-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J3fCO1T19T+UmmJU7GHd1VUEt3+1S2NXidUxAPBogxu6/aAqOpI6lh4HGUPjL+mD rYfqMSsCNgQ6EozTgaCUJw== 0000891092-04-005427.txt : 20041105 0000891092-04-005427.hdr.sgml : 20041105 20041105172503 ACCESSION NUMBER: 0000891092-04-005427 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040926 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTSON TECHNOLOGY INC CENTRAL INDEX KEY: 0000928421 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 770208119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24838 FILM NUMBER: 041123691 BUSINESS ADDRESS: STREET 1: 2800 BAYVIEW DR CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106575900 10-Q 1 e19639_10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q ---------- (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number: 000-24838 ---------- MATTSON TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Delaware 77-0208119 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 47131 Bayside Parkway, Fremont, California 94538 (Address of principal executive offices) (Zip Code) (510) 657-5900 (Registrant's telephone number, including area code) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X| No [ ] Number of shares of common stock outstanding as of November 1, 2004: 51,435,339. ================================================================================ MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES ---------- TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Condensed Consolidated Balance Sheets -- at September 26, 2004 and December 31, 2003.................. 3 Condensed Consolidated Statements of Operations -- for the Three and Nine Months Ended September 26, 2004 and September 28, 2003....................................... 4 Condensed Consolidated Statements of Cash Flows -- for the Nine Months Ended September 26, 2004 and September 28, 2003........................................... 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 36 Item 4. Controls and Procedures........................................ 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................. 39 Item 6. Exhibits...................................................... 39 Signatures.............................................................. 40 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
September 26, December 31, 2004 2003 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ...................................................... $ 80,489 $ 77,115 Restricted cash ................................................................ 510 509 Accounts receivable, net ....................................................... 62,676 34,260 Advance billings ............................................................... 14,293 20,684 Inventories .................................................................... 51,688 27,430 Inventories - delivered systems ................................................ 4,966 6,549 Prepaid expenses and other assets .............................................. 15,480 12,995 --------- --------- Total current assets ......................................................... 230,102 179,542 Property and equipment, net .......................................................... 23,323 16,211 Goodwill ............................................................................. 8,239 8,239 Intangibles .......................................................................... 1,641 2,626 Other non-current assets ............................................................. 1,142 769 --------- --------- Total assets ................................................................. $ 264,447 $ 207,387 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................... $ 24,395 $ 21,340 Accrued liabilities ............................................................ 55,507 62,608 Deferred revenue ............................................................... 32,132 38,680 --------- --------- Total current liabilities .................................................... 112,034 122,628 --------- --------- Long-term liabilities: Deferred income taxes .......................................................... 623 1,055 --------- --------- Total long-term liabilities .................................................. 623 1,055 --------- --------- Total liabilities ............................................................ 112,657 123,683 --------- --------- Commitments and contingencies (Note 14) Stockholders' equity: Common stock ................................................................... 50 45 Additional paid-in capital ..................................................... 593,584 546,099 Accumulated other comprehensive income ......................................... 9,192 9,468 Treasury stock ................................................................. (2,987) (2,987) Accumulated deficit ............................................................ (448,049) (468,921) --------- --------- Total stockholders' equity ................................................... 151,790 83,704 --------- --------- Total liabilities and stockholders' equity ................................... $ 264,447 $ 207,387 ========= =========
See accompanying notes to condensed consolidated financial statements (unaudited). 3 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 26, September 28, September 26, September 28, 2004 2003 2004 2003 --------- --------- --------- --------- Net sales ...................................................... $ 68,038 $ 32,633 $ 181,314 $ 130,926 Cost of sales .................................................. 37,247 19,886 102,112 87,495 --------- --------- --------- --------- Gross profit ............................................. 30,791 12,747 79,202 43,431 --------- --------- --------- --------- Operating expenses: Research, development and engineering .................... 5,616 4,483 15,970 18,716 Selling, general and administrative ...................... 14,956 12,638 41,299 42,309 Amortization of intangibles .............................. 328 328 985 1,823 Restructuring and other charges .......................... -- 489 -- 489 --------- --------- --------- --------- Total operating expenses ............................... 20,900 17,938 58,254 63,337 --------- --------- --------- --------- Income (loss) from operations .................................. 9,891 (5,191) 20,948 (19,906) Loss on disposition of Wet Business ............................ -- -- -- (10,257) Interest and other income: Interest income .......................................... 365 307 889 931 Interest expense ......................................... (22) -- (57) (107) Other income (expense), net .............................. (36) 960 (600) 41 --------- --------- --------- --------- Interest and other income, net ......................... 307 1,267 232 865 --------- --------- --------- --------- Income (loss) before provision for (benefit from) income taxes ............................................. 10,198 (3,924) 21,180 (29,298) Provision for (benefit from) income taxes ...................... 1 (21) 308 142 --------- --------- --------- --------- Net income (loss) .............................................. $ 10,197 $ (3,903) $ 20,872 $ (29,440) ========= ========= ========= ========= Net income (loss) per share: Basic .................................................... $ 0.20 $ (0.09) $ 0.43 $ (0.66) ========= ========= ========= ========= Diluted .................................................. $ 0.20 $ (0.09) $ 0.41 $ (0.66) ========= ========= ========= ========= Shares used in computing net income (loss) per share: Basic .................................................... 49,922 44,975 49,085 44,911 ========= ========= ========= ========= Diluted .................................................. 51,051 44,975 50,588 44,911 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements (unaudited). 4 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended ---------------------------- September 26, September 28, 2004 2003 ------------- ------------- Cash flows from operating activities: Net income (loss) ............................................................................ $ 20,872 $(29,440) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation ............................................................................... 3,877 4,820 Deferred taxes ............................................................................. (403) 477 Provision for excess and obsolete inventories .............................................. 348 -- Amortization of intangibles ................................................................ 985 1,823 Restructuring and other charges ............................................................ -- 489 Loss on disposal of Wet Business ........................................................... -- 10,257 Loss on disposal of property and equipment ................................................. 136 1,206 Changes in assets and liabilities, net of effect of disposition of the Wet Business: Accounts receivable, net .............................................................. (28,495) 15,396 Advance billings ...................................................................... 6,315 8,281 Inventories ........................................................................... (24,662) 7,421 Inventories, delivered systems ........................................................ 1,563 14,473 Prepaid expenses and other current assets ............................................. (2,610) (1,501) Other assets .......................................................................... (512) 1,108 Accounts payable ...................................................................... 3,087 (6,044) Accrued liabilities ................................................................... (7,050) (6,020) Deferred revenue ...................................................................... (6,473) (32,076) -------- -------- Net cash used in operating activities ............................................. (33,022) (9,330) -------- -------- Cash flows from investing activities: Proceeds from the disposition of Wet Business ................................................ -- 2,000 Purchases of property and equipment .......................................................... (10,923) (3,880) -------- -------- Net cash used in investing activities ............................................. (10,923) (1,880) -------- -------- Cash flows from financing activities: Restricted cash .............................................................................. -- 597 Payments on line of credit and long-term debt ................................................ -- (335) Borrowings against line of credit ............................................................ -- 1,397 Proceeds from issuance of common stock, net of costs ......................................... 46,370 91 Proceeds from issuance of common stock under stock plans ..................................... 1,119 305 -------- -------- Net cash provided by financing activities ......................................... 47,489 2,055 -------- -------- Effect of exchange rate changes on cash and cash equivalents ....................................... (170) 4,272 -------- -------- Net increase (decrease) in cash and cash equivalents ............................................... 3,374 (4,883) Cash and cash equivalents, beginning of period ..................................................... 77,115 87,879 -------- -------- Cash and cash equivalents, end of period ........................................................... $ 80,489 $ 82,996 ======== ========
See accompanying notes to condensed consolidated financial statements (unaudited). 5 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 26, 2004 (unaudited) Note 1 -- Basis of Presentation Overview The accompanying interim unaudited condensed consolidated financial statements as of September 26, 2004 and December 31, 2003 and for the three and nine months ended September 26, 2004 and September 28, 2003 have been prepared by Mattson Technology, Inc. and its subsidiaries (the "Company" or "Mattson") in accordance with generally accepted accounting principles in the United States of America ("United States" or "U.S.") for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used for, but are not limited to, the accounting for the allowance for doubtful accounts, inventory reserves, depreciation and amortization periods, asset impairment analyses, sales returns, accrued liabilities, warranty costs and income taxes. Actual results could differ from these estimates. The results of operations for the three and nine months ended September 26, 2004 are not necessarily indicative of results that may be expected for future quarters or for the entire year ending December 31, 2004. Restricted Cash Restricted cash represents cash that has been set aside in accordance with an agreement with the Company's commercial bank that is responsible for issuance of travel and corporate credit cards. As of September 26, 2004, restricted cash of approximately $0.5 million was maintained with the commercial bank. Restricted cash is classified in current assets on the condensed consolidated balance sheet. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued an exposure draft entitled Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95. This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and require that such cost be measured according to the fair value of the stock compensation. In the absence of an observable market price for the stock awards, the fair value of the stock rights or stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the right or option, the expected term of the option, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The proposed requirements in the exposure draft would be effective for the first fiscal year beginning after June 15, 2005. The FASB has announced that it intends to issue a final Statement in late 2004. The Company continues to monitor communications on this subject from the FASB in order to determine the impact on its consolidated financial statements. Stock-Based Compensation The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted to employees under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In December 2002, FASB issued Statement of Financial Accounting 6 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS No. 148"). The statement amends SFAS No. 123, "Accounting For Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003. The following table sets forth the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):
Three Months Ended Nine Months Ended ------------------------------ ------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income (loss): As reported ............................................. $ 10,197 $ (3,903) $ 20,872 $ (29,440) Add: Total stock-based employee compensation expense included in net income (loss) ................... -- -- -- -- Deduct: total stock-based employee compensation expense determined under fair value based method for all awards ....................... (1,852) (685) (5,331) (1,843) ---------- ---------- ---------- ---------- As adjusted ............................................. $ 8,345 $ (4,588) $ 15,541 $ (31,283) ========== ========== ========== ========== Net income (loss) per share - Basic: As reported ............................................. $ 0.20 $ (0.09) $ 0.43 $ (0.66) ========== ========== ========== ========== As adjusted ............................................. $ 0.17 $ (0.10) $ 0.32 $ (0.70) ========== ========== ========== ========== Net income (loss) per share -- Diluted: As reported ............................................. $ 0.20 $ (0.09) $ 0.41 $ (0.66) ========== ========== ========== ========== As adjusted ............................................. $ 0.16 $ (0.10) $ 0.31 $ (0.70) ========== ========== ========== ==========
Note 2 -- Balance Sheet Detail (in thousands):
September 26, December 31, 2004 2003 ------------- ------------ Inventories: Purchased parts and raw materials ........................................ $32,349 $18,884 Work-in-process .......................................................... 14,001 5,444 Finished goods ........................................................... 5,338 3,102 ------- ------- $51,688 $27,430 ======= ======= Accrued liabilities: Warranty ................................................................. $16,157 $16,508 Accrued compensation and benefits ........................................ 9,309 6,596 Income taxes ............................................................. 6,900 6,992 Other .................................................................... 23,141 32,512 ------- ------- $55,507 $62,608 ======= =======
Note 3 -- Disposition of Wet Business On March 17, 2003, the Company sold the portion of its business that was engaged in developing, manufacturing, selling, and servicing wet surface preparation products for the cleaning and preparation of semiconductor wafers (the "Wet Business") to SCP Global Technologies, Inc. ("SCP"). The Company had originally acquired the Wet Business on January 1, 2001, as part of its merger with the STEAG Semiconductor Division of STEAG Electronic Systems AG ("STEAG") and CFM Technologies, Inc. ("CFM"). As part of this 7 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) disposition, SCP acquired certain subsidiaries and assets, and assumed certain contracts relating to the Wet Business, including the operating assets, customer contracts and inventory of CFM, all outstanding stock of Mattson Technology IP, Inc. ("Mattson IP"), a subsidiary that owns various patents relating to the Wet Business, and all equity ownership interest in Mattson Wet Products GmbH, a subsidiary in Germany that owned the Company's principal Wet Business operations. The Company retained rights to all the cash from the Wet Business entities, and the Company retained all rights to payments under the settlement and license agreements with Dainippon Screen Manufacturing Co., Ltd. ("DNS"). SCP acquired the rights to any damages under pending patent litigation relating to patents owned by Mattson IP. SCP assumed responsibility for the operations, sales, marketing and technical support services for the Company's former wet product lines worldwide. The initial purchase price paid to the Company by SCP to acquire the Wet Business was $2 million in cash. That initial purchase price was subject to adjustment based on a number of criteria, including the net working capital of the Wet Business at closing, to be determined post-closing based on a pro forma closing date balance sheet, and an earn-out, up to an aggregate maximum of $5 million, payable to the Company based upon sales by SCP of certain products to identified customers through December 31, 2004. There has been no earn-out received to date through the period ended September 26, 2004. Under the terms of the disposition, the Company remained responsible after the closing for negotiating with the workers' council and funding a significant reduction in force for the Wet Business operations in Germany; agreed to provide transitional support of information services, spare parts logistics and certain other functions in support of the Wet Business for an extended period; assumed certain real property leases relating to transferred facilities in Germany, subject to a sublease to SCP; agreed to reimburse specified legal fees to the extent incurred by SCP in pursuit of existing Wet Business litigation; and remained responsible for resolving or funding resolution of specified customer responsibilities. The Company received the right to earn out payments, as described above, and retained the right to payments under the DNS settlement. As a result of the significant continuing involvement by the Company subsequent to the disposition, the transaction was accounted for as a sale of assets and liabilities. On December 5, 2003, the Company signed a Second Amendment to Stock and Asset Purchase Agreement for Wet Products Division (the "Second Amendment") with SCP. Under the terms of the Second Amendment, the Company paid $4.4 million to SCP in satisfaction of all further liabilities relating to (i) working capital adjustments, (ii) pension obligations, (iii) reductions in force in Germany (iv) reimbursement of legal fees, and (v) reimbursement of amounts necessary to cover specified customer responsibilities. In the first quarter of 2003, the Company recorded a $10.3 million loss on the disposition of the Wet Business, as detailed below (in thousands): Contractual purchase price payment from SCP ................ $ 2,000 Net book value of assets sold, including goodwill and intangibles ....................... (80,824) Net book value of liabilities assumed by SCP, including deferred revenues .............................. 76,117 Other ...................................................... (7,550)(1) -------- Loss on disposition of the Wet Business ............... $(10,257) ======== - ---------- (1) Included in the Other category were cumulative translation adjustments, estimated future costs associated with reduction in force, working capital adjustment, indemnification for future legal fees, investment banker's fees, and legal, accounting and other professional fees directly associated with the disposition of the Wet Business. During the first quarter of 2003, as part of the loss on disposition of the Wet Business, the Company recorded accruals of approximately $11.9 million to cover the future obligations relating to this transaction. The Company has not recorded any additional accruals relating to the transaction. During 2003, the Company paid $11.5 million relating to reductions in force, working capital adjustment, investment banker's fees, legal fees, and accounting and other professional fees which were charged against accruals 8 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) established at the closing of the sale. With the effectiveness of the Second Amendment on December 5, 2003, the Company has no further obligation to SCP relating to the sale of the Wet Business. The Company's Wet Business represented a significant portion of the Company's net sales and costs in 2001, 2002 and the first quarter of 2003. As a result, the divestiture of the Wet Business affects the comparability of the Company's Consolidated Statements of Operations and Balance Sheet for the first nine months of 2004 to its reported results from those prior periods. For periods prior to the divestiture of the Wet Business, the Company's net sales were comprised primarily of sales of Wet Business products, sales of rapid thermal processing ("RTP") products and strip products, and royalties received from DNS. Following the divestiture of the Wet Business, the Company's net sales are comprised primarily of sales of RTP and strip products, and royalties received from DNS. In the fourth quarter of 2003, $1.3 million of revenue was recognized that related to a deferred Wet system that remained the property of the Company after the divestiture. Note 4 -- Goodwill and Intangible Assets The following table summarizes the components of goodwill, other intangible asset and related accumulated amortization balances (in thousands):
September 26, 2004 December 31, 2003 --------------------------------- ----------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount ------ ------------ ------ ------ ------------ ------ Goodwill ........................................... $ 8,239 $ -- $ 8,239 $ 8,239 $ -- $ 8,239 Developed technology ............................... 6,565 (4,924) 1,641 6,565 (3,939) 2,626 ------- ------- ------- ------- ------- ------- Total goodwill and intangible assets ............... $14,804 $(4,924) $ 9,880 $14,804 $(3,939) $10,865 ======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (in thousands):
Three Months Ended Nine Months Ended ----------------------------- ---------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Developed technology amortization................. $ 328 $ 328 $ 985 $ 1,823 -------- -------- -------- -------- Total amortization........................... $ 328 328 $ 985 $ 1,823 ======== ======== ======== ========
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company performed an annual goodwill impairment test as of December 31, 2003 and determined that goodwill was not impaired. The Company evaluates goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. No assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment. An intangible asset for workforce was reclassified to goodwill upon adoption of SFAS No. 141, "Business Combinations," on January 1, 2002. The Company continues to amortize developed technology intangible assets. Amortization expense for developed technology and other intangible assets was $0.3 million and $0.3 million for the three months ended September 26, 2004 and September 28, 2003, respectively. Amortization expense for developed technology and other intangible assets was $1.0 million and $1.8 million for the nine months ended September 26, 2004 and September 28, 2003, respectively. The amortization expense is estimated to be $1.3 million for each of years 2004 and 2005. In the first quarter of 2003, goodwill and intangible assets relating to developed technology were reduced by $4.4 million and $10.5 million, respectively, in connection with the Wet Business divestiture. 9 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) Note 5 -- Net Income (Loss) Per Share Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of basic and diluted net income (loss) per share on the face of the income statement. Basic earnings per share ("EPS") is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average market price of the Company's common stock for the period. All amounts in the following table are in thousands except per share data:
Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income (loss) .................................................... $ 10,197 $ (3,903) $ 20,872 $(29,440) ======== ======== ======== ======== Basic income (loss) per share: Income (loss) available to common stockholders ................. $ 10,197 $ (3,903) $ 20,872 $(29,440) Weighted average common shares outstanding ..................... 49,922 44,975 49,085 44,911 -------- -------- -------- -------- Basic earnings (loss) per share .............................. $ 0.20 $ (0.09) $ 0.43 $ (0.66) ======== ======== ======== ======== Diluted income: Income (loss) available to common stockholders ................. $ 10,197 $ (3,903) $ 20,872 $(29,440) -------- -------- -------- -------- Weighted average common shares outstanding ..................... 49,922 44,975 49,085 44,911 Diluted potential common shares from stock options ............. 1,129 -- 1,503 -- -------- -------- -------- -------- Weighted average common shares and diluted potential common shares ...................................... 51,051 44,975 50,588 44,911 -------- -------- -------- -------- Diluted income (loss) per share .............................. $ 0.20 $ (0.09) $ 0.41 $ (0.66) ======== ======== ======== ========
For the three and nine months ended September 26, 2004, 3,238,665 and 2,607,082 shares of common stock, respectively, subject to outstanding options were not included in the calculation of diluted net income per share because they were considered antidilutive (i.e., the per share exercise price for such options exceeded the trading price of the Company's common stock as reported on The Nasdaq Stock Market). Total stock options outstanding at September 28, 2003 of 4,638,889 were excluded from the computation of diluted EPS because the effect of including them would have been antidilutive. Note 6 -- Comprehensive Income (Loss) SFAS No. 130, "Reporting Comprehensive Income," establishes standards for disclosure and financial statement presentation for reporting total comprehensive income and its individual components. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The following are the components of comprehensive income (loss) (in thousands):
Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income (loss) .......................................... $ 10,197 $ (3,903) $ 20,872 $(29,440) Cumulative translation adjustments ......................... 1,173 (1,150) (276) (850) Unrealized investment gain (loss) .......................... (9) -- -- 87 Gain (loss) on cash flow hedging instruments ............... -- 7 -- (202) -------- -------- -------- -------- Comprehensive gain (loss) ............................ $ 11,361 $ (5,046) $ 20,596 $(30,405) ======== ======== ======== ========
10 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) The components of accumulated other comprehensive income, net of related tax, are as follows (in thousands): September 26, December 31, 2004 2003 ------------- ------------ Cumulative translation adjustments .............. $ 9,192 $ 9,469 Unrealized investment loss ...................... -- (1) ------- ------- $ 9,192 $ 9,468 ======= ======= Note 7 -- Reportable Segments SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The chief executive officer of the Company is the Company's chief decision maker. As the Company's business is completely focused on one industry segment - design, manufacturing and marketing of advanced fabrication equipment to the semiconductor manufacturing industry - management believes that the Company has one reportable segment. The Company's revenues and profits are generated through the sale and service of products for this one segment. As a result, no additional operating segment information is required to be disclosed. The following is net sales information by geographic area for the periods presented (dollars in thousands):
Three Months Ended Nine Months Ended ------------------------------------------ ---------------------------------------- September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003 -------------------- -------------------- ------------------- ------------------ ($) (%) ($) (%) ($) (%) ($) (%) ---------- ----- -------- ----- --------- ----- --------- ----- Taiwan..................... $ 29,799 44 $ 5,699 17 $ 73,021 40 $ 30,081 23 Japan...................... 11,604 17 10,675 33 32,754 18 24,120 18 United States.............. 8,618 13 3,832 12 20,866 11 20,358 16 China...................... 6,611 10 3,666 11 19,321 11 13,598 11 Korea...................... 2,231 3 4,571 14 13,595 8 17,428 13 Germany ................... 5,070 7 1,641 5 13,023 7 17,401 13 Europe - others............ 3,218 5 1,899 6 5,263 3 2,435 2 Singapore.................. 887 1 650 2 3,471 2 5,505 4 -------- -------- --------- --------- $ 68,038 $ 32,633 $ 181,314 $ 130,926 ======== ======== ========= =========
The net sales above have been allocated to the geographic areas based upon the installation location of the systems. In the third quarter of 2004, two customers accounted for 12% and 11%, respectively of net sales. In the third quarter of 2003, three customers accounted for 10%, 13% and 15% of net sales. During the first nine months of 2004, two customers each accounted for 12% of net sales. During the first nine months of 2003, two customers accounted for 21% and 13% of net sales. At September 26, 2004, two customers each accounted for 10% or more of the Company's accounts receivables, net, accounting for 15% and 12%, respectively. At December 31, 2003, two customers each accounted for more than 10% of the Company's accounts receivables, accounting for approximately 14% and 19%, respectively. 11 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) Note 8 -- Debt The Company's Japanese subsidiary has a credit facility with a Japanese bank in the amount of 900 million Yen (approximately $8.3 million at September 26, 2004), collateralized by specific trade accounts receivable of the Japanese subsidiary. At September 26, 2004, ther were no borrowings outstanding under this credit facility. The facility bears interest at a per annum rate of TIBOR plus 75 basis points (0.80% at September 26, 2004). The facility expires on June 20, 2005. The Company has given a corporate guarantee for this credit facility. There are no financial covenant requirements for this credit facility. The Company has a revolving line of credit with a U.S. bank in the amount of $20.0 million, which expires on April 26, 2005. All borrowings under this credit line bear interest at a per annum rate equal to the bank's prime rate plus 125 basis points (6% at September 26, 2004). The line of credit is collateralized by a blanket lien on all of the Company's domestic assets including intellectual property. The line of credit requires the Company to satisfy certain quarterly financial covenants, including maintaining a minimum balance of unrestricted cash and cash equivalents and a minimum balance of investment accounts, and not exceeding a maximum net loss limit. At September 26, 2004, the Company was in compliance with the covenants and there were no borrowings under this credit line. Note 9 -- Employee Stock Option and Stock Purchase Plans Employee Stock Option Grants Options to purchase 42,668 and 942,608 shares of common stock were granted to employees during the three and nine months ended September 26, 2004. As of September 26, 2004, options to purchase 6,038,317 shares of common stock were outstanding. Employee Stock Purchase Plan As of September 26, 2004, 2,376,662 shares had been issued under the Employee Stock Purchase Plan (the "Purchase Plan") since its inception in August 1994. Fair Value Disclosures Information regarding net income and net income per share, as adjusted, is required by SFAS No. 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method. The fair value for these options was estimated using the Black-Scholes option pricing model employing the multiple option valuation methodology. The per share weighted average estimated fair value for employee options granted was $9.10 and $4.52 during the three months ended September 26, 2004 and September 28, 2003, respectively. The per share weighted average estimated fair value for employee options granted was $11.01 and $2.73 during the nine months ended September 26, 2004 and September 28, 2003, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a freely traded market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Company's employee options. The usage of an option valuation model, as required by SFAS No. 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the Company's employee options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Company's estimate of the fair value of those options, it is the Company's opinion that the existing valuation models, including Black-Scholes, are not reliable single measures and may misstate the fair value of the Company's employee options. 12 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) The following weighted average assumptions are included in the estimated fair value calculations for stock option grants in the three and nine months ended September 26, 2004 and September 28, 2003:
Employee Stock Option Plans -------------------------------------------------------------------- Three Months Ended Nine Months Ended -------------------------------- -------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Risk-free interest rate ................................ 2.32% 3.00% 1.96% 3.00% Expected term of options (in years) .................... 1.5 1.5 1.5 1.5 Expected volatility .................................... 99.5% 98.6% 99.5% 98.6% Expected dividend yield ................................ 0 0 0 0
Using Black-Scholes, the per share weighted average estimated fair value of rights issued pursuant to the Company's Purchase Plan during the three and nine months ended September 26, 2004 and September 28, 2003 was $7.56 and $3.06, respectively. The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the Purchase Plan:
Employee Stock Purchase Plan -------------------------------------------------------------------- Three Months Ended Nine Months Ended -------------------------------- -------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Risk-free interest rate ................................ 2.0% 1.2% 1.7% 1.2% Expected term of options (in years) .................... 0.5 0.5 0.5 0.5 Expected volatility .................................... 52.3% 67.6% 58.1% 91.8% Expected dividend yield ................................ 0 0 0 0
Note 9 -- Related Party Transactions On February 17, 2004, STEAG sold approximately 4.3 million shares of the Company's common stock in an underwritten public offering at $11.50 per share. Following that sale, STEAG continued to hold approximately 8.9 million shares, or 17.7%, of the 50.0 million outstanding shares of the Company's common stock. Note 10 -- DNS Patent Infringement Suit Settlement On March 5, 2002, a jury in San Jose, California rendered a verdict in favor of the Company's then subsidiary, Mattson Wet Products, Inc. (formally CFM Technologies, Inc.), in a patent infringement suit against Dainippon Screen Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor wafer processing equipment. The jury found that six different DNS wet processing systems infringed on two of CFM's drying technology patents and that both patents were valid. On June 24, 2002, the Company and DNS jointly announced that they had amicably resolved their legal disputes with a comprehensive, global settlement agreement, which included termination of all outstanding litigation between the companies. On March 17, 2003, as part of the disposition of the Wet Business, the Company sold to SCP the subsidiary that owns the patents licensed to DNS. However, the Company retained all rights to payments under the settlement and license agreements. The settlement agreement and license agreement require DNS to make payments to Mattson totaling between a minimum of $75 million and a maximum of $105 million, relating to past damages, partial reimbursement of attorney's fee and costs, and royalties. 13 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) As of September 26, 2004, DNS had made payments aggregating $57.0 million under the settlement and license agreements. Of the $57.0 million paid by DNS as of September 26, 2004, $4.6 million was withheld to pay Japanese withholding tax, and the net amount the Company received was $52.4 million. In the third quarter of 2004, the Company received confirmation that its request for "competent authority" with the IRS has been granted in connection with its attempt to obtain a partial refund of Japanese taxes withheld in connection with its DNS effort. The Company expects that it will receive an approximately $2.9 million refund of withheld taxes in the fourth quarter of 2004. In future periods, the Company is scheduled to receive minimum royalty payments as follows (in millions): Future DNS Minimum Payments Fiscal Period to be Received ------------- -------------- April 2005 $ 6.0 April 2006 6.0 April 2007 6.0 ------- $ 18.0 ======= During July 2004, DNS made an additional royalty payment of approximately $370,000, beyond the minimum royalty payment of $6.0 million made in April 2004, based on their actual sales. This payment brought the total amount paid by DNS to $57.4 million. The Company determined, based on relative fair values, how much of the aggregate payments due to the Company are attributable to past disputes and how much are attributable to future royalties on DNS sales of the wet processing products. The Company allocated $15.0 million to past damages, which was recorded as "other income" during 2002, and allocated $60 million to royalty income, which is being recognized in net sales in the income statement on a straight-line basis over the license term. During the three and nine months ended September 26, 2004, the Company recognized royalty income of $3.2 million and $9.6 million, respectively. Note 11 -- Guarantees The Company adopted Financial Accounting Standards Board Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Indebtedness of Others" ("FIN 45") during the fourth quarter of 2002. FIN 45 requires disclosures concerning the Company's obligation under certain guarantees, including its warranty obligations. Under its warranty obligations, the Company is required to repair or replace defective products or parts, generally at a customer's site, during the warranty period at no cost to the customer. The warranty offered on the Company's systems ranges from 12 months to 36 months depending on the product. A provision for the estimated cost of warranty is recorded as a cost of sales, based on the historical costs, at the time of revenue recognition. The actual system performance and/or field expense profiles may differ from historical experience, and in those cases the Company adjusts its warranty accruals accordingly. The following table is the detail of the product warranty accrual for the three and nine months periods ended September 26, 2004 and September 28, 2003 (in thousands):
Three Months Ended Nine Months Ended ----------------------------- -------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Balance at beginning of period ............................. $ 16,773 $ 17,437 $ 16,508 $ 16,486 Accrual for warranties during the period ................... 3,309 1,567 10,882 5,721 Changes in liability related to pre-existing warranties ............................................ -- (1,079) -- (1,079) Settlements made during the period ......................... (3,925) (918) (11,233) (4,121) -------- -------- -------- -------- Balance at end of period .............................. $ 16,157 $ 17,007 $ 16,157 $ 17,007 ======== ======== ======== ========
14 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) During the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties as necessary. As of September 26, 2004, the maximum potential amount of future payments that the Company could be required to make under these standby letters of credit is approximately $1.1 million, representing collateral for corporate credit cards, certain equipment leases and security deposits. The Company has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements. The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company may agree to hold the other party harmless against losses arising from a breach of representations or under which the Company may have an indemnity obligation to the counterparty with respect to certain intellectual property matters or certain tax related matters. Customarily, payment by the Company with respect to such matters is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. Further, the Company's obligations under these agreements may be limited in terms of time and/or amount, and in some instances the Company may have recourse against third parties for certain payments made by the Company. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company's financial position or results of operations. The Company believes if it were to incur a loss in any of these matters, such loss should not have a material effect on the Company's financial position or results of operations. Note 12 -- Restructuring and Other Charges During the third quarter of 2003, the Company recorded restructuring and other charges of $489,000 that included $381,000 for workforce reduction and $108,000 for consolidation of excess facilities. The following is a summary of activities in the restructuring-related accruals during the nine month period ended September 26, 2004 (in thousands):
Liability as of Cash Payments Liability as of December 31, Nine Months Ended September 26, 2003 September 26, 2004 2004 ------------ ----------------- ------------- Workforce reduction ................................................ $ 115 $ (35) $ 80 Consolidation of excess facilities ................................. 1,175 (141) 1,034 ------ ------ ------ Total ........................................................ $1,290 $ (176) $1,114 ====== ====== ======
Note 13 -- Public Offering On December 23, 2003, the Company filed a shelf registration statement on Form S-3 that would allow the Company to sell, from time to time, up to $100 million of its common stock or other securities. The shelf registration statement also covered sales of up to 5.9 million of the already outstanding shares of Company common stock owned by STEAG. The registration statement was declared effective by the Securities and Exchange Commission ("SEC") on January 9, 2004. On February 17, 2004, the Company sold approximately 4.3 million newly issued shares of common stock, and STEAG sold approximately 4.3 million already outstanding shares of Company common stock, in an underwritten public offering priced at $11.50 per share. This resulted in proceeds to the Company, net of underwriting discounts and transaction expenses, through the third quarter of 2004, of approximately $46.4 million. Out of the gross proceeds from the sale of common stock by the Company of approximately $49.6 million, approximately $2.5 million represented underwriting discounts and commissions, and there were other costs and expenses of approximately $0.6 million, primarily for legal, accounting and printing services, through the third 15 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) quarter of 2004. The Company estimates its net proceeds were approximately $46.3 million, net payment of transaction costs. The Company intends to use the net proceeds received from the offering for general corporate purposes, including working capital requirements and potential strategic acquisitions or investments. The Company did not receive any proceeds from the sale of shares by STEAG. STEAG remained the Company's single largest shareholder, holding approximately 8.9 million, or 17.7%, of the approximately 50.0 million outstanding shares of Company common stock immediately following the offering. Note 14 -- Commitments and Contingencies The Company is party to certain claims arising in the ordinary course of business. While the outcome of these matters is not presently determinable, management believes that they will not have a material adverse effect on the financial position or results of operations of the Company. The Company leases two buildings previously used to house its manufacturing and administrative functions related to wet surface preparation products in Exton, Pennsylvania. The lease for both buildings has approximately 15 years remaining with a combined rental cost of approximately $1.5 million annually. The lease agreement for both buildings allows for subleasing the premises without the approval of the landlord. In June 2002, the administrative building was sublet for a period of approximately five years, until December 2007, with an option for the subtenant to extend for an additional five years. The sublease, under which lease payments aggregate to approximately $7.2 million, is expected to cover all related costs on the administrative building during the sublease period. In July 2003, the manufacturing building at the Exton, Pennsylvania location was sublet for a period of approximately three years, until September 2006, with an option for the subtenant to renew for a total of two successive periods, the first for five years and the second for the balance of the term of the master lease. The sublease, under which lease payments aggregate approximately $2.1 million, is expected to cover all related costs on the manufacturing building during the sublease period. In determining the facilities lease loss, net of cost recovery efforts from expected sublease income, various assumptions were made, including, the time periods over which the buildings will be vacant; expected sublease terms; and expected sublease rates. The Company has estimated that under certain circumstances the facilities lease losses could be approximately $0.8 million for each additional year that the facilities are not leased and could aggregate to approximately $12.6 million, net of expected sublease income, under certain circumstances. The Company expects to make payments related to the above noted facilities lease losses over the next fifteen years, less any amounts received under subleases. Adjustments for the facilities leases and subleases will be made in future periods, if necessary, based upon the then current actual events and circumstances. In connection with the disposition of the Wet Business, the Company assumed the lease obligations with respect to the facilities used to house the manufacturing and administrative functions of the transferred Wet Business in Pliezhausen, Germany. That lease has approximately two years remaining, ending in August 2006, with an approximate rental cost of $1.2 million annually. The Company had sublet the facilities to SCP on terms that covered all rent and costs payable by the Company under the primary lease. During the third quarter of 2004 and the first nine months of 2004, the Company received sublease payments of approximately $0.3 million and $0.9 million, respectively, from SCP. Under its sublease, SCP has the right upon 90 days notice to partially or completely terminate the sublease. In the second quarter of 2004, SCP terminated the sublease completely. The Company is responsible for the future lease costs of approximately $2.5 million through August 2006, net of cost recovery efforts and any sublease income. The Company has fully accrued for the costs related to this lease, as part of restructuring. In the ordinary course of business, the Company is subject to claims and litigation, including claims that it infringes third party patents, trademarks and other intellectual property rights. Although the Company believes that it is unlikely that any current claims or actions will have a material adverse impact on its operating results or its financial position, given the uncertainty of litigation, the Company cannot be certain of this. Moreover, the defense of claims or actions against the Company, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 16 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) The Company is currently party to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters is not presently determinable and cannot be predicted with certainty, management does not believe that the outcome of any of these matters or any of the above mentioned legal claims will have a material adverse effect on the Company's financial position, results of operations or cash flow. Note 15 -- Income Taxes In the third quarter of 2004, the Company recorded income tax expense of approximately $1,000, which consisted of foreign taxes incurred by its foreign sales and service operations of approximately $24,000, foreign withholding taxes on royalty income of $72,000, and federal and state income taxes of approximately $30,000, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $0.1 million. The effective income tax rate was zero percent for the third quarter of 2004. In the first nine months of 2004, the Company recorded income tax expense of approximately $0.3 million, which consisted of foreign taxes of approximately $0.6 million, and federal and state income taxes of approximately $0.1 million, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $0.4 million. The effective income tax rate was 1.5% for the nine months ended September 26, 2004. At September 26, 2004, the Company has provided a full valuation allowance against its net deferred tax asset as management believes that sufficient uncertainty exists with regard to the realizability of tax assets. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits and the lack of carryback capacity to realize these assets. Based on the 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 all the Company's net deferred tax assets. In the third quarter of 2003, the Company recorded an income tax benefit of approximately $21,000, and an income tax provision of approximately $0.1 million for the first nine months of 2003, which consisted of foreign withholding taxes of $0.6 million, foreign taxes incurred by our foreign sales and service operations of $0.1 million, and state income taxes of approximately $0.1 million, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $0.7 million. There was no US or German current income tax benefit or expense. The effective income tax rate was a negative 0.6% for the nine months ended September 28, 2003. At September 28, 2003, the Company provided a full valuation allowance against its net deferred tax asset as management believes that sufficient uncertainty exists with regard to the realizability of tax assets. Note 16 -- Subsequent Event On October 27, 2004, the Company acquired certain outstanding debt and equity ownership interests in Vortek Industries Ltd., a privately held corporation amalgamated under the laws of British Columbia ("Vortek") for a purchase price of approximately $17.0 million. As a result of the transaction, Vortek became a wholly-owned subsidiary of the Company. Vortek is a developer of millisecond flash annealing technology for rapid thermal processing of silicon wafers, for use in the manufacture of semiconductors. Vortek is based in Vancouver, Canada. As consideration for the acquisition of Vortek, Mattson issued an aggregate of 1,452,808 shares of its common stock, which represents approximately 2.8% of the outstanding common shares of the Company. Between June 28, 2004 and October 27, 2004, the Company provided approximately $2.5 million in working capital loans to Vortek. Of the shares of common stock issued by the Company in the Vortek transaction, 290,561 (the "Escrow Shares") are being held subject to an escrow agreement. The Escrow Shares are subject to forfeiture in the event of valid indemnification claims by the Company within a period of 12 months from October 27, 2004. In connection with the Vortek acquisition, the Company entered into a Stock Registration and Restriction Agreement, dated as of October 27, 2004, pursuant to which the Company agreed to register the shares issued in the 17 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) September 26, 2004 (unaudited) Vortek acquisition, other than the Escrow Shares, under the Securities Act of 1933, for resale by the recipients, and the recipients agreed to certain restrictions on the transfer of such shares. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report, and in conjunction with our audited consolidated financial statements and related notes and other financial information included in our Annual Report on Form 10-K. In addition to historical information, this discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors including, but not limited to, those set forth or incorporated by reference under "Factors That May Affect Future Results and Market Price of Stock" and elsewhere in this document. Overview We are a leading supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits. Our products include dry strip, rapid thermal processing, or RTP, and plasma enhanced chemical vapor deposition, or PECVD, equipment. Our manufacturing equipment utilizes innovative technology to deliver advanced processing capability and high productivity to semiconductor manufacturers for both 200 mm and 300 mm wafer production at technology nodes at and below 130 nanometers, or nm. The last three years, 2001 to 2003, were a period of great challenge and significant change for us. The external market environment was extremely difficult, with the semiconductor industry experiencing a significant downturn, resulting in severe capital spending cutbacks by our customers. At the beginning of 2001, we had just completed the simultaneous acquisition of the semiconductor equipment division of STEAG Electronic Systems AG, or STEAG, and CFM Technologies, Inc. This more than doubled the size of our company and changed the nature and breadth of our product lines. On top of the many challenges in integrating multiple merged companies, we were faced with the impact of dramatically lower sales as a result of the downturn in the industry that resulted in excess production capacity. We determined to refocus our business on our core technologies in dry strip and rapid thermal processing, and in 2002 and the first quarter of 2003 we took restructuring actions to align our business with this focus and to reduce our cost structure. As part of this restructuring effort, we divested a significant line of business, our wet surface preparation products, or the Wet Business, in March of 2003. Our organization and structure was very different at the end of 2003 than it was at the beginning of 2003 or during 2001 and 2002. Because of our significant restructurings and divestitures during this period, both our revenue sources and our cost structure have significantly changed. This affects the comparability of our more recently reported financial information, and causes our historical information not to be a good indicator or predictor of results for future periods. Our size, structure and product focus have been more stable during the last three quarters of 2003 and the first three quarters of 2004. We recorded losses from operations in each of the years 2001, 2002 and 2003. However, as a result of our restructurings and divestitures, we reduced our cost structure and reduced our rate of losses throughout that period. As we finished 2003, we achieved a profit of $1.1 million from operations for the fourth quarter. For the first, second and third quarters of 2004, we recorded net income of $3.3 million, $7.4 million and $10.2 million, respectively. Our net income was $10.2 million in the third quarter of 2004, compared to a loss of $3.9 million in the third quarter of 2003, on a $35.4 million increase in net sales. This reflected the improvement in the efficiency and flexibility of our manufacturing cost structure, which utilizes both internal and outsourced manufacturing and allows us to increase production without increasing internal headcount. We ended the third quarter of 2004 with approximately $80.5 million in cash and cash equivalents. We have no long-term debt. With the recent improvements in our operating results and the infusion of cash on our balance sheet from a stock offering early in the year, we believe we are in a healthy position in terms of liquidity and capital resources. Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. Market conditions improved significantly in the first part of 2004, but recently are demonstrating signs of weakening in the current quarter. However, the cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to us and limit our ability to forecast near term revenue. Given that many of our costs are fixed in the short-term, our ability to quickly modify our operations in response to changes in market 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) conditions is limited. Although we have implemented cost reduction and operational flexibility measures, we are largely dependent upon increases in sales in order to improve our profitability. The success of our business in the future will be dependent on numerous factors, including but not limited to the market demand for semiconductors and semiconductor wafer processing equipment, and our ability to (1) develop and bring to market new products that address our customers' needs, (2) grow customer loyalty through collaboration with and support of our customers, and (3) manage a cost structure which will enable us to operate effectively and profitably throughout changing industry cycles. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or United States or U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates and judgments on an on-going basis, including those related to reserves for excess and obsolete inventory, warranty obligations, bad debts, intangible assets, income taxes, restructuring costs, contingencies and litigation. Our management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition, warranty obligations, inventories, goodwill and other intangible assets, impairment of long-lived assets, and income taxes as critical to our business operations and an understanding of our results of operations. Revenue recognition. We recognize revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 104, "Revenue Recognition," or SAB 104. We derive revenue from two primary sources -- equipment sales and spare part sales. We account for equipment sales as follows: (1) for all sales of new products and sales of (and, for the first quarter of 2003 and earlier periods, for all sales of our wet surface preparation products), revenue is recognized upon customer acceptance; (2) for all sales of existing products, we recognize revenue on a multiple element approach in which we divide a sale transaction into two separate elements based on objective evidence of fair value. The two elements are the tool and installation of the tool. Under this approach, the portion of the invoice price that is due after installation services have been performed and upon final customer acceptance of the tool has been obtained, generally 10% of the total invoice price, is deferred until final customer acceptance of the tool. The remaining portion of the total invoice price relating to the tool, generally 90% of the total invoice price, is recognized upon shipment and title transfer of the tool. From time to time, however, we allow customers to evaluate systems, and since customers can return such systems at any time with limited or no penalty, we do not recognize revenue until the customer accepts these evaluation systems. Revenues associated with sales to customers in Japan are recognized upon title transfer, which generally occurs upon customer acceptance, with the exception of sales of our RTP products through our distributor in Japan, where revenues are recognized upon title transfer to the distributor, FOB shipping point. For spare parts, revenue is recognized upon shipment. Service and maintenance contract revenue is recognized on a straight-line basis over the service period of the related contract. Revenues are difficult to predict, due in part to our reliance on customer acceptance related to a portion of our revenues. Any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Warranty. Our warranties require us to repair or replace defective products or parts, generally at a customer's site, during the warranty period at no cost to the customer. The warranty offered on our systems ranges from 12 months to 36 months, depending on the product. At the time we first recognize revenue for a system sale, we record 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) a provision for the estimated cost of warranty as a cost of sales based on our historical costs. While our warranty costs have historically been within our expectations and the provisions we have established, we cannot be certain that we will continue to experience the same warranty repair costs that we have in the past. An increase in the costs to repair our products could have a material adverse impact on our operating results for the period or periods in which such additional costs materialize. Inventories. We state inventories at the lower of cost or market, with cost determined on a first-in, first-out basis. Due to changing market conditions, estimated future requirements, age of the inventories on hand and our introduction of new products, we regularly monitor inventory quantities on hand and identify obsolete inventories that are no longer used in current production. Accordingly, we write down our inventories to estimated net realizable value. Actual demand may differ from forecasted demand and such difference may result in write-downs that have a material effect on our financial position and results of operations. In the future, if our inventory is determined to be overvalued, we would be required to recognize the decline in value in our cost of goods sold at the time of such determination. Although we attempt to accurately forecast future product demand, given the competitive pressures and cyclicality of the semiconductor industry there may be significant unanticipated changes in demand or technological developments that could have a significant impact on the value of our inventory and our reported operating results. Goodwill and Other Intangible Assets. We assess the realizability of goodwill and other intangible assets at a minimum annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Our judgments regarding the existence of impairment indicators are based on changes in strategy, market conditions and operational performance of our business. Future events, including significant negative industry or economic trends, could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our results of operations. In assessing the recoverability of goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Impairment of Long-Lived Assets. We assess the impairment of identified intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Our judgments regarding the existence of impairment indicators are based on changes in strategy, market conditions and operational performance of our business. Future events, including significant negative industry or economic trends, could cause us to conclude that impairment indicators exist and that long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our results of operations. In assessing the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors, including discount rates and probability of cash flow scenarios, to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Income taxes. We record a valuation allowance to reduce our net deferred tax asset to the amount we estimate is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination was made. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Results of Operations The following table sets forth our statement of operations data expressed as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net sales ........................................................... 100.0% 100.0% 100.0% 100.0% Cost of sales ....................................................... 54.8 60.9 56.3 66.8 ----- ----- ----- ----- Gross profit .................................................. 45.2 39.1 43.7 33.2 ----- ----- ----- ----- Operating expenses: Research, development and engineering ......................... 8.3 13.7 8.8 14.3 Selling, general and administrative ........................... 22.0 38.7 22.8 32.3 Amortization of intangibles ................................... 0.4 1.0 0.5 1.4 Restructuring and other charges ............................... -- 1.6 -- 0.4 ----- ----- ----- ----- Total operating expenses .................................... 30.7 55.0 32.1 48.4 ----- ----- ----- ----- Income (loss) from operations ....................................... 14.5 (15.9) 11.6 (15.2) Loss on disposition of Wet Business ................................. -- -- -- (7.8) Interest and other income: ----- ----- ----- ----- Interest income ............................................... 0.5 1.0 0.5 0.7 ----- ----- ----- ----- Interest expense .............................................. -- -- -- (0.1) Other income (expense), net ................................... -- 2.9 (0.4) -- ----- ----- ----- ----- Interest and other income, net .............................. 0.5 3.9 0.1 0.6 ----- ----- ----- ----- Income (loss) before provision for (benefit from) income taxes .................................................. 15.0 (12.0) 11.7 (22.4) Provision for (benefit from) income taxes ........................... -- -- 0.2 0.1 ----- ----- ----- ----- Net income (loss) ................................................... 15.0% (12.0)% 11.5% (22.5)% ===== ===== ===== =====
The divestiture of our Wet Business on March 17, 2003 has significantly affected the comparability of our net sales and our costs in the nine-month period ended September 26, 2004 to our reported results a year ago for the same period and to periods prior to that. Our reported results for the first nine months of 2003 include sales of Wet Business products and related costs, while our results for the first nine months of 2004 do not. The following table summarizes the amount of our net sales in each quarter of 2003 and in the first three quarters of 2004 attributable to products of the Wet Business, to RTP and strip products, and to royalties from DNS. We believe this additional information regarding our prior period sales will facilitate comparison of our current and future results of operations to our results from prior periods (dollars in millions):
Net Sales Percent of Total Net Sales -------------------------------------------------- ---------------------------------- Wet RTP and DNS Reported Wet RTP and DNS Three Months Business Strip Royalty Total Business Strip Royalty Ended Products Products Revenue Net Sales Products Products Revenue - --------------------------------------- -------- -------- -------- --------- -------- -------- -------- March 30, 2003 ........................ $ 32.3 $ 32.5 $ 3.0 $ 67.8 47.7% 47.9% 4.4% June 29, 2003 ......................... -- 27.5 3.0 30.5 -- 90.2 9.8 September 28, 2003 .................... -- 29.6 3.0 32.6 -- 90.8 9.2 December 31, 2003 ..................... 1.3 39.1 3.0 43.4 3.0 90.1 6.9 -------- -------- -------- -------- ---- ---- --- $ 33.6 $ 128.7 $ 12.0 $ 174.3 19.3% 73.8% 6.9% ======== ======== ======== ======== ==== ==== === March 28, 2004 ........................ $ -- $ 49.9 $ 3.2 $ 53.1 --% 94.0% 6.0% June 27, 2004 ......................... -- 57.0 3.2 60.2 -- 94.7 5.3 September 26, 2004 .................... -- 64.8 3.2 68.0 -- 95.3 4.7 -------- -------- -------- -------- ---- ---- --- $ -- $ 171.7 $ 9.6 $ 181.3 --% 94.7% 5.3% ======== ======== ======== ======== ==== ==== ===
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Net Sales Net sales for the third quarter of 2004 were $68.0 million. This represents an increase of 108% compared to $32.6 million of net sales for the third quarter of 2003. The increase in net sales in the third quarter of 2004 as compared to the third quarter of 2003 is primarily due to higher unit sales resulting from improvement in customer demand for our products. We anticipate our net sales for the fourth quarter of 2004 to range between $68.0 million and $71.0 million. Net sales of RTP and strip systems, spares and services for the third quarter of 2004 were approximately $64.8 million. This represents an increase of 119% compared to $29.6 million of net sales for such products in the third quarter of 2003. The increase in net sales of RTP and strip products in the third quarter of 2004 as compared to the third quarter of 2003 is primarily due to higher unit sales. Units of RTP and strip products shipped in the third quarter of 2004 increased 139.1% as compared to the third quarter of 2003. Net sales for the first nine months of 2004 were $181.3 million, representing an increase of 38% compared to net sales of $130.9 million for the first nine months of 2003. This increase was primarily due to higher shipments in the first nine months of 2004 than in the same period in the prior year, resulting from improvement in demand for both RTP and strip products. Net sales for the first nine months of 2004 include no sales of Wet Business products, whereas net sales for the first nine months of 2003 included $32.3 million in net sales from the divested Wet Business. Net sales of RTP and strip products for the first nine months of 2004 were $171.7 million, representing an increase of 92% as compared to net sales of such products of $89.6 million for the first nine months of 2003. Units of RTP and strip products shipped in the first nine months of 2004 increased 93% as compared to the same period in 2003. This increase was primarily due to increased customer demand closely correlated with improvement in industry-wide demand in our broader market. In the third quarter of 2004, two of our customers accounted for 12.4% and 11.0%, respectively of our net sales. In the third quarter of 2003, three of our customers accounted for 10%, 13% and 15% of our net sales. During the first nine months of 2004, two of our customers accounted for 12.1% and 11.7% of our net sales, respectively. During the first nine months of 2003, two customers accounted for 13% and 21% of net sales. International sales, which are predominantly to customers based in Europe, Japan and the Pacific Rim (which includes Taiwan, China, Korea and Singapore), accounted for 87.3% and 88.3% of net sales for the third quarters of 2004 and 2003, respectively. International sales accounted for 88.5% and 84.5% of net sales for the first nine months of 2004 and 2003, respectively. We anticipate that international sales will continue to account for a significant portion of net sales through the first half of 2005. Gross Margin Our gross margin for the third quarter of 2004 was 45.2%, an increase from 39.1% for the third quarter of 2003. The increase in gross margin in the third quarter of 2004 was primarily due to a seven percentage point improvement in increased absorption of fixed overhead costs resulting from increased production volume. Gross margin in the fourth quarter is expected to be in the range of approximately 43.0% to 46.0%. Our gross margin for the first nine months of 2004 was 43.7%, an increase from 33.9% for the first nine months of 2003. The increase in gross margin in the first nine months of 2004 was primarily due to a nine percentage point improvement in increased absorption of fixed overhead costs resulting from increased production volume, as well as the divestiture of the Wet Business. Our RTP and strip products have relatively higher gross margins than did the Wet Business products we offered until its divestiture in March 2003. The divestiture of our Wet Business affects the comparability of our gross margin in the current nine-month period and will affect the comparability of our gross margins in future periods to our historical margins. Due to intense competition, we continue to face pricing pressure from competitors that can affect our gross margin. In response, we are continuing with our cost controls and efforts to differentiate our product portfolio. Our gross margin has varied over the years and will continue to vary based on many factors, including competitive 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) pressures, product mix, the relative amounts of customer acceptances in a given quarter, economies of scale, overhead absorption levels and costs associated with the introduction of new products. Research, Development and Engineering Research, development and engineering expenses for the third quarter of 2004 were $5.6 million, or 8.3% of net sales, as compared to $4.5 million, or 13.7% of net sales for the third quarter of 2003. The $1.1 million increase in research, development and engineering expenses for the third quarter of 2004 as compared to the same quarter of 2003 was primarily due to reimbursable expenses from a joint development project. The net change from the third quarter of 2003 as compared to the third quarter of 2004 was $1.5 million and resulted from the fulfillment of our joint development program. This was partially offset by a $0.1 million increase in payroll-related expenses. The decrease in research, development and engineering expenses as a percentage of net sales for the third quarter of 2004 as compared to the same quarter of 2003 resulted from the proportionately greater increase in net sales. Research, development and engineering expenses for the first nine months of 2004 were $16.0 million, or 8.8% of net sales, as compared to $18.7 million, or 14.3% of net sales, for the first nine months of 2003. The $2.7 million decrease in research, development and engineering expenses in the first nine months of 2004 as compared to the first nine months of 2003 was primarily due to a $2.7 million reduction in project materials and project-related expenses resulting from cost reimbursement on a joint development project, a $1.2 million reduction in depreciation and amortization resulting from the consolidation of our facilities and the disposition of our Wet business, partially offset by a $0.5 million increase in salary and payroll-related expenses and a $0.4 million increase in outside professional services. The decrease in research, development and engineering expenses as a percentage of net sales for the first nine months of 2004 as compared to the same period in 2003 resulted from the proportionately greater increase in net sales and the reduction in expenses on an absolute dollar basis. Selling, General and Administrative Selling, general and administrative expenses for the third quarter of 2004 were $15.0 million, or 22.0% of net sales, as compared to $12.6 million, or 38.7% of net sales, for the third quarter of 2003. The $2.3 million increase in selling, general and administrative expenses in the third quarter of 2004 as compared to the third quarter of 2003 is primarily due to a $2.1 million increase in salary and payroll-related expenses resulting from increased headcount and variable compensation expenses. The decrease in selling, general and administrative expenses as a percentage of net sales for the third quarter of 2004, as compared to the same period in 2003, resulted from the proportionately greater increase in net sales. Selling, general and administrative expenses for the first nine months of 2004 were $41.3 million, or 22.8% of net sales as compared to $42.3 million, or 32.3% of net sales for the first nine months of 2003. The $1.0 million decrease in selling, general and administrative expenses in the first nine months of 2004 as compared to the first nine months of 2003 is primarily due to a $0.7 million decrease in salaries and payroll-related expenses reflecting our continuing cost containment efforts and a $0.7 million decrease in sales and service costs. Amortization of Intangibles Upon adoption of SFAS No. 142 on January 1, 2002, we no longer amortize goodwill. We continue to amortize the identified intangibles, and our amortization expense during the third quarter of 2004 and first nine months of 2004 were $0.3 million and $1.0 million, respectively. Our amortization expense during the third quarter of 2003 and the first nine months of 2003 were $.03 million and $1.8 million, respectively. We estimate that our amortization expense will be approximately $1.3 million for each of the years 2004 and 2005. Restructuring and other charges During the third quarter of 2003, we recorded restructuring and other charges of $489,000 that included $381,000 for workforce reduction and $108,000 for consolidation of excess facilities. We estimate that expected cost savings as a result of the restructuring and workforce reduction will range from $0.4 million to $0.5 million per quarter. For the three and nine months ended September 26, 2004, no restructuring expenses were recorded. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Interest and Other Income (Expense), Net Interest and other income, net, for the third quarter of 2004 was approximately $0.3 million, or 0.5% of net sales, as compared to interest and other expense, net, of $1.3 million, or 3.9% of net sales, for the third quarter of 2003. During the third quarter of 2004, interest and other income, net consisted primarily of interest income of $0.4 million resulting from the investment of our cash balances in interest-bearing accounts. During the third quarter of 2003, interest and other income, net, consisted primarily of interest income of $0.3 million resulting from the investment of our cash balances in interest-bearing accounts, a foreign exchange gain of $0.9 million, and net other income of $0.5 million, partially offset by a loss on sale of fixed assets of $0.4 million. Interest and other expense, net, for the first nine months of 2004 was approximately $0.2 million, or 0.1% of net sales, as compared to $0.9 million, or 0.7% of net sales, for the first nine months of 2003. During the first nine months of 2004, interest and other expense, net, consisted primarily of interest income of $0.9 million resulting from the investment of our cash balances in interest-bearing accounts, partially offset by other expense of $0.6 million. In the same period of 2003, other income consisted of interest income of $0.9 million resulting from the investment of our cash balances, a foreign exchange gain of $0.1 million and net other income of $0.9 million, partially offset by interest expense of $0.1 million and a loss on sale of fixed assets of $1.0 million. Provision for Income Taxes In the third quarter of 2004, we recorded income tax expense of approximately $1,000, which consisted of foreign taxes incurred by its foreign sales and service operations of approximately $24,000, foreign withholding taxes on royalty income of $72,000, and federal and state income taxes of approximately $30,000, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $125,000. The effective income tax rate was 0.5% for the third quarter of 2004. In the first nine months of 2004, we recorded income tax expense of approximately $309,000, which consisted of foreign taxes of approximately $563,000, and federal and state income taxes of approximately $120,000, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $374,000. The effective income tax rate was 2.8% for the six months ended September 26, 2004. At September 26, 2004, we have provided a full valuation allowance against our net deferred tax asset as management believes that sufficient uncertainty exists with regard to the realizability of tax assets. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits and the lack of carryback capacity to realize these assets. Based on the absence of objective evidence, our management is unable to assert that it is more likely than not that we will generate sufficient taxable income to realize all our net deferred tax assets. In the third quarter of 2003, we recorded an income tax benefit of approximately $21,000, and an income tax provision of approximately $0.1 million for the first nine months of 2003, which consisted of foreign withholding taxes of $0.6 million, foreign taxes incurred by our foreign sales and service operations of $0.1 million, and state income taxes of approximately $0.1 million, partially offset by a deferred tax benefit on the amortization of certain intangible assets of $0.7 million. We had no U.S. or German current income tax benefit or expense. Our effective income tax rate was a negative 0.6% for the nine months ended September 28, 2003. Liquidity and Capital Resources Our cash and cash equivalents, excluding restricted cash, were $80.5 million at September 26, 2004, an increase of $3.4 million from $77.1 million at December 31, 2003. Stockholders' equity at September 26, 2004 was $151.8 million, as compared to $83.7 million at December 31, 2003. Working capital at September 26, 2004 was $118.1 million, as compared to $56.9 million at December 31, 2003. At September 26, 2004, we had no long-term debt. On December 23, 2003, we filed a shelf registration statement on Form S-3 that would allow us to sell, from time-to-time, up to $100 million of our common stock or other securities. The shelf registration statement also covered sales of up to 5.9 million of the already outstanding shares of our common stock owned by STEAG. The registration statement was declared effective by the SEC on January 9, 2004. On February 17, 2004, we sold approximately 4.3 million newly issued shares of common stock, and STEAG sold approximately 4.3 million already outstanding shares of our common stock, in an underwritten public offering priced at $11.50 per share. This resulted in proceeds to us, net of underwriting discounts and transaction expenses, 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) through the third quarter of 2004, of approximately $46.4 million. Out of the gross proceeds from the sale of common stock by us of approximately $49.6 million, approximately $2.5 million represented underwriting discounts and commissions, and there were other costs and expenses of approximately $0.6 million, primarily for legal, accounting and printing services, through the third quarter of 2004. We estimate our net proceeds to be approximately $46.3 million after payment in future periods of the balance of the transaction costs. We intend to use the net proceeds received from the offering for general corporate purposes, including working capital requirements and potential strategic acquisitions or investments. We did not receive any proceeds from the sale of shares by STEAG. STEAG remained our largest single shareholder, holding approximately 8.9 million, or 17.7%, of the 50.0 million then outstanding shares of our common stock. Our Japanese subsidiary has a credit facility with a Japanese bank in the amount of 900 million Yen (approximately $8.2 million at September 26, 2004), collateralized by specific trade accounts receivable of the Japanese subsidiary. At September 26, 2004, there were no borrows outstanding under this credit facility. The facility bears interest at a per annum rate of TIBOR plus 75 basis points (0.80% at September 26, 2004). The facility expires on June 20, 2005. We have given a corporate guarantee for this credit facility. There are no financial covenant requirements for this credit facility. We have a revolving line of credit with a U.S. bank in the amount of $20.0 million, which expires on April 26, 2005. All borrowings under this credit line bear interest at a per annum rate equal to the bank's prime rate plus 125 basis points (6% at September 26, 2004). The line of credit is collateralized by a blanket lien on all of our domestic assets including intellectual property. The line of credit requires us to satisfy certain quarterly financial covenants, including maintaining a minimum balance of unrestricted cash and cash equivalents and a minimum balance of investment accounts, and not exceeding a maximum net loss limit. At September 26, 2004, we were in compliance with the covenants and there were no borrowings under this credit line. We had losses from operations in each of fiscal years 2001, 2002 and 2003. However, as a result of our restructurings and divestitures, we reduced our cost structure and our rate of losses decreased over the course of that period. During the fourth quarter of 2003 and during the first three quarters of 2004, we have been operationally profitable. With the recent improvements in our operating results and the additional cash provided by the stock offering in the first quarter of 2004, we believe we have adequate liquidity and capital resources for our operations for the next twelve months. On June 24, 2002, we entered into a settlement agreement and a cross license agreement with DNS under which DNS agreed to make payments to us totaling between a minimum of $75 million and a maximum of $105 million, relating to past damages, partial reimbursement of attorney's fee and costs, and license fees. The license fee obligations of DNS would cease if all four patents that had been the subject of the lawsuit were to be held invalid by a court. As of September 26, 2004, DNS had made payments aggregating $57.4 million under the terms of the settlement and license agreements. Of the $57.4 million paid by DNS as of September 26, 2004, $4.6 million was withheld to pay Japanese withholding tax, and the net amount we received was $52.8 million. In future periods, we are scheduled to receive minimum royalty payments as follows (in millions): Future DNS Minimum Payments Fiscal Period to be Received ------------- -------------- April 2005 $ 6.0 April 2006 6.0 April 2007 6.0 ------- $ 18.0 ======= 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Cash Flows The net cash used in operating activities during the nine months ended September 26, 2004 totaled $33.0 million, and was primarily attributable to an increase in accounts receivable, net, of $28.5 million, an increase in inventories of $24.7 million, a decrease in accrued liabilities of $7.1 million and a decrease in deferred revenue of $6.5 million. The cash used in operating activities was offset by net income of $20.9 million, a decrease in advanced billings of $6.3 million, an increase in accounts payable of $3.1 million, a decrease in inventories - delivered systems of $1.6 million and non-cash depreciation and amortization of $4.9 million. The increase in accounts receivable, net, was due to the high volume of shipments toward the end of the quarter, while days sales outstanding declined slightly as compared to days sales outstanding at December 31, 2003. The inventory increased proportionately to build plan requirements, while inventory turns declined slightly during the nine-month period ended September 26, 2004. The net cash used in operating activities during the nine months ended September 28, 2003 totaled $9.3 million, and was primarily attributable to a net loss of $29.4 million, a decrease in deferred revenue of $32.1 million, a decrease in accrued liabilities of $6.0 million, and a decrease in accounts payable of $6.0 million. The cash used in operating activities was offset by a decrease in inventories and inventories - delivered systems of $21.9 million, a decrease in accounts receivable and advanced billings of $23.7 million, the loss on disposition of Wet Business of $10.3 million, the non-cash depreciation and amortization of intangibles of $6.6 million and a decrease in prepaid expenses and other current assets of $1.5 million. Net cash used in investing activities was $10.9 million during the nine months ended September 26, 2004, as compared to $1.9 million used in investing activities during the same period last year. The net cash used in investing activities during the nine months ended September 26, 2004 was attributable to purchases of property and equipment. The net cash used in investing activities during the nine months ended September 28, 2003 was attributable to the purchase of property and equipment of $3.9 million, offset by proceeds from the disposition of the Wet Business of $2.0 million. Net cash provided by financing activities was $47.5 million during the nine months ended September 26, 2004, as compared to $2.1 million during the same period last year. The net cash provided by financing activities during the nine months ended September 26, 2004 was primarily attributable to the sale of approximately 4.3 million shares of the company's newly issued common stock in an underwritten public offering at $11.50 per share with proceeds, net of expenses through the third quarter of 2004, of $46.4 million. The net cash provided by financing activities during the nine months ended September 28, 2003 was primarily attributable to net borrowing against our Japanese line of credit in the amount of net $1.1 million, restricted cash of $0.6 million, and proceeds from the issuance of common stock of $0.4 million. Based on current projections, we believe that our current cash and investment positions together with cash provided by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Our operating plans are based on and require us to improve our operating profits, control expenses, manage inventories, and collect accounts receivable balances. As a result of the cyclical nature of the semiconductor industry, we are exposed to a number of challenges and risks, including delays in payments of accounts receivable by customers, and postponements or cancellations of orders. Postponed or cancelled orders can cause excess inventory and underutilized manufacturing capacity. If we are not able to sustain profitability over the upcoming quarters, the operating losses could adversely affect cash and working capital balances, and we may be required to seek additional sources of financing through public or private financing, or other sources, to fund operations. We may not be able to obtain adequate or favorable financing when needed. Failure to raise capital when needed could harm our business. When additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders is reduced, and these equity securities may have rights, preferences or privileges senior to our common stock. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants on the Company's operations and financial condition. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Factors That May Affect Future Results And Market Price Of Stock In this report and from time to time, we may make forward looking statements regarding, among other matters, our anticipated sales and gross margins in future periods, our future strategy, product development plans, productivity gains of our products, financial performance and growth. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements address matters which are subject to a number of risks and uncertainties which could cause actual results to differ materially, including those set forth in our Annual Report on Form 10-K, all of which are incorporated here by reference, in addition to the following: The semiconductor equipment industry is highly cyclical, periodically has severe and prolonged downturns, and causes our operating results to fluctuate significantly. We are exposed to the risks associated with industry overcapacity, including reduced capital expenditures, decreased demand for our products, increased price competition and delays by our customers in paying for our products. The semiconductor industry is highly cyclical and has historically experienced periodic downturns, whether the result of general economic changes or capacity growth temporarily exceeding growth in demand for semiconductor devices. Our business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities. Periods of overcapacity and reductions in capital expenditures by our customers cause decreases in demand for our products. If existing fabrication facilities are not expanded or new facilities are not built, demand for our systems may not develop or increase, and we may be unable to generate significant new orders for our systems. If we are unable to develop new orders for our systems, we will not achieve anticipated net sales levels. During periods of declining demand for semiconductor manufacturing equipment, our customers typically reduce purchases, delay delivery of ordered products and/or cancel orders, resulting in reduced revenues and backlog, delays in revenue recognition, and excess inventory. Increased price competition may result, causing pressure on gross margin and net income. The onset of another market downturn is difficult to predict and may occur suddenly. During the latest downturn, we were unable to reduce our expenses quickly enough to avoid incurring losses. For the years ended December 31, 2001 and 2002 and 2003, our net loss was $336.7 million, $94.3 million and $28.4 million, respectively, compared to net income of $1.5 million for the year ended December 31, 2000. In the event of a future downturn, if we are unable to effectively align our cost structure with prevailing market conditions, we could again experience losses, and may be required to undertake additional cost-cutting measures, and be unable to continue to invest in marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position in our remaining core businesses. Our failure to make these investments could seriously harm our long-term business prospects. We depend on large purchases from a few customers, and any cancellation, reduction or delay of purchases by, or failure to collect receivables from, these customers could harm our business. Currently, we derive most of our revenues from the sale of a relatively small number of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. The list prices on our systems range from $500,000 to over $2.2 million. Consequently, any order cancellations, delays in scheduled shipments, delays in customer acceptances or delays in collection of accounts receivable could materially adversely affect our operating results and cause such results to fall below our expectations and the expectations of market analysts or investors. Our list of major customers changes substantially from year to year, and we cannot predict whether a major customer in one year will make significant purchases from us in future years. Additionally, our customers' capital budget considerations and our lengthy sales cycle make the timing of customer orders uneven and difficult to predict. Accordingly, it is difficult for us to accurately forecast our revenues and operating results from year to year. If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted. Our backlog orders are subject to cancellation or delay. Although we maintain a backlog of customer orders expected to be filled within 12 months, customers may request cancellations or delivery delays. As a result, our backlog may not be a reliable indication of our future revenues. If shipments of orders in backlog are cancelled or delayed, our revenues could fall below our expectations and the expectations of market analysts and investors. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) Delays or technical and manufacturing difficulties incurred in the introduction of new products could be costly and adversely affect our customer relationships. Our success depends in part on the continual introduction of new and improved systems and processes. Our products are complex, and we may experience delays and technical or manufacturing difficulties in the prototype introduction of new systems and enhancements, or in volume production of new systems or enhancements. Our inability to overcome such difficulties, or to meet the technical specifications of any new systems or enhancements, or to manufacture and ship these systems or enhancements in volume and in a timely manner, would materially adversely affect our business and results of operations, as well as our customer relationships. We may from time to time incur unanticipated costs to ensure the functionality and reliability of our products early in their life cycles, which costs can be substantial. If we encounter reliability or quality problems with our new products or enhancements, we could face a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable, and additional service and warranty expenses, all of which could materially adversely affect our business and results of operations. We may not achieve anticipated revenue growth if we are not selected as "vendor of choice" for new or expanded fabrication facilities or if our systems and products do not achieve broader market acceptance. Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility, and proven financial performance. Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this "vendor of choice" for the specific production line application. In addition, the semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by substantial new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are unable to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be adversely affected. We must continually anticipate technology trends, improve our existing products and develop new products in order to be competitive, and the development of new or enhanced products involves significant risk and cost. The markets in which we and our customers compete are characterized by rapidly changing technology, evolving industry standards, and continuous improvements in products and services. Consequently, our success depends upon our ability to anticipate future customer needs, to develop new systems and processes that meet customer requirements and industry standards and that compete effectively on the basis of price and performance, and to continually improve our existing systems and processes. The development and manufacture of new products involves significant risk, since the products are very complex and the development cycle is long and expensive. The success of any new systems we develop and introduce is dependent on a number of factors, including our ability to correctly predict customer requirements for new processes, assess and select alternative technologies for research and development, and timely complete new system designs that are acceptable to the market. We may make substantial investments in new technologies before we can know whether they are technically or commercially feasible or advantageous, and without any assurance that revenue from future products or product enhancements will be sufficient to recover the associated development costs. Not all development activities result in commercially viable products. We may be adversely affected by manufacturing inefficiencies and the challenge of producing innovative systems in volume which meet customer requirements. We may not be able to improve our existing systems or develop new technologies or systems in a timely manner. We may exceed the budgeted cost of reaching our research, development and engineering objectives, and planned product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on our business and results of operations. 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) We are engaged in the implementation of a new enterprise resource planning system, which may be more difficult or costly than anticipated, and could cause disruption to the management of our business and the preparation of our financial statements. We are currently engaged in the implementation of a new enterprise resource planning, or ERP, system, which is expected to become integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management, and prepare our financial statements. However, the new ERP system could be more costly, difficult and time consuming to purchase and implement than we currently anticipate. In addition, implementation of the new ERP system requires us to change our internal business practices, transfer records to a new computer system and train our employees in the correct use of and input of data into the system, which could result in disruption of our procedures and controls and difficulties achieving accuracy in the conversion of data. If we fail to manage these changes effectively, our operations could be disrupted, which could result in the diversion of management's attention and resources, cause us to improperly state or delay reporting of our financial results, materially and adversely affect our operating results, and impact our ability to manage our business. In addition, to manage our business effectively, we may need to implement additional and improved management information systems, further develop our operating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintain closer coordination among our executive, engineering, accounting, marketing, sales and operations organizations. We may incur additional unexpected costs and our systems, procedures or controls may not be adequate to support our operations. Because of our recent implementation of a new ERP system and the limited time remaining in 2004 to complete the procedures required to comply with new requirements under Section 404 of the Sarbanes-Oxley Act for evaluation and attestation of internal control over financial reporting, we may not be able to comply with those requirements in the permitted time. Rules adopted by the Securities and Exchange Commission to implement Section 404 of the Sarbanes-Oxley Act of 2002 (the "Rules") will require us to assess the design and operating effectiveness of our internal control over financial reporting and to include in our Annual Report on Form 10-K for the year ending December 31, 2004 (i) a report from our management, (ii) a statement that our registered independent auditors have issued an attestation report on our management assessment of internal control over financial reporting and (iii) a copy of the registered independent auditors' attestation report. In order to achieve compliance with the new Rules within the required timeframe, we have been conducting a process to document and evaluate our internal control systems and procedures since early in 2004. In parallel with that process, we planned to implement a new enterprise resource planning, or ERP, system. In the latest phase of implementation, we switched our Fremont headquarters over to the new ERP system in October of 2004. Following that implementation, all the affected internal control processes and activities need to be re-documented, evaluated and tested, together with any remediation steps that need to be taken if control deficiencies are noted. Because of the limited time remaining in 2004 to complete the required procedures, there is a significant possibility that our management or our independent auditors may not be able to complete their assessment in the permitted time. If our management is either unable to complete its assessment in a timely manner or to assess our internal control over financial reporting as effective, or if our independent registered public accountants issue an adverse opinion, or disclaim an opinion, relating to the attestation requirements of Section 404, we may be unable to comply with the Rules, and investor confidence in the reliability of our internal controls over financial reporting may be negatively effected. Our results of operations may suffer if we do not effectively manage our inventory. We need to manage our inventory of component parts and finished goods effectively to meet customer delivery demands at an acceptable risk and cost. Customers are increasingly requiring very short lead times for delivery, which may require us to purchase and carry additional inventory. For both the inventories that support manufacture of our products and our spare parts inventories, if anticipated customer demand does not materialize in a timely manner, we will incur increased carrying costs and some inventory could become unsaleable or obsolete, resulting in write-offs which would adversely affect the results of our operations. Warranty claims in excess of our projections could seriously harm our business. We offer a warranty on our products. The cost associated with our warranty is significant, and in the event our projections and estimates of this cost are inaccurate our financial performance could be seriously harmed. In addition, if we experienced product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, customers may decline to place new or additional orders with us, and our business would suffer. 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) We are increasingly outsourcing manufacturing and logistics activities to third party service providers, which decreases our control over the performance of these functions. We have already outsourced certain manufacturing and spare parts logistics functions to third party service providers, and may outsource more of those functions in the future. While we expect to achieve operational flexibility and cost savings as a result of this outsourcing, outsourcing has a number of risks and reduces our control over the performance of the outsourced functions. Significant performance problems by these third party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems which could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations. If for any reason one or more of these third party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our products or spare parts to our customers could be severely impaired. We would quickly need to identify and qualify substitute service providers or increase our internal capacity, which could be expensive, time consuming and difficult and could result in unforeseen operations problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms. If customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers on commercially reasonable terms, if at all. Our requirements are expected to represent a small portion of the total capacities of our third party service providers, and they may preferentially allocate capacity to other customers, even during periods of high demand for our products. In addition, such manufacturers could suffer financial difficulties or disruptions in their operations due to causes beyond our control. We may not be able to continue to successfully compete in the highly competitive semiconductor equipment industry. The semiconductor equipment industry is both highly competitive and subject to rapid technological change. Significant competitive factors include the following: o system performance; o cost of ownership; o size of installed base; o breadth of product line; o delivery availability; and o customer support. Competitive pressure has been increasing in several areas. In particular, there is increased price competition, and customers are delaying purchase commitments, which are then placed with demands for rapid delivery dates and increased product support. Our major competitors are larger than we are, have greater capital resources, and may have a competitive advantage over us by virtue of having: o broader product lines; o longer operating history; o greater experience with high volume manufacturing; o substantially larger customer bases; o the ability to reduce price through product bundling; o substantially greater customer support resources; and o substantially greater financial, technical, and marketing resources. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and on-site customer support of their product lines. We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively. Our lengthy sales cycle increases our costs and reduces the predictability of our revenue. Sales of our systems depend upon the decision of a prospective customer to increase or replace manufacturing capacity, typically involving a significant capital commitment. Accordingly, the decision to purchase our systems requires time consuming internal procedures associated with the evaluation, testing, implementation, and introduction of new technologies into our customers' manufacturing facilities. Even after the customer determines that our systems meet their qualification criteria, we experience delays finalizing system sales while the customer obtains approval for the purchase and constructs new facilities or expands its existing facilities. Consequently, the time between our first contact with a customer regarding a specific potential purchase and the customer's placing its first order may last from nine to twelve months or longer. We may incur significant sales and marketing expenses during this evaluation period. In addition, the length of this period makes it difficult to accurately forecast future sales. If sales forecasted from a specific customer are not realized, we may experience an unplanned shortfall in revenues and our quarterly and annual revenue and operating results may fluctuate significantly from period to period. We are highly dependent on international sales, and face significant economic and regulatory risks because a majority of our net sales are from outside the United States. Our international sales accounted for 87% of our net sales in 2003, 74% in 2002 and 78% in 2001 and we anticipate international sales will continue to account for a significant portion of our future net sales. Asia has been a particularly important region for our business, and we anticipate that it will continue to be important as we expand our sales and marketing efforts by opening an office in China. Our sales to customers located in Taiwan, Japan, other Asian countries and recently China accounted for 71% of our net sales in 2003, 47% in 2002 and 47% in 2001. Because of our continuing dependence upon international sales, we are subject to a number of risks associated with international business activities, including: o unexpected changes in law or regulations resulting in more burdensome governmental controls, tariffs, restrictions, embargoes, or export license requirements; o exchange rate volatility; o the need to comply with a wide variety of foreign and U.S. export laws; o political and economic instability, particularly in Asia; o differing labor regulations; o reduced protection for intellectual property; o difficulties in accounts receivable collections; o difficulties in managing distributors or representatives; o difficulties in staffing and managing foreign subsidiary operations; and o changes in tariffs or taxes. In the U.S. and Asia (excluding Japan), our sales to date have been denominated primarily in U.S. dollars, while our sales in Japan are usually denominated in Japanese Yen. Our sales to date in Europe have been denominated in various currencies, currently primarily U.S. dollars and the Euro. Our sales in foreign currencies are subject to risks of currency fluctuation. For U.S. dollar sales in foreign countries, our products become less price-competitive where the local currency is declining in value compared to the dollar. This could cause us to lose sales or force us to lower our prices, which would reduce our gross margins. In addition, the expenses of our German manufacturing operation are primarily incurred in euros. If the euro were to appreciate in relation to the U.S. dollar, our operating expenses would increase. 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) We depend upon a limited number of suppliers for some components and subassemblies, and supply shortages or the loss of these suppliers could result in increased cost or delays in manufacture and sale of our products. We rely to a substantial extent on outside vendors to provide many of the components and subassemblies of our systems. We obtain some of these components and subassemblies from a sole source or a limited group of suppliers. Because of our anticipated reliance on outside vendors generally, and on a sole or a limited group of suppliers in particular, we may be unable to obtain an adequate supply of required components. Although we currently experience minimal delays in receiving goods from our suppliers, when demand for semiconductor equipment is strong, our suppliers may have difficulty providing components on a timely basis. In addition, during periods of shortages of components, we may have reduced control over pricing and timely delivery of components. We often quote prices to our customers and accept customer orders for our products prior to purchasing components and subassemblies from our suppliers. If our suppliers increase the cost of components or subassemblies, we may not have alternative sources of supply and may no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components. The manufacture of some of these components and subassemblies is an extremely complex process and requires long lead times. If we are unable to obtain adequate and timely deliveries of our required components or subassemblies, we may have to seek alternative sources of supply or manufacture such components internally. This could delay our ability to manufacture or timely ship our systems, causing us to lose sales, incur additional costs, delay new product introductions, and harm our reputation. We manufacture many of our products at two primary manufacturing facilities and are thus subject to risk of disruption. Although we outsource the manufacturing for certain of our products to third parties, we continue to produce our latest generation products at our two principal manufacturing plants in Fremont, California and Dornstadt, Germany. We have limited ability to interchangeably produce our products at either facility, and in the event of a disruption of operations at one facility, our other facility would not be able to make up the capacity loss. Our operations are subject to disruption for a variety of reasons, including, but not limited to natural disasters, work stoppages, operational facility constraints and terrorism. Such disruption thus could cause delays in shipments of products to our customers, result in cancellation of orders or loss of customers and seriously harm our business. Because of competition for qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products. Our growth will depend on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales, and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Historically, competition for such personnel has been intense in all of our locations, but particularly in the San Francisco Bay Area where our headquarters is located. If we are unable to retain existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to our customers, or we could fail to meet our delivery commitments or experience deterioration in service levels or decreased customer satisfaction. If we are unable to protect our intellectual property, we may lose a valuable asset and experience reduced market share. Efforts to protect our intellectual property may require additional costly litigation. We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements, and other intellectual property protection methods to protect our proprietary technology. Despite our efforts to protect our intellectual property, our competitors may be able to legitimately ascertain the non-patented proprietary technology embedded in our systems. If this occurs, we may not be able to prevent the use of such technology. Our means of protecting our proprietary rights may not be adequate and our patents may not be sufficiently broad to protect our technology. Any patents owned by us could be challenged, invalidated, or circumvented and any rights granted under any patent may not provide adequate protection to us. Furthermore, we may not have sufficient resources to protect our rights. Our competitors may independently develop similar technology, or design around patents that may be issued to us. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our 33 products in such foreign countries. As a result of these threats to our proprietary technology, we may have to resort to costly litigation to enforce our intellectual property rights. We might face patent infringement or other intellectual property infringement claims that may be costly to resolve and could divert management attention. We may from time to time be subject to claims of infringement of other parties' patents or other proprietary rights. In addition, we on occasion receive notification from customers who believe that we owe them indemnification or other obligations related to infringement claims made against the customers by third parties. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets, even if the claims are without merit, could be very expensive to defend and could divert the attention of our management. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek costly licenses from third parties, and prevent us from manufacturing and selling our products. Royalty or license agreements, if required, may not be available on terms acceptable to us or at all. Any of these situations could have a material adverse effect on our business and operating results in one or more countries. Our failure to comply with environmental regulations could result in substantial liability. We are subject to a variety of federal, state, local, and foreign laws, rules, and regulations relating to environmental protection. These laws, rules, and regulations govern the use, storage, discharge, and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, especially in our Fremont, California and Dornstadt, Germany manufacturing facilities, we could be subject to substantial liability for clean up efforts, personal injury, and fines or suspension or cessation of our operations. We may be subject to liability if our acquired companies have past violations. Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. Future sales of shares by STEAG could adversely affect the market price of our common stock. There are approximately 51.4 million shares of our common stock outstanding as of October 27, 2004, of which approximately 9.1 million (or 17.8%) are beneficially owned by STEAG Electronic Systems AG, or STEAG. STEAG has indicated that it plans to reduce its ownership in our common stock over time. If STEAG were to sell a large number of shares, the market price of our common stock may decline. Moreover, the perception in the public markets that such sales by STEAG might occur could also adversely affect the market price of our common stock. We incurred net operating losses for the years 2001 through 2003. We may not achieve or maintain profitability on an annual basis. We incurred net losses of approximately $336.7 million for the year ended December 31, 2001, $94.3 million for the year ended December 31, 2002 and $28.4 million for the year ended December 31, 2003. Although we have been profitable for the first nine months of 2004, we expect to continue to incur significant research and development and selling, general and administrative expenses. We may not achieve profitability in 2004 or future years. We will need to continue to generate significant net sales to achieve and maintain profitability on an annual basis, and we may not be able to do so. Our quarterly operating results fluctuate significantly and are difficult to predict, and may fall short of anticipated levels, which could cause our stock price to decline. Our quarterly revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results. A substantial percentage of our operating expenses are fixed in the short term and we may be unable to adjust spending to compensate for an unexpected shortfall in revenues. As a result, any delay in generating or recognizing revenues could cause our operating results to be below the expectations of market analysts or investors, which could cause the price of our common stock to decline. The price of our common stock has fluctuated in the past and may continue to fluctuate significantly in the future, which may lead to losses by investors or to securities litigation. The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future. For example, as of November 3, 2004, the 52-week price range for our common stock was $6.96 to $16.59 per share. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (Continued) In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. Any future business acquisitions may disrupt our business, dilute stockholder value, or distract management attention. As part of our ongoing business strategy, we may consider acquisitions of, or significant investments in, businesses that offer products, services, and technologies complementary to our own. Such acquisitions could materially adversely affect our operating results and/or the price of our common stock. Acquisitions also entail numerous risks, including: o difficulty of assimilating the operations, products, and personnel of the acquired businesses; o potential disruption of our ongoing business; o unanticipated costs associated with the acquisition; o inability of management to manage the financial and strategic position of acquired or developed products, services, and technologies; o inability to maintain uniform standards, controls, policies, and procedures; and o impairment of relationships with employees and customers that may occur as a result of integration of the acquired business. To the extent that shares of our stock or other rights to purchase stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result and our earnings per share may suffer. Any future acquisitions may not generate additional revenue or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses. Compliance with new regulatory and accounting requirements will be challenging and is likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations. In order to comply with the Sarbanes-Oxley Act of 2002, changes to listing standards recently adopted by NASDAQ, and attestation and accounting changes required by the Securities and Exchange Commission, we must document, test and improve our internal controls. This has necessitated that we utilize outside accounting and advisory services, which will cause our general and administrative expenses to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting principles and adversely affect our operating results. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our exposure to market risk for changes in interest rates relates to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. The portfolio includes money market funds and other securities classified as cash equivalents, which trade in the secondary market. All securities in our portfolio are highly liquid. We have no cash flow exposure due to rate changes for cash equivalents, as all of these investments are at market interest rates. The table below presents the fair value of principal amounts and related weighted average interest rates for our investment portfolio as of September 26, 2004 (in thousands): Fair Value at September 26, 2004 ------------- Assets: Cash and cash equivalents .......................... $ 80,489 Average interest rate ........................... 1.46% Restricted cash .................................... $ 510 Average interest rate ........................... 0.49% Foreign Currency Risk We are a United States, or U.S., dollar functional currency entity with non-U.S. subsidiaries. We have an active foreign currency hedging program to mitigate the currency exchange risks associated from various third party transactions. This hedging program is managed and administered at our corporate headquarters by our treasury staff and outside consulting is hired as needed. Hedging of the European EURO and the Japanese Yen transactions have been made by placing forward exchange contracts in the month of the initial exposure. The hedge positions are marked-to-market at the end of each month until the actual settlement of the underlying transaction is consummated and the forward contract is closed. Unrealized gains and losses are recorded as an offset to other comprehensive income. Realized gains and losses are booked to the condensed consolidated statement of operations. We do not engage in any forward contracts for speculative trading purposes. We enter into spot foreign exchange trades to meet third party payment requirements and for operating funding requirements for non-U.S. subsidiaries. The following table provides information as of September 26, 2004 about us and our subsidiaries' derivative financial instruments, which are comprised of foreign currency forward exchange contracts. The information is provided in U.S. dollar and EURO equivalent amounts, as listed below. The table presents the notional amounts (at the contract exchange rates), the weighted average contractual foreign currency exchange rates, and the estimated fair value of those contracts (in thousands, except for average contract rate):
Average Estimated Notional Contract Fair Amount Rate Value -------- -------- --------- Foreign currency forward sell exchange contracts: Mattson Technology, Inc. (U.S. dollar equivalent amount) Japanese Yen............................................. $ 558 110.7 $ 556 European Euro............................................ $ 2,071 1.22 $ 1,105 Foreign currency forward buy exchange contracts: Mattson Technology, Inc. (U.S. dollar equivalent amount) European Euro............................................ $ 3,990 1.22 $ 4,039
The local currency is the functional currency for all foreign operations. Accordingly, all assets and liabilities of these foreign operations are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. Gains or losses from translation of foreign operations where the local currencies are the functional currency are included as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are recognized in the consolidated statements of operations as they are incurred. To help neutralize our U.S. operation's exposure to exchange rate 36 volatility, we keep EUROS in a foreign currency bank account. The balance of this bank account was approximately 0.6 million EUROS at September 26, 2004. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our "disclosure controls and procedures" (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our work to implement and improve our consolidation and enterprise resource planning systems continues as an active project. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Changes in Internal Control Over Financial Reporting During the Quarter Our management, with the participation of our chief executive officer and chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during the third quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our management concluded that there was no such change during the third quarter of 2004. Sarbanes-Oxley 404 Compliance - Changes in Internal Control in the Fourth Quarter Rules adopted by the Securities and Exchange Commission to implement Section 404 of the Sarbanes-Oxley Act of 2002 (the "Rules") require us to assess the design and operating effectiveness of our internal controls over financial reporting and to include in our Annual Report on Form 10-K for the year ending December 31, 2004 (i) a report from our management as to the design and operating effectiveness of those controls, (ii) a statement that our registered independent auditors have issued an attestation report on our management's assessment of internal control over financial reporting and (iii) a copy of the registered independent auditors' attestation report. In order to achieve compliance with the new Rules within the required timeframe, we have been conducting a process to document and evaluate our internal control systems and procedures since early in 2004. In support of this effort, we adopted a detailed work plan, dedicated internal resources and engaged outside consultants to: (i) assess and document the adequacy of internal control over financial reporting; (ii) take steps to improve control processes where required; (iii) validate through testing that controls are functioning as documented; and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. Early in 2004, in parallel with our plans to document and evaluate our internal control systems as required by the Rules, we also determined that we should implement a new enterprise resource planning, or ERP, system as part of ongoing efforts to improve our management information and financial reporting systems, procedures and controls. The implementation has been done in phases. In the latest phase, we switched our Fremont headquarters over to the new ERP system in October of 2004. The new ERP system affects a significant number of our internal controls and procedures. Following the latest implementation phase, all of our affected processes and control activities need to be re-documented, evaluated and tested by management. Then our registered independent auditors need to review the new documentation, and perform evaluations and tests of the affected activities. If control deficiencies are noted, we will need to implement appropriate remediation activities. Any remediated controls would need to be put into operation for a period of time, and then re-tested in order to determine whether they operated effectively at year end. Because of the limited time remaining in 2004 to complete these activities, there is a significant possibility that our management, and therefore our independent auditors, may not be able to complete their assessment in the permitted time. If that happens, our management may not be able to issue the required report on the effectiveness of our internal controls over financial reporting, or our auditors may issue an adverse opinion, or disclaim an opinion, relating to the attestation requirements of Section 404. Our registered independent auditors have delivered a letter to the Chairman of our Audit Committee emphasizing to us their concern over this situation. 37 The requirements of the Rules are new, and we cannot be certain what consequences there may be if, despite our efforts, we or our auditors are unable to timely complete the assessment of our internal controls or comply with the Rules. 38 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain of this. Moreover, the defense of claims or actions against us, even if such claims or actions are not meritorious, could result in the expenditure of significant financial and managerial resources. There have been no developments in the pending cases during the third quarter of 2004 that are material to Mattson. Our involvement in any patent dispute, or other intellectual property dispute or action to protect trade secrets and know-how, could result in a material adverse effect on our business. Adverse determinations in current litigation or any other litigation in which we may become involved could subject us to significant liabilities to third parties, require us to grant licenses to or seek licenses from third parties, and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business. ITEM 6. EXHIBITS
Exhibit Number Description -------- --------------------------------------------------------------------------------------- 3.1(1) Amended and Restated Certificate of Incorporation of the Company. 3.2(2) Third Amended and Restated Bylaws of the Company. 31.1 Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a). 31.2 Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
- ---------- (1) Incorporated by reference from Mattson Technology, Inc. Current Report on Form 8-K/A filed on January 30, 2001. (2) Incorporated by reference from Mattson Technology, Inc. Quarterly Report on Form 10-Q filed on August 14, 2002. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTSON TECHNOLOGY, INC. ------------------------ (Registrant) Dated: November 5, 2004 By: /s/ DAVID DUTTON ------------------------------------- David Dutton President and Chief Executive Officer (Principal Executive Officer) Dated: November 5, 2004 By: /s/ LUDGER VIEFHUES -------------------------------------- Ludger Viefhues Executive Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 40 EX-31.1 2 e19639ex311.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION MATTSON TECHNOLOGY, INC. SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION I, David Dutton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mattson Technology, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 5, 2004 By: /s/ DAVID DUTTON ------------------------------------- David Dutton President and Chief Executive Officer EX-31.2 3 e19639ex312.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION MATTSON TECHNOLOGY, INC. SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION I, Ludger Viefhues, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mattson Technology, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 5, 2004 By: /s/ LUDGER VIEFHUES -------------------------------------------------------------- Ludger Viefhues Executive Vice President - Finance and Chief Financial Officer EX-32.1 4 e19639ex321.txt CERTIFICATION EXHIBIT 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the quarter ended September 26, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David Dutton, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2004 By: /s/ DAVID DUTTON ----------------------- David Dutton Chief Executive Officer EX-32.2 5 e19639ex322.txt CERTIFICATION EXHIBIT 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the quarter ended September 26, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ludger Viefhues, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2004 By: /s/ LUDGER VIEFHUES ----------------------- Ludger Viefhues Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----