 3%
---- ----
Net loss (56)% (68)%
==== ====
Net Sales
Net sales for the first quarter of 2002 were $46.2 million compared to
$73.5 million for the same quarter last year, reflecting a decrease of 37.1%.
Net sales decreased in the first quarter of 2002, compared to the first quarter
of 2001, primarily due to lower demand as a result of the continuing economic
downturn in the semiconductor industry. Our industry entered an economic
slowdown during the first quarter of 2001 which has continued to affect us
through the current quarter.
Our total deferred revenue at March 31, 2002 was approximately $124.5
million, down from $136.6 million at the end of the fourth quarter of 2001, and
up from $93.5 million at the end of the first quarter of 2001. We expect
deferred revenue to be recognized as revenue in our consolidated statement of
operations in the next six to twelve months.
Bookings for the first quarter of 2002 were $26.0 million, an increase of
32.0 percent from $19.7 million in the fourth quarter of 2001, and a decrease of
73.6 percent from $98.5 million in the first quarter of 2001, resulting in a
book-to-bill ratio of 0.77 to 1.0. Backlog at the end of the first quarter of
2002 was $48.2 million, a decrease of 19.7 percent from the $60.0 million at the
end of the fourth quarter of 2001, and a decrease of 43.8 percent from the $85.7
million at the end of the first quarter of 2001.The decrease of the current
quarter bookings compared to the prior year period was primarily due to the
economic slowdown in the semiconductor industry.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea),
accounted for 84.5% and 70.1% for the first quarter of 2002 and 2001,
respectively. We anticipate that international sales will continue to account
for a significant portion of net sales for 2002.
Gross Margin
Our gross margin for the first quarter of 2002 was 16.1%, a decrease from
31.5% for the first quarter of 2001. The decrease in gross margin was due to
various factors. In the first quarter of 2001, our production volume was almost
double our current quarter volume. This higher volume in the first quarter of
2001 allowed for better absorption of our manufacturing overhead costs. We also
continue to have acquisition-related inventory costs that are adversely
affecting our gross margin. In addition, we are facing pricing pressure from
competitors that is affecting our gross margin.
18
Since the economic slowdown, we have taken steps to reduce the number of
our manufacturing sites. We have closed three manufacturing sites since the
first quarter of 2001, and currently have four manufacturing sites remaining. We
continue to have excess capacity at our remaining sites, but have reduced costs
at those sites in an effort to increase our gross margin. During the quarter
ended March 31, 2002, we sold two of the manufacturing sites that we closed
during fiscal 2001. We anticipate subletting another manufacturing site in the
second quarter of 2002.
The acquisition-related inventory costs (APB 16) continue to affect us.
This inventory was revalued upward, to reflect its market value, at the time of
the merger. The largest portion of this revalued inventory was in our Wet
Division, where all revenue is deferred until we obtain customer acceptance. Due
to the nature of the equipment produced by the Wet Division, these customer
acceptances can take up to twelve months. Revenue relating to the Wet Division
equipment shipped during the first quarter of 2001 was virtually all deferred,
so the related costs, including the APB 16 costs, were also deferred and did not
impact cost of goods sold during that period. The sale of equipment that was
shipped in 2001 is now being recognized as revenue as it is accepted by
customers, and the related costs, including APB 16 costs, are included in our
cost of goods sold and had an adverse effect on our gross margin in the quarter.
For the first quarter of 2002, these APB 16 costs were $5.6 million. As of March
31, 2002, we have approximately $6.2 million of APB 16 costs remaining in our
inventories - delivered systems that will continue to have a negative impact on
our future gross margins.
Our gross margin has varied over the years and will continue to vary based
on multiple factors including competitive pressures, product mix, economies of
scale, overhead absorption levels, any remaining ABP 16 costs in our inventories
and costs associated with the introduction of new products.
Research, Development and Engineering
Research, development and engineering expenses for the first quarter of
2002 were $9.6 million, or 20.7 % of net sales, as compared to $18.9 million, or
25.7% of net sales, for the first quarter of 2001. The decrease in research,
development and engineering expenses in the first quarter of 2002 was due to the
reduction of personnel that was implemented during the second half of 2001 and
more selective research and development project funding. Total research,
development and engineering expenses declined from $13.4 million in the fourth
quarter of 2001, as a result of the reduction of personnel and continuing cost
controls during the first quarter of 2002.
Selling, General and Administrative
Selling, general and administrative expenses for the first quarter of 2002
were $22.1 million, or 47.8% of net sales, as compared to $31.9 million, or
43.4% of net sales, for the first quarter of 2001. The first quarter of 2001
included substantial integration expenses relating to the merger, while there
are no comparable expenses in the corresponding quarter of 2002. The decrease in
selling, general and administrative expenses is primarily due to a reduction in
personnel related costs including travel, and reduced commission expenses,
relative to the drop in bookings activity in the first quarter of 2002 compared
with 2001.
We had substantial legal expenses in the first quarter of 2002 due to the
trial in the DNS lawsuit for patent infringement, which resulted in a verdict in
our favor. We expect additional expenses related to this lawsuit as we are now
seeking an injunction against DNS to prevent them from selling infringing
products in the US. See Part 2, Item 1, Legal Proceedings below for a more
detailed explanation.
In-process research and development
In connection with our acquisition of the STEAG Semiconductor Division, we
allocated approximately $5.4 million of the purchase price to in-process
research and development projects. This allocation represented the estimated
fair value based on risk-adjusted cash flows relating to the incomplete research
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, the
purchase price allocated to in-process research and development was expensed as
of the acquisition date.
19
At the acquisition date, the STEAG Semiconductor Division was conducting
design, development, engineering and testing activities associated with the
completion of the Hybrid tool and the Single wafer tool. The projects under
development at the valuation date represent next-generation technologies that
are expected to address emerging market demands for wet processing equipment.
At the acquisition date, the technologies under development were
approximately 60 percent complete based on engineering man-month data and
technological progress. The STEAG Semiconductor Division had spent approximately
$3.3 million on the in-process projects, and expected to spend approximately an
additional $2.4 million to complete all phases of the R&D. Anticipated
completion dates ranged from 10 to 18 months, at which times we expected to
begin benefiting from the developed technologies.
In making our purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects are based on our
estimates of cost of sales, operating expenses, and income taxes from such
projects.
Aggregate revenues for the developmental STEAG Semiconductor Division
products were estimated to grow at a compounded annual growth rate of
approximately 41 percent for the seven years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies were 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.
In connection with the acquisition of CFM, we allocated approximately $4.7
million of the purchase price to an in-process research and development project.
This allocation represented the estimated fair value based on risk-adjusted cash
flows related to one incomplete research and development project. At the date of
acquisition, the development of this project had not yet reached technological
feasibility, and the research and development in progress had no alternative
future use. Accordingly, the purchase price allocated to in-process research and
development was expensed as of the acquisition date.
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 we expected to begin benefiting
from the developed technology.
In making our purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows from the
project, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from the project
is based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.
20
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 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.
Amortization of Goodwill and Intangibles
We adopted SFAS 142 on January 1, 2002, and no longer amortize goodwill. We
continue to amortize the identified intangibles, in an amount estimated to be
$6.7 million for fiscal 2002, or approximately $1.7 million per quarter.
Liquidity and Capital Resources
Our cash and cash equivalents (excluding restricted cash) and short-term
investments were $76.2 million at March 31, 2002, an increase of $6.4 million
from $69.8 million at December 31, 2001. Stockholders' equity at March 31, 2002
was approximately $116.2 million compared to $141.7 million as of December 31,
2001.
On April 30, 2002, we announced the completion and closing of a private
placement transaction in the amount of $45.6 million. As a result, we have
issued approximately 7.4 million shares of our common stock at a price of $6.15
per share, have received net cash proceeds of $37.5 million and have converted
into common stock our outstanding promissory notes to STEAG Electronic Systems
AG, our largest shareholder, in the amount of $8.1 million. We intend to use net
proceeds from this private placement for general corporate purposes.
As a result of our acquisition of the STEAG Semiconductor Division at the
beginning of 2001, as of March 31, 2002 we owed SES a total of approximately
$44.5 million under two promissory notes which bear interest at 6.0% per year
and are due July 2, 2002. After the closing of the private placement transaction
on April 30, 2002, we reduced our outstanding promissory notes to SES by $8.1
million, to $36.4 million. One promissory note, in the amount of $26.9 million,
is secured by an irrevocable standby letter of credit issued by Silicon Valley
Bank, which is in turn secured by approximately $26.9 million of restricted
cash. This obligation had originally been due on July 2, 2001. On November 5,
2001, SES agreed to extend the maturity date to July 2, 2002, and the interest
accrued through July 2, 2001 was capitalized and added to the principal under
the extended note. The note contains certain covenants, which we are in
compliance with. The second promissory note, originally in the amount of 19.2
million EURO (approximately $16.7 million), is secured by the accounts
receivable of two of our acquired subsidiaries, Mattson Thermal Products GmbH,
Dornstadt, Germany, and Mattson Wet Products GmbH, Pliezhausen, Germany. On
April 30, 2002, the amount of this note was reduced to 10.2 million EURO
(approximately $9.2 million as of April 30, 2002). This note contains covenants
and requires us to maintain certain balances, including a minimum amount of
applicable accounts receivable of at least 17.9 million EURO (approximately
$15.6 million) at our relevant subsidiaries. At March 31, 2002, we are in
compliance with all of these covenants.
In fiscal 2001, our Japanese subsidiary entered into a credit line with
Bank of Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $6.9
million), secured by trade accounts receivable. The line bears interest at a per
annum rate of TIBOR plus 75 basis points, which is approximately 0.81% at
December 31, 2001. The term of the line is through June 20, 2002. We have
guaranteed the line. At March 31, 2002, the borrowing on this line was 93.0
million Yen (approximately $704,000).
21
On March 29, 2002 we entered into a one-year revolving line of credit with
a bank in the amount of $20.0 million. The line of credit will expire on March
29, 2003, if not extended by then. All borrowings under this line will bear
interest at a per annum rate equal to the bank's prime rate plus 125 basis
points. The line of credit is secured by a blanket lien on all domestic assets
including intellectual property. The line of credit requires the Company to
satisfy certain quarterly financial covenants, including maintaining a minimum
quick ratio, minimum tangible net worth and meeting minimum revenue targets, all
of which we are in compliance with.
Net cash provided by operating activities was $8.1 million during the first
quarter of 2002 as compared to $33.2 million used in operating activities during
the same quarter in 2001.
The net cash provided by operating activities during the first quarter of
2002 was primarily attributable to the non-cash depreciation and amortization of
$2.4 million, a decrease in accounts receivable of $15.3 million, a decrease in
advance billings of $11.3 million and a decrease in inventories of $19.8
million. The cash provided by operating activities was offset by a net loss of
$25.8 million, a decrease in deferred revenue of $12.0 million, a decrease in
accounts payable of $2.6 million, a decrease in accrued liabilities of $2.7
million, and an increase in restricted cash by $1.3 million. The restricted cash
increased due to letters of credit issued to various suppliers, which were
secured by cash.
Net cash used in operating activities during the first quarter of 2001 was
$33.2 million and was primarily attributable to the net loss of $49.6 million,
deferred taxes of $2.2 million, an increase in advance billings of $35.2
million, an increase in inventories of $36.3 million, and a decrease in accrued
liabilities of $31.1 million. These uses were offset by non-cash depreciation
and amortization of $5.1 million, amortization of goodwill and intangibles of
$10.4 million, acquired in-process research and development of $10.1 million, a
decrease in accounts receivable of $38.1 million, an increase in accounts
payable of $2.4 million, and an increase in deferred revenue of $49.7 million.
Net cash provided by investing activities was $1.9 million during the first
quarter of 2002 as compared to $43.0 million during the same quarter last year.
The net cash provided by investing activities during the first quarter of 2002
is attributable to the proceeds from the sale of investments of $4.1 million,
and sale of equipment of $2.4 million, offset by purchases of investments of
$4.4 million. Net cash provided by investing activities during the first quarter
of 2001 was $43.0 million and was attributable to the net cash acquired from the
acquisition of the STEAG Semiconductor Division and CFM of $39.1 million, net
sales of investments of $8.0 million, offset by purchases of property and
equipment of $4.1 million.
Net cash used in financing activities was $3.8 million during the first
quarter of 2002 as compared to $5.0 million provided by financing activities
during the same quarter last year. The net cash used in financing activities
during the first quarter of 2002 is primarily attributable to the payment
against our Japanese line of credit and long-term debt of $5.1 million offset by
a reduction in the interest accrual on a note payable to SES of $0.6 million,
borrowings under our Japanese line of credit in the amount of $177,000 and
proceeds from our stock plans of $0.5 million. Net cash provided by financing
activities during the first quarter of 2001 was $5.0 million and was primarily
attributable to the borrowings from our Japanese line of credit of $4.2 million
and proceeds from our stock plans of $1.0 million, net of $118,000 payment on
line of credit.
Based on current projections, we believe that our current cash and
investment positions will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. Our
primary source of liquidity is our existing unrestricted cash balance, cash
generated by our operations, and the proceeds from the private placement
transaction. During 2001 and the first quarter of 2002, we had operating losses.
Our operating plans are based on and require that we reduce our operating
losses, control our expenses, manage our inventories, and collect our accounts
receivable balances. In this market downturn, we are exposed to a number of
challenges and risks, including delays in payments of our accounts receivable by
our customers, and postponements or cancellations of orders. Postponed or
cancelled orders can cause us to have excess inventory and underutilized
manufacturing capacity. If we are not able to significantly reduce our present
operating losses over the upcoming quarters, our operating losses could
adversely affect our cash and working capital balances, and we may be required
to seek additional sources of financing.
22
We may need to raise additional funds in future periods through public or
private financing, or other sources, to fund our operations. We may not be able
to obtain adequate or favorable financing when needed. Failure to raise capital
when needed could harm our business. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced, and these equity securities may have rights, preferences or
privileges senior to our common stock. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants on our operations and financial condition.
RISK FACTORS:
Factors That May Affect Future Results and Market Price of Stock
In this report and from time to time, we may make forward looking statements
regarding, among other matters, our future strategy, product development plans,
productivity gains of our products, financial performance and growth. The
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
address matters which are subject to a number of risks and uncertainties which
could cause actual results to vary materially, including those set forth in our
Annual Report on Form 10-K, all of which are incorporated here by reference, and
the following:
Our Quarterly Operating Results Fluctuate Significantly and Are
Difficult to Predict, and May Fall Short of Anticipated Levels, Which
Could Cause Our Stock Price to Decline.
Our quarterly revenue and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. This fluctuation is
due to a number of factors, including:
o cyclicality of the semiconductor industry;
o delays, cancellations and push-outs of orders by our customers;
o delayed product acceptance or payments of invoices by our customers;
o size and timing of sales, shipments and acceptance of our products;
o entry of new competitors into our market, or the announcement of new
products or product enhancements by competitors;
o sudden changes in component prices or availability;
o variability in the mix of products sold;
o manufacturing inefficiencies caused by uneven or unpredictable order
patterns, reducing our gross margins;
o higher fixed costs due to increased levels of research and development
or patent litigation costs; and
o successful expansion of our worldwide sales and marketing
organization.
A substantial percentage of our operating expenses are fixed in the short
term and we may be unable to adjust spending to compensate for an unexpected
shortfall in revenues. As a result, any delay in generating or recognizing
revenues could cause our operating results to be below the expectations of
market analysts or investors, which could cause the price of our common stock to
decline.
23
The Price of Our Common Stock Has Fluctuated in the Past and May Continue to
Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or
to Securities Litigation.
The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future. We believe that a number of
factors could cause the price of our common stock to fluctuate, perhaps
substantially, including:
o general conditions in the semiconductor industry or in the worldwide
economy;
o announcements of developments related to our business;
o fluctuations in our operating results and order levels;
o announcements of technological innovations by us or by our
competitors;
o new products or product enhancements by us or by our competitors;
o developments in patent litigation or other intellectual property
rights; or
o developments in our relationships with our customers, distributors,
and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of high technology stocks in particular, have experienced extreme
price fluctuations. These fluctuations have frequently been unrelated to the
operating performance of the affected companies. Such fluctuations could
adversely affect the market price of our common stock. In the past, securities
class action litigation has often been instituted against a company following
periods of volatility in its stock price. This type of litigation, if filed
against us, could result in substantial costs and divert our management's
attention and resources.
The Semiconductor Equipment Industry is Cyclical, is Currently
Experiencing a Severe and Prolonged Downturn, and Causes Our Operating
Results to Fluctuate Significantly.
The semiconductor industry is highly cyclical and has historically
experienced periodic downturns, whether the result of general economic changes
or capacity growth temporarily exceeding growth in demand for semiconductor
devices. During periods of declining demand for semiconductor manufacturing
equipment, customers typically reduce purchases, delay delivery of products
and/or cancel orders. Increased price competition may result, causing pressure
on our net sales, gross margin and net income. We have been experiencing
cancellations, delays and push-outs of orders, which reduce our revenues, cause
delays in our ability to recognize revenue on orders and reduce backlog. Further
order cancellations, reductions in order size or delays in orders will
materially adversely affect our business and results of operations.
Following the very strong year in 2000, the semiconductor industry is now
in the midst of a significant and prolonged downturn, and we and other industry
participants are experiencing lower bookings, significant push outs and
cancellations of orders. The severity and duration of the downturn are unknown,
but is impairing our ability to sell our systems and to operate profitably. If
demand for semiconductor devices and our systems remains depressed for an
extended period, it will seriously harm our business.
As a result of the acquisition of the STEAG Semiconductor Division and CFM at
the beginning of 2001, we are a larger, more geographically diverse company,
less able to react quickly to the cyclicality of the semiconductor business,
particularly in Europe and other regions where restrictive laws relating to
termination of employees prohibit us from quickly reducing costs in order to
meet the downturn. Accordingly, during this latest downturn we have been unable
to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal
year ended December 31, 2001, our net loss was $336.7 million, compared to net
income of $1.5 million for the year ended December 31, 2000. For the first
quarter of 2002 our net loss was $25.8 million. If our actions to date are
insufficient to effectively align our cost structure with prevailing market
conditions, we may be required to undertake additional cost-cutting measures,
and may be unable to continue to invest in marketing, research and development
and engineering at the levels we believe are necessary to maintain our
competitive position. Our failure to make these investments could seriously harm
our long-term business prospects.
24
We are Exposed to the Risks Associated with Industry Overcapacity, Including
Reduced Capital Expenditures, Decreased Demand for Our Products and the
Inability of Many of Our Customers to Pay for Our Products.
As a result of the recent economic downturn, inventory buildups in
telecommunication products and slower than expected personal computer sales have
resulted in overcapacity of semiconductor devices and has caused semiconductor
manufacturers to experience cash flow problems and reduce their capital
spending. As our business depends in significant part upon capital expenditures
by manufacturers of semiconductor devices, including manufacturers that open new
or expand existing facilities, continued overcapacity and reductions in capital
expenditures by our customers could cause further delays or decreased demand for
our products. If existing fabrication facilities are not expanded or new
facilities are not built, demand for our systems may not develop or increase,
and we may be unable to generate significant new orders for our systems. If we
are unable to develop new orders for our systems, we will not achieve
anticipated net sales levels.
In addition, many semiconductor manufacturers are continuing to forecast
that revenues in the short-term will remain flat or lower than in previous
high-demand years, and we believe that some customers may experience cash flow
problems. As a result, if customers are not successful generating sufficient
revenue or securing alternative financing arrangements, we may be unable to
close sales or collect accounts receivables from such customers or potential
customers, and may be required to take additional reserves against our accounts
receivables.
We Will Need to Improve or Implement New Systems, Procedures and
Controls.
The integration of STEAG and CFM and their operational and financial
systems and controls has placed a significant strain on our management
information systems and our administrative, operational and financial resources.
To efficiently manage the combined company, we must improve our existing and
implement new operational and financial systems, procedures and controls. Since
the merger, we have commenced integration of the businesses, systems and
controls of the three companies, however, each business has historically used a
different financial system, and the resulting integration and consolidation has
placed and will continue to place substantial demands on our management
resources. Improving or implementing new systems, procedures and controls may be
costly, and may place further burdens on our management and internal resources.
If we are unable to improve our existing or implement new systems, procedures
and controls in a timely manner, our business could be seriously harmed.
Our Results of Operations May Suffer if We Do Not Effectively Manage
Our Inventory.
To achieve commercial success with our product lines, we will need to
manage our inventory of component parts and finished goods effectively to meet
changing customer requirements. Some of our products and supplies have in the
past and may in the future become obsolete while in inventory due to rapidly
changing customer specifications. For example, in the quarters ended September
30, 2001 and December 31, 2001, we took inventory valuation charges of $26.4
million. If we are not successfully able to manage our inventory, including our
spare parts inventory, we may need to write off unsaleable or obsolete
inventory, which would adversely affect our results of operations.
Our Financial Reporting may be Delayed and Our Business may be Harmed if Our
Independent Public Accountant, Arthur Andersen LLP, is Unable to Perform
Required Services.
On March 14, 2002, our independent public accounting firm, Arthur Andersen
LLP, was indicted for alleged obstruction of justice arising from the federal
government's investigation of Enron Corporation. Arthur Andersen pleaded not
guilty to the charges, and indicated that it intends to defend itself
vigorously. As a public company, we are required to file with the SEC periodic
financial statements audited or reviewed by an independent, certified public
accountant. The SEC has announced that it will continue accepting financial
statements audited by Arthur Andersen, and interim financial statements reviewed
by it, so long as Arthur Andersen is able to make certain representations to its
clients. Our ability to make timely SEC filings could be impaired if the SEC
ceases accepting financial statements audited by Arthur Andersen, if Arthur
Andersen becomes unable to make required representations to us or if for any
other reason Arthur Andersen is unable to perform required audit-related
services for us in a timely manner. This in turn could damage or delay our
access to the capital markets, and could be disruptive to our operations and
affect the price and liquidity of our securities. Certain investors, including
significant mutual funds and institutional investors, may choose not to hold or
invest in securities of issuers that do not have current financial reports
available. In such a case, we would promptly seek to engage other independent
public accountants or take such other actions as may be necessary to enable us
to timely file required financial reports. In addition, relief that may
otherwise be available to shareholders under the federal securities laws against
auditing firms may not be available as a practical matter against Arthur
Andersen should it cease to operate or become financially impaired.
25
We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation,
Reduction or Delay in Purchases By, or Failure to Collect Receivables From,
These Customers Could Harm Our Business.
Currently, we derive most of our revenues from the sale of a relatively
small number of systems to a relatively small number of customers, which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle
for each system, coupled with customers' capital budget considerations, make the
timing of customer orders uneven and difficult to predict. In addition, our
backlog at the beginning of a quarter is not expected to include all orders
required to achieve our sales objectives for that quarter. As a result, our net
sales and operating results for a quarter depend on our ability to ship orders
as scheduled during that quarter as well as obtain new orders for systems to be
shipped in that same quarter. Any delay in scheduled shipments or in acceptances
of shipped products would delay our ability to recognize revenue, collect
outstanding accounts receivable, and would materially adversely affect our
operating results for that quarter. A delay in a shipment or customer acceptance
near the end of a quarter may cause net sales in that quarter to fall below our
expectations and the expectations of market analysts or investors.
Our list of major customers changes substantially from year to year, and
we cannot predict whether a major customer in one year will make significant
purchases from us in future years. Accordingly, it is difficult for us to
accurately forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer, our financial results
will be negatively impacted.
Unless We Can Continue To Develop and Introduce New Systems that Compete
Effectively on the Basis of Price and Performance, We May Lose Future Sales and
Customers, Our Business May Suffer, and Our Stock Price May Decline.
Because of continual changes in the markets in which our customers and we
compete, our future success will depend in part upon our ability to continue to
improve our systems and technologies. These markets are characterized by rapidly
changing technology, evolving industry standards, and continuous improvements in
products and services. Due to the continual changes in these markets, our
success will also depend upon our ability to develop new technologies and
systems that compete effectively on the basis of price and performance and that
adequately address customer requirements. In addition, we must adapt our systems
and processes to support emerging target market industry standards.
The success of any new systems we introduce is dependent on a number of
factors, including timely completion of new system designs accepted by the
market, and may be adversely affected by manufacturing inefficiencies and the
challenge of producing systems in volume which meet customer requirements. We
may not be able to improve our existing systems or develop new technologies or
systems in a timely manner. In particular, the transition of the market to 300
mm wafers will present us with both an opportunity and a risk. To the extent
that we are unable to introduce 300mm systems that meet customer requirements on
a timely basis, our business could be harmed. We may exceed the budgeted cost of
reaching our research, development and engineering objectives, and estimated
product development schedules may require extension. Any delays or additional
development costs could have a material adverse effect on our business and
results of operations. Because of the complexity of our systems, significant
delays can occur between the introduction of systems or system enhancements and
the commencement of commercial shipments.
26
The Timing of the Transition to 300mm Technology is Uncertain and Competition
May Be Intense.
We have invested, and are continuing to invest, substantial resources to
develop new systems and technologies to automate the processing of 300mm wafers.
However, the timing of the industry's transition to 300mm manufacturing
technology is uncertain, partly as a result of the recent period of reduced
demand for semiconductors. Delay in the transition to 300mm manufacturing
technology could adversely affect our potential revenues and opportunities for
future growth. Moreover, delay in the transition to 300mm technology could
permit our competitors to introduce competing or superior 300mm products at more
competitive prices, causing competition to become more vigorous.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Interest Rate Risk.
The Company's exposure to market risk for changes in interest rates relates
to the Company's investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. We have no cash flow exposure due to rate changes for cash
equivalents and short-term investments, as all of these investments are at fixed
interest rates.
The table below presents the fair value of principal amounts and related
weighted average interest rates for the Company's investment portfolio as of
March 31, 2002.
Fair Value
March 31, 2002
--------------
(In thousands)
Assets
Cash and cash equivalents ......................... $ 69,995
Average interest rate ............................. 1.88%
Restricted cash ................................... $ 28,571
Average interest rate ............................. 1.00%
Short-term investments ............................ $ 6,216
Average interest rate ............................. 3.47%
Foreign Currency Risk
The Company transacts business in various foreign countries. We employed a
foreign currency hedging program utilizing foreign currency forward exchange
contracts to hedge foreign currency fluctuations with Japan. The goal of the
hedging program is to lock in exchange rates to minimize the impact of foreign
currency fluctuations. We do not use foreign currency forward exchange contracts
for speculative or trading purposes.
The following table provides information as of March 31, 2002 about our
derivative financial instruments, which are comprised of foreign currency
forward exchange contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at the contract
exchange rates), the weighted average contractual foreign currency exchange
rates, and the estimated fair value of those contracts.
Average Estimated
Notional Contract Fair
Amount Rate Value
-------- -------- ---------
(In thousands, except for
average contract rate)
Foreign currency forward exchange contracts:
Japanese Yen...................... $ 4,460 129.18 $ 4,364
27
The local currency is the functional currency for all foreign sales
operations. Our exposure to foreign currency risk has increased as a result of
our global expansion of business. In addition, as of March 31, 2002, a payment
obligation to STEAG Electronic Systems AG in the amount estimated to be $16.7
million is payable in EUROS and, accordingly, there exists exposure for exchange
rate volatility. On April 30, 2002, on closing of a private placement
transaction, the payment obligation to STEAG Electronic Systems AG in the amount
estimated to be $17.3 million was reduced by $8.1 million to approximately $9.2
million. The exposure for the exchange rate volatility of the STEAG payment
obligation has been mostly neutralized by using a natural balance sheet hedge
and keeping EUROS in a foreign currency bank account. The balance of this bank
account was 16.1 million EUROS at March 31, 2002.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of business, we are subject to claims and
litigation, including claims that we infringe third party patents, trademarks
and other intellectual property rights. Although we believe that it is unlikely
that any current claims or actions will have a material adverse impact on our
operating results or our financial position, given the uncertainty of litigation
we can not be certain of this. Moreover, the defense of claims or actions, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources.
We are currently litigating three ongoing cases against two of our
competitors involving our wet surface preparation intellectual property. These
litigation matters were brought by or against our subsidiary Mattson Wet
Products, Inc., formerly CFM, and are described under Item 3 of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2001. Except as
discussed below, there have been no material developments in these actions
during the first quarter of 2002.
We have asserted claims relating to our U.S. Patent No. 4,911,761 (the
"`761 patent") against YieldUP International Corp. ("YieldUP"), alleging
infringement, inducement of infringement, and contributory infringement (this
case is CFMT and CFM Technologies, Inc. v. YieldUP International Corp., Civil
Action No. 95-549-RRM). The judge previously hearing the case has retired, and
as a result the case has been transferred to another judge who has delegated
responsibility for all matters, other than trial, to a magistrate judge. On
March 14, 2002, the Court heard oral argument, and on April 15, 2002 issued an
order denying YieldUP's summary judgment motion for non-infringement. On May 1,
2002, we asserted infringement by YieldUP of the `597 patent. Discovery and
trial schedules are now being determined.
We are both a defendant and a counterclaim plaintiff in a lawsuit with
Dainippon Screen Manufacturing Co., Ltd. ("DNS") (this case is Dainippon Screen
Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc. and CFM
Technologies, Inc., Civil Action No. 97-20270 JW). In this action, the DNS
parties sought a declaratory judgment of invalidity and unenforceability of the
`761 patent and U.S. Patent No. 4,984,597 (the "`597 patent"), and a
declaratory judgment of non-infringement of the `761 patent. We counterclaimed
alleging infringement, inducement of infringement, and contributory infringement
of certain claims of each of the '761 patent, the '597 patent, and two other
patents. On March 5, 2002, after a four-week jury trial, a verdict was returned
in our favor, finding that all six models of DNS's wet surface preparation
equipment that included an "LPD dryer" infringed each of the 20 asserted claims
of our `761 and `597 patents. The jury also explicitly rejected each of DNS's
asserted invalidity defenses. We have asked the Court to resolve the remaining
DNS inequitable conduct defense and business tort claims on summary judgment and
requested prompt entry of a permanent injunction against future acts of
infringement by DNS. Our motions are pending. Damages remain to be tried.
However, should DNS prevail on its inequitable conduct defense and business tort
claims, it is possible that our `761 and `597 patents could be ruled
unenforceable. On May 7, 2002, the Court was scheduled to hear arguments on DNS'
four motions for judgment as a matter of law, as well as their motion requesting
a new trial. On May 14, 2002 the Court was scheduled to hear arguments on our
summary judgment motion denying DNS' claim of inequitable conduct. The Court has
currently scheduled a hearing on our request for a permanent injunction for June
3, 2002.
28
Our involvement in any patent dispute, or other intellectual property
dispute or action to protect trade secrets and know-how, could result in a
material adverse effect on our business. Adverse determinations in current
litigation or any other litigation in which we may become involved could subject
us to significant liabilities to third parties, require us to grant licenses to
or seek licenses from third parties, and prevent us from manufacturing and
selling our products. Any of these situations could have a material adverse
effect on our business.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1(1) Restated Articles of Incorporation of the Company
3.2(1) Bylaws of the Registrant
99.1 Risk Factors incorporated by reference to Annual Report
on Form 10-K.
- -----------
(1) Incorporated by reference from Mattson Technology, Inc. current report
on Form 8-K filed on January 30, 2001.
(b) Reports on Form 8-K
None.
29
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: March 15, 2002
/s/ David Dutton
-----------------------------------
David Dutton
President and Chief Executive Officer
/s/ Ludger Viefhues
-----------------------------------
Ludger Viefhues
Executive Vice President -- Finance
and Chief Financial Officer
30