
	COMMITMENTS AND CONTINGENCIES

Warranty

The warranty offered by us on our system sales is generally twelve months, except where previous customer agreements state otherwise, and excludes certain consumable maintenance items. A provision for the estimated cost of warranty, based on historical costs, is recorded as cost of sales when the revenue is recognized. Our warranty obligations require us to repair or replace defective products or parts during the warranty period at no cost to the customer. The actual system performance and/or field warranty expense profiles may differ from historical experience, and in those cases, we adjust our warranty accruals accordingly.

The following table summarizes changes in our product warranty accrual for the years ended December 31, 2013, 2012 and 2011 (in thousands):



	Years Ended December 31,
	2013			2012			2011
Beginning balance	$	1,691		$	3,419		$	2,539
Warranties issued in the period	2,031			2,242			3,577
Costs to service warranties	(1,981		)	(4,286		)	(3,263		)
Warranty accrual adjustments	45			316			566
Ending balance	$	1,786		$	1,691		$	3,419

Operating Leases

We hold various operating leases related to our worldwide facilities and equipment. Our minimum annual lease commitments with respect to our operating leases were as follows as of December 31, 2013 (in thousands):



Year Ending December 31,	Minimum Future Lease Payments		Sublease Rental Income			Minimum Future Lease Payments
2014	$	3,920	$	(118	)	$	3,802
2015	3,401		(85		)	3,316
2016	1,936		—			1,936
2017	2,292		—			2,292
	$	11,549	$	(203	)	$	11,346

Rent expense was $3.9 million, $4.3 million and $5.0 million in 2013, 2012 and 2011, respectively. We recorded sublease income related to our Exton, Pennsylvania facility of $0.4 million, $0.4 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.

In 2005, we entered into a lease agreement for the building which serves as our corporate headquarters in Fremont, California. The lease is for a period of ten years, which commenced on May 31, 2007, and has an initial annual base rent cost of approximately $1.4 million, with annual increases of approximately 3.5 percent. We also are responsible for an additional minimum lease payment at the end of the lease term of approximately $1.5 million, subject to adjustment, under a restoration cost obligation provision, which is being recognized on a straight-line basis over the lease term. To secure this obligation, we provided the landlord a standby letter of credit of $1.5 million.

We continue to lease one building previously used to house the administrative functions related to the wet surface preparation products in Exton, Pennsylvania. The original lease for the administrative building was scheduled to expire on March 31, 2019, with a current rental cost of approximately $0.9 million annually. In December 2011, we reached a settlement with the landlord, which includes exiting from the lease arrangement in July 2015. The settlement also reduces our total future lease obligations from $9.6 million to $3.8 million, which includes $1.0 million in lease termination and other fees. Of the $3.8 million in lease commitments, we paid $1.7 million in 2012, $0.9 million in 2013 and will pay the remaining balance on a declining basis through July 2015. In October 2013, we entered into another lease amendment agreement with the landlord, which accelerated the termination of certain floors under the lease arrangement and further reduced our future lease obligations for this facility.

In determining facilities lease loss liability, various assumptions were made, including the time period over which the buildings will be vacant, expected sublease terms and expected sublease rates. At December 31, 2013 and 2012, we had an accrued liability balance of $0.7 million and $1.0 million, respectively, related to this facility. Adjustments to this accrual may be required in future periods if events and circumstances change.

Guarantees

In the ordinary course of business, our bank provides standby letters of credit or other guarantee instruments on our behalf to certain parties as required. The standby letters of credit are secured by certificates of deposit, which are classified as restricted cash in the accompanying Consolidated Balance Sheets. We have never recorded any liability in connection with these guarantee arrangements beyond what is required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under such guarantee arrangements. As of December 31, 2013, the maximum potential amount that we could be required to pay was $2.1 million, the total amount of outstanding standby letters of credit, which were secured by $2.1 million in money market fund accounts and recorded as restricted cash.

In connection with our acquisition of Vortek Industries, Ltd. ("Vortek") in 2004, we became party to an agreement between Vortek and the Canadian Minister of Industries (the "Minister") relating to an investment in Vortek by Technology Partnerships Canada. Under the agreement, as amended, we, or Vortek (renamed Mattson Technology, Canada, Inc. ("MTC")) agreed to various terms, including (i) payment by us of a royalty to the Minister of 1.4 percent of net revenues from certain Flash RTP products, up to a total of C$14.3 million (approximately $13.4 million based on the applicable exchange rate as of December 31, 2013), (ii) MTC through October 27, 2009 maintaining a specified average workforce of employees in Canada, making certain investments and complying with certain manufacturing, and (iii) certain other covenants concerning protection of intellectual property rights. Under the provisions of this agreement, if MTC is dissolved, files for bankruptcy or we, or MTC, do not materially satisfy the obligations pursuant to any material terms or conditions, the Minister could demand payment of liquidated damages in the amount of C$14.3 million less any royalties paid to the Minister. As of October 27, 2009, we were no longer subject to covenant (ii), as discussed above but are still subject to the remaining terms and conditions until the earlier of payment of royalty of C$14.3 million (approximately $13.4 million based on the applicable exchange rate as of December 31, 2013) or through December 31, 2020. The transition of our research, development and prototype production activities for the Millios system from our Canadian operations to Germany did not result in the dissolution of MTC.

We are a party to a variety of agreements, pursuant to which we may be obligated to indemnify other parties with respect to certain matters. Typically, these obligations arise in the context of contracts under which we may agree to hold other parties harmless against losses arising from a breach of representations or with respect to certain intellectual property, operations or tax-related matters. Our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have defenses to asserted claims and/or recourse against third parties for payments made. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these agreements have not had a material effect on our financial position, results of operations or cash flows. We believe if we were to incur a loss in any of these matters, such loss would not have a material effect on our financial position, results of operations or cash flows.

We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and certain senior officers. We have not recorded a liability associated with these indemnification agreements, as we historically have not incurred any material costs associated with such indemnification agreements. Costs associated with such indemnification agreements may be mitigated, in whole or only in part, by insurance coverage that we maintain.

Government Agencies

As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations ("ITAR") administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations ("EAR") administered by the Bureau of Industry and Security ("BIS"), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC"). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called "dual use" items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals.

As previously reported, in 2008 we self-disclosed to BIS certain inadvertent EAR violations. In April 2012, we entered into a settlement agreement with BIS that resolved in full all matters contained in our voluntary self-disclosure. Under the settlement, we agreed to a civil penalty of $0.9 million of which we paid $0.3 million in May 2012. Payment of the remaining $0.6 million was suspended for a one-year period ended April 30, 2013 and was waived given there were no violations during that period. We are not aware of any known violations during this period.

Litigation

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. The defense of claims or actions against us, even if without merit, could result in the expenditure of significant financial and managerial resources.

We record a legal liability when we believe it is both probable that a liability has been incurred, and the amount can be reasonably estimated. We monitor developments in our legal matters that could affect the estimate we have previously accrued. Significant judgment is required to determine both probability and the estimated amount.