<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
MATTSON TECHNOLOGY INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0208119
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3550 West Warren Avenue
Fremont, California 94538
-----------------------------------------------------
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: 510-657-5900
-------------
Securities registered pursuant to Section 12(b) of the Act: None
-----
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 Par Value per Share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares outstanding of registrant's Common Stock as of February 27,
1998: 14,220,115
As of February 27, 1998, the aggregate market value of voting Common Stock held
by non-affiliates of the registrant, based upon the closing for registrant's
Common Stock as reported in the Wall Street Journal, was $103,149,366.
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs, and certain
assumptions made by the Company's management. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions
that are difficult to predict; therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein
under "Business--Factors That May Affect Future Results and Market Price of
Stock" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as those noted in the documents incorporated
herein by reference. Unless required by law, the Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. However, readers
should carefully review the risk factors set forth in other reports or
documents the Company files from time to time with the Securities and
Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
Mattson Technology, Inc. ("Mattson" or the "Company") designs, manufactures and
markets advanced fabrication equipment for sale to the worldwide semiconductor
industry. The Company's goal is to provide advanced process capability combined
with a high productivity platform to achieve a substantial improvement in
productivity over competitive equipment, and to support this equipment with
world class support.
Each step of the manufacturing process for integrated circuits (ICs) requires
specialized manufacturing equipment. Three of the principal steps in
manufacturing ICs are the deposition of insulating or conducting materials onto
a wafer, the projection of a pattern through a mask onto light sensitive
materials known as photoresist (photolithography), and the etching or removal of
the deposited material not covered by the pattern. Before these steps can be
repeated on the wafer, the photoresist must be removed ("stripped" or "ashed").
This cycle may be repeated as many as thirty times for the most advanced ICs.
In 1991 the Company introduced its first product, the Aspen Strip system, a
photoresist removal system that uses diode source technology. The product was
enhanced in 1993 to allow for a second process chamber and the use of a
"downstream" triode process. The Company commenced shipment in 1995 of a new
version of its Aspen Strip which utilizes inductively coupled plasma (ICP)
technology. In 1994, the Company introduced its second system, the Aspen CVD, a
plasma enhanced chemical vapor deposition system. In 1995, the Company
introduced its third system, the Aspen RTP, a rapid thermal processing system
which is currently in the early marketing phase. In 1996, the Company
introduced a fourth product, the Aspen LiteEtch for isotropic etch processing.
The Aspen Strip, CVD, RTP and LiteEtch are based on the Aspen platform, which
includes wafer handling robotics, dual loadlocks, control electronics and system
software.
SEMICONDUCTOR MANUFACTURING PRODUCTIVITY
Increasing demand for ICs has resulted from the growth of existing markets and
the emergence of new markets such as multimedia, wireless communication and
portable computing. The increase in demand has been fueled by the industry's
ability to supply more complex, higher performance ICs, while continuing to
reduce cost per function. The more complex ICs and the attendant reductions in
feature size have necessitated advanced and expensive wafer fabrication
equipment, resulting in the escalation of the average cost of advanced wafer
fabrication facilities. For example, the average cost in 1984 for a 64 kilobit
dynamic random access memory IC (DRAM) fabrication facility was approximately
$60 million, as compared to the average cost today for a 64 megabit DRAM
fabrication facility of approximately $1 to $2 billion.
2
<PAGE>
Advancements in semiconductor manufacturing equipment have enabled IC
manufacturers to increase productivity dramatically by reducing feature size,
increasing manufacturing yields, improving the uptime of wafer fabrication
equipment and increasing the wafer size. Although feature size will continue to
be reduced, the other historical sources of productivity growth are now reaching
diminishing returns:
HIGHER YIELDS. In the last ten years, manufacturing yields have increased
substantially and the time to reach maximum yield levels has decreased
significantly. For example, the percentage of good DRAMs per wafer during
initial production has increased from 20% ten years ago to over 80% at present.
The potential for further yield improvement is limited.
IMPROVED UPTIME. Wafer fabrication line reliability has improved markedly in
the last ten years. Since equipment uptime now normally exceeds 90%, there is
little room for improvement in equipment reliability.
LARGER WAFER SIZES. Leading edge wafer fabrication lines are currently using 8"
diameter wafers, up from 4" diameters ten years ago. Currently, a handful of IC
makers are starting up pilot lines for 12" diameter wafers, with the balance of
the manufacturers reporting plans to convert to 12" (300mm) production within
the next 2-3 years.
As the industry achieved productivity gains from these sources during the last
ten years, wafer throughput actually declined. Demands from IC manufacturers for
higher yield and larger wafer sizes have resulted in a shift from batch
processing (multiple wafers simultaneously processed) to single wafer processing
(one wafer processed at a time). This shift has resulted in reduced throughput
and increased cost.
Semiconductor equipment manufacturers have responded to the declining throughput
problem with cluster tools, which employ single wafer processing through the use
of a common wafer handling platform with several single wafer processing
chambers. However, cluster tools are highly complex systems, often resulting in
low reliability. The Company believes that this low reliability, combined with
only modestly improved throughput, has limited the ability of cluster tools to
meet the productivity needs of semiconductor manufacturers.
Faced with diminishing productivity gains, IC manufacturers have increased their
emphasis on factors that contribute to overall manufacturing costs. This focus
has led to the use of cost of ownership ("COO") to measure productivity. COO
measures costs associated with operation of equipment in a fabrication line.
There is no accepted industry standard for calculating COO. The Company
calculates COO by estimating the total costs to operate a system including
depreciation, overhead, labor and materials, and dividing those costs by the
system's total wafer output. Because the Company, the Company's customers and
the Company's competitors may use different formulas for calculating COO, there
can be no assurance that the Company and the Company's customers and
competitors, each using the same data, would arrive at the same determination of
COO for a particular system. As used in this document, COO refers to the
Company's method of calculating COO as described in this paragraph.
THE MATTSON SOLUTION - MODULAR CONTINUOUS PROCESSING
The Company believes its Aspen system provides higher productivity than
conventional single wafer systems and cluster tools. The Aspen system's modular
continuous processing architecture achieves this with high throughput, savings
of cleanroom floorspace and improvements in process control as compared to
conventional single wafer processing.
The Aspen system achieves higher throughput, savings in cleanroom floorspace
and enhanced process control by:
SIMULTANEOUS PROCESSING. The Company's Aspen systems process up to two wafers
concurrently in its RTP systems, up to four wafers concurrently (two in each
chamber) in its Strip and LiteEtch systems, and up to eight wafers concurrently
(four in each chamber) in its CVD systems.
3
<PAGE>
CONTINUOUS PROCESSING. The Company's Aspen system substantially reduces
overhead time (the time during which the system is not actually processing
wafers). The Aspen system robotics can handle four wafers simultaneously,
reducing the overhead time during removal and insertion of the wafers into the
process chambers. Through the use of an inner loadlock, the Aspen system
eliminates the overhead time required to pump down the process chambers to a
vacuum and backfill the chambers to atmospheric pressure after processing. An
outer loadlock permits an operator to replace a cassette of processed wafers
with a new cassette while the system continues to process wafers in the inner
loadlock. As a result of these factors, the Aspen Strip generally requires less
than 12 seconds of overhead time per wafer which the Company believes is a
substantial improvement over present competitive systems.
MODULARITY. The Company's Aspen platform allows the use of one or two process
chambers, supporting various applications or increased capacity in any one
application. This modularity enables the Company to develop new systems by
adding a different process chamber to the platform. When a second chamber is
added, the COO is reduced. The commonality of parts, manufacturing techniques,
training, and documentation for the Aspen platform offers operating advantages
to the Company and its customers.
FLOORSPACE SAVINGS. As a result of higher throughput and modularity, customers
require fewer systems and can achieve a substantial savings in cleanroom
floorspace.
ENHANCED PROCESS CONTROL. The Aspen system's dedicated single wafer
processing stations achieve the within-wafer process control benefits of
conventional single wafer systems. In addition, dual loadlocks allow the
process chambers to maintain constant pressure and temperature which improves
upon the wafer-to-wafer repeatability of conventional single wafer systems.
The higher throughput of the Aspen system permits the use of slower, more
consistent and less damaging process technologies than are economically
feasible in conventional single wafer systems.
STRATEGY
The Company's objective is to become a leading supplier of advanced processing
equipment to the worldwide semiconductor industry. The Company intends to
achieve this objective by providing advanced process capability combined with a
substantial improvement in productivity over competitive equipment, and by
supplying world class support. Specific elements of the Company's strategy
include:
IMPROVED PROCESS TECHNOLOGY. The Company seeks to enter segments of the
semiconductor equipment industry when traditional technologies are unable to
satisfy emerging process requirements. For example, submicron etching results in
residues that have required multiple acid processing steps for removal by
traditional stripping systems. The Aspen Strip's plasma processes are capable of
removing many of these residues without the need for the acid steps.
HIGHER PRODUCTIVITY. The Company's goal is to offer systems which have
substantial improvements in productivity over the leading competitive
equipment in each market it enters. The Company believes that its Aspen
Strip, LiteEtch, CVD and RTP systems achieve this goal. In particular, the
Company believes that its systems achieve improvements in throughput, which
it considers an important factor in COO and productivity. The Company plans
to use the same strategy to leverage the high productivity platform for 300mm
production throughout its product lines, in a manner similar to the way it
introduced its 200mm (8") product lines.
REDUCED TIME TO MARKET. The Company's Aspen platform includes wafer handling
robotics, dual loadlocks, control electronics and system software. By basing new
systems on this platform, the Company is able to focus its development
activities almost exclusively on the process chamber. By basing new products on
the standard Aspen platform and the new 300mm Aspen 3 platform, the Company
believes it is able to develop new products quickly and at relatively low cost.
COMMITMENT TO GLOBAL MARKET. From inception, the Company's strategy has been to
sell its systems to leading semiconductor manufacturers throughout the world.
The Company introduced its systems into Japan through Marubeni, which has
substantial experience in plasma equipment and CVD. The Company has opened
service and support offices in Taiwan, Korea and Germany and a research,
development and engineering, and marketing office in Japan. International sales
as a percentage of its total net sales for 1997, 1996, and 1995 were 65%, 76%,
and 67%, respectively.
4
<PAGE>
PRODUCTS
To date, the Company has introduced four systems which are based upon the Aspen
platform: the Aspen Strip for photoresist stripping, the Aspen CVD for chemical
vapor deposition, the Aspen RTP for rapid thermal processing and the Aspen
LiteEtch for isotropic etching.
THE ASPEN STRIP
PHOTORESIST STRIPPING MARKET. A stripping system removes photoresist etch
residues before further film deposition or diffusion processing. Traditional
strip systems use wet and dry chemistry technology. In traditional wet chemistry
strip systems, the photoresist is removed by immersing the wafer into acid or
solvent baths. Dry chemistry strip systems, such as the Company's Aspen ICP
Strip, create gaseous atomic oxygen that is exposed to the wafer to remove the
photoresist.
The demand for photoresist strip equipment has increased as the complexity and
number of strip steps required for each wafer have increased. Complex ICs
require a greater number of layers and a corresponding greater number of
stripping steps with greater than 20 steps required for 64 Megabit DRAMs. The
increase in the number of strip steps in the semiconductor manufacturing process
has led to a need for semiconductor manufacturers to increase their photoresist
strip capacity. The increased complexity of the strip process has also led to
higher average selling prices of such equipment. According to Dataquest figures
published in February 1998, the market was estimated at $354 million for 1997,
and projected to reach $700 million by the year 2000.
EMERGING TECHNICAL REQUIREMENTS. Fabrication of complex ICs with feature sizes
under 0.25 microns requires new strip technologies that have greater sensitivity
to residues, contamination drive-in and underlying film selectivities. With each
shift in feature size, the Company estimates that manufacturers typically
require a 2X reduction in the level of allowable contamination drive-in. In
addition to providing "gentler" non-damaging plasma, the strip system must also
meet the increasing demands of removing photoresist and sidewall polymers from
higher energy etch processes that require increased sidewall polymerization and
resist cross-linking to meet stringent profile control.
MATTSON'S STRIP TECHNOLOGY. To meet this demand, the Company markets
worldwide three separate and distinct plasma strip source products, each
designed for different design regimes. The most recent product offering uses
a patented, inductively coupled plasma (ICP) technology to gently and
thoroughly remove photoresist and residue from the wafer. This remote
(downstream) plasma source generates a gentle, low energy plasma that
achieves advanced "all dry" stripping with zero damage and low contamination
drive-in results without additional post-strip chemical processing. The ICP
technology is specifically designed for advanced semiconductor device
manufacturing submicron processes 0.25 microns and below. When combined with
the standard Aspen platform, the Company believes that the Aspen ICP Strip
system provides significant cost of ownership advantages.
THE ASPEN STRIP. The Aspen Strip consists of the standard Aspen platform
together with one or two processing chambers. Each chamber processes two wafers
at a time. System throughput varies with the resist thickness and is
approximately 60-120 wafers per hour with one chamber and 110-160 wafers per
hour with two chambers for most applications. The Company believes the two
chamber Aspen Strip offers a substantial reduction in COO relative to
conventional single wafer systems. In particular, the Company believes that its
systems achieve substantial improvements in throughput which result in a
substantial reduction in COO and that its systems allow customers to reduce wet
chemical steps, which makes it possible for the customer to achieve an even
greater reduction in COO by decreasing the number of systems needed. To meet the
increasingly stringent requirements of advanced strip processing, in 1997 the
Company introduced the Aspen ICP-SM- Strip system, which features a selectable
plasma mode source. The Company is also extending the ICP source into the
emerging 300mm market by pairing it with the Aspen 3 platform for 300mm
manufacturing.
5
<PAGE>
THE ASPEN CVD
CVD MARKET. CVD processes are used to deposit insulating (dielectric) and
conducting films on wafers. These films are the basic material used to form the
resistors, capacitors, and transistors of an integrated circuit. These materials
are also used to form the wiring and insulation between these electrical
components. The deposition of dielectric films has become a higher priority due
to the increasing number of metalization layers required and the difficulty of
insulating and interconnecting them. The Company's Aspen CVD system deposits
silane-based films, such as silicon dioxide (oxide) films, for interlayer and
intermetal dielectric applications, and silicon nitride (nitride) films, for
final passivation applications. The Aspen CVD also deposits TEOS and
fluorinated TEOS.
EMERGING TECHNICAL REQUIREMENTS. As feature sizes continue to decrease, CVD
process equipment must meet more stringent requirements. Particles or defect
densities must be minimized and controlled to achieve the desired yields. Film
properties such as stress, stoichiometry and conformality must also be improved
and more tightly controlled. Semiconductor manufacturers also place importance
on compatibility with metalization steps, such as aluminum deposition. Finally,
as process complexity increases, the number of CVD steps increases and
throughput and system productivity become significantly more important.
MATTSON'S CVD TECHNOLOGY. Plasma enhanced CVD allows the system to process
wafers at a relatively low temperature, reducing the risk of damage to aluminum
metalization layers during processing. Suppression of hillock formation in
aluminum interconnects is accomplished by limiting the time at higher
temperatures prior to deposition to 8-10 seconds. Film stress and density can be
controlled independent of process chemistry by the use of a low frequency RF
bias. Dual loadlocks isolate the process chamber from pressure and temperature
fluctuations, thereby reducing particulates and improving film quality and
repeatability. Continuous processing improves thickness uniformity and film
quality by randomizing small variations in deposition from one station to the
next. High throughput resulting from continuous processing permits the use of
slower, more consistent and less damaging process technologies than are
economically feasible in conventional single wafer systems. Defect density is
also improved through the use of an IN SITU plasma cleaning process that
automatically cleans the process chamber after every batch of wafers.
THE ASPEN CVD. The Aspen CVD system, like the Aspen Strip, is based on the
standard Aspen platform. The system can be configured with one or two process
chambers and each chamber can process four wafers at a time. The second chamber
can be used to increase throughput with a minimal increase in footprint. The
automatic cleaning cycle and simple system design reduces production downtime
and increases overall system availability. The Company believes that the Aspen
CVD system offers a significant improvement in COO over the leading competitive
system. Among the principal factors which the Company believes contribute to
such improved COO is the throughput of the Company's system and its lower price
as compared to the leading competitive system.
THE ASPEN RTP
An RTP (Rapid Thermal Processing) system heats semiconductor wafers for implant
annealing and formation of films on semiconductor wafer surfaces. Traditional
RTP systems that use lamp heating technology operate at high temperature up to
1200DEG. Celsius. Diffusion furnace systems provide furnace annealing in both
high and low temperature regimes. Low temperature RTP systems, such as the
Company's Aspen RTP system, apply heat to semiconductor wafers to cause a
variety of processing and chemical reactions, including: Titanium Silicide and
Cobalt Silicide formation; Titanium Nitride barrier formation and anneals;
thermal donor annihilation (TDA) and lower temperature reflows and implant
anneals, typically 600-900DEG. Celsius.
As device geometries and thermal budgets shrink, Rapid Thermal Processing (RTP)
is emerging as a key semiconductor processing technology. As the number of
layers on semiconductor wafers have increased, the demand for RTP machines
dedicated to specific applications in the fab has increased.
RTP technology must be able to meet ever more stringent requirements for
processing on semiconductor wafers. Issues concerning uniformity and
repeatability affect the integrity of the IC. IC makers also place importance
on the amount of time a semiconductor wafer is exposed to heat to achieve a
certain process and the level of wafer throughput achieved by the system.
The Aspen RTP system is based on the Aspen platform and the principle of
modular continuous processing, handling up to 110 wafers per hour for
selected processes. The simple design of the process chamber has no moving
parts and no consumables, which contributes to its low preventative
maintenance requirements. The Company believes that its single chamber Aspen
RTP offers a substantial reduction in COO relative to conventional RTP
systems.
6
<PAGE>
THE ASPEN LITEETCH
ISOTROPIC ETCH MARKET. An isotropic etch system performs a variety of blanket
or geometry etch processes on semiconductor wafers, processes which can be used
in as many as 10 steps in a typical 0.25 micron logic fab on 200 millimeter
wafers. At this time, these processes include, but are not restricted to:
silicon soft etch (post-RIE contact cleanup); highly selective nitride stripping
for LOCOS or STI; backside nitride stripping; self-aligned-contact (SAC) nitride
stripping; isotropic contact and via etch; and passivation etch.
Historically, both dry and wet chemistries have been used for isotropic etch
manufacturing processes. In some cases, more expensive anisotropic etchers with
low throughput have been used for isotropic etch applications, which has greatly
increased the cost of these non-critical manufacturing applications. Wet benches
require a large amount of cleanroom floorspace plus special handling and
disposal of chemicals, which increases associated costs and environmental
concerns. For isotropic etch applications, the Company believes that Aspen
LiteEtch offers the benefits of dry etch tools, including lower cost of
ownership than wet benches, floorspace savings and ease of use.
The Company's Aspen LiteEtch system is an isotropic etching system that uses dry
chemistry to create atomic etchant species in a gaseous form (plasma), which is
exposed to the wafer to remove various films for a variety of applications that
do not require a high-end anisotropic etcher.
EMERGING TECHNICAL REQUIREMENTS. With ever-shrinking subgeometries, processes
used to remove films from wafers must be ever more selective to prevent damage
to the films in the underlying layers. This process capability and control is
necessary to achieve the high etch rates required and to provide the uniformity
and selectivity necessary for thin film etching. The ability to use additional
chemistries is often required to control etch rates, provide added selectivity
to underlying films, and to eliminate certain residues created during advanced
etch processing.
MATTSON'S ISOTROPIC ETCH TECHNOLOGY. The Company's first isotropic etch product,
the Aspen LiteEtch, uses a patented, inductively coupled plasma (ICP) source-the
same source used in its Aspen Strip product. This downstream ICP source uses a
high pressure plasma process to produce a low energy plasma that achieves high
etch rates while minimizing electrically charged particles that can damage
sensitive semiconductor devices. By combining ICP technology designed for
advanced device manufacturing with the high throughput of the Aspen platform,
the Company believes that it provides significant cost of ownership advantages
over comparable equipment.
THE ASPEN LITEETCH. The Aspen LiteEtch system is comprised of the standard Aspen
platform together with one or two process chambers. A specially designed ceramic
tube allows for the use of additional chemistries without added contamination.
Each chamber processes two wafers at a time, while retaining single wafer
process control. For most applications, system throughput typically varies with
the process from 40 to 80 wafers per hour for a single chamber system and from
70 to 110 wafers per hour for a dual chamber system. The Company believes the
dual chamber Aspen LiteEtch offers a substantial reduction in cost of ownership
relative to anisotropic etch and wet bench systems. In particular, the Company
believes that Aspen LiteEtch systems achieve improvements in throughput which
result in a substantial reduction in COO; and that its systems allow customers
to further reduce COO by eliminating environmental concerns and costs associated
with the use of acids; and by freeing anisotropic etchers for high end
processing applications.
CUSTOMERS
The Company sells its products to leading IC manufacturers located in the United
States, Japan, the rest of the Pacific Rim and Europe. One end user customer,
TSMC, accounted for 11% of sales in 1997. There were no individually
significant customers in 1996. During 1995, sales to Toshiba Corporation
(through Marubeni Hytech Corporation) and Micron Technology accounted for 16%
and 15%, respectively, of total net sales during that period. While the Company
actively pursues new customers, there can be no assurance that the Company will
be successful in its efforts, and any significant weakening in customer demand
would have a material adverse effect on the Company.
7
<PAGE>
MARKETING AND SALES
The Company sells its systems through a combination of a direct sales force, its
Japanese distributor and a manufacturers' sales representative. In addition to
the direct sales force at the Company's headquarters in Fremont, California, the
Company has domestic regional sales offices located in New Jersey, Arizona,
Oregon and Texas. The Company also maintains regional direct sales and support
offices in Taiwan, Korea, and Germany, and an office in Japan to provide
research, development and engineering, and marketing support for customers in
Japan and certain other Asian markets. The Company is continuing to invest
resources to increase the size of its direct sales force.
The Company believes that strong sales in the Japanese market will be essential
to its future financial performance. As part of its strategy for penetrating the
Japanese market, the Company established a distributor relationship with
Marubeni in December 1990 and is substantially dependent upon its relationship
with Marubeni to address the Japanese market. The Company formed a subsidiary
in Japan in October, 1995, in which Marubeni has a minority interest, in order
to provide research, development and engineering, and marketing support for
customers in Japan and certain other Asian markets. Although management believes
that it maintains a good relationship with Marubeni, there can be no assurance
that the relationship will continue. In the event of a termination of the
Company's distribution agreement with Marubeni, the Company's strategy to
increase its sales in Japan would be adversely affected and the Company would be
obligated to repurchase up to $1.0 million of inventory related to the Company's
sales to Marubeni. Although the Company intends to continue to invest
significant resources in Japan, including the hiring of additional personnel to
support Marubeni's efforts, there can be no assurance that the Company will be
able to maintain or increase its sales to the Japanese semiconductor industry.
The Company also has personnel located in service and customer support offices
in Korea, Taiwan and Germany. In Singapore, the Company utilizes a third party
manufacturers' sales representative. The Company's arrangements with its
customers are generally on a purchase order basis and not pursuant to long term
contracts.
International sales accounted for 65%, 76%, and 67% of total net sales in 1997,
1996 and 1995, respectively. The Company anticipates that international sales
will continue to account for a significant portion of net sales. International
sales are subject to certain risks, including unexpected changes in regulatory
requirements, exchange rates, tariffs and other barriers, political and economic
instability, difficulties in accounts receivable collections, extended payment
terms, difficulties in managing distributors or representatives, difficulties in
staffing and managing foreign subsidiary operations and potentially adverse tax
consequences. Without limiting the generality of the foregoing, because of the
Company's dependence upon international sales in general, and on sales to Japan
and Pacific Rim countries in particular, the Company is particularly at risk to
effects from developments such as the recent Asian economic problems. The
Company's foreign sales are also subject to certain governmental restrictions,
including the Export Administration Act and the regulations promulgated
thereunder. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
CUSTOMER SUPPORT
The Company believes its customer support organization is critical to establish
the long-term customer relationships which often are the basis upon which
semiconductor manufacturers select their equipment vendor. The Company's
customer support organization is headquartered in Fremont, California, with
additional employees located in Arizona, Idaho, Maryland, Massachusetts, Texas,
Oregon, Virginia, Germany, Korea, Taiwan, and the United Kingdom. The Company's
strategy is to use local support personnel in regions where multiple systems are
in place. Marubeni provides service to the Company's customers located in Japan.
The Company's support personnel have technical backgrounds, with process,
mechanical, and electronics training, and are supported by the Company's
engineering and applications personnel. Support personnel install systems,
perform warranty and out-of-warranty service, and provide sales support.
Warranty periods for Mattson systems range from 12 to 36 months after shipment
or acceptance, depending upon the purchase agreement.
8
<PAGE>
BACKLOG
The Company schedules production of its systems based on both backlog and
regular sales forecasts. The Company includes in its backlog only those systems
for which the Company has accepted purchase orders and assigned shipment dates
within the next 12 months. All orders are subject to cancellation or delay by
the customer with limited or no penalty. As of December 31, 1997, the backlog
was approximately $41.5 million. Because of possible changes in delivery
schedules and cancellations of orders, the Company's backlog at any particular
date is not necessarily representative of actual sales for any succeeding
period. In particular, during periods of industry downturns such as the current
period, the Company has experienced significant delays and cancellations
relating to orders which were previously booked and included in backlog.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering efforts are focused upon its
multi-product strategy. In addition, during recent periods the Company has
devoted a significant amount of resources to the development of new products for
the 300mm market.
The Company maintains an applications laboratory in Fremont to test new systems
and customer-specific equipment designs. By basing products on the Aspen
platform, the Company believes that it is able to focus its development
activities on the process chamber and to develop new products quickly and at
relatively low cost. For example, the Company believes it was able to reduce
new product development time on its CVD, RTP and LiteEtch products. The Company
also hopes to leverage the high productivity platform for 300mm production
throughout its product lines, in a manner similar to the way it introduced its
200mm (8") product lines.
The markets in which the Company and its customers compete are characterized by
rapidly changing technology, evolving industry standards and continuous
improvements in products and services. Because of continual changes in these
markets, the Company believes that its future success will depend, in part, upon
its ability to continue to improve its existing systems, process technologies,
and to develop systems and new technologies which compete effectively on the
basis of COO and performance. In addition, the Company must adapt its systems
and processes to technological changes and to support emerging industry
standards for target markets. The success of new system introductions is
dependent on a number of factors, including timely completion of new system
designs and market acceptance. There can be no assurance that the Company will
be able to improve its existing systems and process technologies or to develop
new technologies or systems.
The Company's research, development and engineering expenses for the years 1997,
1996, and 1995, were $14.7 million, $11.5 million, and $6.3 million,
respectively, representing 19%, 16% and 11% of net sales, respectively. There
can be no assurance that the Company's research, development and engineering
efforts will result in the successful development of new products.
COMPETITION
The market for the Company's systems is highly competitive and is subject to
rapid technological change. Significant competitive factors include system
performance, COO, size of installed base, breadth of product line and customer
support. The Company believes that it competes in its chosen markets primarily
on the basis of system performance, COO and customer support. The Company
believes it can also compete on the basis of price due to the design of its
systems.
The Company faces substantial competition in its chosen market segments from
both established competitors and potential new entrants. Most of the
Company's competitors (particularly for CVD systems) have broader product
lines, have been in business longer, have more experience with high volume
manufacturing, have broader name recognition, have substantially larger
customer bases and have substantially greater financial, technical and
marketing resources than the Company. There can be no assurance that these
competitors will not also develop enhancements to or future generations of
competitive products that will offer price or performance features that are
superior to the Company's systems. In the United States and European plasma
photoresist strip markets, the Company competes primarily with GaSonics,
Matrix and Eaton (formerly Fusion). In Japan, the Company competes primarily
with Canon, Plasma Systems Corporation, McElectronics (formerly Ramco), Tokyo
Ohka and various Japanese vendors who have already established relationships
with Japanese IC manufacturers. Competitors for its LiteEtch systems include
Lam Research, GaSonics, Matrix, Tegal and Shibauru. In the CVD market, the
Company competes primarily with Applied Materials, Novellus, ASM and
Watkins-Johnson. In the RTP market the Company competes with AG Associates
and Applied Materials. In the isotropic etch market the Company competes with
Lam Research, GaSonics, Matrix, Tegal, and Shibaura.
9
<PAGE>
MANUFACTURING
The Company's manufacturing operations are based in its Fremont facility and
consist of procurement, subassembly, final assembly, test and reliability
engineering. The Company's current systems are based on the Aspen platform,
enabling the Company to use a large number of common subassemblies and
components. Many of the major assemblies are procured complete from outside
sources. The Company focuses its internal manufacturing efforts on those
precision mechanical and electro-mechanical assemblies which differentiate its
systems from its competitors. The Company is implementing a quality control
program based on ISO-9001 and Sematech-generated measurement and improvement
methodologies.
Certain of the Company's components are obtained from a sole supplier or a
limited group of suppliers. The Company generally acquires such components on a
purchase order basis and not under any long term supply contracts. The
Company's reliance on outside vendors generally, and a limited group of
suppliers in particular, involves several risks, including a potential inability
to obtain an adequate supply of required components and reduced control over
pricing and timely delivery of components. Because the manufacture of certain of
these components and subassemblies is an extremely complex process and can
require long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur. Historically the Company has not experienced
any significant delays in manufacturing due to an inability to obtain components
and is not currently aware of any specific problems regarding the availability
of components which might significantly delay the manufacturing of its systems
in the future. However, any inability to obtain adequate deliveries or any other
circumstance that would require the Company to seek alternative sources of
supply or to manufacture such components internally could delay the Company's
ability to ship its systems and could have a material adverse effect on the
Company. See "Business--Factors That May Affect Future Results and Market
Price of Stock."
The Company is subject to a variety of federal, state and local laws, rules and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during its sales demonstrations and research and development.
Public attention has increasingly been focused on the environmental impact of
operations which use hazardous materials. Failure to comply with present or
future regulations could result in substantial liability to the Company,
suspension or cessation of the Company's operations, restrictions on the
Company's ability to expand at its present locations or requirements for the
acquisition of significant equipment or other significant expense. To date,
compliance with environmental rules and regulations has not had a material
effect on the Company's operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. There can be no
assurance that the Company's competitors will not be able to legitimately
ascertain the non-patented proprietary information embedded in the Company's
systems, in which case the Company may be precluded from preventing the use of
such information. To the extent the Company wishes to assert its patent rights,
there can be no assurance that any claims of the Company's patents will be
sufficiently broad to protect the Company's technology or that the Company's
pending patent application will be approved. In addition, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, that any rights granted thereunder will provide
adequate protection to the Company, or that the Company will have sufficient
resources to prosecute its rights.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any unresolved notices that the Company is infringing intellectual property
rights of others, there can be no assurance that such infringement claims will
not be asserted by third parties in the future. There also can be no assurance
in the event of such claims of infringement that the Company will be able to
obtain licenses on reasonable terms. The Company's involvement in any patent
dispute or other intellectual property dispute or action to protect trade
secrets and know-how could have a material adverse effect on the Company's
business. Adverse determinations in any litigation could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and prevent the Company from manufacturing and selling its
products. Any of these situations could have a material adverse effect on the
Company.
10
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
In this Annual Report on Form 10-K and from time to time, the Company may make
forward looking statements regarding, among other matters, the Company's future
strategy, product development plans, productivity gains of its products,
financial performance and growth. The forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements address matters which are
subject to a number of risks and uncertainties, including the following:
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company derives most of its
net sales from the sale of its photoresist stripping systems which typically
have list prices ranging from approximately $375,000 to $750,000. At its
current revenue level, each sale, or failure to make a sale, can have a
material effect on the Company. The Company's backlog at the beginning of a
quarter typically does not include all sales required to achieve the
Company's sales objectives for that quarter. Consequently, the Company's net
sales and operating results for a quarter depend on the Company shipping
orders scheduled to be sold during that quarter and obtaining orders for
systems to be shipped in that same quarter. A delay in a shipment near the
end of a particular quarter may cause net sales in that quarter to fall
significantly below the Company's expectations and may thus materially and
adversely affect the Company's operating results for such quarter. Other
factors which may lead to fluctuations in the Company's quarterly and annual
operating results include: market acceptance of the Company's systems and its
customers' products; substantial changes in revenues from significant
customers; changes in overhead absorption levels due to changes in the number
of systems manufactured; geographic mix of sales; timing of announcement and
introduction of new systems by the Company and its competitors; seasonality;
changes in product mix; delays in orders due to customer financial
difficulties; and cyclicality in the semiconductor industry and the markets
served by the Company's customers. In particular, the uncertainties regarding
market conditions and customer order changes and cancellations arising from
the recent market slowdown raise significant risks regarding fluctuating
quarterly results. As the Company continues to invest in accordance with its
long-term strategy, fluctuating revenue levels will produce fluctuating
results. Similarly, due to unpredictable order patterns, the Company's
manufacturing efficiency can vary significantly from quarter to quarter which
can adversely affect gross margins and net operating results. The amount of
time from the initial contact with the customer to the first order is
typically nine to twelve months or longer and may involve competing capital
budget considerations for the customer, thus making the timing of customer
orders uneven and difficult to predict. Any delay or failure to receive
anticipated orders, or any deferrals or cancellations of existing orders,
could adversely affect the Company's financial performance. In addition,
continued investments in research, development and engineering, and the
development of a worldwide sales and marketing organization will result in
significantly higher fixed costs which the Company will not be able to reduce
rapidly if its net sales goals for a particular period are not met. The
impact of these and other factors on the Company's operating results in any
future period cannot be forecasted accurately.
The Company has recently announced that it expects revenues for the
First Quarter of fiscal 1998 will be in the range of $20 to $23 million, with
a loss in the range of $.08 to $.12 per share. For the Second Quarter of
1998, the Company currently expects that its revenues will be significantly
lower than its current forecast for the first quarter. As a result, the
Company currently expects to report a significantly higher net loss for the
second quarter. Such estimates are preliminary and are subject to change. In
particular, there can be no assurance that as a result of such announcement,
the continuing industry downturn or other developments, that the Company's
results for such periods or the periods thereafter will not be worse than
currently expected.
MARKET ACCEPTANCE OF SYSTEMS. Given that the Company's systems represent
alternatives to conventional strip, isotropic etch, CVD and RTP equipment
currently marketed by competitors, the Company believes that its growth
prospects depend in large part upon its ability to gain acceptance by a broader
group of customers of the efficacy of the Company's systems and technology. To
date, only the Company's strip products have gained widespread market
acceptance. Because a substantial investment is required by semiconductor
manufacturers to install and integrate capital equipment into a semiconductor
production line, these manufacturers will tend to choose semiconductor equipment
manufacturers based on past relationships, product compatibility and proven
financial performance. Once a semiconductor manufacturer has selected a
particular vendor's capital equipment, the Company believes that the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same vendor. Given these factors, there can be
no assurance that the Company will be successful in obtaining broader acceptance
of its systems and technology. The transition of the market to 300mm wafers will
present both an opportunity and a risk to the Company. To the extent that the
Company is unable to introduce 300mm systems on a timely basis and which meet
customer requirements, the Company's business, results of operations and
financial condition could be materially and adversely affected.
11
<PAGE>
DEPENDENCE ON SIGNIFICANT CUSTOMER. The Company sells its products to leading
IC manufacturers located in the United States, Japan, the rest of the Pacific
Rim and Europe. One end user customer, TSMC, accounted for 11% of sales in
1997. There were no individually significant customers in 1996. During 1995,
sales to Toshiba Corporation (through Marubeni Hytech Corporation) and Micron
Technology accounted for 16% and 15%, respectively, of total net sales during
that period. While the Company actively pursues new customers, there can be
no assurance that the Company will be successful in its efforts, and any
significant weakening in customer demand would have a material adverse effect
on the Company.
DEPENDENCE ON JAPANESE DISTRIBUTOR AND ASIAN MARKET. The Company believes that
strong sales in the Japanese market will be essential to its future financial
performance. As part of its strategy for penetrating the Japanese market, the
Company established a distributor relationship with Marubeni and is
substantially dependent upon Marubeni to address the Japanese market.
Approximately 13% of the Company's net sales for the year ended December 31,
1997 were sold through Marubeni to customers in Japan. Although management
believes that it maintains a good relationship with Marubeni, there can be no
assurance that the relationship will continue. In the event of a termination of
the Company's distribution agreement with Marubeni, the Company's strategy to
increase its sales in Japan would be adversely affected and the Company would
have the obligation to repurchase up to $1 million of inventory related to the
Company's sales to Marubeni. Although the Company intends to continue to invest
significant resources in Japan, including the hiring of additional personnel to
support Marubeni's efforts, there can be no assurance that the Company will be
able to maintain or increase its sales to the Japanese semiconductor industry.
The Company is also substantially dependent upon sales to Pacific Rim countries
generally. During the fiscal year ended December 31, 1997, approximately 60% of
the Company's net sales were to customers based in the Pacific Rim. As such,
the Company is particularly at risk with respect to effects from developments
such as the recent Asian economic problems.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to expand current manufacturing capacity, both of which typically
involve a significant capital commitment. Once a semiconductor manufacturer
has selected a particular vendor's capital equipment, the Company believes
that the manufacturer generally relies upon that equipment for the specific
production line application and frequently will attempt to consolidate its
other capital equipment requirements with the same vendor. Accordingly, the
Company's ability to receive orders from potential customers may depend upon
such customers undertaking an evaluation for new equipment. For many
potential customers, such an evaluation may occur infrequently. Following
initial system qualification, the Company often experiences further delays in
finalizing system sales while the customer evaluates and receives approvals
for the purchase of the Company's systems and completes a new or expanded
facility. The Company believes it must significantly increase its inventory
investment in evaluation systems because they are used by many customers in
their evaluation processes. Due to these factors, the Company's systems
typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort. There can be no assurance that any
of the Company's efforts will be successful.
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY. The Company's business depends in
significant part upon capital expenditures by manufacturers of semiconductor
devices, including manufacturers that are opening new or expanding existing
fabrication facilities, which in turn depend upon the current and anticipated
market demand for such devices and the products utilizing such devices. The
semiconductor industry is highly cyclical and historically has experienced
periods of oversupply, resulting in significantly reduced demand for capital
equipment, including the systems manufactured and marketed by the Company.
The Company saw sales growth in the first two quarters of 1996
followed by a sales downturn in the last two quarters of 1996 and the first
quarter of 1997. Sales in the second through fourth quarters of 1997 showed
continuous positive growth. The Company expects sales in the first, second and
third quarters of 1998 to be significantly lower than in the last two
quarters of 1997. The Company anticipates that a significant portion of new
orders will depend upon demand from semiconductor manufacturers building or
expanding large fabrication facilities, and there can be no assurance that
such demand will exist. The Company's net sales and operating results will
be materially and adversely affected by any downturns or slowdowns in the
semiconductor market in the future.
12
<PAGE>
HIGHLY COMPETITIVE INDUSTRY. The market for the Company's systems is highly
competitive and is subject to rapid technological change. Significant
competitive factors include system performance, cost of ownership, size of
installed base, breadth of product line and customer support. Principal
competitors for the Company's Aspen Strip systems include GaSonics,
Eaton (formerly Fusion) and Matrix in the United States and Canon, Plasma
Systems Corporation, McElectronics (formerly Ramco), Tokyo Ohka and various
Japanese vendors who have already established relationships with Japanese IC
manufacturers. Competitors for its Aspen LiteEtch systems include Lam
Research, GaSonics, Matrix, Tegal and Shibaura. Competitors for its Aspen CVD
systems include Applied Materials, Novellus, ASM and Watkins-Johnson and
competitors for its Aspen RTP system include AG Associates and Applied
Materials. Most of the Company's competitors (particularly for CVD systems)
have broader product lines, have been in business longer, have more
experience with high volume manufacturing, have broader name recognition,
have substantially larger customer bases, and have substantially greater
financial, technical and marketing resources than the Company. In addition,
to expand its sales, the Company must often replace competitors' systems.
There can be no assurance that the Company's competitors will not develop
enhancements to or future generations of competitive products that will offer
price/performance features that are superior to the Company's systems.
DEPENDENCE ON SINGLE SYSTEM. To date, most of the Company's sales of systems
have been Aspen Strip systems. The Company's continued sales growth will
depend upon achieving market acceptance of its Aspen CVD, Aspen RTP and Aspen
LiteEtch systems and future products.
ACQUISITIONS. The Company, as part of its business strategy, subject to
certain regulatory approvals and other conditions, may make acquisitions of,
or significant investments in, businesses that offer complementary products,
services and technologies. Any acquisitions or investments will be
accompanied by the risks commonly encountered in acquisitions of businesses.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of the acquired businesses, the potential disruption
of the Company's ongoing business, the inability of management to maximize
the financial and strategic position of the Company or acquired or invested
products, services, and technologies, the maintenance of uniform standards,
controls and procedures and policies and the impairment of relationships with
employees and customers as a result of any integration. These factors could
have a material adverse effect on the Company's business, results of
operations or financial condition. Consideration paid for future
acquisitions, if any, could be in the form of cash, stock, rights to purchase
stock or a combination thereof. Dilution to existing stockholders and to
earnings per share may result to the extent that shares of stock or other
rights to purchase stock are issued in connection with any such future
acquisitions.
RAPID TECHNOLOGICAL CHANGE - NEW SYSTEMS. The markets in which the Company and
its customers compete are characterized by rapidly changing technology, evolving
industry standards and continuous improvements in products and services. Because
of continual changes in these markets, the Company believes that its future
success will depend, in part, upon its ability to continue to improve its
systems and its process technologies and to develop new technologies and systems
which compete effectively on the basis of price and performance and which
adequately address customer requirements. In addition, the Company must adapt
its systems and processes to technological changes and to support emerging
target market industry standards. The success of new system introductions is
dependent on a number of factors, including timely completion of new system
designs and market acceptance. There can be no assurance that the Company will
be able to improve its existing systems and its process technologies or develop
new technologies or systems in a timely manner. In particular, the transition of
the market to 300mm wafers will present both an opportunity and a risk to the
Company. To the extent that the Company is unable to introduce 300mm systems on
a timely basis and which meet customer requirements, the Company's business,
results of operations and financial condition could be materially and adversely
affected.
SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies to a substantial extent
on outside vendors to manufacture many of the Aspen systems' components and
subassemblies. Certain of these are obtained from a sole supplier or a limited
group of suppliers. The Company's reliance on outside vendors generally, and a
sole or a limited group of suppliers in particular, involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of components.
Because the manufacture of certain of these components and subassemblies is an
extremely complex process and requires long lead times, there can be no
assurance that delays or shortages caused by suppliers will not occur. Any
inability to obtain adequate deliveries or any other circumstance that would
require the Company to seek alternative sources of supply or to manufacture such
components internally could delay the Company's ability to ship its systems and
could have a material adverse effect on the Company.
13
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a large extent
upon the efforts and abilities of Brad Mattson, Chairman and Chief Executive
Officer, and other key managerial and technical employees. The loss of
Mr. Mattson or other key employees could have a material adverse effect on the
Company. The Company has not entered into written employment agreements with
its executive officers. The success of the Company's business will also depend
upon its ability to continue to attract and retain qualified employees,
particularly those highly skilled design and process engineers involved in the
manufacture of existing systems and the development of new systems and
processes. The competition for such personnel is intense.
INTERNATIONAL SALES. International sales accounted for 65%, 76%, and 67% of
total net sales in 1997, 1996 and 1995, respectively. The Company anticipates
that international sales will continue to account for a significant portion of
net sales. International sales are subject to certain risks, including
unexpected changes in regulatory requirements, exchange rates, tariffs and other
barriers, political and economic instability, difficulties in accounts
receivable collections, extended payment terms, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations and potentially adverse tax consequences. Without limiting
the generality of the foregoing, because of the Company's dependence upon
international sales in general, and on sales to Japan and Pacific Rim countries
in particular, the Company is particularly at risk to effects from developments
such as the recent Asian economic problems. The Company's international sales
are also subject to certain governmental restrictions, including the Export
Administration Act and the regulations promulgated thereunder. The Company's
sales to date have been denominated in U.S. dollars and as a result, there have
been no losses related to currency fluctuations on sales. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company.
INTELLECTUAL PROPERTY RIGHTS. The Company relies on a combination of patent,
copyright, trademark and trade secret laws, non-disclosure agreements and other
intellectual property protection methods to protect its proprietary technology.
The Company believes that patents are of less significance in this industry than
such factors as innovative skills, technical expertise and know-how of its
personnel. There can be no assurance that the Company's competitors will not be
able to legitimately ascertain the non-patented proprietary information embedded
in the Company's systems, in which case the Company may be precluded from
preventing the use of such information. To the extent the Company wishes to
assert its patent rights, there can be no assurance that any claims of the
Company's patents will be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented, that any rights
granted thereunder will provide adequate protection to the Company, or that the
Company will have sufficient resources to prosecute its rights.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any unresolved notices that the Company is infringing intellectual property
rights of others, there can be no assurance that such infringement claims will
not be asserted by third parties in the future. There also can be no assurance
in the event of such claims of infringement that the Company will be able to
obtain licenses on reasonable terms. The Company's involvement in any patent
dispute or other intellectual property dispute or action to protect trade
secrets and know-how could have a material adverse effect on the Company.
Adverse determinations in any litigation could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and prevent the Company from manufacturing and selling its
systems. Any of these situations could have a material adverse effect on the
Company.
ENVIRONMENTAL REGULATIONS. The Company is subject to a variety of federal,
state and local laws, rules and regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during sales demonstrations
and research and development. Public attention has increasingly been focused on
the environmental impact of operations which use hazardous materials. To the
best of the Company's knowledge, it is in compliance with all federal, state and
local environmental regulations. However, failure to comply with present or
future regulations could result in substantial liability to the Company,
suspension or cessation of the Company's operations, restrictions on the
Company's ability to expand at its present locations or requirements for the
acquisition of significant equipment or other significant expense.
14
<PAGE>
VOLATILITY OF STOCK PRICE. In the past, the market price of the Common Stock of
the Company has been subject to significant volatility and has declined
substantially from its highs. There can be no assurance that the market price
of the Common Stock of the Company will not decline in the future. The Company
believes that a variety of factors could cause the price of the Company's Common
Stock to fluctuate, perhaps substantially, including: announcements of
developments related to the Company's business; fluctuations in the Company's
operating results and order levels; general conditions in the semiconductor
industry or the worldwide economy; announcements of technological innovations;
new products or product enhancements by the Company or its competitors;
developments in patents or other intellectual property rights; and developments
in the Company's relationships with its customers, distributors and suppliers.
In addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely effect the market price
of the Company's Common Stock.
EMPLOYEES
As of February 27, 1998 the Company had 372 employees. There were 88 employees
in manufacturing operations, 100 in research, development and engineering, 148
in sales, marketing and field service and customer support, and 36 in general,
administrative and finance.
The success of the Company's future operations depends in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurances that the
Company will be successful in retaining or recruiting key personnel. None of the
Company's employees is represented by a labor union and the Company has never
experienced a work stoppage, slowdown, or strike. The Company considers its
relationships with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its headquarters in Fremont, California. During the
year ended December 31, 1997 the Company increased its facilities square
footage by leasing additional office space. The Company's leased 61,000
square foot facility has been supplemented with an additional 30,000 square
feet of space located near the head office. The leases for these facilities
expire in February and August 1999, respectively. The Company's future
growth may require that it secure additional facilities or expand its current
facility further before the term of its headquarters' lease expires. Any move
to new facilities or expansion could be disruptive and could have a material
adverse effect on the operations and financial performance of the Company.
The Company also leases sales offices in Yokohama, Japan; Seoul, Korea;
Hsinchu, Taiwan; and Oberwossen, Germany with expiration dates from February
1998 to August, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
STOCK LISTING
Mattson Technology's common stock has been traded on the over-the-counter market
since the Company's Initial Public Offering on September 28, 1994, and is quoted
on the NASDAQ Stock Market under the symbol "MTSN". The following table sets
forth the high and low closing prices as reported by the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
1997 HIGH LOW
- -----------------------------------------------------------------------
<S> <C> <C>
FIRST 11 5/8 9 3/8
SECOND 10 3/4 7 7/16
THIRD 16 10 11/16
FOURTH 14 7/8 7
1996
- -----------------------------------------------------------------------
FIRST 16 1/2 9
SECOND 16 1/4 10 5/8
THIRD 12 1/4 7 3/4
FOURTH 11 1/4 8 3/8
</TABLE>
The Company has never paid cash dividends on its common stock and has no present
plans to do so. As of February 27, 1998, there were approximately 176
shareholders of record.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1) $ 76,730 $ 73,260 $ 55,342 $ 19,551 $ 3,479
Net income (loss) 1,431 6,465 10,492 3,018 (831)
Net income (loss) per share (2):
Basic $ 0.10 $ 0.46 $ 0.80 $ 0.34 $ (0.12)
Diluted $ 0.09 $ 0.42 $ 0.71 $ 0.29 $ (0.12)
BALANCE SHEET DATA:
Total assets $ 84,443 $ 84,489 $ 74,089 $ 32,479 $ 2,906
Manditorily Redeemable Convertible Preferred Stock - - - - 7,340
Total stockholders' equity (deficit) (3) $ 68,184 $ 69,115 $ 61,076 $ 28,292 $ (7,106)
</TABLE>
QUARTERLY DATA
(unaudited)
<TABLE>
FIRST SECOND THIRD FOURTH
December 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 13,023 $ 16,571 $ 22,633 $ 24,503
Gross profit 6,565 8,306 11,849 12,880
Net income (loss) (568) 55 949 995
Net income (loss) per share (2):
Basic $ (0.04) $ 0.00 $ 0.07 $ 0.07
Diluted $ (0.04) $ 0.00 $ 0.06 $ 0.07
FIRST SECOND THIRD FOURTH
December 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------
Net sales $ 22,002 $ 23,244 $ 14,005 $ 14,009
Gross profit 12,820 13,295 6,819 7,095
Net income (loss) 3,538 3,455 (105) (423)
Net income (loss) per share (2):
Basic $ 0.26 $ 0.25 $ (0.01) $ (0.03)
Diluted $ 0.23 $ 0.23 $ (0.01) $ (0.03)
</TABLE>
(1) Includes sales through a related party distributor for each yearly period
as follows: 1995 - $16,994, 1994 - $8,435, and 1993 - $2,179. See Note 6
of Notes to the Consolidated Financial Statements.
(2) As restated upon adoption of Statement of Financial Accounting Standards
(SFAS) No. 128. See Note 1 of the Notes to Consolidated Financial
Statements.
(3) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
OVERVIEW
Mattson Technology, Inc. ("Mattson" or the "Company") designs, manufactures
and markets advanced fabrication equipment to semiconductor manufacturers
worldwide. The Company began operations in 1989 and shipped its first
photoresist removal product, the Aspen Strip, in 1991. The Company's current
product line is based on a modular Aspen platform which accommodates two
process chambers supporting increased throughput. The Company currently
offers Aspen Strip, CVD, RTP and LiteEtch products.
The Company has derived substantially all of its sales from Aspen Strip
systems. In addition, the Company derives sales from CVD, LiteEtch and RTP
systems as well as spare parts and maintenance services.
The Company experienced sales growth in each quarter throughout 1997.
However, the Company has recently announced that the Company expects that its
revenues for the First Quarter of fiscal 1998 will be in the range of $20 to
$23 million, with a loss in the range of $.08 to $.12 per share. For the
Second Quarter of 1998, the Company currently expects that its revenues will
be significantly lower than its current forecast for the first quarter. As a
result, the Company currently expects to report a significantly higher net
loss for the second quarter. Such estimates are preliminary and are subject
to change. In particular, there can be no assurance that as a result of such
announcement, the continuing industry downturn or other developments, that
the Company's results for such periods or the periods thereafter will not be
worse than currently expected. There can be no assurance that the Company
will be able to regain sales growth or profitability. Future results will
depend on a variety of factors, particularly overall market conditions and
also timing of significant orders, the ability of the Company to successfully
market its CVD, RTP and LiteEtch products as well as to bring new systems to
market, the timing of new product releases by the Company's competitors, the
Company's ability to successfully and timely introduce systems for the 300mm
market, patterns of capital spending by the Company's customers, market
acceptance of new and/or enhanced versions of Company systems, changes in
pricing by the Company, its competitors, customers, or suppliers and the mix
of products sold. In order to support long term growth in its business, the
Company has increased its expense levels. As a result, the Company is
dependent upon increases in sales in order to maintain profitability. If the
Company's sales do not increase, the current levels of operating expenses
could materially and adversely affect the financial results of the Company.
As a result of the well publicized Asian economic problems, many semiconductor
manufacturers have been delaying or canceling previously planned new equipment
purchases. The cyclicality and uncertainties regarding overall market
conditions continue to present significant challenges to the Company and have a
significant adverse impact on the Company's ability to forecast near term
revenue expectations. The ability of the Company to modify its operations in
response to short term changes in market conditions is limited. The extent and
duration of the Asian financial crisis and the short term and ultimate impact on
the Company and its results of operations and financial condition cannot be
precisely predicted.
In response to the impact of the Asian economic problems, the Company has
initiated further cost control measures. These include a reduction of full
time and temporary employees equivalent to approximately 15% of its total
work force. The executive staff has taken a 10% pay cut and the Company has
implemented tighter controls over spending. The Company will record charges
relating to such actions during the quarter ending March 29, 1998, but the
impact of lower cost levels will not be realized until the quarter ending
June 28, 1998.
The Company formed a subsidiary in Japan in October 1995, Mattson Technology
Center K.K. ("MTC"), in which Marubeni, the Company's distributor in Japan, has
a 19% interest. The subsidiary was formed in order to provide research,
development and engineering, and marketing support for Japan and certain other
Asian markets. These activities, to some extent, had previously been provided
by Marubeni. The Company also modified its distributor arrangement with
Marubeni which increased the selling price of systems sold through them.
Marubeni is still primarily responsible for sales and support in Japan.
The Company generally recognizes a sale upon shipment of a system. However,
from time to time, the Company allows customers to evaluate systems. The
Company does not recognize the associated sale until and unless an evaluation
system is accepted by the customer.
18
<PAGE>
The Company was incorporated in California in November 1988 and completed its
initial public offering on October 5, 1994. In September 1997, the Company was
reincorporated in the State of Delaware.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of the Company
expressed as a percentage of net sales for the years indicated:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 48% 45% 45%
Gross margin 52% 55% 55%
Research, development and engineering 19% 16% 11%
Selling, general and administrative 32% 29% 21%
Income from operations 1% 10% 23%
Income before provision for income taxes 3% 13% 26%
Net income 2% 9% 19%
</TABLE>
NET SALES
Net sales for 1997 increased to $76.7 million compared to $73.3 million in
1996 and $55.3 million in 1995. Net sales in 1997 increased 5% as a result
of a 3% increase in unit shipments and a 2% increase in average selling
prices (ASP's). Net sales in 1996 increased 33% as a result of a 14% increase
in unit shipments and a 15% increase in ASP's. Sales to date consist
principally of single and dual chamber Aspen Strip and to a lesser extent,
CVD and LiteEtch systems, spare parts and service revenue. See
"Business--Factors That May Affect Future Results and Market Price of Stock."
Higher ASP's have resulted primarily from increasing sales of the newer CVD
and LiteEtch systems.
International sales, which are predominantly to customers based in Japan and
the Pacific Rim (which includes Taiwan, Singapore and Korea), accounted for
65%, 76%, and 67% of total net sales for the years ended December 31, 1997,
1996 and 1995, respectively. All sales are denominated in U.S. dollars. The
Company anticipates that international sales will continue to account for a
significant portion of sales, primarily due to orders from customers in Japan
and the Pacific Rim. The Company's operating results have been, and in the
future will likely be, materially and adversely affected by any significant
market downturn in Japan or the Pacific Rim such as has recently been
experienced as a result of the Asian economic problems.
GROSS MARGIN
Gross margins for 1997 decreased to 52% compared to 55% in 1996 and 1995.
Gross margins declined in 1997 primarily as a result of pricing pressures and
manufacturing variances due to the higher inefficiencies associated with the
slowdown in the second half of 1996 and the first two quarters of 1997. Gross
margins on shipments through Marubeni increased in 1996 as a result of the
1995 agreement, as described above. This increase was offset by manufacturing
inefficiencies associated with the slowdown in the second half of 1996.
The Company's gross margin will continue to be affected by a variety of
factors. In particular, lower economies of scale have adversely affected
gross margin over the prior year and may affect gross margin in the future.
Lower gross margins will result given the Company's increased manufacturing
overhead with lower sales levels expected by the Company for the first two
quarters of fiscal 1998 augmented by a higher level of finished goods at
December 31, 1997. During 1997, the Company experienced substantial pricing
pressure and there can be no assurance that the Company will not continue to
experience pricing pressures in the future. The Company's gross margin on
international sales, other than sales through Marubeni, is substantially the
same as domestic sales. Sales to Marubeni typically carry a lower gross
margin as Marubeni is still primarily responsible for sales and support costs
in Japan. In addition, the Company has incurred additional research,
development and engineering and marketing expenses primarily through the
Company's Japanese subsidiary, Mattson Technology Center K.K. ("MTC")
19
<PAGE>
The Company's reliance on outside vendors generally, and a sole or a limited
group of suppliers in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over pricing and timely delivery of components. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its systems and could have a material
adverse effect on the Company, including an increase in the Company's cost of
sales and therefore an adverse impact on gross margin. The continuing
uncertainties regarding market conditions and customer order changes also
contribute to lower manufacturing efficiency and could result in lower gross
margins. In addition, new system introductions and enhancements may also have
an adverse effect on gross margin due to the inefficiencies associated with
manufacturing new products.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses for 1997 were $14.7 million, or
19% of sales, compared to $11.5 million, or 16% of sales in 1996 and $6.3
million, or 11% of sales in 1995. The increase in expenses for 1997 was
primarily due to salaries and related expenses which increased to $6.1 million
from $5.4 million in 1996 and $3.5 million in 1995 and engineering project
materials which increased to $3.1 million in 1997 from $2.0 million in 1996 and
$1.1 million in 1995. The increase in salaries and related expenses was due to
increases in personnel required to support the Company's anticipated long-term
future growth, including the support of the Company's multi-product strategy and
development of a new platform to support 300mm wafers. The increase in
engineering project materials was due to ongoing and new product development.
Research, development and engineering expenses also increased in 1996 compared
to 1995 due to the Company's establishment of a subsidiary in Japan, as
described above. Increases in research, development and engineering expenses as
a percentage of revenue in 1996 and 1997 largely resulted from continued
investment in new product. The Company believes that continued investment in
research and development, including its multi-product strategy and its 300mm
development program, is critical to maintaining a strong technological position
in the industry. However, there can be no assurance that the Company will be
able to improve its existing systems and process technologies or to develop new
technologies or systems. See "Business--Factors That May Affect Future Results
and Market Price of Stock."
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for 1997 were $24.5 million, or
32% of net sales, compared to $20.9 million, or 29%, in 1996 and $11.4
million, or 21% in 1995. The increase in expenses was primarily due to
salaries, commissions and related expenses which increased to $16.7 million
from $13.1 million in 1996 and $7.3 million in 1995 and travel and
entertainment expenses which increased to $3.0 million from $2.7 million in
1996 and $1.2 million in 1995. The increase in salaries and related expenses
was due to increases in personnel required to support the Company's
anticipated long-term future growth. The increase in travel and entertainment
expenses was primarily due to increases in sales activity and support
activity. Buildings and utilities also increased to $2.0 million from $1.2
million in 1996, primarily as a result of an additional 31,000 square feet
leased and the increased building lease costs due to the renewal of the lease
of the Company's headquarters in Fremont, California. Selling, general and
administrative expenses increased in 1996 compared to 1995 due to the
Company's establishment of a subsidiary in Japan, as described above, the
continued investment in sales and support offices in Taiwan, Korea and
Germany and the expansion of the Company's headquarters facilities. See
"Business--Factors That May Affect Future Results and Market Price of Stock."
TAX PROVISION
During 1997, 1996 and 1995 the Company provided taxes at an effective tax rate
of 24.0%, 33.0% and 27.9%, respectively. The 1997 and 1996 tax rate is less
than the federal statutory rate as a result of benefits derived from the
Company's foreign sales corporation and the research and development tax credit,
which Congress reinstated effective July 1, 1996. The 1995 tax rate is less
than the federal statutory rate as a result of realization of deferred tax
assets of $1.4 million previously reserved and tax credits, partially offset by
state taxes.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
20
<PAGE>
The Company has commenced a Year 2000 date conversion project to address
necessary changes and an implementation strategy. The "Year 2000 Computer
Problem" creates risks for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on financial
transactions. The Company does not anticipate that it will incur material
expenditures for the resolution of any Year 2000 issues related either to its
own information systems, databases and programs, or its products. However,
there can be no assurance that the Company will not experience serious
unanticipated negative consequences or material costs caused by undetected
errors. In addition, the Company could be adversely impacted by Year 2000
issues faced by major distributors, suppliers, customers, vendors and financial
service organizations with which the Company interacts. Management is in the
process of determining the impact, if any, that third parties who are not Year
2000 compliant may have on the operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements for periods
beginning after December 15, 1997. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources
including unrealized gains and losses on available for sale securities.
Reclassification of financial statements for earlier periods for comparative
purposes is required. The Company will adopt SFAS 130 beginning in 1998 and
such adoption will not have a material effect on the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements for periods beginning after December 31, 1997. It also
establishes standards for related disclosures about products and services,
geographical areas and major customers. It is not expected that adoption of
SFAS No. 131 will have any impact on the Company's consolidated financial
statements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's operating results are subject to a variety of risks characteristic
of the semiconductor manufacturing equipment industry, including intense
competition, fluctuating demand, significant volatility, rapid technological
change, and booking and shipment uncertainties. The Company is actively
developing new products that it believes will meet future customer needs, but no
assurance can be given that its efforts will be successful. Fluctuations in the
Company's operating results could occur in the future due to any of these
factors or many others, including those discussed in the Overview, general
economic conditions or other conditions specific to the semiconductor equipment
manufacturing industry. See "Business--Factors That May Affect Future Results
and Market Price of Stock."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short term investments equaled $34.2 million at December
31, 1997. The Company had no long term debt. Stockholder's equity at December
31, 1997 was approximately $68 million.
Cash generated from operations has been sufficient historically to fund the
Company's investment in research and development activities and Company
growth.
Cash and cash equivalents increased by $4.0 million in 1997. Net cash
provided by operating activities in 1997 was $3.1 million. The net cash
provided in 1997 was primarily attributable to net income of $1.4 million,
non cash depreciation charges of $2.9 million, a decrease in receivable
balances of $1.2 million, offset by an increase in inventories of $6.1
million. Net cash provided by investing activities in 1997 was $3.4 million
primarily from the sales and maturities of short term securities of $25.0
million, partially offset by purchases of short-term investments of $16
million and the acquisition of property and equipment of $4.7 million. Net
cash used by financing activities in 1997 was $2.2 million primarily from the
repurchase of the Company's Common Stock, partially offset by the net
proceeds from the issuance of Common Stock.
21
<PAGE>
The Company's Board of Directors has authorized the Company to repurchase during
the next three years up to 1,000,000 shares of the Company's Common Stock in the
open market from time to time. As of February 27, 1998, the Company had
14,220,115 shares outstanding. The purpose of the repurchase program is to
acquire shares to fund the Company's stock based employee benefit programs,
including the employee stock purchase plan and the stock option plan.
The Company believes that existing cash balances and short-term investments will
be sufficient to meet the Company's cash requirements during the next twelve
months. However, depending upon its rate of growth and profitability, the
Company may require additional equity or debt financing to meet its working
capital requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to the Company.
MARKET RISK DISCLOSURE
As of December 31, 1997, the Company's investment portfolio consisted of
fixed income securities. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels of December 31, 1997, the
decline in the fair value of the portfolio would not be material.
Additionally, the Company has the ability to hold its fixed income
investments until maturity and therefore, the Company would not expect to
recognize such an adverse impact in income or cash flows. The Company has
international facilities and is, therefore, subject to foreign currency
exposure. To date, exposure to the Company related to exchange rate
volatility has not been significant. If foreign currency rates fluctuate by
10% from rates at December 31, 1997, the effect on the Company's financial
position and results of operations would not be material. However, there can
be no assurance that there will not be a material impact in the future.
The local currency is the functional currency for all foreign sales operations
except those in Japan, where the U.S. dollar is the functional currency. Gains
or losses from translation of foreign operations where the local currencies are
the functional currency are included as a separate component of stockholders'
equity.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheet as of 24
December 31, 1997 and 1996
Consolidated Statement of Income 25
for the years ended December 31,
1997, 1996 and 1995
Consolidated Statement of 26
Stockholders' Equity for the
three years ended December 31, 1997
Consolidated Statement of Cash Flows 27
for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements 28
Report of Independent Accountants 37
Financial Statement Schedules:
All schedules are omitted because they are either
not applicable or the required information is shown
in the consolidated financial statements or notes
thereto.
</TABLE>
23
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,583 $ 21,547
Short-term investments 8,598 16,620
Accounts receivable, net 14,784 15,954
Inventories 19,068 12,954
Deferred taxes 4,222 4,197
Prepaid expenses and other current assets 1,000 882
-------- --------
Total current assets 73,255 72,154
Property and equipment, net 11,188 9,373
Other assets - 2,962
-------- --------
$ 84,443 $ 84,489
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,349 $ 1,240
Accrued liabilities 12,910 14,134
-------- --------
Total current liabilities 16,259 15,374
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common Stock, par value $0.001, 60,000 shares authorized;
14,289 issued, 14,189 outstanding in 1997 and 14,197
shares issued and outstanding in 1996 14 14
Additional paid in capital 57,418 57,566
Cumulative translation adjustments (290) (54)
Treasury stock, at cost (1,075) -
Other - (36)
Retained earnings 12,117 11,625
-------- --------
Total stockholders' equity 68,184 69,115
-------- --------
$ 84,443 $ 84,489
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 76,730 $ 73,260 $ 55,342
Cost of sales 37,130 33,231 24,958
-------- ----------- -----------
Gross profit 39,600 40,029 30,384
-------- ----------- -----------
Operating expenses:
Research, development and engineering 14,709 11,507 6,330
Selling, general and administrative 24,495 20,900 11,416
-------- ----------- -----------
Total operating expenses 39,204 32,407 17,746
-------- ----------- -----------
Income from operations 396 7,622 12,638
Interest and other income 1,486 2,027 1,906
-------- ----------- -----------
Income before provision for income taxes 1,882 9,649 14,544
Provision for income taxes 451 3,184 4,052
-------- ----------- -----------
Net income $ 1,431 $ 6,465 $ 10,492
-------- ----------- -----------
-------- ----------- -----------
Net income per share:
Basic $ 0.10 $ 0.46 $ 0.80
-------- ----------- -----------
-------- ----------- -----------
Diluted $ 0.09 $ 0.42 $ 0.71
-------- ----------- -----------
-------- ----------- -----------
Shares used in computing net income per share:
Basic 14,117 13,997 13,109
-------- ----------- -----------
-------- ----------- -----------
Diluted 15,311 15,275 14,854
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Paid In Cumulative Treasury Stock Retained
Stock Capital Translation Earnings
Shares Amount Amount Other Adjustments Shares Amount (Deficit) Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 12,388 $ 13 $ 33,727 $ (223) $ - - $ - $ (5,225) $ 28,292
Sale of Common Stock, net 983 1 20,674 - - - - - 20,675
Exercise of stock options 276 - 255 - - - - - 255
Shares issued under employee
stock purchase plan 132 - 774 - - - - - 774
Income tax benefits realized from
activity in employee stock plans - - 454 - - - - - 454
Repayment of notes receivable - - - 65 - - - - 65
Amortization of deferred
compensation - - - 56 - - - - 56
Net unrealized gain on
investments - - - 29 - - - - 29
Cumulative translation
adjustments - - - - (16) - - - (16)
Net income - - - - - - - 10,492 10,492
------ ----- --------- ------ ------ ---- -------- ------- --------
Balance at December 31, 1995 13,779 14 55,884 (73) (16) - - 5,267 61,076
Purchase of Common Stock, net (65) (442) - - - - (107) (549)
Exercise of stock options 255 - 286 - - - - - 286
Shares issued under employee
stock purchase plan 228 - 1,596 - - - - - 1,596
Income tax benefits realized from
activity in employee stock plans - - 285 - - - - - 285
Amortization of deferred
compensation - - (43) 60 - - - - 17
Net unrealized loss on
investments - - - (23) - - - - (23)
Cumulative translation
adjustments - - - - (38) - - - (38)
Net income - - - - - - - 6,465 6,465
------ ----- --------- ------ ------ ---- -------- ------- --------
Balance at December 31, 1996 14,197 14 57,566 (36) (54) - - 11,625 69,115
------ ----- --------- ------ ------ ---- -------- ------- --------
Purchase of Common Stock, net (335) - (2,197) - - (100) (1,075) (939) (4,211)
Exercise of stock options 183 - 261 - - - - - 261
Shares issued under employee
stock purchase plan 244 - 1,598 - - - - - 1,598
Income tax benefits realized from
activity in employee stock plans - - 190 - - - - - 190
Amortization of deferred
compensation - - - 13 - - - - 13
Net unrealized loss on
investments - - - 23 - - - - 23
Cumulative translation
adjustments - - - - (236) - - - (236)
Net income - - - - - - - 1,431 1,431
------ ----- --------- ------ ------ ---- -------- ------- --------
Balance at December 31, 1997 14,289 $ 14 $ 57,418 $ - $ (290) (100) $( 1,075) $12,117 $ 68,184
------ ----- --------- ------ ------ ---- -------- ------- --------
------ ----- --------- ------ ------ ---- -------- ------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,431 $ 6,465 $ 10,492
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,856 1,963 505
Deferred taxes (25) (2,184) (2,013)
Deferred compensation related to stock options 13 17 56
Changes in assets and liabilities:
Accounts receivable 1,170 (1,966) (9,565)
Inventories (6,114) (2,115) (8,501)
Prepaid expenses and other current assets (118) (455) (311)
Other assets 2,962 (2,962) -
Accounts payable 2,109 (2,647) 2,724
Accrued liabilities (1,224) 5,293 6,556
-------- -------- --------
Net cash provided by (used in) operating activities 3,060 1,409 (57)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (4,671) (6,685) (2,376)
Purchases of short-term investments (16,468) (36,293) (39,521)
Sales and maturities of short-term investments 24,513 47,511 21,894
-------- -------- --------
Net cash provided by (used in) investing activities 3,374 4,533 (20,003)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of Common Stock, net 2,049 1,882 21,704
Repurchase of Common Stock (4,211) (549) -
Repayment of notes receivable from shareholders - - 65
-------- -------- --------
Net cash provided by (used in) financing activities (2,162) 1,333 21,769
-------- -------- --------
Effect of exchange rate changes (236) (38) (16)
-------- -------- --------
Net increase in cash and cash equivalents 4,036 7,237 1,693
Cash and cash equivalents, beginning of period 21,547 14,310 12,617
-------- -------- --------
Cash and cash equivalents, end of period $ 25,583 $ 21,547 $ 14,310
-------- -------- --------
-------- -------- --------
Supplemental disclosures:
Cash paid for income taxes $ 629 $ 4,701 $ 4,163
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mattson Technology, Inc. (the "Company") was incorporated in California on
November 18, 1988. In September, 1997 the Company was reincorporated in the
State of Delaware. As part of the reincorporation, each outstanding share of
the California corporation, no par value common stock, was converted
automatically to one share of the new Delaware corporation $0.001 par value
common stock. The financial statements have been restated to reflect this
change as though the change had taken place as of the earliest period
presented.
The Company designs, manufactures and markets advanced fabrication equipment
to the semiconductor manufacturing industry worldwide. The Company operates
in one industry segment.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reported periods. Actual results could differ from those
estimates.
The Company's fiscal year ends on December 31. The Company's fiscal quarters
end on the Sunday closest to March 31, June 30 and September 30.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments
consist of commercial paper and U.S. Treasury securities with maturities of
more than three months. Investments are classified as "available for sale,"
and are measured at market value. Net unrealized gains or losses are
recorded as a separate component of stockholders' equity until realized. Any
gains or losses on sales of investments are computed by specific
identification. At December 31, 1996 and 1997 the difference between market
value and cost was not significant.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost, using the first-in, first-out method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the useful lives of the assets which range
from three to five years. Leasehold improvements are amortized using the
straight-line method over the term of the related lease or the estimated
useful lives of the improvements, whichever is less.
COMMON STOCK
In October, 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). In accordance
with the provisions of FAS 123, the Corporation applies APB Opinion No. 25
in accounting for its stock option plans and, accordingly, does not recognize
compensation cost because the exercise price equals the market price of the
underlying stock at date of grant. Note 3 to the Consolidated Financial
Statements contains a summary of the pro forma effects to reported net income
and earnings per share for 1997, 1996 and 1995 for compensation cost based on
the fair value of the options granted at grant date as prescribed by FAS 123.
SALES RECOGNITION
System sales are generally recognized upon shipment. However, in certain
circumstances, the Company allows customers to evaluate systems, and since
customers can return such systems to the Company any time with limited or no
penalty, the Company does not recognize the associated sale until an
evaluation system is accepted by the customer. Income related to sales of up
to $1,000,000 to the Company's distributor in Japan is deferred under the
rights of return provisions of the distribution agreement (see Note 6).
Service and maintenance contract revenue, which to date has been
insignificant, is recognized on a straight-line basis over the service period
of the related contract. A provision for the estimated future cost of system
installation and warranty is recorded at the time revenue is recognized.
28
<PAGE>
FOREIGN CURRENCY ACCOUNTING
The local currency is the functional currency for all foreign operations
except those in Japan, where the U.S. dollar is the functional currency.
Gains or losses from translation of foreign operations where the local
currencies are the functional currency are included as a component of
stockholders' equity. Foreign currency transaction gains and losses have not
been material.
NET INCOME PER SHARE
The Company has adopted Financial Accounting Standards Board (FASB) Statement
128 effective with the quarter and year ended December 31, 1997. All
earnings per share data has been restated to reflect the FASB 128 method of
computation. FASB 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the income statement. Basic EPS is
computed by dividing income available to common stockholders (numerator) by
the weighted average number of common shares outstanding (denominator) for
the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted EPS uses the
average market prices during the period.
During the years ended December 31, 1997, 1996 and 1995 there were no
differences between the numerators used for the basic and diluted EPS
calculations and the total amount of the differences in the denominators in
those years is attributable to the effect of dilutive stock options.
RECLASSIFICATION
Certain 1996 and 1995 balances have been reclassified to conform to the 1997
presentation.
2. BALANCE SHEET DETAIL
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES:
Purchased parts and raw materials $ 7,648 $ 6,763
Work-in-process 7,606 4,634
Finished goods 2,266 734
Evaluation systems 1,548 823
-------- --------
$ 19,068 $ 12,954
-------- --------
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment $ 8,277 $ 6,971
Furniture and fixtures 4,412 2,329
Leasehold improvements 1,264 1,360
Construction-in-progress 1,956 1,023
-------- --------
15,909 11,683
Less: accumulated depreciation and amortization (4,721) (2,310)
-------- --------
$ 11,188 $ 9,373
-------- --------
-------- --------
ACCRUED LIABILITIES:
Warranty, installation and retofit reserve $ 4,756 $ 3,378
Accrued compensation and benefits 2,199 1,252
Income taxes 1,971 2,082
Commissions 1,277 1,082
Deferred income 1,598 4,966
Other 1,109 1,374
-------- --------
$ 12,910 $ 14,134
-------- --------
-------- --------
</TABLE>
29
<PAGE>
3. CAPITAL STOCK
COMMON STOCK
In October, 1994, the Company completed its Initial Public Offering (IPO) of
Common Stock, which resulted in the sale of 4,600,000 shares. The Company
received net proceeds of $25.0 million. In June, 1995, the Company completed a
secondary public offering of Common Stock, which resulted in the sale of
2,553,696 shares. Of these shares, 983,090 were offered by the Company for
which the Company received net proceeds of $20.7 million and 1,570,606 were
offered by selling shareholders.
In 1996 the Board of Directors authorized the Company to repurchase up to
500,000 shares of the Company's Common Stock in the open market. As of
December 31, 1997, 500,000 shares had been repurchased by the Company for
funding the Company's Employee Stock Purchase Plan. There were 400,000
shares purchased, prior to the reincorporation in Delaware in September 1997,
which were retired. The 100,000 shares repurchased after the reincorporation
in Delaware are held as treasury stock.
STOCK OPTION PLAN
In September 1989, the Company adopted an incentive and non-statutory stock
option plan (the "Plan") under which a total of 4,300,000 shares of Common Stock
have been reserved for future issuance including increases of 600,000 shares in
1995, 1,000,000 shares in 1996 and 300,000 shares in 1997. Options granted
under the Plan are for periods not to exceed ten years. Incentive stock option
and non-statutory stock option grants under the Plan must be at prices at least
100% and 85%, respectively, of the fair market value of the stock on the date of
grant. The options generally vest 25% one year from the date of grant, with the
remainder vesting 1/36th per month, thereafter.
In February 1994, the Company granted 260,000 options to employees to purchase
Common Stock at $0.20 to $0.50 per share. The Company recorded deferred
compensation related to these grants of $193,000 which was amortized as
compensation expense over the related vesting period of the options. At
December 31, 1997, the deferred compensation was fully amortized.
The following table summarizes activity under the Plan (in thousands, except
prices):
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE OPTIONS OPTION AVERAGE
FOR GRANT OUTSTANDING PRICE EXERCISE PRICE
--------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 251 2,010 $ 0.20 - 10.41 $ 1.76
Shares authorized 600 -
Options granted (626) 626 $ 8.50 - 28.38 $ 19.59
Options exercised - (276) $ 0.20 - 3.00 $ 0.92
Options canceled 39 (39) $ 0.20 - 28.38 $ 6.93
------- -------
Balance at December 31, 1995 264 2,321 $ 0.20 - 28.38 $ 6.62
Shares authorized 1,000 -
Options granted (1,240) 1,240 $ 8.50 - 16.50 $ 10.08
Options exercised - (255) $ 0.20 - 9.00 $ 1.12
Options canceled 762 (762) $ 0.20 - 28.38 $ 17.35
------- -------
Balance at December 31, 1996 786 2,544 $ 0.20 - 24.50 $ 5.62
Shares authorized 300 -
Options granted (926) 926 $ 7.00 - 15.25 $ 9.66
Options exercised - (182) $ 0.20 - 12.25 $ 1.43
Options canceled 221 (221) $ 0.20 - 23.25 $ 9.48
------- -------
Balance at December 31, 1997 381 3,067 $ 0.20 - 24.50 $ 6.82
------- -------
------- -------
</TABLE>
30
<PAGE>
In 1996, the Board of Directors approved a proposal under which all employees,
other than executive officers, could elect to cancel certain options in exchange
for grants of new options with exercise prices which were equal to the fair
value of the Company's Common Stock on the date of the Board's approval and for
which a new four year vesting period commenced as of the new date of grant.
Options for the purchase of a total of 598,200 shares were canceled in exchange
for newly issued options.
The following table summarizes information about stock options outstanding at
December 31, 1997: (amounts in thousands except exercise price and contractual
life)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ---------------- ----------- ----------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 2.00 780 4.6 years $ 1.01 748 $ 0.98
$ 2.20 - $ 8.75 742 6.9 $ 6.05 273 $ 4.52
$ 8.88 - $ 9.00 91 7.7 $ 9.00 51 $ 8.98
$ 9.25 - $ 9.38 864 9.1 $ 9.37 146 $ 9.37
$ 9.50 - $24.50 590 7.4 $ 11.41 143 $ 11.24
----- -------- -------- ----- --------
$ 0.20 - $24.50 3,067 7.0 $ 6.82 1,361 $ 3.97
----- -------- -------- ----- --------
----- -------- -------- ----- --------
</TABLE>
The weighted average grant date fair value of stock options granted in 1997,
1996 and 1995 was approximately $4.67, $3.83, and $9.47, respectively.
Compensation cost for the fair value of each incentive stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model for
the multiple option approach with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected dividend yield - - -
Expected stock price volatility 0.60 0.63 0.61
Risk-free interest rate 6.0% 5.7% 6.7%
Expected life of options (from vesting date) 1 year 1 year 1 year
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under which 1,000,000 shares of Common Stock have been reserved
for future issuance, including an increase of 200,000 shares in 1995, 65,000 in
1996 and 400,000 shares in 1997. The Purchase Plan is administered generally
over offering periods of 24 months, with each offering period divided into four
consecutive six-month purchase periods beginning May 1 and November 1 of each
year. Eligible employees may designate not more than 15% of their cash
compensation to be deducted each pay period for the purchase of Common Stock
under the Purchase Plan and participants may not purchase more than $25,000
worth of Common Stock in any calendar year or 10,000 shares in any offering
period. On the last business day of each purchase period, shares of Common
Stock are purchased with the employees' payroll deductions accumulated during
the six months, at a price per share of 85% of the market price of the Common
Stock on the date immediately preceding the offering date or the date
immediately preceding the purchase date, whichever is lower. Approximately
$312,000 and $227,000 was accrued for use to purchase shares under the Purchase
Plan at December 31, 1997 and 1996, respectively.
The weighted average grant date fair value of employee purchase plan rights
granted in 1997, 1996 and 1995 was approximately $2.96, $4.36, and $7.00,
respectively.
31
<PAGE>
Compensation cost is recognized for the estimated fair value of the employees'
stock purchase rights using the Black-Scholes option pricing model with the
following average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Expected dividend yield - - -
Expected stock price volatility 0.60 0.63 0.61
Risk-free interest rate 6.0% 5.7% 6.7%
Expected life of options (from vesting date) 6 months 6 months 6 months
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plan have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee's stock option and the employee stock purchase plan.
PROFORMA EFFECT OF STOCK BASED COMPENSATION PLANS
In accordance with the provisions of FAS 123, the Company applies APB Opinion
25 in accounting for its Incentive Stock Option and Employee Stock Purchase
plans and accordingly, does not recognize compensation cost in the statement of
operations because the exercise price of the employees stock options equals the
market price of the underlying stock on the date of grant. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by FAS 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated in the table
below:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income - as reported $1,431 $6,465 $10,492
Net income (loss) - pro forma $(2,154) $2,838 $9,120
Net income per share - as reported:
Basic $ 0.10 $ 0.46 $ 0.80
Diluted $ 0.09 $ 0.42 $ 0.71
Net income (loss) per share - pro forma:
Basic $ (0.15) $ 0.20 $ 0.70
Diluted $ (0.15) $ 0.19 $ 0.62
</TABLE>
4. INCOME TAX PROVISION
(in thousands)
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic income $1,347 $ 9,055 $ 14,471
Foreign income 535 594 73
------ ------- --------
Income before provision for income taxes $1,882 $ 9,649 $ 14,544
------ ------- --------
------ ------- --------
</TABLE>
32
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
December 31, 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 237 $ 4,640 $ 4,981
State 2 415 1,043
Foreign 237 313 41
------ ------- ---------
Total Current 476 5,368 6,065
------ ------- ---------
Deferred:
Federal 180 (1,933) (1,839)
State (205) (251) (174)
Total Deferred (25) (2,184) (2,013)
------ ------- ---------
Provision for income taxes $ 451 $ 3,184 $ 4,052
------ ------- ---------
------ ------- ---------
</TABLE>
The provision for income taxes reconciles to the amount computed by multiplying
income before tax by the U.S. statutory rate of 35% as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 659 $ 3,377 $ 5,090
Research and development tax credits (307) (190) -
Realized deferred tax assets previously reserved - - (1,436)
State taxes, net of federal benefit 51 106 801
Foreign earnings taxed at higher rates 81 111 -
Benefit of foreign sales corporation (51) (354) (431)
Other 18 134 28
----- ------- -------
Total provision for income taxes $ 451 $ 3,184 $ 4,052
----- ------- -------
----- ------- -------
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Reserves not currently deductible $ 3,506 $ 3,042 $ 1,621
Deferred income 638 1,155 257
Other 78 - 135
-------- -------- --------
Total net deferred taxes $ 4,222 $ 4,197 $ 2,013
-------- -------- --------
-------- -------- --------
</TABLE>
During 1995 the Company realized $1.4 million of deferred tax assets
previously reserved, reducing the valuation allowance by a corresponding amount.
33
<PAGE>
5. EMPLOYEE BENEFIT PLANS
RETIREMENT/SAVINGS PLAN
Effective April 1, 1994, the Company implemented a retirement/savings plan which
qualifies as a thrift plan under section 401(k) of the Internal Revenue Code.
All employees who are twenty-one years of age or older are eligible to
participate in the Plan. The Plan allows participants to contribute up to 20% of
the total compensation that would otherwise be paid to the participant, not to
exceed the amount allowed by applicable Internal Revenue Service guidelines. The
Company may make a discretionary matching contribution equal to the percentage
of the participant's contributions. To date the Company has not made a matching
contribution.
PROFIT SHARING PLAN
In February 1994, the Company implemented a profit sharing plan, wherein, as
determined by the board of directors, a percentage of income from operations is
accrued and distributed to all employees excluding management. The total charge
to operations for the years ended December 31, 1997, 1996 and 1995 under the
profit sharing plan was approximately $85,000, $411,000, and $552,000,
respectively.
6. CERTAIN TRANSACTIONS
The Company has a distribution agreement with Marubeni, a Japanese distributor.
Marubeni owned approximately 4% of the Company's Common Stock at December 31,
1997. In addition, the Company formed a subsidiary in Japan in October 1995 in
which Marubeni has a minority interest. Prior to January 1996, one member of
the Company's board of directors was also a Vice President of Marubeni. In
January 1996, this board member left Marubeni and the Company's board of
directors and accepted a position with the Company's Japanese subsidiary.
Transactions between the Company and Marubeni prior to January 1996 were
considered related party transactions.
The following is a summary of the Company's transactions with the distributor
(in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales through the distributor for the period $ 9,987 $ 22,804 $ 16,994
Accounts receivable at period end 1,555 2,255 1,402
Deferred income at period end 591 591 591
Minority interest in joint venture 200 204 189
</TABLE>
In the event of termination of the distribution agreement, the Company would be
obligated to repurchase up to a maximum of $1,000,000 of inventory related to
the Company's sales to Marubeni. The Company recorded deferred income at the
time of sale to cover this right of return. At December 31, 1997 and 1996,
deferred income of $591,000 related to this agreement resulted from deferred
revenue of $1,000,000 less the estimated inventory value to the Company of
$409,000.
The Company purchases certain inventory parts from a supplier company which is
majority owned by the CEO of the Company. The Company believes the terms of
these purchases are no less favorable than could be obtained from third party
suppliers. Net purchases were $739,000, $991,000 and $997,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
34
<PAGE>
7. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company currently operates in a single industry segment. The Company
markets its products in the United States and in foreign countries through its
sales personnel, independent sales representatives, and distributors. All
transactions are denominated in U.S. dollars. The Company has one manufacturing
facility located in the United States. The Company's geographic sales as a
percent of net revenues are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
United States 35% 24% 33%
Japan 13% 31% 31%
Pacific Rim 46% 39% 30%
Europe 6% 6% 6%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
8. FINANCIAL INSTRUMENTS, CONCENTRATION OF CREDIT RISK AND SALES TO SIGNIFICANT
CUSTOMERS
CURRENCY SWAP CONTRACTS
Currency swap contracts are entered into primarily to hedge against the
short-term impact of fluctuations in the Yen denominated monetary assets of
the subsidiary in Japan. At December 31, 1997, the Company had a contract to
sell 25.0 million Yen ($0.2 million) which matures in 1998. Because the
impact of movements in currency exchange rates on currency swap contracts
offsets the related impact on the underlying items being hedged, these
financial instruments do not subject the Company to speculative risk that
would otherwise result from changes in currency exchange rates. Net foreign
currency gains and losses to date have not been material.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments, trade accounts receivable and financial instruments
used in hedging activities.
The Company invests in a variety of financial instruments such as certificates
of deposit, corporate bonds and treasury bills. The Company, by policy, limits
the amount of credit exposure to any one financial institution or commercial
issuer.
The fair values of the Company's cash and cash equivalents and short-term
investments are not significantly different than cost. All short-term
investments mature within one year.
35
<PAGE>
The Company's trade accounts receivable are derived from sales in the United
States, Japan, other Pacific Rim countries and Europe. The Company performs
ongoing credit evaluations of its customers (semiconductor manufacturers and
its Japanese distributor) and to date has not experienced any material
losses. As of December 31, 1997 and 1996, the Company had an allowance for
doubtful accounts of $100,000.
The Company is exposed to credit loss in the event of non-performance by
counterparties on the currency swap contracts used in hedging activities.
The Company does not anticipate nonperformance by these counterparties.
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. The
following table summarizes the percentage of net sales to significant
customers:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -------------------------------------------------------
<S> <C> <C> <C>
A 3% 7% 16%
B - - 15%
C 11% 6% 5%
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases which expire at various
dates through 2000 with minimum annual rental commitments as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 1,477
1999 572
2000 34
--------
$ 2,083
--------
--------
</TABLE>
Rent expense was $1,755,000, $1,421,000 and $390,000 for 1997, 1996, and
1995, respectively.
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 they will not have a material adverse effect on the
financial position or results of the operations of the Company.
36
<PAGE>
Report of Independent Accountants
- -----------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Mattson Technology, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Mattson
Technology, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 22, 1998
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth in the 1998 Proxy
Statement under the captions "Election of Directors" and "Additional
Information" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the 1998 Proxy
Statement under the caption "Executive Compensation and Other Matters" and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information related to security ownership of certain beneficial owners and
security ownership of management will be set forth in the 1998 Proxy
Statement under the caption "Security Ownership of Management and Principal
Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the 1998 Proxy
Statement under the caption "Certain Relationships and Related Transactions"
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2) FINANCIAL STATEMENTS
The financial statements and schedules filed as part of this report are
listed on the Index to Consolidated Financial Statements in Item 8 on page
23.
(a)(3) EXHIBITS
The documents listed on the Exhibit Index appearing at page 40 of this
Report are filed herewith. The 1998 Proxy Statement shall be deemed to
have been "filed" only to the extent portions thereof are expressly
incorporated herein by reference. Copies of the exhibits listed in the
Exhibit Index will be furnished, upon request, to holders or beneficial
owners of the Company's Common Stock.
Each management contract or compensatory plan or arrangement listed in the
Exhibit Index has been marked with the letter "C" to identify it as such.
(b) REPORTS ON FORM 8-K
None
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant)
By: / s/ Brad Mattson March 31, 1998
--------------------------
Brad Mattson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ Chief Executive March 31, 1998
- --------------------- Officer and Director
Brad Mattson (Principal Executive Officer)
/s/ Vice President - Finance March 31, 1998
- --------------------- and Chief Financial Officer
Richard Mora (Principal Financial and
Accounting Officer)
/s/ Director March 31, 1998
- ---------------------
Stephen Ciesinski
/s/ Director March 31, 1998
- ---------------------
John Savage
/s/ Director March 31, 1998
- ---------------------
Shigeru Nakayama
/s/ Director March 31, 1998
- ---------------------
Kenneth Smith
39
<PAGE>
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
an asterisk (*), are incorporated herein by reference. Each management
contract or compensatory plan or arrangement has been marked with the letter
"C" to identify it as such.
<TABLE>
<CAPTION>
Management Contract Prior Filing or
Exhibit or Compensatory Plan Sequential Page
Number Description or Arrangement Number Herein
- -------- ----------- -------------------- ----------------
<C> <S> <C> <C>
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Bylaws of the Registrant (1)
4.1 Form of Stock Certificate (1)
10.1 Marubeni Japanese Distribution Agreement, as amended (2)
10.2 1989 Stock Option plan, as amended C (3)
10.3 1994 Employee Stock Purchase Plan C (1)
10.4 Form of Indemnification Agreement C (1)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 filed August 12, 1994 (33-92738), as amended.
(2) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to Registrant's Form 10-K for fiscal year 1996.
(3) Incorporated by reference to the corresponding Registrant's
Registration Statement on Form S-8 filed October 31, 1997
(333-3929)
40
<PAGE>
EXHIBIT 21.1
MATTSON TECHNOLOGY, INC.
SUBSIDIARIES OF THE REGISTRANT
MATTSON INTERNATIONAL, INC.
MATTSON TECHNOLOGY CENTER K.K.
MATTSON INTERNATIONAL GMBH
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 333-39129, No. 33-85272 and No. 33-94972) of
Mattson Technology, Inc., of our report dated January 22, 1998 appearing on
page 37 of this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOUND ON PAGES 24 AND 25 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,583
<SECURITIES> 8,598
<RECEIVABLES> 14,784
<ALLOWANCES> 0
<INVENTORY> 19,068
<CURRENT-ASSETS> 73,255
<PP&E> 11,188
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,443
<CURRENT-LIABILITIES> 16,259
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 84,429
<TOTAL-LIABILITY-AND-EQUITY> 84,443
<SALES> 76,730
<TOTAL-REVENUES> 76,730
<CGS> 37,130
<TOTAL-COSTS> 37,130
<OTHER-EXPENSES> 39,204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,882
<INCOME-TAX> 451
<INCOME-CONTINUING> 1,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,431
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>