<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
COMMISSION FILE NUMBER 0-26784
SPEEDFAM INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 36-2421613
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7406 WEST DETROIT 85226
CHANDLER, ARIZONA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (602) 961-2175
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $69,177,956 as of August 9, 1996.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 10,570,077 as of August 9, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III, Proxy Statement relating to 1996 Annual Meeting of Shareholders
(except for the Report of the Compensation Committee of the Board of Directors
and the Performance Graph).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NO. CAPTION PAGE
---- ------- -------
PART I
<C> <S> <C>
1. Business........................................................ 1
2. Properties...................................................... 13
3. Legal Proceedings............................................... 13
4. Submission of Matters to a Vote of Security Holders............. 14
PART II
5. Market for Common Equity and Related Shareholder Matters........ 14
6. Selected Financial Data......................................... 14
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations........................................... 16
8. Financial Statements and Supplementary Data..................... 25
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure............................................ 59
PART III
10. Directors and Executive Officers of the Company................. 59
11. Executive Compensation.......................................... 59
12. Security Ownership of Certain Beneficial Owners and Management.. 59
13. Certain Relationships and Related Transactions.................. 59
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-
14. K............................................................... 59
Signatures...................................................... 60
List of Exhibits................................................ EXHIBIT
INDEX
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
SpeedFam International, Inc. (the "Company") was incorporated in Illinois in
1959 as SpeedLap Corporation. SpeedFam International, Inc. is a holding
company operating through three wholly owned subsidiaries, and also owns
interests in two joint ventures. The Company operates through SpeedFam
Corporation in the U.S. ("SpeedFam U.S.") and SpeedFam Limited ("SpeedFam
U.K.") and SpeedFam GmbH ("SpeedFam Germany") in Europe. SpeedFam
International, Inc. owns 50% of each of two joint ventures, SpeedFam Co., Ltd.
(the "Far East Joint Venture") and Fujimi Corporation (the "Fujimi Joint
Venture"). The Far East Joint Venture primarily produces and sells products in
the Far East similar to those produced by the Company, and the Fujimi Joint
Venture sells slurries and pads in North America.
Unless the context otherwise requires, the "Company" and "SpeedFam" refer
only to SpeedFam International, Inc., an Illinois corporation, and its wholly
owned subsidiaries. The Company's principal executive offices are located at
7406 West Detroit, Chandler, Arizona 85226 and its telephone number is (602)
961-2175.
The Company designs, develops, manufactures, markets and services high
throughput precision surface processing systems used in the fabrication of
thin film memory disk media, semiconductor wafers, general industrial
components and, more recently, semiconductor devices through chemical
mechanical polishing, or "CMP." In addition, the Company markets and
distributes slurries and parts and expendables used in its customers'
manufacturing processes. The Company's processing systems include polishing,
grinding, lapping and pre-deposition cleaning equipment.
Joint Ventures
Since 1971, the Company has owned a 50% interest in the Far East Joint
Venture. The remaining 50% is owned by Obara Corporation, a privately-owned
Japanese company that supplies products to the automotive industry. Generally,
the Far East Joint Venture designs, produces and markets in the Far East
equipment similar to that produced by the Company in the U.S. Prior to 1971,
the Company marketed its products in Japan through Japanese trading companies;
however, the Company believed that the most effective method to further
penetrate the Japanese market was with a Japanese partner. See "--Joint
Venture Arrangements--Far East Joint Venture." In 1984, the Company
established the Fujimi Joint Venture with Fujimi Incorporated, a Japanese
manufacturer of slurries. The Fujimi Joint Venture sells slurries manufactured
by Fujimi Incorporated, primarily to silicon wafer manufacturers and general
industrial manufacturers in North America. See "--Manufacturing and Suppliers"
and "--Joint Venture Arrangements--Fujimi Joint Venture."
Products
SpeedFam's products include polishing, grinding and lapping equipment; pre-
deposition cleaning machines; other high precision surface processing systems;
and certain other products used in its customers' manufacturing process,
including slurries. During fiscal year 1995 and 1996, 54.5% and 78.5%,
respectively, of the Company's total revenue (including commissions) was
attributable to the sale of capital equipment, parts and expendables and 45.5%
and 21.5%, respectively, of the Company's total revenue was attributable to
the sale of slurries.
Applications. SpeedFam offers equipment that performs specialized surface
processing, such as polishing, lapping, free abrasive machining and grinding.
The Company's polishing systems generally employ a flat rotating table,
covered with a polishing pad, one or more carriers to hold the parts being
processed and slurry. Processes similar to polishing include lapping (a
process where no polishing pad is used and the workpiece is pressed into the
slurry, directly onto a cast-iron lapping wheel) and free abrasive machining
(a process similar to lapping except that instead of using a cast iron wheel,
a high alloy hardened steel wheel is used). Lapping and free abrasive
machining result in higher removal rates than polishing but produce more
coarse surface finishes. Flat
1
<PAGE>
grinding is similar to lapping except that the abrasive particles are
contained within a fixed medium (grinding stones), rather than a liquid.
Grinding results in higher removal rates than lapping but produces a coarser
surface finish. Rotational speed, process type, pressure and the nature of the
chemicals and abrasives used are the primary variables considered in the
determination of the best process for a specific application. Polishing and
other surface treatment processes are typically followed by a cleaning
process. Thin film memory disk cleaning systems offered by SpeedFam
incorporate ultrasonics, PVA (polyvinyl alcohol) brush scrubbing, rinsing and
drying in a Class 1 cleanroom-compatible system.
Equipment
Thin Film Memory Disk Media. The Company sells polishing machines, pre-
deposition cleaning machines and grinding machines for producing aluminum,
nickel-plated and glass substrates for the thin film memory disk media market.
The Company's DSM line of machines is used in the manufacture of thin film
memory disk media for grinding the aluminum substrate as well as polishing
after deposition of the nickel plating. The DSM line of machines
simultaneously processes both sides of a disk substrate and is available in
various sizes.
The MD line of cleaning systems is used to clean the substrate at various
stages of the manufacturing process, including the critical cleaning
immediately prior to the deposition of the magnetic layers. Cleaning systems
distributed by the Company are produced by the Far East Joint Venture.
Semiconductor Wafers. The Company supplies chemical mechanical polishing,
double-sided lapping and, more recently, edge polishing systems to the
semiconductor substrates market.
The Company's DSM line of double-sided lapping systems is available in
various sizes and is used to create the initial flatness and thickness of the
silicon wafer after it is sliced from an ingot. The lapping process also
removes saw marks remaining after slicing and provides a surface finish
suitable for subsequent polishing processes.
The Company began distributing the EP line of edge polishing systems during
fiscal 1995. Edge polishing is an emerging technology that is beginning to be
incorporated into high volume silicon wafer manufacturing. This technology was
introduced for the purpose of making the wafer's edge easier to clean, thereby
increasing semiconductor device manufacturing yields. The Far East Joint
Venture produces the EP line that is marketed and distributed by the Company.
The SP line utilizes a chemical mechanical polishing process to remove the
shallow damage layer remaining from previous process steps and to attain the
specified flatness and surface finish. A 50-inch model is manufactured by the
Company in the U.S. and a 59-inch model is manufactured by the Far East Joint
Venture.
Semiconductor Chemical Mechanical Polishing (CMP). The Company's CMP-V is a
five head, two polishing table CMP system. The Company's CMP process is
currently characterized for oxide and metal (tungsten) applications. The
system incorporates full cassette-to-cassette automation. Robotics remove the
wafers from the cassette and place them into the buffer tray. The wafers are
then staged for batch pickup by the polishing heads. Once secured by the
polishing heads, the wafers are moved onto the primary polishing pad and the
process is initiated. The polishing table, covered with a flat polishing pad,
rotates at a variable speed throughout the polishing cycle. Upon completion of
the initial polish, the wafers are transported either to a rinsing station or
to a second polishing table for an additional polishing or buffing step. The
wafers are then rinsed and placed into the output buffer tray, scrubbed on
both sides with a wet PVA sponge and placed wet into the output cassettes. The
system is self-enclosed, and has its own air filtration and air flow
management system. The CMP-V offers compatibility with all commonly used
slurry chemistries.
2
<PAGE>
General Industrial. The Company offers a broad line of lapping, grinding and
polishing systems for the general industrial market. The line includes
approximately 35 models of single-side processing machines, double-side
processing machines, in-line grinding systems, optics polishing machines and
optics curve generating machines. The product offering is available in a wide
range of sizes from a 12 inch plate diameter up to a 150 inch plate diameter.
Each system typically consists of a specialized machining plate, a rotating
spindle, a means to fix and apply pressure to the workpieces, an abrasive
distribution system and a control system.
Parts and Expendables
The Company markets a broad line of parts and expendables. These products
include general spare parts, bearings, grinding stones, lapping plates,
workpiece carriers, seals, retaining rings, workholders and polishing pads.
These products are typically obtained from outside vendors and are generally
manufactured to the Company's specifications. The Company's parts and
expendables management system provides customer service representatives with
detailed product specifications and availability information. The Company
maintains spare parts inventories at three U.S. locations and two European
locations. The Company believes that its ability to quickly supply parts and
expendables is an important factor in its ability to provide customers with a
total solution.
Slurries
The Company offers a broad line of slurry and slurry components (including
vehicles and abrasives) used in surface treatment processes as part of a total
process solution. Polishing slurry consists of abrasive particles contained in
a liquid vehicle that may contain a suspension agent and may be chemically
active. The slurries marketed by the Company are used by manufacturers of thin
film memory disk media, semiconductor wafers and other products as part of
their polishing processes. Substantially all of the slurries sold by the
Company are manufactured by Fujimi Incorporated.
The Company has entered into a joint venture (the "Fujimi Joint Venture")
with Fujimi Incorporated to sell certain products in North and South American
markets, including slurry and slurry components. The Company distributes thin
film memory disk polishing slurry and related products supplied by Fujimi
Incorporated, while the Fujimi Joint Venture distributes other products
supplied by Fujimi Incorporated. To date, no material sales of products have
been made to South American markets by the Fujimi Joint Venture. See "--Joint
Venture Arrangements--Fujimi Joint Venture."
The slurry for thin film memory disk media polishing applications is
available in different varieties to address the varying needs of each specific
process. Some formulations allow higher stock removal rates and others
emphasize surface finish results. There are also a variety of slurry
formulations available for silicon wafer processing. Slurry is an essential
process component in chemical mechanical polishing. The chemical action of
this process is implemented by designing the slurry to be chemically active
with the surface to be polished, typically by adjusting the pH of the slurry
vehicle. The mechanical portion of the process is accomplished by abrasive
particles in the slurry.
The Company believes that meeting the evolving slurry requirements of each
customer is vital to providing a total process solution. The Company intends
to continue to maintain an emphasis on slurry distribution and to work closely
with Fujimi Incorporated in developing, designing and formulating customized
slurries that address specific customer needs.
Customers
The Company sells its products to leading manufacturers of thin film memory
disks, semiconductor wafers, semiconductor devices and general industrial
applications. Certain of the Company's top customers in fiscal
3
<PAGE>
1994, 1995 and 1996 in the thin film memory disk media, semiconductor wafer,
general industrial application, semiconductor CMP and slurries markets are
listed below.
<TABLE>
<CAPTION>
SEMICONDUCTOR GENERAL
THIN FILM WAFER INDUSTRIAL
MEMORY DISK MEDIA ---------------- APPLICATIONS
----------------- --------------
<S> <C> <C>
Akashic MEMC Coors Ceramics
HMT Siltec Hayward Quartz
IBM Sumitomo Sitix Motorola
Komag Wacker Siltronic Pilkington
Seagate
StorMedia
</TABLE>
<TABLE>
<CAPTION>
SEMICONDUCTOR CMP* SLURRIES
------------------ --------
<S> <C>
AMD Akashic
Digital Equipment HMT
Hewlett-Packard IBM
Mosel Vitelic Komag
Motorola Seagate
Rockwell
Siemens
</TABLE>
- --------
* Through May 31, 1996, the Company had shipped an aggregate of 28 CMP-V
systems to the seven customers listed.
One customer, Komag, accounted for 20.8%, 20.6% and 17.8% of the Company's
total revenue in fiscal years 1994, 1995 and 1996, respectively. In addition,
during fiscal 1994 and 1995, Akashic accounted for 10.1% and 10.9% of the
Company's total revenue, respectively, and, in fiscal 1994, Seagate accounted
for 11.3% of the Company's total revenue. The Company's ten largest customers
accounted for 69.3%, 66.9% and 64.4% of the Company's total revenue in fiscal
years 1994, 1995 and 1996, respectively.
Sales and Marketing
The Company markets and sells its products in North America through a
combination of direct sales personnel and distributors. The Company sells
directly to the thin film memory disk media and semiconductor industries and
uses a network of 19 regional distributors for its general industrial product
lines. In its European operations, the Company uses direct sales personnel and
a small number of distributors.
The Company's sales strategy emphasizes direct interaction with customers,
particularly in the memory disk and semiconductor industries, where ongoing
customer support and service are critical. The Company's direct sales force is
divided into focused units for each of the thin film memory disk media,
semiconductor wafer and semiconductor device industries.
At May 31, 1996, the U.S. direct sales organization had a total of 28 sales
personnel. The Company has sales offices in Chandler, Arizona and Elk Grove
Village, Illinois. The Company also had an aggregate of seven direct sales
personnel in the SpeedFam U.K. and SpeedFam Germany offices. To enhance its
sales capabilities, the Company maintains process development and
demonstration laboratories in its locations in the U.S. and Europe. Sales and
marketing activities in the Far East are conducted by the Far East Joint
Venture. See "--Joint Venture Arrangements--Far East Joint Venture."
The Company's marketing strategy includes involvement with SEMATECH, Inc., a
consortium of major semiconductor manufacturers and equipment suppliers,
attendance at Semicon, Diskcon, IMTS and other trade shows and the sponsorship
of technical conferences, which include the presentation of technical papers
written
4
<PAGE>
by customers, university scientists and the Company's own senior
technologists. The Company believes these initiatives serve to promote
acceptance of the Company's products and process technologies in the thin film
memory disk, semiconductor and other industries.
Customer Service and Support
The Company believes that providing highly responsive service is an
essential factor in providing a total solution to its customers. In order to
provide customers with experienced service and support personnel, the Company
has structured its service operations into distinct service units responsible
for each of the thin film memory disk media, semiconductor wafer,
semiconductor device and general industrial products industries. Elements of
the Company's customer service and support program include system installation
and process certification, process support, machine repair, providing spare
parts inventories, internal training programs, external customer training,
documentation and formation of customer user groups. At May 31, 1996, the
Company had 83 service employees in the U.S. and Europe. For large users of
the Company's systems, the Company often creates a customized service
arrangement designed to meet the specific requirements of the customer.
The Company generally provides a one year warranty on all equipment it
sells. Field service personnel provide warranty service, post-warranty
service, and equipment installations. Field service engineers are located in
various locations throughout the U.S., including dedicated site-specific
engineers in place at certain customer locations pursuant to contractual
arrangements. The Company also provides service and maintenance training as
well as process application training for its customers' personnel. The Company
maintains an extensive inventory of spare parts at its primary locations and
at its satellite service sites. This provides the Company the ability to
provide same day or overnight delivery for many parts.
Backlog
Backlog of orders for capital equipment, parts, expendables and slurries
decreased to approximately $52.1 million at July 31, 1996, from approximately
$63.1 million at July 31, 1995. Approximately $40.6 million, or 77.8% of the
total backlog at July 31, 1996, is comprised of orders for capital equipment.
The Company's backlog does not include orders for capital equipment or other
products manufactured by the Far East Joint Venture and distributed by the
Company in the U.S. and Europe for which the Company receives commissions. The
time between the placing of orders and shipment of parts, expendables and
slurries is significantly less than for capital equipment and as a result, the
Company's backlog consists primarily of orders for capital equipment. The
Company includes in its backlog only those customer orders for which it has
accepted signed purchase orders with assigned delivery dates within 12 months.
Orders generally carry a stipulation that customers may incur a penalty in the
event of cancellation. However, there can be no assurance that orders will not
be cancelled by customers or that the Company will obtain a meaningful penalty
payment. As a result of systems and equipment ordered and shipped in the same
quarter, possible changes in delivery schedules, occasional cancellation of
orders and delays in product shipments, the Company's backlog at any
particular date may not be indicative of actual sales for any succeeding
period.
Research, Development and Engineering
The markets in which the Company competes are characterized by evolving
industry standards and frequent improvements in products and service. To
compete effectively in its markets, the Company must continually improve its
products and its process technologies and develop new technologies and
products that compete effectively on the basis of price and performance and
that adequately address current and future customer requirements. The
Company's research, development and engineering expenditures during fiscal
1994, 1995 and 1996, were approximately $2.3 million, $2.7 million and $11.5
million, respectively.
5
<PAGE>
At May 31, 1996, the Company had an engineering staff of 41 employees and a
research and development staff of 36 employees. Because of the complex and
highly specialized design, testing and manufacturing requirements of the
Company, these employees must be experienced in a wide range of engineering
disciplines. The Company's philosophy is to maintain strong technical
expertise in each of its core competencies and to utilize consulting engineers
for non-critical portions of product development projects. The Company
believes that this approach provides flexibility and allows the Company to
shorten time to market for new products.
Product Development. Typically, the Company cultivates a "user-group" of
current and potential customers to act as technical advisors during the
conceptualization of a new product. The Company's CMP-V system was developed
in a similar manner and its development was assisted through technical
collaboration with and sponsorship by SEMATECH, Inc. and several SEMATECH,
Inc. member companies that are leaders in the use of CMP technology. From time
to time, the Company also engages in formal, funded joint development projects
with customers from the semiconductor and thin film memory disk industries as
a means to enhance its product development efforts. The Company is currently
involved in several development efforts aimed at enhancing the CMP-V system.
The Company is also currently developing a post-CMP cleaning system, which is
presently expected to be introduced during fiscal 1997. The Company is also
developing new products and new product enhancements for the semiconductor,
thin film memory disk and silicon wafer markets.
Process Development. In addition to product development, the Company
continually seeks to enhance existing processes. The Company maintains process
development laboratories in both the U.S. and Europe that are staffed with
process engineers. The Company's process engineers frequently work directly
with customers' engineers, often working within the customers' facilities.
Manufacturing and Suppliers
The Company assembles its equipment and systems from components and
fabricated parts manufactured and supplied by others, including stainless
steel plates and gears, frames and weldments, power supplies, process
controllers, robots and polishing heads. Certain of the items manufactured by
others are made to the Company's specifications. All final assembly and system
tests are performed within the Company's manufacturing/assembly facilities.
Quality control is maintained through incoming inspection of components, in-
process inspection during equipment assembly and final inspection and
operation of all manufactured equipment prior to shipment. Substantially all
of the Company's non-CMP manufacturing is located in its Des Plaines, Illinois
facility. The Company's CMP-V development and manufacturing are located at the
Company's headquarters in Chandler, Arizona.
Certain of the components and sub-assemblies included in the Company's
products are obtained from a single supplier or limited group of suppliers.
The disruption or termination of these sources could have a material adverse
effect on the Company's operations. The Company is dependent upon Fujimi
Incorporated, a Japanese company, as the sole supplier of substantially all of
the slurries sold by the Company, consisting primarily of thin film memory
disk polishing slurry. Approximately 47.1%, 43.4% and 19.7% of the Company's
total revenue in fiscal 1994, 1995 and 1996, respectively, was derived from
the sale of slurries supplied by Fujimi Incorporated. Accordingly, any
disruption in the supply provided by Fujimi Incorporated or in the overall
relationship between the Company and Fujimi Incorporated would have a material
adverse effect upon the Company. The Company has the exclusive right to
distribute Fujimi Incorporated thin film memory disk polishing slurry in North
America until October 1, 1999. See "--Joint Venture Arrangements--Fujimi Joint
Venture."
Competition
The Company competes in several distinct markets. These markets include the
thin film memory disk media equipment market, the semiconductor wafer
equipment market, the CMP equipment market, the general industrial
applications market, the slurries market and the related parts and expendables
market. In all markets, the Company competes on the basis of technology,
overall cost of ownership, product quality, price, availability, size of
installed base, breadth of product line and customer service and support.
6
<PAGE>
The Company faces substantial competition from both established competitors
and from potential new entrants, some of which have substantially greater
financial, engineering, manufacturing and marketing resources than the
Company. In each of the thin film memory disk and semiconductor wafer markets,
there are currently three principal providers of equipment, including the
Company, each of which holds a substantial position within the market. In the
CMP market, the Company faces significant competition from current competitors
and expects other competitors to enter this market in the future. IPEC
currently has the largest installed base of CMP equipment. The Company
believes that other companies are developing CMP machines and are planning to
introduce new products to the CMP market, including Applied Materials, a large
semiconductor capital equipment supplier with significant resources that could
present substantial competition for the Company. Certain competitors,
including IPEC and Applied Materials, have announced and may in the near
future begin volume shipments of multi-head CMP systems. In addition, certain
of the Company's competitors have longer-standing relationships than the
Company with particular customers, including device manufacturers. These
longer-standing relationships may make it more difficult for the Company to
sell its CMP system to such device manufacturers.
Competition in the general industrial products markets is fragmented; no one
competitor currently holds a dominant position. The slurries market presents
significant competitive pressure for the Company, particularly with regard to
pricing, resulting in decreased margins for the Company in recent periods. In
the thin film memory disk slurry market, the Company competes primarily with
Praxair, a large chemical company that manufactures and sells its own
products. In addition, the loss of the Company's distribution rights to slurry
and other products supplied by Fujimi Incorporated would have a material
adverse effect on the Company.
Employees
At May 31, 1996, the Company had 382 full time employees in the U.S. and
Europe, including 122 in manufacturing, 48 in marketing and sales, 83 in field
service, 41 in engineering, 36 in research and development and 52 in general
administration. In addition, the Company had 40 temporary contract employees
engaged principally in its assembly operations at its Chandler, Arizona and
Des Plaines, Illinois facilities. The Company believes that the use of
temporary employees allows the Company to respond more rapidly to fluctuations
in assembly and product demand and enables the Company to better control the
labor component of its manufacturing costs. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage or strike. The Company considers its employee relations to be good.
Intellectual Property
Although the Company currently holds numerous United States patents and
additional foreign patents in Japan and several Asian and European countries
and has several United States patent applications and foreign patent
applications pending, the Company believes that patents are of less
significance in its industry than such factors as continued innovation,
technical expertise and know-how of its personnel and other factors. The
Company holds numerous United States and foreign patents and has a number of
patent applications pending in the United States and in foreign countries. The
Company owns nine U.S. trademark registrations and has one application for
trademark registration pending. The Company also owns numerous foreign
trademarks.
There can be no assurance that the Company's pending patent applications
will be allowed or that the issued or pending patents will not be challenged
or circumvented by competitors. There can be no assurance that any of these
rights held by the Company will not be challenged, invalidated or
circumvented, or that such rights will provide competitive advantages to the
Company.
There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claims by third parties that the Company is infringing intellectual property
rights of such third parties. There can be no assurance that 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, if at all. The Company's
involvement in any patent
7
<PAGE>
dispute or other intellectual property dispute or action could have a material
adverse effect on the Company's business. Adverse determinations in any
litigation relating to intellectual property could possibly 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 one or more of its products. Any of these events could have a
material adverse effect on the Company.
SpeedFam, FAM, Spitfire, Rogers & Clarke and the SpeedFam logo are
registered trademarks of the Company.
JOINT VENTURE ARRANGEMENTS
Far East Joint Venture
SpeedFam Co., Ltd. (together with its subsidiaries and joint ventures, the
"Far East Joint Venture"), is headquartered in Kanagawa Prefecture, Japan.
Generally, the Far East Joint Venture designs, produces and markets in the Far
East equipment similar to that produced by the Company in the U.S. The Far
East Joint Venture conducts operations primarily in Japan but has subsidiaries
and branches located in China, Hong Kong, India, Korea, Singapore, Taiwan and
Thailand, and owns a majority interest in a Japanese subcontract manufacturing
organization, Saku Seiki Co. Ltd. ("Saku Seiki"). The Far East Joint Venture
operations in China, Hong Kong, Singapore, Korea and Thailand are primarily
marketing, sales and service functions. The subsidiaries in India and Taiwan
also include manufacturing facilities where certain of the equipment sold by
the subsidiaries is produced. Through a joint venture with Met-Coil Systems
Corporation (a U.S. company), the Far East Joint Venture manufactures and
markets in the Far East sheet metal forming equipment developed by Met-Coil
Systems Corporation.
Background. During the late 1960's, the Company marketed its products in
Japan through Japanese trading companies. At that time, the Company believed
that a presence in the Japanese market would enhance its competitive position
in the U.S. as well as provide additional sources of income and access to
technology. For numerous business and cultural reasons, the Company believed
it could most effectively penetrate the Japanese market with the aid of a
Japanese partner. In 1970 the Company entered into a joint venture with a
Japanese company, Obara Corporation ("Obara"), pursuant to which the Far East
Joint Venture was formed. The Company and Obara each own a 50% interest in the
Far East Joint Venture. Obara, a privately-owned company, principally supplies
welding guns and related products to the automotive industry; its business is
unrelated to that of the Company and the Far East Joint Venture.
Terms of the Joint Venture Agreement. Pursuant to the terms of an agreement
between the Company and Obara dated November 14, 1970 (the "Joint Venture
Agreement"), the Far East Joint Venture will continue as long as SpeedFam Co.,
Ltd. is in corporate existence and both the Company and Obara are
shareholders. Both parties to the Joint Venture Agreement have agreed to
refrain from competing with the joint venture in Japan. The agreement may,
however, be terminated upon 90-days notification by either party in the event
of a substantial breach by the other party if such breach is not cured within
the 90-day period. In the event that either the Company or Obara desires to
sell its interest in the Far East Joint Venture, it must first offer its
interest to the other party, which then has 60 days to purchase the interest
at a price to be mutually agreed upon. If the interest is not purchased within
the 60-day period, the party desiring to sell its interest may sell it to a
third party free of the right of first offer provisions, provided that the
price is not less than the price initially offered by the other party.
Pursuant to the terms of a License and Technical Assistance Agreement
between the Company and SpeedFam Co., Ltd. dated November 14, 1970 (the
"Technology Agreement"), the Company licensed to the Far East Joint Venture
certain trademarks and technology, and granted to the Far East Joint Venture
the exclusive right to manufacture and sell in Japan, Korea, Taiwan, Hong
Kong, China, India, the Philippines, Thailand, Vietnam, Malaysia, Singapore
and Indonesia, and such other countries as the parties may agree to from time
to time, products similar to those manufactured and distributed by the
Company. In exchange for such rights, the
8
<PAGE>
Far East Joint Venture agreed to pay to the Company a royalty of 4% of the
total net sales of products sold by the Far East Joint Venture that
incorporate the technology. The Company also agreed to provide technical
assistance and to communicate to the Far East Joint Venture all developments
and improvements related to the technology. In addition, the Far East Joint
Venture agreed to communicate to the Company all developments and improvements
known to the Far East Joint Venture relating to the technology, and the
Company agreed to pay to the Far East Joint Venture a 2% royalty fee on
machines sold by the Company that utilize certain of that technology. The
Technology Agreement continued for an initial term of ten years and was
renewable for subsequent ten year periods. By oral agreement in 1980, the
Technology Agreement was extended and amended to reduce the percentage of
royalties to be paid by the Far East Joint Venture. Notwithstanding the
requirements of the Technology Agreement, although the Far East Joint Venture
had transferred technology to the Company, the Company and the Far East Joint
Venture agreed that no royalties would be paid by the Company. By oral
agreement in 1990, the Technology Agreement was extended for a new ten-year
period. By oral agreement in 1991, the Technology Agreement was amended to
eliminate the payment of royalties by either party. On July 24, 1995, the
foregoing oral agreements were confirmed in writing. Unless extended, the
Technology Agreement will expire in November 2000.
Since the inception of the Far East Joint Venture, the Company and the Far
East Joint Venture have worked cooperatively on various research and
development projects and each entity has communicated significant technology
to the other. It is not anticipated that either the Company or the Far East
Joint Venture will pay royalties to the other in connection with the transfer
of technology in the foreseeable future, including with respect to the
Company's CMP technology.
Management. SpeedFam Co., Ltd. currently has eight directors serving on its
Board of Directors, including Messrs. Farley and Kouzuma, the Chairman and
President of the Company, respectively, as well as Hiroshi Obara, Suminori
Suzuki, Ryosuke Tojo, Shinya Iida, Hatsuyuki Arai and Isao Nagahashi. Mr.
Kouzuma is the Executive Vice President and General Manager of SpeedFam Co.,
Ltd. and is responsible for day to day operations and acts as the primary
liaison between the Company and Obara. Mr. Obara is the President of the Far
East Joint Venture. Mr. Suzuki, an employee of Obara, is the senior finance
officer of the Far East Joint Venture. Mr. Tojo is director of sales for the
silicon wafer market and also assists in the overall management of operations.
Mr. Iida is the chief technical officer and is responsible for all research,
development and engineering operations. Messrs. Arai and Nagahashi are the
directors of CMP and thin film memory disk technology, respectively, and
report to Mr. Iida. The Joint Venture Agreement provides limited direction
with respect to the relationship between the joint venture partners and the
operation and management of the Far East Joint Venture. To date, decisions
with respect to the strategic direction of the Far East Joint Venture have
been made by the Company and Obara from time to time on the basis of informal
discussions and the relationships forged over time by the individuals.
Business transactions between the Company and the Far East Joint Venture,
including those relating to the absence of payment of royalties on transfers
of certain technology, may not be consistent with business decisions and
results that would exist between two independent entities dealing at arms-
length.
Financial Information. During the Company's 1994, 1995 and 1996 fiscal
years, the Company's share of the net earnings of the Far East Joint Venture
was $450,000, $1.1 million and $4.8 million, respectively, representing 19.1%,
66.9% and 40.3%, respectively, of the Company's net earnings. The Far East
Joint Venture has not paid significant dividends in the past and is expected
to retain substantially all of its earnings in the foreseeable future to
support the growth of its business. As a result, the Company's share of the
net earnings of the Far East Joint Venture has not in the past resulted and is
not expected in the future to result in a like effect on the cash flows of the
Company. During fiscal 1994, 1995 and 1996, 4.0%, 4.5% and 5.2% respectively,
of the Company's total revenue was attributable to commissions earned on
products produced by the Far East Joint Venture and which were sold by the
Company. At May 31, 1996, the Company's equity interest in the Far East Joint
Venture was $18.5 million, representing 17.2% of the Company's total assets
and 30.9% of shareholders'
equity. Set forth below is certain selected financial information with respect
to the Far East Joint Venture which has been derived from consolidated
financial statements which have been audited by KPMG Peat Marwick LLP.
9
<PAGE>
Such information should be read in conjunction with the consolidated financial
statements and notes thereto of the Far East Joint Venture appearing elsewhere
herein.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
1994 1995 1996
------- -------- --------
(in thousands)
Consolidated Statement of Earnings Data:
<S> <C> <C> <C> <C>
Net sales........................................ $87,217 $108,664 $161,169
Gross profit..................................... $23,812 $ 31,576 $ 54,257
Operating profit................................. $ 2,908 $ 6,467 $ 19,959
Net earnings(1).................................. $ 1,084 $ 2,169 $ 9,637
Consolidated Balance Sheet Data (at period end):
Working capital.................................. $18,377 $ 23,779 $ 23,526
Total assets..................................... $86,869 $110,813 $126,551
Long-term debt, less current portion............. $12,387 $ 12,528 $ 9,106
Stockholders' equity............................. $26,641 $ 34,215 $ 37,091
</TABLE>
- --------
(1) Approximately one-half of such amount is recognized by the Company on the
equity method as "equity in net earnings of affiliates."
Products and Customers. Generally, the Far East Joint Venture designs,
produces and markets in the Far East equipment similar to that produced by the
Company in the U.S. The Far East Joint Venture's product mix is significantly
different than the Company's primarily because, as a percentage of sales, the
Far East Joint Venture sells substantially less slurry and slurry components
than the Company (Fujimi Incorporated sells slurries directly in the Far East)
and because of differences in the composition of the U.S. and Far East
markets. The Far East Joint Venture also designs, produces and markets edge
and flat polishing machines for the semiconductor wafer market and pre-
deposition cleaning machines for the thin film memory disk market and, more
recently, the flat panel display market. The Company distributes these
machines in the U.S. and Europe. The Far East Joint Venture also markets parts
and expendables and, to a much lesser degree than the Company, slurries
(primarily to thin film memory disk and silicon wafer manufacturers).
The Far East Joint Venture has developed and is currently manufacturing and
marketing a two head CMP system. The rate of adoption of the CMP process in
the fabrication of memory devices, which are predominately the type of
semiconductor devices manufactured in the Far East, has been historically
lower than that for advanced logic devices, which are widely manufactured in
the U.S. Accordingly, the marketing of the CMP system manufactured by the Far
East Joint Venture is substantially dependent on the rate of adoption of the
CMP process by the memory device manufacturing industry in the Far East
market.
The Far East Joint Venture's products are sold to semiconductor wafer
(primarily silicon), thin film memory disk and general industrial (primarily
quartz, ceramic and LCD glass) manufacturers. Major end user customers of the
Far East Joint Venture include: NSC Electron Corporation (silicon wafer
manufacturer), Nippon Light Metal Co. Ltd. (aluminum thin film memory disk
substrate manufacturer), Siltron Inc. (silicon wafer manufacturer), Toshiba
Ceramics Co., Ltd. (silicon wafer manufacturer) and Kobe Precision Technology
(thin film memory disk manufacturer). During the Far East Joint Venture's
fiscal years 1994, 1995 and 1996, sales to certain customers through Fujimi
Incorporated, acting as a distributor, accounted for approximately 7%, 11% and
12% of net sales, respectively.
Competition. The Far East Joint Venture competes in several distinct markets
including the semiconductor substrate equipment market, the thin film memory
disk equipment market and the general industrial equipment applications market
(primarily quartz, ceramic and LCD glass) and the slurries market. The Far
East Joint Venture competes on the basis of technology, overall cost of
ownership, product quality, price, availability, size of installed base,
breadth of product line and customer service and support. The Far East Joint
Venture faces intense competition from established competitors, some of which
have substantially greater financial, engineering, manufacturing and marketing
resources. In the equipment markets served, the Far East Joint Venture
10
<PAGE>
generally competes with a relatively small number of competitors which,
together with the Far East Joint
Venture, provide a substantial majority of the products sold into those
markets. In the slurries market, Fujimi Incorporated is the provider of
substantially all of the slurries sold by the Far East Joint Venture. Fujimi
Incorporated also sells directly to end users and is a dominant supplier and
distributor of slurries in the Far East region.
Sales, Marketing and Service. The Far East Joint Venture markets and sells
its products through a combination of Japanese trading companies and direct
sales personnel. As is customary in Japan, the Far East Joint Venture sells a
substantial portion of the products sold in Japan through trading companies,
although the Far East Joint Venture sales personnel have primary
responsibility for most aspects of the sale. The Far East Joint Venture
maintains a field service organization consisting of 42 persons based in the
major locations where the Far East Joint Venture maintains a presence, such as
Japan, India Korea, Singapore Taiwan and Thailand.
Research, Development and Manufacturing. The Far East Joint Venture
maintains a research and development staff of 56 persons. Research and
development efforts are focused on enhancing existing products as well as
developing new products and generally cover a broader range of products and
technologies than the Company's research and development efforts. The Company
and the Far East Joint Venture have in the past collaborated on various
projects and are expected to do so in the future.
The Far East Joint Venture or manufacturing subcontractors retained by the
Far East Joint Venture typically manufacture equipment and systems from
components and fabricated parts manufactured and supplied by others. Certain
of the items manufactured by others are made to the Company's specifications.
A portion of the products sold by the Far East Joint Venture are manufactured
by the Far East Joint Venture's majority owned subsidiary, Saku Seiki, and a
substantial portion are manufactured by unaffiliated third party
subcontractors for the Far East Joint Venture.
Employees. At May 1, 1996, the Far East Joint Venture had 394 full-time
employees, including 318 in Japan, 4 in Thailand, 12 in Korea, 32 in Taiwan,
17 in India, 8 in Singapore, 1 in Shanghai and 2 in Hong Kong. Of these
employees, 70 are engaged in manufacturing, 66 in marketing and sales, 42 in
field service, 53 in engineering, 56 in research and development, 47 in
management and 60 in clerical and general administration.
Certain Relationships. The Company acts as distributor in North America and
Europe of certain machines produced by the Far East Joint Venture. During
fiscal 1995 and 1996, commissions paid to the Company relating to such
distribution amounted to approximately $2.8 million and $6.3 million,
respectively. Further, the Company purchases certain components used in its
machines from the Far East Joint Venture. During fiscal 1995 and 1996,
purchases of components from the Far East Joint Venture totaled approximately
$3.0 million and $5.6 million, respectively.
Messrs. Farley and Kouzuma receive certain amounts from the Far East Joint
Venture consisting of directors' fees and bonuses, as well as dividends on
their individual holdings of stock in certain of SpeedFam Co., Ltd.'s
subsidiaries. During the Far East Joint Venture's fiscal year ended April 30,
1995, Messrs. Farley and Kouzuma received an aggregate of approximately
(Yen)15.3 million ($156,600) and (Yen)32.9 million, ($336,800), respectively
(based upon the yen/dollar exchange rate on dates of payment). During the Far
East Joint Venture's fiscal year ended April 30, 1996, Mr. Kouzuma received an
aggregate of approximately (Yen)39.2 million ($399,587) (based upon the
yen/dollar exchange rate on dates of payment). Pursuant to Mr. Farley's
employment agreement with the Company, all amounts payable to Mr. Farley from
the Far East Joint Venture since the date of his employment agreement and
through April 30, 1996, totaling approximately $85,000, were directed to the
Company. Prior to entering into his employment agreement with the Company and
for the fiscal year ended April 30, 1996, Mr. Farley received an aggregate of
approximately $44,000 from the Far East Joint Venture (based upon the
yen/dollar exchange rate on dates of payment).
Both Messrs. Farley and Kouzuma serve as directors of SpeedFam Co., Ltd. In
addition, both serve as directors of SpeedFam Clean Systems Co. Ltd., a
majority owned subsidiary of SpeedFam Co., Ltd. Mr.
11
<PAGE>
Kouzuma also serves as President of SpeedFam Clean Systems Co. Ltd. In
addition, each of Messrs. Farley and Kouzuma own 5% of the outstanding capital
stock of SpeedFam Clean Systems Co., Ltd. Messrs. Farley and Kouzuma also
serve as directors of Met-Coil Limited, SpeedFam Co. Ltd.'s 50%-owned joint
venture. Mr. Kouzuma owns 10.62% of the outstanding capital stock of Saku
Seiki, a majority owned subsidiary of SpeedFam Co., Ltd., and serves as a
director of Saku Seiki. Messrs. Farley and Kouzuma also serve as directors of
several wholly owned subsidiaries of SpeedFam Co. Ltd., namely SpeedFam Korea
Limited, SpeedFam Incorporated in Taiwan and SpeedFam India (Pvt.) Ltd.
Fujimi Joint Venture
Pursuant to a joint venture agreement dated September 7, 1984, the Company
and Fujimi Incorporated formed Fuijimi Corporation, an Illinois corporation
(the "Fujimi Joint Venture"). Each of Fuijimi Incorporated and the Company
owns 50% of the Fujimi Joint Venture's common stock. Fujimi Incorporated, a
publicly traded company in Japan, is a manufacturer of slurry, abrasives and
compounds in Japan. The initial term of the joint venture agreement was for a
period of five years, but the agreement continues in effect until such time as
either party terminates upon written notice delivered to the other party upon
one-year notice. The agreement may also be terminated upon 60-days
notification by either party in the event of a breach by the other party if
such breach is not cured within 60 days.
The Fujimi Joint Venture was organized to sell Fujimi Incorporated products
in North and South America. The Fujimi Joint Venture distributes abrasives,
polishing pads, diamond wheels and other products to the semiconductor wafer
and general industrial markets. Notwithstanding the written terms of the joint
venture agreement, the Company, through SpeedFam U.S., has distributed a
variety of products, primarily slurry, to manufacturers of thin film memory
disks. The Company has the exclusive right to distribute Fujimi Incorporated
memory disk polishing slurry in North America until October 1, 1999. Revenue
from sales of products by the Fujimi Joint Venture were $12.3 million in
fiscal 1994, $15.8 million in fiscal 1995 and $19.7 million in fiscal 1996.
For a description of other business relationships between the Company and
Fujimi Incorporated, see "Business--Manufacturing and Suppliers." The Fujimi
Joint Venture imports the products it sells and purchases such products in
non-U.S. dollar denominated transactions. This business is subject to both
foreign exchange rate fluctuations and has recently experienced increased
competition which drives down selling prices, the result of which is lower
gross margins for the Fujimi Joint Venture.
The Fujimi Joint Venture currently has six directors serving on its Board of
Directors, including Mr. Farley, Chairman of the Company, Mr. Kouzuma,
President of the Company, and Mr. Augur, President of SpeedFam U.S. The other
three directors, Messrs. Isamu Koshiyama, Shoji Azuma and Sadao Nakamura are
representatives of Fujimi Incorporated. Day to day management of the Fujimi
Joint Venture is under the control of its president, Mr. Donald R. Hixson. The
Fujimi Joint Venture employs four full-time sales personnel.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
HELD PRESENT OTHER POSITIONS HELD
NAME AND POSITION AGE OFFICE SINCE DURING PAST FIVE YEARS
----------------- --- ------------ ----------------------
<S> <C> <C> <C>
James N. Farley..................... 67 1993 President
Chairman of the Board and Chief Ex-
ecutive Officer
Makoto Kouzuma...................... 56 1993 Executive Vice President
President and Chief Operating Offi-
cer
Roger K. Marach..................... 50 1988
Treasurer, Chief Financial Officer
and Assistant Secretary
Christopher E. Augur................ 36 1993 Executive Vice President
of SpeedFam Corporation
and General Manager of
SpeedFam Corporation
President of SpeedFam Corporation
Robert R. Smith..................... 53 1974
Managing Director of SpeedFam Lim-
ited
</TABLE>
12
<PAGE>
ITEM 2. PROPERTIES.
The Company currently owns or leases buildings containing a total of
approximately 130,000 square feet of space in the U.S. and Europe, including
approximately 79,000 square feet of factory/assembly area and approximately
51,000 square feet of corporate office space. The Company's U.S. operations
(the SpeedFam International, Inc. headquarters and the SpeedFam U.S.
subsidiary) account for approximately 119,000 square feet of the total, of
which approximately 42,000 square feet is owned and the balance of
approximately 77,000 square feet is leased. The Company maintains locations in
the United States in Chandler, Arizona, Des Plaines, Illinois, Elk Grove
Village, Illinois, Austin, Texas, Portland, Oregon and Fremont, California.
SpeedFam U.K. is located in Hinckley, England and it maintains approximately
9,000 square feet of owned space. SpeedFam Germany leases approximately 2,000
square feet of office space in Inglefingin, Germany.
The Company recently began construction of a corporate headquarters and
manufacturing facility, consisting of approximately 135,000 square feet, on
13.5 acres of land purchased by the Company. Full occupancy of the building is
anticipated in the fourth quarter of fiscal 1997. The Company believes that
its facilities, after the completion of the new facility, will be adequate to
meet its requirements for the foreseeable future and that suitable additional
or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material legal proceedings.
The Company's wholly owned subsidiary, FamTec AG, incorporated under the
laws of Switzerland, engaged in the manufacture, sale and service of through-
feed grinding systems for the general industrial market. As a result of
declining sales, the Company decided to terminate Swiss operations and to seek
protection under the bankruptcy laws of Switzerland. A voluntary petition for
bankruptcy was filed with Swiss authorities in November, 1993. Subsequently,
creditors' claims were adjudicated and all Swiss assets liquidated. On July
27, 1995, the Bankruptcy Administrator paid out the liquidation proceeds to
creditors, and the bankruptcy matter was closed. Under the laws of
Switzerland, members of the Board of Directors of an entity have potential
personal liability for the debts of the bankrupt entity. Mr. Farley, Chairman
and Chief Executive Officer of the Company, was a director of FamTec AG.
Because no creditor filed within the ten-day period to reserve rights against
the directors of FamTec AG, no personal liability is expected to result.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDERS OF
RECORD AS OF
TITLE OF CLASS MAY 31, 1996
- -------------- ---------------
<S> <C>
Common Stock, no par value...................................... 93
===
</TABLE>
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SFAM." Public trading of the Common Stock commenced on October 10,
1995. Prior to that time, there was no public market for the Company's Common
Stock. The following table sets forth the high and low closing sale prices for
the Common Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1996
Second Quarter (from October 10, 1995)........................ $18 1/4 $11 1/8
Third Quarter................................................. 16 1/2 9 1/2
Fourth Quarter................................................ 22 12
Fiscal 1997
First Quarter (through August 9, 1996)........................ $20 1/8 $12
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and does not intend to pay any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends
in the future, if any, will be made at the discretion of the Board of
Directors of the Company. Such decisions will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of earnings data for the years ended May 31,
1994, 1995 and 1996 and the consolidated balance sheet data as of May 31, 1995
and 1996 are derived from the Company's consolidated financial statements and
notes thereto which have been audited by KPMG Peat Marwick LLP, independent
public accountants and are included elsewhere herein. The consolidated
statement of earnings data for the years ended May 31, 1992 and 1993 and the
consolidated balance sheet data as of May 31, 1992, 1993 and 1994 are derived
from the Company's consolidated financial statements which have been audited
by KPMG Peat Marwick LLP but are not included herein. The selected
consolidated financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's consolidated financial statements,
appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Net sales...................... $36,178 $42,542 $49,247 $57,021 $113,880
Commissions.................... 3,431 772 2,134 2,757 6,290
------- ------- ------- ------- --------
Total revenue.................. 39,609 43,314 51,381 59,778 120,170
Cost of sales.................. 28,059 32,472 38,945 45,494 78,661
------- ------- ------- ------- --------
Gross margin................. 11,550 10,842 12,436 14,284 41,509
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research, development
and engineering........ 1,032 1,778 2,267 2,740 11,496
Selling, general and
administrative
expenses............... 10,687 8,545 8,988 9,948 18,922
------- ------- ------- ------- --------
Operating profit (loss). (169) 519 1,181 1,596 11,091
Interest expense........ (878) (824) (697) (959) (691)
Other income, net....... 442 433(2) 974 6 483
------- ------- ------- ------- --------
Earnings (loss) from
consolidated companies
before income taxes and
cumulative effect of
change in accounting
principle.............. (605) 128 1,458 643 10,883
Income tax expense
(benefit)............... 171 573 (160)(3) 186 4,266
------- ------- ------- ------- --------
Earnings (loss) from
consolidated companies
before cumulative
effect of change in
accounting principle... (776) (445) 1,618 457 6,617
Equity in net earnings
(loss) of
affiliates(1).......... 1,830 (45) 655 1,187 5,204
Cumulative effect of
change in accounting
principle for income
taxes.................. -- -- 78 -- --
------- ------- ------- ------- --------
Net earnings (loss)..... $ 1,054 $ (490) $ 2,351 $ 1,644 $ 11,821
======= ======= ======= ======= ========
Net earnings (loss) per
share................... $ 0.14 $ (0.06) $ 0.31 $ 0.20 $ 1.16
======= ======= ======= ======= ========
Weighted average common
and common equivalent
shares................. 7,632 7,615 7,619 8,146 10,159
======= ======= ======= ======= ========
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $ 6,503 $ 5,944 $ 9,980 $11,072 $ 31,193
Total assets............ 35,136 35,715 45,709 60,029 107,984
Long-term obligations,
less current
maturities............. 8,358 8,133 9,716 10,362 2,593
Shareholders' equity.... 14,339 15,669 18,576 23,037 60,039
</TABLE>
- --------
(1) Includes $1,584,000, ($285,000), $450,000, $1,100,000 and $4,759,000 for
the 1992 through 1996 fiscal years, respectively, attributable to the
Company's share of net earnings (loss) from the Far East Joint Venture,
accounted for on the equity method. See "Business--Joint Venture
Arrangements," the consolidated financial statements of the Far East Joint
Venture included elsewhere herein. The remainder represents the Company's
share of net earnings from the Fujimi Joint Venture.
(2) Reflects charges of $300,000 related to the bankruptcy of a subsidiary
operating in Switzerland.
(3) Reflects income tax benefit of $740,000 related to the bankruptcy of a
subsidiary operating in Switzerland.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The Company designs, manufactures, markets and services high throughput
precision surface processing systems used in the fabrication of thin film
memory disk media, semiconductor wafers, general industrial components and,
more recently, semiconductor devices through chemical mechanical polishing, or
"CMP." In addition, the Company markets and distributes parts and expendables
and slurries. The Company's total revenue consists of net sales in two
business segments: (i) equipment, parts and expendables, and (ii) slurries, as
well as commissions earned on the distribution in the U.S. and Europe of
products of the Far East Joint Venture. Sales of the Company's products are
recorded upon shipment or when the product is accepted by the customer,
provided that no significant obligations remain outstanding and collection of
the related receivable is deemed probable. The Company accrues estimated
warranty and installation expenses for each equipment and system order at the
time the order is shipped.
Equipment, parts and expendables consist of capital equipment manufactured
by the Company, spare parts for that equipment and expendable products, such
as bearings, grinding stones, lapping plates, workpiece carriers, seals,
retaining rings, workholders and polishing pads. During fiscal year 1994, 1995
and 1996, 49.4%, 52.3% and 77.3%, respectively, of the Company's net sales was
attributable to the sale of capital equipment, parts and expendables.
Historically, the gross margin for products in this segment has been
significantly higher than that for slurries.
Slurries consist of polishing slurry and slurry components (including
vehicles and abrasives) used in surface processing. During fiscal year 1994,
1995 and 1996, 50.6%, 47.7% and 22.7%, respectively, of the Company's net
sales was attributable to the sale of slurries. Substantially all of the
slurries sold by the Company are manufactured by Fujimi Incorporated.
Historically, the gross margin for slurries has been significantly lower than
that for equipment, parts and expendables. In recent years, the Company has
experienced severe competitive pressure in the sale of slurries and has been
required to reduce prices. In addition, the Company has experienced increased
slurry costs. The Company expects that these trends will continue.
Commissions from affiliate ("commissions") consist primarily of revenue
derived from the distribution by the Company in the U.S. and Europe of
products of the Far East Joint Venture for which the Company acts as sales
agent. Certain capital equipment marketed and distributed by the Company is
produced solely by the Far East Joint Venture. The Company distributes such
products throughout the U.S. and Europe and receives commissions thereon. Such
amount reflects the difference between the imported equipment's cost to the
Company and sales price to the customer. For fiscal 1994, 1995 and 1996,
commissions accounted for 4.2%, 4.6% and 5.2%, respectively, of total revenue.
International sales by the Company's wholly owned subsidiaries in Europe
accounted for 17.3% of total revenue in fiscal 1995 and 10.1% of total revenue
in fiscal 1996. Approximately 54% and 59% of the Company's total revenue in
Europe in fiscal 1995 and 1996 were attributable to the sale of slurries. In
fiscal 1994, as a result of the bankruptcy of FamTec AG, the Company wrote off
its investment in FamTec AG, formerly a wholly owned subsidiary of the
Company. The net liabilities of FamTec AG and the removal of the foreign
currency translation adjustment from consolidated shareholders' equity
resulted in a pretax gain of $303,000 and an income tax benefit of $740,000 in
fiscal 1994. See "Legal Proceedings."
The Company generally enters into foreign exchange contracts to hedge
certain firm commitments denominated in foreign currencies, principally in
Japanese yen. The terms of the contracts are rarely more than one year.
Currency variations have had an immaterial effect on the Company's results of
operations for the periods presented. Net assets of the Company's foreign
subsidiaries and 50% of the net assets of the Far East Joint Venture were
approximately $20.9 million at April 30, 1996 (the end of fiscal 1996 of such
entities).
The Company owns a 50% interest in both the Far East Joint Venture and the
Fujimi Joint Venture. The Company's equity interests in the joint ventures are
accounted for on the equity method. As a result, the Company's share of the
net earnings of the Far East Joint Venture and the Fujimi Joint Venture appear
in the
16
<PAGE>
"Equity in net earnings of affiliates" caption on the Company's consolidated
statements of earnings. Neither the Far East Joint Venture nor the Fujimi
Joint Venture has paid significant dividends in the past and both are expected
to retain substantially all earnings in the foreseeable future. The Company's
share of the net earnings of the Far East Joint Venture has not in the past
resulted and is not expected in the future to result in a like effect on the
cash flows of the Company. At May 31, 1996, the Company's equity interest in
the Far East Joint Venture was $18.5 million, representing 17.2% of the
Company's total assets and 30.9% of shareholders' equity. The net earnings of
the Company in the past have been substantially influenced by the results of
operations of the Far East Joint Venture and can be expected to continue to be
so influenced in the future. See "Business--Joint Venture Arrangements" and
the consolidated financial statements of SpeedFam Co., Ltd. included elsewhere
herein.
The Company began development of its CMP product, the CMP-V, in 1990. The
Company initiated volume shipments of the CMP-V in 1994. CMP-V sales accounted
for 34.7% of net sales for fiscal 1996, as compared to 7.9% of net sales for
fiscal 1995. The CMP-V generally has gross margins higher than those of the
Company's other capital equipment products.
Historically, a disproportionate share of the Company's revenue and
operating profit has been attributable to the last two quarters of the
Company's fiscal year, primarily the fourth quarter. In particular, the
Company typically experiences a decline in revenues and operating profit from
the fourth fiscal quarter to the first fiscal quarter of the succeeding year.
The Company believes that this decline is primarily due to the seasonal buying
patterns of its customers. Sales of slurries tend to be more consistent than
equipment sales on a quarterly basis.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of earnings
data for the periods indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
YEARS ENDED MAY
31,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
REVENUE:
Net sales................................................. 95.8% 95.4% 94.8%
Commissions............................................... 4.2 4.6 5.2
----- ----- -----
Total revenue............................................. 100.0 100.0 100.0
Cost of sales............................................. 75.8 76.1 65.5
----- ----- -----
Gross margin............................................ 24.2 23.9 34.5
OPERATING EXPENSES:
Research, development and engineering..................... 4.4 4.6 9.6
Selling, general and administrative expenses.............. 17.5 16.6 15.7
----- ----- -----
Operating profit.......................................... 2.3 2.7 9.2
Interest expense.......................................... (1.4) (1.6) (0.6)
Other income, net......................................... 1.9 -- 0.4
----- ----- -----
Earnings from consolidated companies before income taxes
and cumulative effect of change in accounting principle.. 2.8 1.1 9.0
Income tax expense (benefit).............................. (0.3) 0.3 3.5
----- ----- -----
Earnings from consolidated companies before cumulative
effect of change in accounting principle................. 3.1 0.8 5.5
Equity in net earnings of affiliates...................... 1.3 2.0 4.3
Cumulative effect of change in accounting principle for
income tax............................................... 0.2 -- --
----- ----- -----
Net earnings.............................................. 4.6% 2.8% 9.8%
===== ===== =====
</TABLE>
17
<PAGE>
FISCAL 1996 COMPARED WITH FISCAL 1995
Net Sales. Net sales for the fiscal year ended May 31, 1996 were $113.9
million, up 99.7% over net sales of $57.0 million in fiscal 1995. This
increase was primarily attributable to a $58.2 million increase in sales of
equipment, parts and expendables to $88.1 million in fiscal 1996 from $29.8
million in fiscal 1995. CMP-V sales accounted for a significant portion of
this sales growth. In addition, net sales increased due to industry growth in
the thin film memory disk media and semiconductor wafer markets. As a result,
sales of related equipment, parts and expendables also increased in fiscal
1996 over fiscal 1995. Sales of slurries decreased to $25.8 million in fiscal
1996 from $27.2 million in fiscal 1995 primarily due to pricing pressure in an
extremely competitive market. European sales increased slightly to $10.9
million in fiscal 1996 from $10.4 million in fiscal 1995 primarily due to
increased sales of slurries to semiconductor manufacturers.
Commissions from Affiliate. Commissions from affiliate increased to $6.3
million in the year ended May 31, 1996, compared to $2.8 million in the year
ended May 31, 1995. The increase in fiscal 1996, as compared to fiscal 1995,
was due primarily to the increasing demand of the silicon wafer industry to
meet that industry's capacity requirements, and increased demand for certain
technologies developed and manufactured by the Far East Joint Venture.
Gross Margin. In fiscal 1996, gross margin was $41.5 million or 34.5% of
total revenue compared to $14.3 million or 23.9% of total revenue in fiscal
1995. In addition to higher sales levels, gross margin has increased due to a
considerable shift towards higher margin products in the equipment, parts and
expendables segment, particularly the CMP-V planarization system.
Research, Development and Engineering. In the year ended May 31, 1996,
research, development and engineering expense increased to $11.5 million or
9.6% of total revenue compared to $2.7 million or 4.6% of total revenue in
fiscal 1995. The Company has committed significant resources to the continued
development of the CMP process and other related technologies. The Company
believes that increased spending in research, development and engineering,
including providing required technical support services for needs of
customers, are all major factors to continued CMP sales growth.
Selling, General and Administrative. In fiscal 1996, selling general and
administrative expense increased 90.2% to $18.9 million from $9.9 million in
fiscal 1995. In fiscal 1996, selling, general and administrative expense
decreased as a percent of total revenue to 15.7% compared to 16.6% in fiscal
1995 due to the significantly higher level of sales between the same periods.
However, higher levels of spending were required to support this sales growth
including additional administrative and sales personnel, new service and sales
locations, and distributor commissions to the Far East Joint Venture on export
sales from the U.S. to the Far East region.
Interest Expense. In the year ended May 31, 1996, interest expense decreased
27.9% to $691,000 from $959,000 in fiscal 1995. The decrease was due to the
retirement of the outstanding balance of a revolving line of credit and the
retirement of long-term debt payable to a former director. As a percentage of
total revenue, interest expense decreased to 0.6% in 1996 from 1.6% in 1995.
Other Income, Net. Other income increased to $483,000 in fiscal 1996 from
$6,000 in fiscal 1995. In fiscal 1995, the Company incurred a $350,000 foreign
exchange loss on several import equipment orders. The remaining increase is
due primarily to additional interest income earned on the investment of
proceeds received upon completion of the Company's initial public offering of
Common Stock in October 1995.
Provision for Income Taxes. The Company's effective tax rate in fiscal 1996
was 39%, compared to 29% in fiscal 1995. The Company's effective income tax
rate in fiscal 1996 differs from the Federal statutory rate primarily as a
result of state taxes, net of the U.S. federal benefit. The fiscal 1995
effective tax rate differs from the statutory rate primarily as a result of
the tax benefit from the foreign sales corporation.
18
<PAGE>
Equity in Net Earnings of Affiliate. For the year ended May 31, 1996, equity
in net earnings of affiliates increased to $5.2 million compared to $1.2
million in the year ended May 31, 1995. The increase is primarily attributed
to a continued strong demand for products sold to the thin film memory and
semiconductor wafer industries by the Far East Joint Venture. In addition,
profits of the Far East Joint Venture have increased due to improvements in
manufacturing, cost reduction programs and a lower effective tax rate.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net Sales. Net sales increased 15.8% to $57.0 million in fiscal 1995 from
$49.2 million in fiscal 1994. The increase was primarily attributable to a
$5.5 million increase in equipment, parts and expendables sales to $29.8
million in fiscal 1995 from $24.3 million in fiscal 1994. A significant
portion of this increase was due to higher CMP-V sales. The increase also
reflects strong equipment demand from the semiconductor wafer and thin film
memory disk industries due to those industries' expansion of manufacturing
capacity. Slurries sales increased $2.3 million in fiscal 1995 to $27.2
million from $24.9 million in fiscal 1994 primarily as a result of an increase
in unit sales partially offset by a decrease in unit selling prices. European
sales increased 20.9% to $10.4 million in fiscal 1995 from $8.6 million in
fiscal 1994, primarily due to increased sales of slurries to semiconductor
wafer manufacturers.
Commissions. Commissions increased 29.2% to $2.8 million in fiscal 1995 from
$2.1 million in fiscal 1994, due to increased shipments of systems produced by
the Far East Joint Venture, primarily to U.S. manufacturers of semiconductor
wafers.
Gross Margin. Gross margin increased to $14.3 million in fiscal 1995 from
$12.4 million in fiscal 1994 due to higher sales volume in both business
segments. As a percentage of total revenue, gross margin decreased to 23.9% in
fiscal 1995 from 24.2% in fiscal 1994. The decrease was primarily attributable
to increased slurries unit costs and decreased unit sale prices. This decline
was partially offset by increased equipment, parts and expendables sales as a
percentage of total revenue, which traditionally have higher gross margins
than slurries.
Research, Development and Engineering. Research, development and engineering
expenses increased 20.9% to $2.7 million in fiscal 1995 from $2.3 million in
fiscal 1994. The majority of the expenses relate to the continued development
of the CMP-V and CMP process technology. In addition, the Company invested in
the development of proprietary slurries and the enhancement of existing
machines for the thin film memory disk and precision optics markets. As a
percentage of total revenue, research, development and engineering expenses
increased to 4.6% in fiscal 1995 from 4.4% in fiscal 1994.
Selling, General and Administrative. Selling, general and administrative
expenses increased 10.7% to $9.9 million in fiscal 1995 from $9.0 million in
fiscal 1994, primarily as a result of increased expenses related to the
expansion of marketing, sales and customer support functions, the addition of
new office and assembly facilities and the upgrading of management information
systems, all of which were primarily related to the CMP-V. As a percentage of
total revenue, selling, general and administrative expenses decreased to 16.6%
in fiscal 1995 from 17.5% in fiscal 1994 as a result of a larger total revenue
base.
Interest Expense. Interest expense increased 37.6% to $959,000 in fiscal
1995 from $697,000 in fiscal 1994. This increase was the result of increased
borrowings under a revolving line of credit and higher short-term interest
rates. As a percentage of total revenue, interest expense increased to 1.6% in
1995 from 1.4% in 1994.
Other Income, Net. Other income, net decreased 99.4% to $6,000 in fiscal
1995 from $974,000 in fiscal 1994. The most significant change resulted from a
$350,000 foreign exchange loss incurred on several import equipment orders.
Provision for Income Taxes. The Company's effective tax rate in fiscal 1995
was 29%, compared to (11%) in fiscal 1994. The Company's effective income tax
rate in fiscal 1995 differs from the Federal statutory rate primarily as a
result of the tax benefit from the foreign sales corporation. The fiscal 1994
effective tax rate differs
19
<PAGE>
from the Federal statutory rate primarily as a result of the tax benefit
recognized upon the disposal of FamTec AG. The benefit arose from the write-
off and resulting deduction of the Company's investment in FamTec AG for U.S.
tax purposes.
Equity in Net Earnings (Loss) of Affiliates. Equity in net earnings (loss)
of affiliates increased 81.2% to $1.2 million in fiscal 1995 from $655,000 in
fiscal 1994. The increase was primarily attributable to increased sales of
equipment, parts and expendables to the Far East semiconductor industry by the
Far East Joint Venture. Introduction of new and enhanced equipment and systems
as well as improving conditions in the semiconductor equipment market in the
Far East led to increases in sales and profits.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its initial public offering of 2,927,500 shares of
common stock during the second quarter of fiscal 1996. Proceeds to the Company
as a result of the offering were $28.3 million, net of underwriters' discounts
and commissions and offering expenses. Approximately $10.5 million was used to
repay borrowings by the Company's U.S. subsidiary under a working capital
revolving line of credit. In addition, approximately $879,000 was used to
repay indebtedness incurred in 1990, including accrued interest, in connection
with the repurchase of shares of common stock of a former director. The
remaining funds are being used for working capital and other general corporate
purposes.
As of July 31, 1996, the Company had spent $3.6 million in land and
construction costs for a new corporate headquarters and manufacturing facility
in Chandler, Arizona. The Company presently estimates the total costs to be
incurred for the project will be approximately $16.5 million.
On April 15, 1996, the Company entered into a new unsecured $22.5 million
credit facility which replaced the former secured bank line of credit for its
U.S. operations. This increased from $10.2 million at May 31, 1995. As of May
31, 1996, $2.4 million was outstanding under the line of credit.
For the year ended May 31, 1996, the Company used $2.1 million in cash from
operating activities compared to $10,000 in the last fiscal year. This use of
cash is primarily attributable to the buildup of inventories and accounts
receivable associated with the significant growth in sales in fiscal 1996.
The Company believes that anticipated funds provided by operations and
borrowings available under its revolving line of credit agreement, will be
sufficient to meet the Company's working capital requirements during at least
the next 12 months. The Company is seeking to obtain long-term financing for
its new facility in Chandler, Arizona through bank financing, a sale-leaseback
transaction, or the sale of debt or equity securities.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
was issued in March 1995 and is effective for fiscal years beginning after
December 15, 1995. Management has reviewed the Statement and expects that its
provisions will not have a material adverse effect upon the financial
condition or results of operations of the Company.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation Plans" was issued in October 1995. The Statement will be
effective for the Company's fiscal year 1997. As allowed by the new Statement,
the Company plans to continue to use Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" in accounting for its stock
options. Certain pro forma and other information will be disclosed as if the
Company had measured compensation costs in a manner consistent with the new
Statement. Management has reviewed the Statement and expects that its
provisions will not have a material adverse effect upon the financial
condition or results of operations of the Company.
20
<PAGE>
CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
Discussed below are certain factors which may affect the Company's business.
This discussion is not exclusive of other factors that may also affect the
Company's business and should be read in conjunction with the other
information contained in this Annual Report including, without limitation,
information provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have historically and may in the
future vary significantly due to a number of factors. Historically, a
disproportionate share of the Company's revenue and operating profit has been
attributable to the last two quarters of the Company's fiscal year, primarily
the fourth quarter. In particular, the Company typically experiences a decline
in revenues and operating profit from the fourth fiscal quarter to the first
fiscal quarter of the succeeding year. The Company believes that this decline
is primarily due to the seasonal buying patterns of its customers.
Factors that may influence the Company's operating results in a given
quarter include: (i) customer demand, such as economic conditions in the
memory disk and semiconductor industries, market acceptance of products of
both the Company and its customers, changes in product mix, and the timing,
cancellation or delay of customer orders and shipments; (ii) competition, such
as competitive pressures on prices of the Company's products and the
introduction or announcement of new products by competitors; (iii)
manufacturing and operations, such as fluctuations in availability and cost of
raw materials and production capacity; (iv) fluctuations in foreign currency
exchange rates; (v) new product development, such as increased research,
development and engineering, as well as marketing, expenses associated with
new product introductions, including the effect of transitioning to new or
enhanced products, and the Company's ability to introduce new products and
technologies on a timely basis; (vi) sales and marketing, such as
concentrations of customers, and discounts that may be granted to certain
customers; and (vii) the quarterly operating results of the Company's joint
ventures, which the Company accounts for on the equity method; as well as
other factors, such as levels of expenses relative to revenue levels,
personnel changes and generally prevailing economic conditions.
During a given quarter, a significant portion of the Company's revenue may
be derived from the sale of a relatively small number of machines and systems.
Accordingly, a small change in the number of machines and systems actually
shipped may cause significant changes in operating results. Moreover,
customers may cancel or reschedule shipments, and production difficulties
could delay shipments. In addition, because of the significantly different
gross margins attributable to the Company's two segments, changes in product
mix may cause fluctuations in operating results. Further, the lengthy sales
cycle for certain of the Company's capital equipment may result in the Company
incurring significant expenses prior to the receipt of customer orders. In
addition, the introduction of new products has in the past contributed, and
may continue to contribute, to fluctuations in quarterly operating results.
These same factors also could materially and adversely affect annual results
of
21
<PAGE>
operations. In addition, the need for continued investment in research and
development, marketing and customer support limits the Company's ability to
reduce expenses in response to downturns in the industries it serves.
MARKET ACCEPTANCE OF THE COMPANY'S CMP SYSTEM
The Company believes that its future growth, if any, depends in large part
upon its ability to gain customer acceptance of its CMP system and its
technology. Market acceptance of the Company's CMP system depends upon
numerous factors, including cost of ownership, throughput, process
flexibility, performance and reliability and availability of customer support.
The Company intends to periodically develop and introduce enhanced versions of
its CMP system. Failure to continually enhance the Company's CMP system may
impact its future market acceptance. There can be no assurance that the
Company will be successful in obtaining broad market acceptance of its CMP
system or any future enhanced version of the system. The failure of the
Company to accomplish these objectives would have a material adverse effect on
the Company. See "--Adoption of CMP Process" and "--Dependence on New Product
Development; Rapid Technological Change."
CYCLICAL NATURE OF THE COMPANY'S BUSINESS
The Company's business depends substantially on the capital expenditures of
thin film memory disk media and semiconductor manufacturers, which, in turn,
depend upon the current and anticipated market demand for memory disks and
semiconductor devices. Sales of capital equipment to these manufacturers are
expected to continue to represent a significant portion of the Company's total
revenue. These industries are highly cyclical and have historically
experienced periodic downturns characterized by oversupply and weak demand,
which often have a material adverse effect on the acquisition of capital
equipment and other products used in the manufacturing process, including
products offered by the Company. These downturns generally have materially
adversely affected the business and operating results of capital equipment
suppliers, including the Company. The semiconductor and thin film memory disk
industries are currently experiencing downturns which have led many
semiconductor and memory disk manufacturers to delay or cancel capital
expenditures. The Company's business and results of operations will be
materially adversely affected by continued downturns in the semiconductor
market and the thin film memory disk market.
Sales of the Company's capital equipment depend, in large part, upon the
decision of a prospective customer to increase manufacturing capacity or
respond to advances in technology by upgrading or expanding existing
manufacturing facilities or constructing new manufacturing facilities, all of
which typically involve a significant capital commitment. Certain of the
Company's capital equipment have lengthy sales cycles while the customer
evaluates and receives approvals for the purchase of the Company's systems and
completes the upgrading or expansion of existing facilities or the
construction of new facilities. The Company may expend substantial funds and
management effort during the sales cycle. The cyclicality and rapid
technological change present in certain of the industries served by the
Company may also cause prospective customers to postpone decisions regarding
major capital expenditures, including purchases of the Company's equipment.
Recently, certain of the Company's customers have delayed shipments due to a
variety of factors, including the cyclicality of the industries in which the
customers compete. In addition, the need for continued investment in research
and development, marketing and customer support limits the Company's ability
to reduce expenses in response to downturns in the industries it serves.
ADOPTION OF CMP PROCESS
The CMP process is an emerging technology and there can be no assurance that
the process will be utilized on a widespread basis in the manufacture of
semiconductor devices. To date, CMP has been used primarily in the manufacture
of advanced semiconductor logic devices. A small number of CMP process systems
are currently being used in the manufacture of advanced semiconductor memory
devices. There can be no assurance that the process will be widely adopted by
semiconductor memory device manufacturers. Currently, the number of suppliers
for polishing slurry and pads used in the CMP process is limited and an
insufficient supply of those products could impact or impede the adoption of
the CMP process. Further, alternative technologies may be
22
<PAGE>
developed that achieve the results required by semiconductor device
manufacturers. There are a number of patents relating to the CMP process held
by third parties. Accordingly, CMP equipment manufacturers, including the
Company, and semiconductor manufacturers that use the CMP process, may be
required to attempt to obtain licenses from the holders of one or more of such
patents, which may impede the adoption or use of CMP technology by
semiconductor manufacturers. If the CMP process is not adopted on a widespread
basis, or if alternatives to the CMP process emerge, or current non-CMP
planarization technologies are improved to serve the industry's requirements,
the Company's prospects and results of operations would be materially
adversely affected. See "--Market Acceptance of the Company's CMP System" and
"--Dependence on New Product Development; Rapid Technological Change."
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The Company believes that its future success will depend, in part, on its
ability to enhance existing products and processes and develop and manufacture
new products and processes. The markets in which the Company and its customers
compete are characterized by evolving industry standards and frequent
improvements in products and services. To compete effectively in such markets,
the Company must continually improve its products and its process technologies
and develop new technologies and products that compete effectively on the
basis of price and performance. The Company expects to continue to make
significant investments in research, development and engineering. There can be
no assurance that the Company will be able to improve its existing products
and its process technologies or develop new products and technologies. The
Company intends
to develop and introduce enhanced versions of its CMP system. In addition, the
Company is currently developing a post-CMP cleaning system, which is presently
expected to be introduced during fiscal 1997. There can be no assurance that
the Company's development of new or enhanced products, such as the enhanced
version of the CMP system or the post-CMP cleaning system, will be cost-
effective or introduced in a timely manner or accepted in the marketplace.
Failure by the Company to develop or introduce new products and product
enhancements in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
Due to the complexity of the Company's products, significant delays can
occur between a system's introduction and the commencement of commercial
shipments. The Company has from time to time experienced delays in the
introduction of, and certain technical and manufacturing difficulties with,
certain of its systems and enhancements, and may experience such delays and
technical and manufacturing difficulties in future introductions or volume
production of new systems or enhancements. In addition, the Company may incur
substantial unanticipated costs to ensure the functionality and reliability of
its future product introductions early in the product's life cycle. If new
products experience reliability or quality problems, the Company could
encounter a number of problems, including reduced orders, higher manufacturing
costs, delays in collection of accounts receivable and additional service and
warranty expenses, all of which events could materially adversely affect the
Company's business and results of operations. In addition, in the event the
Company does not manage product transitions successfully, announcements or
introductions, or the perception that such events are likely to occur, by
either the Company or its competitors could adversely affect sales of existing
Company products. See "--Market Acceptance of the Company's CMP System" and
"Business--Research, Development and Engineering."
RELOCATION OF MANUFACTURING FACILITY
To provide additional manufacturing capacity, the Company is constructing a
manufacturing and office facility, consisting of approximately 135,000 square
feet, in Chandler, Arizona. The new building, located on 13.5 acres recently
purchased by the Company, will also include laboratory facilities and will
serve as the Company's corporate headquarters. Occupancy is currently
scheduled for the fourth quarter of fiscal 1997. As the Company transfers
manufacturing capacity to its new facility, there is a possibility that normal
operations of the Company may be interrupted. Although the Company has planned
to continue manufacturing at its existing facility until its new facility is
fully operational, there can be no assurances that the transfer of
manufacturing
23
<PAGE>
and other operations to the new facility will not result in operational
difficulties, such as delayed shipments or increased operating expenses, that
could have a material adverse effect on the Company's results of operation.
The transfer to the new facility will also result in higher operating costs
and other fixed expenses related to the facility. There can be no assurances
that the Company's future sales will increase sufficiently to compensate for
these higher operating expenses. In addition, the Company's leases on its
existing facilities in Chandler expire in August 1999 and April 2000. Pursuant
to such leases, the Company is subject to certain provisions regarding
termination of the leases. The Company may incur ongoing lease-related
expenses, including penalty payments, until such time as it is released from
the provisions.
INTERNATIONAL BUSINESS
In fiscal 1994, 1995 and 1996, 16.7%, 17.3% and 21.7%, respectively, of the
Company's total revenue was attributable to sales outside the United States,
primarily in Europe. In addition, under certain circumstances, products sold
to U.S. customers are shipped to those customers' overseas facilities. The
Company expects that international sales will continue to represent a
significant portion of its total revenue. Sales to customers outside the
United States are subject to numerous risks, including exposure to currency
fluctuations, the imposition of government controls, the need to comply with a
wide variety of foreign and U.S. export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes typically
associated with foreign sales, the greater difficulty of administering
business overseas and general economic conditions. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
to the same extent as do the laws of the United States. Moreover, slurries
marketed and distributed by both the Company and the Fujimi Joint Venture are
purchased from Fujimi Incorporated, a Japanese company. The Company also
purchases in Japanese yen certain equipment from the Far East Joint Venture
that the Company then sells in the U.S. and Europe. Fluctuations in exchange
rates have in the past resulted, and may in the future result, in increases in
the cost to the Company of such products. Also, because the value of the net
assets of the Company's foreign subsidiaries and its equity interest in the
Far East Joint Venture fluctuate based upon exchange rates and because the
Company does not hedge the value of such net assets, fluctuations in exchange
rates may have an adverse effect on the Company's shareholders' equity.
Certain statements in "Management's Discussion and Analysis" and "Certain
Factors Affecting the Company's Business" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
<S> <C>
Independent Auditors' Report.............................................. 26
Consolidated Balance Sheets--at the end of fiscal years 1995 and 1996..... 27
Consolidated Statements of Earnings--for the fiscal years 1994, 1995 and
1996..................................................................... 28
Consolidated Statements of Stockholders' Equity--for the fiscal years
1994, 1995 and 1996...................................................... 29
Consolidated Statements of Cash Flows--for the fiscal years 1994, 1995 and
1996..................................................................... 30
Notes to Consolidated Financial Statements................................ 31
SPEEDFAM CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report.............................................. 44
Consolidated Balance Sheets--at the end of fiscal years 1995 and 1996..... 45
Consolidated Statements of Earnings--for the fiscal years 1994, 1995 and
1996..................................................................... 46
Consolidated Statements of Shareholders' Equity--for the fiscal years
1994, 1995 and 1996...................................................... 47
Consolidated Statements of Cash Flows--for the fiscal years 1994, 1995 and
1996..................................................................... 48
Notes to Consolidated Financial Statements................................ 49
</TABLE>
The above consolidated financial statements of SpeedFam Co., Ltd. and
consolidated subsidiaries are included herein pursuant to Rule 3-09 of
Regulation S-X.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SpeedFam International, Inc.:
We have audited the accompanying consolidated balance sheets of SpeedFam
International, Inc. and consolidated subsidiaries as of May 31, 1995 and 1996,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended May 31, 1996.
These consolidated financial statements are the responsibility of the
management of SpeedFam International, Inc. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpeedFam
International, Inc. and consolidated subsidiaries as of May 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," were
adopted in fiscal year 1994.
KPMG Peat Marwick LLP
July 3, 1996
Chicago, Illinois
26
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ ------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 1,095 $ 10,871
Trade accounts and notes receivable, less allowance for
doubtful accounts of $187 and $495 at May 31, 1995 and
1996, respectively........................................ 16,971 34,693
Inventories................................................ 17,995 27,931
Deferred income taxes...................................... 147 1,229
Prepaid expenses and other current assets.................. 1,067 1,241
------- --------
Total current assets..................................... 37,275 75,965
Investments in affiliates.................................... 18,582 20,450
Property, plant and equipment, net........................... 3,061 9,969
Other assets................................................. 1,111 1,600
------- --------
Total assets............................................. $60,029 $107,984
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.......................... $ 908 $ 727
Accounts payable........................................... 7,138 14,704
Customer deposits.......................................... 5,662 4,814
Due to affiliates.......................................... 8,907 11,756
Accrued expenses........................................... 3,083 8,005
Income taxes payable....................................... 505 4,766
------- --------
Total current liabilities................................ 26,203 44,772
------- --------
Long-term liabilities:
Long-term debt............................................. 10,362 2,593
Deferred income taxes...................................... 427 580
------- --------
Total long-term liabilities.............................. 10,789 3,173
------- --------
Stockholders' equity:
Common stock, no par value, 20,000,000 shares authorized,
7,459,700 and 10,514,868 shares issued and outstanding at
May 31, 1995 and 1996, respectively....................... 1 1
Additional paid-in capital................................. 828 26,174
Retained earnings.......................................... 17,426 29,247
Foreign currency translation adjustment.................... 7,991 4,617
Treasury stock............................................. (3,209) --
------- --------
Total stockholders' equity............................... 23,037 60,039
------- --------
Total liabilities and stockholders' equity............... $60,029 $107,984
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Revenue:
Net sales....................................... $49,247 $57,021 $113,880
Commissions from affiliate...................... 2,134 2,757 6,290
------- ------- --------
Total revenue................................. 51,381 59,778 120,170
Cost of sales..................................... 38,945 45,494 78,661
------- ------- --------
Gross margin.................................. 12,436 14,284 41,509
------- ------- --------
Operating expenses:
Research, development and engineering........... 2,267 2,740 11,496
Selling, general, and administrative expenses... 8,988 9,948 18,922
------- ------- --------
Total operating expenses...................... 11,255 12,688 30,418
------- ------- --------
Operating profit.................................. 1,181 1,596 11,091
------- ------- --------
Other income (expense):
Gains on sales of assets........................ 19 246 9
Royalty income.................................. 245 264 --
Interest income................................. 34 52 454
Interest expense................................ (697) (959) (691)
Disposal of FamTec AG........................... 303 -- --
Miscellaneous, net.............................. 373 (556) 20
------- ------- --------
277 (953) (208)
------- ------- --------
Earnings from consolidated companies before income
taxes and cumulative effect of change in
accounting principle............................. 1,458 643 10,883
Income tax expense (benefit)...................... (160) 186 4,266
------- ------- --------
Earnings from consolidated companies before
cumulative of effect of change in accounting
principle........................................ 1,618 457 6,617
Equity in net earnings of affiliates.............. 655 1,187 5,204
------- ------- --------
Earnings before cumulative effect of change in
accounting principle............................. 2,273 1,644 11,821
Cumulative effect of change in accounting
principle for income taxes....................... 78 -- --
------- ------- --------
Net earnings...................................... $ 2,351 $ 1,644 $ 11,821
======= ======= ========
Net earnings per share............................ $ 0.31 $ 0.20 $ 1.16
======= ======= ========
Weighted average common and common equivalent
shares........................................... 7,619 8,146 10,159
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------ ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1993. $ 1 $ 817 $13,431 $4,591 $(3,171) $15,669
Net earnings............ -- -- 2,351 -- -- 2,351
Foreign currency
translation adjustment. -- -- -- 548 -- 548
Purchase of treasury
stock.................. -- -- -- -- (4) (4)
Sale of treasury stock.. -- 11 -- -- 1 12
---- ------- ------- ------ ------- -------
Balance at May 31, 1994. 1 828 15,782 5,139 (3,174) 18,576
Net earnings............ -- -- 1,644 -- -- 1,644
Foreign currency
translation adjustment. -- -- -- 2,852 -- 2,852
Purchase of treasury
stock.................. -- -- -- -- (35) (35)
---- ------- ------- ------ ------- -------
Balance at May 31, 1995. 1 828 17,426 7,991 (3,209) 23,037
Net earnings............ -- -- 11,821 -- -- 11,821
Foreign currency
translation adjustment. -- -- -- (3,374) -- (3,374)
Sale of treasury stock.. -- 16 -- -- 1 17
Retirement of treasury
stock.................. -- (3,208) -- -- 3,208 --
Issuance of common
stock.................. -- 28,284 -- -- -- 28,284
Exercise of stock
options................ -- 254 -- -- -- 254
---- ------- ------- ------ ------- -------
Balance at May 31, 1996. $ 1 $26,174 $29,247 $4,617 $ -- $60,039
==== ======= ======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................... $ 2,351 $1,644 $11,821
Adjustments to reconcile net earnings to net cash
used in operating activities:
Equity in net earnings of affiliates............. (655) (1,187) (5,204)
Depreciation and amortization.................... 675 635 1,326
Provision for losses on accounts receivable...... 7 3 316
Provision for deferred income taxes.............. (220) (120) (922)
Gains on sale of assets.......................... (19) (246) (10)
Increase in cash surrender value of life
insurance....................................... (119) (138) (142)
Gain on disposal of FamTec AG.................... (298) -- --
Cumulative effect of change in accounting
principle....................................... (78) -- --
Change in assets and liabilities:
Increase in trade accounts and notes
receivable.................................... (7,782) (2,271) (18,226)
Increase in inventories........................ (3,297) (7,067) (10,078)
(Increase) decrease in prepaid expenses and
other assets.................................. 50 (452) 23
Increase in accounts payable and due to
affiliates.................................... 5,569 4,149 10,621
Increase in accrued expenses, customer deposits
and other liabilities......................... 1,670 4,474 4,102
Increase (decrease) in income taxes payable.... (368) 566 4,290
------- ------ -------
Net cash used in operating activities................ (2,514) (10) (2,083)
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (443) (744) (8,121)
Proceeds from sales of assets...................... 46 431 24
Dividends from affiliates.......................... 77 90 163
Other investing activities......................... (81) (83) (542)
------- ------ -------
Net cash used in investing activities................ (401) (306) (8,476)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions........................ 8 (35) 17
Net proceeds from issuance of common stock......... -- -- 28,284
Proceeds from exercise of stock options............ -- -- 254
Proceeds from long-term debt....................... 3,750 1,500 3,999
Principal payments on long-term debt............... (778) (899) (12,025)
------- ------ -------
Net cash provided by financing activities............ 2,980 566 20,529
------- ------ -------
Effect of foreign currency rate changes on cash...... (21) 36 (194)
------- ------ -------
Net increase in cash and cash equivalents............ 44 286 9,776
Cash and cash equivalents at beginning of year....... 765 809 1,095
------- ------ -------
Cash and cash equivalents at end of year............. $ 809 $1,095 $10,871
======= ====== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest......................................... $ 664 $ 866 $ 810
======= ====== =======
Income taxes..................................... $ 412 $ 125 $ 860
======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Speedfam International, Inc. (the Company), an Illinois corporation,
designs, develops, manufactures, markets and services high throughput
precision surface processing systems used in the fabrication of thin film
memory disk media, semiconductor wafers, general industrial components and,
more recently, semiconductor devices through chemical mechanical polishing. In
addition, the Company markets and distributes slurries, parts and expendables
used in its customers' manufacturing processes. The Company's customers are
primarily located in the United States, Europe, and the Far East.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the following wholly owned subsidiaries:
<TABLE>
<CAPTION>
SUBSIDIARIES INCORPORATED
------------ --------------
<S> <C>
SpeedFam Corporation....................................... United States
SpeedFam Limited........................................... United Kingdom
SpeedFam GmbH.............................................. Germany
</TABLE>
All significant intercompany balances and transactions have been eliminated.
Non-U.S. subsidiaries are included in the consolidated financial statements
based upon fiscal years ended April 30. The Company's fiscal year ends on May
31.
The Company's investments in the common stock of affiliates, SpeedFam Co.,
Ltd. (a Japanese corporation, 50% owned), and Fujimi Corporation (an Illinois
corporation, 50% owned) are accounted for by the equity method using fiscal
years that end April 30 and May 31, respectively.
(b) Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks and highly liquid short-
term investments with original maturities of three months or less. Short-term
investments are carried at cost which approximates market.
(c) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets.
Depreciation expense was $575, $538 and $1,172 in fiscal years 1994, 1995 and
1996, respectively. The estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 7 to 40 years
Machinery and equipment..................................... 5 years
Furniture and fixtures...................................... 3 to 5 years
Leasehold improvements...................................... 2 to 10 years
</TABLE>
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
(e) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes
(Statement 109)." Statement 109 required a change to the asset
31
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
Effective June 1, 1993, the Company adopted Statement 109 and has reported
the cumulative effect of that accounting change in the 1994 consolidated
statement of earnings.
(f) Revenue Recognition
Sales of the Company's products are recorded upon shipment or when the
product is accepted by the customer. Commission revenue from affiliates is
recorded upon shipment of product.
(g) Installation and Warranty Costs
Costs to be incurred by the Company related to product installation and
warranty fulfillment are accrued at the date of shipment and are estimated by
the Company based on past experience. The accrual for product installation and
warranty fulfillment, included in accrued expenses in the consolidated balance
sheets, was $200 and $2,485 at the end of fiscal years 1995 and 1996,
respectively.
(h) Foreign Currency Translation
Assets and liabilities of the Company' non-U.S. operations have been
translated using the exchange rates in effect at the balance sheet dates.
Results of operations are translated using the average exchange rates
prevailing throughout the period. Local currencies are considered the
functional currencies of the Company's foreign entities. Foreign currency
exchange rates used to translate the financial statements are summarized
below:
<TABLE>
<CAPTION>
FOREIGN CURRENCY PER U.S. DOLLAR
----------------------------------
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Rates at balance sheet date:
Pound sterling ((Pounds))............ .66 .62 .66
Deutsche mark (DM)................... 1.65 1.39 1.53
Japanese yen ((Yen))................. 101.65 84.20 105.07
</TABLE>
(i) Treasury Stock
The Company accounts for treasury stock using the cost method. In fiscal
year 1994, the Company sold 6,000 shares of treasury stock. There were no
sales of treasury stock in fiscal year 1995. The Company sold 8,000 shares of
treasury stock in fiscal year 1996. In fiscal years 1994 and 1995 the number
of shares of treasury stock purchased by the Company amounted to 1,800 and
14,680, respectively. There were no purchases of treasury stock in fiscal year
1996. All of the company's treasury stock was retired upon completion of the
Company's initial public offering of common stock on October 26, 1995 (see
note 15).
(j) Net Earnings Per Share
Net earnings per share data has been computed using the weighted average
number of shares of common stock and common equivalent shares from stock
options (when dilutive using the treasury stock method). Stock options issued
during the twelve month period prior to the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods presented (even if antidilutive using the treasury stock method and
the initial public offering price).
32
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(k) Significant Customers and Concentration of Credit Risk
Presented below is a summary of net sales to and commissions earned from
significant customers as a percentage of total revenue. Net sales to and
commissions earned from these customers are from both of the Company's
segments.
<TABLE>
<CAPTION>
CUSTOMER 1994 1995 1996
-------- ---- ---- ----
<S> <C> <C> <C>
A........................................................ 21% 21% 18%
B........................................................ 10% 11% *
C........................................................ 11% * *
</TABLE>
- --------
*Less than 10%.
Amounts due from three customers represented 14%, 15%, and 25% of total
trade accounts and notes receivable at May 31, 1996.
(l) Patents and Trademarks
Patents and trademarks included in other assets, in the net amount of $311
and $463 at the end of fiscal years 1995 and 1996, respectively, are amortized
on a straight-line basis over 17 years for patents and 5 years for trademarks.
(m) Research, Development and Engineering
Expenditures for research, development and engineering of products and
processes are expensed as incurred.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories at the end of fiscal years 1995 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials............................................. $10,383 $14,626
Work-in-process........................................... 4,930 10,777
Finished goods............................................ 2,682 2,528
------- -------
Total inventories..................................... $17,995 $27,931
======= =======
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at the end of fiscal years 1995 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land.................................................... $ 188 $ 2,275
Buildings............................................... 2,013 2,054
Machinery and equipment................................. 2,448 7,667
Furniture and fixtures.................................. 1,125 1,039
Leasehold improvements.................................. 522 767
Construction in progress................................ -- 495
------- -------
6,296 14,297
Less accumulated depreciation........................... (3,235) (4,328)
------- -------
Net property, plant and equipment....................... $ 3,061 $ 9,969
======= =======
</TABLE>
33
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(4)INVESTMENTS IN AFFILIATES
The Company owns a 50 percent interest in SpeedFam Co., Ltd. The Company's
equity investment in SpeedFam Co., Ltd. was $17,108 and $18,545 in 1995 and
1996, respectively. SpeedFam Co., Ltd.'s consolidated financial statements
include the accounts of the following subsidiaries:
<TABLE>
<CAPTION>
COMPANY LOCATION
------- -----------
<S> <C>
SpeedFam Clean System Co., Ltd................................ Japan
Saku Seiki Co., Ltd........................................... Japan
SpeedFam Incorporated......................................... Taiwan
SpeedFam Korea Ltd............................................ South Korea
SpeedFam India (Pvt.) Ltd..................................... India
</TABLE>
Significant intercompany balances and transactions have been eliminated.
SpeedFam Co., Ltd.'s investments in three affiliated Japanese companies, Met-
Coil Ltd., CRT K.K., and Xevios Corporation are accounted for by the equity
method. Condensed consolidated financial statements of SpeedFam Co., Ltd. are
as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30
-----------------
ASSETS 1995 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash and short-term investments......................... $ 15,531 $ 14,323
Trade accounts receivable, net.......................... 46,088 50,420
Inventories............................................. 11,086 19,961
Due from affiliates..................................... 8,759 10,924
Prepaid expenses........................................ 1,712 2,864
-------- --------
Total current assets.................................. 83,176 98,492
Investments in affiliates................................. 1,223 891
Property, plant and equipment, net........................ 20,371 20,161
Deferred income taxes and other assets.................... 6,043 7,007
-------- --------
Total assets.......................................... $110,813 $126,551
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term borrowings................................... $ 15,744 $ 8,088
Current portion of long-term debt....................... 2,406 2,252
Accounts payable........................................ 34,299 48,326
Accrued expenses........................................ 4,384 7,122
Income taxes payable.................................... 2,564 9,178
-------- --------
Total current liabilities............................. 59,397 74,966
Long-term debt............................................ 12,528 9,106
Liability for employee benefits........................... 2,595 3,421
Minority interest......................................... 2,078 1,967
-------- --------
Total long-term liabilities........................... 17,201 14,494
Stockholders' equity:
Common stock............................................ 210 664
Retained earnings....................................... 18,036 26,943
Foreign currency translation adjustment................. 15,954 9,346
Unrealized gains on marketable securities............... 15 138
-------- --------
Total stockholders' equity............................ 34,215 37,091
-------- --------
Total liabilities and stockholders' equity............ $110,813 $126,551
======== ========
</TABLE>
34
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $87,217 $108,664 $161,169
Costs and operating expenses................... 84,823 103,574 141,752
------- -------- --------
Earnings before income taxes................... 2,394 5,090 19,417
Income taxes................................... 1,026 2,755 9,479
------- -------- --------
Net earnings before minority interest.......... 1,368 2,335 9,938
Minority interest.............................. (241) (166) (301)
------- -------- --------
Net earnings before cumulative effect of change
in accounting principle....................... 1,127 2,169 9,637
Cumulative effect of change in accounting
principle..................................... (43) -- --
------- -------- --------
Net earnings................................... 1,084 2,169 9,637
Retained earnings at beginning of year......... 14,958 15,987 18,036
Common stock dividend.......................... -- -- (454)
Dividends...................................... (55) (120) (276)
------- -------- --------
Retained earnings at end of year............... $15,987 $ 18,036 $ 26,943
======= ======== ========
</TABLE>
The following is a summary of SpeedFam International, Inc. and consolidated
subsidiaries' transactions with SpeedFam Co., Ltd.
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Sales to SpeedFam Co., Ltd............................. $ 67 $ 259 $1,737
====== ====== ======
Purchases from SpeedFam Co., Ltd....................... $2,555 $3,046 $7,612
====== ====== ======
Commission revenue..................................... $2,134 $2,757 $6,290
====== ====== ======
Commission expense..................................... $ 91 $ 196 $ 582
====== ====== ======
</TABLE>
Net amounts due to SpeedFam Co., Ltd. included in the consolidated balance
sheets at the end of fiscal years 1995 and 1996 are $8,698 and $11,591,
respectively.
The Company owns a 50% interest in Fujimi Corporation. The Company's equity
investment in Fujimi Corporation was $1,474 and $1,905 in 1995 and 1996,
respectively. Summary financial information relating to Fujimi Corporation is
as follows:
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $12,301 $15,783 $19,734
Costs and operating expenses........................ 11,595 15,536 18,235
------- ------- -------
Earnings before income taxes........................ 706 247 1,499
Income taxes........................................ 296 72 589
------- ------- -------
Net earnings........................................ $ 410 $ 175 $ 910
======= ======= =======
</TABLE>
35
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company received dividends from Fujimi Corporation of $50, $30, and $25
in 1994, 1995, and 1996, respectively. Purchases from Fujimi Corporation
approximated $775, $1,301, and $952 in 1994, 1995, and 1996, respectively.
Amounts due to Fujimi Corporation included in the consolidated balance sheets
at the end of fiscal years 1995 and 1996 are $208 and $165, respectively.
(5) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 effective June 1,
1993. The cumulative effect of this change in accounting for income taxes of
$78 was determined as of June 1, 1993 and is reported separately in the
consolidated statement of earnings in fiscal year 1994.
The Company files consolidated U.S. Federal income tax returns with its
domestic subsidiary. Operations in the United Kingdom and Germany file local
income tax returns. Earnings from consolidated companies before income taxes
and cumulative effect of change in accounting principle are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ---- -------
<S> <C> <C> <C>
U.S..................................................... $ 1,165 $183 $ 9,380
Non-U.S................................................. 293 460 1,503
------- ---- -------
Total............................................... $ 1,458 $643 $10,883
======= ==== =======
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ---- ------
<S> <C> <C> <C>
Current:
U.S. Federal...................................... $ (72) $112 $3,693
State............................................. -- 12 965
Non-U.S........................................... 132 182 537
------ ---- ------
60 306 5,195
------ ---- ------
Deferred:
U.S. Federal and State............................ (214) (92) (915)
Non-U.S........................................... (6) (28) (14)
------ ---- ------
(220) (120) (929)
------ ---- ------
Income tax expense (benefit)........................ $ (160) $186 $4,266
====== ==== ======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets (liabilities) at the end of fiscal years 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Property, plant and equipment............................. $(478) $(616)
Inventory................................................. (257) 166
Allowance for doubtful accounts........................... 73 164
Trademark amortization.................................... 66 80
Warranty reserve.......................................... 81 984
Alternative minimum tax credit carryforward............... 47 47
Unrealized foreign currency losses........................ 141 --
Other..................................................... 47 (176)
----- -----
Net deferred tax asset (liability)........................ $(280) $ 649
===== =====
</TABLE>
36
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
There is no valuation allowance for deferred tax assets at the end of fiscal
years 1995 or 1996. Deferred tax assets are considered realizable due to the
expectation of future taxable income.
A reconciliation between the Company's effective tax rate and the "expected"
tax rate of 34% on earnings before income taxes and cumulative effect of
change in accounting principle is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
"Expected" income tax rate.............................. 34% 34% 34%
Officers' life insurance................................ 2 4 --
U.S. tax benefit on disposal of FamTec AG............... (51) -- --
Difference of non-U.S. and "expected" tax rates......... 2 -- --
Dividend income from non-U.S. affiliates................ 1 3 --
State taxes, net of U.S. Federal benefit................ (1) -- 4
Foreign sales corporation............................... (2) (13) --
Other................................................... 4 1 1
--- --- ---
Effective income tax rate............................... (11)% 29% 39%
=== === ===
</TABLE>
No provision is made for income taxes on undistributed earnings of wholly
owned non-U.S. subsidiaries and SpeedFam Co., Ltd. because it is the Company's
present intention to reinvest substantially all the earnings of these
operations. At the end of fiscal year 1996 there were approximately $15,943 of
accumulated undistributed earnings of those operations. It is not practical
for the Company to compute the amount of unrecognized deferred tax liability
on the undistributed earnings.
The Company has not recognized a deferred tax liability of approximately
$232 for its share of the undistributed earnings of Fujimi Corporation that
arose in fiscal year 1993 and prior years because the Company does not expect
those unremitted earnings to reverse and become taxable in the foreseeable
future. A deferred tax liability will be recognized when the Company expects
that it will recover those undistributed earnings in a taxable manner, such as
through receipt of dividends or sale of the investment. At the end of fiscal
year 1996 the undistributed earnings of Fujimi Corporation were approximately
$123. A deferred tax liability in the amount of $49 has been provided for the
undistributed earnings subsequent to fiscal year 1993.
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
----- ------
<S> <C> <C>
Loans under revolving line of credit due April 14, 1999;
interest rate at bank's prime rate (8.25% at May 31, 1996)
or LIBOR plus 1.25% (6.75% at May 31, 1996)............... $ -- $2,400
Loans under revolving line of credit due November 8, 1997;
interest rate at bank's prime rate or LIBOR plus 2%....... 6,500 --
Term loan payable in quarterly installments of $100 with
final installment of $1,900 on October 31, 1997; interest
rate fixed at 9%.......................................... 2,800 --
Term loan payable in monthly installments of $26 (including
interest) beginning April 1, 1994 for five years; interest
rate fixed at 9.25%....................................... 1,000 772
</TABLE>
37
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Term loan payable in monthly installments of (Pounds)4.7
($8) for 15 years beginning in November 1987, interest
rate of 2.25% over the bank's base rate (8.25% at April
30, 1996)............................................... 229 148
Note payable in equal annual installments of $207 through
January 15, 1999; interest rate of prime less 1/2%
(however, not less than 8% or greater than 12%); an
imputed interest rate of 15% results in a debt discount
of $87 at May 31, 1995.................................. 828 --
------- ------
Total long-term debt..................................... 11,357 3,320
Less current portion of long-term debt................... 908 727
Less debt discount....................................... 87 --
------- ------
Net long-term debt....................................... $10,362 $2,593
======= ======
</TABLE>
In fiscal year 1996 the Company entered into a new unsecured credit
agreement with two U.S. banks. The credit agreement includes a $22,500
revolving line of credit maturing April 14, 1999. The Company must meet
certain financial objectives each year as defined in the credit agreement.
The term loan payable in monthly installments of $26 is secured by certain
machinery of SpeedFam Corporation with a net book value of $193 at May 31,
1996.
The term loan, payable in pounds sterling is secured by the assets of
SpeedFam Limited and a (Pounds)250 ($377) keyman life insurance policy.
During fiscal year 1996 the revolving line of credit due November 8, 1997,
the term loan payable in quarterly installments of $100, and the note payable
were paid.
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1997.............................................................. $ 727
1998.............................................................. 744
1999.............................................................. 1,849
------
$3,320
======
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
During fiscal year 1996 the Company entered into a technology license
agreement related to the development of a new product expected to be
introduced during fiscal year 1997. The agreement required the payment of $400
upon signing and a final payment of $300 due in June 1996. The agreement also
obligates the Company to make annual royalty payments of 5.5% of the Company's
net sales of products using the licensed technology for ten years. The annual
royalty payments are subject to a minimum payment of $150 beginning in fiscal
year 1998 and $200 for fiscal years 1999 to 2006.
The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases
expiring at various dates through fiscal year 2001. Rental expense aggregated
approximately $468, $611, and $917 in 1994, 1995, and 1996, respectively.
During fiscal year 1996, the Company entered into certain agreements with a
general contractor, project manager and architect relating to the construction
of a new office and manufacturing facility in Chandler, Arizona. The
agreements specify the amounts and timing of payments to be made by the
Company and the work to be performed by the other parties to the agreements.
38
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at the end of fiscal year 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997............................................................... $1,071
1998............................................................... 784
1999............................................................... 609
2000............................................................... 334
2001 and thereafter................................................ 12
------
Total.......................................................... $2,810
======
</TABLE>
(8) FORWARD EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts to hedge certain
firm commitments denominated principally in Japanese yen. The terms of the
contracts are rarely more than one year. The contracts are entered into at the
time an order is received to preserve the expected profit by protecting the
Company from the risk that those commitments will be adversely affected by
changes in exchange rates. Unrealized gains and losses on the forward
contracts are deferred until the related transaction occurs. At the end of
fiscal years 1995 and 1996, deferred net losses amounted to $310 and $228,
respectively.
During fiscal year 1995, the Company incurred foreign currency transaction
losses on three purchase transactions as a result of not hedging on a timely
basis (i.e., at the purchase order date). These losses amounted to $350 and
are included in Miscellaneous, net in the accompanying consolidated statement
of earnings in fiscal year 1995.
The table below summarizes the contractual amounts of the Company's forward
exchange contracts in U.S. dollars. The amounts represent the U.S. dollar
equivalent of commitments to purchase or sell foreign currencies.
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
BUY SELL BUY SELL
------- ------- ------- ------
<S> <C> <C> <C> <C>
Japanese yen............................... $15,399 $10,448 $17,980 $1,224
======= ======= ======= ======
Deutsche mark.............................. $ 65 $ -- $ -- $ --
======= ======= ======= ======
</TABLE>
(9) SAVINGS AND PROFIT-SHARING PLANS
The Company maintains savings and profit-sharing plans for its employees.
The plans cover certain employees who meet length of service requirements.
Expense under the plans, determined by the Company's Board of Directors,
aggregated $180, $60, and $1,443 in 1994, 1995, and 1996, respectively.
(10) EMPLOYEE INCENTIVE STOCK OPTION PLAN
On September 12, 1991, the shareholders approved the Employee Incentive
Stock Option Plan of 1991, reserving 1,500,000 shares of common stock for sale
or award as stock options to officers and key employees. Prior to fiscal year
1995, stock options were granted at 100% to 110% of the value of the Company's
common stock as determined by an established formula. In fiscal year 1995,
stock options were granted at 100% to 110% of the fair value of the Company's
common stock as determined by an independent appraiser. Subsequent to
39
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
fiscal year 1995, stock options are granted at a price not less than the fair
market value on the date of grant. The stock options vest over five years
(i.e., 20% each year) with the exception of 163,800 stock options issued in
1992 which vested immediately. The stock options expire ten years after the
grant date except for 119,700 stock options which expire five years after the
grant date. The following table summarizes the activity in common shares
subject to options for the two years ended May 31, 1996:
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
--------- ----------------------
<S> <C> <C>
Balance, June 1, 1994.................... 822,000 $ 2.0365 - $ 2.2600
Granted................................ 281,660 2.4130 - 6.4100
Exercised.............................. -- -
Canceled or Expired.................... -- -
Balance, May 31, 1995.................... 1,103,660 2.0365 - 6.4100
Granted................................ 330,976 10.7500 - 20.5000
Exercised.............................. 119,668 2.0365 - 5.8250
Canceled or Expired.................... 33,900 2.0365 - 5.8250
Balance, May 31, 1996.................... 1,281,068 $ 2.0365 - $20.5000
</TABLE>
At May 31, 1996, 347,364 shares were exercisable.
(11)DISPOSAL OF FAMTEC AG
During fiscal year 1993, the Company terminated the operations of FamTec AG,
incorporated under the laws of Switzerland. A voluntary petition for
bankruptcy was filed, announced and published in Switzerland in fiscal year
1994. Subsequently, creditors' claims were adjudicated and all Swiss assets
liquidated. On July 27, 1995, the bankruptcy administrator paid out the
liquidation proceeds to creditors, and the bankruptcy matter was closed.
FamTec AG was dissolved and the Company no longer has ownership of the entity.
As a result of this circumstance, the Company's net investment in FamTec AG
was written off in 1994. Since the liabilities and reserve associated with
FamTec AG exceeded its assets, the disposal resulted in a pretax gain of $303
and an income tax benefit of $740 in fiscal year 1994. The benefit arose from
the write-off and resulting deduction of the Company's investment in FamTec AG
for U.S. tax purposes. Results of operations of FamTec AG are not included in
the 1994 consolidated statement of earnings nor are they material.
(12) LITIGATION SETTLEMENT AND CANCELLATION CHARGE
In January, 1993, the Company reached a favorable settlement with a
competitor over the infringement of a patent owned by the Company. Title to
the patent was granted to the competitor. The Company received in the
settlement a royalty free non-exclusive license to use the technology, an
immediate cash payment of $300 and a promissory note in the amount of $500
payable over the five years in equal quarterly installments of $25 plus
interest at the prime rate. Additionally, the Company received a 2% royalty
fee on machines sold by the competitor to a maximum fee of $600. The royalty
fee was satisfied as of November 30, 1994.
In connection with the cancellation of an order, the Company recorded income
of $379 in fiscal year 1994. This amount is included in Miscellaneous, net in
the 1994 consolidated statement of earnings.
40
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(13) BUSINESS SEGMENT INFORMATION
The Company classifies its products into two core business segments: (i)
equipment, parts and expendables, which represent the Company's operations in
designing, developing manufacturing, marketing and servicing high throughput,
precision surface processing systems and (ii) slurries, which represents the
distribution and sale of materials used in the customers' manufacturing
process. Information concerning the Company's business segments in fiscal
years 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Revenue:
Sales to unaffiliated customers:
Equipment, parts and expendables............ $24,336 $29,846 $ 88,050
Slurries.................................... 24,911 27,175 25,830
------- ------- --------
Total sales to unaffiliated customers..... 49,247 57,021 113,880
Commissions from affiliate--Equipment, parts
and expendables.............................. 2,134 2,757 6,290
------- ------- --------
Total revenue............................. $51,381 $59,778 $120,170
======= ======= ========
Segment operating profit:
Equipment, parts and expendables.............. $ 1,840 $ 2,475 $ 14,585
Slurries...................................... 1,705 1,759 572
------- ------- --------
Segment operating profit........................ 3,545 4,234 15,157
General corporate expense....................... (1,390) (2,632) (3,583)
Interest expense................................ (697) (959) (691)
------- ------- --------
Earnings from consolidated companies before
income taxes and cumulative effect of change in
accounting principle........................... $ 1,458 $ 643 $ 10,883
======= ======= ========
Identifiable Assets:
Equipment, parts and expendables.............. $21,727 $30,538 $ 62,177
Slurries...................................... 6,825 7,828 8,836
Investment in affiliates...................... 14,738 18,582 20,450
Corporate assets.............................. 2,419 3,081 16,521
------- ------- --------
Total identifiable assets................. $45,709 $60,029 $107,984
======= ======= ========
Capital expenditures:
Equipment, parts and expendables.............. $ 236 $ 470 $ 5,197
Slurries...................................... 15 12 35
Corporate..................................... 192 262 2,889
------- ------- --------
Total capital additions................... $ 443 $ 744 $ 8,121
======= ======= ========
Depreciation expense:
Equipment, parts and expendables.............. $ 496 $ 437 $ 1,044
Slurries...................................... 30 28 29
Corporate..................................... 49 73 99
------- ------- --------
Total depreciation expense................ $ 575 $ 538 $ 1,172
======= ======= ========
</TABLE>
41
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Intersegment sales are not material. Operating profit represents total
revenue less operating expenses, and excludes equity in net earnings of
affiliates, interest expense and income taxes. Identifiable assets are those
assets employed in each segment's operation, including an allocated value.
Corporate assets consist primarily of cash and assets not employed in
production.
Information regarding the Company's operations in the United States and
internationally are presented below:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Net sales:
United States............................... $41,492 $47,587 $103,698
Europe...................................... 8,559 10,355 10,855
Intercompany sales.......................... (804) (921) (673)
------- ------- --------
Consolidated net sales........................ $49,247 $57,021 $113,880
======= ======= ========
Operating profit:
United States............................... $ 757 $ 1,478 $ 10,184
Europe...................................... 44 165 917
Eliminations................................ 380 (47) (10)
------- ------- --------
Operating profit.............................. $ 1,181 $ 1,596 $ 11,091
======= ======= ========
Identifiable assets:
United States............................... $24,768 $33,408 $ 66,059
Europe...................................... 3,784 4,958 4,954
Corporate................................... 17,157 21,663 36,971
------- ------- --------
Consolidated identifiable assets.............. $45,709 $60,029 $107,984
======= ======= ========
</TABLE>
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of unaudited quarterly information:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended May 31, 1995:
Total revenue............................. $13,953 $13,080 $13,006 $19,739
======= ======= ======= =======
Gross margin.............................. $ 2,773 $ 2,660 $ 3,309 $ 5,542
======= ======= ======= =======
Net earnings (loss)....................... $ 146 $ (433) $ 403 $ 1,528
======= ======= ======= =======
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended May 31, 1996:
Total revenue............................. $17,816 $25,438 $33,140 $43,776
======= ======= ======= =======
Gross margin.............................. $ 5,050 $ 7,018 $12,845 $16,596
======= ======= ======= =======
Net earnings.............................. $ 704 $ 1,625 $ 4,359 $ 5,133
======= ======= ======= =======
</TABLE>
42
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS)
(15) OFFERING OF COMMON STOCK
On October 26, 1995, the Company completed its initial public offering of
common stock. In connection therewith, the Company issued 2,927,500 shares of
common stock and received proceeds of $28,284, net of underwriters' discounts
and commissions and offering expenses.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at May 31, 1995 and 1996 include cash
equivalents, trade receivables, trade payables, noncurrent receivables and
long-term debt. The carrying value of cash equivalents, trade receivables and
trade payables approximates fair value because of the short maturity of these
instruments. The fair value of the Company's noncurrent receivables and long-
term debt are not materially different from their financial statement carrying
values.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SpeedFam Co., Ltd.:
We have audited the accompanying consolidated balance sheets of SpeedFam
Co., Ltd. and consolidated subsidiaries as of April 30, 1995 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended April 30, 1996.
These consolidated financial statements are the responsibility of the
management of SpeedFam Co., Ltd. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpeedFam
Co., Ltd. and consolidated subsidiaries as of April 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended April 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," were
adopted in fiscal year 1994.
KPMG PEAT MARWICK LLP
July 3, 1996
Chicago, Illinois
44
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 7,234 $ 10,993
Short-term investments..................................... 8,297 3,330
Trade accounts and notes receivable, less allowance for
doubtful accounts of $428 and $676 in 1995 and 1996,
respectively.............................................. 46,088 50,420
Inventories................................................ 11,086 19,961
Due from affiliated companies.............................. 8,759 10,924
Income taxes receivable.................................... 44 42
Deferred income taxes...................................... 190 1,089
Prepaid expenses and other current assets.................. 1,478 1,733
-------- --------
Total current assets..................................... 83,176 98,492
Investments in affiliates.................................... 1,223 891
Property, plant and equipment, net........................... 20,371 20,161
Deferred income taxes........................................ 512 640
Other assets................................................. 5,531 6,367
-------- --------
$110,813 $126,551
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term borrowings...................................... $ 15,744 $ 8,088
Current portion of long-term debt.......................... 2,406 2,252
Accounts payable........................................... 34,299 48,326
Accrued expenses........................................... 4,384 7,122
Income taxes payable....................................... 2,564 9,178
-------- --------
Total current liabilities................................ 59,397 74,966
-------- --------
Long-term liabilities:
Long-term debt............................................. 12,528 9,106
Liability for employee benefits............................ 2,595 3,421
Minority interest.......................................... 2,078 1,967
-------- --------
Total long-term liabilities.............................. 17,201 14,494
-------- --------
Stockholders' equity:
Common stock, $6 par value, 240,000 shares authorized,
120,000 and 198,000 shares issued and outstanding, at
April 30, 1995 and 1996, respectively..................... 210 664
Retained earnings.......................................... 18,036 26,943
Foreign currency translation adjustment.................... 15,954 9,346
Unrealized gains on marketable securities.................. 15 138
-------- --------
Total stockholders' equity............................... 34,215 37,091
-------- --------
$110,813 $126,551
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Net sales......................................... $87,217 $108,664 $161,169
Cost of sales..................................... 63,405 77,088 106,912
------- -------- --------
Gross profit...................................... 23,812 31,576 54,257
Selling, general, and administrative expenses..... 20,904 25,109 34,298
------- -------- --------
Operating profit.................................. 2,908 6,467 19,959
------- -------- --------
Other income (expense):
Losses on sales of assets....................... (69) (293) (710)
Equity in net earnings (loss) of affiliates..... 110 89 (203)
Interest income................................. 207 317 407
Interest expense................................ (1,119) (1,056) (851)
Miscellaneous, net.............................. 357 (434) 815
------- -------- --------
(514) (1,377) (542)
------- -------- --------
Earnings before income taxes, minority interest
and cumulative effect of change in accounting
principle........................................ 2,394 5,090 19,417
Income tax expense................................ 1,026 2,755 9,479
------- -------- --------
Earnings before minority interest and cumulative
effect of change in accounting principle......... 1,368 2,335 9,938
Minority interest................................. (241) (166) (301)
------- -------- --------
Earnings before cumulative effect of change in
accounting principle............................. 1,127 2,169 9,637
Cumulative effect of change in accounting
principle........................................ (43) -- --
------- -------- --------
Net earnings...................................... $ 1,084 $ 2,169 $ 9,637
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY UNREALIZED
COMMON RETAINED TRANSLATION GAINS ON
STOCK EARNINGS ADJUSTMENT SECURITIES TOTAL
------ -------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1993...... $210 $14,958 $ 8,578 $ -- $23,746
Net earnings................... -- 1,084 -- -- 1,084
Foreign currency translation
adjustment.................... -- -- 1,866 -- 1,866
Cash dividends................. -- (55) -- -- (55)
---- ------- ------- ---- -------
Balance at April 30, 1994...... 210 15,987 10,444 -- 26,641
Net earnings................... -- 2,169 -- -- 2,169
Foreign currency translation
adjustment.................... -- -- 5,510 -- 5,510
Cash dividends................. -- (120) -- -- (120)
Unrealized gains on securities. -- -- -- 15 15
---- ------- ------- ---- -------
Balance at April 30, 1995...... 210 18,036 15,954 15 34,215
Net earnings................... -- 9,637 -- -- 9,637
Common stock dividend.......... 454 (454) -- -- --
Foreign currency translation
adjustment.................... -- -- (6,608) -- (6,608)
Cash dividends................. -- (276) -- -- (276)
Unrealized gains on securities. -- -- -- 123 123
---- ------- ------- ---- -------
Balance at April 30, 1996...... $664 $26,943 $ 9,346 $138 $37,091
==== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings..................................... $ 1,084 $ 2,169 $ 9,637
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in net (earnings) loss of affiliates.... (110) (89) 203
Depreciation and amortization.................. 2,668 2,531 2,267
Provision (benefit) for deferred income taxes.. (327) 76 (1,368)
Losses on sales of assets...................... 69 293 710
Cumulative effect of change in accounting
principle..................................... 43 -- --
Other, net..................................... 61 375 364
Change in net assets and liabilities:
Increase in trade accounts and notes
receivable and due from affiliates.......... (2,744) (1,729) (18,608)
(Increase) decrease in inventories........... 1,813 608 (11,661)
Increase in prepaid expenses and other
assets...................................... (552) (316) (2,462)
Increase in accounts payable................. 2,255 4,028 22,102
Increase in accrued expenses and other
liabilities................................. 1,215 717 5,482
Increase in income taxes, net................ 922 862 7,509
------- ------- --------
Net cash provided by operating activities.......... 6,397 9,525 14,175
------- ------- --------
Cash flows from investing activities:
Capital expenditures............................. (3,315) (1,214) (7,129)
Proceeds from sales of assets.................... 6 354 283
Other investing activities....................... 18 (5,676) 3,435
------- ------- --------
Net cash used in investing activities.............. (3,291) (6,536) (3,411)
------- ------- --------
Cash flows from financing activities:
Dividends paid................................... (55) (120) (276)
Decrease in short-term borrowings................ (2,551) (155) (4,824)
Proceeds from long-term debt..................... 3,008 247 2,528
Principal payments on long-term debt............. (2,293) (2,165) (3,176)
------- ------- --------
Net cash used in financing activities.............. (1,891) (2,193) (5,748)
------- ------- --------
Effect of foreign currency rate changes on cash.... 254 915 (1,257)
------- ------- --------
Net increase in cash and cash equivalents.......... 1,469 1,711 3,759
Cash and cash equivalents at beginning of year..... 4,054 5,523 7,234
------- ------- --------
Cash and cash equivalents at end of year........... $ 5,523 $ 7,234 $ 10,993
======= ======= ========
Supplemental cash flow information--cash paid
during the year for:
Interest......................................... $ 1,162 $ 1,487 $ 720
======= ======= ========
Income taxes..................................... $ 450 $ 1,783 $ 3,389
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SpeedFam Co., Ltd. (the "Company") was incorporated in 1971 as a joint
venture owned equally by the two corporate shareholders, Obara Corporation, a
Japanese company and SpeedFam International, Inc., a U.S. company.
The Company and its domestic subsidiaries and affiliated companies conduct
operations primarily in Japan but have subsidiaries and branches in Taiwan,
South Korea, India, Singapore, Hong Kong and China.
The Company and its subsidiaries and affiliates are engaged in the design,
engineering, manufacture, and distribution mainly of lapping and polishing
equipment and consumables, through-feed grinders, cleaning machines and
measuring equipment used in high technology industries.
(a) Basis of Presentation
The Company and its consolidated Japanese subsidiaries maintain their books
of account in conformity with the financial accounting standards of Japan. The
Company's non-Japan subsidiaries maintain their books of account in conformity
with the financial accounting standards of the countries in which they are
located. The consolidated financial statements presented herein in dollars
have been adjusted to conform to U.S. generally accepted accounting
principles.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the following subsidiaries:
<TABLE>
<CAPTION>
PERCENTAGE FISCAL
SUBSIDIARIES OWNERSHIP LOCATION YEAR-END
- ------------ ---------- ----------- --------
<S> <C> <C> <C>
SpeedFam Clean System Co., Ltd.................. 61.25% Japan March 31
Saku Seiki K.K.................................. 53.54 Japan March 31
SpeedFam Incorporated........................... 100.00 Taiwan March 31
SpeedFam Korea Ltd.............................. 100.00 South Korea March 31
SpeedFam India (Pvt.) Ltd....................... 82.00 India March 31
</TABLE>
All significant intercompany balances and transactions have been eliminated.
The Company's fiscal year ends on April 30.
The Company's investments in the common stock of affiliates, Met Coil Ltd.
(50% owned), CRT K.K. (23.08% owned) and Xevios Corporation (50% owned,
acquired in fiscal year 1996) are accounted for by the equity method.
The investment in Clean Technology K.K., a 27.5% (1995--45.08%) owned
affiliate of SpeedFam Clean System Co., Ltd., and 22.5% (1995--4.92%) owned by
the Company, is accounted for by the equity method.
At the end of 1993, Precision Technology, Inc. ceased operations and
transferred certain fixed assets at their net book value to SpeedFam Korea
Ltd., which was established in October 1993. Precision Technology, Inc. was
liquidated on May 31, 1994.
49
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(c) Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks and highly liquid short-
term investments with original maturities of three months or less. These
short-term investments are carried at cost which approximates market.
(d) Short-term Investments
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (Statement 115) requiring that certain
investments in debt and equity securities be classified as held-to-maturity,
available-for-sale or trading securities. Investments classified as held-to-
maturity are reported at amortized cost, and those classified as available-
for-sale are reported at fair value with unrealized gains and losses, net of
related taxes, excluded from earnings and reported in a separate component of
stockholders' equity.
Effective May 1, 1994, the Company adopted Statement 115. The effect of
adoption on the consolidated financial statements was not material. Prior to
May 1, 1994, marketable equity securities were carried at the lower of cost or
market and other investment securities were carried at cost.
(e) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided on
the declining balance method over the estimated useful lives of the assets.
Depreciation expense was $2,512, $2,312, and $2,148 in fiscal years 1994, 1995
and 1996, respectively. The estimated useful lives of the assets are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5 to 60 years
Machinery and equipment..................................... 3 to 13 years
Furniture and fixtures...................................... 2 to 20 years
Leasehold improvements...................................... 2 years
</TABLE>
(f) Inventories
Inventories are stated at the lower of cost, determined principally by the
first-in, first-out (FIFO) method, or market.
(g) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(Statement 109). Statement 109 required a change to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Effective May 1, 1993, the Company adopted Statement 109 and has reported
the cumulative effect of that accounting change in the fiscal year 1994
consolidated statement of earnings.
50
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(h) Revenue Recognition
Sales of the Company's products are recorded upon shipment.
(i) Warranty Costs
Generally, the Company provides a one-year warranty against manufacturer's
defects on all machines sold. Due to the specialized nature of the products,
warranty expense is recorded when it is probable and can be estimated rather
than on a units-produced or revenue basis.
(j) Foreign Currency Translation
Assets and liabilities have been translated using the exchange rates in
effect at the balance sheet dates. Results of operations are translated using
the average exchange rates prevailing throughout the period. Local currencies
are considered the functional currencies of the Company's non-Japanese
entities.
(k) Significant Customer
The Company had sales to a Japanese company that amounted to approximately
7.3%, 10.5%, and 11.2% of net sales in fiscal years 1994, 1995, and 1996,
respectively.
(l) Research and Development
Research and development expense amounted to approximately $1,634, $1,748
and $6,651 in fiscal years 1994, 1995, and 1996, respectively. Such
expenditures are expensed as incurred.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(n) Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 financial statement presentation.
(2) INVENTORIES
Inventories at the end of fiscal years 1995 and 1996 are summarized below:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials............................................. $ 1,211 $ 723
Work-in-process........................................... 8,671 16,340
Finished goods............................................ 1,204 2,898
------- -------
Total inventories..................................... $11,086 $19,961
======= =======
</TABLE>
51
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(3) INVESTMENTS
Investments at the end of fiscal years 1995 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Held-to-maturity, debt securities, at amortized cost....... $6,096 $ 133
Time deposits.............................................. 2,201 3,197
------ ------
Total short-term investments........................... 8,297 3,330
Available-for-sale, equity securities, at fair value,
included in other assets.................................. 651 779
------ ------
Total investments...................................... $8,948 $4,109
====== ======
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of available-for-sale and held-to-maturity securities at
the end of fiscal years 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995:
Available-for-sale equity
securities....................... $ 618 $ 45 $12 $ 651
Held-to-maturity debt securities.. $6,096 $ -- $-- $6,096
1996:
Available-for-sale equity
securities....................... $ 515 $265 $(1) $ 779
Held-to-maturity debt securities.. $ 133 $ -- $-- $ 133
</TABLE>
No investments classified as available-for-sale were sold during fiscal
years 1995 and 1996. The Company does not hold securities for trading
purposes.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at the end of fiscal years 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Land.................................................... $ 5,665 $ 4,560
Buildings and improvements.............................. 13,352 11,361
Machinery and equipment................................. 17,929 13,615
Furniture and fixtures.................................. 2,772 2,486
Leasehold improvements.................................. 14 13
Construction in progress................................ -- 3,468
-------- -------
39,732 35,503
Less accumulated depreciation........................... 19,361 15,342
-------- -------
Net property, plant and equipment....................... $ 20,371 $20,161
======== =======
</TABLE>
52
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(5) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 effective May 1,
1993. The cumulative effect of this change in accounting for income taxes of
$43 was determined as of May 1, 1993 and is reported separately in the
consolidated statement of earnings in fiscal year 1994.
Earnings before income taxes, minority interest and cumulative effect of
change in accounting principle are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Japan............................................... $1,564 $3,216 $15,135
Non-Japan........................................... 830 1,874 4,282
------ ------ -------
Total........................................... $2,394 $5,090 $19,417
====== ====== =======
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Japan........................................... $1,139 $2,159 $ 9,546
Non-Japan....................................... 214 520 1,301
------ ------ -------
1,353 2,679 10,847
Deferred:
Japan........................................... (327) 76 (1,360)
Non-Japan....................................... -- -- (8)
------ ------ -------
Total......................................... $1,026 $2,755 $ 9,479
====== ====== =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets (liabilities) at the end of fiscal years 1995 and 1996 are presented
below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Property, plant and equipment............................ $ (507) $ (333)
Inventory................................................ (52) 74
Allowance for doubtful accounts.......................... (46) (60)
Employee benefits........................................ 1,199 1,093
Accrued vacation......................................... 97 166
Business tax............................................. 248 890
Other.................................................... (237) (101)
------ ------
$ 702 $1,729
====== ======
</TABLE>
There is no valuation allowance for tax assets at the end of fiscal years
1995 and 1996. Deferred tax assets are considered realizable due to the
expectation of future taxable income. Income tax expense as a component of
stockholders' equity related to unrealized gains and losses on marketable
securities, aggregated $15 and $129 at the end of fiscal years 1995 and 1996,
respectively.
53
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
A reconciliation between the Company's effective tax rate and the "expected"
tax rate of 51% in Japan on earnings before income taxes, minority interest
and cumulative effect of change in accounting principle is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
"Expected" income tax rate................................ 51% 51% 51%
Expenses not deductible for tax purposes.................. 15 14 4
Equity in earnings of affiliates.......................... (2) (1) 1
Differences of non-Japan and "expected" tax rates......... (9) (5) (5)
Utilization of tax loss carryforward...................... (5) (3) --
Tax credit for research and development................... (6) (2) (3)
Reduced tax rate applicable to earnings less than
threshold................................................ (1) (1) --
Other, net................................................ -- 1 1
--- --- ---
Effective income tax rate................................. 43% 54% 49%
=== === ===
</TABLE>
No provision is made for income taxes on undistributed earnings of non-Japan
subsidiaries and affiliates because it is the Company's present intention to
reinvest substantially all the earnings of these operations. The Company
believes that the amount of income taxes that would be incurred if these
earnings were remitted would not be significant because of available tax
credits.
The Company's corporate tax returns through April 30, 1994 have been
examined by the Japanese tax authorities.
(6) SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Bank borrowings, including overdraft...................... $ 7,984 $ 926
Trade notes discounted at banks with recourse............. 7,760 7,162
------- ------
$15,744 $8,088
======= ======
</TABLE>
Short-term borrowings are secured by trade notes receivable with a net book
value of $7,162 at the end of fiscal year 1996. The short-term borrowings had
weighted average interest rates of 3.54%, 3.28% and 2.34% in fiscal years
1994, 1995 and 1996, respectively.
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Mortgage debentures:
1st Series, due November 1997, fixed interest rate of
7.7%................................................... $ 1,188 $ 952
2nd Series, due September 1999, fixed interest rate of
5.7%................................................... 3,563 2,855
Loans from banks and other financial institutions,
maturing 1995 to 2004, with weighted average interest
rates of 4.2% and 3.46% in 1995 and 1996, respectively... 10,183 7,551
------- ------
Total long-term debt...................................... 14,934 11,358
Less current portion of long-term debt.................... 2,406 2,252
------- ------
Net long-term debt........................................ $12,528 $9,106
======= ======
</TABLE>
54
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The mortgage debentures are secured by land and buildings with a net book
value of $3,776 at the end of fiscal year 1996.
At the end of fiscal year 1996, the Company has provided guarantees for up
to $952 and $181 of bank borrowings by Met-Coil Ltd., Japan, a 50% owned
affiliate, and SpeedFam India (Pvt.) Ltd., a subsidiary of the Company,
respectively. The Company does not anticipate any loss from these
arrangements.
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -------
<S> <C>
1997.............................................................. $ 2,252
1998.............................................................. 2,916
1999.............................................................. 1,445
2000.............................................................. 3,621
2001 and thereafter............................................... 1,124
-------
$11,358
=======
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries occupy certain manufacturing and office
facilities and use certain equipment under noncancelable operating leases
expiring at various dates through fiscal year 2001. Rental expense aggregated
approximately $1,471, $1,500 and $1,635 in fiscal years 1994, 1995 and 1996,
respectively.
Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at the end of fiscal year 1996 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1997............................................................... $ 799
1998............................................................... 643
1999............................................................... 546
2000............................................................... 397
2001 and thereafter................................................ 133
------
Total.......................................................... $2,518
======
</TABLE>
At the end of fiscal year 1996, outstanding commitments for the purchase of
property, plant and equipment were approximately $5,024.
55
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(9) PENSION AND SEVERANCE BENEFITS
The Company maintains pension and severance benefit plans for its employees.
Employees who leave the Company upon retirement because of age or sever their
connection with the Company for reasons other than dismissal for cause are
entitled to lump-sum payments based on their current rate of pay and length of
service.
Effective June 1, 1984 the Company adopted an insured pension plan which
also covers employees of SpeedFam Clean Systems Co., Ltd., the terms of which
provide for the ultimate funding of retirement benefits when due. Premiums
paid under the insured plan constitute the funding of the current costs of the
liability under the plan and the funding of the related past service costs
over a 15-year period.
The funded status of the insured pension plan at the end of fiscal years
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits....................................... $(1,338) $(1,205)
Nonvested benefits.................................... (46) (26)
------- -------
Accumulated benefit obligation.......................... (1,384) (1,231)
------- -------
Projected benefit obligation............................ (2,015) (1,775)
Plan assets at fair value............................... 1,785 1,656
------- -------
Projected benefit obligation in excess of plan assets... (230) (119)
Unrecognized net loss................................... 76 19
Unrecognized net obligation at transition............... 251 185
------- -------
Prepaid pension cost.................................... $ 97 $ 85
======= =======
</TABLE>
The components of net periodic pension cost for the insured pension plan are
shown below:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year........ $167 $204 $176
Interest cost on projected benefit obligation........... 69 89 87
Actual return on plan assets............................ (41) (46) (39)
Net amortization and deferral........................... 25 19 10
---- ---- ----
$220 $226 $234
==== ==== ====
Significant actuarial assumptions:
Discount rate......................................... 5.5% 5.5% 5.5%
Rate of salary increase............................... 3.0% 3.0% 3.0%
Expected long-term return on plan assets.............. 3.0% 3.0% 3.0%
</TABLE>
Plan assets represent the Company's share of funds invested by a trustee in
pooled accounts comprised of cash in bank and real estate.
A separate retirement benefits program for directors and statutory auditors
is not covered by the pension plan described above. The program provides that
directors and statutory auditors who retire or sever their connection with the
Company are entitled to lump-sum payments based on current rates of pay,
determined according to their title and the length of service. Directors and
statutory auditors may also be granted, at the discretion of the Company,
additional lump-sum payments for meritorious service. It is not the policy of
the Company to fund these retirement and severance benefits, but provision has
been made in the financial statements for the estimated accrued liabilities
under the plan. The liability related to these retirement benefits included in
56
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
the accompanying consolidated balance sheets at the end of fiscal years 1995
and 1996 amounted to $2,256 and $3,150, respectively. The plan was amended
during fiscal year 1996 and the resulting past service cost of $1,104 is being
amortized over a period of five years. Unamortized past service cost at the
end of fiscal year 1996 amounting to $883 is classified as other assets in the
accompanying consolidated balance sheets. The retirement benefits expense
amounted to $165, $181, and $520 in fiscal years 1994, 1995 and 1996,
respectively.
Two subsidiaries of the Company have separate employee retirement and
severance plan arrangements. Payments with respect to voluntary severance are
less in amount than payments for involuntary severance and retirement. The
subsidiaries have recorded estimated liabilities in the accompanying
consolidated balance sheets at the end of fiscal years 1995 and 1996 of $338
and $272, respectively, based upon the amount, net of the benefits to be paid
by a government-sponsored small enterprise mutual aid retirement fund, which
would be payable if all employees had to retire voluntarily. Plan assets plus
the accrual liability approximate vested benefits. The expense related to
these employee retirement and severance plans amounted to $20, $20 and $222 in
fiscal years 1994, 1995 and 1996, respectively. The Company believes that the
effect of not adopting Statement of Financial Accounting Standard No. 87,
"Employers' Accounting for Pensions" for these plans is not material to the
consolidated financial statements.
(10) LEGAL RESERVE AND CASH DIVIDENDS
The Japanese Commercial Code provides that earnings in an amount equal to at
least 10% of retained earnings be appropriated as a legal reserve until such
reserve equals 25% of stated common stock. This legal reserve is not available
for dividends but may be used to reduce a deficit or may be transferred to
stated common stock. Certain foreign subsidiaries are also required to
appropriate their earnings to legal reserves under the laws of the respective
countries. The legal reserve included as a component of retained earnings at
the end of fiscal years 1995 and 1996 amounted to $310 and $513, respectively.
On July 20, 1995, shareholders approved the capitalization of a portion of
fiscal year 1995 earnings through an in-substance stock dividend amounting to
$454 by issuing 78,000 shares of new common stock with a par value of six U.S.
dollars per share (0.65 new share against each issued and outstanding share at
the end of fiscal year 1995).
The accompanying consolidated financial statements do not reflect dividends
of $942 ($4.76 per share) declared subsequent to fiscal year 1996 by the Board
of Directors related to fiscal year 1996.
(11)RELATED PARTY TRANSACTIONS
The following is a summary of SpeedFam Co., Ltd. and consolidated
subsidiaries' transactions with SpeedFam International, Inc.
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Sales to SpeedFam International, Inc................ $3,121 $2,984 $7,140
Purchases from SpeedFam International, Inc.......... $ 134 $ 251 $1,696
Commission income................................... $ 91 $ 125 $ 355
Commission expense.................................. $1,991 $2,952 $6,458
</TABLE>
The following is summary of SpeedFam Co., Ltd. transactions with Met-Coil
Ltd., a 50% owned affiliate accounted for by the equity method:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Sales to Met-Coil Ltd............................... $ 281 $ 148 $ 865
Purchases from Met-Coil Ltd......................... $ 767 $ 836 $1,026
Interest income..................................... $ 50 $ 14 $ 28
Interest expense.................................... $ 3 $ 5 $ --
</TABLE>
57
<PAGE>
SPEEDFAM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at April 30, 1995 and 1996 include cash
equivalents, trade receivables, short-term investments, short-term loans,
trade payables, noncurrent receivables and long-term debt. The carrying amount
of cash equivalents, trade receivables, short-term loans and trade payables
approximates fair value because of the short maturity of these instruments.
The fair value of short-term investments has been determined based on quoted
market prices and approximate their financial statement carrying values. The
fair value of the Company's noncurrent receivables and long-term debt has been
determined based on discounted cash flows using current interest rates of
similar instruments and are not materially different from their financial
statement carrying values.
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10, 11, 12 AND 13. These items, constituting Part III of the Form 10-K,
have been omitted from this annual report pursuant to the provisions of
Instruction G to Form 10-K, because a definitive proxy statement, which is
incorporated herein by reference, except for the report of the compensation
committee of the board of directors and the performance graph, will be filed on
or about September 9, 1996. Information required for executive officers is
included in Part I, Item 1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
See Part II, Item 8
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................. S-1
Schedule I........................................................... S-2
Schedule II.......................................................... S-4
</TABLE>
(3) Exhibits filed:
See Exhibit Index.
(b)Reports filed on Form 8-K:
None.
(c)Exhibits filed:
See Exhibit Index.
(d)Financial Statements Omitted from Annual Report to Security Holders:
None.
59
<PAGE>
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.
SpeedFam International, Inc.
/s/ James N. Farley
_____________________________________
James N. Farley
Chairman of the Board and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ James N. Farley Chairman, Chief Executive September 4, 1996
____________________________________ Officer and Director
James N. Farley
/s/ Makoto Kouzuma President, Chief Operating September 4, 1996
____________________________________ Officer and Director
Makoto Kouzuma
/s/ Roger K. Marach Treasurer, Assistant September 4, 1996
____________________________________ Secretary and Chief
Roger K. Marach Financial Officer
(Principal financial and
accounting officer)
/s/ Neil R. Bonke Director September 4, 1996
____________________________________
Neil R. Bonke
/s/ Thomas J. McCook Director September 4, 1996
____________________________________
Thomas J. McCook
/s/ Stuart Meyer Director September 4, 1996
____________________________________
Dr. Stuart Meyer
/s/ Robert Miller Director September 4, 1996
____________________________________
Robert Miller
/s/ Carl S. Pedersen Director September 4, 1996
____________________________________
Carl S. Pedersen
</TABLE>
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SpeedFam International, Inc.:
Under date of July 3, 1996, we reported on the consolidated balance sheets
of SpeedFam International, Inc. and consolidated subsidiaries as of May 31,
1995 and 1996, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended May 31, 1996, which are included in the Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we
also audited the related consolidated financial statement schedules as listed
in Item 14(a)(2) of the Form 10-K. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick llp
July 3, 1996
Chicago, Illinois
S-1
<PAGE>
SCHEDULE I
SPEEDFAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF
SPEEDFAM INTERNATIONAL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
---------------
1995 1996
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 1 $ 7,228
Due from affiliated companies................................ 173 16,699
Prepaid expenses and other current assets.................... 536 1,762
------- -------
Total current assets........................................... 709 25,689
Investments in subsidiaries and affiliates..................... 27,468 35,595
Property, plant and equipment, net............................. 54 2,624
Other assets................................................... 670 820
------- -------
$28,901 $64,728
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt............................ $ 207 $ 400
Accounts payable............................................. 156 149
Due to affiliates............................................ 4,486 2
Accrued expenses............................................. 328 770
Income taxes................................................. 317 1,381
------- -------
Total current liabilities...................................... 5,494 2,702
Long-term debt................................................. 534 2,000
Deferred income taxes.......................................... 253 420
Stockholders' equity........................................... 22,620 59,606
------- -------
$28,901 $64,728
======= =======
</TABLE>
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Revenue................................................ $ 71 $ 96 $ 22
Cost and operating expenses............................ 798 648 251
Other income (expense)................................. 251 (151) 342
------ ------ -------
Earnings (loss) before income taxes and equity in net
earnings of subsidiaries and affiliates............... (476) (703) 113
Income tax expense (benefit)........................... (379) (3) 51
Equity in net earnings of subsidiaries and affiliates.. 2,325 2,275 11,664
------ ------ -------
Net earnings........................................... $2,228 $1,575 $11,726
====== ====== =======
</TABLE>
S-2
<PAGE>
SPEEDFAM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF
SPEEDFAM INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings..................................... $ 2,228 $ 1,575 $ 11,726
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in net earnings of subsidiaries and
affiliates.................................... (2,325) (2,275) (11,664)
Depreciation and amortization.................. 90 92 117
Provision for deferred income taxes............ (302) (75) (1,121)
Gains on sales of assets....................... (7) (15) --
Increase in cash surrender value............... (119) (138) (142)
Gain on disposal of FamTec A.G................. (411) -- --
Change in assets and liabilities............... 1,055 1,037 (19,368)
------- ------- --------
Cash flows (used in) provided by operating
activities...................................... 209 201 (20,452)
------- ------- --------
Cash flows from investing activities:
Capital expenditures........................... (80) (42) (2,589)
Proceeds from sales of assets.................. 21 42 --
Dividends from subsidiaries and affiliates..... 77 90 163
Other investing activities..................... (28) (32) (22)
------- ------- --------
Net cash provided by (used in) investing
activities........................................ (10) 58 (2,448)
------- ------- --------
Cash flows from financing activities:
Treasury transactions, net....................... 8 (35) 17
Net proceeds from issuance of common stock....... -- -- 28,284
Proceeds from exercise of stock options.......... -- -- 254
Proceeds from long-term debt..................... -- -- 2,500
Principal payments on long-term debt............. (267) (224) (928)
------- ------- --------
Net cash provided by (used in) financing
activities........................................ (259) (259) 30,127
------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (60) -- 7,227
Cash and cash equivalents at beginning of year..... 61 1 1
------- ------- --------
Cash and cash equivalents at end of year........... $ 1 $ 1 $ 7,228
======= ======= ========
</TABLE>
S-3
<PAGE>
SCHEDULE II
SPEEDFAM INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED MAY 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED CHARGED TO
TO OTHER ACCOUNTS DEDUCTIONS
BALANCE AT COSTS (TRANSLATION (WRITE-OFFS BALANCE
BEGINNING AND ADJUSTMENT AND AND AT END
DESCRIPTION OF YEAR EXPENSE RECOVERIES) ADJUSTMENTS) OF YEAR
----------- ---------- ------- -------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1994.................. $209 7 (7) 17 $ 192
1995.................. $192 3 7 15 $ 187
1996.................. $187 314 -- 6 $ 495
<CAPTION>
CHARGED
TO CHARGED TO DEDUCTIONS
BALANCE AT COSTS OTHER ACCOUNTS (WRITE- BALANCE
BEGINNING AND (TRANSLATION OFFS OF AT END
DESCRIPTION OF YEAR EXPENSE ADJUSTMENTS) INVENTORY) OF YEAR
----------- ---------- ------- -------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Inventory obsolescence:
1994.................. $826 4 (4) 665 $ 161
1995.................. $161 305 7 121 $ 352
1996.................. $352 1,804 -- 1,097 $1,059
<CAPTION>
CHARGED
TO
BALANCE AT COSTS BALANCE
BEGINNING AND CHARGED TO DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSE OTHER ACCOUNTS FROM RESERVE OF YEAR
----------- ---------- ------- -------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Warranty reserve:
1994.................. $160 420 -- 100 $ 480
1995.................. $480 (145) -- 135 $ 200
1996.................. $200 2,285 -- -- $2,485
</TABLE>
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1, File No. 33-95628).
*3.2 Amended Bylaws of the Registrant.
*10.1 Revolving Credit Agreement between the Registrant and The First
National Bank of Chicago and Firstar Bank Milwaukee, N.A. dated
April 15, 1996.
10.2 Joint Venture Agreement between the Registrant and Obara
Corporation, dated November 14, 1970 (incorporated by reference
to Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1, File No. 33-95628).
10.3 License and Technical Service Agreement between the Registrant
and SpeedFam Co., Ltd., dated November 14, 1970 (incorporated by
reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1, File No. 33-95628).
10.4 Amendment to License and Technical Service Agreement between the
Registrant and SpeedFam Co., Ltd., dated July 24, 1995
(incorporated by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1, File No. 33-95628).
10.5 Joint Venture Agreement between the Registrant and Fujimi
Incorporated, dated September 7, 1984 (incorporated by reference
to Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1, File No. 33-95628).
10.6 Distributorship Agreement between the Registrant and Fujimi
Incorporated, dated October 1, 1994 (incorporated by reference
to Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1, File No. 33-95628).
10.7 Amendment to Distributorship Agreement between the Registrant
and Fujimi Incorporated, dated August 3, 1995 (incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1, File No. 33-95628).
10.8 Registrant's 1991 Stock Option Plan ("1991 Plan") (incorporated
by reference to Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1, File No. 33-95628).
10.9 Registrant's 1995 Stock Option Plan ("1995 Plan") (incorporated
by reference to Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1, File No. 33-95628).
10.10 Registrant's 1995 Stock Purchase Plan (incorporated by reference
to Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1, File No. 33-95628).
10.11 SpeedFam Employees' Savings and Profit Sharing Plan and Trust,
as amended and restated June 1, 1989 (incorporated by reference
to Exhibit 10.12 to the Registrant's Registration Statement on
Form S-1, File No. 33-95628).
10.12 Employment Agreement between the Registrant and James N. Farley
(incorporated by reference to Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1, File No. 33-95628).
10.13 Employment Agreement between the Registrant and Makoto Kouzuma
(incorporated by reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1, File No. 33-95628).
10.14 Employment Agreement between the Registrant and Roger K. Marach
(incorporated by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, File No. 33-95628).
10.15 Employment Agreement between the Registrant's subsidiary and
Christopher E. Augur (incorporated by reference to Exhibit 10.16
to the Registrant's Registration Statement on Form S-1, File No.
33-95628).
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.16 Employment Agreement between the Registrant's subsidiary and
Robert F. Smith (incorporated by reference to Exhibit 10.17 to
the Registrant's Registration Statement on Form S-1,
File No. 33-95628).
*11.1 Statement Re Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registrant's Registration Statement on Form
S-1, File No. 33-95628).
*23.1 Consent of KPMG Peat Marwick LLP.
</TABLE>
- --------
*Previously filed.
2
