10-K 1 mattson10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21970 ---------------- MATTSON TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0208119 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 2800 Bayview Drive Fremont, California 94538 (Address and zip code of principal executive offices) Registrant's telephone number, including area code: 510-657-5900 ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value per Share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 15, 2002 was $134,521,994, based on the closing price for the registrant's common stock reported by the NASDAQ National Market System. Shares of voting stock held by each director and executive officer and by STEAG Electronics Systems AG have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares outstanding of registrant's Common Stock as of March 15, 2002: 37,118,222. Documents incorporated by reference: None FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements made pursuant to the provisions of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Forward looking statements may be identified by use of terms such as "anticipates", "expects", "intends", "plans", "seeks", "estimates", "believes" and similar expressions, although some forward-looking statements are expressed differently. Statements concerning our financial position, business strategy and plans or objectives for future operations are forward looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict and may cause actual results to differ materially from management's current expectations. Such risks and uncertainties include those set forth herein under "Risk Factors That May Affect Future Results and Market Price of Stock" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The forward looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission ("SEC"). PART I ITEM 1. BUSINESS Mattson Technology, Inc. is a leading supplier of semiconductor wafer processing equipment used in "front-end" fabrication of integrated circuits, with an installed base of more than 2,400 tools in over 400 fabrication facilities around the world. We are among the market leaders in worldwide sales of dry strip equipment, rapid thermal processing ("RTP") equipment, wet surface preparation equipment, and plasma-enhanced chemical vapor deposition ("PECVD") equipment. Our integrated circuit manufacturing equipment utilizes innovative technology to deliver advanced processing capability and high productivity. We provide our customers with worldwide support through our international technical support organization and our comprehensive warranty program. We are a leading provider of equipment that enables our customers to transition from 200 mm to 300 mm silicon wafers and to produce integrated circuits with feature geometries below 0.18 microns. We were among the earliest entrants into the market for 300 mm tools, and we offer 300 mm compatible products for dry strip, RTP, wet surface preparation and PECVD. To date, we have sold over two hundred 300 mm compatible systems. Our patented inductively coupled plasma technology for our dry strip systems, dual-sided heating technology for our RTP systems, and drying technology for our wet products provide innovative solutions for the production of features below 0.18 micron. In December 2001, we introduced the Aspen Highlands III, which removes low-K resist and residue from dual damascene copper layers with features as small as 0.10 microns. 2 During 2001, we instituted several actions designed to meet the challenging conditions posed by the industry downturn. At the beginning of 2001, we acquired the semiconductor equipment division of STEAG Electronic Systems AG, and CFM Technologies, Inc. These acquisitions were intended to create a combined company with stronger market positions in multiple products used in front-end integrated circuit fabrication, greater importance as a vendor to key customers, greater technical capabilities and intellectual property assets, and broader worldwide presence and customer support. During 2001, we made significant organizational changes to integrate the acquisitions while focusing our product offerings, reducing our overhead and sizing our business for current market conditions. We also made significant changes to our management team and added several senior executives with considerable technical, managerial and sales experience in the semiconductor equipment industry. We are incorporated in Delaware. Our principal executive offices are located at 2800 Bayview Drive, Fremont, CA 94538, and our contact telephone number is (510) 492-6112 and our general telephone number is (510) 657-5900. Our website can be found at http://www.mattson.com. The information on our web site is not incorporated herein by reference. Industry Background Manufacturing an integrated circuit, commonly called a chip, requires a number of complex steps and processes. Most integrated circuits are built on a base of silicon, called a wafer, and consist of two main structures. The lower structure is made up of components, typically transistors or capacitors, and the upper structure consists of the circuitry that connects the components. Front-end processing is broadly divided into "front-end of line" and "back-end of line" processing. Fabrication at the "front-end of line" includes the steps needed to build transistors, up to the first layer of metalization. The subsequent steps, which create the interconnect metal layers, are called the "back-end of line." Building an integrated circuit requires the deposition of a series of film layers, which may be conductors, dielectrics (insulators) or semiconductors. The deposition of these film layers is interspersed with numerous other processing steps that create circuit patterns, remove portions of the film layers and perform other functions such as heat treatment, measurement and inspection. Each step of the manufacturing process for integrated circuits requires specialized manufacturing equipment. Although the semiconductor industry is cyclical, and currently experiencing a period of downturn and decreased demand, historically, the overall growth of the semiconductor industry and the increasing complexity of integrated circuits has led to increasing demand for advanced semiconductor capital equipment. Semiconductor Manufacturing Industry Matures In periods of economic growth, the semiconductor market has grown, fueled in large part by the growth of the personal computer markets and the emergence of markets such as wireless communication and digital consumer electronics. In past years it was sufficient for semiconductor equipment companies to be either the first on the market or have the most advanced technology to succeed, however, in order to meet the increasing demand in the last upward cycle, sheer size became increasingly important to achieve customer confidence and sales opportunities. This has contributed to recent consolidations in the semiconductor industry and in the companies that supply them capital equipment. Larger sized equipment providers can deliver customers a variety of solutions for their factory without forcing them to coordinate and deal with a large number of suppliers. Larger equipment companies can also provide a more comprehensive worldwide infrastructure to service and support the broad line of products with an increased staff, product spares and strategically located warehouses that a smaller company cannot supply, and can more effectively respond to industry downturns such as has been experienced in the current cycle. Previous growth in the semiconductor industry has also been fueled by the need to supply increasingly complex, higher performance integrated circuits, while continuing to reduce cost, a factor that remains important during the downturn. The more complex integrated circuits and the accompanying reductions in feature size require more advanced and expensive wafer fabrication equipment, which increases the average cost of advanced wafer fabrication facilities. For example, the average cost in 1984 for a 64 kilobit dynamic random access memory integrated circuit, called a DRAM, fabrication facility was approximately $60.0 million. Today the cost for a 256 megabit DRAM fabrication facility can range from $1.7 billion to $2.5 billion. As the semiconductor industry matures and pricing becomes more competitive as a result of both the maturing market and the industry downturn, it is becoming increasingly apparent that the larger semiconductor manufacturers are increasingly restricting the number of suppliers that they deal with, while making stronger demands that their suppliers provide more products with higher productivity. 3 Semiconductor manufacturers have focused on several areas to improve their productivity over the years, including: * reducing feature size of integrated circuits; * increasing manufacturing yields; * improving the utilization of wafer fabrication equipment; and * increasing the wafer size. The industry is now reaching the practical limits of some of these techniques, so that it is becoming increasingly difficult to obtain further productivity gains in this way. Reducing feature sizes. Smaller feature sizes allow more circuits to fit on one wafer. Due to this reduction in feature size, the semiconductor industry has historically been able to double the number of transistors on a given space of silicon every 18 to 24 months. These reductions have contributed significantly to reducing the manufacturing cost per chip. Continued innovation in equipment technology would be required, however, to maintain this trend in device size reduction. Higher manufacturing yields. In the last fifteen years, manufacturing yields, or the percentage of good integrated circuits per wafer, have increased substantially, while the time to reach maximum yield levels during a production lifecycle has decreased significantly. For example, the percentage of good DRAMs per wafer during initial production has increased from 20% fifteen years ago to over 80% at present. Given this high yield, the potential for further yield improvement per wafer is limited. Improved equipment utilization. The utilization of semiconductor manufacturing lines has improved in the last ten years. During periods of full capacity manufacturing lines operate continuously, with equipment run at utilization rates of greater than 90%, leaving limited room for further improvement in equipment utilization. Larger wafer sizes. By increasing the wafer size, integrated circuit manufacturers can produce more circuits per wafer, thus reducing the overall manufacturing costs per chip. Leading edge wafer fabrication lines are currently using 300 millimeter diameter wafers, up from the 200 millimeter diameter wafers used only two years ago. We believe that many more manufacturers will add 300 millimeter production capabilities within the next two to five years. Although the transition to a 300 millimeter wafer size will reduce overall manufacturing costs per chip, we do not believe that the semiconductor industry will transition as quickly to sizes larger than 300 millimeter in the future, limiting the further impact on overall manufacturing costs per chip. Equipment Productivity Has Declined While the semiconductor manufacturing industry has achieved significant productivity gains through technological advances during the last ten to fifteen years, equipment productivity has actually declined in favor of improved process control. Demands from integrated circuit manufacturers for better process quality control, reduced feature sizes and larger wafer sizes have resulted in a shift from batch processing, where multiple wafers are processed simultaneously, to single wafer processing, where one wafer is processed at a time. Although this shift has enhanced semiconductor quality, it has reduced total wafer throughput and increased overall equipment cost. Faced with diminishing productivity gains and increasing equipment costs, integrated circuit manufacturers have challenged equipment manufacturers to provide more cost-effective, higher productivity fabrication equipment. This challenge has led to the use of cost of ownership to measure productivity. Cost of ownership measures the costs associated with the operation of equipment in a fabrication line. We calculate the cost of ownership by first estimating the total costs to operate a system including depreciation, overhead and labor and materials, and then dividing those costs by the total wafer production by the system. The Mattson Solution We provide our customers with multiple product lines that deliver advanced processing capability for front-end integrated circuit fabrication. We are among the market leaders in each of our target front-end of line markets, and offer equipment to perform a broad range of semiconductor manufacturing steps in dry strip, RTP, wet surface preparation and plasma-enhanced CVD, as well as offering products for back-end of line processing. We continue to invest in research and development with the goal of expanding our product offerings and increasing our market share within our target markets. 4 The Mattson Strategy Our strategy for success focuses on five key areas: Maintain and Build Leadership Across the Front-end of Line. We are a world leader in the dry strip market, and we believe we are the second largest supplier of RTP products in the world, among the top six providers of wet surface preparation products, and among the top six providers of PECVD products, representing a broad product portfolio for front-end of line fabrication processes. As a result, we are positioned to address a broader range of our customers' problems with our unique process technology and value-added solutions. We believe our increased market presence will help us to gain market share for our established products as we continue to focus on front-end of line processing technologies, while gaining market exposure for our new product lines. Leverage Innovative Technologies and Provide Product Differentiation. We intend to continue applying our technology leadership and design expertise to provide new solutions that combine advanced technology with higher productivity. In December 2001, we introduced the Aspen III Highlands, an advanced 200/300 mm system designed for low-k cleaning and high-dose implant resist removal. Our patented technologies include inductively coupled plasma technology for dry strip, dual-sided lamp technology for RTP, and Marangoni drying technology for wet surface preparation products. These technologies offer process control advantages that take on increasing importance for the manufacture of smaller device structures. We plan to leverage our technology and development capabilities to bring to market innovative solutions that address specific, front-end of line processing needs in the semiconductor manufacturing industry. Pursue Leadership in the 300 Millimeter Market. We plan to expand our leadership and increase our market share in the 300 mm market. Our 300 mm compatible tools include Aspen III systems (Strip, LiteEtch, PECVD and our newest Highlands product), our 3000 RTP products, and our AWP300 and OMNI300 wet surface preparation products. We have sold more than two hundred 300 mm compatible systems, and our systems are production qualified at leading customer sites. We are also working with industry consortia as well as our customers to ensure that our tools meet future 300 mm automation requirements. Provide World Class, Global Customer Support. Our international customer support organization is a critical element in establishing and maintaining long-term relationships with our customers. We have reached a size that allows us to meet the service requirements of large customers on a global basis, including foundry customers in South East Asia. We are expanding our service capability to address the emerging foundry market in China. We strive to attain preferred vendor status and build customer loyalty by delivering highly reliable products, customer service and support. In 2001, we received VLSI's 10 BEST award for Suppliers of Wafer Processing Equipment for customer satisfaction. We intend to continue to strengthen our commitment to provide continuous service, support and global infrastructure. Implement Operational Excellence to Manage Industry Cycles. We continuously work to improve the quality of the products and services we deliver to our customers, and to improve our operations, information systems and financial performance. In 2001, we implemented an organizational restructuring to align our organizational requirements and our sales, support and product development organizations with the needs of our customers across our multiple product lines and to size our infrastructure with the current business environment. The restructuring has led to a significant reduction in our cost structure and corporate overhead. We believe we are now appropriately sized for expected business conditions this year, with the flexibility to respond if demand in our industry increases. We intend to focus on improving our organization and our information systems, and on reducing corporate and manufacturing overhead, to help manage our operations through industry cycles. Our manufacturing facility in the United States and one of our facilities in Germany are ISO 9001 certified, with certification of our other facility in process. We intend to continue investing in our product and technology development, in our customer support infrastructure, and in our information and manufacturing systems, to improve our operational performance in the future. Markets, Applications and Products Dry Strip Market A strip system removes photoresist and residues from a wafer following each step of film deposition or diffusion processing in preparation for the next processing step. Methods for stripping photoresist include wet chemistries and dry or plasma technologies. Wet chemical stripping removes photoresist by immersing the wafer into acid or solvent baths. Dry stripping systems, such as our Aspen Strip, create gaseous atomic oxygen to which the wafer is exposed to remove the unwanted residues. 5 The demand for photoresist strip equipment has grown as the complexity and number of strip steps required for each wafer have increased. Complex integrated circuits require multiple additional photoresist stripping steps, which increase cost and cycle time, create environmental concerns, increase cleanroom space requirements and reduce yield. The increase in strip steps in the integrated circuit manufacturing process has led to a need for semiconductor manufacturers to increase their photoresist strip capacity and to place greater emphasis on low damage results and residue-free photoresist stripping. The added complexity of the strip process has also contributed to higher average selling prices of the equipment. Fabrication of integrated circuits with feature sizes under 0.18 micron requires advanced dry strip technologies such as our Aspen Strip. In addition, faster integrated circuit devices require new interconnect materials, such as low capacitance, or low-k dielectric films and copper for conducting materials. The use of these new materials creates new challenges for photoresist stripping equipment. The resist or residues must be removed from these materials without degrading the low-k materials and without oxidizing any exposed copper. Our dry strip products encompass both 200 and 300 mm products on our high productivity "Aspen" platform, using our patented, inductively coupled plasma technology. We have an installed base of approximately 1,000 dry strip systems currently installed in production facilities around the world. We continue to be an industry leader in dry strip technology, and in December 2001 we introduced an advanced low-K resist and residue removal system called the Aspen III Highlands. At several Beta sites, our Highlands product has already proven its ability to preserve low-K material integrity and simplify integration schemes by reducing operational steps. Rapid Thermal Processing In rapid thermal processing ("RTP"), semiconductor wafers are rapidly heated to process temperature, held for a few seconds, and rapidly cooled. This thermal process is critical to achieve the exact electrical parameters necessary for the integrated circuit to operate. Historically, diffusion furnaces have been used to heat-treat large batches of wafers. However, diffusion furnaces have long processing times, which is unacceptable for many leading-edge device fabrication processes. In addition, as device features have become smaller, the total allowable temperature exposure of the wafer, or the thermal budget, has decreased. RTP subjects the wafer to much shorter processing times, thus reducing the thermal budget. Individual wafers are rapidly heated to process temperature, held for a few seconds and rapidly cooled. As the device geometries of integrated circuits continue to shrink and the number of semiconductor wafers increases, the need has grown for RTP equipment that can meet ever more stringent processing demands, while maintaining uniformity and repeatability to ensure the integrity of the integrated circuit. We are one of the industry leaders in RTP technology. Our products feature patented, dual-sided, lamp-based technology that achieves good control, process uniformity and repeatability. Our product line includes: the 2800 with over 500 units installed worldwide, the 2800cs for compound semiconductor processing, the 2900 for 200 mm applications, and the 3000 series for 300 mm fabrication and advanced steam applications. We are extending this technology into oxidation applications that use RTP to grow film layers. We have announced the sale of the former AG Associates RTP portion of our product line to Metron Technology, NV. In keeping with our focus on customer satisfaction and our commitment to provide continuous service and support, we chose to transition the mature AG 4000 and 8000 series RTP products to a provider capable of embracing these products as a primary focus. The transitioning of these mature products to Metron Technology will allow us to focus on enhancing our leading-edge 2000 and 3000 series RTP products while developing the next generation of innovative RTP tools. Wet Surface Preparation Wet chemical cleaning strips away photoresist and other residues by immersing the wafer into acid or solvent baths and thoroughly cleaning the wafer surface. This is critical in preparing the surface of the wafer for the building of transistors. Wet processing steps have traditionally been accomplished using wet benches and spray tools. Advanced wet benches utilize a succession of open chemical baths and extensive robotic automation to move wafers from one chemical or rinse bath to the next. Spray tools subject wafers to sequential spray applications of chemicals as the wafers are spun inside an enclosed chamber. There are a number of areas in the semiconductor manufacturing process where wet surface preparation offers the most cost effective solution to cleaning and etching the wafers. 6 "Critical cleans" are those wet surface preparation steps that are performed in front-end processing to remove surface contamination prior to performing highly sensitive fabrication steps such as gate oxidation or diffusion. To date, most of our wet surface preparation systems have been purchased by semiconductor manufacturers for use in these applications. Wet surface preparation is also commonly used in the front-end to etch the surface of the wafer to remove silicon dioxide or other surface material. It is generally important to tightly control the amount of material removed and the uniformity of the etch. These etching steps are often performed as part of a wet surface preparation sequence rather than as stand-alone operations. Most of the wet surface preparation systems we sell perform critical etching and cleaning applications. Our advanced patented drying method provides clean wafers with almost no watermarks or residue. This technology is used to fabricate advanced integrated circuits with feature sizes below 0.18 microns, and we maintain valuable intellectual property rights in this technology. Our "Marangoni" drying systems are sold with complete wet processing systems, as stand-alone systems to end-users and to competitors as original equipment manufacturer modules. We offer two main wet chemical product lines: the OMNI and the AWP. Our wet surface preparation products include traditional multi-bath wet benches, advanced single-bath processing systems and combinations (so called "Hybrids") and drying systems. We are currently focused on reducing the cost and enhancing the modular designs of our existing products to improve profitability, while we continue to develop next generation technologies for wet surface preparation. Plasma Enhanced Chemical Vapor Deposition Chemical vapor deposition processes are used to deposit insulating and conducting films on wafers. These films are the basic material used to form the resistors, capacitors, and transistors of an integrated circuit. These materials are also used to form the wiring and insulation between these electrical components. As feature sizes continue to decrease, chemical vapor deposition processing equipment must meet increasingly stringent requirements. Particles or defect densities must be minimized and controlled to achieve the desired yields. Film properties such as stress must also be improved and more tightly controlled. Compatibility with metallization steps, such as aluminum and copper deposition, is critical. Finally, as process complexity increases with the use of low-k and dual damascene processing solutions, the number of plasma-enhanced chemical vapor deposition steps increases significantly, and system productivity increases in importance. We are focused on PECVD applications at the front-end of the fabrication line, and our products utilize platform and robotic technology based on our leading Aspen dry strip products, that we believe gives us performance and productivity advantages. We offer a PECVD process to deposit insulating films. PECVD allows the system to process wafers at a relatively low temperature, reducing the risk of device parameter drift during processing at the front-end of line and of damage to metalization layers during processing at the back-end of line. Our Aspen III PECVD product has been production-certified at leading fabrication sites for both 200 mm and 300 mm applications. We are currently focusing on developing additional PECVD applications that complement our other front-end of line products. Epi Market Epitaxial, or Epi, deposition systems grow a layer of extremely pure silicon on a wafer in a uniform crystalline structure to form a high quality base for building certain types of chips. The silicon properties of the epitaxy produce a more controlled silicon growth than do manufactured silicon wafers and offer features that differentiate it from manufactured silicon wafers. The Epi market is broken into two segments: applications that require thin Epi, which are typically less than five microns thick, and applications that require thicker Epi film layers, including analog and power devices, sometimes as thick as 100 microns. Our EpiPro series uses a dual chamber batch system that addresses the thick Epi market. Our EpiPro series was introduced in 1998. 7 Isotropic Etch Market The etching process selectively removes patterned material from the surface of a wafer to create the device structures. With the development of sub-micron integrated circuit feature sizes, dry, or plasma, etching has become one of the most frequently used processes in semiconductor manufacturing. Our Aspen II and III LiteEtch systems use our patented ICP source technology for critical etching operations on 200 and 300 mm wafers. An isotropic, or multi-directional, etch system performs a variety of etch processes on semiconductor wafers that can be used in several steps in a typical 0.18 micron chip fabrication. Customer Support Our customer support organization is critical to establishing and maintaining the long term relationships with our customers. Our customer support organization is headquartered in Fremont, California, with additional offices located domestically throughout the U.S. and internationally in Germany, Italy, Japan, Korea, Singapore, Taiwan and the United Kingdom, and are currently in the process of establishing an office in China. Our support personnel have technical backgrounds, with process, mechanical, and electronics training, and are supported by our engineering, software and applications personnel. Support personnel install systems, perform warranty and out-of-warranty service, and provide sales support. We offer competitive, comprehensive warranties on all our products and provide access to training at our headquarters. We maintain spare parts depots in most regions for four-hour parts turnaround and provide regional field and process support. In 2001, we received VLSI's 10 BEST award for Suppliers of Wafer Processing Equipment, which CFM and the Semiconductor Division of STEAG, were awarded in 2000. The STEAG Semiconductor Division appeared in the 10 BEST rankings four previous times under the names AST Elektronik and AG Associates. Sales and Marketing We sell our systems primarily through our direct sales force. In addition to the direct sales force at our headquarters in Fremont, California, we have domestic regional sales offices located throughout the United States, and maintain sales support offices in France, Germany, Italy, Japan, Korea, Singapore, Taiwan and the United Kingdom. Prior to the merger, the STEAG Semiconductor Division utilized PRIMA as a distributor for RTP and wet surface preparation systems in China. While we plan to maintain our distribution relationship with Prima, we also plan to establish a direct sales and support organization in China. While maintaining our own direct sales force in Japan for most of our products, we are continuing our relationship with Canon for the distribution of our RTP systems in Japan. International sales accounted for 78% of total net sales in 2001, 69% in 2000 and 71% in 1999. We anticipate that international sales will continue to account for a significant portion of our net sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, exchange rates, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collections, extended payment terms, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Because of our dependence upon international sales in general, and on sales to Japan and Pacific Rim countries in particular, we are particularly at risk to effects from developments such as the recent Asian economic problems. Our foreign sales are also subject to certain governmental restrictions, including the Export Administration Act and the regulations promulgated under this Act. For a discussion of the risks associated with our international sales, see "Risk Factors That May Affect Future Results and Market Price of Stock--We Are Highly Dependant on Our International Sales, and Face Significant Economic and Regulatory Risks Because a Majority of Our Net Sales Are From Outside the United States." 8 Customers Customers for our products include nearly all of the world's top 20 semiconductor manufactures and foundries. A representative list of our major customers includes: * Hewlett Packard * ProMOS Technologies * Tech Semiconductor * Hynix * Samsung * Texas Instruments * IBM Microelectronics * Silicon Integrated Systems * TSMC * Infineon * SMIC * UMC Group * NEC Corporation * Sony In 2001, one customer, Infineon, accounted for more than 10% of our revenue. Infineon and ProMos accounted for approximately 19% and 16%, respectively, of our total bookings. Although the composition of the group comprising our largest customers has varied from year to year, our top ten customers accounted for 58% of our net sales in 2001, 59% in 2000, and 63% in 1999. For a discussion of risks associated with changes in our customer base, see "Risk Factors That May Affect Future Results and Market Price of Our Stock-- We Are Dependant on Large Purchases From a Few Customers, and Any Loss, Cancellation, Reduction or Delay in Purchases By, or Failure to Collect Receivables From, These Customers Could Harm Our Business." Backlog We schedule production of our systems based on both backlog and regular sales forecasts. We include in backlog only those systems for which we have accepted purchase orders and assigned shipment dates within the next 12 months. Orders are often subject to cancellation or delay by the customer with limited or no penalty. Our backlog was approximately $60.0 million as of December 31, 2001, $109.9 million as of December 31, 2000 and $56.1 million as of December 31, 1999. The backlog as of December 31, 2001 includes backlog from the STEAG Semiconductor Division and CFM, which we acquired on January 1, 2001. The year-to-year fluctuation is due primarily to the downturn in the semiconductor industry and the continuing soft demand in the semiconductor equipment market. Because of possible future changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period and our actual sales for the year may not meet or exceed the backlog represented. During periods of industry downturns, such as we experienced in 2001, we have experienced significant cancellations and delays and push-out of orders that were previously booked and included in backlog. As a result, because customers did not reschedule delivery dates, backlog declined in the fourth quarter of 2001 due to customer cancellations and push out of orders. Research, Development and Engineering Our research, development and engineering efforts are focused upon our multi-product strategy. Continued and timely development of new products and enhancements to existing products are necessary to maintain our competitive position. Key activities during fiscal year 2001 involved bringing the 3000 Steam RTP system into manufacturing production and introducing the Aspen III Highlands. Over the next year, we plan to focus our efforts on developing products across our product lines, with an emphasis on 300 millimeter applications. We maintain applications laboratories in Fremont, California and in Pliezhausen and Dornstadt, Germany to test new systems and customer-specific equipment designs. By basing products on existing and accepted product lines in the thermal, plasma and wet surface preparation markets, we believe that we can focus our development activities on producing new products more quickly and at relatively low cost. The markets in which we compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, we believe that our future success will depend upon our ability to continue to improve our existing systems and process technologies and to develop systems and new technologies that compete effectively. In addition, we must adapt our systems and processes to technological changes and to support emerging industry standards for target markets. We cannot be sure that we will complete our existing and future development efforts within our anticipated schedule or that our new or enhanced products will have the features to make them successful. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new or improved systems or process technologies. 9 In addition, these new and improved systems and process technologies may not meet the requirements of the marketplace and achieve market acceptance. Furthermore, despite testing by us, difficulties could be encountered with our products after shipment, resulting in loss of revenue or delay in market acceptance and sales, diversion of development resources, injury to our reputation or increased service and warranty costs. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs and market acceptance. If we are unable to improve our existing systems and process technologies or to develop new technologies or systems, we may lose sales and customers. Our research, development and engineering expenses were $61.1 million for the year ended December 31, 2001, $28.5 million for 2000 and $19.5 million for 1999, representing 26.6% of net sales in 2001, 15.8% in 2000 and 18.9% in 1999. The expenses for 2001 include research, development and engineering expenses that reflect our acquisition of the STEAG Semiconductor Division and CFM. Competition The global semiconductor fabrication equipment industry is intensely competitive and is characterized by rapid technological change and demanding customer service requirements. Our ability to compete depends upon our ability to continually improve our products, processes and services and our ability to develop new products that meet constantly evolving customer requirements. A substantial capital investment is required by semiconductor manufacturers to install and integrate new fabrication equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular supplier's products, the manufacturer often relies for a significant period of time upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. Accordingly, it is difficult for us to sell to a particular customer for a significant period of time after that customer has selected a competitor's product, and it may be difficult for us to unseat an existing relationship that a potential customer has with one of our competitors in order to increase sales of our products to that customer. Each of our product lines competes in markets defined by the particular wafer fabrication process it performs. In each of these markets we have multiple competitors. At present, however, no single competitor competes with us in all of the market segments in which we compete. Competitors in a given technology tend to have different degrees of market presence in the various regional geographic markets. Competition is based on many factors, primarily technological innovation, productivity, total cost of ownership of the systems, including yield, price, product performance and throughput capability, quality, contamination control, reliability and customer support. We believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to these competitive factors. Our principal competitors in the dry strip market include Axcellis and Novellus. We believe that we compete favorably on each of the competitive elements in this market and estimate that we are one of the top two providers of dry strip products. The principal competitor for our RTP systems is Applied Materials. Principal competitors for our wet surface preparation products include Akrion, Dainippon Screen, FSI International, SCP Global Technologies, Semitool, S.E.S., SEZ, Tokyo Electron and Verteq. The market in which our Aspen LiteEtch products compete is a relatively small niche market with no dominant competitors. Principal competitors for our Aspen LiteEtch systems include Novellus, Lam Research, Shibaura Mechatronics and Tegal. Principal competitors for our PECVD systems include Applied Materials, ASM International and Novellus Systems, with Applied Materials and Novellus representing a major share of the market. Principal competitors for our EpiPro systems include Kokusai Semiconductor Equipment, LPE Products, Moore Technology and Toshiba. We may not be able to maintain our competitive position against current and potential competition. New products, pricing pressures, rapid changes in technology and other competitive actions from both new and existing competitors could materially affect our market position. Some of our competitors have substantially greater installed customer bases and greater financial, marketing, technical and other resources than we do and may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Our competitors may introduce or acquire competitive products that offer enhanced technologies and improvements. In addition, some of our competitors or potential competitors have greater name recognition and more extensive customer bases that could be leveraged to gain market share to our detriment. We believe that the semiconductor equipment industry will continue to be subject to increased consolidation, which will increase the number of larger, more powerful companies and increase competition. 10 Manufacturing Our manufacturing operations are based in the U.S. and Europe and consist of procurement, assembly, test, quality assurance and manufacturing engineering. Our current dry strip, PECVD, RTP, wet surface preparation, epi and LiteEtch systems are based on a variety of platforms. The products utilize common subassemblies and components. Many of the major assemblies are procured complete from outside sources. We focus our internal manufacturing efforts on those precision mechanical and electro-mechanical assemblies that differentiate our systems from those of our competitors. We have manufacturing capability for our thermal (RTP, epi), films (PECVD, strip) and etch products in Fremont, California and Dornstadt, Germany. Wet surface preparation products are manufactured in Pliezhausen and Donaueschingen, Germany. Some of our components are obtained from a sole supplier or a limited group of suppliers. We generally acquire these components on a purchase order basis and not under long term supply contracts. Our reliance on outside vendors generally, and a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely complex process and can require long lead times, we could experience delays or shortages caused by suppliers. Historically, we have not experienced any significant delays in manufacturing due to an inability to obtain components, and we are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing of our systems in the future. However, any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our systems and could have a material adverse effect on us. We are subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our sales demonstrations and research and development. Public attention has increasingly been focused on the environmental impact of operations which use hazardous materials. Failure to comply with present or future regulations could result in substantial liability to us, suspension or cessation of our operations, restrictions on our ability to expand at our present locations or requirements for the acquisition of significant equipment or other significant expense. To date, compliance with environmental rules and regulations has not had a material effect on our operations. Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology. We hold a number of United States patents and corresponding foreign patents and have a number of patent applications pending covering various aspects of our products and processes. Where appropriate, we intend to file additional patent applications on inventions resulting from our ongoing research, development and manufacturing activities to strengthen our intellectual property rights. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we cannot be sure that we will be able to protect our technology adequately, and our competitors could independently develop similar technology, duplicate our products or design around our patents. To the extent we wish to assert our patent rights, we cannot be sure that any claims of our patents will be sufficiently broad to protect our technology or that our pending patent applications will be approved. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, that any rights granted under these patents will provide adequate protection to us, or that we will have sufficient resources to protect and enforce our rights. 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. As a result of the merger, we are involved in several patent lawsuits that had been brought by or against CFM, which are discussed furthur below under Item 3: Legal Proceedings. As is customary in our industry, from time to time we receive or make inquiries regarding possible infringement of patents or other intellectual property rights. Although there are no pending claims against us regarding infringement of any existing patents or other intellectual property rights or any unresolved notices that we are infringing intellectual property rights of others, such infringement claims could be asserted against us or our suppliers by third parties in the future. Any claims, with or without merit, could be time-consuming, result in costly litigation, result in loss or cancellation of customer orders, cause product shipment delays, subject us to significant liabilities to third parties, require us to enter into royalty or licensing agreements, or prevent us from manufacturing and selling our products. 11 If our products were found to infringe a third party's proprietary rights, we could be required to enter into royalty or licensing agreements in order to continue to be able to sell our products. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business. Employees As of January 1, 2001, immediately following our acquisition of the STEAG Semiconductor Division and CFM, we had approximately 2,000 employees. During 2001, we implemented reductions in force of 466 employees. As of December 31, 2001, we had 1,424 employees. There were 362 employees in manufacturing operations, 338 in research, development and engineering, 556 in sales, marketing, field service and customer support, and 168 in general, administrative and finance. During 2001, we significantly reduced our operations and our workforce. However, the success of our future operations will depend in large part on our ability to recruit and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing systems and the development of new systems and processes. Historically, during times of economic expansion, competition for such personnel has been intense, particularly in the San Francisco Bay Area, where our headquarters is located. At times we have experienced difficulty in attracting new personnel and if needed, we may not be successful in retaining or recruiting sufficient key personnel in the future. None of our employees outside Germany is represented by a labor union and we have never experienced a work stoppage, slowdown or strike. In Germany, our employees are represented by workers' councils. We consider our relationships with our employees to be good. Environmental Matters We are subject to federal, state, local and international environmental laws and regulations. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development, and sales demonstrations. Neither compliance with federal, state and local provisions regulating discharge of materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on our capital expenditures, financial condition, results of operations or competitive position. However, if we fail to comply with applicable regulations, we could be subject to substantial liability for clean up efforts, personal injuries, fines or suspension or cessation of our operations. ITEM 2: PROPERTIES Our principal properties as of December 31, 2001 are set forth below:
Square Location Type Principal Use Footage Ownership -------- ---- ------------- ------- --------- Fremont, CA Office, plant & Headquarters, Marketing, 155,000 Leased Warehouse Manufacturing, Distribution Research and Engineering San Jose, CA Office, plant & Vacant, partial sub-lease 150,000(1) Leased Warehouse Austin, TX Office Sales, Service 36,000(2) Owned Exton, PA Office, plant & Marketing, Manufacturing, 140,000(3) Leased Warehouse Operations, Engineering West Chester, PA Plant & Warehouse Vacant 28,000(4) Sold March 2002 Germany Office, plant & Manufacturing, Research 45,000 Owned Warehouse and Engineering 246,000 Leased
12 (1) Includes approximately 40,000 square feet that we have sub-leased to another party, and an additional 18,000 square feet that we sub-leased to Metron in March 2002. (2) We have signed a contract to sell the Austin building in an amount for approximately $1,950,000. (3) We are holding approximately 120,000 square feet in excess capacity and available for sublease. Owner's approval is not required for sub-leasing. (4) In March 2002, we sold the West Chester, PA building for $2,315,000 in cash, with no contingencies. We lease office spaces for sales and customer support office in 31 locations throughout the world: 18 in the United States, 5 in Europe, 2 in Taiwan and one in each of Korea, Japan, Singapore, United Kingdom, Scotland and Israel. We currently have excess space capacity that we are in the process of subleasing to offset the lease obligation expenses. In addition, both STEAG and CFM owned facilities that we have determined are excess space are being offered for sale. ITEM 3: LEGAL PROCEEDINGS We are litigating three ongoing cases against two of our competitors involving our wet surface preparation intellectual property. We have asserted claims relating to our U.S. Patent No. 4,911,761 (the "'761 patent") against a defendant in CFMT and CFM Technologies, Inc. v. YieldUP International Corp., Civil Action No. 95-549-RRM, alleging infringement, inducement of infringement, and contributory infringement. We further asserted claims of U.S. Patent Nos. 4,778,532 (the "'532 patent") and 4,917,123 (the "'123 patent") against this defendant in a subsequent action, CFMT, Inc. and CFM Technologies. v. YieldUP International Corp., Civil Action No. 98-790-RRM. In addition, we are both a defendant and a counterclaim plaintiff in a third litigation, Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc. and CFM Technologies, Inc., Civil Action No. 97-20270 JW. In this action, the plaintiffs seek a declaratory judgment of invalidity and unenforceability of the'761 patent and U.S. Patent No. 4,984,597 (the "'597 patent"), and a declaratory judgment of non-infringement of the '761 patent. We have counterclaimed alleging infringement, inducement of infringement, and contributory infringement of certain claims of each of the '761 patent, the '532 patent, the '123 patent, and the '597 patent. On September 11, 1995, we brought an action against YieldUP International Corp. ("YieldUP") in the United States District Court for the District of Delaware. (YieldUP is now a division of FSI International, Inc.) We seek damages and a permanent injunction to prevent further infringement. YieldUP has denied infringement and has asserted, among other things, that the subject patent is invalid and not infringed. On October 14, 1997, the District Court issued a decision granting summary judgment in favor of YieldUP on the grounds that the process used in YieldUP processing equipment does not infringe the '761 patent. The District Court subsequently granted our request for reargument of the decision. On March 14, 2002, the District Court heard oral argument on the summary judgment motion. The District Court has not issued any further ruling on the pending motion. On December 30, 1998, we filed an additional lawsuit in the United States District Court for the District of Delaware charging patent infringement of the '123 and '532 patents by YieldUP. We are seeking a permanent injunction preventing YieldUP from using, making or selling equipment that violates these patents and request damages for past infringement. YieldUP has asserted counterclaims for alleged tortious interference with prospective economic advantage and defamation and a declaratory judgment that the patents are invalid, not infringed, and unenforceable due to our alleged inequitable conduct in obtaining the patents, and seeking compensatory and punitive damages. On April 4, 2000, the District Court issued an Order granting a YieldUP motion for summary judgment and denying CFM's cross-motion for summary judgment, and found that the '532 and '123 patents were both invalid due to lack of enablement. YieldUP has agreed to withdraw with prejudice the tortious interference and defamation counts. On June 7, 2001 the District Court issued a judgement in favor of YieldUP holding that the '532 and '123 patents are unenforceable. We filed a Notice of Appeal on July 5, 2001,to which YieldUP responded by filing a motion to dismiss on the grounds that the District Court's judgment is not final. The Court of Appeals partially remanded the case for the limited purpose of allowing the District Court to determine whether its June 7, 2001 judgment is final. YieldUP has filed a motion requesting that the District Court consider, 13 prior to appeal of the District Court's judgment that the '532 and '123 patents are invalid and unenforceable, whether other of our patents claiming the same priority date of and related to the '532 and '123 patents, are also unenforceable. YieldUP has also filed a motion requesting that the District Court consider, also prior to appeal, whether the case is exceptional and whether an award of YieldUP's attorneys fees is appropriate. We have filed oppositions to these motions. The District Court has not ruled on the pending motions. In March, 1997, another competitor, Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC (collectively "DNS"), filed a suit against us in the United States District Court for the Northern District of California. In this action, DNS requested a court declaration that DNS does not infringe the '761 patent and that the patent is invalid and unenforceable. DNS also sought monetary damages and injunctive relief for alleged violations of the Lanham Act, unfair competition, tortious interference with prospective economic advantage, and unfair advertising. The causes of action relating to the Lanham Act, unfair competition, tortious interference with prospective economic advantage, and unfair advertising were later dismissed without prejudice. We counterclaimed, alleging infringement by DNS of the '532, '123, and '761 patents. In February, 2000, DNS added additional counts for alleged antitrust and unfair competition violations, and for declaratory judgment that DNS does not infringe the '597 patent and that this patent is invalid and unenforceable. We counterclaimed asserting infringement, inducement of infringement, and contributory infringement of the '597 patent. As a result of the summary judgment finding of invalidity due to lack of enablement of the '532 and '123 patents in the YieldUP case, the counts in the DNS case concerning these two patents were stayed pending further results in the YieldUP case. The damages issues for all counts in the DNS case were also bifurcated to be tried after resolution of the liability issues. On November 20, 2000, the Court dismissed DNS's antitrust count on summary judgment. On July 23,2001, Texas Instruments, Inc. ("TI") filed a Motion to Intervene for the limited purpose of determining the proper inventorship of the '761 and '597 patents and, on October 1, 2001, the judge allowed TI to enter the case. We have settled the claims with TI and TI has been dismissed as a party from the case. On March 5, 2002, after a four-week jury trial, a verdict was returned finding that all six models of DNS's wet surface preparation equipment that included an "LPD dryer" infringed each of the 20 asserted claims of our '761 and '597 patents. The jury also explicitly rejected each of DNS's asserted invalidity defenses. We intend to seek resolution of the remaining DNS inequitable conduct defense and business tort claims on summary judgment and to seek prompt entry of a permanent injunction against future acts of infringement by DNS. Damages remain to be tried. However, should DNS prevail on its inequitable conduct defense and business tort claims, it is possible that our '761 and '597 patents could be ruled unenforceable. 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 the Company 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. We are not aware of any pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, operating results or financial condition. We may, in the future, be party to litigation arising in the course of our business, including claims that we allegedly infringe third party patents, trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Stock Listing Our common stock has traded on the Nasdaq National Market since our initial public offering on September 28, 1994. Our stock is quoted on the NASDAQ National Market under the symbol "MTSN". The following table sets forth the high and low closing prices as reported by the Nasdaq National Market for the periods indicated. HIGH LOW ---- --- 2001 Quarter First........................................... $18.06 $ 9.50 Second.......................................... 19.50 12.19 Third........................................... 17.35 3.45 Fourth.......................................... 9.20 3.06 2000 Quarter First........................................... 43.75 16.25 Second.......................................... 49.13 29.06 Third........................................... 39.50 15.00 Fourth.......................................... 16.50 8.78 Dividends On March 15, 2002, the last reported sales price of our common stock on the Nasdaq National Market was $6.11 per share. We had approximately 216 shareholders of record on that date. We have never paid cash dividends on our common stock and have no present plans to pay cash dividends. We are also restricted by the terms of our credit facility with our bank from paying future dividends. We intend to retain all future earnings for use in our business. Private Placement of Stock On January 1, 2001, we issued 11,850,000 shares of common stock to STEAG Electronic Systems AG as part of the consideration for our purchase of the STEAG Semiconductor Division. The transaction was exempt from registration under the Securities Act of 1933 (the "Act") by virtue of the exemptions provided in Section 4(2) of the Act, and Regulation D. There were no underwriters in the transaction. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data has been derived from our audited consolidated financial statements. The historical financial data should be read in conjunction with our consolidated financial statements and notes thereto. Effective January 1, 2000, we changed our method of accounting for revenue to implement the revenue recognition provisions of SEC Staff Accounting Bulletin No. 101 (SAB 101). This change in accounting method effects the comparability of our financial data for 2000 and 2001 to our reported results for previous years. See Note 1 of Notes to Consolidated Financial Statements for an explanation of this change. Unaudited pro forma information is provided below to show the effect this accounting method change would have had in years prior to 2000. On January 1, 2001, we completed the acquisitions of the STEAG Semiconductor Division and CFM. The acquisitions have been accounted for under the purchase method of accounting, and the results of operations of the acquired companies are included in our selected financial data for 2001. During 2001, we incurred significant charges relating to impairment of long-lived assets, inventory valuation charges and restructuring costs. These acquisitions and charges affect the comparability of our financial data for 2001 to our reported results for previous years. See Management's Discussion and Analysis of Financial Conditions and Results of Operations and Note 2 of Notes to Consolidated Financial Statements for further description of these events. 15
Year Ended December 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales $ 230,149 $ 180,630 $ 103,458 $ 59,186 $ 76,730 Cost of sales 198,350 93,123 53,472 37,595 37,130 Inventory valuation charges 26,418 -- -- -- -- --------- --------- --------- --------- --------- Gross profit 5,381 87,507 49,986 21,591 39,600 --------- --------- --------- --------- --------- Operating expenses: Research, development and engineering 61,114 28,540 19,547 16,670 14,709 Selling, general and administrative 110,785 54,508 31,784 24,542 24,495 Acquired in-process research and development 10,100 -- -- 4,220 -- Amortization of goodwill and intangibles 33,457 -- -- -- -- Impairment of long-lived assets and other charges 150,666 -- -- -- -- --------- --------- --------- --------- --------- Total operating expenses 366,122 83,048 51,331 45,432 39,204 --------- --------- --------- --------- --------- Income (loss) from operations (360,741) 4,459 (1,345) (23,841) 396 Interest and other income, net 5,016 6,228 743 1,811 1,486 --------- --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (355,725) 10,687 (602) (22,030) 1,882 Provision (benefit) for income taxes (18,990) 1,068 247 337 451 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (336,735) 9,619 (849) (22,367) 1,431 Cumulative effect of change in accounting principle, net of tax benefit -- (8,080) -- -- -- --------- --------- --------- --------- --------- Net income (loss) $(336,735) $ 1,539 $ (849) $ (22,367) $ 1,431 ========= ========= ========= ========= ========= Income (loss) per share, before cumulative effect of change in accounting principle: Basic $ (9.14) $ 0.50 $ (0.05) $ (1.52) $ 0.10 Diluted $ (9.14) $ 0.45 $ (0.05) $ (1.52) $ 0.09 Cumulative effect of change in accounting principle Basic $ -- $ (0.42) $ -- $ -- $ -- Diluted $ -- $ (0.38) $ -- $ -- $ -- Net income (loss) per share: Basic $ (9.14) $ 0.08 $ (0.05) $ (1.52) $ 0.10 Diluted $ (9.14) $ 0.07 $ (0.05) $ (1.52) $ 0.09 Shares used in computing net income (loss) per share: Basic 36,854 19,300 15,730 14,720 14,117 Diluted 36,854 21,116 15,730 14,720 15,311 Pro forma amounts with the change in accounting principle related to revenue recognition applied retroactively: Net sales N/A N/A $ 102,781 $ 58,544 * $ 76,079* Net income (loss) N/A N/A $ (3,036) $ (21,926)* $ 862* Net income (loss) per share: Basic N/A N/A $ (0.19) $ (1.49)* $ 0.06* Diluted N/A N/A $ (0.19) $ (1.49)* $ 0.06* As of December 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents $ 64,057 $ 33,431 $ 16,965 $ 11,863 $ 25,583 Working capital 74,044 150,234 37,009 31,034 56,996 Total assets 432,705 269,668 81,148 68,120 84,443 Long-term debt, net of current portion 1,001 -- -- -- -- Total stockholders' equity 141,738 186,127 52,019 49,880 68,184
------- * Unaudited 16 ITEM 7. 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 "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the discussion in this document 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 under the caption "Risk Factors that May Affect Future Results and Market Price of Stock" and elsewhere in this document. OVERVIEW We are a leading supplier of semiconductor wafer processing equipment used in "front-end" fabrication of integrated circuits. Our products include dry strip equipment, rapid thermal processing ("RTP") equipment, wet surface preparation equipment, and plasma-enhanced chemical vapor deposition ("PECVD") equipment. Our integrated circuit manufacturing equipment utilizes innovative technology to deliver advanced processing capability and high productivity. We provide our customers with worldwide support through our international technical support organization, and our comprehensive warranty program. Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. The semiconductor industry is currently experiencing a severe downturn, which has resulted in drastic capital spending cutbacks by our customers. Semiconductor companies continue to reevaluate their capital spending, postpone their new purchase decisions, and reschedule or cancel existing orders. Declines in demand for semiconductors deepened throughout each sequential quarter of 2001. In contrast, the semiconductor industry had one of its best years ever in 2000. The cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to us and impair our ability to forecast near term revenue. Our ability to quickly modify our operations in response to changes in market conditions is limited. In order to support longer term needs for our products, we have continued to increase research and development expenses from previous years. We are dependent upon increases in sales in order to attain profitability. If our sales do not increase, our current operating expenses could prevent us from attaining profitability and adversely affect our financial position and results of operations. On January 1, 2001, we acquired the semiconductor equipment division of STEAG Electronic Systems AG (the "STEAG Semiconductor Division"), which consisted of a number of entities that became our direct or indirect wholly-owned subsidiaries. At the same time, we acquired CFM Technologies, Inc. ("CFM"). We refer to these simultaneous acquisitions as "the merger." The merger substantially changed the size of our company and the nature and breadth of our product lines. The STEAG Semiconductor Division was a leading supplier of RTP equipment, and both the STEAG Semiconductor Division and CFM were suppliers of wet surface preparation equipment. Until 2000, prior to the merger, we derived a substantial majority of our sales from our Aspen dry strip systems, with our remaining sales derived primarily from CVD systems, as well as spare parts and maintenance services. In 2000, sales of our Aspen dry strip system and CVD systems comprised 78% and 19% of our net sales, respectively. In 2001, after the merger, dry strip, RTP, and wet surface preparation systems sales accounted for 56%, 22%, and 22% of our net sales, respectively. The merger affects the comparability of our results from 2001 to our results in prior years. At the time we completed the merger, our industry was entering an economic slowdown. The merger more than doubled the size of our company, and we faced a number of challenges in integrating the merged companies. During 2001, we reduced our workforce by approximately 30%. The acquired businesses had excess production capacity at the time of merger, and this excess production capacity was exacerbated by the economic slowdown. During 2001, in light of our business levels and assessment of the carrying value of our long-lived assets, we took charges totaling approximately $145.4 million due to the impairment of goodwill, intangible assets, and other long-lived assets we acquired in the merger. The merger also had an adverse effect on our gross margins for fiscal 2001. Our excess production capacity was a large factor affecting our margins, especially during the later quarters of the year. As a result of the economic slowdown, we took inventory valuation reserves of approximately $26.4 million during the year, which were recorded as cost of goods sold. 17 International sales, predominantly to customers based in Europe, Japan and the Pacific Rim, including Taiwan, Singapore and Korea, accounted for 78% of total net sales for 2001, 69% of total net sales for 2000 and 71% of total net sales for 1999. We anticipate that international sales will continue to account for a significant portion of our sales. We have substantial research, development and manufacturing facilities in the United States and Germany, and we have sales and service facilities in a number of countries around the world. The local currency is the functional currency for our foreign operations. Gains or losses from translation of foreign operations are included as a component of stockholders' equity. Foreign currency transaction gains and losses are recognized in the statement of operations and have not been material to date. The transactions that were part of the merger have been accounted for under the purchase method of accounting. In our acquisition of the STEAG Semiconductor Division, we issued 11,850,000 shares of our common stock to STEAG Electronic Systems AG ("SES"). This stock was valued at approximately $124 million for purchase accounting purposes. We also assumed certain obligations, certain intercompany indebtedness and contractual payment obligations owed by the acquired subsidiaries to SES. As a result, at the end of 2001 we had approximately $44.6 million in debt obligations to SES, including accrued interest at 6%, due July 2, 2002. In our acquisition of CFM, we issued 4,234,335 shares of our common stock to the former shareholders of CFM. This stock was valued at approximately $150.2 million for purchase accounting purposes. In addition, we issued options to acquire 927,427 shares of our common stock upon our assumption of outstanding options to purchase CFM common stock. These options were valued at approximately $20.4 million for purchase accounting purposes. During 2001, in light of our business levels and assessment of the carrying value of all long-lived assets, we took charges totaling $145.4 million due to the impairment of goodwill, intangible assets, and other long-lived assets that we acquired in the merger and charges of $3.7 million for facilities lease losses for idle facilities. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgements, including those related to inventories, warranty obligations, customer incentives, bad debts, investments, intangible assets, income taxes, restructuring costs, retirement benefits, contingencies and litigation. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition, warranty obligations, inventories, and impairment of long-lived assets as critical to our business operations and an understanding of our results of operations. See Note 1 of Notes to the Consolidated Financial Statements for a summary of our significant accounting policies. Revenue recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). We derive revenue from two primary sources- equipment sales and spare part sales. We account for equipment sales as follows: 1.) for equipment sales of existing products with new specifications or acceptance clauses or to a new customer, for all sales of new products, and for all sales of our wet surface preparation products, revenue is recognized upon customer acceptance; 2.) for equipment sales to existing customers, who have purchased the same equipment with the same specifications and previously demonstrated acceptance provisions, the lesser of the fair value of the equipment or the contractual amount billable upon shipment is recorded as revenue upon title transfer. The remainder is recorded as deferred revenue and recognized as revenue upon customer acceptance. From time to time, however, we allow customers to evaluate systems, and since customers can return such systems at any time with limited or no penalty, we do not recognize revenue until these evaluation systems are accepted by the customer. Revenues associated with sales to customers in Japan are recognized upon customer acceptance, with the exception of sales of our RTP products through our distributor in Japan, where revenues are recognized upon title transfer to the distributor. For spare parts, revenue is recognized upon shipment Service and maintenance contract revenue, which to date has been insignificant, is recognized on a straight-line basis over the service period of the related contract. 18 Revenues are difficult to predict, due in part to our reliance on customer acceptance related to a significant number of our shipments. Any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Warranty. Our warranties require us to repair or replace defective product or parts, generally at a customer's site, during the warranty period at no cost to the customer. The warranty offered on our systems ranges from 12 months to 36 months depending on the product. We have, as part of certain sales agreements, offered extended warranties on some products that generally extend the standard warranty period by up to one year. A provision for the estimated cost of warranty is recorded as a cost of sales based on our historical costs at the time of revenue recognition. While our warranty costs have historically been within our expectations and the provisions we have established, we cannot be certain that we will continue to experience the same warranty repair costs that we have in the past. A significant increase in the costs to repair our products could have a material adverse impact on our operating results for the period or periods in which such additional costs materialize. Inventories. Due to the changing market conditions, recent economic downturn and estimated future requirements, inventory valuation charges of approximately $26.4 million were recorded in the second half of 2001. This reserve largely covers inventories for Thermal and Omni products that were acquired in the merger with the Steag Semiconductor Division and CFM. Given the downturn in the semiconductor industry, the age of the inventories on hand and the introduction of new products, we wrote down excess inventories to net realizable value based on forecasted demand and obsolete inventories that are no longer used in current production. Actual demand may differ from forecasted demand and such difference may have a material effect on our financial position and results of operations. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Although we attempt to accurately forecast future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. As of December 31, 2001, there was an allowance for excess and obsolete inventory of approximately $48.0 million. 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. 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 financial condition and results of operations. In assessing the recoverability of long-lived 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. See Note 2 in Notes to the Consolidated Financial Statements regarding fiscal 2001 impairment charges. 19 Results of Operations The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net sales:
Year Ended December 31, ------------------------------------- 2001 2000 1999 ------- ------- ------- Net sales 100.0% 100.0% 100.0% Cost of sales 86.2 51.6 51.7 Inventory valuation charges 11.5 -- -- ------- ------- ------- Gross margin 2.3 48.4 48.3 ------- ------- ------- Operating expenses: Research, development and engineering 26.6 15.8 18.9 Selling, general and administrative 48.1 30.1 30.7 In-process research and development 4.4 -- -- Amortization of goodwill and intangibles 14.5 -- -- Impairment of long-lived assets and other charges 65.5 -- -- ------- ------- ------- Income (loss) from operations (156.8) 2.5 (1.3) Interest and other income, net 2.2 3.4 0.7 ------- ------- ------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (154.6) 5.9 (0.6) Provision (benefit) for income taxes (8.3) 0.6 0.2 ------- ------- ------- Net income (loss) before cumulative effect of change in accounting principle (146.3) 5.3 (0.8) Cumulative effect of change in accounting principle, net of tax -- (4.5) -- ------- ------- ------- Net income (loss) (146.3)% 0.8% (0.8)% ======= ======= =======
Years Ended December 31, 2001 and 2000 Net Sales. Our net sales for the year ended December 31, 2001 were $230.1 million, compared to net sales of $180.6 million for the year ended December 31, 2000. We estimate that on a pro forma basis for the year ended December 31, 2000, assuming that we had acquired the STEAG Semiconductor Division and CFM on January 1, 2000, the combined company would have had net sales of $372.7 million, so that net sales in the year 2001 would reflect a decrease of 38.3% from 2000. Net sales decreased in 2001 primarily due to the economic downturn in the semiconductor industry and also due to the timing effects of revenue recognition, where the time-lag between product shipment and customer acceptance can exceed one year. A significant proportion of products shipped during fiscal 2001 and 2000 from our Thermal and Wet product divisions (operations acquired from the STEAG Semiconductor Division and CFM) resulted in deferred revenue in accordance with our revenue recognition policy, due to the complexities of the equipment shipped and the associated acceptance clauses. Our total deferred revenue at December 31, 2001 was approximately $136.6 million. We expect deferred revenue to be recognized as revenue in our consolidated statement of operations in the next six to twelve months. Under the rules of the purchase method of accounting, deferred revenue relating to sales by the acquired operations are generally not carried over through the acquisition. As a result, it will take several quarters of combined operations before our net sales results normalize and can be compared across reporting periods. Gross Margin. Gross margin for the year ended December 31, 2001 was 2.3%, a decrease from gross margin of 48.4% for the year ended December 31, 2000. The decrease in gross margin in 2001 was due to several factors. Our costs were adversely affected by the under absorption of our production facilities, leading to manufacturing overhead inefficiencies. We currently have excess production capacity as a result of the drop in sales and bookings combined with our acquisition of additional production capacity in Germany and Exton, PA as a result of the merger. Our gross margin in 2001 was also adversely affected by the write-up of inventory acquired in the merger to fair value, as required by 20 Accounting Principles Board Opinion No. 16 "Business Combinations", in the amount of $13.8 million, or 6.0 percent of net sales. The effect of this write-up is expected to continue, to a lesser extent, in future quarters as this inventory acquired in the merger is sold and recorded as cost of sales. In addition, our gross margin in 2001 was adversely affected by increased provisions for excess inventories that we do not believe will be realized based on our current bookings or forecasted levels of sales, in the amount of $26.4 million, or 11.5 percent of net sales. This provision largely covers inventories for RTP and wet products that were acquired in the merger. We are also facing pricing pressure from competitors that is affecting our gross margin. Our gross margin has varied over the years and will continue to vary based on multiple factors including, competitive pressures, our product mix, economies of scale, overhead absorption levels, and costs associated with the introduction of new products. Our gross margin on international sales, other than sales to Canon, our distributor in Japan for RTP products, have been substantially the same as domestic sales. Sales to Canon typically carry a lower gross margin, as Canon is primarily responsible for RTP sales and support costs in Japan. Research, Development and Engineering. Research, development and engineering expenses were $61.1 million, or 26.6% of net sales, for the year ended December 31, 2001, compared to $28.5 million, or 15.8% of net sales, for the year ended December 31, 2000. The increase in absolute dollars in 2001 was due to additional personnel and spending resulting from the merger. The increase in research, development and engineering expense as a percentage of net sales in 2001 compared to 2000 was primarily attributable to decreased sales in 2001. During 2001, major efforts were made with regard to the improvement of our current product line of 300 mm tools and the processes they are capable of running. Improvement of the reliability of the tools was a focal point for engineering in fiscal 2001. Selling, General and Administrative. Selling, general and administrative expenses were $110.8 million, or 48.1% of net sales, for the year ended December 31, 2001, compared with $54.5 million, or 30.1% of net sales, for the year ended December 31, 2000. The increase in absolute dollars in 2001 was due to additional personnel and spending added by the merger. Also in 2001, the Company incurred $8.1 million of severance charges and $6.9 million bad debt charges recorded in selling, general and administrative expenses. The increase in selling, general and administrative expenses as a percentage of net sales in 2001 compared to 2000 was primarily attributable to decreased net sales in 2001 and the severance charge. In-process research and development. In connection with our acquisition of the STEAG Semiconductor Division, we allocated approximately $5.4 million of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows relating to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, the purchase price allocated to in-process research and development was expensed as of the acquisition date. At the acquisition date, the STEAG Semiconductor Division was conducting design, development, engineering and testing activities associated with the completion of the Hybrid tool and the Single wafer tool. The projects under development at the valuation date represent next-generation technologies that are expected to address emerging market demands for wet processing equipment. At the acquisition date, the technologies under development were approximately 60 percent complete based on engineering man-month data and technological progress. The STEAG Semiconductor Division had spent approximately $3.3 million on the in-process projects, and expected to spend approximately an additional $2.4 million to complete all phases of the R&D. Anticipated completion dates ranged from 10 to 18 months, at which times we expected to begin benefiting from the developed technologies. In making our purchase price allocation, we considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects are based on our estimates of cost of sales, operating expenses, and income taxes from such projects. 21 Aggregate revenues for the developmental STEAG Semiconductor Division products were estimated to grow at a compounded annual growth rate of approximately 41 percent for the seven years following introduction, assuming the successful completion and market acceptance of the major R&D programs. The estimated revenues for the in-process projects were expected to peak within five years of acquisition and then decline sharply as other new products and technologies were expected to enter the market. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 23 percent was used to value the in-process R&D. This discount rate was commensurate with the STEAG Semiconductor Division stage of development and the uncertainties in the economic estimates described above. In connection with the acquisition of CFM, we allocated approximately $4.7 million of the purchase price to an in-process research and development project. This allocation represented the estimated fair value based on risk-adjusted cash flows related to one incomplete research and development project. At the date of acquisition, the development of this project had not yet reached technological feasibility, and the research and development in progress had no alternative future use. Accordingly, the purchase price allocated to in-process research and development was expensed as of the acquisition date. At the acquisition date, CFM was conducting design, development, engineering and testing activities associated with the completion of the O3Di (Ozonated Water Module). The project under development at the valuation date represents next-generation technology that is expected to address emerging market demands for more effective, lower cost, and safer resist and oxide removal processes. At the acquisition date, the technology under development was approximately 80 percent complete based on engineering man-month data and technological progress. CFM had spent approximately $0.2 million on the in-process project, and expected to spend approximately an additional $50,000 to complete all phases of the research and development. Anticipated completion dates ranged from 2 to 3 months, at which times we expected to begin benefiting from the developed technology. In making our purchase price allocation, we considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process research and development was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the resulting net cash flows from the project, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from the project is based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. Aggregate revenues for the developmental CFM product were estimated for the five to seven years following introduction, assuming the successful completion and market acceptance of the major research and development programs. The estimated revenues for the in-process project was expected to peak within two years of acquisition and then decline sharply as other new products and technologies are expected to enter the market. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental project, a discount rate of 23 percent was used to value the in-process research and development. This discount rate was commensurate with CFM's stage of development and the uncertainties in the economic estimates described above. If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. Amortization of Goodwill and Intangibles. Goodwill and intangibles represent the purchase price of the STEAG Semiconductor Division and CFM in excess of identified tangible assets. In connection with the merger, effective January 1, 2001, we recorded $207.3 million of goodwill and intangible assets, which were being amortized on a straight-line basis over three to seven years. We recorded amortization expense of $33.5 million for the year 2001. Upon adoption of SFAS 142 on January 1, 2002, we will no longer amortize goodwill. We will continue to amortize the identified intangibles, in an amount estimated to be $6.7 million for 2002. 22 Impairment of Long-Lived Assets and other charges. In the third and fourth quarters of 2001, an independent third party performed assessments of the carrying values of our long-lived assets to be held and used including goodwill, other intangible assets and property and equipment recorded in connection with our acquisitions of the STEAG Semiconductor Division and CFM. The assessment was performed pursuant to SFAS No. 121 as a result of deteriorated market conditions in the semiconductor industry in general, a reduced demand specifically for the RTP products and certain wet products acquired in the merger, and revised projected cash flows for these products in the future. As a result of these assessments, we recorded a charge of $145.4 million to reduce goodwill, intangible assets and property and equipment based on the amount by which the carrying value of these assets exceeded their fair value. Fair value was determined based on discounted future cash flows. Interest and Other Income, Net. Interest expense of $3.0 million was primarily related to interest on our notes payable to SES. Interest income of $4.4 million resulted from the investment of our cash balances during the year. We also had other income of $3.7 million which included losses on sales of fixed assets of $2.3 million and the remainder was due to foreign exchange gains. For the year ended December 31, 2000, we earned interest income of $6.3 million which was from the investment of the net proceeds from the sale of common stock in March 2000. Provision for Income Taxes. We recorded a tax benefit of $19.0 million for the year ended December 31, 2001 compared to a tax provision of $1.1 million for the year ended December 31, 2000. The tax benefit recorded in 2001, resulted from the release of the deferred tax liability recorded in conjunction with the purchase of the STEAG Semiconductor Division and CFM. FASB Statement No. 109 requires that a deferred tax liability be recorded to offset the tax impact of non-deductible identifiable intangible assets recorded as part of purchase accounting. The deferred tax liability decreases proportionally to any amortization or write-down of the identifiable intangibles. We recognized a provision for income taxes at an effective tax rate of 10% during 2000, as we were able to recognize certain benefits from our prior operating losses. FASB Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon available data, which includes our historical operating performance, we have provided a full valuation allowance against our net deferred tax asset at December 31, 2001, as the future realization of the tax benefit is not sufficiently assured. We intend to evaluate the realization of our deferred tax assets on a quarterly basis. Years Ended December 31, 2000 and 1999 Net Sales. Our net sales for the year ended December 31, 2000 were $180.6 million, representing an increase of $77.1 million, or 74.5%, over net sales of $103.5 million for the year ended December 31, 1999. Net sales of $180.6 million in 2000 reflect the company's adoption of SAB 101. Net sales increased in 2000 primarily as a result of a 98.4% increase in unit shipments and a 4.0% increase in average selling prices that was attributable to semiconductor manufacturers' need for additional capacity and new technology. Gross Margin. Gross profit under the adoption of SAB 101 was $87.5 million for the year ended December 31, 2000, representing 48.4% of net sales, up from $50.0 million, or 48.3% of net sales, for the year ended December 31, 1999 under the historical shipment method of recognizing revenue. Our cost of sales includes labor, materials and overhead. Gross margin increased in 2000 primarily due to favorable manufacturing overhead efficiencies, as the number of systems shipped increased 98.4% in 2000 compared to 1999. Research, Development and Engineering. Research, development and engineering expenses were $28.5 million, or 15.8% of net sales, for the year ended December 31, 2000, compared to $19.5 million, or 18.9% of net sales, for the year ended December 31, 1999. The increase was primarily due to compensation and related benefits, which increased to $12.4 million in 2000 from $9.8 million in 1999, and engineering materials expense, which increased to $7.0 million in 2000 from $3.4 million in 1999. The increase in compensation and related benefits expense was due to increased personnel required to support our anticipated long term future growth. The decrease in research, development and engineering expense as a percentage of net sales in 2000 compared to 1999 was primarily attributable to increased sales in 2000. 23 Selling, General and Administrative. Selling, general and administrative expenses were $54.5 million, or 30.1% of net sales, for the year ended December 31, 2000, compared with $31.8 million, or 30.7% of net sales, for the year ended December 31, 1999. The increase was primarily due to compensation and related benefits, which increased to $32.7 million in 2000 from $22.4 million in 1999 due to increased personnel during 2000, outside services expense, which increased to $5.1 million in 2000 from $1.8 million in 1999, professional fees, which increased to $2.5 million in 2000 from $1.4 million in 1999, travel expense, which increased to $5.4 million in 2000 from $3.2 million in 1999, building and utility expense, which increased to $5.0 million in 2000 from $3.5 million in 1999, and advertisement expense, which increased to $2.0 million in 2000 from $0.7 million in 1999, all due to our growth. The decrease in selling, general and administrative expenses as a percentage of net sales in 2000 compared to 1999 was primarily attributable to increased net sales in 2000. Provision for Income Taxes. We recorded a tax provision of $1,068,000 for the year ended December 31, 2000 compared to $247,000 for the year ended December 31, 1999. We recognized provision for income taxes at an effective tax rate of 10% during 2000, as we were able to recognize certain benefits from our prior operating losses. In 1999 we did not recognize any tax benefits from our operating losses and the 1999 tax provision primarily relates to foreign income tax. FASB Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon available data, which includes our historical operating performance, we provided a $13.2 million valuation allowance against certain net deferred tax assets at December 31, 2000, as the future realization of the tax benefit was not sufficiently assured. Quarterly Results of Operations The following tables set forth our unaudited consolidated statements of operations data for each of the eight quarterly periods ended December 31, 2001. This information should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report. We have prepared this unaudited consolidated information on a basis consistent with our audited consolidated financial statements, reflecting all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Conclusions about our future results should not be drawn from the operating results for any quarter. 24
Quarter Ended (Unaudited) ---------------------------------------------------------------------------------------- MAR 26, JUN 25, SEP 24, DEC 31, APR 1, JUL 1, SEP 30, DEC 31, 2000 2000 2000 2000 2001 2001 2001 2001 -------- ------- ------- -------- -------- -------- --------- -------- CONSOLIDATED STATEMENTS OF OPERATIONS Net sales $ 39,957 $44,484 $48,310 $ 47,879 $ 73,499 $ 71,355 $ 36,643 $ 48,652 Cost of sales 21,606 23,048 24,318 24,151 50,327 56,190 35,356 56,477 Inventory valuation charges -- -- -- -- -- -- 21,341 5,077 -------- ------- ------- -------- -------- -------- --------- -------- Gross profit (loss) 18,351 21,436 23,992 23,728 23,172 15,165 (20,054) (12,902) -------- ------- ------- -------- -------- -------- --------- -------- Operating expenses: Research, development and engineering 6,298 6,867 7,356 8,019 18,901 16,108 12,734 13,371 Selling, general and administrative 10,558 12,907 14,535 16,508 31,874 23,458 26,196 29,257 In-process research and development -- -- -- -- 10,100 -- -- -- Amortization of goodwill and intangibles -- -- -- -- 10,399 9,624 8,730 4,704 Impairment of long-lived assets and other charges -- -- -- -- -- -- 127,684 22,982 -------- ------- ------- -------- -------- -------- --------- -------- Total operating expenses 16,856 19,774 21,891 24,527 71,274 49,190 175,344 70,314 -------- ------- ------- -------- -------- -------- --------- -------- Income (loss) from operations 1,495 1,662 2,101 (799) (48,102) (34,025) (195,398) (83,216) Interest and other income, net 398 1,511 2,267 2,052 488 1,307 2,309 912 -------- ------- ------- -------- -------- -------- --------- -------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle 1,893 3,173 4,368 1,253 (47,614) (32,718) (193,089) (82,304) Provision (benefit) for income taxes 189 317 437 125 2,012 397 (6,231) (15,168) -------- ------- ------- -------- -------- -------- --------- -------- Income before cumulative effect of change in accounting principle 1,704 2,856 3,931 1,128 (49,626) (33,115) (186,858) (67,136) Cumulative effect of change in accounting principle, net of tax benefit (8,080) -- -- -- -- -- -- -- -------- ------- ------- -------- -------- -------- --------- -------- Net income (loss) $ (6,376) $ 2,856 $ 3,931 $ 1,128 $(49,626) $(33,115) $(186,858) $(67,136) ======== ======= ======= ======== ======== ======== ========= ======== Net income (loss) per share before cumulative effect of a change in accounting principle: Basic $ 0.10 $ 0.14 $ 0.20 $ 0.06 $ (1.36) $ (0.90) $ (5.05) $ (1.81) Diluted $ 0.09 $ 0.13 $ 0.18 $ 0.05 $ (1.36) $ (0.90) $ (5.05) $ (1.81) Cumulative effect of change in accounting principle: Basic $ (0.48) $ -- $ -- $ -- $ -- $ -- $ -- $ -- Diluted $ (0.42) $ -- $ -- $ -- $ -- $ -- $ -- $ -- Net income (loss) per share: Basic $ (0.38) $ 0.14 $ 0.20 $ 0.06 $ (1.36) $ (0.90) $ (5.05) $ (1.81) Diluted $ (0.33) $ 0.13 $ 0.18 $ 0.05 $ (1.36) $ (0.90) $ (5.05) $ (1.81) Shares used in computing Income (loss) per share: Basic 16,863 19,877 20,152 20,306 36,613 36,804 36,985 37,013 Diluted 19,184 21,929 21,704 21,070 36,613 36,804 36,985 37,013
Liquidity and Capital Resources ($ in 000s) 2001 2000 1999 -------- --------- -------- Cash flows from operating activities: $(32,276) $(53,109) $(9,510) Cash flows from investing activities: 63,266 (56,463) 8,627 Cash flows from financing activities: 9,620 126,105 6,041 Net increase in cash and cash equivalents 30,626 16,466 5,102 25 Our cash and cash equivalents (excluding restricted cash) and short-term investments were $69.8 million at December 31, 2001, a decrease of $2.4 million from $72.2 million held as of December 31, 2000. Stockholders' equity at December 31, 2001 was approximately $141.7 million. Net cash used in operating activities was $32.3 million for the year ended December 31, 2001 and $53.1 million for the year ended December 31, 2000. The net cash used in operations in 2001 was primarily attributable to the net loss of $336.7 million and a decrease in accrued liabilities of $25.4 million and accrued payables of $20.7 million. These uses of cash were offset by non-cash impairment of long-lived assets and other charges of $150.7 million and depreciation and amortization of goodwill and intangibles of $33.5 million, an increase in deferred revenue of $95.9 million, decrease in accounts receivable of $50.4 million, inventory valuation charges of $26.4 million and acquired in-process research and development of $10.1 million. The net cash used in operations in 2000 was primarily attributable to the net income of $1.5 million, deferred taxes of $6.4 million, an increase in restricted cash of $32.0 million, an increase in accounts receivable of $39.6 million, an increase in inventories of $30.1 million, an increase in prepaid expenses and other assets of $6.7 million, offset by the cumulative effect of a change in accounting principle of $8.1 million, non-cash depreciation and amortization of $4.5 million, an increase in deferred revenue of $31.3 million, an increase in accounts payable of $6.6 million and an increase in accrued liabilities of $11.4 million. The net cash of $9.5 million used in operations in 1999 was primarily attributable to the net loss of $0.8 million, an increase in accounts receivable of $11.9 million and an increase in inventories of $14.8 million, offset by non-cash depreciation and amortization of $4.8 million, a decrease in prepaid expenses and refundable income taxes of $2.7 million, an increase in accounts payable of $5.1 million and an increase in accrued liabilities of $5.4 million. Net cash provided by investing activities was $63.3 million for the year ended December 31, 2001 which consisted of the sale of $58.3 million of investments and cash acquired from the acquisition of STEAG and CFM of $38.0 million offset by the purchase of $17.2 million of property and equipment and $16.3 million of investments. Net cash used in investing activities in 2000 was $56.5 million which consisted of the purchase of $59.4 million of investments and $9.0 million of property and equipment offset by the sale of $12 million of investments. Net cash provided by investing activities in 1999 included the collection of a $3.7 million note receivable from our then chief executive officer, and the sale of $8.1 million of short-term investments, offset by the purchase of $3.3 million of property and equipment. Net cash provided by financing activities was $9.6 million in 2001, primarily from $9.0 million borrowings against lines of credit, $3.6 million proceeds from stock plans and $2.7 million of interest accrued on the notes payable to SES, offset by the repayment of $4.9 million against our line of credit. Net cash provided by financing activities was $126.1 million in 2000, primarily from $122.8 million net proceeds from the issuance of common stock and $6.4 million proceeds from stock plans, offset by the repayment of $3.0 million against our line of credit. Net cash provided by financing activities was $6.0 million in 1999, primarily from the $3.0 million net proceeds from the issuance of common stock under our employee stock purchase plan and our stock option plan and borrowings of $3.0 million against our $15.0 million line of credit. As a result of our acquisition of the STEAG Semiconductor Division at the beginning of 2001, we owe SES a total of approximately $44.6 million under two promissory notes which bear interest at 6.0% per year and are due July 2, 2002. One promissory note, in the amount of $26.9 million, is secured by an irrevocable standby letter of credit issued by Silicon Valley Bank, which is in turn secured by restricted cash on our balance sheet in the amount of $27.3 million. This obligation had originally been due on July 2, 2001. On November 5, 2001, SES agreed to extend the maturity date to July 2, 2002, and the interest accrued through July 2, 2001 was capitalized and added to the principal under the extended note. The note contains certain covenants, and we have been in compliance with them. The second promissory note, in the amount of 19.2 million EURO (approximately $17.1 million), is secured by the accounts receivable of two of our acquired subsidiaries, Mattson Thermal Products GmbH, Dornstadt, Germany, and Mattson Wet Products GmbH, Pliezhausen, Germany. This note contains covenants and requires us to maintain certain balances, including a minimum amount of applicable accounts receivable of at least 17.9 million EURO (approximately $15.9 million) at our relevant subsidiaries. We have been in compliance with all of these covenants. As of December 31, 2001, we have non-cancelable operating lease commitments of $45.8 million. 26 We have made loans to certain current and former executive officers, in an aggregate amount of approximately $670,000. These loans are described in the section captioned "Certain Relationships and Related Transactions." Our Japanese subsidiary has entered into a credit line with Bank of Tokyo-Mitsubishi in the amount of 900 million Yen (approximately $6.9 million), secured by trade accounts receivable. The line bears interest at a per annum rate of TIBOR plus 75 basis points, which is approximately 0.81% at December 31, 2001. The term of the line is through June 20, 2002. We have guaranteed the line. At December 31, 2001, the borrowing on this line was 601.7 million Yen (approximately $4.6 million). During 2000, one of the subsidiaries we acquired as part of the STEAG Semiconductor Division entered into a two-year revolving line of credit with a bank in Japan in the amount of 500 million Yen (approximately $3.8 million), under which 450 million Yen (approximately $3.5 million) was borrowed. It bore interest at a per annum rate of 1.96% through March 2001 and thereafter at a rate of 1.75%, and was secured by a letter of credit in the amount of $5.1 million, which required us to maintain a restricted cash balance in the same amount. These borrowings were repaid in full in December 2001, and the line of credit was cancelled. This resulted in an increase in our unrestricted cash by approximately $1.6 million. On March 8, 2000 we completed a public offering of 3,000,000 shares of our common stock. The public offering price was $42.50 per share. On March 16, 2000, the underwriters exercised a right to purchase an additional 90,000 shares to cover over-allotments. The net proceeds of approximately $122.8 million were raised for general corporate purposes, principally working capital requirements and capital expenditures. On March 29, 2002 we entered into a one-year revolving line of credit with a bank in the amount of $20.0 million. The line of credit will expire on March 29, 2003, if not extended by then. All borrowings under this line will bear interest at a per annum rate equal to the bank's prime rate plus 125 basis points. The line of credit is secured by a blanket lien on all domestic assets including intellectual property. The line of credit requires the Company to satisfy certain quarterly financial covenants, including maintaining a minimum quick ratio, minimum tangible net worth and meeting minimum revenue targets. Based on current projections, we believe that our current cash and investment positions will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our primary source of liquidity is our existing unrestricted cash balance and cash generated by our operations. During 2001, we had operating losses, and used net cash in our operating activities. Our operating plans are based on and require that we reduce our operating losses, control our expenses, manage our inventories, and collect our accounts receivable balances. In this market downturn, we are exposed to a number of challenges and risks, including delays in payments of our accounts receivable by our customers, and postponements or cancellations of orders. Postponed or cancelled orders can cause us to have excess inventory and underutilized manufacturing capacity. If we are not able to significantly reduce our present operating losses over the upcoming quarters, our operating losses could adversely affect our cash and working capital balances, and we may be required to seek additional sources of financing. We may need to raise additional funds in future periods through public or private financing, or other sources, to fund our operations. We may not be able to obtain adequate or favorable financing when needed. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders would be reduced, and these equity securities may have rights, preferences or privileges senior to our common stock. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants on our operations and financial condition. New Accounting Pronouncements On June 29, 2001, the Financial Accounting Standard Board (FASB) approved for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually using a fair value approach, except in certain circumstances, and whenever there is an impairment indicator; 27 other intangible assets will continue to be valued and amortized over their estimated lives; in-process research and development will continue to be written off immediately; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, existing goodwill and certain intangible assets will no longer be subject to amortization. Goodwill arising between July 1, 2001 and December 31, 2001 will not be subject to amortization. Upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill, thereby eliminating annual goodwill amortization of approximately $3.9 million, based on anticipated amortization for 2002. The Company will continue to amortize the identified intangibles, which is estimated to be $6.7 million for 2002. Amortization of goodwill and intangibles for the year ended December 31, 2001 was approximately $33.5 million including amounts related to the amortization of goodwill and intangibles of CFM and the STEAG Semiconductor Division which became impaired. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143"). SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes that the adoption of SFAS 143 will not have a significant effect on its financial position, results of operations or cash flows. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144, which replaces SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS 144 also broadens disposal transactions reporting related to discontinued operations. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company believes that the adoption of SFAS 144 will not have a significant effect on its financial position, results of operations, or cash flows. Mergers and Acquisitions On June 27, 2000, we entered into a definitive Strategic Business Combination Agreement, subsequently amended on December 15, 2000 and November 5, 2001("Combination Agreement") to acquire eleven direct and indirect subsidiaries comprising the semiconductor equipment division of STEAG Electronic Systems AG ("the STEAG Semiconductor Division"), and we entered into an Agreement and Plan of Merger ("Plan of Merger") to acquire CFM Technologies, Inc. ("CFM"). Both transactions were completed simultaneously on January 1, 2001. Under the Combination Agreement, we issued to STEAG Electronic Systems AG ("SES") 11,850,000 shares of common stock, valued at approximately $124 million as of the date of the amended Combination Agreement. We also paid SES $100,000 in cash, assumed certain obligations of SES and STEAG AG, the parent company of SES, and assumed certain intercompany indebtedness and obligations owed by the acquired subsidiaries to SES. We reimbursed SES $3.3 million in acquisition related costs in April 2001. At December 31, 2001, we owed SES approximately $44.6 million (including accrued interest), under two secured promissory notes. One note is in the principal amount of $26.9 million, and the other is in the principal amount of 19.2 million EUROS (approximately $17.1 million as of December 31, 2001). Each note bears interest at 6% per annum, and is due July 2, 2002. The acquisition has been accounted for under the purchase method of accounting, and the results of operations of the STEAG Semiconductor Division are included in our condensed consolidated statement of operations from the date of acquisition. The purchase price of this acquisition was $148.6 million, which included $6.2 million of direct acquisition related costs (including the amount reimbursed to SES). Under the Plan of Merger with CFM, we agreed to acquire CFM in a stock-for-stock merger in which we issued 4,234,335 shares of our common stock, valued at approximately $150.2 million. In addition, we assumed all outstanding CFM stock options, which resulted in our issuance of options to acquire 927,457 shares of our common stock, valued at approximately $20.4 million. The merger has been accounted for under the purchase method of accounting and the results of operations of CFM are included in our consolidated statement of operations from the date of acquisition. The purchase price of the acquisition of CFM was $174.6 million, which included $4.0 million of direct acquisition related costs. 28 Under the Combination Agreement and the Plan of Merger, we also agreed to grant options to purchase 850,000 shares of our common stock to employees of the STEAG Semiconductor Division and options to purchase 500,000 shares of our common stock to employees of CFM subsequent to the closing of the transactions. These options are not included in the purchase price of the STEAG Semiconductor Division or CFM. As a result of our acquisition of the STEAG Semiconductor Division, SES holds approximately 32% of our common stock and currently has two representatives on our board of directors. As part of the acquisition, we entered into several transition services agreements with SES, under which SES agreed to provide specified payroll, communications, accounting information and intellectual property administration services to certain of our German subsidiaries for a term of one year. In 2001, we paid to SES approximately $988,000 in connection with the purchase of services or supplies pursuant to the transition services agreements. In addition, we have a manufacturing supply contract with a company affiliated with SES, under which we had the right to utilize manufacturing and assembly services based on an hourly rate. For 2001, we purchased $3.7 million worth of such manufacturing and assembly services. In February 2001, we announced plans to divest our single-wafer RT-CVD business unit, previously known as STEAG CVD Systems. The business unit, which was acquired as part of the STEAG Semiconductor Division, included lamp-based RT-CVD tools that did not fit with our strategic roadmap for thermal and CVD products. In April 2001, we acquired 97% of the outstanding shares of R.F. Services, Inc. for a cash price of $928,800 (including acquisition-related costs of $41,500). Brad Mattson, former Chief Executive Officer of the Company, owned a majority of the outstanding shares of R.F. Services, Inc. and served as a director of that company. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK The Semiconductor Equipment Industry is Cyclical, is Currently Experiencing a Severe and Prolonged Downturn, and Causes Our Operating Results to Fluctuate Significantly. The semiconductor industry is highly cyclical and has historically experienced periodic downturns, whether the result of general economic changes or capacity growth temporarily exceeding growth in demand for semiconductor devices. During periods of declining demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. Increased price competition may result, causing pressure on our net sales, gross margin and net income. We are experiencing cancellations, delays and push-outs of orders, which reduce our revenues, cause delays in our ability to recognize revenue on the orders and reduce backlog. Further order cancellations, reductions in order size or delays in orders will materially adversely affect our business and results of operations. Following the very strong year in 2000, the semiconductor industry is now in the midst of a significant and prolonged downturn, and we and other industry participants are experiencing lower bookings, significant push outs and cancellations of orders. The severity and duration of the downturn are unknown, but is impairing our ability to sell our systems and to operate profitably. If demand for semiconductor devices and our systems remains depressed for an extended period, it will seriously harm our business. As a result of the acquisition of the STEAG Semiconductor Division and CFM at the beginning of 2001, we are a larger, more geographically diverse company, less able to react quickly to the cyclicality of the semiconductor business, particularly in Europe and other regions where restrictive laws relating to termination of employees prohibit us from quickly reducing costs in order to meet the downturn. Accordingly, during this latest downturn we have been unable to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal year ended December 31, 2001, our net loss was $336.7 million, compared to net income of $1.5 million for the year ended December 31, 2000. The net loss in 2001 reflected the impact of our decline in net sales, and unusual charges of $209.1 million, including impairment charges, effects of APB 16 inventory charges, inventory valuation charges and write-downs, restructuring costs and in-process research and development write-offs. If our actions to date are insufficient to effectively align our cost structure with prevailing market conditions, we may be required to undertake additional cost-cutting measures, and may be unable to continue to invest in marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position. Our failure to make these investments could seriously harm our long-term business prospects. 29 We are Exposed to the Risks Associated with Industry Overcapacity, Including Reduced Capital Expenditures, Decreased Demand for Our Products and the Inability of Many of Our Customers to Pay for Our Products. As a result of the recent economic downturn, inventory buildups in telecommunication products and slower than expected personal computer sales have resulted in overcapacity of semiconductor devices and has caused semiconductor manufacturers to experience cash flow problems and reduce their capital spending. As our business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities, continued overcapacity and reductions in capital expenditures by our customers could cause further delays or decreased demand for our products. If existing fabrication facilities are not expanded or new facilities are not built, demand for our systems may not develop or increase, and we may be unable to generate significant new orders for our systems. If we are unable to develop new orders for our systems, we will not achieve anticipated net sales levels. In addition, many semiconductor manufacturers are continuing to forecast that revenues in the short-term will remain flat or lower than in previous high-demand years, and we believe that some customers may experience cash flow problems. As a result, if customers are not successful generating sufficient revenue or securing alternative financing arrangements, we may be unable to close sales or collect accounts receivables from such customers or potential customers, and may be required to take additional reserves against our accounts receivables. The Merger with STEAG and CFM May Fail to Achieve Beneficial Synergies and We May Be Unable to Efficiently Integrate the Operations of Our Acquisitions. We entered into the merger transaction with the expectation that it would result in beneficial synergies between and among the semiconductor equipment businesses of the three combined companies. Achieving these anticipated synergies and their potential benefits would depend on a number of factors, some of which include: * our ability to timely develop new products and integrate the products and sales efforts of the combined company; and * competitive conditions and cyclicality in the semiconductor manufacturing process equipment market. If we are able to realize the anticipated benefits of these acquisitions, the operations of STEAG and CFM must be integrated and combined efficiently. Although we have commenced these integration activities, the process of integrating supply and distribution channels, computer and accounting systems and other aspects of operations, while managing a larger entity, has presented and is expected to continue to present a significant challenge to our management. In addition, we have incurred substantial restructuring costs in order to achieve desired synergies of the transactions, including severance costs associated with headcount reductions due to duplication; and asset write-offs associated with manufacturing and facility consolidations. We may incur additional costs associated with improving existing and implementing new operational and financial systems, procedures and controls to fully integrate the three businesses. The dedication of management resources to the integration has detracted, and may continue to detract, attention from the day-to-day business. The difficulties of integration are increased by the necessity of combining personnel with disparate business backgrounds, combining different corporate cultures and utilizing incompatible financial systems. We may incur additional costs associated with these activities, which could materially reduce our short-term earnings. Even with the integrated operations, there can be no assurance that the anticipated synergies will be achieved. The failure to achieve such synergies could have a material adverse effect on our business, results of operations, and financial condition. 30 We Will Need to Improve or Implement New Systems, Procedures and Controls. The integration of STEAG and CFM and their operational and financial systems and controls has placed a significant strain on our management information systems and our administrative, operational and financial resources. To efficiently manage the combined company, we must improve our existing and implement new operational and financial systems, procedures and controls. Since the merger, we have commenced integration of the businesses, systems and controls of the three companies, however, each business has historically used a different financial system, and the resulting integration and consolidation has placed and will continue to place substantial demands on our management resources. Improving or implementing new systems, procedures and controls may be costly, and may place further burdens on our management and internal resources. If we are unable to improve our existing or implement new systems, procedures and controls in a timely manner, our business could be seriously harmed. Our Results of Operations May Suffer if We Do Not Effectively Manage Our Inventory. To achieve commercial success with our product lines, we will need to manage our inventory of component parts and finished goods effectively to meet changing customer requirements. Some of our products and supplies have in the past and may in the future become obsolete while in inventory due to rapidly changing customer specifications. For example, in the quarters ended September 30, 2001 and December 31, 2001, we took inventory valuation charges of $26.4 million. If we are not successfully able to manage our inventory, including our spare parts inventory, we may need to write off unsaleable or obsolete inventory, which would adversely affect our results of operations. 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 and our business would suffer. We May Need Additional Capital, Which May Not Be Available and Which Could Be Dilutive to Existing Stockholders. Based on current projections, we believe that our current cash and investments along with cash generated through operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. Management's projections are based on our ability to manage inventories and collect accounts receivable balances in this market downturn. If we are unable to manage our inventories or accounts receivable balances, or if we otherwise experience higher operating costs or lower revenue than we anticipate, then we may be required to seek alternative sources of financing. We may need to raise additional funds in future periods through public or private financing or other sources to fund our operations. We may not be able to obtain adequate or favorable financing when needed. If we fail to raise capital when needed, we would be unable to continue operating our business as we plan, or at all. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. In addition, any future equity securities may have rights, preferences or privileges senior to our common stock. Furthermore, debt financing, if available, may involve restrictive covenants on our operations. If We Are Unable to Repay Amounts Due to STEAG in July 2002, Our Business Could Be Harmed. In connection with our acquisition of the STEAG Electronics Division, we assumed certain obligations to STEAG Electronic Systems AG ("SES"), including certain intercompany indebtedness owed by the acquired subsidiaries to SES, in exchange for a secured promissory note in the principal amount of $26.9 million, with an interest rate of 6%. This note is secured by restricted cash in the amount of $26.9 million. We are also obligated to pay SES approximately Euro 19.2 million (approximately $17.1 million as of December 31, 2001) under a second promissory note, which is secured by accounts receivable of two of our subsidiaries in Germany. As this second note is payable in Euros, we have exposure for exchange rate volatility. Under both of these obligations, including accrued interest, we owe approximately $44.6 million as of December 31, 2001 to SES, which is due on July 2, 2002. At the due date, we will be required to repay these obligations in full. If we are unable to repay the amounts due on the due date, STEAG could foreclose on the loans, resulting in significant harm to our business and financial condition. 31 Our Financial Reporting may be Delayed and Our Business may be Harmed if Our Independent Public Accountant, Arthur Andersen LLP, is Unable to Perform Required Services. On March 14, 2002, our independent public accounting firm, Arthur Andersen LLP, was indicted for alleged obstruction of justice arising from the federal government's investigation of Enron Corporation. Arthur Andersen pleaded not guilty to the charges, and indicated that it intends to defend itself vigorously. As a public company, we are required to file with the SEC periodic financial statements audited or reviewed by an independent, certified public accountant. The SEC has announced that it will continue accepting financial statements audited by Arthur Andersen, and interim financial statements reviewed by it, so long as Arthur Andersen is able to make certain representations to its clients. Our ability to make timely SEC filings could be impaired if the SEC ceases accepting financial statements audited by Arthur Andersen, if Arthur Andersen becomes unable to make required representations to us or if for any other reason Arthur Andersen is unable to perform required audit-related services for us in a timely manner. This in turn could damage or delay our access to the capital markets, and could be disruptive to our operations and affect the price and liquidity of our securities. Certain investors, including significant mutual funds and institutional investors, may choose not to hold or invest in securities of issuers that do not have current financial reports available. In such a case, we would promptly seek to engage other independent public accountants or take such other actions as may be necessary to enable us to timely file required financial reports. In addition, relief that may otherwise be available to shareholders under the federal securities laws against auditing firms may not be available as a practical matter against Arthur Andersen should it cease to operate or become financially impaired. New Accounting Guidance Under SAB 101 Has Resulted in Delayed Recognition of Our Revenue. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Among other things, SAB 101 has resulted in a change from the established practice of recognizing revenue at the time of shipment of a system, and instead delaying revenue recognition in part or totally until the time of customer acceptance. We adopted SAB 101 effective in the fourth quarter of fiscal 2000, retroactive to January 1, 2000, with the impact recorded as a cumulative effect in the first quarter of 2000. In some situations, application of this accounting guidance delays the recognition of revenue that would otherwise have been recognized in earlier periods. As a result, our reported revenue may fluctuate more widely and reported revenue for a particular fiscal period might not meet the expectations of financial analysts or investors. A delay in recognition of revenue resulting from application of this guidance, while not affecting our cash flow, could adversely affect our results of operations, which could cause the value of our common stock to fall. We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation, Reduction or Delay in Purchases By, or Failure to Collect Receivables From, These Customers Could Harm Our Business. Currently, we derive most of our revenues from the sale of a relatively small number of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. The list prices on our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle for each system, coupled with customers' capital budget considerations, make the timing of customer orders uneven and difficult to predict. In addition, our backlog at the beginning of a quarter is not expected to include all orders required to achieve our sales objectives for that quarter. As a result, our net sales and operating results for a quarter depend on our ability to ship orders as scheduled during that quarter as well as obtain new orders for systems to be shipped in that same quarter. During the fourth quarter of 2001, we experienced lower bookings, significant push outs and cancellation of orders. Any delay in scheduled shipments or in acceptances of shipped products would delay our ability to recognize revenue, collect outstanding accounts receivable, and would materially adversely affect our operating results for that quarter. A delay in a shipment or customer acceptance near the end of a quarter may cause net sales in that quarter to fall below our expectations and the expectations of market analysts or investors. If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted. Our list of major customers changes substantially from year to year, and we cannot predict whether a major customer in one year will make significant purchases from us in future years. Accordingly, it is difficult for us to accurately forecast our revenues and operating results from year to year. If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted. 32 Our Quarterly Operating Results Fluctuate Significantly and Are Difficult to Predict, and May Fall Short of Anticipated Levels, Which Could Cause Our Stock Price to Decline. Our quarterly revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results. This fluctuation is due to a number of factors, including: o cyclicality of the semiconductor industry; o delays, cancellations and push-outs of orders by our customers; o delayed payments of invoices by our customers; o size and timing of sales and shipments of our products; o entry of new competitors into our market, or the announcement of new products or product enhancements by competitors; o sudden changes in component prices or availability; o variability in the mix of products sold; o manufacturing inefficiencies caused by uneven or unpredictable order patterns, reducing our gross margins; o higher fixed costs due to increased levels of research and development or patent litigation costs; and o successful expansion of our worldwide sales and marketing organization. A substantial percentage of our operating expenses are fixed in the short term and we may be unable to adjust spending to compensate for an unexpected shortfall in revenues. As a result, any delay in generating or recognizing revenues could cause our operating results to be below the expectations of market analysts or investors, which could cause the price of our common stock to decline. We Incurred Net Operating Losses for the Fiscal Years 1998, 1999 and 2001. We May Not Achieve or Maintain Profitability on an Annual Basis, and If We Do Not, We May Not Utilize Deferred Tax Assets. We incurred net losses of approximately $22.4 million for the year ended December 31, 1998, $0.8 million for the year ended December 31, 1999, and $336.7 million for the year ended December 31, 2001. We expect to continue to incur significant research and development and selling, general and administrative expenses and may not return to profitability in 2002. We will need to generate significant increases in net sales to achieve and maintain profitability on an annual basis, and we may not be able to do so. Our ability to realize our deferred tax assets in future periods will depend on our ability to achieve and maintain profitability on an annual basis. As a Result of the Industry Downturn, We Have Implemented a Restructuring and Workforce Reductions, Which May Adversely Affect the Morale and Performance of our Personnel and our Ability to Hire New Personnel. In connection with our efforts to streamline operations, reduce costs and bring our staffing and structure in line with current demand for our products, we recently restructured our organization and reduced our workforce by 466 full-time positions and 103 consultant positions in 2001. We have incurred costs of $8.1 million associated with the workforce reduction related to severance and other employee-related costs in 2001, and may incur further costs if additional restructuring is needed to right size our business further or bring our costs down to respond to continued industry and economic slowdowns. Our restructuring may also yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. In addition, the recent trading levels of our common stock have decreased the value of our stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive as having less volatile stock prices. Continuity of personnel can be an important factor in the successful sales of our products and completion of our development projects, and ongoing turnover in our sales and research and development personnel could materially and adversely impact our sales, development and marketing efforts. We believe that hiring and retaining qualified individuals at all levels is essential to our success, and there can be no assurance that we will be successful in attracting and retaining the necessary personnel. 33 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. Potential new customers evaluate the need to acquire new semiconductor manufacturing equipment infrequently. 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. We may expend significant sales and marketing expenses during this evaluation period. 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. In this difficult economic climate, the average sales cycle has lengthened even further and is expected to continue to make it difficult to accurately forecast future sales. If sales forecasted from a specific customer for a particular quarter 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 Our International Sales, and Face Significant Economic and Regulatory Risks Because a Majority of Our Net Sales Are From Outside the United States. 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, and other Asian countries accounted for 47% of our total sales in 2001, 54% in 2000, and 59% in 1999. During 2001, Europe also emerged as an important region for our business, contributing 31% of our sales. During 2000 and 1999, sales to customers in Europe accounted for 14% and 11%, respectively. Our international sales accounted for 78% of our total net sales in 2001, 69% in 2000 and 71% in 1999 and we anticipate international sales will continue to account for a significant portion of our future net sales. Because of our continuing dependence upon international sales, however, 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. 34 In the U.S., 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. Although we have, adopted a foreign currency hedging program, to date we have engaged in immaterial amounts hedging transactions or used derivative financial instruments to mitigate our currency risks. 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, we are exposed to the risks of operating a global business, and maintain certain manufacturing facilities in Germany. Managing our global operations presents challenges, including varying business conditions and demands, political instability, export restrictions and fluctuations in interest and currency exchange rates. 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. Unless We Can Continue To Develop and Introduce New Systems that Compete Effectively on the Basis of Price and Performance, We May Lose Future Sales and Customers, Our Business May Suffer, and Our Stock Price May Decline. Because of continual changes in the markets in which our customers and we compete, our future success will depend in part upon our ability to continue to improve our systems and technologies. These markets are characterized by rapidly changing technology, evolving industry standards, and continuous improvements in products and services. Due to the continual changes in these markets, our success will also depend upon our ability to develop new technologies and systems that compete effectively on the basis of price and performance and that adequately address customer requirements. In addition, we must adapt our systems and processes to support emerging target market industry standards. The success of any new systems we introduce is dependent on a number of factors, including timely completion of new system designs accepted by the market, and may be adversely affected by manufacturing inefficiencies and the challenge of producing systems in volume which meet customer requirements. We may not be able to improve our existing systems or develop new technologies or systems in a timely manner. In particular, the transition of the market to 300 mm wafers will present us with both an opportunity and a risk. To the extent that we are unable to introduce 300mm systems that meet customer requirements on a timely basis, our business could be harmed. We may exceed the budgeted cost of reaching our research, development and engineering objectives, and estimated product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on our business and results of operations. Because of the complexity of our systems, significant delays can occur between the introduction of systems or system enhancements and the commencement of commercial shipments. 35 The Timing of the Transition to 300mm Technology is Uncertain and Competition May Be Intense. We have invested, and are continuing to invest, substantial resources to develop new systems and technologies to automate the processing of 300mm wafers. However, the timing of the industry's transition to 300mm manufacturing technology is uncertain, partly as a result of the recent period of reduced demand for semiconductors. Delay in the transition to 300mm manufacturing technology could adversely affect our potential revenues and opportunities for future growth. Moreover, delay in the transition to 300mm technology could permit our competitors to introduce competing or superior 300mm products at more competitive prices, causing competition to become more vigorous. Delays or Technical and Manufacturing Difficulties Incurred in the Introduction of New Products Could Be Costly and Adversely Affect Our Customer Relationships. From time to time, we have experienced delays in the introduction of, and certain technical and manufacturing difficulties with, certain systems and enhancements, and may experience such delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. For example, our inability to overcome such difficulties, 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. In addition, 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 new products or enhancements experience reliability or quality problems, we could encounter 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 Be Able To Continue To Successfully Compete in the Highly Competitive Semiconductor 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; and o customer support. The following characteristics of our major competitors' systems may give them a competitive advantage over us: o broader product lines; o longer operating history; o greater experience with high volume manufacturing; o broader name recognition; o substantially larger customer bases; and o substantially greater financial, technical, and marketing resources. 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, and sale 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. 36 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 manufacture 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, as it was in 2000, our suppliers strained to provide 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. As a result, we have in the past and we may in the future experience delays or shortages. 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 Are Highly Dependent on Our Key Personnel to Manage Our Business and Their Knowledge of Our Business, Management Skills, and Technical Expertise Would Be Difficult to Replace. Our success will depend to a large extent upon the efforts and abilities of our executive officers, our current management and our technical staff, any of whom would be difficult to replace. Several of our executive officers have recently joined us or have assumed new responsibilities at the company. The addition, reassignment or loss of key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and result in lost sales and diversion of management resources. Because of Competition for Additional 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 the current downturn ends suddenly, we may not have enough personnel to promptly return to our previous production levels. If we are unable to expand our existing manufacturing capacity to meet demand, a customer's placement of a large order for our products during a particular period might deter other customers from placing similar orders with us for the same period. It could be difficult for us to rapidly recruit and train substantial numbers of qualified technical personnel to meet increased demand. 37 If We Are Unable to Protect Our Intellectual Property, We May Lose a Valuable Asset, Experience Reduced Market Share, and 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. In addition, 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, duplicate our products, 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 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 are currently litigating several matters involving our wet division intellectual property. These legal proceedings, whether with or without merit, could be time-consuming and expensive to prosecute or defend, and could divert management's attention and resources. There can be no assurance as to the outcome of current or future legal proceedings or claims. Defenses or counterclaims in these proceedings could result in the nullification of any or all of the subject patents. We Might Face Intellectual Property Infringement Claims that May Be Costly to Resolve and Could Divert Management Attention Including the Potential for Patent Infringement Litigation as a Result of Our Increased Market Strength in RTP and Entry into the Wet Processing Market. We may from time to time be subject to claims of infringement of other parties' proprietary rights. Competitors alleging infringement of such competitors' patents have in the past sued our acquired company, STEAG Semiconductor Division. Although all such historic lawsuits have been settled or terminated, the risk of further intellectual property litigation for us may be increased following the expansion of our business after the merger. 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, 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. 38 The Effect of Terrorist Threats on the General Economy Could Decrease Our Revenues. On September 11, 2001, the United States was subject to terrorist attacks at the World Trade Center buildings in New York City and the Pentagon in Washington D.C. The potential near- and long-term impact these attacks may have in regards to our suppliers and customers, markets for their products and the U.S. economy are uncertain. There may be other potential adverse effects on our operating results due to this significant event that we cannot foresee. Future Sales of Shares by STEAG Could Adversely Affect the Market Price of Our Common Stock. There are approximately 37.0 million shares of our common stock outstanding as of December 31, 2001, of which approximately 11.8 million (or 32%) are held beneficially by STEAG. STEAG has agreed to restrictions on its ability to acquire additional shares of our stock, other than to maintain its percentage ownership in us, and from soliciting proxies and certain other standstill restrictions in connection with voting shares of our common stock, for a period of five years after its acquisition of the stock. STEAG may sell these shares in the public markets from time to time, subject to certain limitations on the timing, amount and method of such sales imposed by SEC regulations, and STEAG has the right to require us to register for resale all or a portion of the shares they hold. If STEAG were to sell a large number of shares, the market price of our common stock could 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. The Price of Our Common Stock Has Fluctuated in the Past and May Continue to Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or to Securities Litigation. The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future. We believe that a number of factors could cause the price of our common stock to fluctuate, perhaps substantially, including: o general conditions in the semiconductor industry or in the worldwide economy; o announcements of developments related to our business; o fluctuations in our operating results and order levels; o announcements of technological innovations by us or by our competitors; o new products or product enhancements by us or by our competitors; o developments in patent litigation or other intellectual property rights; or o developments in our relationships with our customers, distributors, and suppliers. In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. 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 additional 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: 39 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. ITEM 7A: QUALITATIVE AND QUANTITATIVE 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 only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have no cash flow exposure due to rate changes for cash equivalents and short-term investments, as all of these investments are at fixed interest rates. The table below presents principal amounts and related weighted average interest rates for our investment portfolio and the fair value of each as of December 31, 2001. Fair Value December 31, 2001 -------------- (In thousands) Assets Cash and cash equivalents................................. $64,057 Average interest rate................................... 1.60% Restricted cash........................................... $27,300 Average interest rate................................... 1.00% Short-term investments..................................... $ 5,785 Average interest rate................................... 4.25% 40 Foreign Currency Risk We transact business in various foreign countries. During 2000, we employed a foreign currency hedging program utilizing foreign currency forward exchange contracts to hedge foreign currency fluctuations with Japan. The goal of the hedging program is to lock in exchange rates to minimize the impact to us of foreign currency fluctuations. We do not use foreign currency forward exchange contracts for speculative or trading purposes. The following table provides information as of December 31, 2001 about our derivative financial instruments, which are comprised of foreign currency forward exchange contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts (at the contract exchange rates), the weighted average contractual foreign currency exchange rates, and the estimated fair value of those contracts. Average Estimated Notional Contract Fair Amount Rate Value ------ ---- ----- (In thousands, except for average contract rate) Foreign currency forward exchange contracts: Japanese Yen............................ $8,060 120.51 $7,330 The local currency is the functional currency for all foreign sales operations. Our exposure to foreign currency risk has increased as a result of our global expansion of business. In addition, a payment obligation to STEAG AG in the amount estimated to be $17.1 million is payable in EUROS and, accordingly, there exists exposure for exchange rate volatility. The exposure for the exchange rate volatility of the STEAG payment obligation has been mostly neutralized by using a natural balance sheet hedge and keeping EUROS in a foreign currency bank account. The balance of this bank account was 17.1 million EUROS at December 31, 2001. 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page ---- Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and 2000 ......... 43 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ................................................. 44 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 .................................... 45 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ................................................. 46 Notes to Consolidated Financial Statements ........................... 47 Report of Independent Public Accountants ............................. 67 Financial Statement Schedules: Schedule II ........................................................ 82 42 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, --------------------------------- 2001 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 64,057 $ 33,431 Restricted cash 27,300 31,995 Short-term investments 5,785 38,814 Accounts receivable, net of allowance for doubtful accounts of $12,473 and $501 in 2001 and 2000, respectively 38,664 20,425 Advance billings 61,874 40,704 Inventories 65,987 43,905 Inventories - delivered systems 74,002 11,528 Deferred tax assets -- 4,010 Prepaid expenses and other current assets 18,321 8,963 --------- --------- Total current assets 355,990 233,775 Property and equipment 33,508 15,953 Long-term investments -- 9,287 Deferred tax assets -- 2,403 Goodwill, intangibles and other assets 43,207 8,250 --------- --------- $ 432,705 $ 269,668 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - STEAG Electronic Systems AG, a shareholder $ 44,613 $ -- Current portion of long-term debt 289 -- Line of credit 4,589 -- Accounts payable 14,175 15,091 Accrued liabilities 78,459 27,746 Deferred revenue 136,580 40,704 Deferred income taxes 3,241 -- --------- --------- Total current liabilities 281,946 83,541 --------- --------- Long-term liabilities: Long-term debt 1,001 -- Deferred income taxes 8,020 -- --------- --------- Total long-term liabilities 9,021 -- --------- --------- Total liabilities 290,967 83,541 --------- --------- Commitments and contingencies (Note 13) Stockholders' equity: Common stock, par value $0.001, 120,000 authorized shares; 37,406 shares issued and 37,032 shares outstanding in 2001; 20,815 shares issued and 20,440 shares outstanding in 2000 37 20 Additional paid-in capital 497,536 198,835 Accumulated other comprehensive loss (6,553) (181) Treasury stock, 375 shares in 2001 and 2000 at cost (2,987) (2,987) Retained deficit (346,295) (9,560) --------- --------- Total stockholders' equity 141,738 186,127 --------- --------- $ 432,705 $ 269,668 ========= =========
See accompanying notes to consolidated financial statements. 43 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, -------------------------------------------- 2001 2000 1999 --------- --------- --------- Net sales $ 230,149 $ 180,630 $ 103,458 Cost of sales 198,350 93,123 53,472 Inventory valuation charges 26,418 -- -- --------- --------- --------- Gross profit 5,381 87,507 49,986 --------- --------- --------- Operating expenses: Research, development and engineering 61,114 28,540 19,547 Selling, general and administrative 110,785 54,508 31,784 Acquired in-process research and development 10,100 -- -- Amortization of goodwill and intangibles 33,457 -- -- Impairment of long-lived assets and other charges 150,666 -- -- --------- --------- --------- Total operating expenses 366,122 83,048 51,331 --------- --------- --------- Income (loss) from operations (360,741) 4,459 (1,345) Interest expense (2,989) (55) (68) Interest income 4,354 6,251 726 Other income, net 3,651 32 85 --------- --------- --------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle (355,725) 10,687 (602) Provision (benefit) for income taxes (18,990) 1,068 247 --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (336,735) 9,619 (849) Cumulative effect of change in accounting principle, net of tax -- (8,080) -- --------- --------- --------- Net income (loss) $(336,735) $ 1,539 $ (849) ========= ========= ========= Income (loss) per share before cumulative effect of a change in accounting principle: Basic $ (9.14) $ 0.50 $ (0.05) Diluted $ (9.14) $ 0.45 $ (0.05) Cumulative effect of change in accounting principle Basic $ -- $ (0.42) $ -- Diluted $ -- $ (0.38) $ -- Net income (loss) per share: Basic $ (9.14) $ 0.08 $ (0.05) Diluted $ (9.14) $ 0.07 $ (0.05) Shares used in computing net income (loss) per share: Basic 36,854 19,300 15,730 Diluted 36,854 21,116 15,730 Pro forma amounts with the change in accounting principle related to revenue applied retroactively: Net sales N/A N/A $ 102,781 Net loss N/A N/A $ (3,036) Net loss per share: Basic N/A N/A $ (0.19) Diluted N/A N/A $ (0.19)
See accompanying notes to consolidated financial statements. 44 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Accumulated Common Stock Other Treasury Stock ---------------- Additional Comprehensive -------------- Paid-In Income Retained Shares Amount Capital (Loss) Shares Amount Deficit Total ------- ------ ------- ------- ------ ------ -------- ------- Balance at December 31, 1998 15,772 $16 $63,239 $(138) (375) $(2,987) $(10,250) $49,880 Components of comprehensive loss: Net loss -- -- -- -- -- -- (849) (849) Cumulative translation adjustments -- -- -- (53) -- -- (53) ------- Comprehensive loss -- -- -- -- -- -- -- (902) ------- Exercise of stock options 456 -- 1,431 -- -- -- -- 1,431 Shares issued under employee stock purchase plan 363 -- 1,610 -- -- -- -- 1,610 ------- --- -------- ------- ----- ------- --------- ------- Balance at December 31, 1999 16,591 16 66,280 (191) (375) (2,987) (11,099) 52,019 Components of comprehensive income (loss): Net income -- -- -- -- -- -- 1,539 1,539 Cumulative translation adjustments -- -- -- (67) -- -- -- (67) Unrealized gain on investments -- -- -- 77 -- -- -- 77 ------- Comprehensive income (loss) -- -- -- -- -- -- -- 1,549 ------- Exercise of stock options 652 1 3,506 -- -- -- -- 3,507 Shares issued under employee stock purchase plan 482 -- 2,848 -- -- -- -- 2,848 Income tax benefits realized from activity in employee stock plans -- -- 3,454 -- -- -- -- 3,454 Issuance of Common Stock, net of offering costs 3,090 3 122,747 -- -- -- -- 122,750 ------- --- -------- ------- ----- ------- --------- ------- Balance at December 31, 2000 20,815 20 198,835 (181) (375) (2,987) (9,560) 186,127 Components of comprehensive loss: Net loss -- -- -- -- -- -- (336,735) (336,735) Cumulative translation adjustments -- -- -- (6,463) -- -- -- (6,463) Increase in minimum pension liability -- -- -- 36 -- -- -- 36 Unrealized loss on investments -- -- -- (61) -- -- -- (61) Accumulated derivative gain -- -- -- 116 -- -- -- 116 ------- Comprehensive loss -- -- -- -- -- -- -- (343,107) ------- Exercise of stock options 362 1 2,418 -- -- -- -- 2,419 Shares issued to Concept shareholder 20 -- -- -- -- -- -- -- Shares issued to STEAG shareholders 11,850 12 124,176 -- -- -- -- 124,188 Shares issued to CFM shareholders 4,234 4 170,614 -- -- -- -- 170,618 Shares issued under employee stock purchase plan 125 -- 1,161 -- -- -- -- 1,161 Income tax benefits realized from activity in employee stock plans -- -- 332 -- -- -- -- 332 ------- --- -------- ------- ----- ------- --------- --------- Balance at December 31, 2001 37,406 $37 $497,536 $(6,553) (375) $(2,987) $(346,295) $ 141,738 ======= === ======== ======= ===== ======= ========= =========
See accompanying notes to consolidated financial statements. 45 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, ------------------------------------------ ` 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) $(336,735) $ 1,539 $ (849) Adjustments to reconcile net income (loss) to net cash used in operating activities: Cumulative effect of accounting change, net of tax -- 8,080 -- Depreciation 16,611 4,535 4,801 Deferred taxes (19,673) (6,413) Provision for allowance for doubtful accounts 6,850 -- -- Inventory valuation charges 26,418 -- -- Amortization of goodwill and intangibles 33,457 -- -- Impairment of long-lived assets and other charges 150,666 -- -- Loss on disposal of fixed assets 2,256 113 -- Acquired in-process research and development 10,100 -- -- Income tax benefit realized from activity in employee stock plans 332 3,454 -- Changes in assets and liabilities, net of effect of acquisitions: Restricted cash 4,695 (31,995) -- Accounts receivable 50,360 (39,629) (11,886) Advance billings (21,170) -- -- Inventories 56,638 (30,059) (14,822) Inventories - delivered systems (62,474) -- -- Prepaid expenses and other current assets (3,180) (6,664) (603) Other assets 2,695 (5,402) 39 Accounts payable (20,656) 6,597 5,095 Accrued liabilities (25,357) 11,419 5,415 Deferred revenue 95,891 31,316 -- Refundable income taxes -- -- 3,300 --------- --------- --------- Net cash used in operating activities (32,276) (53,109) (9,510) --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (17,209) (9,041) (3,250) Proceeds from the sale of equipment 486 -- -- Note receivable from stockholder -- -- 3,749 Purchases of available for sale investments (16,314) (59,406) -- Proceeds from the sale and maturity of available for sale investments 58,257 11,984 8,128 Net cash acquired from acquisitions 38,046 -- -- --------- --------- --------- Net cash provided by (used in) investing activities 63,266 (56,463) 8,627 --------- --------- --------- Cash flows from financing activities: Payment on line of credit (4,888) (3,000) -- Borrowings against line of credit 9,043 -- 3,000 Payment on STEAG notes payable (805) Change in interest accrual on STEAG notes payable 2,690 -- -- Proceeds from the issuance of common stock, net of offering costs -- 122,750 -- Proceeds from stock plans 3,580 6,355 3,041 --------- --------- --------- Net cash provided by financing activities 9,620 126,105 6,041 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents (9,984) (67) (56) --------- --------- --------- Net increase in cash and cash equivalents 30,626 16,466 5,102 Cash and cash equivalents, beginning of year 33,431 16,965 11,863 --------- --------- --------- Cash and cash equivalents, end of year $ 64,057 $ 33,431 $ 16,965 ========= ========= ========= Supplemental disclosures: Cash paid for interest $ 805 $ 55 $ 58 Cash paid for income taxes $ 545 $ 5,337 $ 224 Common stock issued for acquisition of STEAG $ 124,188 $ -- $ -- Common stock issued for acquisition of CFM $ 170,618 $ -- $ -- Non-cash adjustment to goodwill and intangibles $ 14,003 $ 216 $ 2,200
See accompanying notes to consolidated financial statements. 46 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mattson Technology, Inc. (the "Company" or "Mattson") was incorporated in California on November 18, 1988. In September 1997, the Company was reincorporated in the State of Delaware. As part of the reincorporation, each outstanding share of the California corporation, no par value common stock, was converted automatically to one share of the new Delaware corporation, $0.001 par value common stock. The Company designs, manufactures and markets semiconductor wafer processing equipment used in "front-end" fabrication of integrated circuits to the semiconductor manufacturing industry worldwide. Risks and Uncertainties Based on current projections, the Company believes that its current cash and investment positions together with cash provided by operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next twelve months. The Company's operating plans are based on and require that the Company reduce its operating losses, control expenses, manage inventories, and collect accounts receivable balances. In the current semiconductor market downturn, the Company is 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 the Company is not able to significantly reduce its present operating losses over the upcoming quarters, the operating losses could adversely affect cash and working capital balances, and the Company may be required to seek additional sources of financing. The Company may need to raise additional funds in future periods through public or private financing, or other sources, to fund operations. The Company may not be able to obtain adequate or favorable financing when needed. Failure to raise capital when needed could harm the business. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders would be reduced, and these equity securities may have rights, preferences or privileges senior to the 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. Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates. The Company's fiscal year ends on December 31. The Company's fiscal quarters end on the last Sunday in the calendar quarter. Revenue Recognition Mattson derives revenue from two primary sources - equipment sales and spare part sales. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The Company implemented the provisions of SAB 101 in the fourth quarter of 2000, retroactive to January 1, 2000. The Company previously recognized revenue from the sales of its products generally at the time of shipment of the product. Effective January 1, 2000, the Company changed its 47 method of accounting for equipment sales and on equipment sales (a) of existing products where the arrangement includes new specifications, (b) where the sale is to a new customer and includes acceptance clauses, (c) on all sales of new products, or (d) on all sales of wet surface preparation products, revenue is recognized on customer acceptance. For equipment sales to existing customers of products of a type previously sold to such customer, under an arrangement that includes customer specified acceptance provisions that Mattson has previously demonstrated, the lesser of the fair value of the equipment or the contractual amount billable upon shipment is recorded as revenue upon transfer of title, which usually occurs upon delivery of the product. Revenue not recognized at the time of shipment is recorded as deferred revenue and recognized as revenue upon customer acceptance. From time to time, however, the Company allows customers to evaluate systems, and since customers can return evaluation systems at any time with limited or no penalty, the Company does not recognize revenues on these products until the evaluation systems are accepted by the customer. Revenues related to direct sales in Japan are recognized upon customer acceptance. Thermal products sold through a distributor in Japan are recognized upon transfer of title to the distributor. Equipment that has been delivered to customers but has not been accepted is classified as "Inventories - delivered systems" in the accompanying consolidated balance sheets. Receivables for which revenue has not been recognized are classified as "Advance Billings" in the accompanying consolidated balance sheets. Deferred revenue was $136.6 million as of December 31, 2001 and $40.7 million as of December 31, 2000. These amounts represent equipment that was shipped for which amounts were billed per the contractual terms but have not been recognized as revenue in accordance with SAB 101. Revenue recognition for spare part sales has not changed under the provisions of SAB 101 and is recognized upon shipment of the spare parts. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collectibility is reasonably assured. As a result of the change in recognition of revenue on equipment sales, Mattson reported a change in accounting principle in accordance with Accounting Principles Board ("APB") Opinion No. 20 "Accounting Changes", by a cumulative adjustment. The cumulative effect of the change in accounting principle of ($8.1) million (or $.38 per diluted share) was reported as a charge in the quarter ended March 31, 2000. The charge includes system revenue, net of cost of sales and certain expenses, including warranty and commission expenses that will be recognized when the conditions for revenue recognition are met. Service and maintenance contract revenue, which to date has been insignificant, is recognized on a straight-line basis over the service period of the related contract. Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market funds. Restricted Cash At December 31, 2001, the Company had $27.3 million of restricted cash invested in certificates of deposit. This restricted cash collateralizes the $26.9 million secured promissory note issued to STEAG Electronic Systems AG, in connection with the January 1, 2001 acquisition of certain subsidiaries of STEAG Electronic Systems AG (see Note 2), and additionally collateralizes $0.4 million of the Company's corporate credit card. Investments Investments primarily consist of commercial paper and U.S. Treasury securities. The Company classifies its investments in commercial paper and U.S. Treasury securities as available-for-sale. The investments are reported at fair market value, in accordance with the provisions of Statements of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As of December 31, 2001, the fair value of the investments in commercial paper and U.S. Treasury securities approximated amortized cost and, as such, unrealized holding gains and losses were not significant. The fair value of the Company's investments was determined based on the quoted market prices at the reporting date for those instruments. Investments with a contractual maturity of one year or less are classified as short-term in the accompanying consolidated balance sheets. At December 31, 2001 and 2000, the Company had $0 and $9.3 million, respectively, in long-term investments. Realized gain on the sale of investments are included in the accompanying consolidated statements of operations. 48 Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis and include material, labor and manufacturing overhead costs. The Company regularly monitors inventory quantities on hand and obsolete inventories that are no longer used in current production. Based on the current estimated requirements, it was determined that there was excess and obsolete inventory and those excess and obsolete amounts were fully reserved as of December 31, 2001 and 2000. Due to competitive pressures and the cyclicality of the semiconductor industry, it is possible that these estimates could change in the near term. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized using the straight-line method over the term of the related lease or the estimated useful lives of the improvements, whichever is shorter. Depreciation expense was $16.6 million, $4.2 million, and $3.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from retirements or disposals are included in other income in the accompanying consolidated statements of operations. Repair and maintenance costs are expensed as incurred. Goodwill and Intangibles Goodwill and intangibles represent the purchase price of the semiconductor equipment division of STEAG Electronic Systems, CFM Technologies, Inc., and Concept Systems Design in excess of identified tangible assets (see Note 2). In connection with the merger, effective January 1, 2001, the Company recorded $207.3 million of goodwill and intangible assets which were being amortized on a straight-line basis over three to seven years. Intangible assets are comprised of purchased technology and workforce and are presented at cost, net of accumulated amortization. Amortization expense was $33.5 million, $0.9 million and $1.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. Upon adoption of SFAS 142 on January 1, 2002, the Company will no longer amortize goodwill, thereby eliminating annual goodwill amortization of approximately $3.9 million, based on anticipated amortization for 2002. The Company will continue to amortize the identified intangibles, with an estimated $6.7 million in amortization expense in 2002. Impairment of Long-Lived Assets Mattson reviews long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Mattson assesses these assets for impairment based on estimated undiscounted future cash flows from these assets for the operating entities that had separately identifiable future cash flow. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded as the excess of the asset's carrying value over the fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During 2001, in connection with its acquisitions of the STEAG Semiconductor Division and CFM, Mattson recorded an impairment loss of $145.4 million to reduce goodwill, intangible assets, and property and equipment based on the amount by which the carrying value of the assets exceeded their fair value as determined based on estimated discounted future cash flows (see Note 2). Warranty The warranty offered by the Company on its 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 when the revenue is recognized. 49 Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." As allowed by the provisions of SFAS No. 123, the Company has continued to apply APB Opinion No. 25 in accounting for its stock option plans and, accordingly, does not recognize compensation cost because the exercise price equals the market price of the underlying stock at the date of grant. The Company has adopted the disclosure provisions of SFAS No. 123 and Note 6 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income (loss) and earnings (loss) per share for the years ended December 31, 2001, 2000 and 1999 for compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123. In April 2000, the Financial Accounting Standards Board issued FIN 44, "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB No. 25." The Company has adopted the provisions of FIN 44 and such adoption did not materially impact the Company's result of operations. Foreign Currency Accounting 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 and have not been material. Forward Foreign Exchange Contracts In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended by SFAS 138, establishes accounting and reporting standards requiring that all derivatives that are hedged be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Gains or losses are reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. The Company adopted the standard in the first quarter of 2001. The impact of the adoption has not been significant to the Company's results of operations. The Company uses forward foreign exchange contracts primarily to hedge the short-term impact of foreign currency fluctuations of intercompany accounts payable denominated in U.S. dollars recorded by its Japanese subsidiary. All forward foreign exchange contracts employed by the Company are short-term in nature. Because the impact of movements in currency exchange rates on forward foreign exchange contracts offsets the related impact on the underlying items being hedged, these financial instruments do not subject the Company to speculative risks that would otherwise result from changes in currency exchange rates. All foreign currency contracts are marked-to-market and realized and unrealized gains and losses on hedged forward foreign exchange contracts are deferred and recognized in the accompanying consolidated statements of operations when the related transactions being hedged are recognized. Gain and losses on unhedged foreign currency transactions are recognized as incurred. To date, premiums paid for forward exchange contracts have not been material and there are no significant losses as of December 31, 2001 for open contracts. Comprehensive Income In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for disclosure and financial statement presentation for reporting total comprehensive income and its individual components. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company's comprehensive income includes net loss, foreign currency translation adjustments, increase in minimum pension liability, derivative gains and losses and unrealized gains and losses on investments and is presented in the statement of stockholders' equity. 50 Net Income (Loss) Per Share Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share 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. Income Taxes The Company provides for income taxes under the provisions of SFAS No. 109 "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are provided against assets which are not likely to be realized. Segment Reporting In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards on reporting information about operating segments in annual financial statements and also requires companies to report selected segment information in interim financial reports. The Company operates in one reportable segment. Note 11 of the Consolidated Financial Statements contains a summary table of industry segment, geographic and customer information. New Accounting Pronouncements On June 29, 2001, the Financial Accounting Standard Board (FASB) approved for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest methods of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually using a fair value approach, except in certain circumstances, and whenever there is an impairment indicator; other intangible assets will continue to be valued and amortized over their estimated lives; in-process research and development will continue to be written off immediately; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, existing goodwill and certain intangible assets will no longer be subject to amortization; goodwill arising between July 1, 2001 and December 31, 2001 will not be subject to amortization. Upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill and certain intangible assets, thereby eliminating annual goodwill amortization of approximately $3.9 million, based on anticipated amortization for 2002. The Company will continue to amortize the identified intangibles. The amortization expense is estimated to be $6.7 million for 2002. Amortization of goodwill and intangibles for the year ended December 31, 2001 was approximately $33.5 million including amounts related to the amortization of goodwill and intangibles of CFM and the STEAG Semiconductor Division, which became impaired (Note 2). In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143"). SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes that the adoption of SFAS 143 will not have a significant effect on its financial position, results of operations or cash flows. 51 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144, which replaces SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS 144 also broadens disposal transactions reporting related to discontinued operations. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company believes that the adoption of SFAS 144 will not have a significant effect on its financial position, results of operations or cash flows. Reclassifications Certain amounts in prior years have been reclassified to conform with the current year presentation. 2. ACQUISITIONS On June 27, 2000, the Company entered into a definitive Strategic Business Combination Agreement, subsequently amended by an Amendment to the Strategic Business Combination Agreement dated December 15, 2000 ("Combination Agreement"), as amended on November 5, 2001, to acquire eleven direct and indirect subsidiaries, comprising the semiconductor equipment division of STEAG Electronic Systems AG ("the STEAG Semiconductor Division"), and entered into an Agreement and Plan of Merger ("Plan of Merger") to acquire CFM Technologies, Inc. ("CFM"). Both transactions were completed simultaneously on January 1, 2001. STEAG Semiconductor Division Pursuant to the Combination Agreement, the Company issued to STEAG Electronic Systems AG ("SES") 11,850,000 shares of common stock valued at approximately $124 million as of the date of the amended Combination Agreement, paid SES $100,000 in cash, and assumed certain obligations of SES and STEAG AG, the parent company of SES, including certain intercompany indebtedness owed by the acquired subsidiaries to SES, in exchange for a secured promissory note in the principal amount of $26.9 million (with an interest rate of 6%). Under the Combination Agreement, the Company is also obligated to pay to SES the amount of 19.2 million EUROS (approximately $17.1 million as of December 31, 2001). Under both of these obligations, the Company owes an aggregate amount of approximately $44.6 million to SES, including accrued interest at 6% per annum, which was originally payable on July 2, 2001. The Company and SES reached an agreement to extend the terms of the amounts due until July 2, 2002. The Company reimbursed SES $3.3 million in acquisition related costs, in April 2001. The Company also agreed to grant options to purchase 850,000 shares of common stock to employees of the STEAG Semiconductor Division subsequent to the closing of the transaction, which is not included in the purchase price of the STEAG Semiconductor Division. As part of the acquisition transaction, the Company, SES, and Mr. Mattson (the then chief executive officer and approximately 17.7% stockholder of the Company, based on shares outstanding immediately prior to the acquisition) entered into a Stockholder Agreement dated December 15, 2000, as amended on November 5, 2001, providing for, among other things, the election of two persons designated by SES to the Company's board of directors, SES rights to maintain its pro rata share of the outstanding Company common stock and participate in future stock issuances by the Company, and registration rights in favor of SES. The Company also entered into several transition services agreements with SES, under which SES agreed to provide specified payroll, communications, accounting information and intellectual property administration services to certain German subsidiaries of the Company for a term of one year. In fiscal year 2001, the Company paid SES approximately $988,000 in connection with the purchase of services and supplies pursuant to the transition services agreements. In addition, the Company entered into a manufacturing supply contract with a company affiliated with SES, under which the Company had the right to utilize manufacturing and assembly services based on an hourly rate. For fiscal 2001, the Company purchased $3.7 million worth of such manufacturing and assembly services. At December 31, 2001, SES held approximately 32% of the Company's common stock, and currently has two representatives on the Company's board of directors. 52 The acquisition has been accounted for under the purchase method of accounting and the results of operations of the STEAG Semiconductor Division are included in the consolidated statement of operations of the Company from the date of acquisition. The purchase price of the acquisition of $148.6 million, which included $6.2 million of direct acquisition related costs (including the amount reimbursed to SES), was used to acquire the common stock of the eleven direct and indirect subsidiaries of the STEAG Semiconductor Division. The allocation of the purchase price to the assets acquired and liabilities assumed, is as follows (in thousands): Net tangible assets ........................ $ 114,513 Acquired developed technology .............. 18,100 Acquired workforce ......................... 11,500 Goodwill ................................... 10,291 Acquired in-process research and development 5,400 Deferred tax liability ..................... (11,248) --------- $ 148,556 ========= Purchased intangible assets, including goodwill, workforce and developed technology of approximately $39.9 million, are being amortized over their estimated useful lives of seven, three and five years, respectively. The Company attributed $5.4 million to in-process research and development which was expensed immediately. In connection with the acquisition of the STEAG Semiconductor Division, the Company allocated approximately $5.4 million of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, the purchase price allocated to in-process research and development was expensed as of the acquisition date. At the acquisition date, the STEAG Semiconductor Division was conducting design, development, engineering and testing activities associated with the completion of the Hybrid tool and the Single wafer tool. The projects under development at the valuation date represent next-generation technologies that are expected to address emerging market demands for wet processing equipment. At the acquisition date, the technologies under development were approximately 60 percent complete based on engineering man-month data and technological progress. The STEAG Semiconductor Division had spent approximately $3.3 million on the in-process projects, and expected to spend approximately an additional $2.4 million to complete all phases of the R&D. Anticipated completion dates ranged from 10 to 18 months, at which times the Company expected to begin benefiting from the developed technologies. In making its purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from such projects are based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. Aggregate revenues for the developmental STEAG Semiconductor Division products were estimated to grow at a compounded annual growth rate of approximately 41 percent for the seven years following introduction, assuming the successful completion and market acceptance of the major R&D programs. The estimated revenues for the in-process projects were expected to peak within five years of acquisition and then decline sharply as other new products and technologies were expected to enter the market. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 23 percent was used to value the in-process R&D. This discount rate was commensurate with the STEAG Semiconductor Division stage of development and the uncertainties in the economic estimates described above. 53 If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. During the third and fourth quarters of 2001, the Company performed assessments of the carrying value of its long-lived assets to be held and used including goodwill, other intangible assets and property and equipment recorded in connection with its acquisition of the STEAG Semiconductor Division. The assessment was performed pursuant to SFAS No. 121 as a result of deteriorated market conditions in the semiconductor industry in general, a reduced demand specifically for the Thermal products acquired in the merger and revised projected cash flows for these products in the future. As a result of this assessment, the Company recorded a charge of $3.5 million in the third quarter of 2001 to reduce the carrying value of certain intangible assets associated with the acquisition of the STEAG Semiconductor Division based on the amount by which the carrying value of these assets exceeded their fair value. Fair value was determined based on valuations performed by an independent third party. In addition, the Company recorded a charge of $1.0 million in the third quarter of 2001 to reduce certain property and equipment purchased from the STEAG Semiconductor Division to zero as there are no future cash flows expected from these assets. No impairment charges were required in the fourth quarter of 2001. The charge of $4.5 million relating to the STEAG Semiconductor Division has been recorded as impairment of long-lived assets and other charges in the accompanying consolidated statements of operations. CFM Technologies Under the Plan of Merger with CFM, the Company agreed to acquire CFM in a stock-for-stock merger in which the Company issued 0.5223 shares of its common stock for each share of CFM common stock outstanding at the closing date. In addition, the Company agreed to assume all outstanding CFM stock options, based on the same 0.5223 exchange ratio. The Company also agreed to issue additional options to purchase 500,000 shares of its common stock to employees of CFM subsequent to the closing of the transaction. On January 1, 2001, the Company completed its acquisition of CFM. The purchase price included 4,234,335 shares of Mattson common stock valued at approximately $150.2 million and the issuance of 927,457 options to acquire Mattson common stock for the assumption of outstanding options to purchase CFM common stock valued at approximately $20.4 million using the Black Scholes option pricing model and the following assumptions: risk free interest rate of 6.5%, average expected life of 2 years, dividend yield of 0% and volatility of 80%. The merger has been accounted for under the purchase method of accounting and the results of operations of CFM are included in the consolidated statement of operations of the Company from the date of acquisition. The purchase price of the acquisition of CFM was $174.6 million, which included $4.0 million of direct acquisition related costs. The allocation of the purchase price to the assets acquired and liabilities assumed, is as follows (in thousands): Net tangible assets ............................. $ 28,536 Acquired developed technology ................... 50,500 Acquired workforce ............................. 14,700 Goodwill ........................................ 102,216 Acquired in-process research and development .... 4,700 Deferred tax liability .......................... (26,081) -------- $174,571 ======== Purchased intangible assets, including goodwill, workforce and developed technology of approximately $167.4 million are being amortized over their initial estimated useful lives of seven, three and five years, respectively. The Company attributed $4.7 million to in-process research and development which was expensed immediately. In connection with the acquisition of CFM, the Company allocated approximately $4.7 million of the purchase price to an in-process research and development project. This allocation represented the estimated fair value based on risk-adjusted cash flows related to one incomplete research and development project. At the date of acquisition, the development of this project had not yet reached technological feasibility, and the research and development in progress had no alternative future use. Accordingly, the purchase price allocated to in-process research and development was expensed as of the acquisition date. 54 At the acquisition date, CFM was conducting design, development, engineering and testing activities associated with the completion of the O3Di (Ozonated Water Module). The project under development at the valuation date represents next-generation technology that is expected to address emerging market demands for more effective, lower cost, and safer resist and oxide removal processes. At the acquisition date, the technology under development was approximately 80 percent complete based on engineering man-month data and technological progress. CFM had spent approximately $0.2 million on the in-process project, and expected to spend approximately an additional $50,000 to complete all phases of the research and development. Anticipated completion dates ranged from 2 to 3 months, at which times the Company expected to begin benefiting from the developed technology. In making its purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process research and development was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the resulting net cash flows from the project, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from the project is based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. Aggregate revenues for the developmental CFM product were estimated for the five to seven years following introduction, assuming the successful completion and market acceptance of the major research and development programs. The estimated revenues for the in-process project was expected to peak within two years of acquisition and then decline sharply as other new products and technologies are expected to enter the market. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental project, a discount rate of 23 percent was used to value the in-process research and development. This discount rate was commensurate with CFM's stage of development and the uncertainties in the economic estimates described above. If this project is not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. During the third and fourth quarters of 2001, the Company performed assessments of the carrying value of the long-lived assets to be held and used including goodwill, other intangible assets and property and equipment recorded in connection with its acquisition of CFM. The assessment was performed pursuant to SFAS No. 121 as a result of deteriorated market conditions in the semiconductor industry in general, a reduced demand specifically for the Omni products acquired in the merger and revised projected cash flows for these products in the future. As a result of this assessment, the Company recorded a charge of $134.6 million during 2001 to reduce the carrying value of goodwill, and other intangible assets, associated with the acquisition of CFM based on the amount by which the carrying value of these assets exceeded their fair value. Fair value was determined based on valuations performed by an independent third party. In addition, the Company recorded a charge of $5.8 million to reduce certain property and equipment purchased from CFM to zero as there are no future cash flows expected from these assets. The total charge of $140.4 million relating to CFM has been recorded as impairment of long-lived assets and other charges in the accompanying statements of operations. The following table presents the unaudited pro forma results for the year ended December 31, 2000 assuming that the Company acquired the STEAG Semiconductor Division and CFM on January 1, 2000. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of January 1, 2000 or of the results that may occur in the future. Net loss excludes the write-off of acquired-in-process research and development of $10.1 million and includes amortization of goodwill and intangibles related to these acquisitions of $33.5 million for the year ended December 31, 2000. The unaudited pro forma information is as follows (in thousands, except net loss per share): 55 Year Ended DEC. 31, 2000 (unaudited) ------------ Net sales $ 372,708 Net loss $(141,397) Net loss per share $ (3.80) 3. DEBT As discussed in Note 2, the Company has notes payable to STEAG Electronic Systems AG in the aggregate amount of $44.6 million. The note accrue interest at 6% per annum and are due July 2, 2002. The notes contains certain covenants including maintaining a minimum accounts receivable balance of $15.9 million. At December 31, 2001, the Company was in compliance with the covenants. During fiscal 2000, one of the subsidiaries that the Company acquired as part of the STEAG Semiconductor Division entered into a two-year revolving line of credit with a bank in Japan in the amount of 500 million Yen (approximately $3.8 million), with a term expiring September 2002. Under this line of credit, the borrowing was 450 million Yen (approximately $3.5 million) which was paid back in full in December 2001, and thereafter the Company cancelled the line of credit. The line of credit bore interest at a rate of 1.96% per annum through March 2001 and thereafter bore interest at a rate of 1.75% per annum. The line of credit was secured by a letter of credit in the amount of $5.1 million and required the pledge of restricted cash in the same amount, which upon the payment of the line of credit in December 2001 was converted into unrestricted cash. Additionally, one of Mattson's Japanese subsidiaries entered into a credit line with a bank in Japan in the amount of 900 million Yen (approximately $6.9 million) secured by trade accounts receivable. The line bears interest at a per annum rate of TIBOR plus 75 basis points (0.81% at December 31, 2001). The term of the line was through December 28, 2001 but was extended through June 20, 2002. The credit line is guaranteed by the Company. At December 31, 2001, 601.7 million Yen (approximately $4.6 million) was outstanding on this line of credit. Long-term debt is comprised of a $809,418 mortgage payable and various capital lease obligations. The carrying amount of the outstanding debt obligations at December 31, 2001 approximated fair value due to the short maturities of these obligations. 4. SEVERANCE CHARGE In fiscal 2001, the Company recorded a charge of $8.1 million for severance. The charge is included in selling, general, and administrative expense and is related to the termination of 466 employees. During the year, $2.6 million was paid for severance and at December 31, 2001 the remaining severance accrual was $5.5 million. 56 5. BALANCE SHEET DETAIL As of December 31, -------------------------------- 2001 2000 --------- --------- (in thousands) INVENTORIES: Purchased parts and raw materials $ 77,399 $ 32,027 Work-in-process 25,480 14,124 Finished goods 5,363 2,595 Evaluation systems 5,734 1,961 --------- --------- 113,976 50,707 Less: inventory reserves (47,989) (6,802) --------- --------- $ 65,987 $ 43,905 ========= ========= PROPERTY AND EQUIPMENT, NET: Land and buildings $ 4,419 $ -- Machinery and equipment 39,042 19,873 Furniture and fixtures 15,685 8,968 Leasehold improvements 7,655 4,324 --------- --------- 66,801 33,165 Less: accumulated depreciation (33,293) (17,212) --------- --------- $ 33,508 $ 15,953 ========= ========= GOODWILL, INTANGIBLES AND OTHER ASSETS: Developed technology $ 31,997 $ 3,897 Purchased workforce 5,126 875 Goodwill and acquisition related costs 12,610 5,695 Other 2,591 41 --------- --------- 52,324 10,508 Less: accumulated amortization (9,117) (2,258) --------- --------- $ 43,207 $ 8,250 ========= ========= ACCRUED LIABILITIES: Warranty and installation reserve $ 19,936 $ 10,540 Accrued compensation and benefits 10,320 6,415 Income taxes 5,165 2,105 Commissions 2,765 2,130 Customer deposits 686 396 Other 39,587 6,160 --------- --------- $ 78,459 $ 27,746 ========= ========= Due to the changing market conditions, recent economic downturn and estimated future requirements, inventory valuation charges of approximately $26.4 million were recorded in the second half of 2001. This reserve largely covers inventories for Thermal and Omni products that were acquired in the merger with the Steag Semiconductor Division and CFM. As of December 31, 2001 and 2000, the allowance for excess and obsolete inventory was approximately $48.0 million and $6.8 million respectively. In addition, during 2001, the Company recorded impairment charges for long-lived assets of $144.9 million (see Note 2). 57 6. CAPITAL STOCK Mattson's authorized capital stock consists of 120,000,000 shares of common stock of which 37,032,100 were issued and outstanding at December 31, 2001 and 2,000,000 shares of preferred stock, none of which were outstanding at December 31, 2001. Common Stock On March 8, 2000 the Company completed its secondary public offering of 3,000,000 shares of its common stock. The public offering price was $42.50 per share. On March 16, 2000, the underwriters exercised a right to purchase an additional 90,000 shares to cover over-allotments. The net proceeds of the offering were $122.8 million. Stock Option Plan In September 1989, the Company adopted an incentive and non-statutory stock option plan under which a total of 9,675,000 shares of common stock have been reserved for issuance. Options granted under this Plan are for periods not to exceed ten years. Incentive stock option and non-statutory stock option grants under the Plan must be at prices at least 100% and 85%, respectively, of the fair market value of the stock on the date of grant. The options generally vest 25% one year from the date of grant, with the remaining vesting 1/36th per month thereafter. A summary of the status of the Company's stock option plans at December 31, 2001, 2000 and 1999 and changes during the years then ended is presented in the following tables and narrative. Share amounts are shown in thousands.
Year Ended December 31, -------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Activity Shares Price Shares Price Shares Price -------- -------------------------------------------------------------------------- Outstanding at beginning of year 2,824 $12.44 3,143 $ 7.57 3,084 $6.19 Granted 3,299 10.67 625 28.36 881 9.97 CFM options acquired 927 18.99 -- -- -- -- Exercised (362) 6.51 (663) 5.84 (489) 3.59 Forfeited (1,008) 13.69 (281) 8.99 (333) 6.98 ----- ----- ----- Outstanding at end of year 5,680 12.77 2,824 12.44 3,143 7.57 ===== ===== ===== Exercisable at end of year 2,259 14.47 1,279 7.91 1,353 6.85 ===== ===== ===== Weighted-average fair value per option granted 7.32 19.65 6.13
58 The following table summarizes information about stock options outstanding at December 31, 2001 (amounts in thousands except exercise price and contractual life):
Options Outstanding Options Exercisable ------------------------------------------- ----------------------- Weighted- Average Weighted- Weighted- Range of Contractual Average Average Exercise Prices Number Life Exercise Price Number Exercise Price --------------- ------ ---- -------------- ------ -------------- $ 0.20 - $ 7.06 974 6.0 $ 5.75 707 $ 5.59 $ 7.13 - $ 9.38 1,101 7.9 $ 8.02 337 $ 8.70 $ 9.63 - $ 10.44 1,582 8.4 $10.42 142 $10.31 $ 10.50 - $ 15.42 995 7.9 $13.94 396 $13.26 $ 15.63 - $ 41.88 955 7.2 $25.18 634 $26.25 $ 42.50 - $ 69.20 73 7.4 $50.74 43 $55.22 ----- --- ------ ----- ------ 5,680 7.6 $12.77 2,259 $14.47 ===== === ====== ===== ======
Compensation cost under SFAS No. 123 for the fair value of each incentive stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model for the multiple option approach with the following weighted average assumptions: 2001 2000 1999 ---- ---- ---- Expected dividend yield.................. -- -- -- Expected stock price volatility.......... 89% 85% 80% Risk-free interest rate.................. 6.0% 6.0% 5.8% Expected life of options................. 2 years 2 years 2 years Employee Stock Purchase Plan In August 1994, the Company adopted an employee stock purchase plan ("Purchase Plan") under which 2,975,000 shares of common stock have been reserved for issuance. The Purchase Plan is administered generally over offering periods of 24 months, with each offering period divided into four consecutive six-month purchase periods beginning May 1 and November 1 of each year. Eligible employees may designate not more than 15% of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan and participants may not purchase more than $25,000 worth of common stock in any calendar year or 10,000 shares in any offering period. On the last business day of each purchase period, shares of common stock are purchased with the employees' payroll deductions accumulated during the six months, at a price per share equal to 85% of the market price of the common stock on the date immediately preceding the offering date or the date immediately preceding the purchase date, whichever is lower. The weighted average fair value on the grant date of rights granted under the employee stock purchase plan was approximately $5.92 in 2001, $3.15 in 2000, and $3.15 in 1999. Compensation cost under SFAS No. 123 is calculated for the estimated fair value of the employees' stock purchase rights using the Black-Scholes option-pricing model with the following average assumptions: 2001 2000 1999 ---- ---- ---- Expected dividend yield................... -- -- -- Expected stock price volatility........... 89% 80% 80% Risk-free interest rate................... 6.0% 6.0% 5.8% Expected life of options ................. 2 years 2 years 1 year 59 Pro Forma Effect of Stock-Based Compensation Plans In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion No. 25 in accounting for its incentive stock option and employee stock purchase plans, and accordingly, does not recognize compensation cost in the statement of operations because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) and income (loss) per share would have been adjusted to the pro forma amounts indicated in the table below: Year Ended December 31, ---------------------------------------- 2001 2000 1999 ---- ---- ---- (in thousands, except per share amounts) Net income (loss): As reported $(336,735) $ 1,539 $ (849) Pro forma $(347,324) $(1,991) $(5,430) Diluted net income (loss) per share: As reported $ (9.14) $ 0.07 $ (0.05) Pro forma $ (9.42) $ (0.09) $ (0.35) As the SFAS No. 123 method of accounting has not been applied to options granted prior to July 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 7. INCOME TAXES The components of income (loss) before provision (benefit) for income taxes are as follows: Year Ended December 31, ------------------------------------- 2001 2000 1999 --------- ------- ------- (in thousands) Domestic income (loss) $(266,719) $10,946 $(1,065) Foreign income (loss) (89,006) (259) 463 --------- ------- ------- Income (loss) before provision (benefit) for income taxes and cumulative effect of change in accounting principle $(355,725) $10,687 $ (602) ========= ======= ======= The provision (benefit) for income taxes consists of the following: Year Ended December 31, --------------------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Current: Federal $ -- $ 6,709 $ -- State 129 549 -- Foreign 2,782 223 247 -------- -------- -------- Total current 2,911 7,481 247 -------- -------- -------- Deferred: Federal (19,163) (5,452) -- State (2,738) (961) -- -------- -------- -------- Total deferred (21,901) (6,413) -- -------- -------- -------- Provision (benefit) for income taxes $(18,990) $ 1,068 $ 247 ======== ======== ======== 60 Deferred tax assets are comprised of the following: As of December 31, ------------------------ 2001 2000 --------- --------- (in thousands) Reserves not currently deductible ..... $ 34,615 $ 8,453 Deferred revenue ...................... 18,310 7,596 Depreciation .......................... 6,276 -- Net operating loss carryforwards ...... 54,759 2,075 Tax credit carryforwards .............. 7,874 -- Other ................................. 1,113 1,481 --------- --------- Total net deferred taxes .............. 122,947 19,605 Deferred tax assets valuation allowance (122,947) (13,192) --------- --------- Net deferred tax asset .............. -- 6,413 --------- --------- Deferred tax liability - acquired intangibles .......................... (11,261) -- --------- --------- Total deferred tax asset/(liability). $ (11,261) $ 6,413 ========= ========= The provision for income taxes reconciles to the amount computed by multiplying income (loss) before income tax by the U.S. statutory rate of 35% as follows:
Year Ended December 31, ----------------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) Provision (benefit) at statutory rate $(124,504) $ 3,740 $ (211) State taxes, net of federal benefit (9,711) 436 2 Research and development tax credits -- (1,151) (499) Foreign earnings taxed at different rates (2,011) -- 85 Benefit of foreign sales corporation -- (1,272) -- Current unbenefitted losses 37,935 -- -- Non-deductible amortization and impairment charge 37,471 -- -- Valuation allowance - temporary differences 41,834 (950) 816 Other (4) 265 54 --------- --------- --------- Total provision for income taxes $ (18,990) $ 1,068 $ 247 ========= ========= =========
The valuation allowance at December 31, 2001 and 2000 is attributable to federal and state deferred tax assets. Management believes that sufficient uncertainty exists with regard to the realizability of tax assets such that a valuation allowance is necessary. 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. At December 31, 2001, the Company had Federal net operating loss carryforwards of approximately $146 million which will expire at various dates through 2021. Approximately $44 million of the deferred tax asset was acquired by Mattson from STEAG, CFM and Concept and, if realized, will be used to reduce the amount of goodwill and intangibles recorded at the date of acquisition. The federal and state net operating losses acquired from STEAG, CFM and Concept are also subject to change in control limitations. If certain substantial changes in the Company's ownership occur, there would be an additional annual limitation on the amount of the net operating loss carryforwards which can be utilized. Approximately $987,000 of the valuation allowance is related to stock option deductions which, if realized, will be accounted for as an addition to equity rather than as a reduction of the provision for taxes. 61 8. EMPLOYEE BENEFIT PLANS The Company has a retirement/savings plan (the "Plan"), which is qualified under section 401(k) of the Internal Revenue Code. All full-time employees who are twenty-one years of age or older are eligible to participate in the Plan. The Plan allows participants to contribute up to 20% of the total compensation that would otherwise be paid to the participant, not to exceed the amount allowed by the applicable Internal Revenue Service guidelines. The Company may make a discretionary matching contribution equal to a percentage of the participant's contributions. In 2001, 2000, and 1999 the Company made matching contributions of $1,171,000, $663,000, $226,000, respectively. One of the acquired STEAG entities has a pension plan that is established in accordance with certain German laws. Benefits are determined based upon retirement age and years of service with the Company. The plan is not funded and there are no plan assets. The Company makes payments to the plan when distributions to participants are required. The accumulated benefit obligation acquired under the pension plan on January 1, 2001 (date of acquisition) was $640,000. Pension expense for the year was $32,000. At December 31, 2001, the accumulated benefit obligation was $636,000. 9. 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 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. The computation of diluted EPS uses the average market prices during the period. All amounts in the following table are in thousands except per share data.
Year Ended December 31, ----------------------------------------- 2001 2000 1999 --------- --------- --------- BASIC NET INCOME (LOSS) PER SHARE: Income (loss) available to common stockholders $(336,735) $ 1,539 $ (849) Weighted average common shares outstanding 36,854 19,300 15,730 --------- --------- --------- Basic earnings (loss) per share $ (9.14) $ 0.08 $ (0.05) ========= ========= ========= DILUTED NET INCOME (LOSS) PER SHARE: Income (loss) available to common stockholders $(336,735) $ 1,539 $ (849) Weighted average common shares outstanding 36,854 19,300 15,730 Diluted potential common shares from stock options -- 1,816 -- --------- --------- --------- Weighted average common shares and dilutive potential common shares 36,854 21,116 15,730 --------- --------- --------- Diluted net income (loss) per share $ (9.14) $ 0.07 $ (0.05) ========= ========= =========
Total stock options outstanding at December 31, 2001 of 1,889,248, at December 31, 2000 of 480,637, and at December 31, 1999 of 3,143,000 were excluded from the computations of diluted net income (loss) per share because of their anti-dilutive effect on earnings (loss) per share. 62 10. RELATED PARTY TRANSACTIONS The Company purchases certain inventory parts from a supplier company, R.F. Services. In April 2001, the Company completed the acquisition of 97% of the outstanding shares of R.F. Services, Inc. for a cash price of approximately $928,800 (including acquisition-related costs of $41,500). Brad Mattson, a member of the Company's board of directors and the Company's former Chief Executive Officer, owned a majority of the outstanding shares of R.F. Services, Inc. and served as a director of that corporation. Net purchases prior to the acquisition in 2001 were $868,000, and net purchases during 2000 and 1999 were $1,161,000 and $680,000, respectively. During the second quarter of 2000, the Company extended a loan to Mr. Mattson in the principal amount of $200,000. The interest rate of the loan is 6% per annum. As of March 15, 2002, Mr. Mattson owed the Company a total of $221,867 pursuant to the loan. The repayment of the loan was originally due in the first quarter of 2001, but the Company extended the maturity date to December 31, 2002. During the fourth quarter of 1998, the Company extended a two-year loan to David Dutton, the Company's current Chief Executive Officer and former President, Plasma Product Division, in the principal amount of $100,000. The loan is collateralized by approximately 32,000 shares of the Company's common stock and is a full recourse note bearing interest at 6% per annum. During the second quarter of 2000, the Company extended a second loan to Mr. Dutton in the principal amount of $50,000. The interest rate on the second loan is 6% per annum. The repayment of the second loan was originally due in the first quarter of 2001. During the third quarter of 2001, the Company extended a note to Mr. Dutton in the amount of $20,000. The interest rate on the third loan is 6% per annum, and is due on December 31, 2002. As of December 31, 2001 and 2000, the total principal balance owed on these loans were $170,000 and $150,000, respectively. The Company has extended the maturity date on the first two loans to December 31, 2002. During the third quarter of 2000, the Company extended a loan to Mr. Morita, Executive Vice President, Global Business Operations, in the principal amount of $300,000. The interest rate of the loan is 6% per annum. As of December 31, 2001 and 2000, principal balance owed on the loan was $300,000. The repayment of the loan was originally due in the first quarter of 2001, but the Company extended the maturity date to December 31, 2002. At December 31, 2001, we had loans receivable from other employees of $1.9 million. The interest rates on these loans range from 5.5% to 6%. The loans are due in 2002. The Company entered into a consulting agreement with Shigeru Nakayama, a member of its Board of Directors, on August 10, 2000. Under his consulting agreement, Mr. Nakayama receives $10,000 per month and an option to purchase 6,000 shares of Company common stock per year, in exchange for consulting services regarding the integration of the Company's operations in Japan. In May 2001, the Company made payments of $90,000 to Mr. Nakayama for consulting services performed from August 2000 to April 2001. STEAG Electronic Systems AG ("SES") holds approximately 32% of the Company's common stock, which it obtained in conjunction with the Company's acquisition of eleven subsidiaries of SES (see Note 2). Pursuant to the Stockholder Agreement entered into in connection with the acquisition transaction, Dr. Jochen Melchior and Dr. Hans-Georg Betz were elected to the Company's Board of Directors as designees of SES. On November 5, 2001, the Company and SES amended the Combination Agreement and the Stockholder Agreement. The Amendment to the Stockholder Agreement eliminated the restrictions on future dispositions of Company common stock by SES. The Second Amendment to the Combination Agreement provided for, among other things, the amendment of the secured promissory note issued to SES in connection with the acquisition transaction, extending the maturity date and capitalizing accrued interest, and the issuance of a second secured promissory note in lieu of payment of profits of two of the acquired subsidiaries due to SES, as required under the Combination Agreement. As discussed in Note 2 and 3, the Company owed SES $44.6 million at December 31, 2001. 63 In fiscal year 2001, the Company paid approximately $988,000 to SES in connection with the purchase of services or supplies pursuant to several transitional services agreements with SES, under which SES agreed to provide specified payroll, communications, accounting information and intellectual property administration services to certain German subsidiaries of the Company. In addition, in fiscal 2001, the Company purchased approximately $3.7 million of manufacturing and assembly services pursuant to a manufacturing supply contract with a company affiliated with SES. The Company paid Alliant Partners, a technology merger and acquisition advisory firm, a fee of $300,000 for rendering an opinion as to the fairness from a financial point of view to Mattson's stockholders of the consideration to be provided by Mattson in connection with the acquisition of the STEAG Semiconductor Division and CFM. The Company also agreed to pay Alliant Partners a success fee of $2,000,000 upon the closing of the transactions. This payment was made in January 2001. This amount was capitalized in 2000 as a direct acquisition related cost. Mr. Savage, who was a member of Mattson's Board of Director until January 1, 2001 is a partner at Alliant Partners. 11. REPORTABLE SEGMENTS SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments, geographic areas and major customers 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, the 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. The following is net sales information by geographic area for the years ended December 31 (in thousands): 2001 2000 1999 -------- -------- -------- United States $ 51,148 $ 56,736 $ 30,428 Japan 34,190 8,118 10,706 Taiwan 29,394 53,355 20,173 Korea 17,418 23,029 22,081 Singapore 11,487 13,470 8,441 Europe 71,224 25,922 11,629 China 15,243 -- -- Other Asian countries 45 -- -- -------- -------- -------- $230,149 $180,630 $103,458 ======== ======== ======== The net sales above have been allocated to the geographic areas based upon the installation location of the systems. For purposes of determining sales to significant customers, the Company includes sales to customers through its distributor (at the sales price to the distributor) and excludes the distributor as a significant customer. In 2001, 13% of net sales were to a single customer. In 2000, no single customer accounted for greater than 10% of net sales. In 1999, 20% of net sales was to a single customer. 64 12. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and financial instruments used in hedging activities. The Company invests in a variety of financial instruments such as certificates of deposit, corporate bonds and treasury bills. The Company limits the amount of credit exposure to any one financial institution or commercial issuer. To date, the Company has not experienced significant losses on these investments. The Company's trade accounts receivable are concentrated with companies in the semiconductor industry and are derived from sales in the United States, Japan, other Pacific Rim countries and Europe. The Company performs ongoing credit evaluations of its customers and records specific allowances for bad debts when a customer is unable to meet its financial obligation as in the case of bankruptcy filings or deteriorated financial position. Estimates are used in determining allowances for all other customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. During the year ended December 31, 2001, the Company provided approximately $6.9 million to increase its allowance for doubtful accounts receivable to a level deemed necessary by management to provide for potential uncollectible accounts. The Company is exposed to credit loss in the event of non performance by counterparties on the forward foreign exchange contracts used in hedging activities. The Company does not anticipate nonperformance by these counterparties. 13. COMMITMENTS AND CONTINGENCIES The Company leases 29 out of its 31 facilities under operating leases, which expire at various dates through 2019, with minimum annual rental commitments as follows (in thousands): 2002....................................................... $9,507 2003....................................................... 6,375 2004....................................................... 3,759 2005....................................................... 3,285 2006....................................................... 2,932 Thereafter................................................. 19,953 ------- $45,811 ======= Rent expense was approximately $10.7 million in 2001, $3.9 million in 2000, and $1.9 million in 1999. The increase in rent expense in 2001 was due to the inclusion of the facilities leased by the companies acquired by the Company on January 1, 2001. During the year ended December 31, 2001, the semiconductor industry was in a significant and prolonged downturn, and the Company experienced lower bookings, significant push outs and cancellation of orders as a result of these unfavorable economic conditions. Accordingly, given the Company's acquisition of additional facilities resulting from the acquisitions of STEAG Semiconductor Division and CFM, the Company performed a comprehensive analysis of its real estate facility requirements and identified excess facility buildings, which have been offered for sublease and sale. The Company, at its Exton, Pennsylvania location, leases two buildings to house its manufacturing and administrative functions related to the Omni product. The two buildings have leases of 17 years remaining on them with an approximate combined rental cost of $1.5 million annually. The leases for these two buildings allow for subleasing the premises without the approval of the landlord. In addition, the Company has excess facilities in San Jose, CA, and has non-cancelable annual lease payments of approximately $1 million over one year related to this facility. Factors considered in the analysis included, but were not limited to, anticipated future revenue growth rates and anticipated future headcount and manufacturing requirements. Based upon the results of this analysis and the excess facilities space identified, during the six months ended December 31, 2001, the Company recorded a charge of $3.2 million related to facilities lease losses as impairment of long-lived assets and other charges in the accompanying 65 consolidated statement of operations. As of December 3, 2001, there is a lease loss accrual of $3.2 million recorded as accrued liabilities in the accompanying consolidated balance sheet. In determining the facilities lease loss, net of cost recovery efforts from expected sublease income, various assumptions were made, including, the time period over which the building will be vacant; expected sublease terms; and expected sublease rates. The facilities lease losses and related asset impairment charges are estimates in accordance with SFAS No. 5, "Accounting for Contingencies," and represent the low-end of an estimated range that may be adjusted upon the occurrence of future triggering events. Triggering events may include, but are not limited to, changes in estimated time to sublease, sublease terms, and sublease rates. Should operating lease rental rates continue to decline in current markets or should it take longer than expected to find a suitable tenant to sublease the facilities, adjustments to the facilities lease losses accrual will be made in future periods, if necessary, based upon the then current actual events and circumstances. The Company has estimated that under certain circumstances the facilities lease losses could increase approximately $1.5 million for each additional year that the facilities remain un-leased and could aggregate $25.5 million under certain circumstances. The Company expects to make payments related to the above noted facilities lease losses over the next seventeen years. As of December 31, 2001, the Company has established an accrual for purchase commitments of $1.3 million for excess inventory component commitments to key component vendors that it believes may not be realizable during future normal ongoing operations. No such accrual was required at December 31, 2000. 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. 66 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Mattson Technology, Inc.: We have audited the accompanying consolidated balance sheets of Mattson Technology, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mattson Technology, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP San Jose, California February 27, 2002 67 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning our executive management team as of March 15, 2002. Name Age Title ---- --- ----- David L. Dutton 41 Chief Executive Officer, President, Director Ludger H. Viefhues 59 Chief Financial Officer, Executive Vice President, Finance and Secretary David J. Ferran 45 President, Wet Products Bob MacKnight 52 President, Thermal/Films/Etch Products Yasuhiko (Mike) Morita 59 Executive Vice President, Global Business Operations Dr. Jochen Melchior 59 Director, Chairman of the Board Brad S. Mattson 47 Director, Vice Chairman of the Board Dr. Hans-Georg Betz 56 Director Kenneth Kannappan 42 Director Shigeru Nakayama 67 Director Kenneth G. Smith 52 Director David L. Dutton - Chief Executive Officer David Dutton has served as Mattson's Chief Executive Officer and President since October 2001 and was elected to this position in December 2001. Prior to being elected Chief Executive Officer and President, Mr. Dutton served as the President of the Plasma Products Division. Mr. Dutton joined Mattson in 1994 as General Manager in the Strip/Plasma Etch division, then from 1998 to 2000, Mr. Dutton served as Executive Vice President and Chief Operating Officer of Mattson. From 1993 to 1994, Mr. Dutton was Engineering Manager for Thin Films Processing at Maxim Integrated Products, Inc. From 1984 to 1993, Mr. Dutton served as an engineer and then manager in plasma etch processing and yield enhancement at Intel Corp. Ludger H. Viefhues - Chief Financial Officer Ludger Viefhues joined Mattson as the Chief Financial Officer in December 2000 and also serves as Executive Vice President, Finance and Secretary. From 1999 to 2000, Mr. Viefhues was Chief Financial Officer of STEAG RTP Systems GmbH. From 1996 to 1999, Mr. Viefhues was Chief Executive Officer at MEMC Electronic Materials, Inc., a supplier of silicon wafers. Prior to being appointed Chief Executive Officer at MEMC, Mr. Viefhues served as MEMC's Chief Financial Officer. From 1993 to 1996, Mr. Viefhues held the post of Chief Financial Officer at Huels AG (Germany). David J. Ferran - President, Wet Products David Ferran joined Mattson as President of the Wet Product Division in July 2001 and was elected Executive Vice President in December 2001. From 1999 to 2000, Mr. Ferran served at Akrion LLC, a supplier of semiconductor processing equipment, where he was most recently President and Chief Executive Officer. From 1997 to 1999, Mr. Ferran was Chief Executive Officer of Submicron Systems Corp., a maker of semiconductor manufacturing equipment. Mr. Ferran served as Chairman and Chief Executive Officer of Tylan General, Inc., a maker of equipment used in semiconductor manufacturing process from 1989 to 1997. 68 Bob MacKnight - President, Thermal/Films/Etch Products Mr. MacKnight has served as President of Mattson's Thermal/Films/Etch division and Executive Vice President since December 2001. Mr. MacKnight joined Mattson in September 2001 as Executive Vice President of Corporate Development and General Manager of the RTP Product Business. From 1998 to 2001, Mr. MacKnight served at Microbar, Inc., a manufacturer of chemical systems for the semiconductor industry where he was most recently President and Chief Operating Officer. From 1996 to 1998, Mr. MacKnight was Vice President and General Manager of After Market Operations for Cymer, Inc., a supplier of equipment used in semiconductor manufacturing. Yasuhiko (Mike) Morita - Executive Vice President, Global Business Operations Mr. Morita has served as Mattson's Executive Vice President of Global Business Operations since December 2001. Mr. Morita served as the Mattson's Vice President of Global Sales operations from 1998 until 2001. From 1996 to 1998, Mr. Morita was Vice President of Asia Operations and President of Mattson's subsidiary, Mattson Technology Center, K.K. Mr. Morita served on Mattson's Board of Directors from July 1994 through February 1996. From 1967 to 1996, Mr. Morita served at Marubeni Corporation in various positions, most recently as Executive Vice President and General Manager of the semiconductor equipment division. Dr. Jochen Melchior - Director Dr. Melchior has served as a director and Chairman since January 2001. Dr. Melchior has served as a member of the Management Board of STEAG AG since June 1987 and Chairman of the Management Board and Chief Executive Officer of STEAG AG since November 1995. Since November 1995, Dr. Melchior has also served as Chairman of the Supervisory Board of STEAG Electronic Systems AG. Dr. Melchior also currently serves as a member of the Supervisory Boards of Nationalbank AG, Vinci Deutschland AG, Saarberg AG, TUV Mitte AG, and Colonia Nordstern Versicherungs-Management AG. He serves as Vice Chairman of the Westfalische Hypothekenbank AG and Chairman of the Supervisory Board of STEAG Electronic Systems AG, STEAG HamaTech AG, and STEAG Walsum Immobilien AG. Brad S. Mattson - Director Mr. Mattson has served as a director since November 1988. Mr. Mattson served as Chairman until January 2001, when he became the Vice Chairman. Mr. Mattson founded Mattson Technology in November 1988 and served as Chief Executive Officer from its inception until he retired in October 2001. Mr. Mattson also served as President until January 1997. Mr. Mattson was the founder of Novellus Systems, Inc., a semiconductor equipment company, and formerly served as its President, Chief Executive Officer and Chairman. He has held previous executive positions at Applied Materials, Inc. and LFE Corporation, both semiconductor equipment companies. Dr. Hans-Georg Betz - Director Dr. Betz has served as a director since January 2001. Dr. Betz has served as Chief Executive Officer of West STEAG Partners since August 2001. Dr. Betz served as Chairman of the Management Board and Chief Executive Officer of STEAG Electronic Systems AG from January 1996 to July 2001 and as a member of the Management Board of STEAG Electronic Systems AG from October 1992 to July 2001. Dr. Betz served as a member of the Management Board of STEAG AG from January 1997 to July 2001. Dr. Betz also currently serves as Vice Chairman of the Supervisory Board of STEAG HamaTech AG, as Chairman of the Supervisory Board of STEAG MicroParts and as a director of GuideTech, Inc. Kenneth Kannappan - Director Mr. Kannappan has served as a director since July 1998. Mr. Kannappan has served as the President and Chief Executive Officer of Plantronics, Inc., a telecommunications equipment manufacturer, since March 1998. From 1995 to 1998, Mr. Kannappan held various executive positions at Plantronics, Inc. From 1991 to 1995, Mr. Kannappan was Senior Vice President of Kidder, Peabody & Co. Incorporated, an investment banking company. Mr. Kannappan currently serves as a member of the board of directors of Plantronics, Inc. and Integrated Device Technology, Inc. Shigeru Nakayama - Director Mr. Nakayama has served as a director since May 1996. Since 1996, Mr. Nakayama has been a business consultant to Semiconductor Equipment and Materials International, an international association of semiconductor equipment manufacturers and materials suppliers. From 1984 to 1994, Mr. Nakayama was the President of SEMI Japan, a member of Semiconductor Equipment and Materials International. 69 Kenneth G. Smith - Director Mr. Smith has served as a director since August 1994. Mr. Smith was President, Chief Operating Officer and a Director of WaferTech, a semiconductor manufacturer, from May 1996 until April 2000. From 1991 to 1995, Mr. Smith was Vice President of Operations at Micron Semiconductor, Inc., a semiconductor manufacturer. Voting Arrangements In connection with the business combination in which we acquired the semiconductor equipment division of STEAG Electronic Systems AG ("SES"), we entered into a Stockholder Agreement with SES and Brad Mattson that provides, among other things, for the appointment of two persons designated by SES to join our board of directors. Dr. Jochen Melchior and Dr. Hans Georg-Betz were designated by SES and were appointed as directors effective January 1, 2001. The Stockholder Agreement also provides that we will cause the nomination of Dr. Melchior and Dr. Betz, or successors designated by SES, for election at each annual meeting of our stockholders at which their terms as directors will expire. SES and Mr. Mattson each agreed to be present and voting at each stockholder meeting where directors are to be elected, and to vote affirmatively for the election of nominees for director proposed in accordance with the Stockholder Agreement. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on review of the copies of such reports furnished to us and written representation from certain reporting persons that no other reports were required, we believe that all Section 16(a) filing requirements applicable to our executive officers, directors and greater than ten percent shareholders were complied with. 70 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table presents information for the fiscal years ended December 31, 1999, 2000, and 2001 regarding the compensation paid to our chief executive officer and each of our four most highly compensated executive officers, as well as of two of our former officers.
Long Term Compensation Awards/ Annual Compensation Securities Fiscal Underlying Name and Principal Position Year Salary($) Bonus($)(1) Options(#) --------------------------- ---- --------- ----------- ---------- David Dutton (2) 2001 300,756 -- 240,000 Chief Executive Officer and President 2000 218,077 168,197 -- 1999 194,692 119,000 37,500 Ludger Viefhues (3) 2001 299,058 -- 250,000 Chief Financial Officer, Executive 2000 6,154 110,000 -- Vice President, Finance and Secretary 1999 -- -- -- David Ferran (4) 2001 177,019 -- 250,000 President, Wet Products Division 2000 -- -- -- 1999 -- -- -- Yasuhiko Morita 2001 208,256 -- 55,000 Executive Vice President, 2000 200,000 116,000 -- Global Business Operations 1999 200,936 81,000 20,000 Former Officers --------------- Walter Kasianchuk (5) 2001 271,902 -- 60,000 Executive Vice President, 2000 200,000 135,000 -- President, Thermal Products Division 1999 53,570 20,000 30,000 Brad Mattson (6) 2001 423,064 -- 200,000 Chief Executive Officer 2000 352,500 339,000 920 1999 313,272 201,000 100,000
--------- (1) Bonuses are based on performance or achievement of goals and accrued for the fiscal year indicated, but are paid after fiscal year end. (2) Mr. Dutton was elected Chief Executive Officer in December 2001 and previously held positions as Executive Vice President and President, Plasma Division. (3) Mr. Viefhues joined the Company in December 2000. (4) Mr. Ferran joined the Company in July 2001. (5) Mr. Kasianchuk resigned from his position as President, Thermal Products Division in December 2001. (6) Mr. Mattson resigned from his position as Chief Executive Officer in October 2001, but remains Vice Chairman of the board of Directors. 71 Stock Options Granted in Fiscal 2001 The following table provides the specified information concerning grants of options to purchase our common stock made during the fiscal year ended December 31, 2001, to the persons named in the Summary Compensation Table.
Individual Grants in Fiscal 2001 Potential ------------------------------------------------------------- Realizable Value % of Total at Assumed Annual Number of Options Rates of Stock Securities Granted to Appreciation for Underlying Employees Exercise Option Term(5) Options in Fiscal Price Expiration -------------------------- Name Granted(1) 2001(2) ($/share)(3) Date(4) 5% 10% ---- ---------- ------- ------------ ------- ---------- ---------- David Dutton 5,814 0.18% $10.44 01/02/11 $ 38,000 $ 97,000 11,936 0.36% $7.65 12/13/11 $ 57,000 $ 146,000 188,064 5.70% $7.65 12/13/11 $ 905,000 $2,293,000 34,186 1.04% $10.44 01/02/11 $ 224,000 $ 569,000 Ludger Viefhues 31,865 0.97% $10.44 01/02/11 $ 209,000 $ 530,000 8,808 0.27% $7.65 12/13/11 $ 42,000 $ 107,000 91,192 2.76% $7.65 12/13/11 $ 439,000 $1,112,000 118,135 3.58% $10.44 01/02/11 $ 775,000 $1,965,000 David Ferran 26,612 0.81% $15.03 07/09/11 $ 252,000 $ 637,000 123,388 3.74% $15.03 07/09/11 $1,166,000 $2,956,000 100,000 3.03% $7.65 12/13/11 $ 481,000 $1,219,000 Yasuhiko Morita 5,208 0.16% $10.44 01/02/11 $ 34,000 $ 87,000 4,792 0.15% $10.44 01/02/11 $ 31,000 $ 80,000 14,911 0.45% $7.65 12/13/11 $ 72,000 $ 182,000 30,089 0.91% $7.65 12/13/11 $ 145,000 $ 367,000 Walter Kasianchuk 13,958 0.42% $10.44 01/02/11 $ 92,000 $ 232,000 46,042 1.40% $10.44 01/02/11 $ 302,000 $ 766,000 Brad Mattson 11,663 0.35% $10.44 01/02/11 $ 77,000 $ 194,000 94,143 2.85% $13.36 07/16/11 $ 791,000 $2,005,000 5,857 0.18% $13.36 07/16/11 $ 49,000 $ 125,000 88,337 2.68% $10.44 01/02/11 $ 580,000 $1,470,000
--------- (1) Options granted in fiscal year 2001 to executive officers were granted under our 1989 Stock Option Plan, have ten-year terms and, except as set forth below, vest over a period of four years at a rate of 25% after one year and 1/48th each month thereafter, conditioned upon continous employment with us. Under the 1989 Stock Option Plan, the Board of Directors retains discretion to modify the terms, including the price of outstanding options. (2) We granted an aggregate of 3,298,556 options during the fiscal year ended December 31, 2001. (3) All options were granted at fair market value on the date of grant, representing the closing sale price of our common stock as quoted on the Nasdaq National Market on the date of grant. (4) The options in this table may terminate before their expiration upon the termination of the optionee's status as an employee or consultant or upon the optionee's disability or death. 72 (5) Potential gains are net of exercise price, but before taxes associated with exercise. These amounts represent certain assumed rates of appreciation only, in accordance with the Securities and Exchange Commission's rules. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock, overall market conditions and the option holders' continued employment through the vesting period. The 5% and 10% assumed annual rates of appreciation are specified in SEC rules and do not represent our estimate or projection of future stock price growth. We do not necessarily agree that this method can properly determine the value of an option and there can be no assurance that the potential realizable values shown in this table will be achieved. One share of stock purchased at $7.65 in fiscal 2001 would yield profits of approximately $4.81 per share at 5% appreciation over ten years, or approximately $12.19 per share at 10% appreciation over the same period. One share of stock purchased at $10.44 in fiscal 2001 would yield profits of approximately $6.57 per share at 5% appreciation over ten years, or approximately $16.64 per share at 10% appreciation over the same period. One share of stock purchased at $13.36 in fiscal 2001 would yield profits of approximately $8.40 per share at 5% appreciation over ten years, or approximately $21.29 per share at 10% appreciation over the same period. One share of stock purchased at $15.03 in fiscal 2001 would yield profits of approximately $9.45 per share at 5% appreciation over ten years, or approximately $23.95 per share at 10% appreciation over the same period. Option Exercises in last Fiscal Year and Fiscal 2001 Year-End Option Values The following table provides the specified information concerning exercises of options to purchase our common stock in the fiscal year ended December 31, 2001, and unexercised options held as of December 31, 2001, by the persons named in the Summary Compensation Table above. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised Unexercised Options at In-the-Money Options at Shares December 31, 2001 December 31, 2001(3) Acquired on Value ------------------------ ---------------------- Name Exercise Realized Vested(1) Unvested(2) Vested(4) Unvested ---- -------- -------- --------- ----------- --------- -------- David Dutton -- -- 66,900 278,000 $91,731 $280,927 Ludger Viefhues -- -- -- 250,000 -- $116,000 David Ferran -- -- -- 250,000 -- $116,000 Yasuhiko Morita -- -- 65,225 71,775 $32,555 $ 81,745 Walter Kasianchuk -- -- 16,873 73,127 -- -- Brad Mattson -- -- 152,549 275,000 $67,650 $ 39,900
--------- (1) Represents shares which are immediately exercisable and/or vested. Options granted in fiscal 2001 under the 1989 Stock Option Plan generally vest and become exercisable over a period of four years at a rate of 25% after one year and 1/48th each month thereafter. Under the 1989 Stock Option Plan, the Board of Directors retains discretion to modify the terms, including the price of outstanding options. (2) Represents shares which are unvested and not exercisable. (3) Market value of underlying securities is based on the closing price of our Common Stock on December 31, 2001 (the last trading day of the 2001 fiscal year), which was $8.81 as reported on the Nasdaq National Market. (4) Represents shares that are immediately exercisable and/or vested. 73 Shares Acquired on Exercise includes all shares underlying the option, or portion of the option, exercised without deducting shares withheld to satisfy tax obligations, sold to pay the exercise price or otherwise disposed of. Value Realized is calculated by multiplying the difference between the market value, deemed to be the closing market price of our common stock on the Nasdaq National Market, and exercise price when exercised by the number of shares acquired upon exercise. The value of any payment by the Company for the exercise price or related taxes is not included. Value of Unexercised In-the-Money Options at Fiscal Year End is calculated by multiplying the difference between the market value and exercise price at fiscal year end by the number of options held at fiscal year end. Compensation of Directors Non-employee directors are paid $5,000 per Board of Directors meeting attended, with no cap on the number of meetings. The Chairman is paid $10,000 per meeting attended. The Company also reimburses its outside directors for out-of-pocket expenses associated with attending meetings. Non-employee directors are paid $1,000 or, in the case of the Chairman, $2,000 per committee meeting attended. Our Amended and Restated 1989 Stock Option Plan (the "Stock Option Plan") provides for the automatic grant of options to our non-employee directors. Currently, each non-employee director is granted options to purchase 30,000 shares on the date of appointment or election to the Board, and each is to be granted an option to purchase an additional 10,000 shares or, the case of the Chairman, an option to purchase an additional 15,000 shares in, each year thereafter, on the date immediately after each annual meeting of stockholders following which he remains a non-employee director of the Company, as long as he has continuously served on the board for six months as of the date of the annual meeting of stockholders. Employment Contracts and Termination of Employment and Change-in-Control Arrangements None of our current executive officers have employment agreements with us, and they may resign and their employment may be terminated at any time. Effective as of October 15, 2001, Brad Mattson resigned as our chief executive officer. Pursuant to the Transition Agreement by and between Mr. Mattson and us, dated as of December 13, 2001, Mr. Mattson shall continue to work for us as a part time employee, assisting on strategic issues, for a term of two years from the date of his resignation. Mr. Mattson shall be paid $450,000 per year for his services. The Transition Agreement also provides that, among other things, Mr. Mattson will continue to serve on our Board of Directors, unless requested to resign by a majority of the board for good cause, and that during the term of the Transition Agreement Mr. Mattson will vote his shares of our Common Stock in the manner recommended by a majority of the Board of Directors, provided that he shall have no obligation to vote for any proposal that adversely impacts his rights as a stockholder in a manner materially adverse to the impact on other stockholders. In addition, Mr. Mattson agrees that, during the term of the Transition Agreement, he will not compete with our business. Pursuant to our Amended and Restated 1989 Stock Option Plan, in the event that a change in control, as defined therein, occurs and the acquiring corporation does not assume or substitute for outstanding options granted under the 1989 Plan, any unexercised and unvested portions of the outstanding options will be immediately exercisable and vested in full as of the date ten days prior to the date of the change in control. Any option or portion thereof that is neither assumed or substituted for by the acquiring corporation nor exercised as of the date of the change in control will terminate and cease to be outstanding effective as of the date of the change in control. Pursuant to our 1994 Employee Stock Purchase Plan, as amended, in the event of a proposed sale of all or substantially all of our assets, or a merger or consolidation, then in the sole discretion of the plan administrator, (1) each option granted under the 1994 Plan shall be assumed or an equivalent option shall be substituted by the successor corporation, (2) all outstanding options shall be deemed exercisable on a date set by the administrator that is on or before the date of consummation of such merger, consolidation or sale or (3) all outstanding options shall terminate and the accumulated payroll deductions shall be returned to the participants. Compensation Committee Interlocks and Insider Participation No interlocking relationship exists between any member of our Board of Directors or Compensation Committee and any member of the Board of Directors or Compensation Committee of any other company. 74 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following sets forth information regarding ownership of the Company's outstanding common stock as of February 25, 2002 by (i) each stockholder known by us to be the beneficial owners of more than 5% of our outstanding shares of common stock, (ii) each director (iii) each executive officer named in the Summary Compensation Table above, and (iv) all directors and executive officers as a group. To our knowledge and except as otherwise indicated below and subject to applicable community property laws, each person named in the table has sole voting and sole investment powers with respect to all shares of common stock shown as beneficially owned by them. Applicable percentage ownership in the table is based on 37,085,026 shares of common stock outstanding as of February 25, 2002. Beneficial ownership is determined under the rules and regulations of the Securities and Exchange Commission. Shares of common stock subject to options or warrants that are presently exercisable or exercisable within 60 days of February 25, 2002 are deemed outstanding for the purpose of computing the percentage ownership of the person or entity holding options or warrants, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. Entries denoted by an asterisk represent an amount less than 1%. Amount and Percent of Nature Of Common Beneficial Stock Name of Beneficial Owner(1) Ownership Outstanding(2) --------------------------- --------- -------------- STEAG Electronic Systems AG..................11,850,000(1) 31.9% Ruettenscheider Strasse 1-3, 45128 Essen, Germany Mellon Financial Corporation.................4,150,760(2) 11.1% One Mellon Center Pittsburgh, Pennsylvania 15258 Brad Mattson.................................3,428,845(3) 9.2% Dr. Jochen Melchior (4) ..................... 9,375(5) * Dr. Hans-Georg Betz ......................... 9,375(5) * Kenneth Kannappan ........................... 25,593(6) * Shigeru Nakayama ............................ 45,948(7) * Kenneth G. Smith ............................ 59,218(8) * David Dutton ................................ 84,215(9) * David Ferran ................................ -- -- Walter Kasianchuk............................ 40,059(10) * Yasuhiko Morita.............................. 72,203(11) * Ludger H. Viefhues........................... 48,873(12) * Directors and executive officers as a group (11 persons) ..............................3,783,645(13) 10.0% --------- * Less than 1%. 75 (1) As disclosed in the Schedule 13D filed with the Securities and Exchange Commission on January 11, 2001 by STEAG Electronic Systems AG ("SES") and by STEAG AG ("STEAG"), SES directly beneficially owns 11,850,000 shares of the Company's Common Stock. STEAG owns all of the capital stock of SES and, as a result, is the indirect beneficial owner of the shares of the Company held directly by SES, and each has sole voting and dispositive power with respect to such shares. (2) According to Schedule 13G filed with the Securities and Exchange Commission on January 23, 2002 by Mellon Financial Corporation, Mellon Financial Corporation beneficially owns 4,150,760 shares of the Company's Common Stock, The Boston Company, Inc. beneficially owns 3,457,820 shares of the Company's Common Stock and The Boston Company Asset Management, LLC beneficially owns 2,581,320 shares of the Company's Common Stock. Mellon Financial Corporation has sole voting power with respect to 3,592,360 shares of the Company's Common Stock, has shared voting power with respect to 398,700 shares of the Company's Common Stock, has sole dispositive power over 4,148,860 shares of the Company's Common Stock and has shared dispositive power over 1,900 shares of the Company's 2 Common Stock. The Boston Company, Inc. has sole voting power with respect to 2,914,920 shares of the Company's Common Stock, has shared voting power with respect to 398,700 shares of the Company's Common Stock, and has sole dispositive power over 3,457,820 shares of the Company's Common Stock. The Boston Company Asset Management, LLC has sole voting power with respect 2,038,420 shares of the Company's Common Stock, has shared voting power with respect to 398,700 and has sole dispositive power over 2,581,320 shares of the Company's Common Stock. (3) Includes 184,839 shares subject to options exercisable within 60 days of February 25, 2002. (4) Dr. Melchior is Chief Executive Officer and Chairman of the Management Board of STEAG AG and Chairman of the Supervisory Board of SES. Accordingly, he may be deemed to share voting power or investment power with respect to the 11,850,000 shares held by SES. He disclaims beneficial ownership of these shares. (5) Consists of 9,375 shares subject to options exercisable within 60 days of February 25, 2002. (6) Includes 23,593 shares subject to options exercisable within 60 days of February 25, 2002. (7) Consists of 45,948 shares subject to options exercisable within 60 days of February 25, 2002. (8) Consists of 59,218 shares subject to options exercisable within 60 days of February 25, 2002. (9) Includes 80,962 shares subject to options exercisable within 60 days of February 25, 2002. (10) Includes 38,122 shares subject to options exercisable within 60 days of February 25, 2002. (11) Consists of 72,203 shares subject to options exercisable within 60 days of February 25, 2002. (12) Includes 46,873 shares subject to options exercisable within 60 days of February 25, 2002. (13) Includes 532,386 shares subject to options exercisable within 60 days of February 25, 2002. 76 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In April 2001, we completed the acquisitions of 97% of the outstanding shares of R.F. Services, Inc. for a cash price of approximately $928,800 (including acquisition-related costs of $41,500). Brad Mattson, a member of our board of directors and our former Chief Executive Officer, owned a majority of the outstanding shares of R.F. Services, Inc. and served as a director of that corporation. During the second quarter of 2000, we extended a loan to Mr. Mattson in the principal amount of $200,000. The interest rate of the loan is 6%. As of March 15, 2002, Mr. Mattson owed us a total of $221,867 pursuant to the loan. The repayment of the loan was originally due in the first quarter of 2001, but the Company extended the maturity date to December 31, 2002. During the fourth quarter of 1998, we extended a two-year loan to David Dutton, our current Chief Executive Officer and former President, Plasma Product Division, in the principal amount of $100,000. The loan is collateralized by approximately 32,000 shares of our common stock and is a full recourse note bearing interest at 6% per year. During the second quarter of 2000, we extended a second loan to Mr. Dutton in the principal amount of $50,000. The interest rate on the second loan is 6%. The repayment of the second loan was originally due in the first quarter of 2001. During the third quarter of 2001, we extended a third loan to Mr. Dutton in the amount of $20,000. The interest rate on these loans is 6%. As of March 15, 2002, Mr. Dutton owed us a total of $204,070 pursuant to the loans. The maturity date on the loans is December 31, 2002. During the third quarter of 2000, we extended a loan to Mr. Morita in the principal amount of $300,000. The interest rate on the loan is 6%. As of March 15, 2002, Mr. Morita owed us a total of $327,700 pursuant to the loan. The repayment of the loan was originally due in the first quarter of 2001, but we extended the maturity date to December 31, 2002. We entered into a consulting agreement with Shigeru Nakayama, a member of our Board of Directors, on August 10, 2000. Under his consulting agreement, Mr. Nakayama receives $10,000 per month and an option to purchase 6,000 shares of our Common Stock per year, in exchange for consulting services regarding the integration of our operations in Japan. In May 2001, we made payments of $90,000 to Mr. Nakayama for consulting services performed from August 2000 to April 2001. STEAG Electronic Systems AG ("SES") holds approximately 32% of our Common Stock, which it acquired pursuant to the purchase by us of eleven subsidiaries of SES, which was consummated on January 1, 2001 under the terms of a Strategic Business Combination Agreement by and between SES and us, dated June 27, 2000, as amended by the Amendment to Strategic Business Combination Agreement dated December 15, 2000 (the "Combination Agreement"). Pursuant to the Stockholder Agreement entered into in connection with the acquisition transaction, Dr. Jochen Melchior and Dr. Hans-Georg Betz were elected to our Board of Directors as designees of SES. On November 5, 2001, we agreed with SES to amend the Combination Agreement and the Stockholder Agreement. The Amendment to Stockholder Agreement eliminated the restrictions on future dispositions of our Common Stock by SES. The Second Amendment to the Combination Agreement provided for, among other things, the amendment of the secured promissory note issued to SES in connection with the acquisition transaction, extending the maturity date and capitalizing accrued interest, and an additional loan from SES to us in an amount equal to the year 2000 profits that were transferred from two of the acquired German subsidiaries to SES pursuant to the Combination Agreement. We issued the Amended and Restated Secured Promissory Note in the principal amount of $26.9 million with an interest rate of 6% per annum. This note is secured by a standby letter of credit, which is in turn secured by restricted cash in the principal amount of the note. We also issued to SES the second Secured Promissory Note in the principal amount of approximately Euro 19.2 million, with an interest rate of 6% per annum and secured by an assignment of accounts receivable of the two acquired German subsidiaries. Both notes are due on July 2, 2002. In fiscal year 2001, we paid approximately $988,000 to SES in connection with the purchase of services or supplies pursuant to several transition services agreements with SES, under which SES agreed to provide specified payroll, communications, accounting information and intellectual property administration services to certain of our German subsidiaries. In addition, in fiscal 2001, the Company purchased approximately $3.7 million of manufacturing and assembly services pursuant to a manufacturing supply contract with a company affiliated with SES. 77 Effective as of October 15, 2001, Brad Mattson resigned as our chief executive officer. Pursuant to the Transition Agreement by and between Mr. Mattson and us, dated as of December 13, 2001, Mr. Mattson shall continue to work for us as a part time employee, assisting on strategic issues, for a term of two years from the date of his resignation. Mr. Mattson shall be paid $450,000 per year for his services. The Transition Agreement also provides that, among other things, Mr. Mattson will continue to serve on our Board of Directors, unless requested to resign by a majority of the board for good cause, and that during the term of the Transition Agreement Mr. Mattson will vote his shares of our Common Stock in the manner recommended by a majority of the Board of Directors, provided that he shall have no obligation to vote for any proposal that adversely impacts his rights as a stockholder in a manner materially adverse to the impact on other stockholders. In addition, Mr. Mattson agrees that, during the term of the Transition Agreement, he will not compete with our business. The Company paid Alliant Partners, a technology merger and acquisition advisory firm, a fee of $300,000 for rendering an opinion as to the fairness from a financial point of view to Mattson's stockholders of the consideration to be provided by Mattson in connection with the acquisition of the STEAG Semiconductor Division and CFM. The Company also agreed to pay Alliant Partners a success fee of $2,000,000 upon the closing of the transactions. This payment was made in January 2001. This amount was capitalized in 2000 as a direct acquisition related cost. Mr. Savage, who was a member of Mattson's Board of Director until January 1, 2001 is a partner at Alliant Partners. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8 on page 45. (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Account for each of the three years in the period ended December 31, 2001 (a)(3) Exhibits
Management Contract Exhibit or Compensatory Plan Number Description or Arrangement Notes ------- ----------- -------------------- ----- 2.1 Strategic Business Combination (4) Agreement, dated as of June 27, 2000, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 2.2 Amendment to Strategic Business (5) Combination Agreement, dated as of December 15, 2000, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 2.3 Agreement and Plan of Merger, dated (4) as of June 27, 2000, by and among Mattson Technology, Inc., a Delaware corporation, M2C Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Mattson, and CFM Technologies, Inc., a Pennsylvania corporation. 78 2.4 Second Amendment to Strategic Business Combination Agreement, dated as of November 5, 2001, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 3.1 Amended and Restated Certificate of (7) Incorporation of Mattson Technology, Inc. 3.2 Second Amended and Restated Bylaws (7) of Mattson Technology, Inc. 10.1 Marubeni Japanese Distribution Agreement, as amended (2) 10.2 1989 Stock Option plan, as amended C (3) 10.3 1994 Employee Stock Purchase Plan C (1) 10.4 Form of Indemnification Agreement C (1) 10.5 Stockholder Agreement by and among (6) STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, Mattson Technology, Inc., a Delaware corporation, and Brad Mattson. 10.6 Amendment to Stockholder Agreement dated as of November 5, 2001, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 10.7 Amended and Restated Secured Promissory Note in favor of STEAG Electronic Systems AG, dated as of July 2, 2001. 10.8 Secured Promissory Note in favor of STEAG Electronic Systems AG, dated as of November 5, 2001. 10.9 Transition Agreement by and between C Mattson Technology, Inc. and Brad Mattson, dated as of December 13, 2001. 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Public Accountants 23.2 Consent of Independent Accountants 24.1 Power of Attorney (See page 81 of this form 10-K) 99 Representation Letter to the SEC
79 ------- (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 filed August 12, 1994 (33-92738), as amended. (2) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Form 10-K for fiscal year 1997. (3) Incorporated by reference to the corresponding Registrant's Registration Statement on Form S-8 filed October 31, 1997 (333-39129). (4) Incorporated by reference from Mattson's filing on Form S-4 (File No. 333- 46568) filed on September 25, 2000. (5) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K (File No. 000-24838) filed on December 21, 2000. (6) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 16, 2001. (7) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 30, 2001. (b) Reports on Form 8-K Form 8-K filed October 18, 2001 reporting resignation of Brad Mattson as Chief Executive Officer. 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MATTSON TECHNOLOGY, INC. (Registrant) By: /s/ David Dutton --------------------------------- David Dutton President, Chief Executive Officer and Director April 1, 2002 KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints David Dutton and Ludger Viefhues, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in all capacities, to sign any amendments to this form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ David Dutton President, April 1, 2002 -------------------------------- Chief Executive Officer David Dutton and Director /s/ Ludger Viefhues Executive Vice President-- April 1, 2002 -------------------------------- Finance and Chief Financial Ludger Viefhues Officer (Principal Financial and Accounting Officer) /s/ Jochen Melchior Chairman of the Board and April 1, 2002 -------------------------------- Director Dr. Jochen Melchior /s/ Brad Mattson Vice Chairman of the Board April 1, 2002 -------------------------------- and Director Brad Mattson /s/ Shigeru Nakayama Director April 1, 2002 -------------------------------- Shigeru Nakayama /s/ Kenneth Smith Director April 1, 2002 -------------------------------- Kenneth Smith /s/ Kenneth Kannappan Director April 1, 2002 -------------------------------- Kenneth Kannappan /s/ Hans-Georg Betz Director April 1, 2002 -------------------------------- Dr. Hans-Georg Betz 81 SCHEDULE II VALUATION AND QUALIFYING ACCOUNT Allowance for Doubtful Accounts (in thousands)
Balance at Additions -- Balance at Beginning Acquisition Charged to End of Fisal Year of Year Adjustments Income Deductions Year ---------- ------- ----------- ------ ---------- ---- 1999 $ 141 $ -- $ -- $ -- $ 141 2000 $ 141 $ -- $ 360 $ -- $ 501 2001 $ 501 $ 9,178 $ 6,850 $(4,056) $12,473 82
EXHIBIT INDEX The following Exhibits to this report are filed herewith or are incorporated herein by reference. Each management contract or compensatory plan or arrangement has been marked with the letter "C" to identify it as such.
Management Contract Exhibit or Compensatory Plan Number Description or Arrangement Notes ------ ----------- -------------- ----- 2.1 Strategic Business Combination Agreement, (4) dated as of June 27, 2000, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 2.2 Amendment to Strategic Business (5) Combination Agreement, dated as of December 15, 2000, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 2.3 Agreement and Plan of Merger, dated as of (4) June 27, 2000, by and among Mattson Technology, Inc., a Delaware corporation, M2C Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Mattson, and CFM Technologies, Inc., a Pennsylvania corporation. 2.4 Second Amendment to Strategic Business Combination Agreement, dated as of November 5, 2001, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 3.1 Amended and Restated Certificate of (7) Incorporation of Mattson Technology, Inc. 3.2 Second Amended and Restated Bylaws of (7) Mattson Technology, Inc. 10.1 Marubeni Japanese Distribution Agreement, (2) as amended 10.2 1989 Stock Option plan, as amended C (3) 10.3 1994 Employee Stock Purchase Plan C (1) 10.4 Form of Indemnification Agreement C (1) 10.5 Stockholder Agreement by and among STEAG (6) Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, Mattson Technology, Inc., a Delaware corporation, and Brad Mattson. 10.6 Amendment to Stockholder Agreement dated as of November 5, 2001, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson Technology, Inc., a Delaware corporation. 83 10.7 Amended and Restated Secured Promissory Note in favor of STEAG Electronic Systems AG, dated as of July 2, 2001. 10.8 Secured Promissory Note in favor of STEAG Electronic Systems AG, dated as of November 5, 2001. 10.9 Transition Agreement by and between Mattson C Technology, Inc. and Brad Mattson, dated as of December 13, 2001. 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Public Accountants 23.2 Consent of Independent Accountants 24.1 Power of Attorney (See page 81 of this form 10-K) 99 Representation Letter to the SEC
-------- (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 filed August 12, 1994 (33-92738), as amended. (2) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Form 10-K for fiscal year 1997. (3) Incorporated by reference to the corresponding Registrant's Registration Statement on Form S-8 filed October 31, 1997 (333-39129). (4) Incorporated by reference from Mattson's filing on Form S-4 (File No. 333- 46568) filed on September 25, 2000. (5) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K (File No. 000-24838) filed on December 21, 2000. (6) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 16, 2001. (7) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 30, 2001. 84