-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OsPLUcNgIv6QzRsdH73MNUcISipEWFSErlrBrFD+p6i+vbzr6JkdGNnlxhLc2fMO V/HKWuYj/4/aJJVeZsYqNA== 0001010410-02-000018.txt : 20020814 0001010410-02-000018.hdr.sgml : 20020814 20020814152154 ACCESSION NUMBER: 0001010410-02-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTSON TECHNOLOGY INC CENTRAL INDEX KEY: 0000928421 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 770208119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24838 FILM NUMBER: 02735678 BUSINESS ADDRESS: STREET 1: 2800 BAYVIEW DR CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106575900 10-Q 1 mattson10q.txt MATTSON TECHNOLOGY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 0-21970 ------------------ MATTSON TECHNOLOGY, INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 77-0208119 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2800 Bayview Drive Fremont, California 94538 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (510) 657-5900 -------------- (Registrant's telephone number, including area code) --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Number of shares of common stock outstanding as of August 2, 2002: 44,695,962. MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES --------------------- TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. - -------- Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 ................................................ 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and July 1, 2001 .................. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and July 1, 2001................... 5 Notes to Condensed Consolidated Financial Statements ............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................ 30 Item 2. Changes in Securities ............................................ 31 Item 3. Defaults Upon Senior Securities................................... 31 Item 4. Submission of Matters to a Vote of Security Holders............... 31 Item 5. Other Information................................................. 32 Item 6. Exhibits and Reports on Form 8-K ................................. 32 Signatures........................................................ 34 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) ASSETS
June 30, December 31, 2002 2001 --------- ---------- Current assets: Cash and cash equivalents $ 101,389 $ 64,057 Restricted cash 28,163 27,300 Short-term investments 1,461 5,785 Accounts receivable, net 25,907 38,664 Advance billings 45,835 61,874 Inventories 60,054 65,987 Inventories - delivered systems 56,561 74,002 Prepaid expenses and other current assets 16,153 18,321 --------- --------- Total current assets 335,523 355,990 Property and equipment, net 26,072 33,508 Goodwill and intangibles 35,511 40,616 Other assets 3,289 2,591 --------- --------- $ 400,395 $ 432,705 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - STEAG Electronic Systems AG, a shareholder $ 37,729 $ 44,613 Current portion of long-term debt -- 289 Line of credit -- 4,589 Accounts payable 17,131 14,175 Accrued liabilities 76,079 78,459 Deferred revenue 117,400 136,580 --------- --------- Total current liabilities 248,339 278,705 --------- --------- Long-term liabilities: Long-term debt -- 1,001 Deferred income taxes 8,315 11,261 --------- --------- Total long-term liabilities 8,315 12,262 --------- --------- Total liabilities 256,654 290,967 --------- --------- Stockholders' equity: Common stock 45 37 Additional paid-in capital 542,004 497,536 Accumulated other comprehensive income (loss) 1,274 (6,553) Treasury stock (2,987) (2,987) Accumulated deficit (396,595) (346,295) --------- --------- Total stockholders' equity 143,741 141,738 --------- --------- $ 400,395 $ 432,705 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Six Months Ended ------------------------- ------------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 --------- --------- --------- --------- Net sales $ 47,263 $ 71,355 $ 93,468 $ 144,854 Cost of sales 37,810 56,190 76,596 106,517 --------- --------- --------- --------- Gross profit 9,453 15,165 16,872 38,337 --------- --------- --------- --------- Operating expenses: Research, development and engineering 9,348 16,108 18,912 35,009 Selling, general and administrative 21,098 23,458 43,195 55,332 In-process research and development -- -- -- 10,100 Amortization of goodwill and intangibles 1,687 9,624 3,374 20,023 --------- --------- --------- --------- Total operating expenses 32,133 49,190 65,481 120,464 --------- --------- --------- --------- Loss from operations (22,680) (34,025) (48,609) (82,127) Interest and other income (expense), net (2,005) 1,307 (2,004) 1,795 --------- --------- --------- --------- Loss before provision for income taxes (24,685) (32,718) (50,613) (80,332) Provision for (benefit from) income taxes (162) 397 (313) 2,409 --------- --------- --------- --------- Net loss $ (24,523) $ (33,115) $ (50,300) $ (82,741) ========= ========= ========= ========= Net loss per share: Basic $ (0.58) $ (0.90) $ (1.27) $ (2.25) ========= ========= ========= ========= Diluted $ (0.58) $ (0.90) $ (1.27) $ (2.25) ========= ========= ========= ========= Shares used in computing net loss per share: Basic 42,315 36,804 39,712 36,709 ========= ========= ========= ========= Diluted 42,315 36,804 39,712 36,709 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended ------------------------- June 30, July 1, 2002 2001 --------- --------- Cash flows from operating activities: Net loss $ (50,300) $ (82,741) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 4,855 10,760 Deferred taxes (1,214) (2,208) Amortization of goodwill and intangibles 3,374 20,023 Loss on disposal of property and equipment 607 -- Stock-based compensation 125 -- Acquired in-process research and development -- 10,100 Changes in assets and liabilities, net of effect of acquisitions: Restricted cash (863) -- Accounts receivable 17,527 20,718 Advance billings 20,703 (19,642) Inventories 9,340 9,402 Inventories - delivered systems 24,572 (44,096) Prepaid expenses and other current assets 2,400 (2,645) Other assets (745) 5,700 Accounts payable 2,597 (7,566) Accrued liabilities (8,759) (37,885) Deferred revenue (31,381) 63,930 --------- --------- Net cash used in operating activities (7,162) (56,150) --------- --------- Cash flows from investing activities: Purchases of property and equipment (652) (10,361) Proceeds from the sale of equipment 2,939 -- Purchases of investments (5,118) (26,247) Proceeds from the sale and maturity of investments 9,590 50,737 Net cash acquired from acquisitions -- 38,016 --------- --------- Net cash provided by investing activities 6,759 52,145 --------- --------- Cash flows from financing activities: Payments on line of credit and long-term debt (5,341) (118) Borrowings against line of credit 194 11,128 Payment on STEAG notes payable (1,204) -- Change in interest accrual on STEAG note 1,255 -- Proceeds from the issuance of common stock, net of costs 34,861 -- Proceeds from the issuance of common stock under stock plans 1,342 3,190 --------- --------- Net cash provided by financing activities 31,107 14,200 --------- --------- Effect of exchange rate changes on cash and cash equivalents 6,628 (12,167) --------- --------- Net increase (decrease) in cash and cash equivalents 37,332 (1,972) Cash and cash equivalents, beginning of period 64,057 33,431 --------- --------- Cash and cash equivalents, end of period $ 101,389 $ 31,459 ========= ========= Supplemental disclosures: Common stock issued for business combination $ -- $ 294,804 ========= ========= Stock issued in partial settlement of STEAG note $ 8,140 $ -- ========= =========
See accompanying notes to condensed consolidated financial statements. 5 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (unaudited) Note 1 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet as of December 31, 2001 has been derived from the audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are used for, but are not limited to, the accounting for the allowance for doubtful accounts, inventory reserves, depreciation and amortization periods, sales returns, warranty costs and income taxes. Actual results could differ from these estimates. The condensed consolidated financial statements include the accounts of Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results that may be expected for the future quarters or for the entire year ending December 31, 2002. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for issuance SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and is no longer amortizing goodwill, thereby eliminating annual goodwill amortization of approximately $3.9 million, based on anticipated amortization for fiscal year 2002 that would have been incurred under the prior accounting standard. In accordance with the provisions of SFAS No. 142, the Company reclassified $4.6 million from intangible assets to goodwill relating to the acquired workforce. The Company completed the first step of the transitional goodwill impairment test and has determined that no potential impairment exists. As a result, the Company has recognized no transitional impairment 6 loss in the first six months of 2002 in connection with the adoption of SFAS No. 142. However, no assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment. The Company will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. The Company will continue to amortize the identified intangibles. The amortization expense is estimated to be $6.7 million for fiscal 2002 and each of fiscal years 2003, 2004 and 2005. Amortization of intangibles for the six months ended June 30, 2002 was approximately $3.4 million. Net loss on an adjusted basis, excluding goodwill amortization expense, would have been as follows (unaudited, in thousands):
For the Three Months Ended For the Six Months Ended ---------------------------- --------------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net loss, as reported $ (24,523) $ (33,115) $ (50,300) $ (82,741) Add: goodwill amortization -- 6,055 -- 12,885 ---------- ---------- ---------- ---------- Net loss -- as adjusted $ (24,523) $ (27,060) $ (50,300) $ (69,856) ========== ========== ========== ========== Basic and diluted loss per share, as reported $ (0.58) $ (0.90) $ (1.27) $ (2.25) Add: goodwill amortization -- 0.16 -- 0.35 ---------- ---------- ---------- ---------- Basic and diluted loss per share - as adjusted $ (0.58) $ (0.74) $ (1.27) $ (1.90) ========== ========== ========== ==========
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, which will be effective for the Company's fiscal year beginning 2003. 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 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 adopted SFAS 144 on January 1, 2002 and this adoption did not have a significant effect on its financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", as well as SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, 7 or describe their applicability under changed conditions. The Company will adopt SFAS No. 145 during fiscal year 2003. We do not anticipate that adoption of this statement will have a material impact on our consolidated balance sheets or consolidated statements of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. We are required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The adoption of SFAS No. 146 will, on a prospective basis, change the timing of when restructuring charges are recorded from the commitment date to the date that the liability is incurred. The Company is currently assessing the impact of SFAS 146 on its financial statements. Reclassifications Certain reclassifications were made to prior year financial data to conform with current year presentation. Note 2 Balance Sheet Detail (in thousands): June 30, December 31, 2002 2001 --------- --------- Inventories: Purchased parts and raw materials $ 73,956 $ 77,399 Work-in-process 25,537 25,480 Finished goods 1,971 5,363 Evaluation systems 3,022 5,734 --------- --------- 104,486 113,976 Less: inventory reserves (44,432) (47,989) --------- --------- $ 60,054 $ 65,987 ========= ========= Accrued liabilities: Warranty and installation $ 19,179 $ 19,936 Accrued compensation and benefits 11,116 10,320 Income taxes 5,561 5,165 Commissions 2,826 2,765 Customer deposits 568 686 Other 36,829 39,587 --------- --------- $ 76,079 $ 78,459 ========= ========= Note 3 Acquisitions On June 27, 2000, the Company entered into a 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 simultaneously 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. 8 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 Combination Agreement, paid SES $100,000 in cash, assumed certain obligations of SES and STEAG AG, the parent company of SES, and agreed to repay certain intercompany indebtedness owed by the acquired subsidiaries to SES, in exchange for which the Company delivered to SES a secured promissory note in the principal amount of $26.9 million (with an interest rate of 6% per annum). Under the amendment to the Combination Agreement, the Company also agreed to pay SES the amount of 19.2 million EUROS. On April 30, 2002, upon closure of a private placement transaction, the Company issued approximately 1.3 million shares of common stock to SES in exchange for the cancellation of $8.1 million (approximately 9.0 million EUROS as of April 30, 2002) of indebtedness. Under these two obligations, as of June 30, 2002, the Company owed an aggregate amount of approximately $37.7 million to SES (including accrued interest at 6% per annum). On July 2, 2002, the Company paid to SES in full its remaining two obligations of $26.9 million and 10.2 million EUROS and accrued interest thereon, aggregating approximately $37.7 million. 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. At June 30, 2002, SES held approximately 29.5% of the Company's common stock, and currently has two representatives on the Company's board of directors. 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 amounts 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 were approximately $39.9 million. Goodwill, including workforce, is no longer amortized under SFAS 142. Developed technology is being amortized over an estimated useful life of five years. 9 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 represented next-generation technologies that were 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 hours and technological progress. Due to market conditions the Hybrid tool project has been redefined as the Kronos II project which is expected to beta in mid-2003. The Single wafer tool technology development efforts will continue at a pace to meet market needs. 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. During the second half 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 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 to reduce certain property and equipment purchased from the STEAG Semiconductor Division to zero as there were no future cash flows expected from these assets. These charges of $4.5 million relating to the STEAG Semiconductor Division were recorded as impairment of long-lived assets and other charges in the third and fourth quarters of 2001. 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, which are not included in the purchase price of CFM. 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%. 10 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 were approximately $167.4 million. Goodwill, including acquired workforce, is no longer amortized under SFAS 142. Developed technology is being amortized over an estimated useful life of five years. 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. At the acquisition date, CFM was conducting design, development, engineering and testing activities associated with the completion of the O3Di (Ozonated Water Module), which is currently in-process as of June 30, 2002. The project under development currently represents next-generation technology that is expected to address emerging market demands for more effective, lower cost, and safer resist and organics residue removal processes. As of June 30, 2002, the technology under development was approximately 95 percent complete based on engineering man hours and technological progress. CFM had spent approximately $0.2 million on the in-process project prior to the merger, and since the completion of the merger the Company has spent approximately an additional $50,000 and expected to spend approximately an additional $10,000 in 2002 to complete all phases of the research and development. Anticipated completion dates range from 1 to 2 months, with estimated completion in August 2002, at which time 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. 11 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. At the time of acquisition, 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. This project was merged into the Kronos II project to be beta tested, estimated in mid-2003. 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. During the second half 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 were 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 third and fourth quarters of 2001. The following table summarizes the components of gross and net goodwill and intangible asset balances (in thousands):
June 30, 2002 December 31, 2001 ------------------------------------- ------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount -------- ------------ -------- -------- ------------ -------- Goodwill $12,676 $ -- $12,676 $12,610 $(2,759) $ 9,851 Other intangible assets -- -- -- 5,126 (570) 4,556 Developed technology 31,997 (9,162) 22,835 31,997 (5,788) 26,209 ------- ------- ------- ------- ------- ------- Total goodwill and intangible assets $44,673 $(9,162) $35,511 $49,733 $(9,117) $40,616 ======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (unaudited, in thousands):
For the Three Months Ended For the Six Months Ended -------------------------- ------------------------ June 30, July 1, June 30, July 1, 2002 2001 2002 2001 ------- ------- ------- ------- Goodwill amortization $ -- $ 3,799 $ -- $ 8,373 Other intangible assets amortization -- 2,256 -- 4,512 Developed technology amortization 1,687 3,569 3,374 7,138 ------- ------- ------- ------- Total amortization $ 1,687 $ 9,624 $ 3,374 $20,023 ======= ======= ======= =======
12 Note 4 Net Income (Loss) Per Share Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of basic and diluted net income (loss) per share on the face of the income statement. Basic earnings per share (EPS) is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average market price of the Company's common stock for the period. All amounts in the following table are in thousands except per share data.
Three Months Ended Six Months Ended --------------------------- ------------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 ---------- --------- --------- -------- NET LOSS $ (24,523) $ (33,115) $ (50,300) $(82,741) ========== ========= ========= ======== BASIC AND DILUTED LOSS PER SHARE: Loss available to common stockholders $ (24,523) $ (33,115) $ (50,300) $(82,741) ========== ========= ========= ======== Weighted average common shares outstanding 42,315 36,804 39,712 36,709 ========== ========= ========= ======== Basic and diluted loss per share $ (0.58) $ (0.90) $ (1.27) $ (2.25) ========== ========= ========= ========
Total stock options outstanding at June 30, 2002 and July 1, 2001 of 4,548,669 and 1,035,259 shares, respectively, were excluded from the computation of diluted EPS because the effect of including them would have been antidilutive. Note 5 Comprehensive Income (Loss) 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 following are the components of comprehensive loss:
Three Months Ended Six Months Ended -------------------------- ------------------------ June 30, July 1, June 30, July 1, 2002 2001 2002 2001 -------- -------- -------- -------- Net loss $(24,523) $(33,115) $(50,300) $(82,741) Cumulative translation adjustments 8,058 (4,702) 7,995 (9,518) Increase (decrease) in minimum pension liability - - (36) - Unrealized investment gain (loss) - (293) (16) 10 Gain (loss) on cash flow hedging instruments - (62) (116) 270 -------- -------- -------- -------- Comprehensive loss $(16,465) $(38,172) $(42,473) $(91,979) ======== ======== ======== ========
13 The components of accumulated other comprehensive income (loss), net of related tax are as follows: (in thousands) June 30, December 31, 2002 2001 ------- ------- Cumulative translation adjustments $ 1,274 $(6,721) Increase (decrease) in minimum pension liability -- 36 Unrealized investment gain (loss) -- 16 Gain on cash flow hedging instruments -- 116 ------- ------- $ 1,274 $(6,553) ======= ======= Note 6 Reportable Segments SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The chief executive officer of the Company is the Company's chief decision maker. As the Company's business is completely focused on one industry segment, design, manufacturing and marketing of advanced fabrication equipment to the semiconductor manufacturing industry, management believes that the Company has one reportable segment. The Company's revenues and profits are generated through the sale and service of products for this one segment. As a result, no additional operating segment information is required to be disclosed. The following is net sales information by geographic area for the periods presented (dollars in thousands):
Sales by Geographic Regions Three Months Ended Six Months Ended -------------------------------- -------------------------------- June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001 -------------- -------------- -------------- -------------- ($) (%) ($) (%) ($) (%) ($) (%) -------- --- -------- --- -------- --- -------- --- United States $ 15,134 32 $ 15,698 22 $ 22,297 24 $ 37,676 26 Europe 12,232 26 22,120 31 22,747 24 44,236 31 Asia Pacific (including Korea, Taiwan, Singapore and China) 17,919 38 23,547 33 42,688 46 44,838 31 Japan 1,978 4 9,990 14 5,736 6 18,104 12 -------- -------- -------- ------- $ 47,263 $ 71,355 $ 93,468 $144,854 ======== ======== ======== ========
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 the second quarter of 2002, two customers accounted for 18.1% and 13.7% of net sales. In the second quarter of 2001, 13.0% of net sales was to a single customer. Note 7 Debt The Company had notes payable to STEAG Electronic Systems AG in the aggregate amount of approximately $37.7 million as of June 30, 2002. The notes accrued interest at 6% per annum, and were due and paid in full including all accrued interest on July 2, 2002. The Company's Japanese subsidiary has a credit line with a Japanese bank in the amount of 900 million Yen (approximately $7.5 million at June 30, 2002), secured by the Japanese subsidiary's trade accounts receivable. The line bears interest at a per annum rate of TIBOR plus 75 basis points. The term of the line, originally through June 20, 2002, has been extended through June 20, 2003. The Company has provided a corporate guarantee for this credit line. At June 30, 2002, there was no borrowing on this credit line. 14 On March 29, 2002, the Company 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 a minimum quick ratio, minimum tangible net worth and minimum revenue. At June 30, 2002, the Company was in compliance with the covenants. Currently, the Company has no borrowings under this line of credit. Note 8 Related Party Transaction In April 2002, the Company issued unsecured loans to Brad Mattson, a board member, and Diane Mattson, a shareholder, each in the principal amount of $700,000. The loans do not bear interest and are due and payable on August 31, 2002. During the term of the notes, Mr. Mattson and Ms. Mattson may not sell, pledge or otherwise dispose of any common stock of the Company. Any disposition of common stock of the Company by Mr. Mattson or Ms. Mattson would result in a default under the notes and all proceeds from such disposition would be applied to the repayment of the notes. On July 3, 2002, the Company issued additional loans to Brad Mattson and Diane Mattson, in the principal amounts of $2,600,647 and $1,141,058, respectively. The interest rate on both these loans will be the greater of the prime rate plus 125 basis points or that interest rate that would have been charged under the margin agreement the borrowers had previously maintained with Prudential Securities. Both loans are secured, collateralized, and are due and payable on December 31, 2002. Note 9 Other Items On February 27, 2002, the Company signed an agreement to sell to Metron Technology N.V. ("Metron") the AG Associates rapid thermal processing (RTP) product line, which the Company obtained through its acquisition of the STEAG Semiconductor Division. Upon closing of the transaction in March 2002, Metron assumed exclusive ownership of the 4000 and 8000 series RTP product line and the distribution of spare parts for the installed base. The Company recognized an immaterial loss on this transaction. As part of the agreement, Metron sub-leased a portion of the San Jose facility from the Company. On March 5, 2002, a jury in San Jose, California rendered a verdict in favor of the Company's subsidiary, Mattson Wet Products, Inc. (formerly CFM Technologies, Inc.), in a patent infringement suit against Dainippon Screen Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor wafer processing equipment. In the lawsuit, CFM claimed that six different DNS wet processing systems infringed two of CFM's patents on drying technology. DNS denied that its machines infringed and alleged that the CFM patents were invalid. The jury found that each of the six DNS machines infringed both of the CFM patents, and that both patents were valid. On June 24, 2002, the Company and DNS jointly announced that they have amicably resolved their legal disputes with a comprehensive, global settlement, which includes termination of all outstanding litigation between the companies and cross-licenses of patents related to certain aspects of wet immersion processing systems. The Company also released all DNS customers from any claims of infringement relating to their purchase and future use of DNS wet processing equipment. In addition, the Company has agreed to afford DNS a two month period for DNS to evaluate its interest in discussing the acquisition of intellectual property or assets relating to wet surface preparation. The settlement agreement calls for DNS to pay $40 million to the Company for past damages, including partial reimbursement of legal fees, related to sales of certain wet processing products in the United States. Of that amount, $22 million is payable in two installments due by October 22, 2002, $7 million is payable on April 30, 2003, $5 million on September 1, 2003 and $6 million on December 15, 2003. Under the related license agreement, DNS and the Company agree to cross-license certain technologies pertaining to automated batch immersion wet processing systems. DNS has agreed to pay the Company annual royalties over a five-year period, 2003 through 2007, based on worldwide sales of certain DNS wet processing systems. Royalties payable to the Company under the license total a minimum of $30 million and a maximum of $60 million. Minimum royalties are payable in equal amounts of $6 million due on April 1 of each year. Once total royalty payments equal $30 million, the minimum royalties no longer apply. No further royalties are payable once total payments reach $60 million. The payment obligations of DNS are unsecured, and the royalty payment obligations would cease if all four of the U.S. patents that had been the subject of the lawsuit were to be held invalid and unenforceable by a competent court. 15 In March 2002, the Company sold its building in West Chester, PA, for $2.3 million in cash, with no contingencies. The Company also paid off the remaining mortgage on this building, of approximately $0.8 million, thereby reducing its long-term debt by the same amount. In April 2002, the Company sold its building in Austin, TX, for $2.0 million. There was no remaining mortgage on this building. Both buildings were determined to be excess facilities. On April 30, 2002, the Company issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were issued to Steag Electronic Systems AG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for aggregate gross cash proceeds of $37.5 million. Note 10 Commitments and Contingencies The Company is party to certain claims arising in the ordinary course of business. While the outcome of these matters is not presently determinable, management believes that they will not have a material adverse effect on the financial position or results of operations of the Company. The Company, at its Exton, Pennsylvania location, leases two buildings to house its manufacturing and administrative functions related to the Omni product. The lease for both buildings has approximately 17 years remaining with an approximate combined rental cost of $1.5 million annually. The lease agreement for both buildings allows for subleasing the premises without the approval of the landlord. The administrative building has been sublet for a period of five years with an option to extend for an additional five years. The sublease is expected to cover all related costs on the administrative building. The Company had originally anticipated subletting the manufacturing building in the second quarter of 2002, but was unable to do so. In the second quarter of 2002, the Company leased space in two new facilities in Malvern, Pennsylvania to house its administrative functions previously located in Exton, Pennsylvania. These leases are each for a two year term. In addition, the Company has excess facilities in San Jose, CA, and has non-cancelable annual lease payment obligations of approximately $1.0 million over seven months related to this facility. As of June 30, 2002, there is a remaining lease loss accrual of approximately $2.4 million related to the excess facilities in Pennsylvania and California, recorded as accrued liabilities in the accompanying condensed 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 buildings will be vacant; expected sublease terms; and expected 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 any of 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 are not 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, less any sublet amounts. As of June 30, 2002, the Company has 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. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth or incorporated by reference under "Factors That May Affect Future Results and Market Price of Stock" and elsewhere in this document. Overview We are a leading supplier of semiconductor wafer processing equipment used in "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 has been experiencing a severe downturn, which has resulted in capital spending cutbacks by our customers. Semiconductor companies continue to reevaluate their capital spending, postpone their new capital equipment purchase decisions, and reschedule or cancel existing orders. Declines in demand for semiconductors deepened throughout each sequential quarter of 2001. During the first quarter of 2002, the semiconductor industry bookings began to show some signs of recovery, driven by modestly improving global economies and consumer-related demand. However, the overall demand outlook is still uncertain over the intermediate term due to low levels of investment in corporate infrastructure. Currently there are indications that this recovery in the second quarter may not be able to maintain its momentum in the next few quarters. The cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to us and impair our ability to forecast near term revenue. Given that many of our costs are fixed in the short-term, our ability to quickly modify our operations in response to changes in market conditions is limited. 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. At the time we completed the merger, our industry was entering an economic slowdown. On April 30, 2002, we issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were issued to Steag Electronic Systems AG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for aggregate gross cash proceeds of $37.5 million. 17 On March 5, 2002, a jury rendered a verdict in our favor in a patent infringement lawsuit with Dainippon Screen Manufacturing Co., Ltd. ("DNS"). Subsequently, on June 24, 2002, we settled the lawsuit. As part of the settlement, DNS agreed to pay $40 million relating to past damages and partial reimbursement of our attorneys' fees and costs, payable in installments over the next 18 months, and DNS agreed to pay royalties during the five years from 2003 to 2007, totaling a minimum of $30 million and a maximum of $60 million, in return for our granting DNS a worldwide license under the previously infringed patents. During the quarter ended June 30, 2002, we had a net loss of $24.5 million. Future results will depend on a variety of factors, particularly overall market conditions and the timing of significant orders, our cost reduction efforts, our ability to bring new systems to market, the timing of new product releases by our competitors, patterns of capital spending by our customers, market acceptance of new and/or enhanced versions of our systems, changes in pricing by us, our competitors, customers, or suppliers and the mix of products sold. We are dependent upon increases in sales or reductions in our cost structure in order to achieve and sustain profitability. If our sales do not increase, the current levels of operating expenses could materially and adversely affect our financial position and results. 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 of America. 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 reserves for excess and obsolete inventory, warranty obligations, 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, impairment of long-lived assets, and income taxes as critical to our business operations and an understanding of our results of operations. Revenue recognition. We recognize revenue in accordance with 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 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, we recognize revenue on a multiple element approach in which we bifurcate a sale transaction into two separate elements. Under this approach, the portion of the invoice price that is due upon final customer acceptance of the tool, generally 10% of the total invoice price, is deferred until final customer acceptance of the tool. The remaining portion of the total invoice price relating to the tool, generally 90% of the total invoice price, is recognized upon shipment of the tool. From time to time, however, we allow customers to evaluate systems, and since customers can return such systems at any time with limited or no penalty, we do not recognize revenue until 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 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. 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, we recorded inventory valuation charges of approximately $26.4 million 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 our 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 the decline in value in our cost of goods sold at the time of such determination. Although we attempt to accurately forecast future product demand, 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. Goodwill and Other Intangible Assets. We assess the realizability of goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Our judgments regarding the existence of impairment indicators are based on changes in strategy, market conditions and operational performance of our business. Future events, including significant negative industry or economic trends, could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. In assessing the recoverability of goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Income taxes. We record a valuation allowance to reduce our net deferred tax asset to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination would be made. 19 Results of Operations The following table sets forth our statement of operations data expressed as a percentage of net sales for the periods indicated: Three Months Ended Six Months Ended ------------------ ----------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 ------- ------ ------- ------ Net sales 100% 100% 100% 100% Cost of sales 80% 79% 82% 74% ------ ------ ------ ------ Gross profit 20% 21% 18% 26% ------ ------ ------ ------ Operating expenses: Research, development and engineering 20% 23% 20% 24% Selling, general and administrative 45% 33% 46% 38% In-process research and development - - - 7% Amortization of goodwill and intangibles 3% 13% 4% 14% ------ ------ ------ ------ Total operating expenses 68% 69% 70% 83% ------ ------ ------ ------ Loss from operations (48)% (48)% (52)% (57)% Interest and other income, net (4)% 2% (2)% 1% ------ ------ ------ ------ Loss before provision for income taxes (52)% (46)% (54)% (56)% Provision for (benefit from) income taxes - - - (1)% ------ ------ ------ ------ Net loss (52)% (46)% (54)% (57)% ====== ====== ====== ====== Net Sales Net sales for the second quarter of 2002 of $47.3 million reflected a decrease of 33.8% compared to $71.4 million for the second quarter of 2001, and an increase of 2.3% compared to $46.2 million for the first quarter of 2002. Net sales for the first six months of 2002 of $93.5 million reflected a decrease of 35.5% compared to $144.9 million for the first six months of 2001. Net sales in the second quarter of 2002 and the first six months of 2002 decreased, compared to the same periods of 2001, primarily due to lower demand as a result of the economic downturn in the semiconductor industry. Net sales increased slightly in the second quarter of 2002 compared to the first quarter of 2002. Total deferred revenue at June 30, 2002 was approximately $117.4 million, down from $124.5 million at the end of the first quarter of 2002, and up from $107.8 million at the end of the second quarter of 2001. We generally expect deferred revenue from particular product sales to be recognized as revenue in our consolidated statement of operations with a time lag of six to twelve months from product shipment. International sales, which are predominantly to customers based in Europe, Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea), accounted for 68.0% and 78.0% of net sales for the second quarter of 2002 and 2001, respectively. We anticipate that international sales will continue to account for a significant portion of net sales for 2002. 20 Gross Margin Our gross margin for the second quarter of 2002 was 20.0%, a decrease from 21.3% for the second quarter of 2001. The decrease in gross margin was primarily due to under absorption of our fixed manufacturing overhead costs because our production volume was significantly lower than the second quarter of 2001 volume. We also continue to have acquisition-related inventory costs that are adversely affecting our gross margin. In addition, due to intense competition we are facing pricing pressure from competitors that is affecting our gross margin. In light of the economic slowdown in our industry, we have taken steps to reduce the number of our manufacturing sites. We have closed three manufacturing sites since the first quarter of 2001. We continue to have excess capacity at our remaining sites but have reduced costs at those sites in an effort to improve our gross margin. During the first two quarters of 2002, we sold two of the manufacturing sites that we closed during fiscal 2001. Acquisition-related inventory costs, determined in accordance with APB 16, continue to affect us. The inventory subject to these costs was revalued upward, to reflect its market value, at the time of the merger. The largest portion of this revalued inventory was in our Wet Division, where all revenue is deferred until we obtain customer acceptances of our product. The sold inventory is being recognized as revenue as it is accepted by customers, and the related costs, including APB 16 costs, are included in our cost of goods sold with an adverse effect on our gross margin in the corresponding quarter. For the second quarter of 2002, these APB 16 costs were $3.2 million. As of June 30, 2002, we have approximately $3.5 million of APB 16 costs remaining in inventories - delivered systems that will continue to have a negative impact on our future gross margins as the relevant systems are accepted. Our gross margin has varied over the years and will continue to vary based on many factors, including competitive pressures, product mix, economies of scale, overhead absorption levels, remaining ABP 16 costs in our inventories and costs associated with the introduction of new products. Research, Development and Engineering Research, development and engineering expenses for the second quarter of 2002 were $9.3 million, or 19.8% of net sales, as compared to $16.1 million, or 22.6% of net sales, for the second quarter of 2001. The decrease in research, development and engineering expenses in the second quarter of 2002 was due to the reduction of personnel and associated costs that was implemented during the second half of 2001, more selective research and development project funding, and various cost control measures that resulted in reduction in expenses for outside services, engineering materials, licenses, and professional fees. Total research, development and engineering expenses decreased slightly from $9.6 million in the first quarter of 2002, as a result of continuing cost controls during the second quarter of 2002. Research, development and engineering expenses for the first six months of 2002 were $18.9 million, or 20.2% of net sales, as compared to $35.0 million, or 24.2% of net sales, for the first six months of 2001. The decrease in research, development and engineering expenses was due to the reduction of personnel and associated costs that was implemented during the second half of 2001, more selective research and development project funding, and various cost control measures that resulted in reduction in expenses for professional fees, outside services, licenses, and engineering materials. Selling, General and Administrative Selling, general and administrative expenses for the second quarter of 2002 were $21.1 million, or 44.6% of net sales, as compared to $23.5 million, or 32.9% of net sales, for the second quarter of 2001. The decrease in selling, general and administrative expenses is primarily due to a reduction in personnel and related costs, fewer buildings, lower utilities, lower sales commissions, lower professional fees, and lower travel expenses partially offset by outside services. The increase in selling, general and administrative expenses in the second quarter of 2002, as a percentage of net sales, is due to significantly lower sales compared to the second quarter of 2001. 21 Selling, general and administrative expenses for the first six months of 2002 were $43.2 million, or 46.2% of net sales, as compared to $55.3 million, or 38.2% of net sales, for the first six months of 2001. The decrease in selling, general and administrative expenses is primarily due to reduction in personnel and related expenses, no bonus pay-outs, fewer buildings, lower utilities, lower sales commissions, lower outside services, lower professional fees, lower repair & maintenance, and lower travel expenses. The increase in selling, general and administrative expenses during the first six months of 2002, as a percentage of net sales, is due to significantly lower sales compared to the same period of 2001. We had substantial legal expenses in 2002, especially in the first quarter, due to the DNS lawsuit for patent infringement, which resulted in a verdict in our favor. Interest and other income (expense) The interest and other income (expense) for the first six months of 2002 were $(2.0) million, or (2.1)% of net sales, as compared to $1.8 million, or 1.2% of net sales, for the first six months of 2001. During the first six months of 2002, interest expense of $1.4 million related to interest on our notes payable to SES and a foreign exchange loss of $2.3 million, were offset by interest income of $1.1 million resulting from the investment of our cash balances. In the same period of 2001, interest expense of $1.0 million was primarily related to interest on our notes payable to SES, and interest income of $2.8 million resulting from the investment of our cash balances. Provision for Income Taxes We recorded an income tax benefit for the second quarter of 2002 of approximately $0.1 million, and approximately $0.3 million for the first six months of 2002, which consisted of foreign taxes incurred by our foreign sales and service operations of $0.2 million, other foreign taxes of $0.6 million, state income taxes of $0.1 million, and deferred tax benefit on the amortization of certain intangible assets of $1.2 million. There is no US or German current income tax benefit or expense. The effective income tax rate was 0.6% for the six months ended June 30, 2002. 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. 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. Amortization of Goodwill and Intangibles We adopted SFAS 142 on January 1, 2002, and no longer amortize goodwill. We continue to amortize the identified intangibles, in an amount estimated to be $6.7 million for fiscal 2002, or approximately $1.7 million per quarter. 22 Liquidity and Capital Resources Our cash and cash equivalents (excluding restricted cash) and short-term investments were $102.9 million at June 30, 2002, an increase of $26.7 million from $76.2 million at March 31, 2002. Stockholders' equity at June 30, 2002 was approximately $143.7 million compared to $116.2 million as of March 31, 2002. On April 30, 2002, we issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were issued to Steag Electronic Systems AG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for aggregate gross cash proceeds of $37.5 million. As a result of our acquisition of the STEAG Semiconductor Division at the beginning of 2001, as of June 30, 2002 we owed SES a total of approximately $37.7 million under two promissory notes which bore interest at 6.0% per year and were due July 2, 2002. One promissory note, in the amount of $26.9 million, was secured by an irrevocable standby letter of credit issued by Silicon Valley Bank, which in turn was secured by approximately $26.9 million of restricted cash. 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 added to the principal under the extended note. The second promissory note, originally in the amount of 19.2 million EURO, was reduced by $8.1 million (approximately $9.0 million EUROS as of April 30, 2002) to 10.2 million EURO (approximately $9.2 million as of April 30, 2002) upon the closing of our private placement transaction on April 30, 2002, and was 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 contained covenants and required us to maintain certain balances, including a minimum amount of applicable accounts receivable of at least 17.9 million EURO (approximately $17.7 million as of June 30, 2002) at our relevant subsidiaries. On July 2, 2002, we retired these two obligations of $26.9 million and 10.2 million EUROS, including accrued interest thereon, and made payments to SES in the total amount of approximately $37.7 million. Our Japanese subsidiary has a credit line with a Japanese bank in the amount of 900 million Yen (approximately $7.5 million at June 30, 2002), secured by our Japanese subsidiary's trade accounts receivable. The line bears interest at a per annum rate of TIBOR plus 75 basis points. The term of the line, originally through June 20, 2002, has been extended through June 20, 2003. We have given a corporate guarantee for this credit line. At June 30, 2002, there were no borrowings under this credit line. 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 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 of our domestic assets including intellectual property. The line of credit requires us to satisfy certain quarterly financial covenants, including maintaining a minimum quick ratio, minimum tangible net worth and meeting minimum revenue targets, all of which we are in compliance with. At June 30, 2002, there were no borrowings under this credit line. On June 24, 2002, we entered into a settlement agreement with DNS under which DNS agreed to pay us $40 million, of which $22 million is payable in two installments due by October 22, 2002, $7 million is payable on April 30, 2003, $5 million on September 1, 2003 and $6 million on December 15, 2003. Under a related license agreement, DNS agreed to pay us annual royalties over a five-year period, 2003 through 2007, based on worldwide sales of certain DNS wet processing systems. Minimum royalties are payable in equal amounts of $6 million due on April 1 of each year. Once total royalty payments equal $30 million, the minimum royalties no longer apply. No further royalties are payable once total payments reach $60 million. The payment obligations of DNS are unsecured, and the royalty payment obligations cease if all four of the U.S. patents that had been the subject of the lawsuit were to be held invalid and unenforceable by a competent court. 23 Net cash used in operating activities was $7.2 million during the six months ended June 30, 2002 as compared to $56.2 million used in operating activities during the same period in 2001. The net cash used in operating activities during the six months ended June 30, 2002 was primarily attributable to a net loss of $50.3 million, a decrease in deferred revenue of $31.4 million, a decrease in accrued liabilities of $8.8 million, and a decrease in deferred taxes of $1.2 million. The cash used in operating activities was offset by non-cash depreciation and amortization of $8.2 million, a decrease in inventories and inventories-delivered systems of $33.9 million, a decrease in advance billings of $20.7 million, a decrease in accounts receivable of $17.5 million, and an increase in accounts payable of $2.6 million. Net cash used in operating activities was $56.2 million during the six months ended July 1, 2001 and was primarily attributable to the net loss of $82.7 million, an increase in inventories and inventories - delivered systems of $34.7 million, a decrease in accrued liabilities of $37.9 million and a decrease in accounts payable of $7.6 million. Non-cash items included depreciation and amortization charges of $10.8 million, amortization of goodwill and intangibles of $20.0 million, acquired in-process research and development of $10.1 million and an increase in deferred revenue of $63.9 million. Net cash provided by investing activities was $6.8 million during the six month ended June 30, 2002 as compared to $52.1 million during the same period last year. The net cash provided by investing activities during the first six months of 2002 is attributable to the proceeds from the sale of investments of $9.6 million and sale of equipment of $2.9 million offset by purchases of investments of $5.1 million. Net cash provided by investing activities was $52.1 million during the six months ended July 1, 2001 and was attributable to the sales of investments of $50.7 million, and net cash acquired from the acquisition of the STEAG Semiconductor Division and CFM of $38.0 million offset by purchases of investments of $26.2 million, and purchases of property and equipment of $10.4 million. Net cash provided by financing activities was $31.1 million during the six months ended June 30, 2002 as compared to $14.2 million provided by financing activities during the same period last year. The net cash provided by financing activities during the first six months of 2002 is primarily attributable to the net proceeds from the issuance of common stock of $34.9 million, an increase in the interest accrual on a note payable to SES of $1.3 million, offset by payments against our Japanese line of credit and long-term debt in the amount of $5.3 million, and payment on SES notes payable of $1.2 million. Net cash provided by financing activities was $14.2 million during the six months ended July 1, 2001 and was primarily attributable to the borrowings, net of repayments, on a line of credit of $11.0 million, and proceeds from our stock plans of $3.2 million. 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, cash generated by our operations, and the proceeds from the private placement transaction. During 2001 and the first six months of 2002, we had operating losses. 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. 24 RISK FACTORS: Factors That May Affect Future Results and Market Price of Stock In this report and from time to time, we may make forward looking statements regarding, among other matters, our future strategy, product development plans, productivity gains of our products, financial performance and growth. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements address matters which are subject to a number of risks and uncertainties which could cause actual results to differ materially, including those set forth in our Annual Report on Form 10-K, all of which are incorporated here by reference, in addition to the following: 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 product acceptance or payments of invoices by our customers; o size and timing of sales, shipments and acceptance 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. 25 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. 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 have been experiencing cancellations, delays and push-outs of orders, which reduce our revenues, cause delays in our ability to recognize revenue on 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. 26 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. For the first and second quarters of 2002 our net losses were $25.8 million and $24.5 million, respectively. 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. 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. 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. 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. 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. 27 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. 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. We 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. Legislative actions, higher insurance cost and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations. In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase. Insurers are also likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors' and officers' insurance policies, are likely to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting principles and adversely affect our operating results. 28 Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Interest Rate Risk. The Company's exposure to market risk for changes in interest rates relates to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits 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 the fair value of principal amounts and related weighted average interest rates for the Company's investment portfolio as of June 30, 2002. Fair Value June 30, 2002 -------------- (In thousands) Assets Cash and cash equivalents $ 101,389 Average interest rate 1.65% Restricted cash $ 28,163 Average interest rate 1.00% Short-term investments $ 1,461 Average interest rate 1.64% Foreign Currency Risk The Company transacts business in various foreign countries. 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 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 June 30, 2002 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................. $ 4,552 126.58 $4,841 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. As of June 30, 2002, the payment obligation to STEAG Electronic Systems AG (SES) in the amount of approximately 10.2 million EUROS (approximately $10.1 million as of June 30, 2002) was payable in EUROS and, accordingly, exposure for exchange rate volatility existed. The exposure for the exchange rate volatility of the STEAG payment obligation had 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 13.1 million EUROS at June 30, 2002. On July 2, 2002, the company paid off the 10.2 million EUROS payment obligation to SES along with interest payment due in the amount of approximately 198,000 EUROS from its EUROS foreign currency bank account. 29 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we can not be certain of this. Moreover, the defense of claims or actions against us, even if not meritorious, could result in the expenditure of significant financial and managerial resources. On June 26, 2002, the court approved the dismissal of our lawsuit with Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC ("DNS") in which we had been both a defendant and a counterclaim plaintiff (this case was Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc. and CFM Technologies, Inc., Civil Action No. 97-20270 JW, brought in the United States District Court for the Northern District of California). On June 24, 2002, DNS and we jointly announced that we had amicably resolved our legal disputes with a comprehensive, global settlement that included termination of all outstanding litigation between us and cross-licenses of patents related to certain aspects of wet immersion processing systems. We also released all DNS customers from any claims of infringement relating to their purchase and future use of DNS wet processing equipment. In addition, we agreed to afford DNS a two month period for DNS to evaluate its interest in discussing the acquisition of intellectual property or assets relating to wet surface preparation. The settlement agreement calls for DNS to pay us a total of $40 million, of which $29 million is attributable to past damages related to sales of certain wet processing products in the United States, and $11 million is attributable to reimbursement of a portion of the legal fees we incurred. Of these amounts, $22 million is payable in two installments due by October 22, 2002, $7 million is payable on April 30, 2003, $5 million on September 1, 2003 and $6 million on December 15, 2003. Under the related license agreement, we and DNS agreed to cross-license certain technologies pertaining to automated batch immersion wet processing systems, and to pay royalties to each other based upon future sales of products utilizing the cross-licensed technologies. DNS agreed to pay us annual royalties over a five-year period, 2003 through 2007, based on worldwide sales of certain DNS wet processing systems. Royalties payable to us under the license total a minimum of $30 million and a maximum of $60 million. Minimum royalties are payable in equal amounts of $6 million due on April 1 of each year. Once total royalty payments equal $30 million, the minimum royalties no longer apply. No further royalties are payable once total payments reach $60 million. The payment obligations of DNS are unsecured, and the royalty payment obligations would cease if all four of the U.S. patents that had been the subject of the lawsuit were to be held invalid and unenforceable by a competent court. We are currently litigating two ongoing cases against one of our competitors involving our wet surface preparation intellectual property. These litigation matters were brought by our subsidiary Mattson Wet Products, Inc., formerly CFM, and are described under Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Except as discussed below, there have been no material developments in these actions during the second quarter of 2002. 30 We have asserted claims relating to our U.S. Patent No. 4,911,761 (the "`761 patent") against YieldUP International Corp. ("YieldUP"), alleging infringement, inducement of infringement, and contributory infringement (this case is CFMT and CFM Technologies, Inc. v. YieldUP International Corp., Civil Action No. 95-549-RRM). On March 14, 2002, the United States District Court for the District of Delaware heard oral argument, and on April 15, 2002, issued an order denying YieldUP's summary judgment motion for non-infringement. On May 1, 2002, we asserted infringement by YieldUP of U.S. Patent No. 4,984,597 (the "'597 patent"). The discovery schedule for this litigation has been established: Fact discovery is currently set to end on October 11, 2002, with expert discovery to be completed by December 20, 2002. A final pre-trial conference is scheduled for May 29, 2003, although there is no trial date scheduled at this time. Our involvement in any patent dispute, or other intellectual property dispute or action to protect trade secrets and know-how, could result in a material adverse effect on our business. Adverse determinations in current litigation or any other litigation in which we may become involved could subject us to significant liabilities to third parties, require us to grant licenses to or seek licenses from third parties, and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business. Item 2. Changes in Securities and Use of Proceeds. On April 30, 2002, Mattson sold 6.3 million shares of common stock at $6.15 per shares in a private placement to four institutional investors for an aggregate of $37.5 million. In addition, at the same time, Mattson issued 1.3 million shares of common stock to STEAG Electronic Systems AG in exchange for the cancellation of $8.1 million of existing indebtedness owed by Mattson to STEAG Electronic Systems, at a conversion price of $6.15 per share. Bear, Stearns & Co. Inc. served as the sole placement agent for these transactions. These securities were issued and sold pursuant to an exemption from registration under Section 506 of Regulation D under the Securities Act of 1933, as amended, 17 CFR 230.506. Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. Our annual meeting of stockholders was held on May 21, 2002. At the meeting, the stockholders elected Hans-Georg Betz, David Dutton and Kenneth G Smith as Class II Directors to hold office for a three-year term and until their successors are elected and qualified. The nominees received the following votes: Nominee For Withheld ------- --- -------- Hans-Georg Betz 21,669,529 2,004,619 David Dutton 21,712,829 1,961,319 Kenneth G Smith 21,669,529 2,004,619 31 In addition to the nominees above, Dr. Jochen Melchior, Brad Mattson, Kenneth Kannappan, and Shigeru Nakayama continued to serve their term as directors. The stockholders approved a proposal to increase the number of shares reserved for issuance under the Company's amended and Restated 1989 Stock Option Plan by 800,000 shares. The proposal received the following votes: For Against Abstain Broker Non-Vote ---------- ---------- ------- ---------------- 12,586,425 11,078,185 9,538 0 The stockholders approved a proposal to increase the number of shares reserved for issuance under the Company's 1994 Employee Stock Purchase Plan by 1,000,000 shares. The proposal received the following votes: For Against Abstain Broker Non-Vote ---------- ---------- ------- --------------- 23,277,478 396,230 440 0 Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1(1) Amended and Restated Certificate of Incorporation of the Company 3.2 Third Amended and Restated Bylaws of the Company 4.1(2) Form of Share Purchase Agreement 4.2(3) Share Purchase Agreement between Mattson Technology, Inc. and STEAG Electronic Systems AG dated April 4, 2002. 10.2 Amended and Restated 1989 Stock Option Plan 10.10 Executive Change of Control agreement between Mattson Technology, Inc. and David Dutton, dated as of March 4, 2002. 10.11 Form of Executive Change of Control agreement between Mattson Technology, Inc. and its Executive Vice Presidents and Product Division Presidents 10.12 Promissory Note between Mattson Technology, Inc. and Brad Mattson, dated April 29, 2002. 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 99.3 Risk Factors incorporated by reference to Annual Report on Form 10-K. 32 (b) Reports on Form 8-K Form 8-K filed May 28, 2002 reporting under Item 4 the dismissal of Arthur Andersen LLP and engagement of PricewaterhouseCoopers LLP as independent accountants. Form 8-K filed June 25, 2002 reporting under Item 5 the patent infringement settlement agreement with DNS. ----------- (1) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 30, 2001. (2) Incorporated by reference from Mattson Technology, Inc. registration statement on Form S-3 filed on April 12, 2002. (3) Incorporated by reference from Schedule 13 D/A filed by RAG Aktiengesellschaft on May 8, 2002. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTSON TECHNOLOGY, INC. Date: August 14, 2002 /s/ David Dutton ------------------------------------------ David Dutton President and Chief Executive Officer /s/ Ludger Viefhues --------------------------------------- Ludger Viefhues Executive Vice President -- Finance and Chief Financial Officer 34 EX-3.(II) 3 exh3_2.txt THIRD AMENDED AND RESTATED BYLAWS Exhibit 3.2 THIRD AMENDED AND RESTATED BYLAWS OF MATTSON TECHNOLOGY, INC. TABLE OF CONTENTS Page Article 1. Stockholders...............................................1 1.1 Place of Meetings..........................................1 1.2 Annual Meeting.............................................1 1.3 Special Meetings...........................................1 1.4 Notice of Meetings.........................................1 1.5 Voting List................................................1 1.6 Quorum.....................................................2 1.7 Adjournments...............................................2 1.8 Voting and Proxies.........................................2 1.9 Action at Meeting..........................................2 1.10 Notice of Stockholder Business.............................3 1.11 Conduct of Business........................................3 1.12 No Stockholder Action Without Meeting......................4 Article 2. Board of Directors.........................................4 2.1 General Powers.............................................4 2.2 Number and Term of Office..................................4 2.3 Vacancies and Newly Created Directorships; Qualification..............................................5 2.4 Resignation................................................5 2.5 Regular Meetings...........................................5 2.6 Special Meetings...........................................6 2.7 Notice of Special Meetings.................................6 2.8 Participation in Meetings by Telephone Conference Calls......................................................6 2.9 Quorum.....................................................6 2.10 Action at Meeting..........................................6 2.11 Action by Consent..........................................6 2.12 Removal....................................................6 2.13 Committees.................................................7 2.14 Compensation of Directors..................................7 2.15 Nomination of Director Candidates; Nominating Committee..................................................7 Article 3. Officers...................................................9 3.1 Enumeration................................................9 3.2 Election...................................................9 3.3 Qualification..............................................9 3.4 Tenure.....................................................9 3.5 Resignation and Removal....................................9 3.6 Chairman of the Board......................................9 3.7 Vice Chairman of the Board................................10 3.8 Chief Executive Officer...................................10 3.9 President.................................................10 3.10 Vice Presidents...........................................10 3.11 Secretary and Assistant Secretaries.......................10 3.12 Chief Financial Officer...................................11 3.13 Salaries..................................................11 3.14 Delegation of Authority...................................11 Article 4. Capital Stock.............................................11 4.1 Issuance of Stock.........................................11 4.2 Certificates of Stock.....................................11 4.3 Transfers.................................................12 4.4 Lost, Stolen or Destroyed Certificates....................12 4.5 Record Date...............................................12 Article 5. General Provisions........................................13 5.1 Fiscal Year...............................................13 5.2 Corporate Seal............................................13 5.3 Waiver of Notice..........................................13 5.4 Actions with Respect to Securities of Other Corporations..............................................13 5.5 Evidence of Authority.....................................13 5.6 Certificate of Incorporation..............................13 5.7 Severability..............................................13 5.8 Pronouns..................................................13 5.9 Notices...................................................14 5.10 Reliance Upon Books, Reports and Records..................14 5.11 Time Periods..............................................14 5.12 Facsimile Signatures......................................14 Article 6. Amendments................................................14 6.1 By the Board of Directors.................................14 6.2 By the Stockholders.......................................15 Article 7. Indemnification of Directors and Officers.................15 7.1 Right to Indemnification..................................15 7.2 Right of Claimant to Bring Suit...........................16 7.3 Indemnification of Employees and Agents...................16 7.4 Non-Exclusivity of Rights.................................16 7.5 Indemnification Contracts.................................16 7.6 Insurance.................................................16 7.7 Effect of Amendment.......................................16 Article 8. Restrictions on Certain Stock Option and Securities Matters...................................................17 8.1 Stock Options.............................................17 8.2 Sales of Securities.......................................17 8.3 ESPP Permitted............................................18 8.4 Amendments................................................18 THIRD AMENDED AND RESTATED BYLAWS OF MATTSON TECHNOLOGY, INC. Article 1. Stockholders 1.1 Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the Chief Executive Officer or, if not so designated, at the registered office of the Corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the Chief Executive Officer at the time and place to be fixed by the Board of Directors or the Chief Executive Officer and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. 1.3 Special Meetings. Special meetings of Stockholders may be called at any time only by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. 1.4 Notice of Meetings. Written notice of each meeting of stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or as required by law (meaning here and hereafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation). The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. 1.5 Voting List. The officer who has charge of the stock ledger of the Corporation shall prepare, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 1 1.6 Quorum. Except as otherwise provided by law or these Bylaws, the holders of a majority of the shares of the capital stock of the Corporation entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. 1.7 Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these Bylaws by the holders of a majority of the shares of stock present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. 1.8 Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by law. Each stockholder of record entitled to vote at a meeting of stockholders, may vote in person or may authorize any other person or persons to vote or act for him by written proxy executed by the stockholder or his authorized agent or by a transmission permitted by law and delivered to the Secretary of the Corporation. No stockholder may authorize more than one proxy for his shares. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile transmission or other reproduction shall be a complete reproduction of the entire original writing or transmission. 1.9 Action at Meeting. When a quorum is present at any meeting, any election shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election, and all other matters shall be determined by a majority of the votes cast affirmatively or negatively on the matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, a majority of each such class present or represented and voting affirmatively or negatively on the matter) shall decide such matter, except when a different vote is required by express provision of law, the Certificate of Incorporation or these Bylaws; provided, however, that if the Board of Directors by resolution determines that the vote of a larger portion of the Corporation's stock is required to approve any particular matter in order to satisfy or comply with applicable governmental or regulatory requirements, such as NASDAQ corporate governance rules or Internal Revenue Service stockholder approval guidelines, then such higher vote shall be deemed required by these Bylaws. All voting, including on the election of directors, but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as an alternate inspector to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. 2 1.10 Notice of Stockholder Business. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) properly brought before the meeting by or at the direction of the Board of Directors, or (iii) properly brought before an annual meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been advanced by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholders to be timely must be received not later than the close of business on the tenth day following the day on which the date of the annual meeting is publicly announced. A stockholder's notice to the Secretary of the Corporation shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. 1.11 Conduct of Business. At every meeting of the stockholders, the Chairman of the Board, if there is such an officer, or if not, the Chief Executive Officer or such other person as is appointed by the Board of Directors, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman of the meeting shall act as Secretary of the meeting. Unless otherwise approved by the Chairman of the meeting, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 1.8 of these Bylaws to act by proxy, and officers of the Corporation. The Chairman of the meeting shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of, and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 1.11 and Section 1.10 above. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any proposed item of business was not brought before the meeting in accordance with the provisions of this Section 1.11 and Section 1.10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 3 1.12 No Stockholder Action Without Meeting. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Article 2. Board of Directors 2.1 General Powers. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the Corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law or as otherwise set forth in these Bylaws, may exercise the powers of the full Board until the vacancy is filled. 2.2 Number and Term of Office. (a) The authorized number of directors shall be seven (7) until the termination of the Stockholder Agreement between the Corporation, STEAG Electronic Systems AG and Brad Mattson effective concurrent with the effective date of these Bylaws (the "Stockholder Agreement"). Following termination of the Stockholder Agreement, the authorized number of directors may be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). (b) The directors shall be divided into three classes, with the term of office of the first class (Class I) to expire at the first annual meeting of stockholders held after January 1, 2001; the term of office of the second class (Class II) to expire at the second annual meeting of stockholders held after January 1, 2001; the term of office of the third class (Class III) to expire at the third annual meeting of stockholders held after the January 1, 2001; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected and qualified, except in the case of the death, resignation or removal of any director. The class membership of the incumbent directors shall remain unaffected by the adoption of these Bylaws. 4 2.3 Vacancies and Newly Created Directorships; Qualification. Newly created directorships resulting from any increase in the authorized number of directors, or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (including removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires; provided, however, that until the termination of the Stockholder Agreement, (a) if there is a vacant directorship as the result the resignation, retirement, disqualification, removal, death, or other cause of a STEAG Representative (as defined in Section 2.15(e) below), no person shall be eligible for nomination and qualified to fill such vacancy other than another STEAG Representative, and (b) if there is any other vacant directorship, including any vacancy as a result of any increase in the authorized number of directors, no person shall be eligible for nomination and qualified to fill such vacancy other than a person nominated in accordance with Section 2.15 herein. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 2.4 Resignation. Any director may resign by delivering his written resignation to the Corporation at its principal office or to the Chief Executive Officer or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.5 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 5 2.6 Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, the Chief Executive Officer, two or more directors, or by one director in the event that there is only a single director in office. 2.7 Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone or electronic voice message system at least 48 hours in advance of the meeting, (ii) by sending a telegram, email, telecopy or telex, or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least seven (7) days in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. 2.8 Participation in Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone, videoconference equipment, or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. 2.9 Quorum. A majority of the total number of authorized directors shall constitute a quorum at any meeting of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or at a meeting of a committee which authorizes a particular contract or transaction. 2.10 Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these Bylaws. 2.11 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing. Any such written consents shall be filed with the minutes of proceedings of the Board or committee. 2.12 Removal. Any directors, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of all of the outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class. 6 2.13 Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation, with such lawfully delegated powers and duties as it therefor confers, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these Bylaws for the Board of Directors. 2.14 Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. 2.15 Nomination of Director Candidates; Nominating Committee. (a) There is hereby established a nominating committee to evaluate and propose nominees to serve as directors of the Corporation (the "Nominating Committee"). Until the termination of the Stockholder Agreement, the Nominating Committee shall be comprised of three (3) directors, at least one of whom shall be a STEAG Representative, as defined below. (b) Nominations for the election and appointment of directors, including vacant directorships, whether caused by death, resignation, disqualification, removal, retirement, or other causes, shall be made exclusively by the Nominating Committee, subject to (i) Section 2.15(c) and (ii) the rights of stockholders pursuant to Section 2.15(d). For a period of three (3) years following the effective date of the Stockholder Agreement, if at any time there is a vacant directorship other than a directorship previously held by a STEAG Representative, the Nominating Committee shall nominate to fill such vacancy only those persons who receive the unanimous approval of the members of the Nominating Committee. Until the termination of the Stockholder Agreement, the Nominating Committee shall nominate only such nominees as would, if elected, result in the following composition of the Board of Directors: (i) two (2) STEAG Representatives, (ii) the Chief Executive Officer of the Corporation, and (iii) at least three (3) incumbent directors of the Corporation as of June 27, 2000, and/or persons who are Independent Directors, as defined below. 7 (c) In the event that the Nominating Committee fails to nominate a nominee within four (4) months after a directorship becomes vacant, the Board of Directors may act to elect and appoint a nominee to fill such vacancy; provided that the election and appointment of such nominee is consistent with maintaining the composition of the Board of Directors described in the last sentence of Section 2.15(b). (d) Any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a stockholder nomination for a director to be elected at an annual meeting must be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a nomination for director to be elected at a special meeting, notice by the stockholders to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. (e) For purposes of these Bylaws, the term "STEAG Representative" means a person designated by STEAG in accordance with Section 1.1(a) of the Stockholder Agreement for election or appointment as a director of the Corporation. For purposes of these Bylaws, the term "Independent Director" means any person who has not and has never been an officer, employee or paid consultant of the Corporation, STEAG or any of their respective Affiliates (as defined in the Stockholder Agreement). For purposes of these Bylaws, the term "STEAG" means STEAG Electronic Systems AG, or its successors and permitted assigns in accordance with the Stockholder Agreement. (f) In the event that a person is validly designated as a nominee in accordance with this Section 2.15 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, any proposed substitute nominee must be approved for nomination in accordance with the foregoing provisions of this Section 2.15. (g) If the Chairman of a stockholder meeting at which a vote is to be taken for the election of directors determines that a nomination of any candidate for election as a director at such meeting was not made in accordance with the applicable provisions of this Section 2.15, such nomination shall be void. 8 Article 3. Officers 3.1 Enumeration. The officers of the Corporation shall consist of a Chief Executive Officer, a President, a Secretary, a Chief Financial Officer and such other officers with such other titles as the Board of Directors shall determine, including, at the discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, and one or more Vice Presidents and Assistant Secretaries; provided, that for at least one year after the Stockholder Agreement becomes effective, the officers of the Corporation shall include a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 Election. Subject to such powers as are delegated by the Board of Directors to any Executive Staffing Committee or other committee, officers shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders and may be appointed by the Board of Directors at any other meeting. 3.3 Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote appointing him, or until his earlier death, resignation or removal. 3.5 Resignation and Removal. Any officer may resign by delivering his written resignation to the Corporation at its principal office or to the Chief Executive Officer or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by the Board of Directors. 3.6 Chairman of the Board. The Board of Directors may appoint a Chairman of the Board; provided, that for at least one year after the Stockholder Agreement becomes effective, the Board of Directors shall appoint a Chairman of the Board. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are set forth in these Bylaws or assigned to him by the Board of Directors; provided, however, that the Chairman of the Board shall have the power, at any time and from time to time, to fully or partially delegate any such duties and powers to the Vice Chairman of the Board. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders. The Chairman of the Board shall preside at all meetings of the Board of Directors. 9 3.7 Vice Chairman of the Board. The Board of Directors may appoint a Vice Chairman of the Board; provided, that for at least one year after the Stockholder Agreement becomes effective, the Board of Directors shall appoint a Vice Chairman of the Board.. If the Board of Directors appoints a Vice Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors and/or delegated to him by the Chairman of the Board. In the event of the absence, disability or refusal to perform his duties of the Chairman of the Board, the Vice Chairman shall perform the duties of the Chairman and when so performing shall have all the powers of the Chairman. 3.8 Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Directors, have responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. The Chief Executive Officer shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. He or she shall have power to sign stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation, other than the Chairman of the Board. Unless otherwise provided by the Board of Directors, in the absence of the Chairman of the Board, he shall preside at all meetings of the stockholders. 3.9 President. Should there exist an office of President which is held by a person other than the Chief Executive Officer and which differs from the office of Chief Executive Officer, the President shall have the responsibilities delegated to him or her by the Board of Directors. 3.10 Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. In the event of the absence, disability or refusal to perform his duties of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the Chief Executive Officer and when so performing shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. 3.11 Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the Secretary, including, without limitation, the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to keep a record of the proceedings of all meetings of stockholders and the Board of Directors, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. In the event of the absence, disability or refusal to perform his duties of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 10 3.12 Chief Financial Officer. Unless otherwise designated by the Board of Directors, the Chief Financial Officer shall be the Treasurer. The Chief Financial Officer shall perform such duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the Chief Executive Officer. In addition, the Chief Financial Officer shall perform such duties and have such powers as are incident to the office of chief financial officer, including without limitation, the duty and power to keep and be responsible for all funds and securities of the Corporation, to maintain the financial records of the Corporation, to deposit funds of the Corporation in depositories as authorized, to disburse such funds as authorized, to make proper accounts of such funds, and to render as required by the Board of Directors accounts of all such transactions and of the financial condition of the Corporation. 3.13 Salaries. Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. 3.14 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Article 4. Capital Stock. 4.1 Issuance of Stock. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the Corporation or the whole or any part of any unissued balance of the authorized capital stock of the Corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 Certificates of Stock. Every holder of stock of the Corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the Corporation. Each such certificate shall be signed by, or in the name of the Corporation by, the Chairman or Vice Chairman, if any, of the Board of Directors, or the Chief Executive Officer, President or a Vice President, and the Chief Financial Officer, or the Secretary or an Assistant Secretary of the Corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the Bylaws, applicable securities laws or any agreement among any number of shareholders or among such holders and the Corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. 11 4.3 Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or authenticity of signature as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by the Bylaws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the Corporation in accordance with the requirements of these Bylaws. 4.4 Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate of stock in place of any previously saved certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the Corporation or any transfer agent or registrar. 4.5 Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, concession or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 13 Article 5. General Provisions. 5.1 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. 5.2 Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 Waiver of Notice. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these Bylaws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telecopy, telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.4 Actions with Respect to Securities of Other Corporations. Except as the Board of Directors may otherwise designate, the Chief Executive Officer or any officer of the Corporation authorized by the Chief Executive Officer shall have the power to vote and otherwise act on behalf of the Corporation, in person or proxy, and may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact to this Corporation (with or without power of substitution) at any meeting of stockholders or shareholders (or with respect to any action of stockholders) of any other corporation or organization, the securities of which may be held by this Corporation and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of this Corporation's ownership of securities in such other corporation or other organization. 5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the Corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 Certificate of Incorporation. All references in these Bylaws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and in effect from time to time. 5.7 Severability. Any determination that any provision of these Bylaws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these Bylaws. 5.8 Pronouns. All pronouns used in these Bylaws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. 13 5.9 Notices. Except as otherwise specifically provided in these Bylaws or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or be telegram or mailgram. 5.10 Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. 5.11 Time Periods. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. 5.12 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Article 6. Amendments. 6.1 By the Board of Directors. Except as is otherwise set forth in these Bylaws, these Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present; provided, however, that until the termination of the Stockholder Agreement, Sections 2.2, 2.3, 2.6, 2.7, 2.8, 2.15, 3.1 and 3.6 herein, and this Section 6.1, may only be altered, amended or repealed pursuant to a resolution adopted with approval by (i) a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption), (ii) at least one STEAG Representative, and (iii) a majority of the Independent Directors then serving on the Board; and provided, further, that if any amendment to Section 2.2, 2.3, 2.6, 2.7, 2.8, 2.15, 3.1 or 3.6 or this Section 6.1 is proposed prior to the termination of the Stockholder Agreement at a time when there is no STEAG Representative on the Board of Directors, then, notwithstanding the foregoing, such amendment may only be adopted by the affirmative vote of stockholders in accordance with Section 6.2. 14 6.2 By the Stockholders. Except as otherwise set forth in these Bylaws, these Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any annual meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeat or adoption of new Bylaws shall have been stated in the notice of such special meeting. Article 7. Indemnification of Directors and Officers. 7.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 7.2 of this Article 7, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however that, unless the Delaware General Corporation Law then so prohibits, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation. service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. 15 7.2 Right of Claimant to Bring Suit. If a claim under Section 7.1 is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other then an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. 7.3 Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to the advancement of related expenses, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification of and advancement of expenses to directors and officers of the Corporation. 7.4 Non-Exclusivity of Rights. The rights conferred on any person in Sections 7.1 and 7.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 7.5 Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article 7. 7.6 Insurance. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 7.7 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article 7 by the stockholders and the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. 16 Article 8. Restrictions on Certain Stock Option and Securities Matters. 8.1 Stock Options. The Corporation shall not, unless approved by the affirmative vote of the holders of a majority of the shares of Common Stock of the Corporation outstanding: (a) grant any stock option, including stock appreciation right, with an exercise price that is less than 100% of the fair market value of the underlying stock on the date of grant; or (b) reduce the exercise price of any stock option, including stock appreciation right, at any time outstanding; cancel and re-grant any stock option at a lower exercise price (including entering into any "6 month and 1 day" cancellation and re-grant program), whether or not the shares subject to cancelled options are put back into the available pool reserved for grant; replace "out of the money" options with restricted stock in an exchange, buy-back or other similar program; or replace any stock options with new options having a lower exercise price or accelerated vesting schedule in an exchange, buy-back or other similar program. 8.2 Sales of Securities. The Corporation shall not, unless approved by the affirmative vote of the holders of a majority of the shares of Common Stock of the Corporation outstanding: (a) sell or issue any security of the Corporation convertible, exercisable or exchangeable into shares of common stock ("Common Stock Equivalent") having a conversion, exercise or exchange price per share that is subject to downward adjustment based on the market price of the common stock at the time of conversion, exercise or exchange of such security into common stock (except for appropriate adjustments made to give effect to stock splits or stock dividends); or (b) enter into (a) any "equity line" or similar agreement or arrangement; or (b) any agreement to sell common stock or Common Stock Equivalent at a per share price (or, with respect to a Common Stock Equivalent, at a conversion, exercise or exchange price, as the case may be ("Equivalent Price")) that is fixed after the execution date of the sale agreement, whether or not based on any predetermined price-setting formula or calculation method. Notwithstanding the foregoing provisions of this Section 8.2, however, a price protection clause shall be permitted in an agreement for sale of common stock or Common Stock Equivalents, if such clause provides for an adjustment to the price per share of common stock or, with respect to a Common Stock Equivalent, to the Equivalent Price (provided that such price or Equivalent Price is fixed on or before the execution date of the agreement) (the "Fixed Price"), in the event that the Corporation, during the period beginning on the date of the agreement and ending no later than 90 days after the closing date of the issuance transaction, sells shares of common stock or Common Stock Equivalent to another party at a price or Equivalent Price, as the case may be, below the Fixed Price. 17 8.3 ESPP Permitted. Notwithstanding the provisions of Sections 8.1 and 8.2, the Corporation is permitted to grant to employees the right to purchase stock of the Corporation pursuant to the Corporation's 1994 Employee Stock Purchase Plan, as amended from time to time, or other "employee stock purchase plan" approved by the stockholders of the Corporation and intended to qualify under section 423 of the Internal Revenue Code, at per share purchase prices determined in accordance with the terms of such plans. 8.4 Amendments. This Article 8 may only be altered, amended or repealed upon the affirmative vote of the holders of a majority of the shares of Common Stock of the Corporation outstanding. 18 EX-10 4 exh10_2.txt AMENDED AND RESTATED 1989 STOCK OPTION PLAN Exhibit 10.2 MATTSON TECHNOLOGY, INC. AMENDED AND RESTATED 1989 STOCK OPTION PLAN (As Amended Effective May 2002) 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. --------------------------------------- 1.1 Establishment. The Mattson Technology, Inc. 1989 Stock Option Plan was initially established effective September 29, 1989 (the "Initial Plan"). The Initial Plan is hereby amended and restated in its entirety as the Mattson Technology, Inc. Amended and Restated 1989 Stock Option Plan (the "Plan") effective as of the date of its approval by the stockholders of the Company (the "Effective Date"). 1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. ---------------------------- 2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "Code" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "Committee" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "Company" means Mattson Technology, Inc., a Delaware corporation, or any successor corporation thereto. (e) "Consultant" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (f) "Director" means a member of the Board or of the board of directors of any other Participating Company. (g) "Disability" means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code. (h) "Employee" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. 2 (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "Incentive Stock Option" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (l) "Insider" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "Nonemployee Director" means a Director of the Company who is not an Employee. (n) "Nonemployee Director Option" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) granted to a Nonemployee Director pursuant to the terms and conditions of the Plan. Nonemployee Director Options shall be Nonstatutory Stock Options. (o) "Nonstatutory Stock Option" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (p) "Option" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan, including a Nonemployee Director Option. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (q) "Option Agreement" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (r) "Optionee" means a person who has been granted one or more Options. (s) "Parent Corporation" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (t) "Participating Company" means the Company or any Parent Corporation or Subsidiary Corporation. (u) "Participating Company Group" means, at any point in time, all corporations collectively which are then Participating Companies. 3 (v) "Rule 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (w) "Section 162(m)" means Section 162(m) of the Code. (x) "Securities Act" means the Securities Act of 1933, as amended. (y) "Service" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. An Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. An Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether an Optionee's Service has terminated and the effective date of such termination. (z) "Stock" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (aa) "Subsidiary Corporation" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (bb) "Ten Percent Owner Optionee" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 4 3. ADMINISTRATION. -------------- 3.1 Administration by the Board. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.2 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.3 Committee Complying with Section 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 3.4 Powers of the Board. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; 5 (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel, renew, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; provided, however, that without the approval of the Company's stockholders, the Board may not (i) amend an Option to reduce the exercise price for such Option, (ii) replace an Option that is "out of the money" with restricted stock or other form of equity-based compensation in an exchange, buy-back or other similar program, (iii) replace an Option with a new Option having a lower exercise price or accelerated vesting schedule in an exchange, buy-back or other similar program, or (iv) implement any other option repricing, replacement or cancellation and regrant program or buy-back scheme which effectively reduces the exercise price of an Option (excluding any change to the exercise price of an Option required by Section 4.2 and/or Section 9); (g) except as precluded under Section 3.4(f), to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to delegate to any proper officer of the Company the authority to grant one or more Options, without further approval of the Board, to any person eligible pursuant to Section 5, other than a person who, at the time of such grant, is an Insider; provided, however, that (i) such Options shall not be granted to any one person within any fiscal year of the Company for more than twenty-five thousand (25,000) shares in the aggregate, (ii) the exercise price per share of each such Option shall be equal to the Fair Market Value per share of the Stock on the effective date of grant (or, if the Stock has not traded on such date, on the last day preceding the effective date of grant on which the Stock was traded), and (iii) each such Option shall be subject to the terms and conditions of the appropriate standard form of Option Agreement approved by the Board and shall conform to the provisions of the Plan and such other guidelines as shall be established from time to time by the Board; (i) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (j) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 6 4. SHARES SUBJECT TO INITIAL PLAN AND PLAN. --------------------------------------- 4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Initial Plan and the Plan shall be ten million four hundred seventy-five thousand (10,475,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled, or if shares of Stock acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. 4.2 Adjustments for Changes in Capital Structure. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options, in the share limit set forth in Section 3.4(h), in the Section 162(m) Grant Limit set forth in Section 5.4, to the automatic Nonemployee Director Option grant provisions set forth in Section 7.1 and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 9.1) shares of another corporation (the "New Shares"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. ---------------------------------- 5.1 Persons Eligible for Options. Options may be granted only to Employees, Consultants and Directors. For purposes of the foregoing sentence, "Employees", "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2 Option Grant Restrictions. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences service as an Employee with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. Nonemployee Director Options may be granted only to a person who at the time of grant is a Nonemployee Director. 7 5.3 Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 5.4 Section 162(m) Grant Limit. Subject to adjustment as provided in Section 4.2, at any such time as a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than five hundred thousand (500,000) shares (the "Section 162(m) Grant Limit"). 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and, except as otherwise set forth in Section 7 with respect to Nonemployee Director Options, shall comply with and be subject to the following terms and conditions: 6.1 Exercise Price. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 8 6.2 Exercise Period. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of the grant of the Option. 6.3 Payment of Exercise Price. (a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "Cashless Exercise"), (iv) provided that the Optionee is an Employee, by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 8, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. 9 (c) Cashless Exercise. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) Payment by Promissory Note. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 Tax Withholding. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 Effect of Termination of Service. (a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein, an Option shall be exercisable after an Optionee's termination of Service as follows: (i) Disability. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "Option Expiration Date"). 10 (ii) Death. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (iii) Other Termination of Service. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.5(a) is prevented by the provisions of Section 12 below, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) Extension if Optionee Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.5(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 7. TERMS AND CONDITIONS OF NONEMPLOYEE DIRECTOR OPTIONS. Nonemployee Director Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Such Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 7.1 Automatic Grant. Subject to execution by a Nonemployee Director of an appropriate Option Agreement, Nonemployee Director Options shall be granted automatically and without further action of the Board, as follows: (a) Initial Option. A Nonemployee Director shall be granted a Nonemployee Director Option (an "Initial Option") as follows: 11 (vi) On the Effective Date, each person listed on Attachment A attached hereto who remains on such date a Nonemployee Director shall be granted a Nonemployee Director Option to purchase the number of shares of Stock shown opposite his name on Attachment A. (vii) Each person who first became a Nonemployee Director after the Effective Date and prior to December 16, 1999, was granted on the date he or she first became a Nonemployee Director a Nonemployee Director Option to purchase twelve thousand five hundred (12,500) shares of Stock. Each person who first becomes a Nonemployee Director on or after December 16, 1999 shall be granted on the date he or she first becomes a Nonemployee Director a Nonemployee Director Option to purchase thirty thousand (30,000) shares of Stock. Notwithstanding anything herein to the contrary, an Initial Option shall not be granted to a Director who previously did not qualify as a Nonemployee Director but subsequently becomes a Nonemployee Director as a result of the termination of his or her status as an Employee. (b) Annual Option. Prior to December 16,1999, except as otherwise provided in Attachment B, each Nonemployee Director (including any Director who previously had not qualified as a Nonemployee Director but who subsequently became a Nonemployee Director) was granted on the date of each annual meeting of the stockholders of the Company which occurred after the Effective Date (an "Annual Meeting") following which such person remained a Nonemployee Director an Option to purchase five thousand (5,000) shares of Stock (an "Annual Option"). Effective December 16, 1999, except as otherwise provided, each Nonemployee Director (including any Director who previously did not qualify as a Nonemployee Director but who subsequently becomes a Nonemployee Director) shall be granted on the date of each Annual Meeting following which such person remains a Nonemployee Director an Annual Option to purchase ten thousand (10,000) shares of Stock. Notwithstanding the foregoing, a Nonemployee Director who has not served continuously as a Director of the Company for at least six (6) months as of the date of such Annual Meeting shall not receive an Annual Option on such date. (c) Right to Decline Nonemployee Director Option. Notwithstanding the foregoing, any person may elect not to receive a Nonemployee Director Option by delivering written notice of such election to the Board no later than the day prior to the date such Nonemployee Director Option would otherwise be granted. A person so declining a Nonemployee Director Option shall receive no payment or other consideration in lieu of such declined Nonemployee Director Option. A person who has declined a Nonemployee Director Option may revoke such election by delivering written notice of such revocation to the Board no later than the day prior to the date such Nonemployee Director Option would be granted pursuant to Section 7.1(a) or (b), as the case may be. 7.2 Exercise Price. The exercise price per share of Stock subject to a Nonemployee Director Option shall be the Fair Market Value of a share of Stock on the date the Nonemployee Director Option is granted. 12 7.3 Exercise Period. Each Nonemployee Director Option shall terminate and cease to be exercisable on the date ten (10) years after the date of grant of the Nonemployee Director Option unless earlier terminated pursuant to the terms of the Plan or the Option Agreement. 7.4 Right to Exercise Nonemployee Director Options. (a) Initial Options. (i) An Initial Option granted pursuant to Section 7.1(a)(i) shall become vested and exercisable in accordance with the vesting provisions set forth opposite the Optionee's name in Attachment A, subject to the Optionee's continued Service. (ii) Except as otherwise provided in the Plan or in the Option Agreement and provided that the Optionee's Service has not terminated prior to the respective date set forth below, (1) an Initial Option granted pursuant to Section 7.1(a)(ii) prior to December 16, 1999, shall become vested and exercisable cumulatively as follows: (A) no shares prior to the date occurring one (1) year after the date of grant; (B) 5,000 shares on and after the date occurring one (1) year after the date of grant; (C) 3,750 shares on and after the date occurring two (2) years after the date of grant; (D) 2,500 shares on and after the date occurring three (3) years after date of grant; and (E) 1,250 shares on and after the date occurring four (4) years after the date of grant; and (2) an Initial Option granted pursuant to Section 7.1(a)(ii) on or after December 16, 1999, shall become vested and exercisable cumulatively as follows: (A) no shares prior to the date occurring one (1) year after the date of grant; (B) 12,000 shares on and after the date occurring one (1) year after the date of grant; (C) 9,000 shares on and after the date occurring two (2) years after the date of grant; (D) 6,000 shares on and after the date occurring three (3) years after date of grant; and (E) 3,000 shares on and after the date occurring four (4) years after the date of grant (b) Annual Options. Except as otherwise provided in the Plan or in the Option Agreement and provided the Optionee's Service has not terminated prior to the relevant date, each Annual Option shall become vested and exercisable cumulatively for 25% of the shares of Stock initially subject to the Option on each of the first four (4) anniversaries of the date on which the Annual Option was granted. (c) Adjustments for Changes in Capital Structure. The number of shares becoming vested and exercisable as set forth on Attachment A, on Attachment B, and in this Section 7.4 shall be adjusted proportionately pursuant to the provisions of Section 4.2 in the event of a change in the Company's capital structure. 13 8. STANDARD FORMS OF OPTION AGREEMENT. ---------------------------------- 8.1 Incentive Stock Options. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.2 Nonstatutory Stock Options (Other than Nonemployee Director Option). Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "Nonstatutory Stock Option" (other than a Nonemployee Director Option) shall comply with and be subject to the terms and conditions set forth in the form of Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.3 Nonemployee Director Option. Each Nonemployee Director Option shall comply with and be subject to the terms and conditions set forth in the appropriate form of Nonstatutory Stock Option Agreement (Nonemployee Director Option) adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 8.4 Authority to Vary Terms. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 8 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable subject to the Company's right to repurchase any unvested shares of Stock acquired by an Optionee upon the exercise of an Option in the event such Optionee's Service with the Participating Company Group is terminated for any reason, with or without cause. 9. CHANGE IN CONTROL. ----------------- 9.1 Definitions. (a) An "Ownership Change Event" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; 14 (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "Change in Control" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 9.2 Effect of Change in Control on Options. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 9.2, an Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. In the event the Acquiring Corporation elects not to assume or substitute for outstanding Options in connection with a Change in Control, any unexercisable or unvested portion of the outstanding Options shall be immediately exercisable and vested in full as of the date ten (10) days prior to the date of the Change in Control. The exercise or vesting of any Option that was permissible solely by reason of this Section 9.2 shall be conditioned upon the consummation of the Change in Control. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 9.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 15 10. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 11. TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall be assignable or transferable to the extent permitted by the Board and set forth in the Option Agreement evidencing such Option. 12. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 13. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 16 14. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise (except as to (c) and (d) below), without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, (c) no amendment of Sections 3.4(f) or (g) with respect to the matters referenced therein that require stockholder approval, (d) no amendment of Section 6.1(a) which will allow the grant of an Option with an exercise price per share that is less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (e) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 15. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS. Any other provision of the Plan to the contrary notwithstanding, the Initial Plan shall remain in effect and apply to all Options granted under the Initial Plan. 17 ATTACHMENT A NONEMPLOYEE DIRECTOR OPTIONS GRANTED EFFECTIVE AS OF THE EFFECTIVE DATE* ============================================================================ Name Number of Shares Vesting of Shares Subject to Option - ---------------------------------------------------------------------------- Stephen J. Ciesinski 11,500 4,000 shares will vest 1 year after the date of grant, 3,750 shares will vest 2 years after the date of grant, 2,500 shares will vest 3 years after the date of grant and 1,250 shares will vest 4 years after the date of grant - ------------------------------------------------------------------------- John C. Savage 10,500 3,000 shares will vest 1 year after the date of grant, 3,750 shares will vest 2 years after the date of grant, 2,500 shares will vest 3 years after the date of grant and 1,250 shares will vest 4 years after the date of grant - ------------------------------------------------------------------------- Kenneth G. Smith 13,125 7,500 shares will be vested as of the date of grant, 1,875 shares will vest 2 years after the date of grant, 2,500 shares will vest 3 years after the date of grant and 1,250 shares will vest 4 years after the date of grant ========================================================================= * The number of shares of Stock set forth in this Attachment A shall be adjusted pursuant to Section 4.2 of the Plan to reflect changes in the capital structure of the Company. Vesting of the shares subject to the Nonemployee Director Options set forth in this Attachment A shall be subject to the Optionee's continued Service. ATTACHMENT B 1998 ANNUAL OPTION FOR SHIGERU NAKAYAMA* =========================================================================== Number of Shares Vesting of Shares Subject to Option - --------------------------------------------------------------------------- 3,855 105 Shares will vest 2 years after the date of grant, 2,500 shares will vest 3 years after the date of grant and 1,250 shares will vest 4 years after the date of grant. =========================================================================== * Notwithstanding the provisions of Section 7.1(b), the Annual Option, if any, granted to Shigeru Nakayama following the 1998 Annual Meeting shall be an Option to purchase the number of shares set forth in this Attachment B and such shares shall vest and become exercisable as described above. The number of shares of Stock set forth in this Attachment B shall be adjusted pursuant to Section 4.2 of the Plan to reflect changes in the capital structure of the Company. Vesting of the shares subject to the Nonemployee Director Option set forth in this Attachment B shall be subject to the Optionee's continued Service. EX-10 5 exh10_10.txt EXECUTIVE CHANGE OF CONTROL AGREEMENT Exhibit 10.10 EXECUTIVE CHANGE OF CONTROL AGREEMENT THIS EXECUTIVE CHANGE OF CONTROL AGREEMENT is dated as of March 4, 2002 (this "Agreement"), by and between Mattson Technology, Inc., (the "Company"), and David Dutton (the "Executive"). RECITALS WHEREAS, the Company desires to create a greater incentive for the Executive to remain in the employ of the Company, particularly in the event of any possible change or threatened change of control of the Company; and WHEREAS, the parties desire to memorialize their agreement with respect thereto in the manner set forth herein, NOW, THEREFORE, in consideration of the Executive's past and future services to the Company and the mutual covenants contained herein, the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Termination By Company Without Cause Following a Change of Control. If the Executive's employment with the Company is terminated by the Company for any reason other than for "Good Cause" as defined in Section 8 herein, within one (1) year following the occurrence of a "Change of Control" as defined in Section 8 herein, Executive shall be entitled to the following benefits: (a) Final Paycheck. Payment, in a lump sum, of any and all base salary due and owing through the date of termination, plus an amount equal to all earned but unused PTO hours through the date of termination and reimbursement for all reasonable expenses, less any deductions required by applicable law; (b) Continued Payment of Salary. In exchange for a signed, unrevoked General Release, payment of Executive's then-current base salary for a period of twelve (12) months, less any deductions required by applicable law; and (c) Accelerated Vesting. All unvested options granted as of the date of this Agreement as well as all unvested options granted after the date of this Agreement ("Options") shall fully vest, provided that such Options have not already accelerated under the Company Stock Option Plan. 1 (d) Medical and Dental Benefits. The Company shall pay for Executive's and his dependent's medical and dental benefit coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to the same extent provided for by the Company's group plans at the time of termination for a period of twelve (12) months; provided that Executive completes and returns the appropriate COBRA enrollment forms to the respective provider in a timely manner. In the event Executive becomes covered as a primary insured under another employer's group health plan during this period, Executive shall notify Company and Company shall cease its obligation to provide for continued medical and dental benefits coverage. The period of such Company-paid COBRA coverage shall be considered part of Executive's COBRA coverage entitlement period, and may, for tax purposes, be considered income to Executive. 2. Termination By Executive for Good Reason Following a Change of Control. Alternatively, should Executive terminate employment with the Company for "Good Reason" as defined in Section 8 herein, with thirty (30) days written notice to the Company, within one (1) year of a "Change of Control" as defined in Section 8 herein, Executive shall be entitled to the following benefits: (a) Final Paycheck. Payment, in a lump sum, of any and all base salary due and owing through the date of termination, plus an amount equal to all earned but unused PTO hours through the date of termination and reimbursement for all reasonable expenses, less any deductions required by applicable law; (b) Continued Payment of Salary. In exchange for a sign, unrevoked General Release, payment of Executive's then-current base salary for a period of twenty four (24) months, less any deductions required by applicable law; and (c) Accelerated Vesting. Provided that Executive's Options have not accelerated under the Company Stock Option Plan, then all such Options shall fully vest. (d) Medical and Dental Benefits. The Company shall pay for Executive's and his dependent's medical and dental benefit coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), to the same extent provided for by the Company's group plans at the time of termination, for a period of eighteen (18) months ("COBRA Benefits Period"); provided that Executive completes and returns the appropriate COBRA enrollment forms to the respective provider in a timely manner. Further, upon conclusion of this COBRA Benefits Period, the Company shall pay Executive, on a monthly basis, an amount equivalent to the Executive's medical and dental benefit coverage under COBRA, for a period of six (6) months ("Post-COBRA Benefit Period"). The Executive shall be responsible for securing his and his dependent's benefits coverage in this Post-COBRA Benefits Period. In the event Executive becomes covered or insured under another employer's group health plan during either the COBRA Benefits Period or Post-COBRA Benefits Period, Executive shall notify Company and Company shall cease its obligation to provide for continued medical and dental benefits coverage and for payments thereof. The period of such Company-paid COBRA coverage shall be considered part of Executive's COBRA coverage entitlement period, and together with the Post-COBRA Benefits Period, may, for tax purposes, be considered income to Executive. 2 The severance benefits provided in this Section 2 are the exclusive remedies and shall not be provided in addition to those benefits provided in Sections 1 herein. 3. Timing of Payments. The payments provided for in Sections 1(a) or 2(a) herein, as applicable, shall be payable immediately upon Executive's termination. Payments provided for in Sections 1(b) or 2(b) herein, as applicable, shall begin upon Executive's termination date or within ten (10) days after the Company's receipt of a signed, unrevoked release of claims, whichever is later, and shall continue in accordance with the Company's customary payroll practices. All such payments will be subject to applicable payroll or other taxes required to be withheld by the Company. Benefits provided for in Sections 1(c) or 2(c) shall be made in accordance with the Stock Option Plan. Benefits coverage provided for in Sections 1(d) and 2(d) shall begin on the first day of the next full month following the date of termination. 4. Subsequent Employment. The compensation and benefits payable hereunder, with the exception of those benefits provided for under Sections 1(d) or 2(d), shall not be reduced or offset by any amounts that the Executive earns or could earn from any subsequent employment. 5. Section 280G Matters. If the benefits described in Sections 1 or 2 herein, as applicable, (the "Severance Payment") would otherwise constitute a parachute payment under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and but for this Section would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), Executive shall either: (i) pay the Excise Tax, or (ii) have the benefits reduced to such lesser extent as would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants ("Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 6. General Release. All compensation and benefits under Sections 1 or 2 herein, as applicable, are in consideration for the Executive's execution of a general release of all known and unknown claims that Executive may then have against the Company and its agents, a form of which is available from the Company. If the Executive does not properly execute such Release, the parties expressly acknowledge and agree that the Executive will not be entitled to any of the benefits provided under Sections 1 or 2 herein, as applicable. 7. Employment Status. Nothing in this Agreement shall be deemed to constitute a contract for employment for any specific period of time. The parties expressly acknowledge and agree that the undersigned's employment with the Company shall continue to be "at will." 3 8. Definitions. (a) Good Cause. For purposes of this Agreement, "Good Cause" means: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company, (ii) dishonesty, material breach of any agreement with the Company, or intentional misconduct, or (iii) commission of a crime involving dishonesty, breach of trust, physical or emotional harm to any person. (b) Good Reason. For purposes of this Agreement, "Good Reason" means any of the following, without Executive's written consent: (i) a significant reduction by the Company in Executive's annual base salary; (ii) the failure of the Company to obtain an agreement from any successor to the Company, or purchaser of all or substantially all of the Company's assets, to assume this Agreement; (iii) the assignment of Executive to duties which reflect a material adverse change in authority, responsibility or status with the Company or any successor; or (iv) the Company requiring Executive to reside or be based at a location 50 miles or more from the location where Executive was based immediately prior to the Change in ontrol. (c) Ownership Change Event. For purposes of the definition of "Change of Control," below, "Ownership Change Event" shall be defined in accordance with the Company's Stock Option Plan, that is: An "Ownership Change Event" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (d) Change in Control. A "Change in Control" shall be defined in accordance with the Company's Stock Option Plan, that is: A "Change in Control" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 4 9. Miscellaneous Provisions. (a) This Agreement, together with the Company's Stock Option Plans, stock option agreements and/or stock repurchase agreements and any Confidentiality, Proprietary Information and Assignment of Inventions Agreement, contains the entire agreement of the parties with respect to the subject matter herein and supersedes and replaces all prior or contemporaneous agreements or understandings between the parties. This Agreement may not be amended or modified in any manner, except by an instrument in writing signed by the Executive and Chief Executive Officer of the Company. Failure of either party to enforce any of the provisions of this Agreement or any rights with respect thereto or failure to exercise any election provided for herein shall in no way be considered to be a waiver of such provisions, rights or elections or in any way effect the validity of this Agreement. The failure of either party to exercise any of said provisions, rights or elections shall not preclude or prejudice such party from later enforcing or exercising the same or other provisions, rights or elections which it may have under this Agreement. (b) Successors and Beneficiaries. This Agreement shall be binding on and inure to the benefit of the successors, assigns, heirs, devisees and personal representatives of the parties, including any successor to the Company by merger or combination and any purchaser of all or substantially all of the assets of the Company. In the event that the Executive dies before receipt of all benefits to which the Executive becomes entitled under this Agreement, the payment of such benefits will be made, on the due date or dates hereunder had the Executive survived, to the executors or administrators of the Executive's estate. (c) Governing Law. This Agreement is made in, and shall be governed by and construed in accordance with the laws of, the State of California. (d) Severability. If any term, provision, covenant or condition of this Agreement is held to be invalid, void, or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "Company" "the Executive" MATTSON, INC. ------------------------------- (David Dutton) By: ---------------------------- ------------------------------- Name: (Sign Name) Title: Address: ------------------------------- ------------------------------- 5 EX-10 6 exh10_11.txt EXECUTIVE CHANGE OF CONTROL AGREEMENT Exhibit 10.11 EXECUTIVE CHANGE OF CONTROL AGREEMENT THIS EXECUTIVE CHANGE OF CONTROL AGREEMENT is dated as of ________, 2002 (this "Agreement"), by and between Mattson Technology, Inc., (the "Company"), and ____________ (the "Executive"). RECITALS WHEREAS, the Company desires to create a greater incentive for the Executive to remain in the employ of the Company, particularly in the event of any possible change or threatened change of control of the Company; and WHEREAS, the parties desire to memorialize their agreement with respect thereto in the manner set forth herein, NOW, THEREFORE, in consideration of the Executive's past and future services to the Company and the mutual covenants contained herein, the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Termination By Company Without Cause Following a Change of Control. If the Executive's employment with the Company is terminated by the Company for any reason other than for "Good Cause" as defined in Section 8 herein, within one (1) year following the occurrence of a "Change of Control" as defined in Section 8 herein, Executive shall be entitled to the following benefits: (a) Final Paycheck. Payment, in a lump sum, of any and all base salary due and owing through the date of termination, plus an amount equal to all earned but unused PTO hours through the date of termination and reimbursement for all reasonable expenses, less any deductions required by applicable law; (b) Continued Payment of Salary. In exchange for a signed, unrevoked General Release, payment of Executive's then-current base salary for a period of nine (9) months, less any deductions required by applicable law; and (c) Accelerated Vesting. All unvested options granted as of the date of this Agreement as well as all unvested options granted after the date of this Agreement ("Options") shall fully vest, provided that such Options have not already accelerated under the Company Stock Option Plan. 1 (d) Medical and Dental Benefits. The Company shall pay for Executive's and his dependent's medical and dental benefit coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to the same extent provided for by the Company's group plans at the time of termination for a period of nine (9) months; provided that Executive completes and returns the appropriate COBRA enrollment forms to the respective provider in a timely manner. In the event Executive becomes covered as a primary insured under another employer's group health plan during this period, Executive shall notify Company and Company shall cease its obligation to provide for continued medical and dental benefits coverage. The period of such Company-paid COBRA coverage shall be considered part of Executive's COBRA coverage entitlement period, and may, for tax purposes, be considered income to Executive. 2. Termination By Executive for Good Reason Following a Change of Control. Alternatively, should Executive terminate employment with the Company for "Good Reason" as defined in Section 8 herein, with thirty (30) days written notice to the Company, within one (1) year of a "Change of Control" as defined in Section 8 herein, Executive shall be entitled to the following benefits: (a) Final Paycheck. Payment, in a lump sum, of any and all base salary due and owing through the date of termination, plus an amount equal to all earned but unused PTO hours through the date of termination and reimbursement for all reasonable expenses, less any deductions required by applicable law; (b) Continued Payment of Salary. In exchange for a sign, unrevoked General Release, payment of Executive's then-current base salary for a period of eighteen (18) months, less any deductions required by applicable law; and (c) Accelerated Vesting. Provided that Executive's Options have not accelerated under the Company Stock Option Plan, then all such Options shall fully vest. (d) Medical and Dental Benefits. The Company shall pay for Executive's and his dependent's medical and dental benefit coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to the same extent provided for by the Company's group plans at the time of termination for a period of eighteen (18) months; provided that Executive completes and returns the appropriate COBRA enrollment forms to the respective provider in a timely manner. In the event Executive becomes covered as a primary insured under another employer's group health plan during this period, Executive shall notify Company and Company shall cease its obligation to provide for continued medical and dental benefits coverage. The period of such Company-paid COBRA coverage shall be considered part of Executive's COBRA coverage entitlement period, and may, for tax purposes, be considered income to Executive. The severance benefits provided in this Section 2 are the exclusive remedies and shall not be provided in addition to those benefits provided in Sections 1 herein. 2 3. Timing of Payments. The payments provided for in Sections 1(a) or 2(a) herein, as applicable, shall be payable immediately upon Executive's termination. Payments provided for in Sections 1(b) or 2(b) herein, as applicable, shall begin upon Executive's termination date or within ten (10) days after the Company's receipt of a signed, unrevoked release of claims, whichever is later, and shall continue in accordance with the Company's customary payroll practices. All such payments will be subject to applicable payroll or other taxes required to be withheld by the Company. Benefits provided for in Sections 1(c) or 2(c) shall be made in accordance with the Stock Option Plan. Benefits coverage provided for in Sections 1(d) and 2(d) shall begin on the first day of the next full month following the date of termination. 4. Subsequent Employment. The compensation and benefits payable hereunder, with the exception of those benefits provided for under Sections 1(d) or 2(d), shall not be reduced or offset by any amounts that the Executive earns or could earn from any subsequent employment. 5. Section 280G Matters. If the benefits described in Sections 1 or 2 herein, as applicable, (the "Severance Payment") would otherwise constitute a parachute payment under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and but for this Section would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), Executive shall either: (i) pay the Excise Tax, or (ii) have the benefits reduced to such lesser extent as would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants ("Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 6. General Release. All compensation and benefits under Sections 1 or 2 herein, as applicable, are in consideration for the Executive's execution of a general release of all known and unknown claims that Executive may then have against the Company and its agents, a form of which is available from the Company. If the Executive does not properly execute such Release, the parties expressly acknowledge and agree that the Executive will not be entitled to any of the benefits provided under Sections 1 or 2 herein, as applicable. 7. Employment Status. Nothing in this Agreement shall be deemed to constitute a contract for employment for any specific period of time. The parties expressly acknowledge and agree that the undersigned's employment with the Company shall continue to be "at will." 3 8. Definitions. (a) Good Cause. For purposes of this Agreement, "Good Cause" means: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company, (ii) dishonesty, material breach of any agreement with the Company, or intentional misconduct, or (iii) commission of a crime involving dishonesty, breach of trust, physical or emotional harm to any person. (b) Good Reason. For purposes of this Agreement, "Good Reason" means any of the following, without Executive's written consent: (i) a significant reduction by the Company in Executive's annual base salary; (ii) the failure of the Company to obtain an agreement from any successor to the Company, or purchaser of all or substantially all of the Company's assets, to assume this Agreement; (iii) the assignment of Executive to duties which reflect a material adverse change in authority, responsibility or status with the Company or any successor; or (iv) the Company requiring Executive to reside or be based at a location 50 miles or more from the location where Executive was based immediately prior to the Change in Control. (c) Ownership Change Event. For purposes of the definition of "Change of Control," below, "Ownership Change Event" shall be defined in accordance with the Company's Stock Option Plan, that is: An "Ownership Change Event" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (d) Change in Control. A "Change in Control" shall be defined in accordance with the Company's Stock Option Plan, that is: A "Change in Control" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 4 9. Miscellaneous Provisions. (a) This Agreement, together with the Company's Stock Option Plans, stock option agreements and/or stock repurchase agreements and any Confidentiality, Proprietary Information and Assignment of Inventions Agreement, contains the entire agreement of the parties with respect to the subject matter herein and supersedes and replaces all prior or contemporaneous agreements or understandings between the parties. This Agreement may not be amended or modified in any manner, except by an instrument in writing signed by the Executive and Chief Executive Officer of the Company. Failure of either party to enforce any of the provisions of this Agreement or any rights with respect thereto or failure to exercise any election provided for herein shall in no way be considered to be a waiver of such provisions, rights or elections or in any way effect the validity of this Agreement. The failure of either party to exercise any of said provisions, rights or elections shall not preclude or prejudice such party from later enforcing or exercising the same or other provisions, rights or elections which it may have under this Agreement. (b) Successors and Beneficiaries. This Agreement shall be binding on and inure to the benefit of the successors, assigns, heirs, devisees and personal representatives of the parties, including any successor to the Company by merger or combination and any purchaser of all or substantially all of the assets of the Company. In the event that the Executive dies before receipt of all benefits to which the Executive becomes entitled under this Agreement, the payment of such benefits will be made, on the due date or dates hereunder had the Executive survived, to the executors or administrators of the Executive's estate. (c) Governing Law. This Agreement is made in, and shall be governed by and construed in accordance with the laws of, the State of California. (d) Severability. If any term, provision, covenant or condition of this Agreement is held to be invalid, void, or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "Company" "the Executive" MATTSON, INC. -------------------------------- ( ) By: ---------------------------- --------------------------------- Name: (Sign Name) Title: Address: --------------------------------- --------------------------------- 5 EX-10 7 exh10_12.txt PROMISSORY NOTE Exhibit 10.12 PROMISSORY NOTE $700,000 April 29, 2002 FOR VALUE RECEIVED, Brad Mattson (the "undersigned") promises to pay to Mattson Technology, Inc. (the "Company"), or order, the principal sum of Seven Hundred Thousand Dollars ($700,000) on or before the later of (i) August 31, 2002 and (ii) the date which is ninety days after the date that the Securities and Exchange Commission declares effective that certain registration statement on Form S-3 (File No. 333-86072), filed by the Company with the Securities and Exchange Commission on April 12, 2002 ("Due Date"). Such principal sum shall not bear interest. The entire outstanding balance of principal shall be due and payable on the Due Date. The undersigned agrees that until this Note is repaid in full, he shall not sell, pledge or otherwise transfer or dispose of any Company common stock in any manner except as required to (i) transfer 1,000,000 shares to Diane Mattson as part of a Marriage Settlement Agreement, or (ii) sell shares after the end of the lock-up period as necessary to repay the principal due under this note. In the event of any other disposition, including any disposition relating to a merger or acquisition involving the Company, this Note shall be immediately due and payable and all proceeds relating to any such transactions shall be applied to the repayment of this Note. The Company may at its option accelerate, in whole or in part, the maturity of the outstanding principal balance due on this Note and any accrued interest thereon upon the occurrence of any of the following events: (1) A default in the payment of any installment of principal when due; (2) The undersigned becomes insolvent; and (3) The commencement by the undersigned of any proceeding under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with creditors, or proceedings seeking reorganization, arrangement, or other relief (collectively, an "Insolvency Proceeding"), or the commencement against the undersigned of an Insolvency Proceeding that is not dismissed or stayed within thirty (30) days. 1 The undersigned waives demand, presentment, notice of protest, notice of demand, dishonor, diligence in collection and notices of intention to accelerate maturity. The Company may automatically effectuate any such acceleration by making an entry to such effect in its records, in which event the unpaid balance on this Note shall become immediately due and payable without demand or notice. Principal is payable in lawful money of the United States of America. The undersigned may prepay any amount due hereunder, without premium or penalty. In the event the Company incurs any costs or fees in order to enforce payment of this Note or any portion thereof, the undersigned agrees to pay to the Company, in addition to such amounts as are owed pursuant to this Note, such costs and fees, including, without limitation, a reasonable sum for attorneys' fees. The undersigned hereby waives to the full extent permitted by law all rights to plead any statute of limitations as a defense to any action hereunder. The failure of the Company to exercise any of the rights created hereby, or to promptly enforce any of the provisions of this Note, shall not constitute a waiver of the right to exercise such rights or to enforce any such provisions. This Note is made under and shall be construed in accordance with the laws of the State of California, without regard to the conflict of law provisions thereof. The undersigned agrees to execute and deliver any documents requested by the Company in order to enforce its rights hereunder. --------------------------------- Brad Mattson 2 EX-99 8 exh99_1.txt CERTIFICATION OF CEO EXHIBIT 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David Dutton, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. August 14, 2002 /S/ DAVID DUTTON ------------------------- David Dutton Chief Executive Officer EX-99 9 exh99_2.txt CERTIFICATION OF CEO EXHIBIT 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ludger Viefhues, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. August 14, 2002 /S/ LUDGER VIEFHUES ----------------------------- Ludger Viefhues Chief Financial Officer EX-99 10 exh99_3.txt RISK FACTORS EXHIBIT 99.3 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. 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: o our ability to timely develop new products and integrate the products and sales efforts of the combined company; and o 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. We 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. 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. 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. 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. 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. 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. 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. 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. 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: 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. -----END PRIVACY-ENHANCED MESSAGE-----