| MATTSON TECHNOLOGY INC Item 1A Risk Factors RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK The semiconductor equipment industry is highly cyclical and periodically has severe and prolonged downturns, which causes our operating results to fluctuate significantly |
| We are exposed to the risks associated with industry overcapacity, including reduced capital expenditures, decreased demand for our products, increased price competition and delays by our customers in paying for our products |
| The semiconductor industry is highly cyclical and has historically experienced periodic downturns, whether as the result of general economic changes or capacity growth temporarily exceeding growth in demand for semiconductor devices |
| Our business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities |
| Periods of overcapacity and reductions in capital expenditures by our customers cause decreases in demand for our products |
| If existing fabrication facilities are not expanded and new facilities are not built, demand for our systems may not develop or increase, and we may be unable to generate significant new orders for our systems |
| If we are unable to develop new orders for our systems, we will not achieve anticipated net sales levels |
| During periods of declining demand for semiconductor manufacturing equipment, our customers typically reduce purchases, delay delivery of ordered products and/or cancel orders, resulting in reduced revenues and backlog, delays in revenue recognition and excess inventory |
| Increased price competition may result, causing pressure on our gross margin and net income |
| In future downturns, if we are unable to effectively align our cost structure with prevailing market conditions, we could experience losses, may be required to undertake additional cost-cutting measures, and may be unable to continue to invest in marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position in our core businesses |
| Our failure to make these investments could seriously harm our long-term business prospects |
| We depend on large purchases from a few customers, and any cancellation, reduction or delay of purchases by or failure to collect receivables from these customers could harm our business |
| Currently, we derive most of our revenues from the sale of a relatively small number of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business |
| Consequently, any order cancellations, delays in scheduled shipments, delays in customer acceptances or delays in collection of accounts receivable could materially adversely affect our operating results and cause our results to fall below our expectations and the expectations of market analysts or investors |
| Delays in collection of accounts receivable could require us to increase our accounts receivable reserve, which would increase our operating expenses |
| Our list of major customers changes substantially from year to year, and we cannot predict whether a major customer in one year will make significant purchases from us in future years |
| Additionally, our customers &apos capital budget considerations and our lengthy sales cycle make the timing of customer orders uneven and difficult to predict |
| Accordingly, it is difficult for us to accurately forecast our revenues and operating results from year to year |
| If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted |
| Our backlog orders are subject to cancellation or delay |
| Although we maintain a backlog of customer orders with expected shipment dates within the next 12 months, customers may request cancellations or delivery delays |
| As a result, our backlog may not be a reliable indication of future revenues |
| If shipments of orders in backlog are cancelled or delayed, revenues could fall below our expectations and the expectations of market analysts and investors |
| Delays or technical and manufacturing difficulties incurred in the introduction of new products could be costly and adversely affect our customer relationships |
| Our success depends in part on the continual introduction of new and improved systems and processes |
| Our products are complex, and we may experience delays and technical or manufacturing difficulties in the prototype introduction of new systems and enhancements, or in achieving volume production of new systems or enhancements |
| Our inability to overcome such difficulties, to meet the technical specifications of any new systems or enhancements, or to manufacture and ship these systems or enhancements in volume and in a timely manner would materially adversely affect our business and results of operations, as well as our customer relationships |
| We may from time to time incur unanticipated costs to ensure the functionality and reliability of our products early in their life cycles, and such costs can be substantial |
| If we encounter reliability or quality problems with our new products or enhancements, we could face a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable and additional service and warranty expenses, all of which could materially adversely affect our business and results of operations |
| We may not achieve anticipated revenue levels if we are not selected as "e vendor of choice "e for new or expanded fabrication facilities, or if our systems and products do not achieve broader market acceptance |
| Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven financial performance |
| Once a semiconductor manufacturer selects a particular vendorapstas capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this "e vendor of choice "e (VOC) for the specific production line application |
| In addition, the semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendors |
| Accordingly, we may face narrow windows of opportunity to be selected as the VOC by significant new customers |
| It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitorapstas product, and we may not be successful in obtaining broader acceptance of our systems and technology |
| If we are unable to achieve broader market acceptance of our systems and technology, we may be unable to maintain and grow our business and our operating results and financial condition will be adversely affected |
| We must continually anticipate technology trends, improve our existing products and develop new products in order to be competitive |
| The development of new or enhanced products involves significant risk and cost |
| The markets in which we and our customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services |
| Consequently, our success depends upon our ability to anticipate future technology trends and customer needs, to develop new systems and processes that meet customer requirements and industry standards and that compete effectively on the basis of price and performance, and to continually improve our existing systems and processes |
| Our development and manufacture of new products involves significant risk, since the products are very complex and the development cycle is long and expensive |
| The success of any new systems we develop and introduce is dependent on a number of factors, including our ability to correctly predict customer requirements for new processes, to assess and select the potential technologies for research and development, and to timely complete new system designs that are acceptable to the market |
| We may make substantial investments in new technologies before we can know whether they are technically or commercially feasible or advantageous, and without any assurance that revenue from future products or product enhancements will be sufficient to recover the associated development costs |
| Not all development activities result in commercially viable products |
| We may be adversely affected by manufacturing inefficiencies and the challenge of producing innovative systems in volumes that meet customer requirements |
| We may not be able to improve our existing systems or develop new technologies or systems in a timely manner |
| We may exceed the budgeted cost of reaching our research, development and engineering objectives, and planned product development schedules may require extension |
| Any delays or additional development costs could have a material adverse effect on our business and results of operations |
| As we continue our work to implement and improve our new enterprise resource planning and financial statement consolidation systems, unexpected problems could occur and could cause disruption to the management of our business and delays in the preparation of our financial statements |
| In the fourth quarter of 2004, as part of a multi-phase process, we completed the implementation of a new enterprise resource planning, or ERP, system for our worldwide operations |
| The new ERP system has become integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management and prepare our financial statements |
| Our work to implement and improve our new computerized consolidation and ERP systems continues as an active project |
| The new ERP and consolidation systems could eventually become more costly, difficult and time-consuming to purchase and implement than we currently anticipate |
| Implementation of the new ERP system has required us to change internal business practices |
| We may encounter unexpected difficulties or costs or other challenges, any of which may disrupt our business or cause delays in the reporting of our financial results |
| Our existing systems, procedures or controls may not be adequate to support our operations and require us to change our internal business practices |
| Corrections and improvements may be required as we continue the implementation of our new systems, procedures and controls, and could cause us to incur additional costs and require additional management attention, placing burdens on our internal resources |
| If we fail to manage these changes effectively, it could adversely affect our ability to manage our business and our operating results |
| Our results of operations may suffer if we do not effectively manage our inventory |
| We need to manage our inventory of component parts, work-in-process and finished goods effectively to meet customer delivery demands at an acceptable risk and cost |
| Customers are increasingly requiring very short lead times for delivery, which may require us to purchase and carry additional inventory |
| For both the inventories that support manufacture of our products and our spare parts inventories, if the customer demand we anticipate does not materialize in a timely manner, we will incur increased carrying costs and some inventory could become un-saleable or obsolete, resulting in write-offs which would adversely affect the results of our operations |
| Warranty claims in excess of our projections could seriously harm our business |
| We offer a warranty on our products |
| The cost associated with our warranty is significant, and in the event our projections and estimates of this cost are inaccurate, our financial performance could be seriously harmed |
| In addition, if we experience product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, and our business would suffer |
| We are increasingly outsourcing manufacturing and logistics activities to third-party service providers, which decreases our control over the performance of these functions |
| We have already outsourced certain manufacturing and spare parts logistics functions to third-party service providers, and we may outsource more of those functions in the future |
| While we expect to achieve operational flexibility and cost savings as a result of this outsourcing, outsourcing has a number of risks and reduces our control over the performance of the outsourced functions |
| Significant performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems that could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations |
| If for any reason one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our products or spare parts to our customers could be severely impaired |
| We would quickly need to identify and qualify substitute service providers or increase our internal capacity, which could be expensive, time-consuming and difficult, and could result in unforeseen operations problems |
| Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms |
| If customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers on commercially reasonable terms, if at all |
| Our requirements are expected to represent a small portion of the total capacities of our third-party service providers, and they may preferentially allocate capacity to other customers, even during periods of high demand for our products |
| In addition, such manufacturers could suffer financial difficulties or disruptions in their operations due to causes beyond our control |
| We may not be able to continue to successfully compete in the highly competitive semiconductor equipment industry |
| The semiconductor equipment industry is both highly competitive and subject to rapid technological change |
| Significant competitive factors include the following: * system performance; * cost of ownership; * size of installed base; * breadth of product line; * delivery availability; and * customer support |
| Competitive pressure has been increasing in several areas |
| In particular, there is increased price competition, and customers are waiting to make purchase commitments based on their end-user demand, which are then placed with requests for rapid delivery dates and increased product support |
| Our major competitors are larger than we are, have greater capital resources, and may have a competitive advantage over us by virtue of having: * broader product lines; * longer operating history; * greater experience with high-volume manufacturing; * substantially larger customer bases; * the ability to reduce price through product bundling; and * substantially greater customer support, financial, technical and marketing resources |
| In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors |
| Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems |
| Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sale and on-site customer support of their product lines |
| We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively |
| Our lengthy sales cycle increases our costs and reduces the predictability of our revenue |
| Sales of our systems depend upon the decision of a prospective customer to increase or replace manufacturing capacity, typically involving a significant capital commitment |
| Accordingly, the decision to purchase our systems requires time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers &apos manufacturing facilities |
| Even after the customer determines that our systems meet their qualification criteria, we may experience delays finalizing system sales while the customer obtains approval for the purchase, constructs new facilities or expands its existing facilities |
| Consequently, the time between our first contact with a customer regarding a specific potential purchase and the customerapstas placing its first order may last from nine to twelve months or longer |
| We may incur significant sales and marketing expenses during this evaluation period |
| In addition, the length of this period makes it difficult to accurately forecast future sales |
| If sales forecasted from a specific customer are not realized, we may experience an unplanned shortfall in revenues, and our quarterly and annual revenue and operating results may fluctuate significantly from period to period |
| We are highly dependent on international sales, and face significant economic and regulatory risks |
| International sales accounted for 84prca of our net sales in 2005, 87prca of our net sales in 2004, and 87prca of our net sales in 2003 |
| We anticipate international sales will continue to account for a significant portion of our future net sales |
| Asia has been a particularly important region for our business, and we anticipate that it will continue to be important going forward |
| Our sales to customers located in China, Japan, Korea, Taiwan and other Asian countries accounted for 72prca of our net sales in 2005, 78prca of our net sales in 2004 and 70prca of our net sales in 2003 |
| Because of our continuing dependence upon international sales, we are subject to a number of risks associated with international business activities, including: * unexpected changes in law or regulations resulting in more burdensome governmental controls, tariffs, taxes, restrictions, embargoes or export license requirements; * exchange rate volatility; * the need to comply with a wide variety of foreign and US export laws; * political and economic instability, particularly in Asia; * differing labor regulations; * reduced protection for intellectual property; * difficulties in accounts receivable collections; * difficulties in managing distributors or representatives; and * difficulties in staffing and managing foreign subsidiary operations |
| In the US and Asia (excluding Japan), our sales to date have been denominated primarily in US dollars, while our sales in Japan are usually denominated in Japanese Yen |
| Our sales to date in Europe have been denominated in various currencies, currently primarily US dollars and the Euro |
| Our sales in foreign currencies are subject to risks of currency fluctuation |
| For US dollar sales in foreign countries, our products may become less price-competitive when the local currency is declining in value compared to the dollar |
| This could cause us to lose sales or force us to lower our prices, which would reduce our gross margins |
| In addition, the expenses of our German manufacturing operation are primarily incurred in Euros |
| If the Euro were to appreciate in relation to the US dollar, our operating expenses would increase |
| We depend upon a limited number of suppliers for some components and subassemblies, and supply shortages or the loss of these suppliers could result in increased cost or delays in manufacture and sale of our products |
| We rely to a substantial extent on outside vendors to provide many of the components and subassemblies of our systems |
| We obtain some of these components and subassemblies from a sole source or a limited group of suppliers |
| Because of our anticipated reliance on outside vendors generally, and on a sole or a limited group of suppliers in particular, we may be unable to obtain an adequate supply of required components |
| Although we currently experience minimal delays in receiving goods from our suppliers, when demand for semiconductor equipment is strong, our suppliers may have difficulty providing components on a timely basis |
| In addition, during periods of shortages of components, we may have reduced control over pricing and timely delivery of components |
| We often quote prices to our customers and accept customer orders for our products prior to purchasing components and subassemblies from our suppliers |
| If our suppliers increase the cost of components or subassemblies, we may not have alternative sources of supply and may no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components |
| The manufacture of some of these components and subassemblies is an extremely complex process and requires long lead times |
| If we are unable to obtain adequate and timely deliveries of our required components or subassemblies, we may have to seek alternative sources of supply or manufacture such components internally |
| This could delay our ability to manufacture or timely ship our systems, causing us to lose sales, incur additional costs, delay new product introductions, and harm our reputation |
| We manufacture many of our products at two primary manufacturing facilities and are thus subject to risk of disruption |
| Although we outsource the manufacturing for certain of our products to third parties, we continue to produce our latest generation products at our two principal manufacturing plants in Fremont, California and Dornstadt, Germany |
| We have limited ability to interchangeably produce our products at either facility, and in the event of a disruption of operations at one facility, our other facility would not be able to make up the capacity loss |
| Our operations are subject to disruption for a variety of reasons, including, but not limited to natural disasters, work stoppages, operational facility constraints and terrorism |
| Such disruption could cause delays in shipments of products to our customers, result in cancellation of orders or loss of customers and seriously harm our business |
| Because of competition for qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products |
| Our growth will depend on our ability to attract and retain qualified, experienced employees |
| There is substantial competition for experienced engineering, technical, financial, sales, and marketing personnel in our industry |
| In particular, we must attract and retain highly skilled design and process engineers |
| Historically, competition for such personnel has been intense in all of our locations, but particularly in the San Francisco Bay Area where our headquarters is located |
| If we are unable to retain existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers |
| As a result, our growth could be limited, or we could fail to meet our delivery commitments or experience deterioration in service levels or decreased customer satisfaction |
| If we are unable to protect our intellectual property, we may lose a valuable asset and experience reduced market share |
| Efforts to protect our intellectual property may require additional costly litigation |
| We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements, and other intellectual property protection methods to protect our proprietary technology |
| Despite our efforts to protect our intellectual property, our competitors may be able to legitimately ascertain the non-patented proprietary technology embedded in our systems |
| If this occurs, we may not be able to prevent the use of such technology |
| Our means of protecting our proprietary rights may not be adequate and our patents may not be sufficiently broad to protect our technology |
| Any patents owned by us could be challenged, invalidated, or circumvented and any rights granted under any patent may not provide adequate protection to us |
| Furthermore, we may not have sufficient resources to protect our rights |
| Our competitors may independently develop similar technology, or design around patents that may be issued to us |
| In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our products in such foreign countries |
| As a result of these threats to our proprietary technology, we may have to resort to costly litigation to enforce our intellectual property rights |
| We might face patent infringement or other intellectual property infringement claims that may be costly to resolve and could divert management attention |
| We may from time to time be subject to claims of infringement of other parties &apos patents or other proprietary rights |
| In addition, we on occasion receive notification from customers who believe that we owe them indemnification or have other obligations related to infringement claims made against the customers by third parties |
| Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets, even if the claims are without merit, could be very expensive to defend and could divert the attention of our management |
| Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek costly licenses from third parties, and prevent us from manufacturing and selling our products |
| Royalty or license agreements, if required, may not be available on terms acceptable to us or at all |
| Our failure to comply with environmental regulations could result in substantial liability |
| We are subject to a variety of federal, state, local, and foreign laws, rules, and regulations relating to environmental protection |
| These laws, rules, and regulations govern the use, storage, discharge, and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations |
| If we fail to comply with present or future regulations, especially in our Fremont, California and Dornstadt, Germany manufacturing facilities, we could be subject to substantial liability for clean up efforts, personal injury, and fines or suspension or cessation of our operations |
| We may be subject to liability if our acquired companies have past violations |
| Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us, or we could be required to acquire costly remediation equipment, or incur other significant expenses |
| We incurred net operating losses during 2001 to 2003 |
| We may not achieve or maintain profitability on an annual basis |
| We incurred net losses of approximately dlra336dtta7 million for the year ended December 31, 2001, dlra69dtta7 million for the year ended December 31, 2002 and dlra35dtta5 million for the year ended December 31, 2003 |
| Although we were profitable for 2004 and 2005, we expect to continue to incur significant research and development and selling, general and administrative expenses |
| We may not achieve profitability in future years |
| We will need to continue to generate significant sales to achieve and maintain profitability, and we may not be able to do so |
| Our quarterly operating results fluctuate significantly, are difficult to predict, and may fall short of anticipated levels, which could cause our stock price to decline |
| Our quarterly revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results |
| A substantial percentage of our operating expenses are fixed in the short term and we may be unable to adjust spending to compensate for an unexpected shortfall in revenues |
| As a result, any delay in generating or recognizing revenues could cause our operating results to be below the expectations of market analysts or investors, which could cause the price of our common stock to decline |
| The price of our common stock has fluctuated in the past and may continue to fluctuate significantly in the future, which may lead to losses by investors or to securities litigation |
| The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future |
| For example, for the year ended December 31, 2005, the price range for our common stock was dlra5dtta77 to dlra10dtta68 per share |
| In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations |
| These fluctuations have frequently been unrelated to the operating performance of the affected companies |
| Such fluctuations could adversely affect the market price of our common stock |
| In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price |
| This type of litigation, if filed against us, could result in substantial costs and divert our managementapstas attention and resources |
| Any future business acquisitions may disrupt our business, dilute stockholder value, or distract management attention |
| As part of our ongoing business strategy, we may consider acquisitions of, or significant investments in, businesses that offer products, services, and technologies complementary to our own |
| Such acquisitions could materially adversely affect our operating results and/or the price of our common stock |
| Acquisitions also entail numerous risks, including: * difficulty of assimilating the operations, products, and personnel of the acquired businesses; * potential disruption of our ongoing business; * unanticipated costs associated with the acquisition; * inability of management to manage the financial and strategic position of acquired or developed products, services, and technologies; * inability to maintain uniform standards, controls, policies, and procedures; and * impairment of relationships with employees and customers that may occur as a result of integration of the acquired business |
| To the extent that shares of our stock or other rights to purchase stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result, and our earnings per share may suffer |
| Any future acquisitions may not generate additional revenue or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses |
| Continued compliance with new regulatory and accounting requirements will be challenging and is likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations |
| As a result of compliance with the Sarbanes-Oxley Act of 2002, as well as changes to listing standards adopted by the Nasdaq Stock Market, and the attestation and accounting changes required by the Securities and Exchange Commission, we are required to implement additional internal controls, to improve our existing internal controls, and to comprehensively document and test our internal controls |
| As a result, we are required to hire additional personnel and to obtain additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase |
| Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting principles, which may adversely affect our operating results |
| The Company Has Material Weaknesses in Its Internal Control over Financial Reporting During the audit of the 2005 financial statements, the Companyapstas management identified the following material weaknesses in internal control over financial reporting: * lack of sufficient personnel and resources to properly perform the quarterly and year-end financial statement closing processes, including the monitoring of the previously selected accounting policy for the amounts received from a patent infringement settlement, and the review of certain account reconciliations and analyses |
| * lack of effective controls over the computation and review of reserves for slow-moving and excess and obsolete inventory Although the Company has taken and is continuing to undertake a number of initiatives to address these material weaknesses, the existence of a material weakness is an indication that there is more than a remote likelihood that a material misstatement of its financial statements might not be prevented or detected in the current or any future period |
| In addition, the Company may in the future identify other material weaknesses or significant deficiencies in its internal control over financial reporting that it has not discovered to date |
| Furthermore, the initiatives taken by the Company to remedy the material weaknesses are expected to result in additional costs for increased personnel, which could adversely affect our operating results |
| There can also be no assurance that the initiatives being taken by management will result in a determination by the Companyapstas independent registered public accounting firm that its internal controls over financial reporting are properly designed and operating effectively in future periods |