-----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, U63jl6egMzobwQk9EvWuJsHZ72weTipoPq6aXOMhR/J1ZbuyHUrrX2QnC092jNJ+ IG3575xqVM+T2Hns9gRpvw== 0001047469-98-013134.txt : 19980401 0001047469-98-013134.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013134 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24838 FILM NUMBER: 98583431 BUSINESS ADDRESS: STREET 1: 3550 WEST WARREN AVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106575900 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21970 MATTSON TECHNOLOGY INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 77-0208119 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 3550 West Warren Avenue Fremont, California 94538 ----------------------------------------------------- (Address and zip code of principal executive offices) Registrant's telephone number, including area code: 510-657-5900 ------------- Securities registered pursuant to Section 12(b) of the Act: None ----- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value per Share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Number of shares outstanding of registrant's Common Stock as of February 27, 1998: 14,220,115 As of February 27, 1998, the aggregate market value of voting Common Stock held by non-affiliates of the registrant, based upon the closing for registrant's Common Stock as reported in the Wall Street Journal, was $103,149,366. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs, and certain assumptions made by the Company's management. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Business--Factors That May Affect Future Results and Market Price of Stock" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those noted in the documents incorporated herein by reference. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. PART I ITEM 1. BUSINESS Mattson Technology, Inc. ("Mattson" or the "Company") designs, manufactures and markets advanced fabrication equipment for sale to the worldwide semiconductor industry. The Company's goal is to provide advanced process capability combined with a high productivity platform to achieve a substantial improvement in productivity over competitive equipment, and to support this equipment with world class support. Each step of the manufacturing process for integrated circuits (ICs) requires specialized manufacturing equipment. Three of the principal steps in manufacturing ICs are the deposition of insulating or conducting materials onto a wafer, the projection of a pattern through a mask onto light sensitive materials known as photoresist (photolithography), and the etching or removal of the deposited material not covered by the pattern. Before these steps can be repeated on the wafer, the photoresist must be removed ("stripped" or "ashed"). This cycle may be repeated as many as thirty times for the most advanced ICs. In 1991 the Company introduced its first product, the Aspen Strip system, a photoresist removal system that uses diode source technology. The product was enhanced in 1993 to allow for a second process chamber and the use of a "downstream" triode process. The Company commenced shipment in 1995 of a new version of its Aspen Strip which utilizes inductively coupled plasma (ICP) technology. In 1994, the Company introduced its second system, the Aspen CVD, a plasma enhanced chemical vapor deposition system. In 1995, the Company introduced its third system, the Aspen RTP, a rapid thermal processing system which is currently in the early marketing phase. In 1996, the Company introduced a fourth product, the Aspen LiteEtch for isotropic etch processing. The Aspen Strip, CVD, RTP and LiteEtch are based on the Aspen platform, which includes wafer handling robotics, dual loadlocks, control electronics and system software. SEMICONDUCTOR MANUFACTURING PRODUCTIVITY Increasing demand for ICs has resulted from the growth of existing markets and the emergence of new markets such as multimedia, wireless communication and portable computing. The increase in demand has been fueled by the industry's ability to supply more complex, higher performance ICs, while continuing to reduce cost per function. The more complex ICs and the attendant reductions in feature size have necessitated advanced and expensive wafer fabrication equipment, resulting in the escalation of the average cost of advanced wafer fabrication facilities. For example, the average cost in 1984 for a 64 kilobit dynamic random access memory IC (DRAM) fabrication facility was approximately $60 million, as compared to the average cost today for a 64 megabit DRAM fabrication facility of approximately $1 to $2 billion. 2 Advancements in semiconductor manufacturing equipment have enabled IC manufacturers to increase productivity dramatically by reducing feature size, increasing manufacturing yields, improving the uptime of wafer fabrication equipment and increasing the wafer size. Although feature size will continue to be reduced, the other historical sources of productivity growth are now reaching diminishing returns: HIGHER YIELDS. In the last ten years, manufacturing yields have increased substantially and the time to reach maximum yield levels has decreased significantly. For example, the percentage of good DRAMs per wafer during initial production has increased from 20% ten years ago to over 80% at present. The potential for further yield improvement is limited. IMPROVED UPTIME. Wafer fabrication line reliability has improved markedly in the last ten years. Since equipment uptime now normally exceeds 90%, there is little room for improvement in equipment reliability. LARGER WAFER SIZES. Leading edge wafer fabrication lines are currently using 8" diameter wafers, up from 4" diameters ten years ago. Currently, a handful of IC makers are starting up pilot lines for 12" diameter wafers, with the balance of the manufacturers reporting plans to convert to 12" (300mm) production within the next 2-3 years. As the industry achieved productivity gains from these sources during the last ten years, wafer throughput actually declined. Demands from IC manufacturers for higher yield and larger wafer sizes have resulted in a shift from batch processing (multiple wafers simultaneously processed) to single wafer processing (one wafer processed at a time). This shift has resulted in reduced throughput and increased cost. Semiconductor equipment manufacturers have responded to the declining throughput problem with cluster tools, which employ single wafer processing through the use of a common wafer handling platform with several single wafer processing chambers. However, cluster tools are highly complex systems, often resulting in low reliability. The Company believes that this low reliability, combined with only modestly improved throughput, has limited the ability of cluster tools to meet the productivity needs of semiconductor manufacturers. Faced with diminishing productivity gains, IC manufacturers have increased their emphasis on factors that contribute to overall manufacturing costs. This focus has led to the use of cost of ownership ("COO") to measure productivity. COO measures costs associated with operation of equipment in a fabrication line. There is no accepted industry standard for calculating COO. The Company calculates COO by estimating the total costs to operate a system including depreciation, overhead, labor and materials, and dividing those costs by the system's total wafer output. Because the Company, the Company's customers and the Company's competitors may use different formulas for calculating COO, there can be no assurance that the Company and the Company's customers and competitors, each using the same data, would arrive at the same determination of COO for a particular system. As used in this document, COO refers to the Company's method of calculating COO as described in this paragraph. THE MATTSON SOLUTION - MODULAR CONTINUOUS PROCESSING The Company believes its Aspen system provides higher productivity than conventional single wafer systems and cluster tools. The Aspen system's modular continuous processing architecture achieves this with high throughput, savings of cleanroom floorspace and improvements in process control as compared to conventional single wafer processing. The Aspen system achieves higher throughput, savings in cleanroom floorspace and enhanced process control by: SIMULTANEOUS PROCESSING. The Company's Aspen systems process up to two wafers concurrently in its RTP systems, up to four wafers concurrently (two in each chamber) in its Strip and LiteEtch systems, and up to eight wafers concurrently (four in each chamber) in its CVD systems. 3 CONTINUOUS PROCESSING. The Company's Aspen system substantially reduces overhead time (the time during which the system is not actually processing wafers). The Aspen system robotics can handle four wafers simultaneously, reducing the overhead time during removal and insertion of the wafers into the process chambers. Through the use of an inner loadlock, the Aspen system eliminates the overhead time required to pump down the process chambers to a vacuum and backfill the chambers to atmospheric pressure after processing. An outer loadlock permits an operator to replace a cassette of processed wafers with a new cassette while the system continues to process wafers in the inner loadlock. As a result of these factors, the Aspen Strip generally requires less than 12 seconds of overhead time per wafer which the Company believes is a substantial improvement over present competitive systems. MODULARITY. The Company's Aspen platform allows the use of one or two process chambers, supporting various applications or increased capacity in any one application. This modularity enables the Company to develop new systems by adding a different process chamber to the platform. When a second chamber is added, the COO is reduced. The commonality of parts, manufacturing techniques, training, and documentation for the Aspen platform offers operating advantages to the Company and its customers. FLOORSPACE SAVINGS. As a result of higher throughput and modularity, customers require fewer systems and can achieve a substantial savings in cleanroom floorspace. ENHANCED PROCESS CONTROL. The Aspen system's dedicated single wafer processing stations achieve the within-wafer process control benefits of conventional single wafer systems. In addition, dual loadlocks allow the process chambers to maintain constant pressure and temperature which improves upon the wafer-to-wafer repeatability of conventional single wafer systems. The higher throughput of the Aspen system permits the use of slower, more consistent and less damaging process technologies than are economically feasible in conventional single wafer systems. STRATEGY The Company's objective is to become a leading supplier of advanced processing equipment to the worldwide semiconductor industry. The Company intends to achieve this objective by providing advanced process capability combined with a substantial improvement in productivity over competitive equipment, and by supplying world class support. Specific elements of the Company's strategy include: IMPROVED PROCESS TECHNOLOGY. The Company seeks to enter segments of the semiconductor equipment industry when traditional technologies are unable to satisfy emerging process requirements. For example, submicron etching results in residues that have required multiple acid processing steps for removal by traditional stripping systems. The Aspen Strip's plasma processes are capable of removing many of these residues without the need for the acid steps. HIGHER PRODUCTIVITY. The Company's goal is to offer systems which have substantial improvements in productivity over the leading competitive equipment in each market it enters. The Company believes that its Aspen Strip, LiteEtch, CVD and RTP systems achieve this goal. In particular, the Company believes that its systems achieve improvements in throughput, which it considers an important factor in COO and productivity. The Company plans to use the same strategy to leverage the high productivity platform for 300mm production throughout its product lines, in a manner similar to the way it introduced its 200mm (8") product lines. REDUCED TIME TO MARKET. The Company's Aspen platform includes wafer handling robotics, dual loadlocks, control electronics and system software. By basing new systems on this platform, the Company is able to focus its development activities almost exclusively on the process chamber. By basing new products on the standard Aspen platform and the new 300mm Aspen 3 platform, the Company believes it is able to develop new products quickly and at relatively low cost. COMMITMENT TO GLOBAL MARKET. From inception, the Company's strategy has been to sell its systems to leading semiconductor manufacturers throughout the world. The Company introduced its systems into Japan through Marubeni, which has substantial experience in plasma equipment and CVD. The Company has opened service and support offices in Taiwan, Korea and Germany and a research, development and engineering, and marketing office in Japan. International sales as a percentage of its total net sales for 1997, 1996, and 1995 were 65%, 76%, and 67%, respectively. 4 PRODUCTS To date, the Company has introduced four systems which are based upon the Aspen platform: the Aspen Strip for photoresist stripping, the Aspen CVD for chemical vapor deposition, the Aspen RTP for rapid thermal processing and the Aspen LiteEtch for isotropic etching. THE ASPEN STRIP PHOTORESIST STRIPPING MARKET. A stripping system removes photoresist etch residues before further film deposition or diffusion processing. Traditional strip systems use wet and dry chemistry technology. In traditional wet chemistry strip systems, the photoresist is removed by immersing the wafer into acid or solvent baths. Dry chemistry strip systems, such as the Company's Aspen ICP Strip, create gaseous atomic oxygen that is exposed to the wafer to remove the photoresist. The demand for photoresist strip equipment has increased as the complexity and number of strip steps required for each wafer have increased. Complex ICs require a greater number of layers and a corresponding greater number of stripping steps with greater than 20 steps required for 64 Megabit DRAMs. The increase in the number of strip steps in the semiconductor manufacturing process has led to a need for semiconductor manufacturers to increase their photoresist strip capacity. The increased complexity of the strip process has also led to higher average selling prices of such equipment. According to Dataquest figures published in February 1998, the market was estimated at $354 million for 1997, and projected to reach $700 million by the year 2000. EMERGING TECHNICAL REQUIREMENTS. Fabrication of complex ICs with feature sizes under 0.25 microns requires new strip technologies that have greater sensitivity to residues, contamination drive-in and underlying film selectivities. With each shift in feature size, the Company estimates that manufacturers typically require a 2X reduction in the level of allowable contamination drive-in. In addition to providing "gentler" non-damaging plasma, the strip system must also meet the increasing demands of removing photoresist and sidewall polymers from higher energy etch processes that require increased sidewall polymerization and resist cross-linking to meet stringent profile control. MATTSON'S STRIP TECHNOLOGY. To meet this demand, the Company markets worldwide three separate and distinct plasma strip source products, each designed for different design regimes. The most recent product offering uses a patented, inductively coupled plasma (ICP) technology to gently and thoroughly remove photoresist and residue from the wafer. This remote (downstream) plasma source generates a gentle, low energy plasma that achieves advanced "all dry" stripping with zero damage and low contamination drive-in results without additional post-strip chemical processing. The ICP technology is specifically designed for advanced semiconductor device manufacturing submicron processes 0.25 microns and below. When combined with the standard Aspen platform, the Company believes that the Aspen ICP Strip system provides significant cost of ownership advantages. THE ASPEN STRIP. The Aspen Strip consists of the standard Aspen platform together with one or two processing chambers. Each chamber processes two wafers at a time. System throughput varies with the resist thickness and is approximately 60-120 wafers per hour with one chamber and 110-160 wafers per hour with two chambers for most applications. The Company believes the two chamber Aspen Strip offers a substantial reduction in COO relative to conventional single wafer systems. In particular, the Company believes that its systems achieve substantial improvements in throughput which result in a substantial reduction in COO and that its systems allow customers to reduce wet chemical steps, which makes it possible for the customer to achieve an even greater reduction in COO by decreasing the number of systems needed. To meet the increasingly stringent requirements of advanced strip processing, in 1997 the Company introduced the Aspen ICP-SM- Strip system, which features a selectable plasma mode source. The Company is also extending the ICP source into the emerging 300mm market by pairing it with the Aspen 3 platform for 300mm manufacturing. 5 THE ASPEN CVD CVD MARKET. CVD processes are used to deposit insulating (dielectric) and conducting films on wafers. These films are the basic material used to form the resistors, capacitors, and transistors of an integrated circuit. These materials are also used to form the wiring and insulation between these electrical components. The deposition of dielectric films has become a higher priority due to the increasing number of metalization layers required and the difficulty of insulating and interconnecting them. The Company's Aspen CVD system deposits silane-based films, such as silicon dioxide (oxide) films, for interlayer and intermetal dielectric applications, and silicon nitride (nitride) films, for final passivation applications. The Aspen CVD also deposits TEOS and fluorinated TEOS. EMERGING TECHNICAL REQUIREMENTS. As feature sizes continue to decrease, CVD process equipment must meet more stringent requirements. Particles or defect densities must be minimized and controlled to achieve the desired yields. Film properties such as stress, stoichiometry and conformality must also be improved and more tightly controlled. Semiconductor manufacturers also place importance on compatibility with metalization steps, such as aluminum deposition. Finally, as process complexity increases, the number of CVD steps increases and throughput and system productivity become significantly more important. MATTSON'S CVD TECHNOLOGY. Plasma enhanced CVD allows the system to process wafers at a relatively low temperature, reducing the risk of damage to aluminum metalization layers during processing. Suppression of hillock formation in aluminum interconnects is accomplished by limiting the time at higher temperatures prior to deposition to 8-10 seconds. Film stress and density can be controlled independent of process chemistry by the use of a low frequency RF bias. Dual loadlocks isolate the process chamber from pressure and temperature fluctuations, thereby reducing particulates and improving film quality and repeatability. Continuous processing improves thickness uniformity and film quality by randomizing small variations in deposition from one station to the next. High throughput resulting from continuous processing permits the use of slower, more consistent and less damaging process technologies than are economically feasible in conventional single wafer systems. Defect density is also improved through the use of an IN SITU plasma cleaning process that automatically cleans the process chamber after every batch of wafers. THE ASPEN CVD. The Aspen CVD system, like the Aspen Strip, is based on the standard Aspen platform. The system can be configured with one or two process chambers and each chamber can process four wafers at a time. The second chamber can be used to increase throughput with a minimal increase in footprint. The automatic cleaning cycle and simple system design reduces production downtime and increases overall system availability. The Company believes that the Aspen CVD system offers a significant improvement in COO over the leading competitive system. Among the principal factors which the Company believes contribute to such improved COO is the throughput of the Company's system and its lower price as compared to the leading competitive system. THE ASPEN RTP An RTP (Rapid Thermal Processing) system heats semiconductor wafers for implant annealing and formation of films on semiconductor wafer surfaces. Traditional RTP systems that use lamp heating technology operate at high temperature up to 1200DEG. Celsius. Diffusion furnace systems provide furnace annealing in both high and low temperature regimes. Low temperature RTP systems, such as the Company's Aspen RTP system, apply heat to semiconductor wafers to cause a variety of processing and chemical reactions, including: Titanium Silicide and Cobalt Silicide formation; Titanium Nitride barrier formation and anneals; thermal donor annihilation (TDA) and lower temperature reflows and implant anneals, typically 600-900DEG. Celsius. As device geometries and thermal budgets shrink, Rapid Thermal Processing (RTP) is emerging as a key semiconductor processing technology. As the number of layers on semiconductor wafers have increased, the demand for RTP machines dedicated to specific applications in the fab has increased. RTP technology must be able to meet ever more stringent requirements for processing on semiconductor wafers. Issues concerning uniformity and repeatability affect the integrity of the IC. IC makers also place importance on the amount of time a semiconductor wafer is exposed to heat to achieve a certain process and the level of wafer throughput achieved by the system. The Aspen RTP system is based on the Aspen platform and the principle of modular continuous processing, handling up to 110 wafers per hour for selected processes. The simple design of the process chamber has no moving parts and no consumables, which contributes to its low preventative maintenance requirements. The Company believes that its single chamber Aspen RTP offers a substantial reduction in COO relative to conventional RTP systems. 6 THE ASPEN LITEETCH ISOTROPIC ETCH MARKET. An isotropic etch system performs a variety of blanket or geometry etch processes on semiconductor wafers, processes which can be used in as many as 10 steps in a typical 0.25 micron logic fab on 200 millimeter wafers. At this time, these processes include, but are not restricted to: silicon soft etch (post-RIE contact cleanup); highly selective nitride stripping for LOCOS or STI; backside nitride stripping; self-aligned-contact (SAC) nitride stripping; isotropic contact and via etch; and passivation etch. Historically, both dry and wet chemistries have been used for isotropic etch manufacturing processes. In some cases, more expensive anisotropic etchers with low throughput have been used for isotropic etch applications, which has greatly increased the cost of these non-critical manufacturing applications. Wet benches require a large amount of cleanroom floorspace plus special handling and disposal of chemicals, which increases associated costs and environmental concerns. For isotropic etch applications, the Company believes that Aspen LiteEtch offers the benefits of dry etch tools, including lower cost of ownership than wet benches, floorspace savings and ease of use. The Company's Aspen LiteEtch system is an isotropic etching system that uses dry chemistry to create atomic etchant species in a gaseous form (plasma), which is exposed to the wafer to remove various films for a variety of applications that do not require a high-end anisotropic etcher. EMERGING TECHNICAL REQUIREMENTS. With ever-shrinking subgeometries, processes used to remove films from wafers must be ever more selective to prevent damage to the films in the underlying layers. This process capability and control is necessary to achieve the high etch rates required and to provide the uniformity and selectivity necessary for thin film etching. The ability to use additional chemistries is often required to control etch rates, provide added selectivity to underlying films, and to eliminate certain residues created during advanced etch processing. MATTSON'S ISOTROPIC ETCH TECHNOLOGY. The Company's first isotropic etch product, the Aspen LiteEtch, uses a patented, inductively coupled plasma (ICP) source-the same source used in its Aspen Strip product. This downstream ICP source uses a high pressure plasma process to produce a low energy plasma that achieves high etch rates while minimizing electrically charged particles that can damage sensitive semiconductor devices. By combining ICP technology designed for advanced device manufacturing with the high throughput of the Aspen platform, the Company believes that it provides significant cost of ownership advantages over comparable equipment. THE ASPEN LITEETCH. The Aspen LiteEtch system is comprised of the standard Aspen platform together with one or two process chambers. A specially designed ceramic tube allows for the use of additional chemistries without added contamination. Each chamber processes two wafers at a time, while retaining single wafer process control. For most applications, system throughput typically varies with the process from 40 to 80 wafers per hour for a single chamber system and from 70 to 110 wafers per hour for a dual chamber system. The Company believes the dual chamber Aspen LiteEtch offers a substantial reduction in cost of ownership relative to anisotropic etch and wet bench systems. In particular, the Company believes that Aspen LiteEtch systems achieve improvements in throughput which result in a substantial reduction in COO; and that its systems allow customers to further reduce COO by eliminating environmental concerns and costs associated with the use of acids; and by freeing anisotropic etchers for high end processing applications. CUSTOMERS The Company sells its products to leading IC manufacturers located in the United States, Japan, the rest of the Pacific Rim and Europe. One end user customer, TSMC, accounted for 11% of sales in 1997. There were no individually significant customers in 1996. During 1995, sales to Toshiba Corporation (through Marubeni Hytech Corporation) and Micron Technology accounted for 16% and 15%, respectively, of total net sales during that period. While the Company actively pursues new customers, there can be no assurance that the Company will be successful in its efforts, and any significant weakening in customer demand would have a material adverse effect on the Company. 7 MARKETING AND SALES The Company sells its systems through a combination of a direct sales force, its Japanese distributor and a manufacturers' sales representative. In addition to the direct sales force at the Company's headquarters in Fremont, California, the Company has domestic regional sales offices located in New Jersey, Arizona, Oregon and Texas. The Company also maintains regional direct sales and support offices in Taiwan, Korea, and Germany, and an office in Japan to provide research, development and engineering, and marketing support for customers in Japan and certain other Asian markets. The Company is continuing to invest resources to increase the size of its direct sales force. The Company believes that strong sales in the Japanese market will be essential to its future financial performance. As part of its strategy for penetrating the Japanese market, the Company established a distributor relationship with Marubeni in December 1990 and is substantially dependent upon its relationship with Marubeni to address the Japanese market. The Company formed a subsidiary in Japan in October, 1995, in which Marubeni has a minority interest, in order to provide research, development and engineering, and marketing support for customers in Japan and certain other Asian markets. Although management believes that it maintains a good relationship with Marubeni, there can be no assurance that the relationship will continue. In the event of a termination of the Company's distribution agreement with Marubeni, the Company's strategy to increase its sales in Japan would be adversely affected and the Company would be obligated to repurchase up to $1.0 million of inventory related to the Company's sales to Marubeni. Although the Company intends to continue to invest significant resources in Japan, including the hiring of additional personnel to support Marubeni's efforts, there can be no assurance that the Company will be able to maintain or increase its sales to the Japanese semiconductor industry. The Company also has personnel located in service and customer support offices in Korea, Taiwan and Germany. In Singapore, the Company utilizes a third party manufacturers' sales representative. The Company's arrangements with its customers are generally on a purchase order basis and not pursuant to long term contracts. International sales accounted for 65%, 76%, and 67% of total net sales in 1997, 1996 and 1995, respectively. The Company anticipates that international sales will continue to account for a significant portion of net sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, exchange rates, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collections, extended payment terms, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Without limiting the generality of the foregoing, because of the Company's dependence upon international sales in general, and on sales to Japan and Pacific Rim countries in particular, the Company is particularly at risk to effects from developments such as the recent Asian economic problems. The Company's foreign sales are also subject to certain governmental restrictions, including the Export Administration Act and the regulations promulgated thereunder. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER SUPPORT The Company believes its customer support organization is critical to establish the long-term customer relationships which often are the basis upon which semiconductor manufacturers select their equipment vendor. The Company's customer support organization is headquartered in Fremont, California, with additional employees located in Arizona, Idaho, Maryland, Massachusetts, Texas, Oregon, Virginia, Germany, Korea, Taiwan, and the United Kingdom. The Company's strategy is to use local support personnel in regions where multiple systems are in place. Marubeni provides service to the Company's customers located in Japan. The Company's support personnel have technical backgrounds, with process, mechanical, and electronics training, and are supported by the Company's engineering and applications personnel. Support personnel install systems, perform warranty and out-of-warranty service, and provide sales support. Warranty periods for Mattson systems range from 12 to 36 months after shipment or acceptance, depending upon the purchase agreement. 8 BACKLOG The Company schedules production of its systems based on both backlog and regular sales forecasts. The Company includes in its backlog only those systems for which the Company has accepted purchase orders and assigned shipment dates within the next 12 months. All orders are subject to cancellation or delay by the customer with limited or no penalty. As of December 31, 1997, the backlog was approximately $41.5 million. Because of possible changes in delivery schedules and cancellations of orders, the Company's backlog at any particular date is not necessarily representative of actual sales for any succeeding period. In particular, during periods of industry downturns such as the current period, the Company has experienced significant delays and cancellations relating to orders which were previously booked and included in backlog. RESEARCH, DEVELOPMENT AND ENGINEERING The Company's research, development and engineering efforts are focused upon its multi-product strategy. In addition, during recent periods the Company has devoted a significant amount of resources to the development of new products for the 300mm market. The Company maintains an applications laboratory in Fremont to test new systems and customer-specific equipment designs. By basing products on the Aspen platform, the Company believes that it is able to focus its development activities on the process chamber and to develop new products quickly and at relatively low cost. For example, the Company believes it was able to reduce new product development time on its CVD, RTP and LiteEtch products. The Company also hopes to leverage the high productivity platform for 300mm production throughout its product lines, in a manner similar to the way it introduced its 200mm (8") product lines. The markets in which the Company and its customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, the Company believes that its future success will depend, in part, upon its ability to continue to improve its existing systems, process technologies, and to develop systems and new technologies which compete effectively on the basis of COO and performance. In addition, the Company must adapt its systems and processes to technological changes and to support emerging industry standards for target markets. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs and market acceptance. There can be no assurance that the Company will be able to improve its existing systems and process technologies or to develop new technologies or systems. The Company's research, development and engineering expenses for the years 1997, 1996, and 1995, were $14.7 million, $11.5 million, and $6.3 million, respectively, representing 19%, 16% and 11% of net sales, respectively. There can be no assurance that the Company's research, development and engineering efforts will result in the successful development of new products. COMPETITION The market for the Company's systems is highly competitive and is subject to rapid technological change. Significant competitive factors include system performance, COO, size of installed base, breadth of product line and customer support. The Company believes that it competes in its chosen markets primarily on the basis of system performance, COO and customer support. The Company believes it can also compete on the basis of price due to the design of its systems. The Company faces substantial competition in its chosen market segments from both established competitors and potential new entrants. Most of the Company's competitors (particularly for CVD systems) have broader product lines, have been in business longer, have more experience with high volume manufacturing, have broader name recognition, have substantially larger customer bases and have substantially greater financial, technical and marketing resources than the Company. There can be no assurance that these competitors will not also develop enhancements to or future generations of competitive products that will offer price or performance features that are superior to the Company's systems. In the United States and European plasma photoresist strip markets, the Company competes primarily with GaSonics, Matrix and Eaton (formerly Fusion). In Japan, the Company competes primarily with Canon, Plasma Systems Corporation, McElectronics (formerly Ramco), Tokyo Ohka and various Japanese vendors who have already established relationships with Japanese IC manufacturers. Competitors for its LiteEtch systems include Lam Research, GaSonics, Matrix, Tegal and Shibauru. In the CVD market, the Company competes primarily with Applied Materials, Novellus, ASM and Watkins-Johnson. In the RTP market the Company competes with AG Associates and Applied Materials. In the isotropic etch market the Company competes with Lam Research, GaSonics, Matrix, Tegal, and Shibaura. 9 MANUFACTURING The Company's manufacturing operations are based in its Fremont facility and consist of procurement, subassembly, final assembly, test and reliability engineering. The Company's current systems are based on the Aspen platform, enabling the Company to use a large number of common subassemblies and components. Many of the major assemblies are procured complete from outside sources. The Company focuses its internal manufacturing efforts on those precision mechanical and electro-mechanical assemblies which differentiate its systems from its competitors. The Company is implementing a quality control program based on ISO-9001 and Sematech-generated measurement and improvement methodologies. Certain of the Company's components are obtained from a sole supplier or a limited group of suppliers. The Company generally acquires such components on a purchase order basis and not under any long term supply contracts. The Company's reliance on outside vendors generally, and a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely complex process and can require long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur. Historically the Company has not experienced any significant delays in manufacturing due to an inability to obtain components and is not currently aware of any specific problems regarding the availability of components which might significantly delay the manufacturing of its systems in the future. However, any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could delay the Company's ability to ship its systems and could have a material adverse effect on the Company. See "Business--Factors That May Affect Future Results and Market Price of Stock." The Company is subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its sales demonstrations and research and development. Public attention has increasingly been focused on the environmental impact of operations which use hazardous materials. Failure to comply with present or future regulations could result in substantial liability to the Company, suspension or cessation of the Company's operations, restrictions on the Company's ability to expand at its present locations or requirements for the acquisition of significant equipment or other significant expense. To date, compliance with environmental rules and regulations has not had a material effect on the Company's operations. INTELLECTUAL PROPERTY The Company relies on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. There can be no assurance that the Company's competitors will not be able to legitimately ascertain the non-patented proprietary information embedded in the Company's systems, in which case the Company may be precluded from preventing the use of such information. To the extent the Company wishes to assert its patent rights, there can be no assurance that any claims of the Company's patents will be sufficiently broad to protect the Company's technology or that the Company's pending patent application will be approved. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, that any rights granted thereunder will provide adequate protection to the Company, or that the Company will have sufficient resources to prosecute its rights. Although there are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any unresolved notices that the Company is infringing intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. There also can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms. The Company's involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on the Company's business. Adverse determinations in any litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its products. Any of these situations could have a material adverse effect on the Company. 10 FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK In this Annual Report on Form 10-K and from time to time, the Company may make forward looking statements regarding, among other matters, the Company's future strategy, product development plans, productivity gains of its products, financial performance and growth. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements address matters which are subject to a number of risks and uncertainties, including the following: QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company derives most of its net sales from the sale of its photoresist stripping systems which typically have list prices ranging from approximately $375,000 to $750,000. At its current revenue level, each sale, or failure to make a sale, can have a material effect on the Company. The Company's backlog at the beginning of a quarter typically does not include all sales required to achieve the Company's sales objectives for that quarter. Consequently, the Company's net sales and operating results for a quarter depend on the Company shipping orders scheduled to be sold during that quarter and obtaining orders for systems to be shipped in that same quarter. A delay in a shipment near the end of a particular quarter may cause net sales in that quarter to fall significantly below the Company's expectations and may thus materially and adversely affect the Company's operating results for such quarter. Other factors which may lead to fluctuations in the Company's quarterly and annual operating results include: market acceptance of the Company's systems and its customers' products; substantial changes in revenues from significant customers; changes in overhead absorption levels due to changes in the number of systems manufactured; geographic mix of sales; timing of announcement and introduction of new systems by the Company and its competitors; seasonality; changes in product mix; delays in orders due to customer financial difficulties; and cyclicality in the semiconductor industry and the markets served by the Company's customers. In particular, the uncertainties regarding market conditions and customer order changes and cancellations arising from the recent market slowdown raise significant risks regarding fluctuating quarterly results. As the Company continues to invest in accordance with its long-term strategy, fluctuating revenue levels will produce fluctuating results. Similarly, due to unpredictable order patterns, the Company's manufacturing efficiency can vary significantly from quarter to quarter which can adversely affect gross margins and net operating results. The amount of time from the initial contact with the customer to the first order is typically nine to twelve months or longer and may involve competing capital budget considerations for the customer, thus making the timing of customer orders uneven and difficult to predict. Any delay or failure to receive anticipated orders, or any deferrals or cancellations of existing orders, could adversely affect the Company's financial performance. In addition, continued investments in research, development and engineering, and the development of a worldwide sales and marketing organization will result in significantly higher fixed costs which the Company will not be able to reduce rapidly if its net sales goals for a particular period are not met. The impact of these and other factors on the Company's operating results in any future period cannot be forecasted accurately. The Company has recently announced that it expects revenues for the First Quarter of fiscal 1998 will be in the range of $20 to $23 million, with a loss in the range of $.08 to $.12 per share. For the Second Quarter of 1998, the Company currently expects that its revenues will be significantly lower than its current forecast for the first quarter. As a result, the Company currently expects to report a significantly higher net loss for the second quarter. Such estimates are preliminary and are subject to change. In particular, there can be no assurance that as a result of such announcement, the continuing industry downturn or other developments, that the Company's results for such periods or the periods thereafter will not be worse than currently expected. MARKET ACCEPTANCE OF SYSTEMS. Given that the Company's systems represent alternatives to conventional strip, isotropic etch, CVD and RTP equipment currently marketed by competitors, the Company believes that its growth prospects depend in large part upon its ability to gain acceptance by a broader group of customers of the efficacy of the Company's systems and technology. To date, only the Company's strip products have gained widespread market acceptance. Because a substantial investment is required by semiconductor manufacturers to install and integrate capital equipment into a semiconductor production line, these manufacturers will tend to choose semiconductor equipment manufacturers based on past relationships, product compatibility and proven financial performance. Once a semiconductor manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Given these factors, there can be no assurance that the Company will be successful in obtaining broader acceptance of its systems and technology. The transition of the market to 300mm wafers will present both an opportunity and a risk to the Company. To the extent that the Company is unable to introduce 300mm systems on a timely basis and which meet customer requirements, the Company's business, results of operations and financial condition could be materially and adversely affected. 11 DEPENDENCE ON SIGNIFICANT CUSTOMER. The Company sells its products to leading IC manufacturers located in the United States, Japan, the rest of the Pacific Rim and Europe. One end user customer, TSMC, accounted for 11% of sales in 1997. There were no individually significant customers in 1996. During 1995, sales to Toshiba Corporation (through Marubeni Hytech Corporation) and Micron Technology accounted for 16% and 15%, respectively, of total net sales during that period. While the Company actively pursues new customers, there can be no assurance that the Company will be successful in its efforts, and any significant weakening in customer demand would have a material adverse effect on the Company. DEPENDENCE ON JAPANESE DISTRIBUTOR AND ASIAN MARKET. The Company believes that strong sales in the Japanese market will be essential to its future financial performance. As part of its strategy for penetrating the Japanese market, the Company established a distributor relationship with Marubeni and is substantially dependent upon Marubeni to address the Japanese market. Approximately 13% of the Company's net sales for the year ended December 31, 1997 were sold through Marubeni to customers in Japan. Although management believes that it maintains a good relationship with Marubeni, there can be no assurance that the relationship will continue. In the event of a termination of the Company's distribution agreement with Marubeni, the Company's strategy to increase its sales in Japan would be adversely affected and the Company would have the obligation to repurchase up to $1 million of inventory related to the Company's sales to Marubeni. Although the Company intends to continue to invest significant resources in Japan, including the hiring of additional personnel to support Marubeni's efforts, there can be no assurance that the Company will be able to maintain or increase its sales to the Japanese semiconductor industry. The Company is also substantially dependent upon sales to Pacific Rim countries generally. During the fiscal year ended December 31, 1997, approximately 60% of the Company's net sales were to customers based in the Pacific Rim. As such, the Company is particularly at risk with respect to effects from developments such as the recent Asian economic problems. LENGTHY SALES CYCLE. Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to expand current manufacturing capacity, both of which typically involve a significant capital commitment. Once a semiconductor manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, the Company's ability to receive orders from potential customers may depend upon such customers undertaking an evaluation for new equipment. For many potential customers, such an evaluation may occur infrequently. Following initial system qualification, the Company often experiences further delays in finalizing system sales while the customer evaluates and receives approvals for the purchase of the Company's systems and completes a new or expanded facility. The Company believes it must significantly increase its inventory investment in evaluation systems because they are used by many customers in their evaluation processes. Due to these factors, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort. There can be no assurance that any of the Company's efforts will be successful. CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY. The Company's business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which in turn depend upon the current and anticipated market demand for such devices and the products utilizing such devices. The semiconductor industry is highly cyclical and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the systems manufactured and marketed by the Company. The Company saw sales growth in the first two quarters of 1996 followed by a sales downturn in the last two quarters of 1996 and the first quarter of 1997. Sales in the second through fourth quarters of 1997 showed continuous positive growth. The Company expects sales in the first, second and third quarters of 1998 to be significantly lower than in the last two quarters of 1997. The Company anticipates that a significant portion of new orders will depend upon demand from semiconductor manufacturers building or expanding large fabrication facilities, and there can be no assurance that such demand will exist. The Company's net sales and operating results will be materially and adversely affected by any downturns or slowdowns in the semiconductor market in the future. 12 HIGHLY COMPETITIVE INDUSTRY. The market for the Company's systems is highly competitive and is subject to rapid technological change. Significant competitive factors include system performance, cost of ownership, size of installed base, breadth of product line and customer support. Principal competitors for the Company's Aspen Strip systems include GaSonics, Eaton (formerly Fusion) and Matrix in the United States and Canon, Plasma Systems Corporation, McElectronics (formerly Ramco), Tokyo Ohka and various Japanese vendors who have already established relationships with Japanese IC manufacturers. Competitors for its Aspen LiteEtch systems include Lam Research, GaSonics, Matrix, Tegal and Shibaura. Competitors for its Aspen CVD systems include Applied Materials, Novellus, ASM and Watkins-Johnson and competitors for its Aspen RTP system include AG Associates and Applied Materials. Most of the Company's competitors (particularly for CVD systems) have broader product lines, have been in business longer, have more experience with high volume manufacturing, have broader name recognition, have substantially larger customer bases, and have substantially greater financial, technical and marketing resources than the Company. In addition, to expand its sales, the Company must often replace competitors' systems. There can be no assurance that the Company's competitors will not develop enhancements to or future generations of competitive products that will offer price/performance features that are superior to the Company's systems. DEPENDENCE ON SINGLE SYSTEM. To date, most of the Company's sales of systems have been Aspen Strip systems. The Company's continued sales growth will depend upon achieving market acceptance of its Aspen CVD, Aspen RTP and Aspen LiteEtch systems and future products. ACQUISITIONS. The Company, as part of its business strategy, subject to certain regulatory approvals and other conditions, may make acquisitions of, or significant investments in, businesses that offer complementary products, services and technologies. Any acquisitions or investments will be accompanied by the risks commonly encountered in acquisitions of businesses. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired businesses, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company or acquired or invested products, services, and technologies, the maintenance of uniform standards, controls and procedures and policies and the impairment of relationships with employees and customers as a result of any integration. These factors could have a material adverse effect on the Company's business, results of operations or financial condition. Consideration paid for future acquisitions, if any, could be in the form of cash, stock, rights to purchase stock or a combination thereof. Dilution to existing stockholders and to earnings per share may result to the extent that shares of stock or other rights to purchase stock are issued in connection with any such future acquisitions. RAPID TECHNOLOGICAL CHANGE - NEW SYSTEMS. The markets in which the Company and its customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, the Company believes that its future success will depend, in part, upon its ability to continue to improve its systems and its process technologies and to develop new technologies and systems which compete effectively on the basis of price and performance and which adequately address customer requirements. In addition, the Company must adapt its systems and processes to technological changes and to support emerging target market industry standards. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs and market acceptance. There can be no assurance that the Company will be able to improve its existing systems and its process technologies or develop new technologies or systems in a timely manner. In particular, the transition of the market to 300mm wafers will present both an opportunity and a risk to the Company. To the extent that the Company is unable to introduce 300mm systems on a timely basis and which meet customer requirements, the Company's business, results of operations and financial condition could be materially and adversely affected. SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies to a substantial extent on outside vendors to manufacture many of the Aspen systems' components and subassemblies. Certain of these are obtained from a sole supplier or a limited group of suppliers. The Company's reliance on outside vendors generally, and a sole or a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely complex process and requires long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could delay the Company's ability to ship its systems and could have a material adverse effect on the Company. 13 DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a large extent upon the efforts and abilities of Brad Mattson, Chairman and Chief Executive Officer, and other key managerial and technical employees. The loss of Mr. Mattson or other key employees could have a material adverse effect on the Company. The Company has not entered into written employment agreements with its executive officers. The success of the Company's business will also depend upon its ability to continue to attract and retain qualified employees, particularly those highly skilled design and process engineers involved in the manufacture of existing systems and the development of new systems and processes. The competition for such personnel is intense. INTERNATIONAL SALES. International sales accounted for 65%, 76%, and 67% of total net sales in 1997, 1996 and 1995, respectively. The Company anticipates that international sales will continue to account for a significant portion of net sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, exchange rates, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collections, extended payment terms, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Without limiting the generality of the foregoing, because of the Company's dependence upon international sales in general, and on sales to Japan and Pacific Rim countries in particular, the Company is particularly at risk to effects from developments such as the recent Asian economic problems. The Company's international sales are also subject to certain governmental restrictions, including the Export Administration Act and the regulations promulgated thereunder. The Company's sales to date have been denominated in U.S. dollars and as a result, there have been no losses related to currency fluctuations on sales. There can be no assurance that any of these factors will not have a material adverse effect on the Company. INTELLECTUAL PROPERTY RIGHTS. The Company relies on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. The Company believes that patents are of less significance in this industry than such factors as innovative skills, technical expertise and know-how of its personnel. There can be no assurance that the Company's competitors will not be able to legitimately ascertain the non-patented proprietary information embedded in the Company's systems, in which case the Company may be precluded from preventing the use of such information. To the extent the Company wishes to assert its patent rights, there can be no assurance that any claims of the Company's patents will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, that any rights granted thereunder will provide adequate protection to the Company, or that the Company will have sufficient resources to prosecute its rights. Although there are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any unresolved notices that the Company is infringing intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. There also can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms. The Company's involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on the Company. Adverse determinations in any litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its systems. Any of these situations could have a material adverse effect on the Company. ENVIRONMENTAL REGULATIONS. The Company is subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during sales demonstrations and research and development. Public attention has increasingly been focused on the environmental impact of operations which use hazardous materials. To the best of the Company's knowledge, it is in compliance with all federal, state and local environmental regulations. However, failure to comply with present or future regulations could result in substantial liability to the Company, suspension or cessation of the Company's operations, restrictions on the Company's ability to expand at its present locations or requirements for the acquisition of significant equipment or other significant expense. 14 VOLATILITY OF STOCK PRICE. In the past, the market price of the Common Stock of the Company has been subject to significant volatility and has declined substantially from its highs. There can be no assurance that the market price of the Common Stock of the Company will not decline in the future. The Company believes that a variety of factors could cause the price of the Company's Common Stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; fluctuations in the Company's operating results and order levels; general conditions in the semiconductor industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; developments in patents or other intellectual property rights; and developments in the Company's relationships with its customers, distributors and suppliers. In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely effect the market price of the Company's Common Stock. EMPLOYEES As of February 27, 1998 the Company had 372 employees. There were 88 employees in manufacturing operations, 100 in research, development and engineering, 148 in sales, marketing and field service and customer support, and 36 in general, administrative and finance. The success of the Company's future operations depends in large part on the Company's ability to recruit and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing systems and the development of new systems and processes. The competition for such personnel is intense. There can be no assurances that the Company will be successful in retaining or recruiting key personnel. None of the Company's employees is represented by a labor union and the Company has never experienced a work stoppage, slowdown, or strike. The Company considers its relationships with its employees to be good. ITEM 2. PROPERTIES The Company maintains its headquarters in Fremont, California. During the year ended December 31, 1997 the Company increased its facilities square footage by leasing additional office space. The Company's leased 61,000 square foot facility has been supplemented with an additional 30,000 square feet of space located near the head office. The leases for these facilities expire in February and August 1999, respectively. The Company's future growth may require that it secure additional facilities or expand its current facility further before the term of its headquarters' lease expires. Any move to new facilities or expansion could be disruptive and could have a material adverse effect on the operations and financial performance of the Company. The Company also leases sales offices in Yokohama, Japan; Seoul, Korea; Hsinchu, Taiwan; and Oberwossen, Germany with expiration dates from February 1998 to August, 2000. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or to which any of its properties is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERS STOCK LISTING Mattson Technology's common stock has been traded on the over-the-counter market since the Company's Initial Public Offering on September 28, 1994, and is quoted on the NASDAQ Stock Market under the symbol "MTSN". The following table sets forth the high and low closing prices as reported by the Nasdaq National Market for the periods indicated.
1997 HIGH LOW - ----------------------------------------------------------------------- FIRST 11 5/8 9 3/8 SECOND 10 3/4 7 7/16 THIRD 16 10 11/16 FOURTH 14 7/8 7 1996 - ----------------------------------------------------------------------- FIRST 16 1/2 9 SECOND 16 1/4 10 5/8 THIRD 12 1/4 7 3/4 FOURTH 11 1/4 8 3/8
The Company has never paid cash dividends on its common stock and has no present plans to do so. As of February 27, 1998, there were approximately 176 shareholders of record. 16 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA - ------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIVE-YEAR SUMMARY
December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA: Net sales(1) $ 76,730 $ 73,260 $ 55,342 $ 19,551 $ 3,479 Net income (loss) 1,431 6,465 10,492 3,018 (831) Net income (loss) per share (2): Basic $ 0.10 $ 0.46 $ 0.80 $ 0.34 $ (0.12) Diluted $ 0.09 $ 0.42 $ 0.71 $ 0.29 $ (0.12) BALANCE SHEET DATA: Total assets $ 84,443 $ 84,489 $ 74,089 $ 32,479 $ 2,906 Manditorily Redeemable Convertible Preferred Stock - - - - 7,340 Total stockholders' equity (deficit) (3) $ 68,184 $ 69,115 $ 61,076 $ 28,292 $ (7,106)
QUARTERLY DATA (unaudited) FIRST SECOND THIRD FOURTH December 31, 1997 QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------ Net sales $ 13,023 $ 16,571 $ 22,633 $ 24,503 Gross profit 6,565 8,306 11,849 12,880 Net income (loss) (568) 55 949 995 Net income (loss) per share (2): Basic $ (0.04) $ 0.00 $ 0.07 $ 0.07 Diluted $ (0.04) $ 0.00 $ 0.06 $ 0.07 FIRST SECOND THIRD FOURTH December 31, 1996 QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------ Net sales $ 22,002 $ 23,244 $ 14,005 $ 14,009 Gross profit 12,820 13,295 6,819 7,095 Net income (loss) 3,538 3,455 (105) (423) Net income (loss) per share (2): Basic $ 0.26 $ 0.25 $ (0.01) $ (0.03) Diluted $ 0.23 $ 0.23 $ (0.01) $ (0.03)
(1) Includes sales through a related party distributor for each yearly period as follows: 1995 - $16,994, 1994 - $8,435, and 1993 - $2,179. See Note 6 of Notes to the Consolidated Financial Statements. (2) As restated upon adoption of Statement of Financial Accounting Standards (SFAS) No. 128. See Note 1 of the Notes to Consolidated Financial Statements. (3) The Company has not paid and does not intend to pay dividends in the foreseeable future. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS OVERVIEW Mattson Technology, Inc. ("Mattson" or the "Company") designs, manufactures and markets advanced fabrication equipment to semiconductor manufacturers worldwide. The Company began operations in 1989 and shipped its first photoresist removal product, the Aspen Strip, in 1991. The Company's current product line is based on a modular Aspen platform which accommodates two process chambers supporting increased throughput. The Company currently offers Aspen Strip, CVD, RTP and LiteEtch products. The Company has derived substantially all of its sales from Aspen Strip systems. In addition, the Company derives sales from CVD, LiteEtch and RTP systems as well as spare parts and maintenance services. The Company experienced sales growth in each quarter throughout 1997. However, the Company has recently announced that the Company expects that its revenues for the First Quarter of fiscal 1998 will be in the range of $20 to $23 million, with a loss in the range of $.08 to $.12 per share. For the Second Quarter of 1998, the Company currently expects that its revenues will be significantly lower than its current forecast for the first quarter. As a result, the Company currently expects to report a significantly higher net loss for the second quarter. Such estimates are preliminary and are subject to change. In particular, there can be no assurance that as a result of such announcement, the continuing industry downturn or other developments, that the Company's results for such periods or the periods thereafter will not be worse than currently expected. There can be no assurance that the Company will be able to regain sales growth or profitability. Future results will depend on a variety of factors, particularly overall market conditions and also timing of significant orders, the ability of the Company to successfully market its CVD, RTP and LiteEtch products as well as to bring new systems to market, the timing of new product releases by the Company's competitors, the Company's ability to successfully and timely introduce systems for the 300mm market, patterns of capital spending by the Company's customers, market acceptance of new and/or enhanced versions of Company systems, changes in pricing by the Company, its competitors, customers, or suppliers and the mix of products sold. In order to support long term growth in its business, the Company has increased its expense levels. As a result, the Company is dependent upon increases in sales in order to maintain profitability. If the Company's sales do not increase, the current levels of operating expenses could materially and adversely affect the financial results of the Company. As a result of the well publicized Asian economic problems, many semiconductor manufacturers have been delaying or canceling previously planned new equipment purchases. The cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to the Company and have a significant adverse impact on the Company's ability to forecast near term revenue expectations. The ability of the Company to modify its operations in response to short term changes in market conditions is limited. The extent and duration of the Asian financial crisis and the short term and ultimate impact on the Company and its results of operations and financial condition cannot be precisely predicted. In response to the impact of the Asian economic problems, the Company has initiated further cost control measures. These include a reduction of full time and temporary employees equivalent to approximately 15% of its total work force. The executive staff has taken a 10% pay cut and the Company has implemented tighter controls over spending. The Company will record charges relating to such actions during the quarter ending March 29, 1998, but the impact of lower cost levels will not be realized until the quarter ending June 28, 1998. The Company formed a subsidiary in Japan in October 1995, Mattson Technology Center K.K. ("MTC"), in which Marubeni, the Company's distributor in Japan, has a 19% interest. The subsidiary was formed in order to provide research, development and engineering, and marketing support for Japan and certain other Asian markets. These activities, to some extent, had previously been provided by Marubeni. The Company also modified its distributor arrangement with Marubeni which increased the selling price of systems sold through them. Marubeni is still primarily responsible for sales and support in Japan. The Company generally recognizes a sale upon shipment of a system. However, from time to time, the Company allows customers to evaluate systems. The Company does not recognize the associated sale until and unless an evaluation system is accepted by the customer. 18 The Company was incorporated in California in November 1988 and completed its initial public offering on October 5, 1994. In September 1997, the Company was reincorporated in the State of Delaware. RESULTS OF OPERATIONS The following table sets forth the statement of operations data of the Company expressed as a percentage of net sales for the years indicated:
1997 1996 1995 - ----------------------------------------------------------------------- Net sales 100% 100% 100% Cost of sales 48% 45% 45% Gross margin 52% 55% 55% Research, development and engineering 19% 16% 11% Selling, general and administrative 32% 29% 21% Income from operations 1% 10% 23% Income before provision for income taxes 3% 13% 26% Net income 2% 9% 19%
NET SALES Net sales for 1997 increased to $76.7 million compared to $73.3 million in 1996 and $55.3 million in 1995. Net sales in 1997 increased 5% as a result of a 3% increase in unit shipments and a 2% increase in average selling prices (ASP's). Net sales in 1996 increased 33% as a result of a 14% increase in unit shipments and a 15% increase in ASP's. Sales to date consist principally of single and dual chamber Aspen Strip and to a lesser extent, CVD and LiteEtch systems, spare parts and service revenue. See "Business--Factors That May Affect Future Results and Market Price of Stock." Higher ASP's have resulted primarily from increasing sales of the newer CVD and LiteEtch systems. International sales, which are predominantly to customers based in Japan and the Pacific Rim (which includes Taiwan, Singapore and Korea), accounted for 65%, 76%, and 67% of total net sales for the years ended December 31, 1997, 1996 and 1995, respectively. All sales are denominated in U.S. dollars. The Company anticipates that international sales will continue to account for a significant portion of sales, primarily due to orders from customers in Japan and the Pacific Rim. The Company's operating results have been, and in the future will likely be, materially and adversely affected by any significant market downturn in Japan or the Pacific Rim such as has recently been experienced as a result of the Asian economic problems. GROSS MARGIN Gross margins for 1997 decreased to 52% compared to 55% in 1996 and 1995. Gross margins declined in 1997 primarily as a result of pricing pressures and manufacturing variances due to the higher inefficiencies associated with the slowdown in the second half of 1996 and the first two quarters of 1997. Gross margins on shipments through Marubeni increased in 1996 as a result of the 1995 agreement, as described above. This increase was offset by manufacturing inefficiencies associated with the slowdown in the second half of 1996. The Company's gross margin will continue to be affected by a variety of factors. In particular, lower economies of scale have adversely affected gross margin over the prior year and may affect gross margin in the future. Lower gross margins will result given the Company's increased manufacturing overhead with lower sales levels expected by the Company for the first two quarters of fiscal 1998 augmented by a higher level of finished goods at December 31, 1997. During 1997, the Company experienced substantial pricing pressure and there can be no assurance that the Company will not continue to experience pricing pressures in the future. The Company's gross margin on international sales, other than sales through Marubeni, is substantially the same as domestic sales. Sales to Marubeni typically carry a lower gross margin as Marubeni is still primarily responsible for sales and support costs in Japan. In addition, the Company has incurred additional research, development and engineering and marketing expenses primarily through the Company's Japanese subsidiary, Mattson Technology Center K.K. ("MTC") 19 The Company's reliance on outside vendors generally, and a sole or a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could delay the Company's ability to ship its systems and could have a material adverse effect on the Company, including an increase in the Company's cost of sales and therefore an adverse impact on gross margin. The continuing uncertainties regarding market conditions and customer order changes also contribute to lower manufacturing efficiency and could result in lower gross margins. In addition, new system introductions and enhancements may also have an adverse effect on gross margin due to the inefficiencies associated with manufacturing new products. RESEARCH, DEVELOPMENT AND ENGINEERING Research, development and engineering expenses for 1997 were $14.7 million, or 19% of sales, compared to $11.5 million, or 16% of sales in 1996 and $6.3 million, or 11% of sales in 1995. The increase in expenses for 1997 was primarily due to salaries and related expenses which increased to $6.1 million from $5.4 million in 1996 and $3.5 million in 1995 and engineering project materials which increased to $3.1 million in 1997 from $2.0 million in 1996 and $1.1 million in 1995. The increase in salaries and related expenses was due to increases in personnel required to support the Company's anticipated long-term future growth, including the support of the Company's multi-product strategy and development of a new platform to support 300mm wafers. The increase in engineering project materials was due to ongoing and new product development. Research, development and engineering expenses also increased in 1996 compared to 1995 due to the Company's establishment of a subsidiary in Japan, as described above. Increases in research, development and engineering expenses as a percentage of revenue in 1996 and 1997 largely resulted from continued investment in new product. The Company believes that continued investment in research and development, including its multi-product strategy and its 300mm development program, is critical to maintaining a strong technological position in the industry. However, there can be no assurance that the Company will be able to improve its existing systems and process technologies or to develop new technologies or systems. See "Business--Factors That May Affect Future Results and Market Price of Stock." SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for 1997 were $24.5 million, or 32% of net sales, compared to $20.9 million, or 29%, in 1996 and $11.4 million, or 21% in 1995. The increase in expenses was primarily due to salaries, commissions and related expenses which increased to $16.7 million from $13.1 million in 1996 and $7.3 million in 1995 and travel and entertainment expenses which increased to $3.0 million from $2.7 million in 1996 and $1.2 million in 1995. The increase in salaries and related expenses was due to increases in personnel required to support the Company's anticipated long-term future growth. The increase in travel and entertainment expenses was primarily due to increases in sales activity and support activity. Buildings and utilities also increased to $2.0 million from $1.2 million in 1996, primarily as a result of an additional 31,000 square feet leased and the increased building lease costs due to the renewal of the lease of the Company's headquarters in Fremont, California. Selling, general and administrative expenses increased in 1996 compared to 1995 due to the Company's establishment of a subsidiary in Japan, as described above, the continued investment in sales and support offices in Taiwan, Korea and Germany and the expansion of the Company's headquarters facilities. See "Business--Factors That May Affect Future Results and Market Price of Stock." TAX PROVISION During 1997, 1996 and 1995 the Company provided taxes at an effective tax rate of 24.0%, 33.0% and 27.9%, respectively. The 1997 and 1996 tax rate is less than the federal statutory rate as a result of benefits derived from the Company's foreign sales corporation and the research and development tax credit, which Congress reinstated effective July 1, 1996. The 1995 tax rate is less than the federal statutory rate as a result of realization of deferred tax assets of $1.4 million previously reserved and tax credits, partially offset by state taxes. IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. 20 The Company has commenced a Year 2000 date conversion project to address necessary changes and an implementation strategy. The "Year 2000 Computer Problem" creates risks for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions. The Company does not anticipate that it will incur material expenditures for the resolution of any Year 2000 issues related either to its own information systems, databases and programs, or its products. However, there can be no assurance that the Company will not experience serious unanticipated negative consequences or material costs caused by undetected errors. In addition, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. Management is in the process of determining the impact, if any, that third parties who are not Year 2000 compliant may have on the operations of the Company. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements for periods beginning after December 15, 1997. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources including unrealized gains and losses on available for sale securities. Reclassification of financial statements for earlier periods for comparative purposes is required. The Company will adopt SFAS 130 beginning in 1998 and such adoption will not have a material effect on the Company's financial position or results of operations. In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in annual financial statements for periods beginning after December 31, 1997. It also establishes standards for related disclosures about products and services, geographical areas and major customers. It is not expected that adoption of SFAS No. 131 will have any impact on the Company's consolidated financial statements. FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's operating results are subject to a variety of risks characteristic of the semiconductor manufacturing equipment industry, including intense competition, fluctuating demand, significant volatility, rapid technological change, and booking and shipment uncertainties. The Company is actively developing new products that it believes will meet future customer needs, but no assurance can be given that its efforts will be successful. Fluctuations in the Company's operating results could occur in the future due to any of these factors or many others, including those discussed in the Overview, general economic conditions or other conditions specific to the semiconductor equipment manufacturing industry. See "Business--Factors That May Affect Future Results and Market Price of Stock." LIQUIDITY AND CAPITAL RESOURCES The Company's cash and short term investments equaled $34.2 million at December 31, 1997. The Company had no long term debt. Stockholder's equity at December 31, 1997 was approximately $68 million. Cash generated from operations has been sufficient historically to fund the Company's investment in research and development activities and Company growth. Cash and cash equivalents increased by $4.0 million in 1997. Net cash provided by operating activities in 1997 was $3.1 million. The net cash provided in 1997 was primarily attributable to net income of $1.4 million, non cash depreciation charges of $2.9 million, a decrease in receivable balances of $1.2 million, offset by an increase in inventories of $6.1 million. Net cash provided by investing activities in 1997 was $3.4 million primarily from the sales and maturities of short term securities of $25.0 million, partially offset by purchases of short-term investments of $16 million and the acquisition of property and equipment of $4.7 million. Net cash used by financing activities in 1997 was $2.2 million primarily from the repurchase of the Company's Common Stock, partially offset by the net proceeds from the issuance of Common Stock. 21 The Company's Board of Directors has authorized the Company to repurchase during the next three years up to 1,000,000 shares of the Company's Common Stock in the open market from time to time. As of February 27, 1998, the Company had 14,220,115 shares outstanding. The purpose of the repurchase program is to acquire shares to fund the Company's stock based employee benefit programs, including the employee stock purchase plan and the stock option plan. The Company believes that existing cash balances and short-term investments will be sufficient to meet the Company's cash requirements during the next twelve months. However, depending upon its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to the Company. MARKET RISK DISCLOSURE As of December 31, 1997, the Company's investment portfolio consisted of fixed income securities. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels of December 31, 1997, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company has international facilities and is, therefore, subject to foreign currency exposure. To date, exposure to the Company related to exchange rate volatility has not been significant. If foreign currency rates fluctuate by 10% from rates at December 31, 1997, the effect on the Company's financial position and results of operations would not be material. However, there can be no assurance that there will not be a material impact in the future. The local currency is the functional currency for all foreign sales operations except those in Japan, where the U.S. dollar is the functional currency. Gains or losses from translation of foreign operations where the local currencies are the functional currency are included as a separate component of stockholders' equity. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Page ---- Consolidated Financial Statements: Consolidated Balance Sheet as of 24 December 31, 1997 and 1996 Consolidated Statement of Income 25 for the years ended December 31, 1997, 1996 and 1995 Consolidated Statement of 26 Stockholders' Equity for the three years ended December 31, 1997 Consolidated Statement of Cash Flows 27 for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 28 Report of Independent Accountants 37 Financial Statement Schedules: All schedules are omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.
23 MATTSON TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1997 1996 - ------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 25,583 $ 21,547 Short-term investments 8,598 16,620 Accounts receivable, net 14,784 15,954 Inventories 19,068 12,954 Deferred taxes 4,222 4,197 Prepaid expenses and other current assets 1,000 882 -------- -------- Total current assets 73,255 72,154 Property and equipment, net 11,188 9,373 Other assets - 2,962 -------- -------- $ 84,443 $ 84,489 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,349 $ 1,240 Accrued liabilities 12,910 14,134 -------- -------- Total current liabilities 16,259 15,374 -------- -------- Commitments and contingencies (Note 9) Stockholders' equity: Common Stock, par value $0.001, 60,000 shares authorized; 14,289 issued, 14,189 outstanding in 1997 and 14,197 shares issued and outstanding in 1996 14 14 Additional paid in capital 57,418 57,566 Cumulative translation adjustments (290) (54) Treasury stock, at cost (1,075) - Other - (36) Retained earnings 12,117 11,625 -------- -------- Total stockholders' equity 68,184 69,115 -------- -------- $ 84,443 $ 84,489 -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 MATTSON TECHNOLOGY, INC. CONSOLIDATED STATEMENT OF INCOME - ------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------- Net sales $ 76,730 $ 73,260 $ 55,342 Cost of sales 37,130 33,231 24,958 -------- ----------- ----------- Gross profit 39,600 40,029 30,384 -------- ----------- ----------- Operating expenses: Research, development and engineering 14,709 11,507 6,330 Selling, general and administrative 24,495 20,900 11,416 -------- ----------- ----------- Total operating expenses 39,204 32,407 17,746 -------- ----------- ----------- Income from operations 396 7,622 12,638 Interest and other income 1,486 2,027 1,906 -------- ----------- ----------- Income before provision for income taxes 1,882 9,649 14,544 Provision for income taxes 451 3,184 4,052 -------- ----------- ----------- Net income $ 1,431 $ 6,465 $ 10,492 -------- ----------- ----------- -------- ----------- ----------- Net income per share: Basic $ 0.10 $ 0.46 $ 0.80 -------- ----------- ----------- -------- ----------- ----------- Diluted $ 0.09 $ 0.42 $ 0.71 -------- ----------- ----------- -------- ----------- ----------- Shares used in computing net income per share: Basic 14,117 13,997 13,109 -------- ----------- ----------- -------- ----------- ----------- Diluted 15,311 15,275 14,854 -------- ----------- ----------- -------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 MATTSON TECHNOLOGY, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Additional Common Paid In Cumulative Treasury Stock Retained Stock Capital Translation Earnings Shares Amount Amount Other Adjustments Shares Amount (Deficit) Total ------------------------------------------------------------------------------------- Balance at December 31, 1994 12,388 $ 13 $ 33,727 $ (223) $ - - $ - $ (5,225) $ 28,292 Sale of Common Stock, net 983 1 20,674 - - - - - 20,675 Exercise of stock options 276 - 255 - - - - - 255 Shares issued under employee stock purchase plan 132 - 774 - - - - - 774 Income tax benefits realized from activity in employee stock plans - - 454 - - - - - 454 Repayment of notes receivable - - - 65 - - - - 65 Amortization of deferred compensation - - - 56 - - - - 56 Net unrealized gain on investments - - - 29 - - - - 29 Cumulative translation adjustments - - - - (16) - - - (16) Net income - - - - - - - 10,492 10,492 ------ ----- --------- ------ ------ ---- -------- ------- -------- Balance at December 31, 1995 13,779 14 55,884 (73) (16) - - 5,267 61,076 Purchase of Common Stock, net (65) (442) - - - - (107) (549) Exercise of stock options 255 - 286 - - - - - 286 Shares issued under employee stock purchase plan 228 - 1,596 - - - - - 1,596 Income tax benefits realized from activity in employee stock plans - - 285 - - - - - 285 Amortization of deferred compensation - - (43) 60 - - - - 17 Net unrealized loss on investments - - - (23) - - - - (23) Cumulative translation adjustments - - - - (38) - - - (38) Net income - - - - - - - 6,465 6,465 ------ ----- --------- ------ ------ ---- -------- ------- -------- Balance at December 31, 1996 14,197 14 57,566 (36) (54) - - 11,625 69,115 ------ ----- --------- ------ ------ ---- -------- ------- -------- Purchase of Common Stock, net (335) - (2,197) - - (100) (1,075) (939) (4,211) Exercise of stock options 183 - 261 - - - - - 261 Shares issued under employee stock purchase plan 244 - 1,598 - - - - - 1,598 Income tax benefits realized from activity in employee stock plans - - 190 - - - - - 190 Amortization of deferred compensation - - - 13 - - - - 13 Net unrealized loss on investments - - - 23 - - - - 23 Cumulative translation adjustments - - - - (236) - - - (236) Net income - - - - - - - 1,431 1,431 ------ ----- --------- ------ ------ ---- -------- ------- -------- Balance at December 31, 1997 14,289 $ 14 $ 57,418 $ - $ (290) (100) $( 1,075) $12,117 $ 68,184 ------ ----- --------- ------ ------ ---- -------- ------- -------- ------ ----- --------- ------ ------ ---- -------- ------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 MATTSON TECHNOLOGY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------ (IN THOUSANDS)
DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,431 $ 6,465 $ 10,492 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,856 1,963 505 Deferred taxes (25) (2,184) (2,013) Deferred compensation related to stock options 13 17 56 Changes in assets and liabilities: Accounts receivable 1,170 (1,966) (9,565) Inventories (6,114) (2,115) (8,501) Prepaid expenses and other current assets (118) (455) (311) Other assets 2,962 (2,962) - Accounts payable 2,109 (2,647) 2,724 Accrued liabilities (1,224) 5,293 6,556 -------- -------- -------- Net cash provided by (used in) operating activities 3,060 1,409 (57) -------- -------- -------- Cash flows from investing activities: Acquisition of property and equipment (4,671) (6,685) (2,376) Purchases of short-term investments (16,468) (36,293) (39,521) Sales and maturities of short-term investments 24,513 47,511 21,894 -------- -------- -------- Net cash provided by (used in) investing activities 3,374 4,533 (20,003) -------- -------- -------- Cash flows from financing activities: Proceeds from the issuance of Common Stock, net 2,049 1,882 21,704 Repurchase of Common Stock (4,211) (549) - Repayment of notes receivable from shareholders - - 65 -------- -------- -------- Net cash provided by (used in) financing activities (2,162) 1,333 21,769 -------- -------- -------- Effect of exchange rate changes (236) (38) (16) -------- -------- -------- Net increase in cash and cash equivalents 4,036 7,237 1,693 Cash and cash equivalents, beginning of period 21,547 14,310 12,617 -------- -------- -------- Cash and cash equivalents, end of period $ 25,583 $ 21,547 $ 14,310 -------- -------- -------- -------- -------- -------- Supplemental disclosures: Cash paid for income taxes $ 629 $ 4,701 $ 4,163
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mattson Technology, Inc. (the "Company") was incorporated in California on November 18, 1988. In September, 1997 the Company was reincorporated in the State of Delaware. As part of the reincorporation, each outstanding share of the California corporation, no par value common stock, was converted automatically to one share of the new Delaware corporation $0.001 par value common stock. The financial statements have been restated to reflect this change as though the change had taken place as of the earliest period presented. The Company designs, manufactures and markets advanced fabrication equipment to the semiconductor manufacturing industry worldwide. The Company operates in one industry segment. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates. The Company's fiscal year ends on December 31. The Company's fiscal quarters end on the Sunday closest to March 31, June 30 and September 30. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments consist of commercial paper and U.S. Treasury securities with maturities of more than three months. Investments are classified as "available for sale," and are measured at market value. Net unrealized gains or losses are recorded as a separate component of stockholders' equity until realized. Any gains or losses on sales of investments are computed by specific identification. At December 31, 1996 and 1997 the difference between market value and cost was not significant. INVENTORIES Inventories are stated at the lower of standard cost, which approximates actual cost, using the first-in, first-out method, or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the useful lives of the assets which range from three to five years. Leasehold improvements are amortized using the straight-line method over the term of the related lease or the estimated useful lives of the improvements, whichever is less. COMMON STOCK In October, 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). In accordance with the provisions of FAS 123, the Corporation applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, does not recognize compensation cost because the exercise price equals the market price of the underlying stock at date of grant. Note 3 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share for 1997, 1996 and 1995 for compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 123. SALES RECOGNITION System sales are generally recognized upon shipment. However, in certain circumstances, the Company allows customers to evaluate systems, and since customers can return such systems to the Company any time with limited or no penalty, the Company does not recognize the associated sale until an evaluation system is accepted by the customer. Income related to sales of up to $1,000,000 to the Company's distributor in Japan is deferred under the rights of return provisions of the distribution agreement (see Note 6). Service and maintenance contract revenue, which to date has been insignificant, is recognized on a straight-line basis over the service period of the related contract. A provision for the estimated future cost of system installation and warranty is recorded at the time revenue is recognized. 28 FOREIGN CURRENCY ACCOUNTING The local currency is the functional currency for all foreign operations except those in Japan, where the U.S. dollar is the functional currency. Gains or losses from translation of foreign operations where the local currencies are the functional currency are included as a component of stockholders' equity. Foreign currency transaction gains and losses have not been material. NET INCOME PER SHARE The Company has adopted Financial Accounting Standards Board (FASB) Statement 128 effective with the quarter and year ended December 31, 1997. All earnings per share data has been restated to reflect the FASB 128 method of computation. FASB 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) for the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS uses the average market prices during the period. During the years ended December 31, 1997, 1996 and 1995 there were no differences between the numerators used for the basic and diluted EPS calculations and the total amount of the differences in the denominators in those years is attributable to the effect of dilutive stock options. RECLASSIFICATION Certain 1996 and 1995 balances have been reclassified to conform to the 1997 presentation. 2. BALANCE SHEET DETAIL (IN THOUSANDS)
December 31, 1997 1996 - -------------------------------------------------------------------------------- INVENTORIES: Purchased parts and raw materials $ 7,648 $ 6,763 Work-in-process 7,606 4,634 Finished goods 2,266 734 Evaluation systems 1,548 823 -------- -------- $ 19,068 $ 12,954 -------- -------- -------- -------- PROPERTY AND EQUIPMENT: Machinery and equipment $ 8,277 $ 6,971 Furniture and fixtures 4,412 2,329 Leasehold improvements 1,264 1,360 Construction-in-progress 1,956 1,023 -------- -------- 15,909 11,683 Less: accumulated depreciation and amortization (4,721) (2,310) -------- -------- $ 11,188 $ 9,373 -------- -------- -------- -------- ACCRUED LIABILITIES: Warranty, installation and retofit reserve $ 4,756 $ 3,378 Accrued compensation and benefits 2,199 1,252 Income taxes 1,971 2,082 Commissions 1,277 1,082 Deferred income 1,598 4,966 Other 1,109 1,374 -------- -------- $ 12,910 $ 14,134 -------- -------- -------- --------
29 3. CAPITAL STOCK COMMON STOCK In October, 1994, the Company completed its Initial Public Offering (IPO) of Common Stock, which resulted in the sale of 4,600,000 shares. The Company received net proceeds of $25.0 million. In June, 1995, the Company completed a secondary public offering of Common Stock, which resulted in the sale of 2,553,696 shares. Of these shares, 983,090 were offered by the Company for which the Company received net proceeds of $20.7 million and 1,570,606 were offered by selling shareholders. In 1996 the Board of Directors authorized the Company to repurchase up to 500,000 shares of the Company's Common Stock in the open market. As of December 31, 1997, 500,000 shares had been repurchased by the Company for funding the Company's Employee Stock Purchase Plan. There were 400,000 shares purchased, prior to the reincorporation in Delaware in September 1997, which were retired. The 100,000 shares repurchased after the reincorporation in Delaware are held as treasury stock. STOCK OPTION PLAN In September 1989, the Company adopted an incentive and non-statutory stock option plan (the "Plan") under which a total of 4,300,000 shares of Common Stock have been reserved for future issuance including increases of 600,000 shares in 1995, 1,000,000 shares in 1996 and 300,000 shares in 1997. Options granted under the Plan are for periods not to exceed ten years. Incentive stock option and non-statutory stock option grants under the Plan must be at prices at least 100% and 85%, respectively, of the fair market value of the stock on the date of grant. The options generally vest 25% one year from the date of grant, with the remainder vesting 1/36th per month, thereafter. In February 1994, the Company granted 260,000 options to employees to purchase Common Stock at $0.20 to $0.50 per share. The Company recorded deferred compensation related to these grants of $193,000 which was amortized as compensation expense over the related vesting period of the options. At December 31, 1997, the deferred compensation was fully amortized. The following table summarizes activity under the Plan (in thousands, except prices):
SHARES WEIGHTED AVAILABLE OPTIONS OPTION AVERAGE FOR GRANT OUTSTANDING PRICE EXERCISE PRICE --------- ----------- -------------- -------------- Balance at December 31, 1994 251 2,010 $ 0.20 - 10.41 $ 1.76 Shares authorized 600 - Options granted (626) 626 $ 8.50 - 28.38 $ 19.59 Options exercised - (276) $ 0.20 - 3.00 $ 0.92 Options canceled 39 (39) $ 0.20 - 28.38 $ 6.93 ------- ------- Balance at December 31, 1995 264 2,321 $ 0.20 - 28.38 $ 6.62 Shares authorized 1,000 - Options granted (1,240) 1,240 $ 8.50 - 16.50 $ 10.08 Options exercised - (255) $ 0.20 - 9.00 $ 1.12 Options canceled 762 (762) $ 0.20 - 28.38 $ 17.35 ------- ------- Balance at December 31, 1996 786 2,544 $ 0.20 - 24.50 $ 5.62 Shares authorized 300 - Options granted (926) 926 $ 7.00 - 15.25 $ 9.66 Options exercised - (182) $ 0.20 - 12.25 $ 1.43 Options canceled 221 (221) $ 0.20 - 23.25 $ 9.48 ------- ------- Balance at December 31, 1997 381 3,067 $ 0.20 - 24.50 $ 6.82 ------- ------- ------- -------
30 In 1996, the Board of Directors approved a proposal under which all employees, other than executive officers, could elect to cancel certain options in exchange for grants of new options with exercise prices which were equal to the fair value of the Company's Common Stock on the date of the Board's approval and for which a new four year vesting period commenced as of the new date of grant. Options for the purchase of a total of 598,200 shares were canceled in exchange for newly issued options. The following table summarizes information about stock options outstanding at December 31, 1997: (amounts in thousands except exercise price and contractual life)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE - ---------------- ----------- ----------------- --------------- ------------ --------------- $ 0.20 - $ 2.00 780 4.6 years $ 1.01 748 $ 0.98 $ 2.20 - $ 8.75 742 6.9 $ 6.05 273 $ 4.52 $ 8.88 - $ 9.00 91 7.7 $ 9.00 51 $ 8.98 $ 9.25 - $ 9.38 864 9.1 $ 9.37 146 $ 9.37 $ 9.50 - $24.50 590 7.4 $ 11.41 143 $ 11.24 ----- -------- -------- ----- -------- $ 0.20 - $24.50 3,067 7.0 $ 6.82 1,361 $ 3.97 ----- -------- -------- ----- -------- ----- -------- -------- ----- --------
The weighted average grant date fair value of stock options granted in 1997, 1996 and 1995 was approximately $4.67, $3.83, and $9.47, respectively. Compensation cost for the fair value of each incentive stock option grant is estimated on the date of grant using the Black-Scholes option pricing model for the multiple option approach with the following weighted average assumptions:
1997 1996 1995 ------ ------ ------ Expected dividend yield - - - Expected stock price volatility 0.60 0.63 0.61 Risk-free interest rate 6.0% 5.7% 6.7% Expected life of options (from vesting date) 1 year 1 year 1 year
EMPLOYEE STOCK PURCHASE PLAN In August 1994, the Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") under which 1,000,000 shares of Common Stock have been reserved for future issuance, including an increase of 200,000 shares in 1995, 65,000 in 1996 and 400,000 shares in 1997. The Purchase Plan is administered generally over offering periods of 24 months, with each offering period divided into four consecutive six-month purchase periods beginning May 1 and November 1 of each year. Eligible employees may designate not more than 15% of their cash compensation to be deducted each pay period for the purchase of Common Stock under the Purchase Plan and participants may not purchase more than $25,000 worth of Common Stock in any calendar year or 10,000 shares in any offering period. On the last business day of each purchase period, shares of Common Stock are purchased with the employees' payroll deductions accumulated during the six months, at a price per share of 85% of the market price of the Common Stock on the date immediately preceding the offering date or the date immediately preceding the purchase date, whichever is lower. Approximately $312,000 and $227,000 was accrued for use to purchase shares under the Purchase Plan at December 31, 1997 and 1996, respectively. The weighted average grant date fair value of employee purchase plan rights granted in 1997, 1996 and 1995 was approximately $2.96, $4.36, and $7.00, respectively. 31 Compensation cost is recognized for the estimated fair value of the employees' stock purchase rights using the Black-Scholes option pricing model with the following average assumptions:
1997 1996 1995 -------- -------- -------- Expected dividend yield - - - Expected stock price volatility 0.60 0.63 0.61 Risk-free interest rate 6.0% 5.7% 6.7% Expected life of options (from vesting date) 6 months 6 months 6 months
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options and employee stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee's stock option and the employee stock purchase plan. PROFORMA EFFECT OF STOCK BASED COMPENSATION PLANS In accordance with the provisions of FAS 123, the Company applies APB Opinion 25 in accounting for its Incentive Stock Option and Employee Stock Purchase plans and accordingly, does not recognize compensation cost in the statement of operations because the exercise price of the employees stock options equals the market price of the underlying stock on the date of grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income - as reported $1,431 $6,465 $10,492 Net income (loss) - pro forma $(2,154) $2,838 $9,120 Net income per share - as reported: Basic $ 0.10 $ 0.46 $ 0.80 Diluted $ 0.09 $ 0.42 $ 0.71 Net income (loss) per share - pro forma: Basic $ (0.15) $ 0.20 $ 0.70 Diluted $ (0.15) $ 0.19 $ 0.62
4. INCOME TAX PROVISION (in thousands) The components of income before provision for income taxes are as follows:
December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Domestic income $1,347 $ 9,055 $ 14,471 Foreign income 535 594 73 ------ ------- -------- Income before provision for income taxes $1,882 $ 9,649 $ 14,544 ------ ------- -------- ------ ------- --------
32 The provision for income taxes consists of the following: December 31, 1997 1996 1995 - ---------------------------------------------------------------- Current: Federal $ 237 $ 4,640 $ 4,981 State 2 415 1,043 Foreign 237 313 41 ------ ------- --------- Total Current 476 5,368 6,065 ------ ------- --------- Deferred: Federal 180 (1,933) (1,839) State (205) (251) (174) Total Deferred (25) (2,184) (2,013) ------ ------- --------- Provision for income taxes $ 451 $ 3,184 $ 4,052 ------ ------- --------- ------ ------- ---------
The provision for income taxes reconciles to the amount computed by multiplying income before tax by the U.S. statutory rate of 35% as follows:
December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------- Provision at statutory rate $ 659 $ 3,377 $ 5,090 Research and development tax credits (307) (190) - Realized deferred tax assets previously reserved - - (1,436) State taxes, net of federal benefit 51 106 801 Foreign earnings taxed at higher rates 81 111 - Benefit of foreign sales corporation (51) (354) (431) Other 18 134 28 ----- ------- ------- Total provision for income taxes $ 451 $ 3,184 $ 4,052 ----- ------- ------- ----- ------- -------
Deferred tax assets are comprised of the following:
December 31, 1997 1996 1995 - ---------------------------------------------------------------------- Reserves not currently deductible $ 3,506 $ 3,042 $ 1,621 Deferred income 638 1,155 257 Other 78 - 135 -------- -------- -------- Total net deferred taxes $ 4,222 $ 4,197 $ 2,013 -------- -------- -------- -------- -------- --------
During 1995 the Company realized $1.4 million of deferred tax assets previously reserved, reducing the valuation allowance by a corresponding amount. 33 5. EMPLOYEE BENEFIT PLANS RETIREMENT/SAVINGS PLAN Effective April 1, 1994, the Company implemented a retirement/savings plan which qualifies as a thrift plan under section 401(k) of the Internal Revenue Code. All employees who are twenty-one years of age or older are eligible to participate in the Plan. The Plan allows participants to contribute up to 20% of the total compensation that would otherwise be paid to the participant, not to exceed the amount allowed by applicable Internal Revenue Service guidelines. The Company may make a discretionary matching contribution equal to the percentage of the participant's contributions. To date the Company has not made a matching contribution. PROFIT SHARING PLAN In February 1994, the Company implemented a profit sharing plan, wherein, as determined by the board of directors, a percentage of income from operations is accrued and distributed to all employees excluding management. The total charge to operations for the years ended December 31, 1997, 1996 and 1995 under the profit sharing plan was approximately $85,000, $411,000, and $552,000, respectively. 6. CERTAIN TRANSACTIONS The Company has a distribution agreement with Marubeni, a Japanese distributor. Marubeni owned approximately 4% of the Company's Common Stock at December 31, 1997. In addition, the Company formed a subsidiary in Japan in October 1995 in which Marubeni has a minority interest. Prior to January 1996, one member of the Company's board of directors was also a Vice President of Marubeni. In January 1996, this board member left Marubeni and the Company's board of directors and accepted a position with the Company's Japanese subsidiary. Transactions between the Company and Marubeni prior to January 1996 were considered related party transactions. The following is a summary of the Company's transactions with the distributor (in thousands):
December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales through the distributor for the period $ 9,987 $ 22,804 $ 16,994 Accounts receivable at period end 1,555 2,255 1,402 Deferred income at period end 591 591 591 Minority interest in joint venture 200 204 189
In the event of termination of the distribution agreement, the Company would be obligated to repurchase up to a maximum of $1,000,000 of inventory related to the Company's sales to Marubeni. The Company recorded deferred income at the time of sale to cover this right of return. At December 31, 1997 and 1996, deferred income of $591,000 related to this agreement resulted from deferred revenue of $1,000,000 less the estimated inventory value to the Company of $409,000. The Company purchases certain inventory parts from a supplier company which is majority owned by the CEO of the Company. The Company believes the terms of these purchases are no less favorable than could be obtained from third party suppliers. Net purchases were $739,000, $991,000 and $997,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 34 7. INDUSTRY AND GEOGRAPHIC INFORMATION The Company currently operates in a single industry segment. The Company markets its products in the United States and in foreign countries through its sales personnel, independent sales representatives, and distributors. All transactions are denominated in U.S. dollars. The Company has one manufacturing facility located in the United States. The Company's geographic sales as a percent of net revenues are as follows:
December 31, 1997 1996 1995 - -------------------------------------------------------------- United States 35% 24% 33% Japan 13% 31% 31% Pacific Rim 46% 39% 30% Europe 6% 6% 6% --- --- --- 100% 100% 100% --- --- --- --- --- ---
8. FINANCIAL INSTRUMENTS, CONCENTRATION OF CREDIT RISK AND SALES TO SIGNIFICANT CUSTOMERS CURRENCY SWAP CONTRACTS Currency swap contracts are entered into primarily to hedge against the short-term impact of fluctuations in the Yen denominated monetary assets of the subsidiary in Japan. At December 31, 1997, the Company had a contract to sell 25.0 million Yen ($0.2 million) which matures in 1998. Because the impact of movements in currency exchange rates on currency swap contracts offsets the related impact on the underlying items being hedged, these financial instruments do not subject the Company to speculative risk that would otherwise result from changes in currency exchange rates. Net foreign currency gains and losses to date have not been material. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, short-term investments, trade accounts receivable and financial instruments used in hedging activities. The Company invests in a variety of financial instruments such as certificates of deposit, corporate bonds and treasury bills. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. The fair values of the Company's cash and cash equivalents and short-term investments are not significantly different than cost. All short-term investments mature within one year. 35 The Company's trade accounts receivable are derived from sales in the United States, Japan, other Pacific Rim countries and Europe. The Company performs ongoing credit evaluations of its customers (semiconductor manufacturers and its Japanese distributor) and to date has not experienced any material losses. As of December 31, 1997 and 1996, the Company had an allowance for doubtful accounts of $100,000. The Company is exposed to credit loss in the event of non-performance by counterparties on the currency swap contracts used in hedging activities. The Company does not anticipate nonperformance by these counterparties. 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. The following table summarizes the percentage of net sales to significant customers:
December 31, 1997 1996 1995 - ------------------------------------------------------- A 3% 7% 16% B - - 15% C 11% 6% 5%
9. COMMITMENTS AND CONTINGENCIES The Company leases its facilities under operating leases which expire at various dates through 2000 with minimum annual rental commitments as follows (in thousands): 1998 $ 1,477 1999 572 2000 34 -------- $ 2,083 -------- --------
Rent expense was $1,755,000, $1,421,000 and $390,000 for 1997, 1996, and 1995, respectively. The Company is party to certain claims arising in the ordinary course of business. While the outcome of these matters is not presently determinable, management believes they will not have a material adverse effect on the financial position or results of the operations of the Company. 36 Report of Independent Accountants - ----------------------------------------------------------------------------- To the Board of Directors and Stockholders of Mattson Technology, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Mattson Technology, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 22, 1998 37 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be set forth in the 1998 Proxy Statement under the captions "Election of Directors" and "Additional Information" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the 1998 Proxy Statement under the caption "Executive Compensation and Other Matters" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information related to security ownership of certain beneficial owners and security ownership of management will be set forth in the 1998 Proxy Statement under the caption "Security Ownership of Management and Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in the 1998 Proxy Statement under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)(2) FINANCIAL STATEMENTS The financial statements and schedules filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8 on page 23. (a)(3) EXHIBITS The documents listed on the Exhibit Index appearing at page 40 of this Report are filed herewith. The 1998 Proxy Statement shall be deemed to have been "filed" only to the extent portions thereof are expressly incorporated herein by reference. Copies of the exhibits listed in the Exhibit Index will be furnished, upon request, to holders or beneficial owners of the Company's Common Stock. Each management contract or compensatory plan or arrangement listed in the Exhibit Index has been marked with the letter "C" to identify it as such. (b) REPORTS ON FORM 8-K None 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MATTSON TECHNOLOGY, INC. (Registrant) By: / s/ Brad Mattson March 31, 1998 -------------------------- Brad Mattson Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Chief Executive March 31, 1998 - --------------------- Officer and Director Brad Mattson (Principal Executive Officer) /s/ Vice President - Finance March 31, 1998 - --------------------- and Chief Financial Officer Richard Mora (Principal Financial and Accounting Officer) /s/ Director March 31, 1998 - --------------------- Stephen Ciesinski /s/ Director March 31, 1998 - --------------------- John Savage /s/ Director March 31, 1998 - --------------------- Shigeru Nakayama /s/ Director March 31, 1998 - --------------------- Kenneth Smith 39 EXHIBIT INDEX The following Exhibits to this report are filed herewith, or if marked with an asterisk (*), are incorporated herein by reference. Each management contract or compensatory plan or arrangement has been marked with the letter "C" to identify it as such.
Management Contract Prior Filing or Exhibit or Compensatory Plan Sequential Page Number Description or Arrangement Number Herein - -------- ----------- -------------------- ---------------- 3.1 Restated Articles of Incorporation of the Company (1) 3.2 Bylaws of the Registrant (1) 4.1 Form of Stock Certificate (1) 10.1 Marubeni Japanese Distribution Agreement, as amended (2) 10.2 1989 Stock Option plan, as amended C (3) 10.3 1994 Employee Stock Purchase Plan C (1) 10.4 Form of Indemnification Agreement C (1) 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants 27 Financial Data Schedule
(1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 filed August 12, 1994 (33-92738), as amended. (2) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Form 10-K for fiscal year 1996. (3) Incorporated by reference to the corresponding Registrant's Registration Statement on Form S-8 filed October 31, 1997 (333-3929) 40 EX-21.1 2 EXHIBIT 21.1 EXHIBIT 21.1 MATTSON TECHNOLOGY, INC. SUBSIDIARIES OF THE REGISTRANT MATTSON INTERNATIONAL, INC. MATTSON TECHNOLOGY CENTER K.K. MATTSON INTERNATIONAL GMBH EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-39129, No. 33-85272 and No. 33-94972) of Mattson Technology, Inc., of our report dated January 22, 1998 appearing on page 37 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California March 30, 1998 EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 24 AND 25 OF THE COMPANY'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 25,583 8,598 14,784 0 19,068 73,255 11,188 0 84,443 16,259 0 0 0 14 84,429 84,443 76,730 76,730 37,130 37,130 39,204 0 0 1,882 451 1,431 0 0 0 1,431 0.10 0.09
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