<PAGE> 1
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 August 31, 1999
[ ] 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-IPEC, 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 (October 11, 1999).
Common Stock, no par value: 29,436,445 shares
<PAGE> 2
SPEEDFAM-IPEC, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
August 31, 1999 and May 31, 1999.................................................2
Condensed Consolidated Statements of Operations
Three Months Ended August 31, 1999 and 1998......................................3
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 1999 and 1998......................................4
Notes to Condensed Consolidated Financial Statements.............................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................19
SIGNATURE.....................................................................................................20
</TABLE>
EXHIBIT INDEX
Exhibit-27 Financial Data Schedule
<PAGE> 3
PART I - FINANCIAL INFORMATION
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
---------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67,701 $ 97,003
Short-term investments 65,126 50,020
Trade accounts receivable, net 78,543 76,808
Inventories 80,257 80,744
Other current assets 9,616 9,790
--------- ---------
Total current assets 301,243 314,365
Investments in affiliates 25,342 25,360
Property, plant and equipment, net 85,776 88,997
Other assets 13,934 15,056
--------- ---------
Total assets $ 426,295 $ 443,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,371 $ 1,275
Accounts payable and due to affiliates 23,730 25,101
Customer deposits 2,418 1,490
Accrued expenses 36,340 42,764
--------- ---------
Total current liabilities 63,859 70,630
--------- ---------
Long-term liabilities:
Long-term debt 115,864 116,129
Other liabilities 9,729 10,269
--------- ---------
Total long-term liabilities 125,593 126,398
--------- ---------
Stockholders' equity:
Common stock, no par value, 96,000 shares authorized, 29,418 and
29,392 shares issued and outstanding
at August 31, 1999 and May 31, 1999, respectively 1 1
Additional paid-in capital 427,413 427,290
Retained earnings (191,274) (180,311)
Accumulated comprehensive income (loss) 703 (230)
--------- ---------
Total stockholders' equity 236,843 246,750
--------- ---------
Total liabilities and stockholders' equity $ 426,295 $ 443,778
========= =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 4
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended August 31, 1999 and 1998
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Net sales $ 50,327 $ 64,984
Commissions from affiliate -- 585
-------- --------
Total revenue 50,327 65,569
Cost of sales 35,160 46,399
-------- --------
Gross margin 15,167 19,170
Research and development 12,890 15,511
Selling, general and administrative 12,260 15,278
-------- --------
Operating loss (9,983) (11,619)
Other income (expense), net (88) 2,506
-------- --------
Loss from consolidated companies before income taxes (10,071) (9,113)
Income tax benefit -- (1,096)
-------- --------
Loss from consolidated companies (10,071) (8,017)
Equity in net earnings (loss) of affiliates (892) 728
-------- --------
Net loss $(10,963) $ (7,289)
Cumulative dividend on preferred stock -- (21)
-------- --------
Net loss attributable to common stockholders $(10,963) $ (7,310)
======== ========
Net loss per share:
Basic and diluted $ (0.37) $ (0.25)
======== ========
Weighted average number of shares:
Basic and diluted 29,404 28,677
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 5
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended August 31, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (10,963) $ (7,289)
Adjustments to reconcile net loss to net cash used in
operating activities:
June 1998 IPEC net income -- (2,232)
Equity in net earnings (loss) of affiliates 892 (728)
Depreciation and amortization 4,523 4,389
Dividend from affiliate -- 521
Other (102) (385)
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (1,587) 10,957
Decrease in inventories 697 1,041
(Increase) decrease in other current assets 175 (680)
Decrease in accounts payable and due to affiliates (1,170) (13,206)
Decrease in customer deposits and accrued expenses (7,348) (2,865)
--------- ---------
Net cash used in operating activities (14,883) (10,477)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (26,024) (11,158)
Maturities of short-term investments 10,918 11,161
Proceeds from the sale of short-term investments -- 35,849
Proceeds from licensing technology and transfer of associated assets 2,335 --
Capital expenditures (2,233) (6,839)
Other investing activities 603 (424)
--------- ---------
Net cash provided by (used in) investing activities (14,401) 28,589
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee stock plan purchases 123 1,328
Principal payments on long-term debt (169) (182)
--------- ---------
Net cash provided by (used in) financing activities (46) 1,146
--------- ---------
Effects of foreign currency rate changes on cash 28 40
--------- ---------
Net increase (decrease) in cash and cash equivalents (29,302) 19,298
Cash and cash equivalents at beginning of year 97,003 104,482
--------- ---------
Cash and cash equivalents at August 31, 1999 and 1998 $ 67,701 $ 123,780
========= =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
SPEEDFAM-IPEC, 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, 1999, as filed with the Securities and
Exchange Commission on August 30, 1999 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 ended August 31,
1999 are not necessarily indicative of results to be expected for the
full fiscal year.
(2) LOSS PER SHARE
Basic loss per common share is based upon the weighted average
number of common shares outstanding. Diluted loss per common share
assumes the exercise of all options which are dilutive, whether
exercisable or not. The dilutive effect of stock options is measured
under the treasury stock method. Employee stock options outstanding
during the three months ended August 31, 1999 and 1998 were not included
in the computation of diluted loss per share because the effect would be
antidilutive.
(3) INVENTORIES
The components of inventory were:
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
---------- --------
<S> <C> <C>
Raw materials $ 49,335 $ 48,082
Work-in-process 19,893 23,428
Finished goods 11,029 9,234
-------- --------
$ 80,257 $ 80,744
======== ========
</TABLE>
(4) SHORT-TERM INVESTMENTS
In August, 1998 the Company recorded a realized gain of $46 from
the sale of tax exempt short-term investments, classified as
held-to-maturity securities, with a carrying value of $35,803. The
proceeds of $35,849 were re-invested. The Company sold investments
originally intended to be held-to maturity to take advantage of more
favorable rates of return available on taxable securities. The Company's
short-term investments are now classified as available-for-sale. The
short-term investments are recorded at fair market value and an
unrealized loss of $252 is included as part of accumulated other
comprehensive income (loss) within stockholders' equity at May 31 and
August 31, 1999.
5
<PAGE> 7
(5) INVESTMENTS IN AFFILIATES
The Company owns a 50% interest in SpeedFam-IPEC Co., Ltd. The
Company's equity interest in SpeedFam-IPEC Co., Ltd. was $21,587 and
$21,764 at August 31, 1999 and at May 31, 1999, respectively, based on
the balance sheet of SpeedFam-IPEC Co., Ltd. at July 31, 1999 and April
30, 1999, 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-IPEC Co., Ltd., which are consolidated on a
fiscal year that ends April 30, are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 1999
-------- ---------
<S> <C> <C>
Assets
Total current assets $ 85,945 $ 81,760
Property, plant and equipment, net 36,784 36,003
Other assets 11,746 10,759
-------- --------
Total assets $134,475 $128,522
======== ========
Liabilities and Stockholders' Equity
Total current liabilities $ 58,596 $ 57,789
Long-term debt 24,529 19,607
Other long-term liabilities 8,176 7,599
Stockholders' equity 43,174 43,527
-------- --------
Total liabilities and stockholders' equity $134,475 $128,522
======== ========
</TABLE>
6
<PAGE> 8
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
July 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 19,934 $ 39,623
Costs and operating expenses 23,310 37,765
-------- --------
Earnings (loss) before income taxes (3,376) 1,858
Income taxes 1,062 1,182
-------- --------
Net earnings (loss) before minority interest (2,314) 676
Minority interest (213) (232)
-------- --------
Net earnings (loss) (2,101) 908
Beginning retained earnings 40,326 41,162
Dividends -- (1,042)
-------- --------
Ending retained earnings $ 38,225 $ 41,028
======== ========
</TABLE>
The Company pays a commission to SpeedFam-IPEC Co., Ltd. on sales
of equipment produced by the Company in the U. S. and exported to Pacific Rim
customers through SpeedFam-IPEC Co., Ltd. As of August 31, 1999 the Company had
accrued $785 of commission expense to SpeedFam-IPEC Co., Ltd.
(6) 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
include foreign currency forward contracts. The Company evaluates and
monitors consolidated net exposures by currency and maturity, and
external derivative financial instruments correlate with those net
exposures in all material respects. Gains and losses on hedges of
existing assets and liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income when
those carrying amounts are converted. Gains or losses related to hedges
of firm commitments are deferred and included in the bases of the
transactions when they are completed. Gains or losses on unhedged foreign
currency transactions, if any, are included in income as part of cost of
sales. Gains and losses on derivative financial instruments which protect
the Company from exposure in a particular currency, but do not currently
have a designated underlying transaction, are also included in income as
part of cost of sales. If a hedged item matures, or is sold,
extinguished, terminated, or is related to an anticipated transaction
that is no longer likely to take place, the derivative financial
instrument is closed and the related gain or loss is included in income
as part of cost of sales.
7
<PAGE> 9
(7) COMPREHENSIVE LOSS
The Company's comprehensive loss was as follows:
COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss $(10,963) $ (7,310)
Other comprehensive income (loss):
Foreign currency translation adjustments 933 (1,813)
-------- --------
Comprehensive loss $(10,030) $ (9,123)
======== ========
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Unrealized Accumulated Other
Foreign Currency Losses on Comprehensive Income
Translation Securities (Loss)
----------- ----------- --------------------
<S> <C> <C> <C>
Balance at May 31, 1999 $ 22 $(252) $(230)
Three month period change 933 -- 933
----- ----- -----
Balance at August 31, 1999 $ 955 $(252) $ 703
===== ===== =====
</TABLE>
(8) MERGER, INTEGRATION, AND RESTRUCTURING COSTS
In connection with the merger of SpeedFam International, Inc. and
Integrated Process Equipment Corp. in April 1999, the Company recorded
various merger, integration and restructuring costs. Direct merger costs
primarily consist of professional fees, such as investment banking, legal
and accounting for services rendered through the date of the merger. The
Company recorded integration and restructuring costs for lease
terminations, the write-off of duplicative equipment previously used for
demonstration purposes, the write-down of inventory and equipment related
to product lines that will no longer be supported, and severance costs
resulting from workforce reductions.
The following table summarizes the components of the merger,
integration, and restructuring costs:
<TABLE>
<CAPTION>
Three Months
Activity
------------
Accrued at Cash Accrued at
May 31, 1999 Expenditures August 31, 1999
------------ ------------ ---------------
<S> <C> <C> <C>
Direct merger costs $ 3,600 $ 3,600 --
Lease termination costs 14,600 1,736 12,864
Discontinued product lines 100 -- 100
Severance costs 4,200 2,545 1,655
Other costs 500 15 485
------- ------- -------
$23,000 $ 7,896 $15,104
======= ======= =======
</TABLE>
8
<PAGE> 10
(9) BUSINESS SEGMENT INFORMATION
The Company classifies its products into three core business
segments: (i) the CMP Group, which is comprised of the Company's
development and production of chemical mechanical planarization systems;
(ii) the Surface Technology Group, which is comprised of the development
and production of high-throughput precision surface processing equipment
used in thin film memory disk media and silicon wafer industries; and
(iii) the Industrial Applications Group, which is comprised of the
development and production of high-throughput precision surface
processing equipment used in general industrial applications. Information
concerning the Company's business segments in the three months ended
August 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Sales to unaffiliated customers:
CMP Group ................................... $ 39,784 $ 50,880
Surface Technology Group .................... 7,694 10,575
Industrial Applications Group ............... 2,849 3,529
-------- --------
Total net sales to unaffiliated customers 50,327 64,984
-------- --------
Commissions from affiliate:
Surface Technology Group .................... -- 485
Industrial Applications Group ............... -- 100
-------- --------
Total revenue ........................... $ 50,327 $ 65,569
======== ========
Segment operating loss:
CMP Group ................................... $ (5,339) $ (5,010)
Surface Technology Group .................... (400) (1,951)
Industrial Applications Group ............... 230 541
-------- --------
Total segment operating loss ............ (5,509) (6,420)
General corporate income (expense), net ................... (4,303) (3,109)
Interest income (expense), net ............................ (259) 416
-------- --------
Loss from consolidated companies before income taxes ...... $(10,071) $ (9,113)
======== ========
</TABLE>
(10) RECLASSIFICATIONS
Certain reclassifications have been made in the financial
statements for the three months ended August 31, 1998 to conform to the
fiscal 2000 presentation.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEGMENTS
The Company sells its products and services to three market
segments: (1) semiconductor device manufacturers (CMP Group), (2) thin film
memory disk media and silicon wafer manufacturers (Surface Technology
Group), and (3) manufacturers of general industrial components (Industrial
Applications Group).
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------------
1999 1998
------ ------
<S> <C> <C>
Revenue:
Net sales 100.0% 99.1%
Commissions from affiliate 0.0 0.9
----- -----
Total revenue 100.0 100.0
Cost of sales 69.9 70.8
----- -----
Gross margin 30.1 29.2
Research and development 25.6 23.6
Selling, general and administrative 24.3 23.3
----- -----
Operating loss (19.8) (17.7)
Other income (expense), net (0.2) 3.8
----- -----
Loss from consolidated companies before income taxes (20.0) (13.9)
Income tax benefit 0.0 1.7
----- -----
Loss from consolidated companies (20.0) (12.2)
Equity in net earnings (loss) of affiliates (1.8) 1.1
----- -----
Net loss (21.8)% (11.1)%
===== =====
</TABLE>
Net Sales. Net sales for the first quarter of fiscal 2000 were
$50.3 million, down 22.6% from net sales of $65.0 million in the first
quarter of fiscal 1999. Sales of CMP systems totaled $39.8 million, or
79.0% of net sales, down 21.8% from the $50.9 million, or 78.3% of net
sales, of CMP system sales in the first quarter of fiscal 1999. Sales of
CMP systems declined in fiscal 2000 from the prior year due to a worldwide
slowdown in overall demand for semiconductor manufacturing equipment, which
was caused by an over-capacity situation in the semiconductor device market
worldwide. In addition, the Company has seen erosion in its market share of
new sales due to increased competition in the sales of CMP systems to
semiconductor manufacturers.
10
<PAGE> 12
Sales of the Surface Technology Group in the first quarter of fiscal 2000
accounted for $7.7 million, or 15.3% of net sales, as compared to $10.6
million, or 16.3% of net sales in the first quarter of fiscal 1999. During
the first quarter of fiscal 2000, thin film memory disk manufacturers
continued to experience manufacturing over-capacity which in turn reduced
capital spending. The thin film memory disk industry continues to feel
"price per unit" pressures which in turn has forced a reduction in capital
spending for equipment the Company supplies from its U.S. operations. The
decline in sales from the Surface Technology Group was also due to
continued slowdown in the silicon wafer market. This slowdown was due to
the ongoing manufacturing over-capacity caused by various factors including
die shrink, increased production efficiencies and Asian economic
conditions. The Company expects the slowdown in these markets to continue
for at least the next 12 months. Sales in the first quarter of fiscal 2000
of the Industrial Applications Group were $2.8 million, or 5.7% of net
sales in the first quarter of fiscal 2000, compared to $3.5 million, or
5.4% of net sales in the first quarter of fiscal 1999.
Commissions from Affiliate. No commissions from affiliate were
recorded in the first quarter of fiscal 2000, compared to $585,000 recorded
in the first quarter of fiscal 1999. The decrease was due to the continued
slowdown in the thin film memory disk market, and silicon wafer markets.
The Company believes that capital equipment spending will continue to be
weak in the thin film memory and silicon wafer industries through the next
12 months in turn lowering commissions from affiliate compared to prior
year periods.
Gross Margin. In first quarter of fiscal 2000, gross margin was
$15.2 million, or 30.1% of total revenue, compared to $19.2 million, or
29.2% of total revenue, in the first quarter of fiscal 1999. Gross margin
dollars declined due to the decrease in total revenue in the first quarter
of fiscal 2000 compared to the prior year period. The Company expects that
the gross margin percentage will continue to increase compared to prior
year quarters due to increased production efficiencies as a merged company.
Research and Development. In the first quarter of fiscal 2000,
research and development expense decreased to $12.9 million, or 25.6% of
total revenue, compared to $15.5 million, or 23.6% of total revenue, in the
first quarter of fiscal 1999. The decrease was due to management's efforts
to realign the Company's research and development efforts around critical
and key programs while eliminating duplicate projects.
Selling, General and Administrative. In the first quarter of
fiscal 2000, selling, general and administrative expense decreased to $12.3
million, or 24.3% of total revenue, from $15.3 million, or 23.3% of total
revenue, in the first quarter of fiscal 1999. The dollar amount decrease in
selling, general and administrative expense resulted primarily from
management's efforts to reduce costs and eliminate functional duplications
throughout the merged company.
Other Income (Expense). Other income (expense) decreased to
$88,000 of other expense in the first three months of fiscal 2000 from $2.5
million of other income in same period of fiscal 1999. In the first quarter
of fiscal 1999, the Company recorded a gain arising from the collection of
insurance proceeds for a CMP tool, which was destroyed in transit. The
decrease in other income (expense) in the first three months of fiscal 2000
compared to the same period in fiscal 1999, was also due to the decrease in
interest income caused by the decline in short-term investments.
Provision for Income Taxes. At the end of fiscal 1999, as well as
at the end of the first quarter of fiscal 2000, the Company established a
valuation allowance for deferred tax assets generated by its operating
losses. As a result, the effective tax rate for the first quarter of fiscal
2000 was zero. While the Company will reassess its tax situation each
quarter, the Company expects that its effective tax rate will be zero at
least throughout fiscal 2000.
11
<PAGE> 13
Equity in Net Earnings of Affiliates. For the first quarter of
fiscal 2000, equity in net earnings (loss) of affiliates decreased to a
loss of $892,000 compared to $728,000 of net earnings in the first quarter
of fiscal 1999. This decline was due to significantly decreased sales
revenue of the Far East Joint Venture. Investments by manufacturers of both
silicon wafer and thin film memory disks continue to be weak in fiscal
2000. The Company believes that the results of the Far East Joint Venture
will be adversely affected in fiscal year 2000 by both a slowdown 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
As of August 31, 1999, the Company had $132.8 million in cash,
cash equivalents and short-term investments, compared to $147.0 million at
May 31, 1999. The Company used $14.9 million of cash in operating
activities during the first three months of fiscal 2000. Cash used in
operations included the net loss of $11.0 million adjusted for non-cash
items of $5.3 million, primarily representing depreciation and amortization
expense. In addition, $8.5 million in cash was used to pay down accrued
expenses and accounts payable, and $700,000 of cash was used to fund a net
increase in certain current assets. The decrease in accrued expenses was
primarily due to the payment of accrued liabilities for merger, integration
and restructuring costs.
The Company made capital expenditures of $2.2 million in the first quarter
of fiscal 2000. The majority of the cash was used to fund additional
building construction, software and equipment purchases. Cash of $2.3
million was provided from the licensing of certain technologies and
transferring associated assets. Cash was also used to purchase short-term
investments of $26.0 million, partially offset by proceeds of maturing
investments totaling $10.9 million.
The Company believes that its current cash, cash equivalents and
short-term investments will be sufficient to meet the Company's cash needs
during the next 12 months.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for financial years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The Company is evaluating
the new Statement's provisions and has not yet determined its impact. The
Company will adopt SFAS No. 133 effective June 1, 2001.
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 have been
completed. 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. The Company has evaluated the vendor responses which
have been received and concluded that the vendors which have responded
12
<PAGE> 14
either are Year 2000 compliant or are proceeding with their own Year 2000
compliance programs. The Company will continue to follow-up with vendors
with which the Company has a material relationship and who have not
responded to obtain assurances that they expect to be Year 2000 compliant
in time. 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. Management estimates that the
Company's remaining Year 2000 compliance expense will be immaterial. 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. To mitigate this risk, the Company is
reviewing its vendor relationships and building alternative sources of
supply should the business operations of any one vendor be interrupted due
to Year 2000 problems.
CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
The Company's business is subject to numerous risks, including
those discussed below. If any of the events described in these risks
occurs, the Company's business, financial condition and results of
operations could be seriously harmed.
The Company's growth depends on continued and increased acceptance
of CMP among semiconductor manufacturers. While CMP is used by a number of
advanced logic semiconductor manufacturers, CMP has been used to
manufacture advanced memory devices only in the past 2 years. Continued and
increased acceptance of CMP systems depends on many factors considered by
potential customers, including the CMP product's
- cost of ownership
- throughput
- process flexibility
- performance, including reliability
- customer support
Failure to adequately meet potential customers' needs with respect
to one or more of these factors will result in decreased acceptance of CMP
and, therefore, the Company's CMP systems, which will in turn negatively
impact the Company's profitability.
The Company's Business is Highly Cyclical. The Company's business
depends substantially on the capital expenditures of semiconductor
manufacturers and, to a lesser extent, thin film memory disk and silicon
wafer manufacturers. These industries are highly cyclical and have
historically experienced periodic downturns, 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 have in the past and are expected in the future to
materially adversely affect the business and operating results of the
Company. The semiconductor device industry has recently experienced a
slowdown and the memory disk and silicon wafer industries are currently
experiencing a slowdown. These events have negatively impacted the
Company's results of operations.
If the Company does not continue to integrate SpeedFam's and
IPEC's technology and operations quickly and effectively, its operations
may be adversely affected. The merger of SpeedFam and IPEC was consummated
April 6, 1999. The company must continue to integrate all components of
IPEC's former operations, including the following:
13
<PAGE> 15
- - Sales and marketing operations, including international distribution
channels. Combining international sales channels could result in
significant expense or customer confusion.
- - Product offerings, including marketing of products to the other's
customers.
- - Research and development programs.
- - Manufacturing operations and philosophies.
- - Field service support for CMP equipment.
- - Management information and reporting systems. Since SpeedFam and IPEC used
different management information systems, the Company may face
difficulties obtaining timely and accurate information, data and reports
to operate the company effectively until integration is completed.
The Company cannot be certain that it can achieve integration of
these components without adversely impacting operations. To the extent
management focuses on integration, it may not be able to develop the business.
The Company, and its predecessors, have had losses recently and the
Company expects losses in the near future. In the first quarter of fiscal 2000,
the Company recorded a net loss of $11.0 million. In fiscal 1999, the Company
had a net loss of $139.9 million. This loss included $53.9 million of various
merger, integration and restructuring costs. Direct merger costs primarily
consist of professional fees, such as investment banking, legal and accounting
for services rendered through the date of the merger. The Company recorded
integration and restructuring costs for lease terminations, the write-off of
duplicative equipment previously used for demonstration purposes, the writedown
of inventory and equipment related to products lines that will no longer be
supported, and severance costs resulting from workforce reductions. The Company
attributes the additional loss to the slowdown in the industry combined with
increasing investment in research and development.
IPEC had net losses of $42.3 million in fiscal 1998 and $33.7
million in fiscal 1997. In fiscal 1998, IPEC incurred net charges of $25.9
million to increase the valuation allowance for its deferred tax assets and
$10.6 million for an additional writedown of assets in connection with the
closure of IPEC Clean, a subsidiary of IPEC.
These losses, excluding the one time charges, are attributed mainly
to the slowdown in the industry combined with increasing investment in research
and development.
The Company faces intense competition, including from companies with
greater resources. Several companies currently market CMP systems that directly
compete with the Company's
14
<PAGE> 16
products, including Applied Materials, Inc. and Ebara Corporation. For
several reasons, the Company may not compete effectively with competitors.
These reasons include:
- Some competitors may have greater financial resources than the
Company. They also may have more extensive engineering,
manufacturing, marketing and customer service and support
capabilities.
- Some competitors may supply a broader range of semiconductor
capital equipment than the Company. As a result, these
competitors may have better relationships with semiconductor
manufacturers, including current and potential customers of
the Company.
- The Company expects competitors to continue to improve their
existing technology and introduce new products. This could
cause a decline in the Company's sales or lead to intensified
pricebased competition.
- Other capital equipment manufacturers not currently involved
in the development of CMP systems may enter the market or
develop technology that reduces the need for the Company's
products.
The Company may not develop products in time to meet changing
technologies. Semiconductor manufacturing equipment and processes are
subject to rapid technological changes and product obsolescence. Developing
new products in the rapidly evolving industry in which the company operates
involves a number of risks:
- products may be introduced behind schedule or after customers
have made buying decisions
- products may not be accepted in the marketplace
Competitive pressures require the Company to continue to enhance
performance for finer geometrics in oxide and tungsten applications, while
developing new process capabilities for emerging STI, copper and 300mm
applications. The Company will also continue to develop with the Far East
Joint Venture products and processes for thin film memory disk
manufacturers and to enhance the plasma-assisted chemical etch processes.
Product or process development problems could harm the Company's
results of operations. The Company's products are complex, and from time to
time have defects or bugs that are difficult and costly to fix. This can
harm results of operations for the Company, in two ways:
(1) The Company incurs substantial costs to ensure the functionality and
reliability of products earlier in their life cycle. This can reduce
orders, increase manufacturing costs, adversely impact working capital and
increase service and warranty expenses.
(2) The Company requires significant lead-times between product introduction
and commercial shipment. As a result, the Company may have to write off
inventory and other assets related to products and could lose customers and
revenue. For example, in the second quarter of fiscal 1997, the Company
incurred a $17.6 million pretax asset write-off for discontinuance of the
Avanti 672 product development program.
The Company's quarterly operating results will fluctuate for
reasons not in its control. The Company's quarterly operating results will
fluctuate due to a variety of factors, including:
15
<PAGE> 17
- Industry demand for capital equipment, which depends on
economic conditions in the semiconductor, memory disk and
silicon wafer markets.
- Timing, cancellation or delay of customer orders and
shipments. The Company continues to derive a significant
portion of revenue from the sale of a relatively small
number of machines during a given quarter. Order and
delivery delays and cancellations, even of one or two
systems, may cause the company to miss quarterly revenue
and profit expectations.
- Unexpected costs associated with sales and service of the
CMP tools and processes.
- The quarterly operating results of the company's joint
ventures, which are accounted for on the equity method.
- Foreign currency exchange rates.
Results of operations in any period are not an indication of
future results. Fluctuations in the Company's operating results may also
result in fluctuations in the Company's common stock price. Operating
results may not meet the expectations of public market analysts or
investors and the trading price of the common stock could decline.
Orders in backlog may not result in future revenue if customers
cancel or reschedule orders. The Company includes in backlog only those
customer orders for which it has accepted purchase orders. Expected revenue
may be lower if customers cancel or reschedule orders, which they can
generally do without penalty. For example, the Company removed from its
backlog orders of approximately $5.3 million in the fourth quarter of
fiscal 1999, primarily due to reduced capacity requirements and increased
funding constraints of certain customers.
The Company Depends on key personnel. The Company's success is
dependent upon its ability to attract and retain qualified management,
technical, sales and support personnel. Competition for qualified
personnel in the industry served by the Company, particularly in the
Phoenix metropolitan area, is intense. SpeedFam and IPEC had in the past
experienced difficulty in attracting qualified personnel. Also, other
employers may offer lucrative compensation and benefit programs, including
those with respect to stock options. The Company presently experiences the
same difficulty and may continue to in the future.
The Company depends on a small number of major customers.
Currently, and for the foreseeable future, the Company expects that it will
sell machines to a limited number of major customers. To date, the CMP
process has been used primarily to fabricate advanced semiconductors, which
accounts for only a portion of the overall semiconductor market. In fiscal
1999, Samsung and Intel accounted for 11.4% and 10.5%, respectively, of its
total revenue. In fiscal 1998, Intel accounted for 19.4% of total revenue.
The Company's success depends on international sales, particularly
in Asia and Europe. International sales accounted for 38.1% of
SpeedFam-IPEC's total revenue for fiscal 1999, 34.3% for fiscal year 1998
and 26.5% for fiscal year 1997. The Company expects that international
sales will continue to account for a significant portion of total revenue
in future periods. International sales are subject to risks, including:
- foreign exchange issues
- political, economic and regulatory environment of the
countries where customers are located
- collectibility of accounts receivable
- inadequate intellectual property protection
Foreign exchange issues also affect the value of the Company's
foreign subsidiaries and equity interest in its Far East joint venture. The
Company does not manage this balance sheet risk through currency
transactions known as hedging, which are designed to minimize this risk.
The
16
<PAGE> 18
Company does try to manage near term currency risks through hedging.
However, efforts may not be enough to decrease the risks involved.
If the Company is unable to protect its intellectual property, its
business could suffer. The company's intellectual property portfolio is
very important to its success. However, the Company may not be able to
protect its technology because:
- pending and new patent applications may not be approved in
a timely manner or approved at all
- third parties may try to challenge or invalidate existing
patents and new patents
- policing unauthorized use of intellectual property is
difficult and expensive
- the laws of some foreign countries do not protect
intellectual property rights as much as U.S. laws
- competitors may independently develop similar technology or
design around intellectual property owned by the company
Third parties may prevent the Company from selling products that
allegedly infringe on those third parties' intellectual property rights.
The Company cannot be certain that third parties will not in the future
claim that its products infringe their intellectual property rights. Third
parties may
- bring claims of patent, copyright or trademark infringement
- obtain patents or other intellectual property rights that
limit the Company's ability to do business or require the
Company to license or cross-license technology
- Bring costly, time consuming lawsuits
Third parties hold many patents relating to CMP machines and
processes. The Company licenses the right to manufacture CMP machines
employing an orbital motion in its Avant Gaard 676, 776 and 876 from a
semiconductor manufacturer.
The Company may Be subject To risks associated with acquisitions and
dispositions. The Company continually evaluates strategic acquisitions of
other businesses and dispositions of portions of its business that it
determines are not complementary to its strategy. If the Company were to
consummate an acquisition, the Company would be subject to a number of
risks, including the following:
- difficulty in assimilating the acquired operations and
retaining acquired personnel;
- limits on the Company's ability to retain acquired
distribution channels and customers;
- disruption of the Company's ongoing business; and
- limits on the Company's ability to successfully incorporate
acquired technology and rights into its service offerings
and maintain uniform standards, controls, procedures and
policies.
Similarly, a disposition could absorb significant management time,
distracting it from developing the business. The Company may not
successfully overcome problems encountered in connection with potential
acquisitions or dispositions.
The Company may experience Year 2000 computer problems that harm
its business. Certain computer systems may not correctly recognize dates
when the year changes from 1999 to 2000. This could cause computers to
either shut down or lead to incorrect calculations. The Company has
reviewed their exposure to this problem, and does not believe it will incur
significant expenses either to remedy the problem or as a result of the
effect of the problem on business operations. However, Year 2000 issues may
cause disruptions in the Company's business for the following reasons:
- The Company cannot be certain that the measures taken are
enough. Despite completed efforts, the company may incur
significant expenses to remedy unforeseen problems or may
suffer disruptions in its business.
- Third parties with whom the Company has relationships may
not successfully complete their Year 2000 remediation
efforts. This could also result in disruptions in the
company's business, which would harm its financial
condition, results of operations and business prospects.
For additional information regarding the status of Year 2000 issues, refer
to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Year 2000"
17
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For financial market risks related to changes in interest rates
and foreign currency exchange rates, refer to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the
Company's Annual Report on Form 10-K for the year ended May 31, 1999.
18
<PAGE> 20
SPEEDFAM-IPEC, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
August 31, 1999.
19
<PAGE> 21
SPEEDFAM-IPEC, 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-IPEC, INC.
/s/ J. Michael Dodson
-------------------------------------
Date: October 15, 1999 By J. Michael Dodson
Treasurer and Chief Financial Officer
(As Chief Accounting Officer and Duly
Authorized Officer of SpeedFam-IPEC, Inc.)
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 67,701
<SECURITIES> 65,126
<RECEIVABLES> 78,543
<ALLOWANCES> 0
<INVENTORY> 80,257
<CURRENT-ASSETS> 301,243
<PP&E> 85,776
<DEPRECIATION> 0
<TOTAL-ASSETS> 426,295
<CURRENT-LIABILITIES> 63,859
<BONDS> 115,864
0
0
<COMMON> 1
<OTHER-SE> 236,842
<TOTAL-LIABILITY-AND-EQUITY> 426,295
<SALES> 50,327
<TOTAL-REVENUES> 50,327
<CGS> 35,160
<TOTAL-COSTS> 60,310
<OTHER-EXPENSES> 88
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,071)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,963)
<EPS-BASIC> (.37)
<EPS-DILUTED> (.37)
</TABLE>
