<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 28, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number 0-26784
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 Number)
305 North 54th Street, Chandler, Arizona 85226
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 705-2100
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (April 6, 1998).
Common Stock, no par value: 15,949,399 shares
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<PAGE> 2
SPEEDFAM INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
February 28, 1998 and May 31, 1997.............................................. 2
Condensed Consolidated Statements of Earnings
Three Months and Nine Months Ended February 28, 1998 and 1997................... 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1998 and 1997.................................... 4
Notes to Condensed Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURE........................................................................................... 20
</TABLE>
EXHIBIT INDEX
Exhibit 10 Amendment No. 1, dated January 25, 1998, to Amended and
Restated Revolving Credit Agreement between the Registrant
and Firstar Bank Milwaukee, N.A., the First National Bank of
Chicago, Bank of America National Trust and Savings
Association and Norwest Bank Arizona, N.A.
Exhibit 27 Financial Data Schedule
<PAGE> 3
PART I - FINANCIAL INFORMATION
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1998 1997
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $176,821 $ 76,895
Trade accounts and notes receivable, net 45,472 38,021
Inventories 43,317 35,849
Other current assets 5,246 4,950
-------- --------
Total current assets 270,856 155,715
Investments in affiliates 24,058 23,956
Property, plant and equipment, net 39,411 24,582
Other assets 2,832 2,247
-------- --------
Total assets $337,157 $206,500
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 274 $ 250
Accounts payable and due to affiliates 19,260 25,747
Customer deposits 5,803 4,165
Other current liabilities 17,253 18,731
-------- --------
Total current liabilities 42,590 48,893
-------- --------
Long-term liabilities:
Long-term debt 45 272
Deferred income taxes 802 802
-------- --------
Total long-term liabilities 847 1,074
-------- --------
Stockholders' equity:
Common stock, no par value, 60,000,000 shares authorized,
15,933,031 and 13,323,547 shares issued and outstanding
at February 28, 1998 and May 31, 1997, respectively 1 1
Additional paid-in capital 225,761 105,522
Retained earnings 67,786 49,466
Foreign currency translation adjustment 172 1,544
-------- --------
Total stockholders' equity 293,720 156,533
-------- --------
Total liabilities and stockholders' equity $337,157 $206,500
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 4
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ---------------------
1998 1997 1998 1997
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Revenue:
Net sales $47,004 $40,918 $152,818 $ 115,202
Commissions from affiliate 1,376 4,362 5,936 8,925
------- ------- -------- ---------
Total revenue 48,380 45,280 158,754 124,127
Cost of sales 28,341 25,591 90,941 75,465
------- ------- -------- ---------
Gross margin 20,039 19,689 67,813 48,662
Research, development and engineering 7,669 4,884 22,372 12,779
Selling, general and administrative 8,726 9,003 26,814 22,483
------- ------- -------- ---------
Operating profit 3,644 5,802 18,627 13,400
Other income (expense), net 1,581 64 3,851 (401)
------- ------- -------- ---------
Earnings from consolidated companies before income taxes 5,225 5,866 22,478 12,999
Income tax expense 1,822 2,286 7,966 5,053
------- ------- -------- ---------
Earnings from consolidated companies 3,403 3,580 14,512 7,946
Equity in net earnings of affiliates 1,740 1,329 3,808 5,784
------- ------- -------- ---------
Net earnings $ 5,143 $ 4,909 $ 18,320 $ 13,730
======= ======= ======== =========
Net earnings per share:
Basic $ 0.32 $ 0.45 $ 1.25 $ 1.28
======= ======= ======== =========
Diluted $ 0.31 $ 0.42 $ 1.19 $ 1.20
======= ======= ======== =========
Weighted average number of shares:
Basic 15,861 10,957 14,641 10,694
======= ======= ======== =========
Diluted 16,429 11,801 15,391 11,463
======= ======= ======== =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 5
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28,
------------------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 18,320 $ 13,730
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Equity in net earnings of affiliates (3,808) (5,784)
Depreciation and amortization 2,948 1,494
Other 267 550
Changes in assets and liabilities:
Increase in trade accounts and notes receivable (7,384) (7,419)
Increase in inventories (7,413) (5,453)
Increase in other current assets (297) (2,604)
Increase (decrease) in accounts payable and due to affiliates (5,010) 3,005
Increase in customer deposits and other
current liabilities 143 2,539
--------- --------
Net cash provided by (used in) operating activities (2,234) 58
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,833) (10,185)
Dividend from affiliate 875 554
Other investing activities (556) (368)
--------- --------
Net cash used in investing activities (17,514) (9,999)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 116,704 77,778
Proceeds from exercise of stock options 1,074 472
Proceeds from sale of stock to employees 2,088 887
Proceeds from long-term debt -- 414
Principal payments on long-term debt (203) (3,155)
--------- --------
Net cash provided by financing activities 119,663 76,396
--------- --------
Effects of foreign currency rate changes on cash 11 40
--------- --------
Net increase in cash and cash equivalents 99,926 66,495
Cash and cash equivalents at beginning of year 76,895 10,871
--------- --------
Cash and cash equivalents at February 28, 1998 and 1997 $ 176,821 $ 77,366
========= ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by management without audit. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted, although management believes that the disclosures
made are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company
for the year ended May 31, 1997, as filed with the Securities and
Exchange Commission on August 26, 1997 as part of its Annual Report on
Form 10-K. In the opinion of management the information furnished herein
reflects all adjustments (consisting of normal recurring adjustments)
necessary for a fair statement of results for the interim periods
presented. Results of operations for the three months and nine months
ended February 28, 1998 are not necessarily indicative of results to be
expected for the full fiscal year.
(2) EARNINGS PER SHARE
In the current period, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
includes the effect of all potential common shares that are dilutive and
outstanding during the reporting period. Earnings per share amounts for
all periods presented have been restated to conform to SFAS No. 128.
5
<PAGE> 7
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $ 5,143 $ 4,909 $18,320 $13,730
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 15,861 10,957 14,641 10,694
Effect of dilutive securities:
Employee stock options 568 844 750 769
------- ------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted-average shares outstanding 16,429 11,801 15,391 11,463
======= ======= ======= =======
Basic earnings per share $ 0.32 $ 0.45 $ 1.25 $ 1.28
======= ======= ======= =======
Diluted earnings per share $ 0.31 $ 0.42 $ 1.19 $ 1.20
======= ======= ======= =======
</TABLE>
Options to purchase 522 shares of common stock at an average price of
$37.38 per share, were outstanding during the three months ended
February 28, 1998, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than
the average market price of the common shares and, therefore, the
effect would be antidilutive.
(3) INVENTORIES
The components of inventory were:
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
------------ -------
<S> <C> <C>
Raw materials $21,453 $16,323
Work-in-process 14,094 16,030
Finished goods 7,770 3,496
------- -------
$43,317 $35,849
======= =======
</TABLE>
6
<PAGE> 8
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
(4) INVESTMENTS IN AFFILIATES
The Company owns a 50% interest in SpeedFam Co., Ltd. The Company's
equity interest in SpeedFam Co., Ltd. was $20,545 and $20,363 at
February 28, 1998 and at May 31, 1997, respectively, based on the
balance sheet of SpeedFam Co., Ltd. at January 31, 1998 and April 30,
1997, respectively. The remaining equity interest included in
investments in affiliates relates to the Company's 50% ownership
interest in Fujimi Corporation. Condensed consolidated financial
statements of SpeedFam Co., Ltd., which are consolidated on a fiscal
year that ends April 30, are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1997
----------- --------
<S> <C> <C>
ASSETS
Total current assets $141,822 $115,671
Investment in affiliates 783 780
Property, plant and equipment, net 36,771 30,327
Deferred income taxes and other assets 7,897 6,922
-------- --------
Total assets $187,273 $153,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $125,842 $ 96,034
Long-term debt 13,498 10,786
Other long-term liabilities 6,843 6,154
Stockholders' equity
Common stock 664 664
Retained earnings 40,154 37,049
Foreign currency translation adjustment 97 2,817
Unrealized gains on marketable securities 175 196
-------- --------
Total liabilities and stockholders' equity $187,273 $153,700
======== ========
</TABLE>
7
<PAGE> 9
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -----------------------
1998 1997 1998 1997
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $55,098 $45,219 $ 168,893 $ 156,073
Costs and operating expenses 51,059 42,572 160,208 137,620
------- ------- --------- ---------
Earnings before income taxes 4,039 2,647 8,685 18,453
Income taxes 1,303 845 3,983 8,589
------- ------- --------- ---------
Net earnings before minority interest 2,736 1,802 4,702 9,864
Minority interest 95 132 (153) 634
------- ------- --------- ---------
Net earnings 2,641 1,670 4,855 9,230
Beginning retained earnings 37,513 33,596 37,049 26,943
Dividends -- -- (1,750) (907)
------- ------- --------- ---------
Ending retained earnings $40,154 $35,266 $ 40,154 $ 35,266
======= ======= ========= =========
</TABLE>
The Company pays a commission to SpeedFam Co., Ltd. on sales of
equipment produced by the Company in the U. S. and exported to Pacific
Rim customers through SpeedFam Co., Ltd. As of February 28, 1998 the
Company had accrued $4,300 of commission expense to SpeedFam Co., Ltd.
(5) LONG-TERM DEBT
On August 29, 1997, the Company executed a new unsecured credit
facility with its U.S. bank group. The new credit agreement provides
for a revolving loan facility in the amount of $60,000 with a term of
three years. Should the loan be utilized, principal will be repaid at
the end of the loan term. Interest will accrue and be paid monthly on
the outstanding balance based on a 90 day LIBOR rate plus 25 to 100
basis points. The Company must meet certain financial objectives each
year as defined in the credit agreement. At February 28, 1998, no
amounts were outstanding on this loan facility.
8
<PAGE> 10
SPEEDFAM INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
(6) OFFERING OF COMMON STOCK
On October 15, 1997, the Company completed a public offering of common
stock. The Company issued 2,327 shares of common stock and received
proceeds of $116,704 net of underwriters' discounts and commissions and
offering expenses.
(7) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to offset exposure to
market risks arising from changes in foreign exchange rates. Derivative
financial instruments currently utilized by the Company are foreign
exchange forward contracts for certain currencies. The Company
evaluates and monitors consolidated net exposures by currency and
maturity, and external derivative financial instruments correlate with
that net exposure in all material respects. Gains or losses related to
hedges of firm commitments are deferred and included in the basis of
the transaction when it is completed. Gains or losses on unhedged
foreign currency transactions are included in income as part of cost of
sales.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEGMENTS
The Company's total revenue consists of net sales in two 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 produced by
SpeedFam Co., Ltd. (the "Far East Joint Venture").
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>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Net sales 97.2% 90.4% 96.3% 92.8%
Commissions from affiliate 2.8 9.6 3.7 7.2
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Cost of sales 58.6 56.5 57.3 60.8
------ ------ ------ ------
Gross margin 41.4 43.5 42.7 39.2
Research, development and engineering 15.9 10.8 14.1 10.3
Selling, general and administrative 18.0 19.9 16.9 18.1
------ ------ ------ ------
Operating profit 7.5 12.8 11.7 10.8
Other income (expense), net 3.3 0.2 2.4 (0.3)
------ ------ ------ ------
Earnings from consolidated companies before 10.8 13.0 14.1 10.5
income taxes
Income tax expense 3.8 5.1 5.0 4.1
------ ------ ------ ------
Earnings from consolidated companies 7.0 7.9 9.1 6.4
Equity in net earnings of affiliates 3.6 2.9 2.4 4.7
------ ------ ------ ------
Net earnings 10.6% 10.8% 11.5% 11.1%
====== ====== ====== ======
</TABLE>
Net Sales. The Company's net sales for the three months ended February
28, 1998 were $47.0 million, an increase of 14.9% over net sales of $40.9
million for the corresponding period in the prior year. Sales of equipment,
parts and expendables increased to $40.9 million or 87.0% of net sales in the
third quarter of fiscal 1998, up from $35.3 million or 86.2% of net sales in the
same period of fiscal 1997. The growth in this segment was attributable to
higher sales of the Company's CMP systems to the semiconductor industry. Sales
of CMP systems generated $28.0 million, or 59.5% of net sales, up from the $22.5
million, or 55.0% of net sales, reported a year earlier. During the quarter, the
Company added two new semiconductor device manufacturers to its list of global
customers. However, the Company believes that there has been a slowdown in
overall sales of semiconductor equipment, including CMP systems, to the
semiconductor device market worldwide. In addition, the semiconductor device
market has been affected by the conditions surrounding the economic health of
Asian countries, particularly Korea and Japan. The Company believes that these
market and economic uncertainties will more than likely have an adverse effect
on sales of CMP systems in the near term.
10
<PAGE> 12
The growth in net sales in the three months ended February 28, 1998 was
also attributable to an increase in sales of slurries. Sales of slurries
increased to $6.1 million or 13.0% of net sales in the third quarter of fiscal
1998 from $5.7 million or 13.8% in the comparable period of fiscal 1997.
Sales to the thin film memory disk market in the third quarter of
fiscal 1998 accounted for $12.7 million, or 27.0% of net sales, compared with
$14.3 million, or 34.9%, for the third quarter of fiscal 1997. Sales declined in
this quarter from the prior year due to continuing manufacturing over-capacity
in the thin film memory disk industry which in turn has reduced capital
spending. The Company expects these problems to continue in that industry for
the next several quarters.
Net sales for the nine months ended February 28, 1998 were $152.8
million, up 32.7% over net sales of $115.2 million for the same period in fiscal
1997. Equipment, parts and expendables accounted for $130.6 million or 85.5% of
net sales in the first nine months of fiscal 1998 compared to $96.9 million or
84.1% in the same period of fiscal 1997. CMP equipment accounted for the
significant portion of this sales growth. In the first nine months of fiscal
1998, sales of CMP systems were $93.4 million, or 61.1% of net sales, compared
to $55.6 million or 48.2% of net sales, reported a year earlier. In addition,
net sales have increased due to an increase in sales of slurries to $22.2
million or 14.5% of net sales in the first nine months of fiscal 1998 from $18.3
million or 15.9% of net sales in the same period of fiscal 1997. In the nine
months ended February 28, 1998, sales to the thin film memory disk market (which
includes equipment, parts, expendables and slurries) were $42.5 million compared
to $43.2 million in the same nine months of the prior year. The reason for this
decline is due to a radical fall off in equipment sales to that industry over
the past nine months due to the reasons set forth above.
Commissions from Affiliate. Commissions from affiliate decreased to
$1.4 million during the third quarter of fiscal 1998 from $4.4 million in the
corresponding period of fiscal 1997. Commissions from affiliate were $5.9
million for the first nine months of fiscal 1998 down from $8.9 million for the
first nine months of fiscal 1997. The decline in commission revenue in the three
and nine months ended February 28, 1998 is due not only to the continued
slowdown in the thin film memory disk market, but also to a weakening in orders
of capital equipment from the silicon wafer market. The Company believes that
the slowdown in the silicon wafer market will continue to affect commissions
from affiliate through at least the end of calendar year 1998.
Gross Margin. Gross margin increased to $20.0 million or 41.4% of total
revenue for the three months ended February 28, 1998 from $19.7 million or 43.5%
of total revenue for the three months ended February 28, 1997. The gross margin
percentage was down year over year due primarily to lower commission revenue.
For the first nine months of fiscal 1998, gross margin was $67.8 million or
42.7% of total revenue compared to $48.7 million or 39.2% of total revenue in
fiscal 1997. The increase in gross margin and gross margin percentage for the
nine months ended February 28, 1998 was due primarily to the continued shift in
the revenue mix to higher margin CMP systems.
Research, Development and Engineering. Research, development and
engineering expense was $7.7 million or 15.9% of total revenue in the third
quarter of fiscal 1998 up from $4.9 million or 10.8% of total revenue in the
third quarter of fiscal 1997. For the nine months ended February 28, 1998,
research, development and engineering expense increased to $22.4 million or
14.1% of total revenue compared to $12.8 million or 10.3% of total revenue in
the same period of fiscal year 1997. The increase in both the three month and
nine month periods ended February 28, 1998 is a result of the Company's
significant investment in dry-in/dry-out, end-point detection and 300mm
planarization capabilities for its CMP systems; improvements in CMP systems'
reliability and productivity; and various process technologies for the
semiconductor device, thin film memory disk and silicon wafer markets.
11
<PAGE> 13
Selling, General and Administrative. In the third quarter of fiscal
1998 selling, general and administrative expense was $8.7 million, or 18.0% of
total revenue, compared with $9.0 million, or 19.9%, last year. Selling, general
and administrative expense increased to $26.8 million or 16.9% of total revenue
in the first nine months of fiscal 1998 from $22.5 million or 18.1% of total
revenue for the same period a year ago. The dollar increase in the nine month
period of fiscal 1998 as compared to the prior year was due primarily to higher
commissions paid to the Far East Joint Venture for sales of CMP systems
manufactured in the United States and sold into the Asian markets, and continued
investments in the Company's sales, support and administrative infrastructure.
Other Income (Expense). Other income increased to $1.6 million in the
third quarter of fiscal 1998 from $64,000 in the comparable period of fiscal
1997. Other income increased to $3.9 million in the first nine months of fiscal
1998 from $401,000 of other expense in the comparable period of fiscal 1997.
Other income consisted almost entirely of interest income in the first three
quarters of fiscal 1998.
Equity in Net Earnings of Affiliates. The Company's equity in the net
earnings of its joint ventures was $1.7 million for the third quarter, up from
$1.3 million a year ago. This increase in the three month period is primarily a
result of increased earnings of the Far East Joint Venture. Earnings from the
Far East Joint Venture improved in the third quarter of fiscal 1998 over the
prior year period due to increased sales of equipment, parts and expendables,
and continued tightening of cost controls throughout the entire organization.
For the first nine months of fiscal 1998, equity in net earnings of affiliates
decreased to $3.8 million from $5.8 million in the corresponding period in the
prior year. Revenue of the Far East Joint Venture grew in the first nine months
of the fiscal 1998 from the same period a year ago. However, for the first nine
months of fiscal 1998, net earnings of the Far East Joint Venture were down from
the prior year due to competitive pricing pressures for the automated disk
polishing systems affecting gross profit margins, combined with higher costs of
producing these systems. The Far East Joint Venture has adopted an aggressive
pricing strategy designed to gain market share for the automated disk polishing
systems. Accordingly, such strategy sacrifices gross margins and profit.
Although the Far East Joint Venture's management expects this situation to
continue to impact that company's earnings for at least the near term, they
believe this pricing strategy represents an important strategic investment for
the future. In addition, the Company believes that the earnings of the Far East
Joint Venture may be adversely affected in the near term by both the slow down
in demand for equipment sold into the thin film memory disk and silicon wafer
markets, as well as the current financial difficulties facing several Asian
economies.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended February 28, 1998, $2.2 million in cash was
used in operating activities. Cash from operations was used to invest in working
capital, primarily accounts receivable and inventories and to reduce accounts
payable and amounts due to affiliates. This use of cash from operations was
offset by cash generated from net earnings.
In fiscal 1998, the Company executed a new unsecured credit facility
with its U.S. bank group which provides for a revolving loan facility in the
amount of $60 million with a term of three years. At February 28, 1998, no
amounts were outstanding on this loan facility.
On October 15, 1997, the Company completed a public offering of common
stock. The Company issued 2,327,000 shares of common stock and received net
proceeds of $116.7 million.
The Company is constructing a new 87,000 square foot Technology Center
next to the corporate headquarters in Chandler, Arizona. The current projected
cost of this new facility is estimated at $22.5 million with another $20.0
million for capital equipment.
12
<PAGE> 14
On March 12, 1998 the Company purchased approximately 30 acres of
undeveloped land near the Company's headquarters in Chandler, Arizona for
approximately $5.9 million. The Company has no immediate plans to build on the
site, but has acquired the property in anticipation of future growth.
The Company currently anticipates capital expenditure spending of
approximately $27.4 million for fiscal 1998. Through the nine months ended
February 28, 1998, the Company had made capital expenditures of $17.8 million
primarily to purchase machinery and plant equipment, complete payments for the
construction of the corporate headquarters in Chandler, Arizona and purchase
furniture and computer equipment. The Company believes that cash proceeds from
the common stock offering described above and the revolving loan facilities will
be sufficient to meet the Company's capital requirements during at least the
next 12 months.
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income in its financial
statements. The Company will adopt SFAS No. 130 effective June 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will adopt
SFAS No. 131 effective June 1, 1998.
YEAR 2000
The Company is addressing the issues associated with the programming
code in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 problem is pervasive and complex as virtually every computer operation
will be affected in some way. The Company is aware of and is addressing the
potential computing difficulties that may be triggered by the Year 2000.
The Company has commenced a Year 2000 date review and conversion
project to address all the necessary changes, testing and implementation issues.
The project encompasses three major areas of review: internal systems (hardware
and software), supplier compliance and Company products. The Company has
identified the changes required to its computer programs and hardware. The
necessary modifications to the Company's centralized financial, manufacturing
and operational information systems are expected to be completed by the end of
calendar year 1998. To date, the Company's suppliers have been sent letters
requesting information regarding their own Year 2000 plan, as well as requesting
confirmation that the components supplied by these vendors are Year 2000
compliant. Equipment and systems manufactured and supplied by the Company have
been evaluated and determined to be free of any material problems that could be
caused by the Year 2000 issue. To date, the Company believes that Year 2000
problems related to its own internal systems and equipment and systems it sells
will not have a material effect on the Company's business, financial condition
and results of operations. However, there can be no assurance that the systems
of other companies upon which the Company's systems and business rely will be
timely converted or that any such failure to convert by another company would
not have a material adverse effect on the Company's business, financial
conditions or results of operations.
13
<PAGE> 15
Certain statements and information in this Form 10-Q constitute
"forward-looking statements" within the meaning of the federal securities laws.
Such forward-looking statements involve risks and uncertainties 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. Factors that may affect the
Company's business and may therefore affect actual results include, among
others, the cyclical nature of the Company's business and the industries which
it serves, the Company's dependence on new product development and the effects
of rapid technological change in the semiconductor and disk media industries,
including the effects of significant competition in these industries, the normal
fluctuations in the Company's quarterly operating results, including the effects
of the Far East Joint Venture's results of operations. This is only a summary of
some of the important factors that could cause actual results to vary. For a
more complete description of these and other factors, refer to "Certain Factors
Affecting the Company's Business" elsewhere herein and in the Company's Form
10-K filed with the Securities and Exchange Commission. The Company undertakes
no obligation to update the information, including the forward-looking
statements, in the Form 10-Q.
14
<PAGE> 16
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 Form 10-Q including, without limitation,
information provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON CMP SYSTEMS
The Company believes that its future growth, if any, depends in large
part upon its ability to grow revenues attributable to its CMP systems and its
technology. Revenue growth attributable to 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
ability to grow revenues attributable to its CMP system. There can be no
assurance that the Company will be successful in growing revenue attributable to
its current CMP systems, 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.
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 even if such investments
negatively impact operating profits in a reporting period. 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. There can
be no assurance that the Company's development of new or enhanced products 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 sales of existing Company products
could be adversely affected.
15
<PAGE> 17
CYCLICAL NATURE OF THE COMPANY'S BUSINESS
The Company's business depends substantially on the capital
expenditures of thin film memory disk 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.
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. 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.
16
<PAGE> 18
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 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.
SOLE OR LIMITED SOURCES OF SUPPLY
The Company relies to a substantial extent on outside suppliers to
manufacture many of the components and subassemblies used in the Company's
capital equipment, some of which are obtained from a single supplier or a
limited group of suppliers. The Company's reliance on outside suppliers
generally, and a sole or a limited group of suppliers in particular, involves
several risks, including a potential inability to obtain an adequate supply of
required components and reduced control over quality, pricing and timing of
delivery of components. In the past, the Company has experienced delays in
receiving materials from suppliers, sometimes resulting in delays in the
delivery of products by the Company. Such delays, or other significant supplier
or supply quality issues may occur in the future, which could result in a
material adverse effect on the Company. Because the manufacture of certain of
these components and subassemblies is specialized and requires long lead times,
there can be no assurance that delays or shortages caused by suppliers will not
recur. Any inability to obtain adequate deliveries, or any other circumstance
that would require the Company to seek alternative sources of supply or to
manufacture such components internally, could delay shipment of the Company's
products, increase its cost of goods sold and have material adverse effect on
the Company's business and results of operations.
INTERNATIONAL BUSINESS
In fiscal 1996, 1997 and the nine months ended February 28, 1998,
21.7%, 31.2% and 30.2%, respectively, of the Company's total revenue was
attributable to sales outside the United States, primarily in Europe and Asia.
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 Fujimi
Corporation 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.
17
<PAGE> 19
The Company anticipates that the recent turmoil in Asian financial
markets and the recent deterioration of the underlying economic conditions in
certain Asian countries may have an impact on its sales, and the sales of its
joint ventures, to customers located in or whose end-user customers are located
in those countries. Also, revenue may be impacted as a result of currency
fluctuations on the relative price of the Company's products, or the products of
its joint ventures, and restrictions on government spending. In addition,
customers in those countries may face reduced access to working capital to fund
purchases of the Company's products, or the products of its joint ventures, due
to higher interest rates, reduced bank lending or the deterioration in the
customer's or its bank's financial condition or the inability to access other
financing.
18
<PAGE> 20
SPEEDFAM INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit - 10 Amendment No. 1, dated January 25, 1998, to
Amended and Restated Revolving Credit
Agreement between the Registrant and Firstar
Bank Milwaukee, N.A., the First National
Bank of Chicago, Bank of America National
Trust and Savings Association and Norwest
Bank Arizona, N.A.
Exhibit - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
February 28, 1998.
19
<PAGE> 21
SPEEDFAM INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEEDFAM INTERNATIONAL, INC.
/s/ Roger K. Marach
---------------------------------------------
Date: April 8, 1998 By Roger K. Marach
Treasurer and Chief Financial Officer
(As Chief Accounting Officer and Duly
Authorized Officer of SpeedFam
International, Inc.)
20
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10 Amendment No. 1, dated January 25, 1998, to Amended and
Restated Revolving Credit Agreement between the Registrant and
Firstar Bank Milwaukee, N.A., the First National Bank of
Chicago, Bank of America National Trust and Savings
Association and Norwest Bank Arizona, N.A.
27 Financial Data Schedule
21
<PAGE> 1
Exhibit 10
AMENDMENT NO. 1 TO AMENDED AND
RESTATED REVOLVING CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is
made as of January 25, 1998, by and among SPEEDFAM INTERNATIONAL, INC., an
Illinois corporation (the "Borrower"), THE FIRST NATIONAL BANK OF CHICAGO
("First Chicago"), a national banking association, FIRSTAR BANK MILWAUKEE, N.A.
("Firstar"), a national banking association, BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION ("BA"), a national banking association, and NORWEST BANK
ARIZONA, N.A. ("Norwest"), a national banking association, (First Chicago,
Firstar in its capacity as a bank, BA and Norwest shall be collectively referred
to as the "Banks"), and Firstar in its capacity as agent for the Banks (the
"Agent").
In consideration of the mutual covenants, conditions and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used herein, the following terms shall have the following meanings
specified:
1.1 "Amendment" shall mean this Amendment No. 1 to Amended and Restated
Revolving Credit Agreement.
1.2 "Credit Agreement" shall mean the Amended and Restated Revolving
Credit Agreement dated as of August 29, 1997, as amended by this Amendment.
ARTICLE II
AMENDMENTS
The Credit Agreement is amended as follows:
2.1 Section 6.5 -- Restricted Payments. Section 6.5 of the Credit
Agreement is hereby amended by replacing the period at the end of Section 6.5
with the following:
"and (c) the Company may redeem (the "Redemption") up to ten percent (10%)
of the common stock of the Company outstanding as of December 31, 1997,
provided that all such redemptions shall occur on or before December 31,
1999."
2.2 Section 6.8 -- Net Worth. Section 6.8 of the Credit Agreement is
hereby amended in its entirety as follows:
<PAGE> 2
"6.8 Net Worth. Permit the Net worth of the Company at any time to
be less than (a) $125,000,000 plus (b) all net proceeds from the issuance
of shares of all capital stock of the Company after August 29, 1997 on a
cumulative basis plus (c) 50% of the Company's Net Income (but not Net
Loss) for each fiscal year of the Company ending after May 31, 1997 on a
cumulative basis minus (d) the lesser of (i) $30,000,000 or (ii) the
aggregate amount paid by the Company to repurchase its common stock
pursuant to the Redemption"
2.3 Miscellaneous Amendments. The Credit Agreement, the Notes, the
Related Documents and all other agreements and instruments executed and
delivered heretofore or hereafter pursuant to the Credit Agreement are amended
hereby so that any reference therein to the Credit Agreement shall be deemed to
be a reference to such agreements and instruments as amended by or pursuant to
this Amendment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Banks and Agent that:
3.1 Credit Agreement. All of the representations and warranties made by
the Borrower in the Credit Agreement are true and correct on the date of this
Amendment.
3.2 Authorization; Enforceability. The making, execution and delivery of
this Amendment and performance of and compliance with the terms of the Credit
Agreement, as amended, have been duly authorized by all necessary corporate
action by the Borrower. This Amendment is the valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its terms.
3.3 Absence of Conflicting Obligations. The making, execution and delivery
of this Amendment and performance of and compliance with the terms of the Credit
Agreement, as amended, do not violate any presently existing provision of law or
the articles or certificate of incorporation or bylaws of the Borrower or any
agreement to which the Borrower is a party or by which it or any of its assets
is bound.
ARTICLE IV
MISCELLANEOUS
4.1 Continuance of Credit Agreement. Except as specifically amended by
this Amendment, the Credit Agreement shall remain in full force and effect.
2
<PAGE> 3
4.2 Survival. All agreements, representations and warranties made in this
Amendment or in any documents delivered pursuant to this Amendment shall survive
the execution of this Amendment and the delivery of any such document.
4.3 Governing Law. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Wisconsin applicable to
agreements made and wholly performed within such state.
4.4 Counterparts; Headings. This Amendment may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same agreement. Article and section
headings in this Amendment are inserted for convenience of reference only and
shall not constitute a part hereof.
4.5 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Amendment in such jurisdiction or affecting the
validity or enforceability of any provision in any other jurisdiction.
4.6 Conditions. The effectiveness of this Amendment is subject to the
Banks and Agent having received on or before the date hereof such additional
supporting documents and materials as the Banks and Agent may reasonably
request.
4.7 Other Capitalized Terms. All capitalized terms used in this Amendment
and not specifically defined herein shall have the definitions assigned to such
terms in the Credit Agreement.
[SIGNATURES ON FOLLOWING PAGE]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to Amended and Restated Revolving Credit Agreement as of the day and year first
written above.
SPEEDFAM INTERNATIONAL, INC.
By: /s/ Roger K. Marach
---------------------------------------
Roger K. Marach, Treasurer and CFO
FIRSTAR MILWAUKEE, N.A.
By: /s/ James A. Meyer
---------------------------------------
James A. Meyer, Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ James D. Benkow
---------------------------------------
James D. Benkow, Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Kevin McMahon
---------------------------------------
Kevin McMahon, Managing Director
NORWEST BANK ARIZONA, N.A.
By: /s/ Mae G. DelaBarre
---------------------------------------
Mae G. DelaBarre, Assistant Vice President
FIRSTAR BANK MILWAUKEE, N.A., as agent
By: /s/ Stephen E. Carlton
---------------------------------------
Stephen E. Carlton, vice President
4
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