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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
MATTSON TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0208119
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3550 West Warren Avenue
Fremont, California 94538
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(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
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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 19,
1999: 15,398,274.
As of February 19, 1999, 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 $82,933,970.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by reference into
this Annual Report contain forward-looking statements that have been made
pursuant to the provisions of Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements are based on the following: (i) current
expectations, (ii) estimates and projections about the Company's industry, (iii)
management's beliefs, and (iv) 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. 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 for any other reason. 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. Of particular use are our 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. Our 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 (i) the deposition of insulating or conducting materials
onto a wafer, (ii) the projection of a pattern through a mask onto light
sensitive materials known as photoresist (photolithography), and (iii) 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. In 1995 we first shipped a new version of our 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.
With the acquisition of Concept Systems Design, Inc. (Concept) in 1998, the
Company added epitaxial processing systems to its growing product lines.
Incorporated in 1989, Concept has long been a leader in the EPI market with the
venerable Gemini product line. Concept's installed base represents a significant
segment of the batch EPI market. Along with a 60,000 sq. ft. headquarters
located in Fremont, California, Concept is strategically positioned worldwide,
with locations throughout Europe, Asia, and the US, to service an installed base
of over 400 systems.
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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. Today the average cost for a 64-megabit DRAM fabrication facility
is approximately $1 to $2 billion.
Advancements in semiconductor manufacturing equipment have enabled IC
manufacturers to increase productivity dramatically by (i) reducing feature
size, (ii) increasing manufacturing yields, (iii) improving the uptime of wafer
fabrication equipment and (iv) 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. Equipment uptime now normally exceeds 90%, leaving
little room for improvement in equipment reliability.
- - LARGER WAFER SIZES. Leading edge wafer fabrication lines are currently
using 8" diameter wafers, up from the 4" diameter wafers were ten years
ago. Currently, a handful of IC makers are starting up pilot lines for 12"
diameter wafers. The balance of the manufacturers are 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. These tools 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. We believe 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 first estimating the total costs to operate a system including
(i) depreciation, (ii) overhead, (iii) labor and materials. We then divide those
costs by the system's total wafer output. The Company, the Company's customers
and the Company's competitors may use different formulas for calculating COO. As
a result we cannot assume 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.
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OUR SOLUTION - MODULAR CONTINUOUS PROCESSING
We believe our Aspen system provides higher productivity than conventional
single wafer systems and cluster tools. As compared to conventional single wafer
processing, the Aspen system's modular continuous processing architecture
achieves this with (i) high throughput, (ii) savings of cleanroom floorspace and
(iii) improvements in process control.
The Aspen system achieves higher throughput, savings in cleanroom floorspace and
enhanced process control by:
- - SIMULTANEOUS PROCESSING. Our Aspen systems process (i) up to two wafers
concurrently in our RTP systems, (ii) up to four wafers concurrently (two
in each chamber) in our Strip and LiteEtch systems, and (iii) up to eight
wafers concurrently (four in each chamber) in our CVD systems.
- - CONTINUOUS PROCESSING. Our 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. This ability
to handle four wafers at once reduces 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 we believe is a substantial
improvement over present competitive systems.
- - MODULARITY. Our 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
Our objective is to become a leading supplier of advanced processing equipment
to the worldwide semiconductor industry. We intend 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. We seek 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.
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- - HIGHER PRODUCTIVITY. Our goal is to offer systems which have substantial
improvements in productivity over the leading competitive equipment in each
market it enters. We believe that our Aspen Strip, LiteEtch, CVD, RTP and
EpiPro systems achieve this goal. In particular, we believe that our
systems achieve improvements in throughput, which we consider an important
factor in COO and productivity. In the future we plan to use the same
strategy to leverage the high productivity platform for 300mm production
throughout our product lines, in a manner similar to the way we introduced
our 200mm (8") product lines.
- - REDUCED TIME TO MARKET. Our Aspen platform includes wafer handling
robotics, dual loadlocks, control electronics and system software. By
basing new systems on this platform, we are able to focus our development
activities almost exclusively on the process chamber. By basing new
products on the standard Aspen platform, we believe that we are able to
develop new products quickly and at relatively low cost.
- - COMMITMENT TO GLOBAL MARKET. From inception, our strategy has been to sell
our systems to leading semiconductor manufacturers throughout the world. We
introduced our systems into Japan through Marubeni, which has substantial
experience in plasma equipment and CVD. We have opened service and support
offices in Singapore, Taiwan, Korea and Germany and a research, development
and engineering, and marketing office in Japan. International sales as a
percentage of our total net sales for 1998, 1997, and 1996 were 67%, 65%,
and 76%, respectively.
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
- - the Aspen LiteEtch for isotropic etching
With the acquisition of Concept Systems Design, Inc. in 1998, we added epitaxial
processing systems to our growing product lines.
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 our Aspen ICP Strip, create gaseous atomic oxygen that is
exposed to the wafer to remove the photoresist.
The demand for photoresist strip equipment has grown as the complexity and
number of strip steps required for each wafer have increased. Complex ICs
require additional photoresist stripping steps with more than 20 steps
required for 64 Megabit DRAMs. The increase in strip steps in the IC
manufacturing process has led to a need for semiconductor manufacturers to
increase their photoresist strip capacity. The added complexity of the
strip process has also led to higher average selling prices of such
equipment. According to Dataquest figures published in January 1999, the
market was projected to reach $450 million by the year 2002.
- - EMERGING TECHNICAL REQUIREMENTS. Fabrication of advanced ICs with feature
sizes under 0.25 microns require new strip technologies that have greater
sensitivity to residues, contamination drive-in and underlying film
selectivities. With each reduction in feature size, the Company estimates
that manufacturers typically require a 2X decrease in the level of
allowable contamination drive-in. In addition to providing a "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.
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- - MATTSON'S STRIP TECHNOLOGY. To meet this demand, we market 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 90-130 wafers per hour with one chamber and 110-160 wafers
per hour with two chambers for most applications. We believe the two
chamber Aspen Strip offers a substantial reduction in cost of ownership
relative to conventional single wafer systems. In particular, the systems
provide substantial improvements in throughput which result in a
significant reduction in cost of ownership and initial capital investment.
In addition, the ICP residue removal capability reduces the need for wet
chemical steps, which allows for the customer to realize a greater
reduction in cost of ownership by decreasing the number of wet stations
needed.
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, silicon nitride (nitride) films, for final passivation
applications and oxynitrides for Dielectric Antireflective Coatings. 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 and copper 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. 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. This isolation of the process chamber reduces
particulates and improves 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.
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- - THE ASPEN CVD. The Aspen CVD system, like the Aspen Strip, is based on one
of the two standard Aspen platforms. The Aspen 2 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 Aspen 3 platform can be configured with
one, two or three process chambers and each chamber can process 2 wafers at
a time. Aspen 3 is specifically designed for 200 and 300 mm wafer and
higher productivity for a larger variety of thin dielectric films. The
automatic cleaning cycle and simple system design reduces production
downtime and increases overall system availability. The Company believes
that the Aspen CVD systems offer a significant improvement in COO over the
leading competitive systems. Meeting the technology requirements of
advanced films combined with the COO advantage and a global support
structure, the Company believes its CVD system is very competitively
positioned for the emerging dual damascene technology trend.
THE ASPEN RTP
- - RTP MARKET. An RTP (Rapid Thermal Processing) system heats semiconductor
wafers for silicide formation, implant annealing and formation of films on
semiconductor wafer surfaces. Traditional RTP systems that use lamp heating
technology operate at high temperatures ranging from 400 to 1150 Celsius.
Diffusion furnace systems provide furnace annealing in both high and low
temperature regimes. Based on Dataquest and VLSI figures, we estimate the
RTP market at $571 million in 1999, including diffusion furnace and RTP
technology, and estimate that market at $1.4 billion in the year 2002.
- - EMERGING TECHNICAL REQUIREMENTS. 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.
- - MATTSON'S RTP TECHNOLOGY. The Company's Aspen RTP system employs
susceptor-based heating technology for excellent temperature stability,
uniformity and repeatability in a wide operating range of 400-1150 Celsius
at minimum power consumption. The system is capable of 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.
- - THE ASPEN RTP. The Aspen RTP system is based on the Aspen platform and the
principle of modular continuous processing. It handles 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. We believe that our single chamber
Aspen RTP offers a substantial reduction in COO relative to conventional
RTP systems.
THE ASPEN LITEETCH
- - ISOTROPIC ETCH MARKET. An isotropic etch system performs a variety of etch
processes on semiconductor wafers - processes which can be used in as many
as 10 steps in a typical 0.25 micron DRAM or logic fab. At this time, these
processes include, but are not restricted to: (i) silicon soft etch
(post-RIE contact cleanup); (ii) highly selective nitride removal for LOCOS
or STI; (iii) backside nitride stripping; (iv) self-aligned-contact (SAC)
nitride removal; (v) isotropic contact and via etch; and (vi) passivation
etch. These advanced isotropic etch applications make up the building
blocks of current and future generation ULSI devices.
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Historically, both dry and wet chemistries have been used for isotropic
etch manufacturing processes. In some cases, more expensive anisotropic
etchers with low productivity have been used in place of isotropic etch
applications. The use of anisotropic etchers greatly increases the cost of
these manufacturing applications. Wet benches require a large amount of
cleanroom floorspace plus special handling and disposal of chemicals,
increasing associated costs and environmental concerns. With the inevitable
move from wet to dry processing for key application steps, the Company
believes that Aspen LiteEtch offers enabling technological capabilities
with the benefits of dry etch tools. These benefits include (i) lower cost
of ownership than wet stations, (ii) floorspace savings and (iii) a higher
level of process automation for ease of use.
Our Aspen LiteEtch system is an isotropic etching system that uses dry
chemistry to selectively remove inorganic films such as silicon nitride,
polysilicon and silicon oxides from the wafers. This etching is done in a
damage-free and contamination-free environment, which is critical to the
formation of advanced IC structures such as shallow trench isolation (STI)
for devices with design rules of less than 0.25 micron.
- - EMERGING TECHNICAL REQUIREMENTS. With the ever-shrinking device feature
size, 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 in order to produce reliable
and yielding devices. As device geometries shrink below 0.18 micron, the
ability of wet chemicals to clean and etch such features will be limited.
- - MATTSON'S ISOTROPIC ETCH TECHNOLOGY. Our first isotropic etch product, the
Aspen LiteEtch, uses a patented, inductively coupled plasma (ICP) source -
the same source used in our 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, we believe that we provide 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 source allows for the use of aggressive etching
chemistries while reducing consumables cost. The system provides greater
than 90% uptime without added damage or 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. We believe our unique
dual chamber Aspen LiteEtch offers a substantial reduction in cost of
ownership compared to competing isotropic as well as anisotropic etchers
and wet bench systems. In particular, we believe that Aspen LiteEtch
systems provides enabling and manufacturable technical capabilities,
provide a high throughput which result in a substantial reduction in COO;
and that our systems allow customers to further reduce COO by eliminating
environmental concerns and costs associated with the use and disposal of
wet chemical acids.
EPIPRO SYSTEMS
- - EPI TECHNOLOGY. An epitaxial film is the controlled growth on a crystalline
substrate of a crystalline layer, also known as an epilayer. Epi film is an
essential part of IC fabrication and consists of two types of film growth.
In "homo-epitaxy" (e.g., silicon layers on a silicon substrate), the
epilayer exactly duplicates the crystal structure of the substrate while
allowing the IC designers to change resistivity or dopant concentration, of
the substrate. In "hetero-epitaxy" (e.g., silicon on sapphire), the
deposited epilayer is a different material with a different crystalline
structure than the substrate. The silicon properties of the epitaxy produce
a more controlled silicon growth than do manufactured silicon wafers. The
use of epitaxy results in a huge (tenfold) increase in yield during the
manufacturing process over the old method of applying diffusion three
times.
- - THE EPI MARKET. According to information published by Dataquest in January
1999, the market for batch and single wafer epi equipment is estimated at
$150 million in 1999, and is projected to reach $371 million in the year
2002.
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- - CONCEPT-HTP EPIPRO SERIES. Dedicated to increasing epitaxy process
productivity for semiconductor manufacturers worldwide, Mattson's
Concept-HTP Division offers the largest batch epi load sizes available,
while delivering a 2X productivity advantage over the Gemini product line.
This advantage in productivity is dramatically increasing the
cost-effectiveness of Epi processing. With substantial batch size
advantages, the EpiPro is the leading performer for batch, thin and thick
film Epi in 100mm to 200mm wafers.
CUSTOMERS
We sell our products to leading IC manufacturers located in the United
States, Japan, the rest of the Pacific Rim and Europe. There were no
individually significant customers in 1998 or 1996. One end user customer,
TSMC, accounted for 11% of sales in 1997. While we actively pursue new
customers, there can be no assurance that we will be successful in our
efforts, and any significant weakening in customer demand would have a
material adverse effect on the Company.
MARKETING AND SALES
We sell our systems through a combination of a direct sales force, our Japanese
distributor and a manufacturers' sales representative. In addition to the direct
sales force at the Company's headquarters in Fremont, California, we have
domestic regional sales offices located in New Jersey, Arizona, Oregon and
Texas. The Company also maintains regional direct sales and support offices in
Singapore, 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. We are continuing to invest resources to
increase the size of our direct sales force.
As part of our strategy for penetrating the Japanese market, we established a
distributor relationship with Marubeni in December 1990 and are substantially
dependent upon our relationship with Marubeni to address the Japanese market. We
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 we believe that we maintain a good relationship with Marubeni, there
can be no assurance that the relationship will continue. In the event of a
termination of our distribution agreement with Marubeni, our strategy to
increase our sales in Japan would be adversely affected and we would be
obligated to repurchase up to $1.0 million of inventory related to the Company's
sales to Marubeni. Although we intend 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 we will be able to maintain
or increase our sales to the Japanese semiconductor industry.
We also have personnel located in service and customer support offices in
Singapore, Korea, Taiwan and Germany. Our arrangements with our customers are
generally on a purchase order basis and not pursuant to long term contracts.
International sales accounted for 67%, 65%, and 76% of total net sales in 1998,
1997 and 1996, respectively. We anticipate 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 our
dependence upon international sales in general, and on sales to Japan and
Pacific Rim countries in particular, we are particularly at risk to effects from
developments such as the recent Asian economic problems. Our 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
our business, financial condition and results of operations.
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CUSTOMER SUPPORT
We believe our 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. Our customer support
organization is headquartered in Fremont, California, with additional employees
located in Arizona, Idaho, Maryland, Massachusetts, Texas, Oregon, Virginia,
Germany, Korea, Singapore, Taiwan, and the United Kingdom. Our 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. Our
support personnel have technical backgrounds, with process, mechanical, and
electronics training, and are supported by our engineering and applications
personnel. Support personnel install systems, perform warranty and
out-of-warranty service, and provide sales support.
The warranty periods for Mattson systems range from 12 to 36 months after
shipment or acceptance. The exact warranty depends upon the purchase agreement.
BACKLOG
We schedule production of our systems based on both backlog and regular sales
forecasts. We include in backlog only those systems for which we have 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, 1998, backlog was approximately $22.7 million.
Because of possible changes in delivery schedules and cancellations of orders,
our backlog at any particular date is not necessarily representative of actual
sales for any succeeding period. In particular, during periods of industry
downturns we have experienced significant delays relating to orders which were
previously booked and included in backlog.
RESEARCH, DEVELOPMENT AND ENGINEERING
Our research, development and engineering efforts are focused upon our
multi-product strategy. During recent periods we have devoted a significant
amount of resources to the EpiPro 5000 in-process technology acquired from
Concept. Due to projected push-outs of the 300mm implementation by our
customers we have also increased our efforts on our RTP system.
We maintain an applications laboratory in Fremont to test new systems and
customer-specific equipment designs. By basing products on the Aspen platform,
we believe that we are able to focus our development activities on the process
chamber and to develop new products quickly and at relatively low cost. For
example, we believe we were able to reduce new product development time on our
CVD, RTP and LiteEtch products. In the future we also hope to leverage the high
productivity platform for 300mm production throughout our product lines, in a
manner similar to the way we introduced our 200mm (8") product lines.
The markets in which our customers and we compete are characterized by rapidly
changing technology, evolving industry standards and continuous improvements in
products and services. Because of continual changes in these markets, we believe
that our future success will depend, in part, upon our ability to continue to
improve our existing systems, process technologies, and to develop systems and
new technologies which compete effectively on the basis of COO and performance.
In addition we must adapt our 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 we will be able to improve our existing systems and process
technologies or to develop new technologies or systems.
Our research, development and engineering expenses for the years 1998, 1997, and
1996, were $16.7 million, $14.7 million, and $11.5 million, respectively,
representing 28%, 19% and 16% of net sales, respectively. There can be no
assurance our research, development and engineering efforts will result in the
successful development of new products.
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ACQUISITION
On July 24, 1998 we completed our acquisition of Concept Systems Design, Inc.
("Concept"), a supplier of epitaxial (EPI) systems. The transaction was achieved
through the merger of a wholly-owned subsidiary of Mattson with and into
Concept. In connection with the acquisition, we issued 795,138 shares of our
Common Stock to the former shareholders of Concept. The former shareholders of
Concept also may acquire up to 547,569 additional shares of Mattson Common Stock
in connection with the acquisition if certain conditions are met prior to the
end of the first twenty-four full calendar months following the closing of the
transaction. The transaction has been accounted for as a purchase. The
acquisition resulted in a $4.2 million write-off of in-process research and
development in the third quarter of 1998.
In addition to the tangible assets and liabilities assumed with the acquisition
of Concept, we also acquired three categories of intangible assets as shown
below:
- - Developed technology
- - In-Process technology
- - In-Place workforce
DEVELOPED TECHNOLOGY
Developed technology was made up of all technology currently employed in the
existing products of Concept at the time of the acquisition, and all technology
that had reached a level of technological feasibility. This included the Epi
2400 and 3000 batch reactors.
IN-PROCESS TECHNOLOGY
As of the acquisition date, Concept was engaged in the development of two major
projects which had required the majority of Concept's research and development
resources over the preceding several years - the development of the EpiPro 5000
and the development of a single-wafer system.
- - The EpiPro 5000 had been under development for approximately four years at
the date of the acquisition, including two years of initial work by a team
of approximately two engineers engaged in proof-of-process, followed by a
much more extensive effort by a team of approximately eleven engineers. By
October 1997, Concept had produced an "alpha" prototype, and focus shifted
toward development of a single wafer system. At the end of March 1998
attention shifted back toward the EpiPro 5000 and as of the acquisition
date a full staff was working toward a `beta" version. Management estimated
that approximately $2.0 million had been invested in the EpiPro 5000 system
as of the acquisition date. As of December 31, 1998, Mattson had invested
approximately another $0.8 million into the system. We expect to ship the
first system in the spring of 1999.
- - Development of the Single Wafer System (SWS) began in 1995, and from the
spring of 1996 through April 1998 approximately $10 million had been spent.
By early 1998 Concept produced an `alpha" prototype, but subsequently
reduced their development efforts because of a lack of funding.
During 1998 we focused our development efforts on the EpiPro 5000 project. We
plan to intensify efforts on the Single Wafer project after completion of the
EpiPro 5000 project.
IN-PLACE WORKFORCE
Concept's in-place workforce consisted of highly skilled engineers with
specialized experience in epitaxial deposition. This workforce would be
difficult and expensive to recreate, and as such has been valued as an
intangible asset of the acquisition.
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COMPETITION
The market for our 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. We believe that we compete in our chosen markets primarily on the basis
of system performance, COO and customer support. We believe we can also compete
on the basis of price due to the design of our systems.
We face substantial competition in our chosen market segments from both
established competitors and potential new entrants. Most of our 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 we have. 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 our systems. In the United States and European
plasma photoresist strip markets we compete primarily with GaSonics, Matrix and
Eaton (formerly Fusion). In Japan, we compete primarily with Canon, Plasma
Systems Corporation, KEM (formerly MC Electronics), Tokyo Ohka and various
Japanese vendors who have already established relationships with Japanese IC
manufacturers. Competitors for our LiteEtch systems include Lam Research,
GaSonics, Matrix, Tegal and Shibauru. In the CVD market, we compete primarily
with Applied Materials, Novellus and ASM. In the RTP market we compete with
Steag Microelectronics and Applied Materials. In the isotropic etch market we
compete with Lam Research, GaSonics, Matrix, Tegal, and Shibaura. In the United
States and European epitaxial markets we compete primarily with Applied
Materials, ASM and Moore Technology. In Asia and Japan we also compete with
Toshiba.
MANUFACTURING
Our manufacturing operations are based in our Fremont facility and consist of
procurement, subassembly, final assembly, test and reliability engineering. Our
current Strip, CVD, RTP and LiteEtch systems are based on the Aspen platform,
enabling us to use a large number of common subassemblies and components.
Additional manufacturing floor space was added with the acquisition of Concept.
The Concept facilities were not fully utilized in 1998. With several large
Concept orders booked in December 1998, we expect to better utilize this
manufacturing space. Many of the major assemblies are procured complete from
outside sources. We focus our internal manufacturing efforts on those precision
mechanical and electro-mechanical assemblies which differentiate our systems
from our competitors. We are implementing a quality control program based on
ISO-9001 and Sematech-generated measurement and improvement methodologies.
Certain of our components are obtained from a sole supplier or a limited group
of suppliers. We generally acquire such components on a purchase order basis and
not under any long term supply contracts. Our 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 we have not experienced any significant delays in manufacturing due
to an inability to obtain components and we are not currently aware of any
specific problems regarding the availability of components which might
significantly delay the manufacturing of our systems in the future. However, any
inability to obtain adequate deliveries or any other circumstance that would
require us to seek alternative sources of supply or to manufacture such
components internally could delay our ability to ship our systems and could have
a material adverse effect on us. See "Business--Factors That May Affect Future
Results and Market Price of Stock."
We are 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 our 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 us, suspension or
cessation of our operations, restrictions on our ability to expand at our
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 our operations.
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INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other intellectual property protection methods to
protect our proprietary technology. There can be no assurance that our
competitors will not be able to legitimately ascertain the non-patented
proprietary information embedded in our systems, in which case we may be
precluded from preventing the use of such information. To the extent we wish to
assert our patent rights, there can be no assurance that any claims of our
patents will be sufficiently broad to protect our technology or that our pending
patent application will be approved. In addition, there can be no assurance that
any patents issued to us will not be challenged, invalidated or circumvented,
that any rights granted thereunder will provide adequate protection to us, or
that we will have sufficient resources to prosecute our 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 we are 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 we will be able to obtain licenses on
reasonable terms. Our 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 our business. Adverse determinations in any
litigation could subject the Company to significant liabilities to third
parties, require us to seek licenses from third parties and prevent us from
manufacturing and selling our products. Any of these situations could have a
material adverse effect on the Company.
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:
- - OUR QUARTERLY RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY
FLUCTUATE SIGNIFICANTLY IN THE FUTURE. We derive most of our net sales from
the sale of our photoresist stripping systems. The list prices range from
approximately $375,000 to $750,000. At our current revenue level, each
sale, or failure to make a sale, can have a material effect on the Company.
Our backlog at the beginning of a quarter typically does not include all
sales required to achieve our sales objectives for that quarter.
Consequently, our 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 our expectations and may thus
materially and adversely affect our operating results for such quarter.
Other factors which may lead to fluctuations in our 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
- - cyclicality in the semiconductor industry and the markets served by the
Company's customers.
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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 we continue to
invest in accordance with our long-term strategy, fluctuating revenue levels
will produce fluctuating results. Similarly, due to unpredictable order
patterns, our 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 our 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 we will not be able to reduce rapidly if our net sales goals for a
particular period are not met. The impact of these and other factors on our
operating results in any future period cannot be forecasted accurately.
- - THE COMPANY'S FUTURE SUCCESS DEPENDS UPON THE COMPANY CONTINUING TO DEVELOP
ITS SYSTEMS, PRODUCTS AND THE MARKET'S ACCEPTANCE OF THEM. Given that our
systems represent alternatives to conventional strip, isotropic etch, CVD,
RTP and Epi equipment currently marketed by competitors, we believe that
our growth prospects depend in large part upon our ability to gain
acceptance by a broader group of customers of the efficacy of the Company's
systems and technology. To date, only our strip and Epi 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, we believe 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 we will be
successful in obtaining broader acceptance of our systems and technology.
The transition of the market to 300mm wafers will present both an
opportunity and a risk to us. To the extent that we are unable to introduce
300mm systems on a timely basis and which meet customer requirements, our
business, results of operations and financial condition could be materially
and adversely affected.
- - OUR REVENUES ARE SIGNIFICANTLY DEPENDENT ON INDIVIDUAL CUSTOMERS MAKING
PURCHASES. We sell our products to leading IC manufacturers located in the
United States, Japan, the rest of the Pacific Rim and Europe. There were no
individually significant customers in 1998 or 1996. One end user customer,
TSMC, accounted for 11% of sales in 1997. While we actively pursue new
customers, there can be no assurance that we will be successful in our
efforts, and any significant weakening in customer demand would have a
material adverse effect on us.
- - OUR REVENUES ARE HIGHLY DEPENDENT ON OUR JAPANESE DISTRIBUTOR, MARUBENI,
AND THE ASIAN MARKET IN GENERAL. We believe that strong sales in the
Japanese market will be essential to our future financial performance. As
part of our strategy for penetrating the Japanese market, we established a
distributor relationship with Marubeni and are substantially dependent upon
Marubeni to address the Japanese market. Approximately 16% of our net sales
for the year ended December 31, 1998 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 our distribution agreement
with Marubeni, our strategy to increase our sales in Japan will be
adversely affected and we would have the obligation to repurchase up to $1
million of inventory related to our sales to Marubeni. Although we intend
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 we will be able to maintain or increase our sales to the
Japanese semiconductor industry.
We are also substantially dependent upon sales to Pacific Rim countries
generally. During the fiscal year ended December 31, 1998, approximately
50% of our net sales were to customers based in the Pacific Rim. Some of
our foreign sales are denominated in U.S. dollars, so our products become
less price competitive in countries with currencies that are declining in
value against the dollar. As such, we are particularly at risk with respect
to effects from developments such as the recent Asian economic problems.
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- - OUR SALES CYCLE IS LENGTHY BECAUSE SALES FOR OUR SYSTEMS DEPEND UPON THE
DECISIONS OF PROSPECTIVE CUSTOMERS TO MAKE SIGNIFICANT CAPITAL COMMITMENTS.
Sales of our 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, we believe 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, our
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, we often experience further delays in finalizing
system sales while the customer evaluates and receives approvals for the
purchase of our systems and completes a new or expanded facility. We
believe we must significantly increase our inventory investment in
evaluation systems because many customers in their evaluation processes use
them. Due to these factors, our systems typically have a lengthy sales
cycle during which we may expend substantial funds and management effort.
There can be no assurance that any of our efforts will be successful.
- - OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY. Our
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 us. We 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. Sales in 1998 saw three
quarters of falling sales and then ending with an up-tick in the fourth
quarter of the year. We expect sales in the first quarter of 1999 to be
higher than in the last quarter of 1998. We anticipate 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. Any downturns or slowdowns
in the semiconductor market will materially and adversely affect our net
sales and operating results in the future.
- - WE MAY NOT BE ABLE TO COMPETE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR
INDUSTRY. The market for our systems is highly competitive and is subject
to rapid technological change. Significant competitive factors include (i)
system performance, (ii) cost of ownership, (iii) size of installed base,
(iv) breadth of product line and (v) customer support. Principal
competitors for our Aspen Strip systems include GaSonics, Eaton (formerly
Fusion) and Matrix in the United States and Canon, Plasma Systems
Corporation, KEM (formerly MC Electronics), Tokyo Ohka and various
Japanese vendors who have already established relationships with Japanese
IC manufacturers. Competitors for our Aspen LiteEtch systems include Lam
Research, GaSonics, Matrix, Tegal and Shibaura. Competitors for our Aspen
CVD systems include Applied Materials, Novellus and ASM and competitors for
our Aspen RTP system include Steag Microelectronics and Applied Materials.
In the United States and European epitaxal markets, we compete primarily
with Applied Materials, ASM and Moore Technology. In Asia and Japan we also
compete with Toshiba. Most of our 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 us.
In addition, to expand our sales, we must often replace competitors'
systems. There can be no assurance that our competitors will not develop
enhancements to, or future generations of competitive products that will
offer price/performance features that are superior to our systems.
- - MOST OF OUR SALES REVENUE IS CONCENTRATED IN ASPEN STRIP SYSTEMS. 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, Aspen LiteEtch, EpiPro systems and
future products.
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- - ACQUISITIONS, WHICH ARE INHERENTLY RISKY, ARE PART OF OUR BUSINESS
STRATEGY. As part of our business strategy, we 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, (i) the difficulty of
assimilating the operations and personnel of the acquired businesses, (ii)
the potential disruption of the Company's ongoing business (iii), the
inability of management to maximize the financial and strategic position of
the Company or acquired or invested products, services, and technologies,
(iv) 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.
- - OUR FUTURE SUCCESS DEPENDS UPON OUR CONTINUING TO DEVELOP AND INTRODUCE NEW
SYSTEMS WHICH COMPETE EFFECTIVELY ON THE BASIS OF PRICE AND PERFORMANCE.
Rapidly changing technology, evolving industry standards and continuous
improvements in products and services characterize the markets in which we
and our customers compete. Because of continual changes in these markets,
we believe that our future success will depend, in part, upon our ability
to continue to improve our systems and our 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, We must adapt our 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 we will be able to improve our
existing systems and our process technologies or develop new technologies
or systems in a timely manner.
- - OUR SUBSTANTIAL DEPENDENCE UPON A LIMITED NUMBER OF SUPPLIERS FOR SOME
COMPONENTS AND SUBASSEMBLIES REDUCE OUR CONTROL OVER THE TERMS OF THEIR
DELIVERIES. We rely 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. Our 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 us to seek alternative sources of supply or to manufacture such
components internally could delay our ability to ship our systems and could
have a material adverse effect on the Company.
- - WE ARE HIGHLY DEPENDENT ON OUR PERSONNEL. Our 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 us. We have not entered into written employment agreements with
our executive officers. The success of our business will also depend upon
our 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.
- - WE ARE HIGHLY DEPENDENT ON OUR SALES OVERSEAS, PARTICULARLY TO JAPAN AND
OTHER PACIFIC RIM COUNTRIES. International sales accounted for 67%, 65%,
and 76% of total net sales in 1998, 1997 and 1996, respectively. We
anticipate 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 our dependence upon international sales in
general, and on sales to Japan and Pacific Rim countries in particular, we
are particularly at risk to effects from developments such as the recent
Asian economic problems. Our international sales are also subject to
certain governmental
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restrictions, including the Export Administration Act and the regulations
promulgated under that act. Our 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.
- - WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS TO PROTECT OUR PROPRIETARY
TECHNOLOGY. We rely on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other intellectual
property protection methods to protect our proprietary technology. We
believe that patents are of less significance in this industry than such
factors as innovative skills, technical expertise and know-how of our
personnel. There can be no assurance that our competitors will not be able
to legitimately ascertain the non-patented proprietary information embedded
in our systems, in which we may be precluded from preventing the use of
such information. To the extent we wish to assert our patent rights, there
can be no assurance that any claims of our patents will be sufficiently
broad to protect our technology. In addition, there can be no assurance
that any patents issued to us will not be challenged, invalidated or
circumvented, that any rights granted thereunder will provide adequate
protection to us, or that we will have sufficient resources to prosecute
our rights.
Although there are no pending lawsuits against us regarding infringement of
any existing patents or other intellectual property rights or any
unresolved notices that we are 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 we will be able to obtain
licenses on reasonable terms. Our 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 us. Adverse determinations
in any litigation could subject us to significant liabilities to third
parties, require us to seek licenses from third parties and prevent us from
manufacturing and selling our systems. Any of these situations could have a
material adverse effect on the Company.
- - OUR FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS
COULD RESULT IN SUBSTANTIAL LIABILITY TO THE COMPANY. We are 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 our knowledge, we are 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 us, suspension or cessation of our operations,
restrictions on our ability to expand at our present locations or
requirements for the acquisition of significant equipment or other
significant expense.
- - THE PRICE OF OUR COMMON STOCK HAS IN THE PAST AND MAY IN THE FUTURE
FLUCTUATE SIGNIFICANTLY. In the past, the market price of our Common Stock
has been subject to significant volatility and has declined substantially
from its highs. There can be no assurance that the market price of our
Common Stock will not decline in the future. We believe that a variety of
factors could cause the price of our 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
- - 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 our Common Stock.
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- - WE ARE EXPOSED TO RISKS RELATED TO YEAR 2000 (Y2K) ISSUES FROM OUR
PRODUCTS, OUR INTERNAL INFRASTRUCTURE AND OUR BUSINESS PARTNERS WHICH COULD
HAVE A SIGNIFICANT IMPACT ON OUR FINANCIAL CONDITION. As with many other
companies, the Year 2000 computer issue presents risks for us. We use a
significant number of computer software programs and operating systems in
our internal operations, including applications used in our financial,
product development, order management and manufacturing systems. The
inability of computer software programs to accurately recognize, interpret
and process date codes designating the year 2000 and beyond could cause
systems to yield inaccurate results or encounter operating problems
resulting in the interruption of the business operations which they
control. This could adversely affect our ability to process orders,
forecast production requirements or issue invoices. A significant failure
of the computer integrated manufacturing systems, which monitor and control
factory equipment, would disrupt manufacturing operations and cause a delay
in completion and shipping of products. Moreover, if our critical
suppliers' or customers' systems or products fail because of a Year 2000
malfunction, it could impact our operating results. Finally, our own
products could malfunction as a result of a failure in date recognition,
giving rise to the possibility of warranty claims and litigation. Based on
currently available information, our management does not believe that the
Year 2000 issues discussed above, related to internal systems or products
sold to customers, will have a material impact on our financial condition
or overall trends in results of operations. However, we are uncertain to
what extent we may be affected by such matters. A significant disruption of
our financial management and control systems or a lengthy interruption in
our manufacturing operations caused by a Year 2000 related issue could
result in a material adverse impact on our operating results and financial
condition. In addition, it is possible that a supplier's failure to ensure
Year 2000 capability or our customer's concerns about Year 2000 readiness
of our products would have a material adverse effect on our results of
operations.
EMPLOYEES
As of February 19, 1999 we had 349 employees. There were 58 employees in
manufacturing operations, 93 in research, development and engineering, 160 in
sales, marketing and field service and customer support, and 38 in general,
administrative and finance.
The success of our future operations depends in large part on our 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 we will be successful
in retaining or recruiting key personnel. None of our employees is represented
by a labor union and we have never experienced a work stoppage, slowdown, or
strike. We consider our relationships with our employees to be good.
ITEM 2. PROPERTIES
We maintain our headquarters in Fremont, California. During the years ended
December 31, 1998 and 1997, we increased our facility square footage by
leasing additional office space. Our leased 61,000 square foot facility was
supplemented with an additional 31,000 square feet of space located near the
61,000 square foot facility in the fourth quarter of 1997. This 31,000 square
foot facility was used until we acquired Concept's 60,000 square foot
facility in July 1998. We then began moving personnel from the 31,000 square
foot facility, which was vacated in the third quarter of 1998. We do not
expect to use this facility again before the expiration of the lease in
August 1999. The leases for the two remaining 61,000 and 60,000 square foot
facilities expire in February 1999 and April 2003, respectively. Our future
growth may require that we secure additional facilities or expand our current
facilities further before the term of our headquarters' lease expires. Any
move to new facilities or expansion could be disruptive and could have a
material adverse effect on our operations and financial performance. We also
lease sales offices in Yokohama, Japan; Singapore, Seoul, Korea; Hsinchu,
Taiwan; and Oberwossen, Germany with expiration dates from July 1999 to
August, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or to
which any of our properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
<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. Our stock 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>
1998 HIGH LOW
- ----------------------------------------------------------------
<S> <C> <C>
FIRST 9 3/4 6 1/8
SECOND 7 5/16 5 1/4
THIRD 6 3 1/8
FOURTH 7 1/2 2 3/4
1997
- ----------------------------------------------------------------
FIRST 11 5/8 9 3/8
SECOND 10 3/4 7 7/16
THIRD 16 10 11/16
FOURTH 14 7/8 7
</TABLE>
The Company has never paid cash dividends on its common stock and has no present
plans to do so. As of February 19, 1999, there were approximately 196
shareholders of record.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIVE-YEAR SUMMARY
December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1) (4) $ 59,186 $ 76,730 $ 73,260 $ 55,342 $ 19,551
Net income (loss) (2) (4) (22,367) 1,431 6,465 10,492 3,018
Net income (loss) per share (2):
Basic $ (1.52) $ 0.10 $ 0.46 $ 0.80 $ 0.34
Diluted $ (1.52) $ 0.09 $ 0.42 $ 0.71 $ 0.29
BALANCE SHEET DATA:
Total assets $ 68,120 $ 84,443 $ 84,489 $ 74,089 $ 32,479
Total stockholders' equity (deficit) (3) $ 49,880 $ 68,184 $ 69,115 $ 61,076 $ 28,292
</TABLE>
QUARTERLY DATA
(unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
December 31, 1998 QUARTER QUARTER QUARTER(5) QUARTER
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales (4) $ 20,248 $ 15,649 $ 9,420 $ 13,869
Gross profit (4) 9,075 7,201 500 4,815
Net income (loss) (2) (4) (1,220) (1,245) (14,799) (5,103)
Net income (loss) per share (2) (4):
Basic $ (0.09) $ (0.09) $ (1.00) $ (0.33)
Diluted $ (0.09) $ (0.09) $ (1.00) $ (0.33)
FIRST SECOND THIRD FOURTH
December 31, 1997 QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------------------
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:
Basic $ (0.04) $ 0.00 $ 0.07 $ 0.07
Diluted $ (0.04) $ 0.00 $ 0.06 $ 0.07
</TABLE>
(1) Includes sales through a related party distributor for each yearly period
as follows: 1995 - $16,994 and 1994 - $8,435.
(2) Includes a one time charge for in-process research and development of $4.2
million in the third quarter of 1998.
(3) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
(4) Statement of operations data for 1998 includes sales and expense activity
from Concept subsequent to the acquisition date of July 24, 1998.
(5) As restated in the 10Q/A filed on February 19, 1999.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
OVERVIEW
We design, manufacture and market advanced fabrication equipment to
semiconductor manufacturers worldwide. We began operations in 1989 and shipped
our first photoresist removal product, the Aspen Strip, in 1991. Our current
Aspen Strip, CVD, RTP and LiteEtch product lines are based on a modular Aspen
platform which accommodates two process chambers supporting increased
throughput. We currently offer Aspen Strip, CVD, RTP LiteEtch and EpiPro
products.
We have derived substantially all of our sales from Aspen Strip systems. In
addition, we derive sales from CVD, RTP, LiteEtch and EpiPro systems as well as
spare parts and maintenance services.
We experienced 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. Sales in the first three quarters of 1998 fell from previous levels and
showed some improvement in the fourth quarter. We expect sales in the first
quarter of 1999 to be higher than the last quarter of 1998. Such estimates are
preliminary and are subject to change. In particular, there can be no assurance
that our results for such periods or the periods thereafter will not be worse
than currently expected. There can be no assurance that we will be able to
regain sales growth or profitability. Future results will depend on a variety of
factors, particularly (i) overall market conditions and also timing of
significant orders, (ii) our ability to successfully market our CVD, RTP,
LiteEtch and EpiPro products as well as to bring new systems to market, (iii)
the timing of new product releases by our competitors, (iv) patterns of capital
spending by our customers, (v) market acceptance of new and/or enhanced versions
of our systems, (vi) changes in pricing by us, our competitors, customers, or
suppliers and (vii) the mix of products sold. In order to support long term
growth in our business, we have continued to increase research and development
expense levels from the previous years. Selling, general and administrative
costs in 1998 are comparable to those in 1997. Increasing expenditures related
to the Concept product line offset cost cutting measures implemented in the
second quarter of 1998. We are still dependent upon increases in sales in order
to regain profitability. If our 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 delayed previously planned new equipment purchases. The
cyclicality and uncertainties regarding overall market conditions continue to
present significant challenges to us and have a significant adverse impact on
our ability to forecast near term revenue expectations. Our ability to modify
our 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 us and our results of operations and financial
condition cannot be precisely predicted.
We continue to be affected by the continuing industry slowdown. In response to
continued lower revenues, we implemented cost control measures in 1998,
including a 15 percent reduction in our workforce. We continue to implement
tighter controls over spending. Future results will depend on a variety of
factors, particularly (i) overall market conditions and also timing of
significant orders; (ii) our ability to bring new systems to market; (iii) the
timing of new product releases by our competitors; (iv) patterns of capital
spending by our customers; (v) market acceptance of new and/or enhanced versions
of our systems; (vi) changes in pricing by us, our competitors, customers, or
suppliers and the mix of products sold.
We have a subsidiary in Japan, Mattson Technology Center K.K. ("MTC"), in which
Marubeni, our 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. We also modified our
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. In September 1998, we formed a subsidiary in Singapore to
provide customer service, sales and marketing support in that region and to
continue our strategy of providing world class global sales and service to our
customers.
We generally recognize a sale upon shipment of a system. However, from time to
time, we allow customers to evaluate systems. We do not recognize the associated
sale until an evaluation system is accepted by the customer.
21
<PAGE>
On July 24, 1998 we completed our acquisition of Concept. In connection with the
acquisition, we issued 795,138 shares of our Common Stock to the former
shareholders of Concept. The former shareholders of Concept also may acquire up
to 547,569 additional shares of our Common Stock in connection with the
acquisition if certain conditions are met prior to the end of the first
twenty-four full calendar months following the closing of the transaction. The
transaction has been accounted for as a purchase.
Subsequent to the acquisition of Concept we moved some of our corporate
administration to the Concept facility and have been in the process of
integrating the operations of the two companies. The integration costs are
not expected to be significant and have not been accrued as part of the
acquisition.
In addition to the tangible assets and liabilities assumed with the acquisition
of Concept, we also acquired three categories of intangible assets as shown
below:
- - DEVELOPED TECHNOLOGY - Developed technology was made up of all technology
currently employed in the existing products of Concept at the time of the
acquisition, and all technology that had reached a level of technological
feasibility. This included the Epi 2400 and Epi 3000 batch reactors.
- - IN-PROCESS TECHNOLOGY - As of the acquisition date, Concept was engaged in
the development of two major projects which had required the majority of
the Company's research and development resources over the preceding several
years - the development of the EpiPro 5000 and the development of a
single-wafer system.
- The EpiPro 5000 had been under development for approximately four
years at the date of the acquisition, including two years of
initial work by a team of approximately two engineers engaged in
proof-of-process, followed by a much more extensive effort by a
team of approximately eleven engineers. By October 1997, Concept
had produced an "alpha" prototype, and focus shifted toward
development of a single wafer system. At the end of March 1998
attention shifted back toward the EpiPro 5000 and as of the
acquisition date a full staff was working toward a `beta" version.
Management estimated that approximately $2.0 million had been
invested in the EpiPro 5000 system as of the acquisition date. As
of December 31, 1998, Mattson had invested approximately another
$0.8 million into the system. We expect to ship the first system
in the spring of 1999.
- Development of the Single Wafer System (SWS) began in 1995, and
from the spring of 1996 through April 1998 approximately $10
million had been spent. By early 1998 Concept produced an `alpha"
prototype, but subsequently reduced their development efforts
because of a lack of funding.
During 1998 we focused our development efforts on the EpiPro 5000 project. We
plan to intensify efforts on the Single Wafer project after completion of the
EpiPro 5000 project.
- - IN-PLACE WORKFORCE - Concept's in-place workforce consisted of highly
skilled engineers with specialized experience in epitaxial deposition.
This workforce would be difficult and expensive to recreate, and as such
has been valued as an intangible asset of the acquisition.
We were incorporated in California in November 1988 and completed our initial
public offering on October 5, 1994. In September 1997, we were reincorporated in
the State of Delaware.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data expressed as a
percentage of net sales for the years indicated:
22
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 64% 48% 45%
Gross margin 36% 52% 55%
Research, development and engineering 28% 19% 16%
Selling, general and administrative 41% 32% 29%
Acquired In-Process R&D 7% 0% 0%
Income (loss) from operations (40%) 1% 10%
Income (loss) before provision for income taxes (37%) 3% 13%
Net income (loss) (38%) 2% 9%
</TABLE>
NET SALES
Net sales for 1998 decreased to $59.2 million compared to $76.7 million in
1997 and $73.3 million in 1996. Net sales in 1998 decreased 23% as a result of
a 32% decrease in unit shipments partially offset by a 7% increase in Average
Selling Prices (ASP's). Net sales in 1997 increased 5% from 1996 as a result
of a 3% increase in unit shipments and a 2% increase in ASP's. Net sales in
1996 increased 33% from 1995 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, RTP 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 a change in sales mix to CVD, RTP and LiteEtch systems which
carry higher selling prices than the Aspen Strip systems.
International sales, which are predominantly to customers based in Japan and the
Pacific Rim (which includes Taiwan, Singapore and Korea), accounted for 67%,
65%, and 76% of total net sales for the years ended December 31, 1998, 1997 and
1996, respectively. All sales are denominated in U.S. dollars. We anticipate
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. Our
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 1998 decreased to 36% compared to 52% and 55% in 1997 and
1996, respectively. Gross margins declined in 1998 due to inventory write-downs
in the third quarter of 1998, the acquisition of Concept, and manufacturing
variances due to higher inefficiencies associated with the sales slowdown
throughout 1998. Also, the addition of Concept manufacturing overhead, the lower
production volumes and pricing pressure in Taiwan and Japan continued to result
in lower margins in the later half of 1998. Inventory write-downs in the third
quarter were primarily a result of a $2.6 million write down of inventory
related to our 300mm program. Due to the continued push-out by the industry of
its 300mm requirements because of current excess capacity at existing fabs, we
have also slowed down development of our 300mm program. As a result of this
change in circumstances and the concern that the delay will obsolete current
300mm inventory, all 300mm program materials were reserved in the third quarter
of 1998. 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.
Our 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 two years and may affect gross margin in the future. Our 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.
23
<PAGE>
Our 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 us to seek alternative
sources of supply or to manufacture such components internally could delay our
ability to ship systems and could have a material adverse effect on us,
including an increase in our 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 1998 were $16.7 million, or
28% of sales, compared to $14.7 million, or 19% of sales in 1997 and $11.5
million, or 16% of sales in 1996. The increase in expenses for 1998 was
primarily due to compensation and benefits which increased to $8.6 million in
1998 from $7.9 million in 1997, engineering project materials which increased to
$3.3 million in 1998 from $3.1 million in 1997 and depreciation which increased
to $1.9 million in 1998 from $1.4 million in 1997. The increase in compensation
expense was due to personnel required to support our anticipated long-term
future growth, including the support of our multi-product strategy. The increase
in engineering project materials was due to ongoing and new product development,
including the EpiPro 5000 research and development project acquired with the
acquisition of Concept. The increase in depreciation expense is due to the
additional fixed assets acquired from the Concept acquisition. The overall
increases in research, development and engineering expenses as a percentage of
revenue in 1996, 1997 and 1998 largely resulted from continued investment in new
product. We believe that continued investment in research and development,
including our multi-product strategy, is critical to maintaining a strong
technological position in the industry. However, there can be no assurance that
we will be able to improve our 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."
The increase in expenses for 1997 over 1996 was primarily due to compensation
and related expenses which increased to $7.9 million from $5.4 million in 1996
and engineering project materials which increased to $3.1 million in 1997 from
$2.0 million in 1996. The increase in compensation and related expenses was due
to increases in personnel required to support our anticipated long-term future
growth, including the support of our multi-product strategy. 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 our establishment of a subsidiary in Japan, as described above.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The original amount allocated to in-process research and development ("IPR&D")
and other intangible assets in the third quarter of 1998 was $5.7 million and
$5.4 million, respectively, relating to the acquisition of Concept, was made in
a manner consistent with widely recognized appraisal practices that were being
utilized at the time of the acquisition. Subsequent to the acquisition, in a
letter dated September 15, 1998 to the American Institute of Certified Public
Accountants, the Chief Accountant of the Securities and Exchange Commission
(SEC) expressed views of the SEC staff that took issue with certain appraisal
practices employed in the determination of the fair value of the IPR&D that was
the basis for our measurement of the IPR&D charge. Accordingly, we, in
consultation with our independent accountants, resolved to adjust the amount
originally allocated to acquired IPR&D and other intangible assets in a manner
to reflect the SEC staff's views and restated our third quarter 1998
consolidated financial statements and filed an amended Form 10Q. The revised
amounts of IPR&D and other intangible assets that resulted from this change was
$4.2 million and $6.9 million, respectively.
The value assigned to IPR&D was determined by identifying research projects in
areas for which technological feasibility had not been established. These
included the Concept EpiPro 5000 system and a single wafer system. The value was
determined by estimating the expected cash flows from the projects, taking into
consideration an estimate of future obsolescence of the technology, once
commercially viable, applying a percentage of completion and then discounting
the net cash flows back to their present value.
24
<PAGE>
The percentage of completion for each project was determined using management
estimates of time and dollars spent as of the acquisition date as compared to
time and dollars that were expected to be required to complete the project.
The degree of difficulty of the portion of each project completed as of July
24, 1998 was also compared to the estimated remaining research and
development to be completed to bring each project to technical feasibility.
The percentage of completion for the Concept EpiPro 5000 and single wafer
system was estimated at 80% and 50%, respectively, at July 24, 1998.
If the projects discussed above are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may become
impaired. We believe that the restated IPR&D charge of $4.2 million is valued
consistently with the SEC staff's current views regarding valuation
methodologies. There can be no assurance, however, that the SEC staff will not
take issue with any assumptions used in our valuation model and require us to
further revise the amount allocated to IPR&D.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for 1998 were $24.5 million, or 41%
of net sales, compared to $24.5 million, or 32%, in 1997 and $20.9 million, or
29% in 1996. Spending in 1998 was comparable to 1997 levels. Cost cutting
measures implemented in the second quarter of 1998 were offset by increased
expenditures relating to the acquired Concept workforce and related overhead.
Salaries, commissions and related expenses increased to $15.2 million in 1998
from $15.2 million in 1997. Building and utilities expenses to increased to $3.1
million from $2.0 million. The increase in building and utilities expenses is
due to an additional 31,000 square foot facility leased at the end of 1997. This
31,000 square foot facility was vacated in the third quarter of 1998 after we
moved to the acquired Concept facilities. The increase in building and utilities
charges were offset by nominal decreases in advertisement and promotion and
travel and entertainment expenses in 1998.
In 1997, the increase in selling, general and administrative expenses from 1996
was also due to compensation, 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 compensation and related expenses
was due to increases in personnel required to support our 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 our headquarters in Fremont,
California. See "Business--Factors That May Affect Future Results and Market
Price of Stock."
TAX PROVISION
During 1998, 1997 and 1996 we provided taxes at an effective tax rate of (1.5%),
24.0% and 33.0%, respectively. The 1998 tax rate is less than the federal
statutory rate primarily as a result of us having fully reserved our deferred
tax assets due to the uncertainty of their realization and recording the tax
liability for income of the foreign operations. The 1997 and 1996 tax rates are
less than the federal statutory rate as a result of benefits derived from our
foreign sales corporation and the research and development tax credit, which
Congress reinstated effective July 1, 1996.
IMPACT OF YEAR 2000
The following statement is a Year 2000 Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998. Some of the Company's older
computer programs were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-sensitive
software that may recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has commenced a Year 2000 date conversion project to address
necessary changes and an implementation strategy. The "Year 2000 Computer
Problem" creates risks for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on financial
transactions. The Company does not anticipate that it will incur material
expenditures for the resolution of any Year 2000 issues related either to its
own information systems, databases and programs, or its products. However, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences or material costs caused by undetected errors. In
addition, the Company could be adversely impacted by Year 2000 issues faced by
major distributors, suppliers, customers, vendors and financial service
organizations with which the Company interacts.
25
<PAGE>
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. We are engaged in a comprehensive program to assess the Company's Year
2000 risk exposure and to plan and implement remedial and corrective action
where necessary. We have reviewed all of our major internal systems, including
financial and manufacturing systems, to assess Year 2000 readiness and to
identify critical systems that require correction or remediation. We believe
that our existing financial and manufacturing systems are Year 2000 ready. We
cannot assure you, however, that integration and testing of new, corrected or
updated programs or systems with which they interface will not result in
necessary corrective action to one or more critical systems. A significant
disruption of our financial or manufacturing systems would adversely impact our
ability to process orders, manage production and issue and pay invoices. Our
inability to perform these functions for a long period of time could result in a
material impact on our results of operations and financial condition. Our
assessment of the Year 2000 readiness of our manufacturing system is complete.
Based on information currently available, we believe that our systems will not
be materially impacted by Year 2000 issues. However, we cannot assure you that a
significant disruption in systems resulting from a Year 2000 problem will not
occur. If the computer system fails for this or any other reason, there could be
a material adverse impact on our operating results and financial condition. We
are working with critical suppliers of products and services to assess their
Year 2000 readiness with respect both to their operations and the products and
services they supply to us. This analysis will continue well into 1999, with
corrective action taken to commensurate with the criticality of affected
products and services. Our assessment program also has encompassed our own
product offerings. We have completed our assessment of the Year 2000 readiness
of these products, and there is no information to indicate that Year 2000 issues
will have a material impact on sales or functionality of our standard product
offerings. Customers are seeking assurances of our Year 2000 readiness with
increasing frequency, and we are endeavoring promptly and completely to address
their concerns. However, we have no control over a customer's Year 2000
readiness. The potential ramifications of a Year 2000 type failure are
potentially far-reaching and largely unknown. We cannot assure you that a
contingency plan in effect at the time of a system failure will adequately
address the immediate or long term effects of a failure, or that such a failure
would not have a material adverse impact on our operations or financial results
in spite of prudent planning. Our costs to date related to the Year 2000 issue
consist primarily of reallocation of internal resources to evaluate and assess
systems and products as described above and to plan our remediation and testing
efforts. We have not maintained detailed accounting records, but based on our
review of department budgets and staff allocations, we believe these costs to be
immaterial. We cannot assure you that remediation and testing will not identify
issues which require additional expenditure of material amounts which could
result in an adverse impact on financial results in future reporting periods.
Based on currently available information, management does not believe that the
Year 2000 issues discussed above related to internal systems or products sold to
customers will have a material adverse on our financial condition or overall
trends in results of operations. However, we are uncertain to what extent we may
be affected by such matters. In addition, we cannot assure you that the failure
to ensure Year 2000 capability by a supplier not considered critical or another
third party would not have a material adverse effect on us.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities. SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. We are currently assessing the disclosure effects of
adopting SFAS 133, which will be effective for our fiscal 2000 operations.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and short term investments equaled $20.0 million at December 31, 1998.
We had no long term debt. Stockholder's equity at December 31, 1998 was
approximately $49.9 million.
Cash generated from operations has historically been sufficient to fund our
investment in research and development activities and our growth.
26
<PAGE>
Cash and cash equivalents decreased by $13.7 million in 1998. Net cash used in
operating activities in 1998 was $6.7 million. The net cash used in operations
in 1998 was primarily attributable to the net loss of $22.4 million, offset by
non cash depreciation, in-process research and development and deferred taxes,
an increase in accounts payable of $4.5 million and a decrease in accrued
liabilities of $3.7 million partially offset by a decrease in inventories of
$10.7 million and a decrease in accounts receivable of $5.5 million. Net cash
used in investing activities in 1998 was $7.0 million, primarily from retirement
of debt acquired during the acquisition of Concept of $4.0 million and the
issuance of a note receivable to an officer for $3.1 million. Net cash used in
financing activities in 1998 was $0.1 million primarily from the repurchase of
our Common Stock, partially offset by the net proceeds from the issuance of
Common Stock.
Our Board of Directors has authorized us to repurchase, through the year 2000,
up to 1,000,000 shares of our Common Stock in the open market from time to time.
As of December 31,1998, 274,800 of these shares had been repurchased by us. The
purpose of the repurchase program is to acquire shares to fund our stock based
employee benefit programs, including the employee stock purchase plan and the
stock option plan. As of February 19, 1999, we had 15,202,723 shares
outstanding.
During the third quarter of 1998 we extended a one-year loan to Brad Mattson,
the Chief Executive Officer of the Company, in the amount of $3.1 million.
The note is a full recourse note and is fully collateralized by 2.2 million
shares of Mattson Technology, Inc. common stock. The interest rate on the
loan is 8%.
We believe that existing cash balances and short-term investments will be
sufficient to meet our cash requirements during the next twelve months. However,
depending upon our rate of growth and profitability, we may require additional
equity or debt financing to meet our 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 us.
MERGER WITH CONCEPT SYSTEMS DESIGN, INC.
On July 24, 1998, we completed our acquisition of Concept. The purchase price of
the acquisition of $4,689,000, which included $650,000 in estimated acquisition
related costs, was used to acquire the net assets of Concept. The purchase price
was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Property and equipment $ 3,055
Current and other assets 4,041
Liabilities assumed (13,570)
Goodwill 1,643
Acquired in-process research and development 4,220
Acquired developed technology and workforce 5,300
--------
Total $ 4,689
--------
--------
</TABLE>
The goodwill, acquired developed technology and workforce are recorded on the
balance sheet as other assets and will be amortized on a straight-line basis
over periods ranging from 3 to 7 years.
The acquired in-process research and development was expensed at the time of the
acquisition as a one-time charge.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
We have exposure to the impact of foreign currency fluctuations and
changes in market values of our investments. We have foreign subsidiaries
which operate and sell our products in various global markets; however, all
of our sales are denominated in U.S. dollars, and therefore, our foreign
currency risk is reduced. We also have some monetary assets, particularly in
Japan, where we attempt to limit our foreign currency risk through the use of
financial market instruments. We use currency swap contracts with maturities
generally less than three months to manage our exposure on these assets.
Investment Risk. As of December 31, 1998, our investment portfolio consisted of
fixed income securities. These securities, like all fixed income instruments,
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Foreign Currency Risk. We have international facilities and are, therefore,
subject to foreign currency exposure. 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. To date, our exposure related to exchange
rate volatility has not been significant. There can be no assurance that there
will not be a material impact in the future.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
<S> <C>
Consolidated Balance Sheet as of 30
December 31, 1998 and 1997
Consolidated Statement of Operations 31
for the years ended December 31,
1998, 1997 and 1996
Consolidated Statement of 32
Stockholders' Equity for the
three years ended December 31, 1998
Consolidated Statement of Cash Flows 33
for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements 34
Report of Independent 45
Accountants
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>
29
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,863 $ 25,583
Short-term investments 8,128 8,598
Accounts receivable, net 9,614 14,784
Inventories 10,924 19,068
Refundable income taxes 3,300 -
Note receivable from stockholder 3,129 -
Deferred taxes - 4,222
Prepaid expenses and other current assets 2,316 1,000
-------- --------
Total current assets 49,274 73,255
Property and equipment, net 12,090 11,188
Other assets 6,756 -
-------- --------
$ 68,120 $ 84,443
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,399 $ 3,349
Accrued liabilities 14,841 12,910
-------- --------
Total current liabilities 18,240 16,259
-------- --------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common Stock, par value $0.001, 60,000 shares authorized; 15,772 issued,
15,397 outstanding in 1998 and 14,289
shares issued and 14,189 outstanding in 1997 16 14
Additional paid in capital 63,239 57,418
Accumulated other comprehensive loss (138) (290)
Treasury stock, 375 and 100 shares in 1998 and
1997 respectively, at cost (2,987) (1,075)
Retained earnings (deficit) (10,250) 12,117
-------- --------
Total stockholders' equity 49,880 68,184
-------- --------
$ 68,120 $ 84,443
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 59,186 $ 76,730 $ 73,260
Cost of sales 37,595 37,130 33,231
-------- -------- --------
Gross profit 21,591 39,600 40,029
-------- -------- --------
Operating expenses:
Research, development and engineering 16,670 14,709 11,507
Selling, general and administrative 24,542 24,495 20,900
Acquired in-process research and development 4,220 - -
-------- -------- --------
Total operating expenses 45,432 39,204 32,407
-------- -------- --------
Income (loss) from operations (23,841) 396 7,622
Interest and other income 1,811 1,486 2,027
-------- -------- --------
Income (loss) before provision for income taxes (22,030) 1,882 9,649
Provision for income taxes 337 451 3,184
-------- -------- --------
Net income (loss) $(22,367) $ 1,431 $ 6,465
-------- -------- --------
-------- -------- --------
Net income (loss) per share:
Basic $ (1.52) $ 0.10 $ 0.46
-------- -------- --------
-------- -------- --------
Diluted $ (1.52) $ 0.09 $ 0.42
-------- -------- --------
-------- -------- --------
Shares used in computing net income (loss) per share:
Basic 14,720 14,117 13,997
-------- -------- --------
-------- -------- --------
Diluted 14,720 15,311 15,275
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Accumulated
Common Paid In Other
Stock Capital Comprehensive
Shares Amount Amount Other Income (Loss)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 13,779 $ 14 $ 55,884 $ (73) $ (16)
Purchase of Common Stock, net (65) - (442) - -
Exercise of stock options 255 - 286 - -
Shares issued under employee
stock purchase plan 228 - 1,596 - -
Income tax benefits realized from
activity in employee stock plans - - 285 - -
Amortization of deferred
compensation - - (43) 60 -
Net unrealized loss on investments - - - - (23)
Cumulative translation
adjustments - - - - (38)
Net income - - - - -
Total comprehensive income - - - - -
------ -------- -------- -------- --------
Balance at December 31, 1996 14,197 14 57,566 (13) (77)
Purchase of Common Stock, net (335) - (2,197) - -
Exercise of stock options 183 - 261 - -
Shares issued under employee
stock purchase plan 244 - 1,598 - -
Income tax benefits realized from
activity in employee stock plans - - 190 - -
Amortization of
deferred compensation - - - 13 -
Net unrealized gain on investments - - - - 23
Cumulative translation
adjustments - - - - (236)
Net income - - - - -
Total comprehensive income - - - - -
------ -------- -------- -------- --------
Balance at December 31, 1997 14,289 14 57,418 - (290)
Purchase of Common Stock, net - - - -
Exercise of stock options 380 - 163 - -
Shares issued under employee
stock purchase plan 308 1 1,620 - -
Shares issued for
acquisition of Concept
Systems Design, Inc. 795 1 4,038 - -
Cumulative translation
adjustments - - - - 152
Net loss - - - - -
Total comprehensive loss - - - - -
------ -------- -------- -------- --------
Balance at December 31, 1998 15,772 $ 16 $ 63,239 $ - $ (138)
------ -------- -------- -------- --------
------ -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Retained
Earnings
Shares Amount (Deficit) Total
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - $ 5,267 $ 61,076
Purchase of Common Stock, net - - (107) (549)
Exercise of stock options - - - 286
Shares issued under employee
stock purchase plan - - - 1,596
Income tax benefits realized from
activity in employee stock plans - - - 285
Amortization of deferred
compensation - - - 17
Net unrealized loss on investments - - - -
Cumulative translation adjustments - - - -
Net income - - 6,465 -
Total comprehensive income - - - 6,404
---- ------- -------- --------
Balance at December 31, 1996 - - 11,625 69,115
-
Purchase of Common Stock, net (100) (1,075) (939) (4,211)
Exercise of stock options - - - 261
Shares issued under employee
stock purchase plan - - - 1,598
Income tax benefits realized from
activity in employee stock plans - - - 190
Amortization of
deferred compensation - - - 13
Net unrealized loss on investments - - - -
Cumulative translation
adjustments - - - -
Net income - - 1,431 -
Total comprehensive income - - - 1,218
---- ------- -------- --------
Balance at December 31, 1997 (100) (1,075) 12,117 68,184
Purchase of Common Stock, net (275) (1,912) - (1,912)
Exercise of stock options - - - 163
Shares issued under employee
stock purchase plan - - - 1,621
Shares issued for
acquisition of Concept
Systems Design, Inc. - - - 4,039
Cumulative translation
adjustments - - - -
Net loss - - (22,367) -
Total comprehensive loss - - - (22,215)
---- ------- -------- --------
Balance at December 31, 1998 (375) $ (2,987) $(10,250) $ 49,880
---- ------- -------- --------
---- ------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
<PAGE>
MATTSON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(22,367) $ 1,431 $ 6,465
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 4,441 2,856 1,963
Amortization of in-process research and development 4,220
Deferred taxes 4,222 (25) (2,184)
Deferred compensation related to stock options - 13 17
Changes in assets and liabilities:
Accounts receivable 5,509 1,170 (1,966)
Income tax receivable (2,748)
Inventories 10,714 (6,114) (2,115)
Prepaid expenses and other current assets (1,183) (118) (455)
Other assets 72 2,962 (2,962)
Accounts payable (4,468) 2,109 (2,647)
Accrued liabilities (3,771) (1,224) 5,293
-------- -------- --------
Net cash provided by (used in) operating activities (5,359) 3,060 1,409
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (1,726) (4,671) (6,685)
Notes receivable, shareholder (3,129) - -
Purchases of short-term investments (13,606) (16,468) (36,293)
Sales and maturities of short-term investments 14,090 24,513 47,511
Repayment of debt acquired in acquisition (4,000) - -
-------- -------- --------
Net cash provided by (used in) investing activities (8,371) 3,374 4,533
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of Common Stock, net 1,784 2,049 1,882
Repurchase of Common Stock (1,912) (4,211) (549)
-------- -------- --------
Net cash provided by (used in) financing activities (128) (2,162) 1,333
-------- -------- --------
Effect of exchange rate changes 138 (236) (38)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (13,720) 4,036 7,237
Cash and cash equivalents, beginning of period 25,583 21,547 14,310
-------- -------- --------
Cash and cash equivalents, end of period $ 11,863 $ 25,583 $ 21,547
-------- -------- --------
-------- -------- --------
Supplemental disclosures:
Cash paid for income taxes $ 280 $ 629 $ 4,701
Shares issued for acquisition of Concept $ 4,039 - -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
<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 Company designs, manufactures and markets advanced fabrication equipment to
the semiconductor manufacturing industry worldwide.
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,
1997 and 1998 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.
OTHER ASSETS
Purchased technology, workforce and goodwill are presented at cost, net of
accumulated amortization, and are being amortized using the straight-line method
over their estimated useful lives of three to seven years.
STOCK BASED COMPENSATION
In October, 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). As allowed by the
provisions of FAS 123, the Company has continued to apply 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 the date of grant. The Company has adopted the disclosure
only provisions of FAS 123 and Note 8 to the Consolidated Financial Statements
contains a summary of the pro forma effects to reported net income (loss) and
earnings (loss) per share for 1998, 1997 and 1996 for compensation cost based on
the fair value of the options granted at the grant date as prescribed by FAS
123.
34
<PAGE>
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 10). 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.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income, for the
Company, is due to foreign currency translation adjustments. Comprehensive
income is being shown in the statement of stockholders' equity.
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 (LOSS) PER SHARE
Basic earnings per shares (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.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities, SFAS 133 establishes new standards of accounting and reporting
for derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statements of financial
position, and that the corresponding gains or losses be reported either in
the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. We are currently
assessing the disclosure effects of adopting SFAS 133, which will be
effective for our fiscal 2000 operations.
2. ACQUISITION OF CONCEPT SYSTEMS DESIGN
On July 24, 1998, the Company completed its acquisition of Concept. The
transaction was achieved through the merger of a wholly-owned subsidiary of the
Company with and into Concept. In connection with the merger, the Company issued
795,138 shares of Common Stock to the former shareholders of Concept. The former
shareholders of Concept also may be entitled to receive up to 547,569 additional
shares of the Company's Common Stock in connection with the merger if certain
conditions are met prior to the end of the first twenty-four full calendar
months following the closing of the transaction. The merger has been accounted
for as a purchase and the results of operations of Concept have been included in
the consolidated statement of operations of the Company from the date of
acquisition. The purchase price of the acquisition of $4,689,000, which included
$650,000 of estimated acquisition related costs, was used to acquire the net
assets of Concept. The purchase price was allocated to assets acquired and
liabilities assumed based on the fair value of Concept's current assets and
liabilities, which management believes approximated their book value, the
estimated fair value of property and equipment, based on management's estimates
of fair value, and an independent appraisal for all other identifiable assets.
The excess of the purchase price over the net tangible and intangible assets
acquired and liabilities assumed has been allocated to goodwill. The allocation
of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment $ 3,055
Current and other assets 4,041
Liabilities assumed (13,570)
Acquired developed technology and workforce 5,300
Goodwill 1,643
Acquired in-process research and development 4,220
--------
$ 4,689
--------
--------
</TABLE>
35
<PAGE>
The goodwill, acquired developed technology and workforce are recorded on the
balance sheet as other assets and will be amortized on a straight-line basis
over periods ranging from 3 to 7 years.
The original amount allocated to in-process research and development ("IPR&D")
and other intangible assets in the third quarter of 1998 of $5.7 million and
$5.4 million, respectively, relating to the acquisition of Concept, was made in
a manner consistent with widely recognized appraisal practices that were being
utilized at the time of acquisition. Subsequent to the acquisition, in a letter
dated September 15, 1998 to the American Institute of Certified Public
Accountants, the Chief Accountant of the Securities and Exchange Commission
(SEC) expressed views of the SEC staff that took issue with certain appraisal
practices employed in the determination of the fair value of the IPR&D that was
the basis for the Company's measurement of its IPR&D charge. Accordingly, the
Company resolved to adjust the amount originally allocated to acquired IPR&D
and other intangible assets in a manner to reflect the SEC staff's views and
restated its third quarter 1998 consolidated financial statements and filed an
amended Form 10Q. The revised amounts of IPR&D and other intangible assets that
resulted from this change was $4.2 million and $6.9 million, respectively.
The value assigned to IPR&D was determined by identifying research projects
in areas for which technological feasibility had not been established. These
included the Concept EpiPro 5000 system and a single wafer system. The value
was determined by estimating the expected cash flows from the projects
(taking into consideration an estimate of future obsolescence of the
technology) once commercially viable, applying a percentage of completion and
then discounting the net cash flows back to their present value.
The percentage of completion for each project was determined using management
estimates of time and dollars spent as of the acquisition date as compared to
time and dollars that were expected to be required to complete the project. The
degree of difficulty of the portion of each project completed as of July 24,
1998 was also compared to the remaining research and development to be completed
to bring each project to technical feasibility. The percentage of completion for
the Concept EpiPro 5000 and single wafer system was estimated at 80% and 50%,
respectively, at July 24, 1998.
If the projects discussed above are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may become
impaired. Company management believes that the restated IPR&D charge of $4.2
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurance, however, that the SEC staff
will not take issue with any assumptions used in the Company's valuation model
and require the Company to further revise the amount allocated to IPR&D.
In addition to the purchase price shown above, the agreement for the
acquisition of Concept also includes the contingent distribution of shares of
Mattson Common Stock of 100,000 shares that will be issued to the Concept
shareholders if Concept achieves net revenues of at least $16,667,000 during
the first twenty-four full calendar months following the acquisition date. Up
to an additional 447,569 shares of Mattson Common Stock will be issued to the
Concept shareholders if the net revenue milestone is achieved and the stock
price of Mattson Common Stock does not reach at least $12 per share for any
consecutive ten day trading period during the twenty-four full calendar
months following the acquisition. Additional shares issued, if any, will be
valued at the fair value of the shares at the date of issue and will result
in additional goodwill.
The following pro forma summary is provided for illustrative purposes only and
is not necessarily indicative of the consolidated results of operations for
future periods or that actually would have been realized had the Company and
Concept been a consolidated entity during the periods presented. The summary
combines the results of operations as if Concept had been acquired as of the
beginning of the periods presented.
The summary includes the impact of certain adjustments such as goodwill
amortization and changes in depreciation. Additionally, the IPR&D charge of $4.2
million has been excluded from the periods presented due to their non-recurring
nature.
36
<PAGE>
The following table represents unaudited pro forma information assuming that the
acquisition took place at the beginning of the periods presented.
<TABLE>
<CAPTION>
(IN THOUSANDS, 12 Months ended 12 Months ended
EXCEPT PER SHARE DATA) December 31, 1998 December 31, 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net sales $ 62,503 $ 83,040
Net loss (32,632) (8,694)
Basic and diluted loss per share $ (2.25) $ (0.58)
</TABLE>
3. NOTES RECEIVABLE FROM STOCKHOLDER
During the third quarter of 1998 the Company extended a one-year loan to the
Chief Executive Officer of the Company in the amount of $3.1 million. The loan
is collateralized by 2.2 million shares of the Company's Common Stock and is a
full recourse note bearing interest at 8%. Interest is payable at the end of the
one year loan.
4. BALANCE SHEET DETAIL
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES:
Purchased parts and raw materials $ 7,128 $ 7,648
Work-in-process 2,586 7,606
Finished goods 1,147 2,266
Evaluation systems 63 1,548
-------- --------
$ 10,924 $ 19,068
-------- --------
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment $ 12,487 $ 8,277
Furniture and fixtures 4,583 4,412
Leasehold improvements 2,880 1,264
Construction-in-progress 740 1,956
-------- --------
20,690 15,909
Less: accumulated depreciation and amortization (8,600) (4,721)
-------- --------
$ 12,090 $ 11,188
-------- --------
-------- --------
OTHER ASSETS:
Developed technology $ 4,340 $ -
Purchased workforce 960 -
Goodwill 1,643 -
Other 375 -
-------- --------
7,318 -
Less accumulated amortization (562) -
-------- --------
$ 6,756 $ -
-------- --------
-------- --------
</TABLE>
37
<PAGE>
<TABLE>
December 31, 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
ACCRUED LIABILITIES:
Warranty, installation and retrofit reserve $ 5,820 $ 4,756
Accrued compensation and benefits 1,214 2,199
Income taxes 1,131 1,971
Commissions 539 1,277
Customer deposits 2,690 -
Deferred income 1,437 1,598
Other 2,010 1,109
------- -------
$14,841 $12,910
------- -------
------- -------
</TABLE>
5. CAPITAL STOCK
COMMON STOCK
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, all 500,000 shares had been repurchased by the Company for funding the
Company's Employee Stock Purchase Plan. Of the shares purchased, 400,000 shares
were purchased prior to the reincorporation in Delaware in September 1997, and
were retired. The 100,000 shares repurchased after the reincorporation in
Delaware are held as treasury stock. In 1998 the Board of Directors authorized
the Company to repurchase up to 1,000,000 shares of the Company's Common Stock
in the open market. As of December 31, 1998, 274,800 of these shares had been
repurchased by the Company. The shares 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 1,000,000 shares
in 1996, 300,000 shares in 1997 and 250,000 in 1998. 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.
The following table summarizes activity under the Plan (in thousands, except
option and exercise price amounts):
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE OPTIONS OPTION AVERAGE
FOR GRANT OUTSTANDING PRICE EXERCISE PRICE
--------- ----------- ------ --------------
<S> <C> <C> <C> <C>
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
Shares authorized 250 -
Options granted (1,337) 1,337 $ 1.05 - 9.75 $ 5.71
Options exercised (380) $ 0.20 - 3.60 $ 0.57
Options canceled 940 (940) $ 2.00 - 24.50 $ 9.85
------ -----
Balance at December 31, 1998 234 3,084 $ 0.20 - 15.19 $ 6.19
------ -----
------ -----
</TABLE>
38
<PAGE>
In 1998, 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.
Employees canceled options for the purchase of a total of 681,315 shares on the
Board approved date, in exchange for newly issued options.
The following table summarizes information about stock options outstanding at
December 31, 1998: (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 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 2.00 418 5.0 years $ 1.48 418 $ 1.48
$ 2.20 - $ 5.88 716 8.3 4.49 190 2.79
$ 6.00 - $ 6.00 811 9.2 6.00 51 6.00
$ 6.06 - $ 9.25 466 6.9 7.84 156 8.52
$ 9.38 - $ 15.19 673 6.7 10.03 323 10.22
----- --------- ------ ----- ------
$ 0.20 - $ 15.19 3,084 7.5 $ 6.19 1,138 $ 5.35
----- --------- ------ ----- ------
----- --------- ------ ----- ------
</TABLE>
The weighted average grant date fair value of stock options granted in 1998,
1997 and 1996 was approximately $3.53, $4.67, and $3.83, respectively.
Compensation cost under FAS 123 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>
1998 1997 1996
<S> <C> <C> <C>
Expected dividend yield - - -
Expected stock price volatility 80% 60% 63%
Risk-free interest rate 4.5% 6.0% 5.7%
Expected life of options 2 years 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 1,450,000 shares of Common Stock have been reserved
for future issuance, including an increase of 65,000 in 1996, 400,000 shares in
1997 and 450,000 in 1998. 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.
The weighted average grant date fair value of employee purchase plan rights
granted in 1998, 1997 and 1996 was approximately $3.42, $2.96, and $4.36,
respectively.
Compensation cost under FAS 123 is calculated for the estimated fair value of
the employees' stock purchase rights using the Black-Scholes option pricing
model with the following average assumptions:
39
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected dividend yield - - -
Expected stock price volatility 80% 60% 63%
Risk-free interest rate 4.5% 6.0% 5.7%
Expected life of options 1 year 6 months 6 months
</TABLE>
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 (loss) and earnings
(loss) per share would have been reduced to the pro forma amounts indicated in
the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) - as reported $ (22,367) $ 1,431 $ 6,465
Net income (loss) - pro forma $ (25,471) $(2,154) $ 2,838
Net income (loss) per share - as reported:
Basic $ (1.52) $ 0.10 $ 0.46
Diluted $ (1.52) $ 0.09 $ 0.42
Net income (loss) per share - pro forma:
Basic $ (1.73) $ (0.15) $ 0.20
Diluted $ (1.73) $ (0.15) $ 0.19
</TABLE>
6. INCOME TAX PROVISION
(IN THOUSANDS)
The components of income (loss) before provision for income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic income (loss) $(22,467) $ 1,347 $ 9,055
Foreign income 437 535 594
-------- -------- --------
Income (loss) before provision for income taxes $(22,030) $ 1,882 $ 9,649
-------- -------- --------
-------- -------- --------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (3,589) $ 237 $ 4,640
State (633) 2 415
Foreign 337 237 313
-------- -------- --------
Total Current (3,885) 476 5,368
-------- -------- --------
Deferred:
Federal 3,589 180 (1,933)
State 633 (205) (251)
-------- -------- --------
Total Deferred 4,222 (25) (2,184)
-------- -------- --------
Provision for income taxes $ 337 $ 451 $ 3,184
-------- -------- --------
-------- -------- --------
</TABLE>
40
<PAGE>
The provision for income taxes reconciles to the amount computed by multiplying
income (loss) before income tax by the U.S. statutory rate of 35% as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) at statutory rate $ (7,710) $ 659 $ 3,377
Research and development tax credits - (307) (190)
State taxes, net of federal benefit - 51 106
Foreign earnings taxed at higher rates 184 81 111
Benefit of foreign sales corporation - (51) (354)
Deferred tax asset valuation allowance 7,863 - -
Other - 18 134
-------- -------- --------
Total provision for income taxes $ 337 $ 451 $ 3,184
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves not currently deductible $ 4,824 $ 3,506 $ 3,042
Deferred income 985 638 1,155
Net operating loss and credit carryforwards 6,682 - -
Other 1,245 78 -
-------- -------- --------
Total net deferred taxes 13,736 4,222 4,197
Deferred tax assets valuation allowance (13,736) - -
-------- -------- --------
$ - $ 4,222 $ 4,197
-------- -------- --------
-------- -------- --------
</TABLE>
The deferred tax assets valuation allowance at December 31, 1998 is
attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these
tax assets such that a full valuation allowance is necessary. These factors
include the lack of a significant history of consistent profits and the lack
of carryback capacity to realize these assets. Based on this absence of
objective evidence, management is unable to assert that it is more likely
than not that the Company will generate sufficient taxable income to realize
the Company's net deferred tax assets. At December 31, 1998 the Company had
net Federal operating loss operating carryforwards of approximately $13.5
million which expire in 2018. This amount includes approximately $7.5 million
of net operating loss carryforwards from the acquisition of Concept which are
generally limited to a utilization of approximately $0.2 million per year.
The net operating loss carryforward also includes approximately $0.2 million
resulting from employee exercises of non qualified stock options or
disqualifying dispositions, the tax benefits of which, when realized, will be
accounted for as an addition to additional paid in capital rather than as a
reduction of the provision for income taxes. The deferred tax assets at
December 31, 1998 also include approximately $5.6 million related to the
acquisition of Concept (including the net operating loss carryforward) and,
when realized, will be used to reduce the amount of goodwill recorded at the
date of the acquisition. Federal and state research and development credit
carryforwards of approximatley $0.8 million are also available to reduce
future Federal and state income taxes and expire in 2011 to 2018. If certain
substantial changes in the Company's ownership occur, there would be an
additional annual limitation on the amount of the net operating loss
carryforwards which can be utilized.
41
<PAGE>
7. EMPLOYEE BENEFIT PLANS
RETIREMENT/SAVINGS PLAN
The Company has 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 a percentage of the
participant's contributions. In 1998, the Company made a matching
contribution of $197,000. There were no matching contributions in 1997 or
1996.
PROFIT SHARING PLAN
The Company has 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, 1998, 1997 and 1996 under the profit sharing plan
was approximately $0, $85,000, and $411,000, respectively.
8. NET INCOME (LOSS) PER SHARE
Financial Accounting Standards Board (FASB) Statement 128 (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 (loss)
available to common stockholders (numerator) by the weighted average number
of common shares outstanding (denominator) for the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of diluted EPS uses the average market prices during the
period.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income* Shares+ Amount Income* Shares+ Amount Income* Shares+ Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss)
available to common
stockholders $(22,367) 14,720 $ (1.52) $ 1,431 14,117 $ 0.10 $ 6,465 13,997 $ 0.46
-------- ------ ------
-------- ------ ------
Effect of dilutive stock
options - - - 1,194 - 1,278
-------- ------ -------- ------ -------- ------
Diluted EPS:
Net income (loss)
available to common
stockholders $(22,367) 14,720 $ (1.52) $ 1,431 15,311 $ 0.09 $ 6,465 15,275 $ 0.42
-------- ------ -------- -------- ------ ------ -------- ------ ------
-------- ------ -------- -------- ------ ------ -------- ------ ------
</TABLE>
* numerator
+ denominator
Total stock options outstanding at December 31, 1998 were 3,084,000. All
options outstanding during 1998 were excluded from the diluted loss per share
calculation because they were anti-dilutive in view of the losses of the
Company.
9. 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, 1998. 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.
42
<PAGE>
The following is a summary of the Company's transactions with the distributor
(in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales through the distributor for the period $ 9,289 $ 9,987 $ 22,804
Accounts receivable at period end 2,103 1,555 2,255
Deferred income at period end 591 591 591
Minority interest in joint venture at period end 180 200 204
</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, 1998 and
1997, 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. Net purchases were $363,000,
$739,000 and $991,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
10. REPORTABLE SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 supersedes FAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services. Geographic areas
and major customers. The adoption of FAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
The Company is organized on the basis of products and services. All of the
Company's business units have been aggregated into one operating segment. The
Company's service business is a separate operating segment; however, this
segment does not meet the quantitative thresholds as prescribed in FAS 131.
As a result, no operating segment information is required to be disclosed.
The following is net sales information by geographic area as of and for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 19,395 $ 26,831 $ 17,292
Japan 9,289 9,987 22,804
Taiwan 14,057 21,634 8,664
Korea 2,247 2,798 12,802
Singapore 3,845 10,961 7,278
Europe 10,353 4,519 4,420
-------- -------- --------
$ 59,186 $ 76,730 $ 73,260
-------- -------- --------
-------- -------- --------
</TABLE>
The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.
For the 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
Company had sales to one customer of 11% of net sales in 1997. In 1998 and
1996 no sales to a single customer exceeded 10% of net sales.
43
<PAGE>
11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
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 Company's subsidiary in Japan. At December 31, 1998, the Company had a
contract to sell 23.0 million Yen ($0.2 million) which matures in 1999.
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 unrealized gains and losses as of December 31, 1998 and
realized 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.
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, 1998 and 1997, the Company had an allowance for
doubtful accounts of $141,000 and $100,000, respectively.
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.
12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases which expire at
various dates through 2003, with minimum annual rental commitments as follows
(in thousands):
<TABLE>
<S> <C>
1999 $ 2,013
2000 1,593
2001 851
2002 709
2003 236
-------
$ 5,402
-------
-------
</TABLE>
Rent expense was $2,009,000 $1,755,000 and $1,421,000 for 1998, 1997, and
1996, 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 operations of the Company.
44
<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 operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Mattson Technology, Inc. and its subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
San Jose, California
February 9, 1999
45
<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 1999 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 1999 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 1999 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 1999 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 29.
(a)(3) EXHIBITS
The documents listed on the Exhibit Index appearing at page
48 of this Report are filed herewith. The 1999 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
On August 6, 1998, the Registrant filed a report on Form 8-K
in connection with the Registrant's acquisition of Concept
Systems Design, Inc. and also filed a Report on Form 8-K/A
on September 28, 1998, amending the former filing to include
certain financial information related to the acquisition.
46
<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, 1999
------------------------
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.
<TABLE>
<S> <C> <C>
/s/ Chief Executive March 31, 1999
- ----------------------------- Officer and Director
Brad Mattson (Principal Executive Officer)
/s/ Vice President - Finance March 31, 1999
- ----------------------------- and Chief Financial Officer
Richard Mora (Principal Financial and
Accounting Officer)
/s/ Director March 31, 1999
- -----------------------------
Stephen Ciesinski
/s/ Director March 31, 1999
- -----------------------------
John Savage
/s/ Director March 31, 1999
- -----------------------------
Shigeru Nakayama
/s/ Director March 31, 1999
- -----------------------------
Kenneth Smith
/s/ Director March 31, 1999
- -----------------------------
Kenneth Kannappan
</TABLE>
47
<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
- ------ ----------- ------------------- ---------------
<S> <C> <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 1997.
(3) Incorporated by reference to the corresponding Registrant's
Registration Statement on Form S-8 filed October 31, 1997
(333-39129).
48
<PAGE>
EXHIBIT 21.1
MATTSON TECHNOLOGY, INC.
SUBSIDIARIES OF THE REGISTRANT
MATTSON INTERNATIONAL, INC.
MATTSON TECHNOLOGY CENTER K.K.
MATTSON INTERNATIONAL GmbH
MATTSON INTERNATIONAL KOREA CO.
MATTSON TECHNOLOGY OF SINGAPORE PTE. LTD.
CONCEPT SYSTEMS DESIGN, INC.
<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. 333-59859, No. 33-85272 and
No. 33-94972) of Mattson Technology, Inc. of our report dated February 9,
1999 appearing on page 45 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 31, 1999
<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 30 AND 31 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED
DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,863
<SECURITIES> 8,128
<RECEIVABLES> 9,614
<ALLOWANCES> 0
<INVENTORY> 10,924
<CURRENT-ASSETS> 49,274
<PP&E> 12,090
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,120
<CURRENT-LIABILITIES> 18,240
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 49,864
<TOTAL-LIABILITY-AND-EQUITY> 68,120
<SALES> 59,186
<TOTAL-REVENUES> 59,186
<CGS> 37,595
<TOTAL-COSTS> 37,595
<OTHER-EXPENSES> 45,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22,030)
<INCOME-TAX> 337
<INCOME-CONTINUING> (22,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,367)
<EPS-PRIMARY> (1.52)
<EPS-DILUTED> (1.52)
</TABLE>
