UNITED STATES

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of

For the fiscal year ended June 3, 2000

SpeedFam-IPEC, Inc.

Registrant’s Telephone Number: (480) 705-2100

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]     No  [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

      State the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant: $408,323,953 as of July 31, 2000.

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock: 29,895,142 as of July 31, 2000.

Documents incorporated by reference:

      Part III, Proxy Statement relating to the 2000 Annual Meeting of Shareholders (except for the report of the compensation committee of the board of directors and the performance graph).

TABLE OF CONTENTS

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Item 1.  Business

      SpeedFam-IPEC, Inc. (the Company) was incorporated in Illinois in 1959 as SpeedLap Corporation. Effective April 6, 1999, Integrated Process Equipment Corp. (IPEC), a supplier of chemical mechanical planarization (or CMP) systems, merged into a wholly owned subsidiary of SpeedFam International, Inc. Following the merger, SpeedFam International, Inc. changed its name to SpeedFam-IPEC, Inc. The Company operates through three wholly owned subsidiaries, SpeedFam-IPEC Corporation in the U.S. (SpeedFam-IPEC U.S.), and SpeedFam-IPEC Limited (SpeedFam-IPEC U.K.) and SpeedFam-IPEC GmbH (SpeedFam-IPEC Germany) in Europe. The Company also owns 50% of SpeedFam-IPEC Co., Ltd. (together with its subsidiaries and joint ventures, the Far East Joint Venture).

      The Company designs, develops, manufactures, markets and supports CMP systems used in the fabrication of semiconductor devices and also manufactures other high-throughput precision surface processing systems. The Company’s flat surface processing systems are used in general industrial applications markets. The Company also markets and distributes polishing liquids (slurries), parts and consumables used in its customers’ manufacturing processes.

      Unless the context otherwise requires, the “Company” and “SpeedFam-IPEC” refer to SpeedFam-IPEC, Inc., an Illinois corporation, and its wholly owned subsidiaries. The Company’s principal executive offices are located at 305 North 54th Street, Chandler, Arizona 85226 and its telephone number is (480) 705-2100.

      Effective December 1, 1999, the Company changed its fiscal year from the twelve-month period ended May 31 to a 52 or 53 week period ending on the Saturday nearest May 31. Accordingly, the 2000 fiscal year ended on June 3 and contained 53 weeks, whereas the previous two fiscal years ended on May 31 and contained 52 weeks. All references to years relate to fiscal years unless otherwise noted.

Joint Ventures

      Since 1971, the Company has owned a 50% interest in the Far East Joint Venture. The remaining 50% is owned by Obara Corporation, a publicly traded Japanese company that supplies products to the automotive industry. The Far East Joint Venture designs and manufactures most of the equipment sold by the Company to the thin film memory disk media and silicon wafer markets in the U.S. and Europe. It also distributes such products in the Far East and provides sales and service channels in the Far East for products manufactured by the Company, including distribution of the Company’s CMP systems to manufacturers of semiconductor devices. In June 2000, the Company announced an agreement which will transfer full ownership of the CMP operations in the Far East to the Company. Per the agreement, Obara Corporation will assume the business operations for non CMP activities. This agreement is expected to close during the first six months of 2001.

      In 1984, the Company and Fujimi Incorporated formed Fujimi Corporation (the Fujimi Joint Venture), an Illinois corporation. Fujimi Incorporated and the Company each owned 50% of the common stock of the Fujimi Joint Venture. Fujimi Incorporated is a publicly traded Japanese manufacturer of abrasives. In the second quarter of 2000, the Company sold its 50% interest in the Fujimi Joint Venture to its 50% partner, Fujimi Incorporated. The Fujimi Joint Venture sold slurries manufactured by Fujimi Incorporated, primarily to silicon wafer, thin film memory disk and general industrial manufacturers in North and South America.

Industry Background

      The semiconductor industry has experienced significant growth over the past decade due to increased demand for personal computers and the internet; the expansion of the telecommunications industry (especially wireless communications); the emergence of new applications such as consumer electronics products; and the increased semiconductor content in electronics systems. Significant performance advantages and lower prices for integrated circuits have contributed to the growth and expansion of the semiconductor industry over time.

      The semiconductor market is cyclical by nature, however, characterized by short-term periods of either under or over supply for both memory and logic devices. When demand decreases, semiconductor manufacturers typically slow their purchasing of capital equipment; conversely, when demand increases, so does capital

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Products

      The Company offers the broadest range of CMP systems currently available to the semiconductor industry. The Company’s product lines include both orbital and rotational technology.

      CMP is a process used to change the characteristics of the surface of a semiconductor wafer. CMP is a complex science, often involving multiple steps, each at a specified set of process parameters such as polishing speed, pressure, time, and temperature, as well as slurry pH and particle size, hardness and shape. CMP improves the flatness (planarity), smoothness and optical properties of a surface. One typical flat polishing system consists of a moving platen that is covered with a polishing pad, in combination with a polishing liquid (or slurry) containing abrasive particles that impinge on the surface, thereby creating the desired surface qualities. This liquid slurry can be chemically active such that the surface of the component being polished is chemically modified, thus accelerating and improving the polishing process.

      Orbital CMP Systems. The Company’s orbital CMP systems incorporate an advanced polishing technique developed in conjunction with a major semiconductor manufacturer. Planarization in these systems is achieved by the downward pressure from and rotational motion of the upper wafer carrier against the orbital motion of the lower polishing platen, which has a polishing pad attached to its surface. The use of orbital polishing technology in conjunction with other enhancements offered on the Company’s orbital platforms provides customers with improved polish flexibility in a smaller footprint tool. Moreover, the Company’s orbital systems incorporate an innovative polish slurry delivery method that delivers the slurry through the polishing pad directly to the wafer surface. This slurry delivery method is designed to increase throughput and improve process control and planarity, and therefore yield to the device manufacturer, as well as reduce the consumption of slurry compared to conventional methods, which deposit slurry on the pad surface.

•	The AvantGaard 676 features four independent heads, allowing simultaneous polishing of four wafers and offers one of the industry’s smallest footprints. This system is capable of polishing either oxide or metal layers. The AvantGaard 676 was initially designed solely to planarize metal layers and has been adopted for this purpose in volume production by a majority of the customers that have purchased the system.
•	The AvantGaard 776 is based on the same four-head orbital polishing technology as the AvantGaard 676. The AvantGaard 776 integrates CMP, metrology and wafer cleaning in a single unit that requires less clean room space than separate CMP and post-CMP cleaning equipment.
•	The MomentumTM product, announced in July 2000, is a highly flexible, universal tool that processes copper, shallow-trench isolation (STI), tungsten, oxide and other advanced applications. MomentumTM was developed to address the industry’s growing need for an advanced level of process capability for geometry shrinks to 0.13 micron. The tool features a new polishing system that combines SpeedFam-IPEC’s industry proven rotational and orbital technologies. The system integrates tunable, adaptable carrier technology and edge control (APT™), a stable, highly flexible new polishing technique (Next™), and a newly designed cleaner. The system also integrates Intelligent In-line Inspection technology (I3TM) with closed-loop control metrology for maximum effective throughput and reduced cost of ownership. The system and processes for the MomentumTM product are scalable to 300mm.

  Rotational CMP Systems.

•	The Avanti® 472, introduced in 1994, is a fully automated, single wafer planarization system for polishing oxide or metal layers on silicon wafers from four to eight inches in diameter. In addition to the planarization

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	of oxide layers, the system planarizes layers of metal interconnects, including tungsten, aluminum and copper.
•	The Company’s AurigaTM system is a five head, two polishing table CMP system capable of processing 50-60 wafers per hour. The AurigaTM system, which began shipping commercially in November 1996, is used for oxide and metal (tungsten) applications. The system incorporates full cassette-to-cassette automation. Robotics remove the wafers from the cassette and places them into the buffer tray. The wafers are then staged for batch pickup by the polishing heads. Once secured by the polishing heads, the wafers are moved onto the primary polishing pad and the process is initiated. The polishing table, covered with a flat polishing pad, rotates at a variable speed throughout the polishing cycle. Upon completion of the initial polish, the wafers are transported either to a rinsing station or to a second polishing table for an additional polishing or buffing step. The wafers are then rinsed and placed into the output buffer tray, scrubbed on both sides with a wet polyvinyl alcohol brush and placed wet into the output cassettes. The system is self-enclosed, and has its own air filtration and air flow management system. The AurigaTM offers compatibility with all commonly used slurry chemistries.
•	In 1998, the Company introduced the Auriga-CTM, which integrates cleaning and drying technology into the Company’s CMP system thereby providing a complete dry-in/dry-out system. The design of the Auriga-CTM is based upon the replacement of the automation module on the AurigaTM with a new automation module, which incorporates the cleaning technology.
•	The Auriga VisionTM is the latest tool derived from the industry proven AurigaTM platform. Announced in July  2000, the Auriga VisionTM provides complete dry-in/dry-out CMP processing in a high throughput tool. With an advanced carrier design, in-table end-point system, HF capable dual-station cleaner and computer integrated manufacturing automation, this low cost of ownership tool is suited for fabs producing devices in the most cost-competitive markets. The Auriga VisionTM is targeted at the 0.18 and 0.13 micron technology nodes for memory manufacturers.

      Thin Film Memory Disk Media Polishing Products. The Company sells polishing machines, pre-deposition cleaning machines and grinding machines for producing aluminum, nickel-plated and alternative substrates for the thin film memory disk media market.

      Semiconductor Wafer Polishing Products. The Company supplies chemical mechanical polishing, double-sided lapping and edge polishing systems to the semiconductor substrates market.

      The Company’s line of double-sided lapping systems is available in various sizes and is used to create the initial flatness and thickness of the silicon wafer after it has been sliced. The lapping process removes saw marks remaining after slicing and provides a surface finish suitable for subsequent polishing processes. The double-sided polishers for silicon wafer polishing are also available.

      The Company also utilizes a line whereby a chemical mechanical polishing process removes the shallow damage layer remaining from previous process steps to attain the specified flatness and surface finish.

      The edge polishing technology was developed and introduced for the purpose of making the wafer’s edge easier to clean, thereby increasing semiconductor device manufacturing yields.

      General Industrial Products. The Company offers a broad line of lapping, grinding and polishing systems for the general industrial market. The line includes approximately 35 models of single-side processing machines, double-side processing machines and in-line grinding systems. The product offering is available in a wide range of sizes from a 12-inch plate diameter up to a 150-inch plate diameter. Each system typically consists of a specialized machining plate, a rotating spindle, a means to fix and apply pressure to the workpieces, an abrasive distribution system and a control system.

Customers

      The Company sells its products to leading manufacturers of semiconductor devices, thin film memory disks, semiconductor wafers and various general industrial applications. During the last three years, the majority of the Company’s total revenue has been derived from the sale of CMP products and services. In

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      Sales to two customers in 2000 accounted for 11.1% and 11.8% of the Company’s total revenue. In 1999, sales to two customers accounted for 10.5% and 11.4% of the Company’s total revenue and in 1998 sales to one customer accounted for 19.4% of the Company’s total revenue. No other customer accounted for 10% or more of the Company’s total revenue during these periods. The Company’s ten largest customers accounted for 64.9%, 60.8% and 53.4% of the Company’s total revenue in 2000, 1999 and 1998, respectively.

Sales and Marketing

      The Company markets and sells its products in North America through a combination of direct sales personnel and distributors. The Company sells directly to all the industries it serves and in addition uses a network of 10 regional distributors for its general industrial product lines. In its European operations, the Company uses direct sales personnel and a small number of distributors. For CMP products, the Company uses a distributor who sells in Germany, France, the Netherlands, Belgium, Italy, Scandinavia, Spain and Switzerland. After the merger, SpeedFam-IPEC’s relationship with a distributor in Japan was discontinued because the Company markets and sells its products in the Far East through the sales and marketing arm of the Far East Joint Venture. Most of the equipment sold to the thin film memory disk media and silicon wafer markets is manufactured by the Far East Joint Venture.

      The Company’s sales strategy emphasizes direct interaction with customers, particularly in the semiconductor device, silicon wafer and memory disk industries, where ongoing customer support and service are critical. The Company’s direct sales force is divided into focused units for each of the industries it serves.

      The Company’s sales offices are in Chandler, Arizona; Austin, Texas; Portland, Oregon; Des Plaines, Illinois; Taiwan; Seoul, Korea; India; Singapore; Hong Kong; and Shanghai, China. To enhance its sales capabilities, the Company maintains process development and demonstration laboratories throughout the U.S. and Europe. Sales and marketing activities in the Far East are conducted primarily by the Far East Joint Venture. The Company also has direct sales personnel in the SpeedFam-IPEC U.K. and SpeedFam-IPEC Germany offices.

      The Company’s marketing strategy includes involvement with SEMATECH, Inc., a consortium of major semiconductor manufacturers and equipment suppliers, attendance at Semicon, Diskcon, IMTS and other trade shows worldwide and participation in technical conferences, which include the presentation of technical papers written by customers, university scientists and the Company’s own senior technologists. The Company believes these initiatives serve to promote acceptance of the Company’s products and process technologies in the semiconductor, thin film memory disk and other industries.

Service and Support

      The Company believes that providing highly responsive service is an essential factor in providing a total solution to its customers. In order to provide customers with experienced service and support personnel, the Company has structured its service operations into distinct service units responsible for each of the semiconductor device, thin film memory disk media, semiconductor wafer and general industrial products industries. Elements of the Company’s service and support program include system installation and process certification, process support, machine repair, providing spare parts inventories, internal training programs, external customer training, documentation and formation of customer user groups. For large users of the Company’s systems, the Company often creates a customized service arrangement designed to meet the specific requirements of the customer.

      The Company generally provides a one-year warranty on all equipment it sells and in certain instances the Company has provided a warranty period in excess of one year. Field and technical service personnel provide

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Backlog

      Backlog of orders for capital equipment, parts, consumables and slurries was approximately $93.1 million on July 31, 2000, compared to $45.4 million on July 31, 1999. The Company’s backlog does not include orders for capital equipment or other products manufactured by the Far East Joint Venture and distributed by the Company in the U.S. and Europe for which the Company receives commissions. The time between the placing of orders and shipment of parts, consumables and slurries is significantly less than for capital equipment and as a result, the Company’s backlog consists mostly of orders for capital equipment. The Company includes in its backlog only those customer orders for which it has accepted signed purchase orders with assigned delivery dates within 12 months. Orders generally carry a stipulation that customers may incur a penalty in the event of cancellation. However, there can be no assurance that orders will not be canceled by customers or that the Company will obtain a meaningful penalty payment. As a result of systems and equipment ordered and shipped in the same quarter, possible changes in delivery schedules, occasional cancellation of orders and delays in product shipments, the Company’s backlog at any particular date may not be indicative of actual sales for any succeeding period.

Research and Development

      The capital equipment market, and in particular the semiconductor capital equipment market in which the Company competes, is characterized by rapid technological development and product innovation. The Company’s research and development efforts are currently focused on enhanced performance for finer geometries in oxide and tungsten applications while developing new process capabilities for emerging shallow-trench isolation, copper, and 300mm applications. The Company’s research and development expenditures during 2000, 1999 and 1998 were approximately $53.7 million, $61.8 million and $67.2 million, respectively.

      Because of the complex and highly specialized design, testing, and manufacturing requirements of the Company, research and development employees must be experienced in a wide range of engineering disciplines. These primary disciplines include process development, mechanical engineering, software engineering, electrical engineering and test engineering. Development programs are organized around cross-functional project teams including leaders for engineering, manufacturing, marketing and customer support. Teams are lead by program managers responsible for concurrent activity across all functional areas. The Company believes that this approach provides flexibility and allows the Company to shorten time to market for new products and processes.

      In order to respond to developing technologies in the semiconductor industry, the Company augments its internal development capabilities by seeking cooperative research and product development relationships with industry participants. Three such relationships are currently active: alliances with other capital equipment suppliers; joint development projects with customers; and sponsorship of university research.

      During 2000, the Company developed its advanced CMP system, which combines SpeedFam-IPEC’s industry-proven rotational and orbital technologies. The Momentum^TM product was developed to address the industry’s growing need for an advanced level of process capability, continued geometry shrinks down to 0.13 micron and CMP challenges for applications such as copper and STI in advanced semiconductor device manufacturing. Momentum^TM is a highly flexible system, which can be configured to provide world-class process results for oxide, tungsten, copper and STI. In addition, the Company developed the Auriga Vision^TM

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Manufacturing

      The Company generally assembles its equipment and systems from components and fabricated parts manufactured and supplied by third parties, including stainless steel plates, gears, frames and weldments, power supplies, process controllers, robots and polishing heads. Certain of the items manufactured by others are made to the Company’s specifications. All final assembly and system tests are performed within the Company’s manufacturing/assembly facilities. Quality control is maintained through incoming inspection of components, in-process inspection during equipment assembly and final inspection and operation of all manufactured equipment prior to shipment. Substantially all of the Company’s products sold to manufacturers of general industrial components are manufactured in its Illinois facility. Most of the equipment sold to the thin film memory disk media and silicon wafer markets is manufactured by the Far East Joint Venture. The Company’s CMP system development and manufacturing are located at the Company’s headquarters in Chandler, Arizona and in June 2000, the Company completed the expansion of this CMP manufacturing facility, which nearly doubled the overall manufacturing space.

Competition

      The Company competes in several distinct markets. These markets include the semiconductor device equipment market (specifically for CMP), the thin film memory disk media equipment market, the semiconductor wafer equipment market, the general industrial applications market, and the related parts and consumables market. In all markets, the Company competes on the basis of technology, overall cost of ownership, product quality, price, availability, size of installed base, breadth of product line and customer service and support.

      The Company faces substantial competition from both established competitors and from potential new entrants, some of which have substantially greater financial, engineering, manufacturing and marketing resources than the Company. The Company expects its competitors to improve the design and performance of their products. There can be no assurance that the Company’s competitors will not develop enhancements or acquire new technologies through business acquisitions that will offer price or performance features superior to those offered by the Company. In the semiconductor device equipment market, the Company faces significant competition from current competitors including Applied Materials, Inc. and Ebara Corporation, and any others that may enter this market in the future. In addition, certain of the Company’s competitors have longer-standing relationships than the Company with particular customers, including device manufacturers. These longer-standing relationships may make it more difficult for the Company to sell its CMP systems to such semiconductor device manufacturers. Consolidation among CMP equipment suppliers or the acquisition of CMP equipment suppliers by large, established suppliers of non-CMP capital equipment to semiconductor device manufacturers or others could materially adversely affect the Company’s ability to compete and would have a material adverse effect on the Company’s results of operations.

      Competition in the general industrial products market is fragmented with no one competitor currently holding a dominant position. The Company faces significant competitive pressure in the sale of slurries, particularly with regard to pricing, which has resulted in decreased margins for certain products of the Company in recent periods. In the thin film memory disk slurry market, the Company competes primarily with Praxair, a large chemical company that manufactures and sells its own products.

Employees

      As of July 31, 2000, the Company had approximately 1,020 full time employees in the U.S. and Europe. From time to time, the Company uses temporary employees to respond more rapidly to fluctuations in assembly and product demand and to better control the labor component of its manufacturing costs. None of

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Intellectual Property

      The Company currently holds 127 United States patents and 113 foreign patents in Japan and several Asian and European countries. As of July 31, 2000, the Company has 143 United States patent applications pending and 226 foreign patent applications pending. In addition, the Company believes that such factors as continued innovation, technical expertise and know-how of its personnel and other factors are also important. The Company also owns 10 U.S. trademark registrations and numerous foreign trademarks.

      The Company licenses the right to manufacture CMP machines employing the orbital motion used in its AvantGaard 676, 776, 876 and Momentum^TM products from a semiconductor manufacturer.

      There can be no assurance that the Company’s pending patent applications will be allowed or that the issued or pending patents will not be challenged or circumvented by competitors. There can be no assurance that any of these rights held by the Company will not be challenged, invalidated or circumvented, or that such rights will provide competitive advantages to the Company.

      There are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any unresolved claims by third parties that the Company is infringing intellectual property rights of such third parties. There can be no assurance that infringement claims will not be asserted by third parties in the future. There also can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms, if at all. The Company’s involvement in any patent dispute or other intellectual property dispute or action could have a material adverse effect on the Company’s business. Adverse determinations in any litigation relating to intellectual property could possibly subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling one or more of its products. Any of these events could have a material adverse effect on the Company.

Executive Officers of the Company

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Item 2.  Properties.

      The Company’s operations are conducted primarily in three buildings in Chandler, Arizona and one building in Des Plaines, Illinois. Two of the Chandler buildings are owned by the Company and consist of approximately 245,000 square feet. The other building is leased and is approximately 26,000 square feet. These buildings house the main manufacturing operation, research and development, various administrative and customer support offices, corporate headquarters and a state-of-the-art applications and customer demonstration lab. In June 2000, the Company completed the expansion of its CMP manufacturing facility, which nearly doubled the overall manufacturing space. The Des Plaines, Illinois building is owned by the Company and consists of approximately 42,000 square feet. It houses the Industrial Applications Group.

      The Company also leases 22,000 square feet in Portland, Oregon, which is used for research and development and also houses the northwest field service operation. The central region field service operation is housed in a 20,000 square foot leased facility in Austin, Texas.

      SpeedFam-IPEC U.K. is located in Hinckley, England and owns a 9,000 square foot facility used for demonstration, customer service, sales and administration purposes. SpeedFam-IPEC GmbH leases 2,000 square feet of office space in Ingelfingen, Germany.

      The Company also leases various smaller facilities worldwide, which are used as sales and customer service centers.

      The Company is currently seeking sub-lessees for or has subleased certain of the properties occupied by the former IPEC operations, which have been relocated to the facilities in Chandler, Arizona. This includes a 150,000 square foot facility in Phoenix, Arizona, which was the primary manufacturing, research and administration facility for the IPEC operations.

      The Company owns approximately 30 acres of vacant land in Chandler, Arizona close to the current facilities, which is being held for future expansion needs.

      The Company believes that its current properties will be sufficient to meet the Company’s requirements for the foreseeable future.

Item 3.  Legal Proceedings.

      The Company is not presently involved in any material legal proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders.

      None

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

      The Company’s Common Stock is traded on the Nasdaq National Market under the symbol “SFAM.” Public trading of the Common Stock commenced on October 10, 1995. Prior to that time, there was no public

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      The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. Payment of dividends in the future, if any, will be made at the discretion of the Board of Directors of the Company. Such decisions will depend on a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant.

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Item 6.  Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

      The consolidated statements of operations data for the years ended June 3, 2000 and May 31, 1999 and 1998 and the consolidated balance sheet data as of June 3, 2000 and May 31, 1999 are derived from the Company’s consolidated financial statements and notes thereto which have been audited by KPMG LLP, independent public accountants and are included elsewhere herein. The consolidated statements of operations data for the years ended May 31, 1997 and 1996 and the consolidated balance sheet data as of May 31, 1998, 1997 and 1996 are derived from the Company’s consolidated financial statements but are not included herein. The selected consolidated financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the Company’s consolidated financial statements, appearing elsewhere herein.

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      Set forth below is certain selected financial information with respect to the Far East Joint Venture, which has been derived from consolidated financial statements, which have been audited by KPMG LLP. Such information should be read in conjunction with the consolidated financial statements and notes thereto of the Far East Joint Venture (SpeedFam-IPEC Co., Ltd.) appearing elsewhere herein.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

      Effective April 6, 1999, Integrated Process Equipment Corp. (IPEC) merged into a wholly owned subsidiary of SpeedFam International, Inc. Following the merger, SpeedFam International, Inc. changed its name to SpeedFam-IPEC, Inc. The merger was accounted for as a pooling of interests. Accordingly, the financial statements of the separate entities were combined and the discussion herein reflects such combination.

      The Company designs, develops, manufactures, markets and supports chemical mechanical planarization (or CMP) systems used in the fabrication of semiconductor devices and other high-throughput precision surface processing systems. The Company’s flat surface processing systems are used in the general industrial components market. In addition, the Company markets and distributes parts, consumables and slurries. The Company’s total revenue consists of net sales of the products described above and service revenues, as well as commissions from affiliates (Commissions) which consist primarily of revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company distributes such products throughout the U.S. and Europe acting as sales agent and receives Commissions thereon. Such amount reflects the difference between the imported equipment’s cost to the Company and sales price to the customer.

      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 or STG), and (3) manufacturers of general industrial components (Industrial Applications Group or IAG). Over the last three years, the majority of the Company’s total revenue has been derived from the sales of products and services by the CMP Group. In 2000, 1999 and 1998, sales to semiconductor device manufacturers were 84.0%, 74.2% and 74.8% of total revenue, respectively.

      In 2000, 1999 and 1998, 69.6%, 37.4% and 34.3%, respectively, of the Company’s total revenue was attributable to sales outside of the United States. In particular, in 2000, 26.6% of the Company’s total revenue was attributable to sales made to European markets and 42.1% was attributable to sales to markets in the Far East. In 1999, 12.4% of the Company’s total revenue was attributable to sales made to European markets and 22.9% was attributable to sales to markets in the Far East.

      Since 1971, the Company has owned a 50% interest in the Far East Joint Venture. The remaining 50% is owned by Obara Corporation, a publicly traded Japanese company that supplies products to the automotive industry. The Far East Joint Venture designs and manufactures most of the equipment sold by the Company to the thin film memory disk media and silicon wafer markets in the U.S. and Europe. It also distributes such products in the Far East and provides sales and service channels in the Far East for products manufactured by the Company, including distribution of the Company’s CMP systems to manufacturers of semiconductor devices. The Company’s equity interest in the Far East Joint Venture is accounted for using the equity method. As a result, the Company’s share of the net earnings (loss) of the Far East Joint Venture appear in the “Equity in net earnings (loss) of affiliates” caption on the Company’s consolidated statements of operations. The Far East Joint Venture has paid dividends in the past, but is expected to reinvest substantially all earnings back into the business. The Company’s share of the net earnings (loss) of the Far East Joint Venture has not in the past resulted and is not expected in the future to result in a material effect on the cash flows of the Company. As of June 3, 2000, the Company’s equity interest in the Far East Joint Venture was $19.8 million, representing 4.6% of the Company’s total assets and 8.4% of stockholders’ equity.

      On June 27, 2000, the Company announced an agreement with Obara Corporation to transfer 100% of the CMP sales and service operations in the Far East region to SpeedFam-IPEC. Per the agreement, Obara Corporation will assume the business operations for non-CMP activities. In conjunction with this agreement, the Company is evaluating its impact on SpeedFam-IPEC’s domestic non-CMP operations. Based upon this ongoing review, as well as the terms of the agreement reached with Obara Corporation, the Company believes it will incur a one-time non-cash charge to operations in the range of $10 million to $20 million in the first half of 2001. The Company believes there will be no material cash outlays in conjunction with finalizing this

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      Pursuant to a joint venture agreement dated September 7, 1984, the Company and Fujimi Incorporated formed Fujimi Corporation (the Fujimi Joint Venture), an Illinois corporation. Fujimi Incorporated and the Company each owned 50% of the Fujimi Joint Venture’s common stock. Fujimi Incorporated, a publicly traded company in Japan, is a manufacturer of slurry, abrasives and compounds in Japan. The initial term of the joint venture agreement was for a period of five years. The agreement was in effect until it was terminated in the second quarter of 2000, at which time the Company sold its 50% interest in the joint venture to Fujimi Incorporated. Proceeds from the sale were $10.0 million and the Company recorded a gain on the sale of $6.1 million.

      The Company generally enters into foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies, principally in Japanese yen. The terms of the contracts are rarely more than one year. Currency exchange rate variations have had an immaterial effect on the Company’s results of operations for the periods presented. The results of operations of the Company’s subsidiaries and its equity in the net earnings (loss) of the Far East Joint Venture are translated for financial statement purposes based upon average exchange rates during the period covered. As a result, fluctuations in exchange rates may have an adverse effect on the Company’s results of operations.

      Effective December 1, 1999, the Company changed its fiscal year from the twelve-month period ended May 31 to a 52 or 53 week period ending on the Saturday nearest May 31. Accordingly, the 2000 fiscal year ended on June 3 and contained 53 weeks, whereas the previous two fiscal years ended on May 31 and contained 52 weeks. All references to years relate to fiscal years unless otherwise noted.

Results of Operations

      The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total revenue:

  2000 Compared with 1999

      Net Sales. Net sales for 2000 were $274.0 million, up 26.6% from net sales of $216.4 million in 1999. Sales of CMP systems totaled $230.2 million, or 84.0% of net sales, up 43.3% from the $160.6 million of CMP system sales in 1999. Sales of CMP systems increased significantly in 2000 as a reflection of strong demand for semiconductor manufacturing equipment, which was caused by an increasing demand from semiconductor device manufacturers. Sales volume was higher in 2000 than in 1999 because the semiconductor and

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      Sales of thin film memory and silicon wafer products in 2000 accounted for $29.2 million, or 10.6% of net sales, as compared to $42.4 million, or 19.6% of net sales in 1999. During 2000, thin film memory disk manufacturers continued to experience manufacturing over-capacity which in turn reduced capital spending. In addition, this over-capacity situation has created a larger market for used equipment making it even more difficult to sell new equipment. While the Company continues to actively pursue consumable sales, the Company does not foresee a return of high volume equipment sales to this market. The silicon wafer market also experienced continued softness in demand due to the ongoing manufacturing over-capacity caused by various factors including available capacity and increased production efficiencies due to the fact that more chips could be produced on a given wafer per machine.

      Sales of products for general industrial applications increased to $14.7 million, or 5.4% of net sales in 2000 compared with $13.3 million, or 6.2% of net sales in 1999 due to increased shipments in European markets.

      Included in net sales are commissions from affiliates which increased to $2.9 million in 2000, compared to $2.2 million in 1999 due to an increase in the Company’s distribution in the U.S. and Europe of products manufactured by the Far East Joint Venture.

      In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements of all publicly held companies. The semiconductor capital equipment industry association and a number of association members have met with the Staff of the SEC to discuss and evaluate the applicability of SAB 101 and various practical implementation considerations. On June 26, 2000, the Staff of the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted the delay in the Company’s implementation date of SAB 101 until the fourth quarter of 2001. Accordingly, any shipments previously reported as revenue, including revenue reported during the first nine months of 2001, which do not meet SAB 101’s guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101 and SAB 101B would not involve the restatement of prior financial statements, but would, to the extent applicable, be reported as a change in accounting principle in the fourth quarter of 2001.

      Management believes that SAB 101 and SAB 101B, to the extent that they impact the Company, will not affect the underlying strength or weakness of the business operations as measured by the dollar value of the Company’s product shipments and cash flows.

      Gross Margin. In 2000, gross margin was $89.5 million, or 32.7% of total revenue, compared to $21.4 million, or 9.9% of total revenue, in 1999. Gross margin, both in dollars and as a percentage of total revenue, was up year over year primarily due to an increase in total revenue during 2000 compared to the prior year period, as well as increased production efficiencies as a merged Company. In addition, during 1999 the Company wrote down inventory in the amount of $13.6 million in connection with the merged Company’s new strategic plan to discontinue certain product lines and also increased its allowance for excess inventory and obsolescence. In 1999, the Company faced significant competition in the sale of its products from other equipment manufacturers, in addition to increased customer demands to meet changing process requirements and develop new technologies. As these factors grew in significance in 1999, the Company determined that additional excess and obsolescence reserves were necessary considering the weakness in order activity and lower demand for the Company’s products that became apparent in the fourth quarter of 1999.

      Research, Development and Engineering. In 2000, research, development and engineering expense decreased to $53.7 million, or 19.6% of total revenue, compared to $61.8 million, or 28.6% of total revenue, in 1999. The decrease in research, development and engineering expense was due to management’s efforts to realign the Company’s research and development efforts around critical and key programs while eliminating duplicate projects.

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      Selling, General and Administrative. In 2000, selling, general and administrative expense decreased to $52.4 million, or 19.1% of total revenue from $68.2 million, or 31.5% of total revenue, in 1999. The decrease in selling, general and administrative expense, both in dollars and as a percentage of total revenue, resulted primarily from management’s efforts to control expenses which includes eliminating functional duplications throughout the merged Company.

      Merger, Integration and Restructuring. In the fourth quarter of 1999, the Company recorded the following merger, integration and restructuring costs totaling $53.9 million: $6.9 million direct merger costs; $16.9 million lease termination costs including $2.3 million in lease improvement write-offs; $4.2 million write-down of equipment and $19.4 million write-down of inventory due to certain discontinued product lines; $4.7 million related to severance costs and $1.8 million related to other merger, integration and restructuring write-offs and costs. In 1999, merger, integration and restructuring expenses included in operating expenses were $40.3 million, or 18.6% of total revenue. These charges were incurred primarily to close duplicate facilities, record transaction costs, account for certain employee termination benefits and record adjustments and accruals resulting from strategic decisions to discontinue certain product lines and sales and marketing activities as a merged Company. The severance and other related employee costs provided for the reduction of approximately 70 employment positions resulting from facility closures, and the elimination of duplicate positions or positions no longer necessary due to the streamlining of operations. Notification of the planned severance and the amount of the related benefits were made to employees prior to May 31, 1999.

      During 2000, the Company completed the majority of its restructuring activities in accordance with its previously established and announced plans. Through June 3, 2000, the Company incurred $27.0 million in asset write-downs and paid and charged to the liability $17.7 million. The remaining restructuring accrual for lease termination, severance and other expenses associated with the merger was approximately $9.2 million as of June 3, 2000, which the Company believes is adequate to cover the remaining liabilities. Cash expenditures related to the merger, integration and restructuring charges are expected to be $2.0 million for 2001 and paid from cash generated from operations. During 2000, lease terminations payments on certain vacated facilities (which were included in the restructuring charge) primarily related to remaining rent, related utilities and common area maintenance on the closed Phoenix, Arizona manufacturing and administrative facility. The Company also estimated in May 1999, given the then-current real estate market conditions, that it would take approximately 9-12 months to sublease the facility. Sublease activity began in May 2000 (as reflected in the remaining accrual) and is projected to be carried out through the Company’s lease term. The Company’s management has been and is currently in the process of securing additional subleases or other negotiated agreements for the Phoenix, Arizona manufacturing and administrative facility.

      During 2000 and going forward, lease termination payments associated with its Phoenix, Arizona facility not recovered through sublease activity have been and are projected to be offset by savings associated with consolidation of the merged Company’s facilities and administrative functions.

      Other Income (Expense). Other income (expense) increased to $5.6 million in 2000 from $4.3 million in 1999. This increase from prior year resulted from a $6.1 million gain recorded in the second quarter of 2000 on the sale of the Company’s 50% interest in its joint venture, Fujimi Corporation. In the first quarter of 1999, the Company recorded a gain arising from the collection of insurance proceeds for a CMP tool, which was destroyed in transit. Other income in 1999 also included an increase in interest income due to the Company’s decision in the first quarter of 1999 to transfer a significant portion of the Company’s short-term investments to higher yielding taxable securities.

      Provision for Income Taxes. At the end of 1999, as well as at the end of 2000, the Company established a valuation allowance for deferred tax assets generated by its operating losses and is in a net operating loss carryforward position. As a result, the effective tax rate for 2000 was zero. Income tax benefit was $3.9 million for 1999. The effective tax benefit rate for 1999 was approximately 2.7%. In 1999, the expected tax benefit computed by applying the statutory rate to the current year loss was offset by a $51.5 million increase to the Company’s deferred tax valuation allowance. The deferred tax valuation allowance fully offsets the Company’s net deferred tax assets at June 3, 2000 and May 31, 1999.

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      Equity in Net Earnings (Loss) of Affiliates. Equity in net loss of affiliates was $3.3 million in 2000 compared to equity in net earnings of $0.9 million in 1999. This decline compared to the prior year was due to significantly decreased sales revenue of the Far East Joint Venture. Investments by manufacturers of both silicon wafers and thin film memory disks continued to weaken in 2000. Also during 2000, the Far East Joint Venture recorded a charge for certain asset impairments, severance costs and other reorganization charges to account for the slowdown in the thin film memory disk media market and the transition of CMP research and development operations to the Company. The Company’s share of this charge was approximately $2.9 million.

      During 2000, the Company’s share of the net loss of the Far East Joint Venture was $3.8 million compared with the Company’s share of the net earnings of the Far East Joint Venture of $0.1 million in 1999. Historically, the Far East Joint Venture has not paid significant dividends, although in 1999, the Far East Joint Venture paid $0.5 million in dividends to the Company.

  1999 Compared with 1998

      Net Sales. Net sales for 1999 were $216.4 million, down 42.2% from net sales of $374.3 million in 1998. Sales of CMP systems totaled $160.6 million, or 74.2% of net sales, down 42.6% from the $280.1 million of CMP system sales in 1998. Sales of CMP systems declined significantly in 1999 from the prior year due to a worldwide slowdown in overall demand for semiconductor manufacturing equipment, including CMP systems, which was caused by an over-capacity situation in the semiconductor device market worldwide. In addition, the Company saw erosion in its market share of new sales due to increased competition in the sales of CMP systems to semiconductor manufacturers.

      Sales of thin film memory and silicon wafer products in 1999 accounted for $42.4 million, or 19.6% of net sales, as compared to $80.2 million, or 21.4% of net sales in 1998. During 1999, thin film memory disk manufacturers continued to experience manufacturing over-capacity which in turn reduced capital spending. This industry continued to feel “price per unit” pressures which in turn forced a reduction in capital spending for equipment the Company supplies from its U.S. operations. The decline in sales was also due to continued slowdown in the silicon wafer market. This slowness was due to the ongoing manufacturing over-capacity caused by various factors including the Asian economic conditions and increased production efficiencies due to the fact that more chips could be produced on a given wafer per machine. Sales in the industrial applications market were $13.3 million, or 6.2% of net sales in 1999, compared to the $14.0 million, or 3.8% of net sales in 1998.

      Included in net sales are commissions from affiliates which decreased to $2.2 million in the year ended May 31, 1999, compared to $9.0 million in the year ended May 31, 1998. The decrease in 1999, as compared to 1998, was due to the continued slowdown in the thin film memory disk market, and silicon wafer markets.

      Gross Margin. In 1999, gross margin was $21.4 million, or 9.9% of total revenue, compared to $142.9 million, or 38.2% of total revenue, in 1998. Gross margin, both in dollars and as a percentage of total revenue, was down year over year, primarily due to higher material costs for some of the Company’s mainline tools, higher overhead costs due to excess production capacity spread over a smaller revenue base, lower commission revenue, pricing pressure in all markets and shifts in the product mix. In addition, in the fourth quarter of 1999, the Company recorded approximately $13.6 million in integration inventory charges associated with the new Company’s strategic plan to discontinue certain product lines and accordingly increased its reserves for excess inventory and obsolescence. In 1999, the Company faced significantly increased competition in the sale of its products to equipment manufacturers, in addition to increased customer demands to meet changing process requirements and develop new technologies. As these factors grew in significance in 1999, the Company determined to record an increase in its allowance for excess and obsolescence to inventory to coincide with the increased weakness in order activity and demand for the Company’s products in the fourth quarter of 1999.

      Research, Development and Engineering. In 1999, research, development and engineering expense increased as a percent of total revenue to $61.8 million, or 28.6%, compared to $67.2 million, or 18.0% of total revenue, in 1998. During 1999, the Company delivered numerous enhancements to the Auriga-C^TM system and 776 orbital system. In addition, in 1999, the Company continued to focus on enhanced performance for

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      Selling, General and Administrative. In 1999, selling, general and administrative expense decreased to $68.2 million from $72.9 million in 1998. In 1999, selling, general and administrative expense increased as a percent of total revenue to 31.5% from 19.4% in 1998. Selling, general and administrative expense, in dollars, declined in 1999 from 1998 due to management’s efforts to control expenses to align them with lower revenue expectations, including decreased travel, an across-the-board reduction in all management salaries, a freeze on new hires, and reductions in the Company’s global workforce. Selling, general and administrative expense in 1999 as a percentage of total revenue increased substantially from prior year primarily due to reduced revenues in 1999.

      Merger, Integration and Restructuring. In the fourth quarter of 1999, the Company recorded the following merger, integration and restructuring costs totaling $53.9 million: $6.9 million direct merger costs; $16.9 million lease termination costs including $2.3 million in lease improvement write-offs; $4.2 million write-down of equipment and $19.4 million write-down of inventory due to certain discontinued product lines; $4.7 million related to severance costs and $1.8 million related to other merger, integration and restructuring write-offs and costs. Through May 31, 1999, the Company incurred $26.8 million in asset write-downs and paid and charged to the liability $4.1 million. The remaining restructuring accrual for lease termination, severance and other expenses associated with the merger was approximately $23.0 million as of May 31, 1999 which the Company believed was adequate to cover the remaining liabilities. In 1999, merger, integration and restructuring expenses included in operating expenses were $40.3 million, or 18.6% of total revenue. These charges were incurred primarily to close duplicate facilities, record transaction costs, account for certain employee termination benefits and record adjustments and accruals resulting from strategic decisions to discontinue certain product lines and sales and marketing activities as a merged Company.

      Other Income (Expense). Other income (expense) increased to $4.3 million in 1999 from $3.5 million in 1998. This increase was due primarily to a gain arising from the collection of insurance proceeds for a CMP tool, which was destroyed in transit. Other income also increased in 1999 due to the Company’s decision in the first quarter of 1999 to transfer a significant portion of the Company’s short-term investments to higher yielding taxable securities.

      Provision for Income Taxes. Income tax benefit was $3.9 million for 1999 compared to an income tax expense of $29.6 million in 1998. The effective tax expense (benefit) rates for 1999 and 1998 were approximately (2.7)% and 466%, respectively. Tax expense in 1998 resulted primarily from a $25.9 million net charge, which increased the Company’s deferred tax valuation allowance. In 1999, the tax benefit created by the current year loss was offset by a $51.5 million increase to the Company’s deferred tax valuation allowance. This increase in the deferred tax valuation allowance fully offset the Company’s net deferred tax assets.

      Equity in Net Earnings of Affiliates. For 1999, equity in net earnings of affiliates decreased to $0.9 million compared to $4.4 million in 1998. Equity in the net earnings of affiliates was down from the prior year primarily due to significantly decreased sales revenue of the Far East Joint Venture. Investments by manufacturers of both silicon wafer and thin film memory disks were reduced significantly in 1999 compared to 1998. This reduced manufacturing volume also resulting in lower sales of consumable goods.

Liquidity and Capital Resources

      As of June 3, 2000, the Company had $100.3 million in cash, cash equivalents and short-term investments compared to $147.0 million at May 31, 1999. The Company used $45.2 million of cash in operating activities during 2000 compared to $51.6 million in 1999. During 2000, cash primarily decreased due to a $52.7 million increase in accounts receivable as a result of the revenue growth during 2000. Changes in other working capital accounts provided cash of $7.0 million in 2000. In 2000, the net loss was $14.2 million, adjusted for non-cash items of $17.4 million for depreciation and amortization expense and $3.3 million in equity in the net loss of the Far East Joint Venture which were offset by a $6.1 million gain on the sale of Fujimi Corporation and other items.

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      Net cash provided by investing activities totaled $18.4 million in 2000 compared with $41.5 million in 1999. The Company incurred capital expenditures of $15.1 million and $31.4 million in 2000 and 1999, respectively. The majority of the cash was used to fund building improvements, software and equipment purchases in 2000. During 1999, the majority of cash expenditures were used to fund the construction of a 109,000 square foot Technology Center next to the corporate headquarters in Chandler, Arizona with the remaining expenditures relating to purchase of equipment and software. During the second quarter of 2000, the Company sold its 50% interest in its joint venture, Fujimi Corporation, to its 50% partner, Fujimi Incorporated which generated proceeds of $10.0 million. In addition, cash of $2.3 million was provided from the licensing of certain technologies and transferring associated assets. During 2000, cash was also used to purchase short-term investments of $64.3 million offset by proceeds of maturing investments totaling $85.8 million.

      Financing activities provided $2.3 million and $1.6 million during 2000 and 1999, respectively. The sale of stock to employees and the exercise of stock options generated proceeds of $3.4 million during each year. Principal payments on capital lease obligations amounted to $1.2 million in 2000 compared to $1.1 million in 1999. Total long-term debt decreased to $116.2 million at June 3, 2000 compared to $117.4 million at May 31, 1999. Total long-term debt as a percentage of stockholder’s equity increased to 49.0% as of June 3, 2000 from 47.6% as of May 31, 1999.

      The Company believes that its current cash position and cash generated through operations will be sufficient to meet the Company’s cash needs during the next 12 months.

      On June 27, 2000, the Company announced that it reached an agreement with its partner in the Far East Joint Venture, Obara Corporation, that will transfer full ownership of CMP sales and service operations in that region to the Company. Per the agreement, Obara Will assume the business operations for non-CMP activities. In conjunction with this agreement, the Company is evaluating its impact on its domestic non-CMP operations. Based upon this ongoing review, as well as the terms of the agreement reached with Obara Corporation, the Company believes it will incur a special, non-cash charge to operations in the range of $10.0 million to $20.0 million in the first six months of 2001. The Company believes there will be no material cash outlays in conjunction with finalizing this transaction

      Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” and No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, establishes accounting and reporting standards for derivative financial instruments and hedging activities. These statements require that the Company recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against changes in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company will adopt SFAS No. 133 and No. 138 in the first quarter of 2002, and does not expect the adoption to have a material effect on its financial condition or results of operations.

      In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements of all publicly held companies. The semiconductor capital equipment industry association and a number of association members have met with the Staff of the SEC to discuss and evaluate the applicability of SAB 101 and various practical implementation considerations. On June 26, 2000, the Staff of the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted the delay in the Company’s implementation date of SAB 101 until the fourth quarter of 2001. Accordingly, any shipments previously reported as revenue, including revenue reported during the first nine months of 2001, which do not meet SAB 101’s guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101 and SAB 101B would not involve the restatement of prior financial statements, but would, to the extent applicable, be reported as a change in accounting principle in the fourth quarter of 2001.

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      Management believes that SAB 101 and SAB 101B, to the extent that they impact the Company, will not affect the underlying strength or weakness of the business operations as measured by the dollar value of the Company’s product shipments and cash flows.

Year 2000

      In calendar year 1999, the Company completed all of its Year 2000 review and conversion projects to address all necessary changes, testing and implementation issues. This project encompassed three major areas of review; internal systems (hardware and software), supplier compliance and Company products. To date, the Company has not experienced any interruption to its business activities or incurred any impairment to its financial condition or results of operations as a result of entering calendar year 2000. The Company will continue to monitor its own internal systems and products to determine the impact, if any, of problems associated with the Year 2000.

Cautionary Statement Regarding Forward-Looking Statements

      This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements because of a number of factors, risks and uncertainties, including the risk factors described in this discussion and elsewhere in this report. Such forward-looking statements include, but are not limited to, statements that relate to the Company’s future revenue, product development, product backlog, customers, demand, acceptance and market share, competitiveness, gross margins, levels of research and development and operating expenses, intellectual property, management’s plans and objectives for current and future operations of the Company, the effects of the Company’s reorganization of the Far East Joint Venture, the ability of the Company to complete the reorganization of the Far East Joint Venture, and the markets in which the Company does business. In addition, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions generally identify forward-looking statements. The information included in this report is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein.

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RISK FACTORS

      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 faces intense competition, including from companies with greater resources. Several companies currently market CMP systems that directly compete with the Company’s 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 price-based 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.
	•	Once a semiconductor manufacturer commits to purchase a competitor’s equipment, the manufacturer generally relies on that equipment for an entire production line and continues to purchase that equipment exclusively for an extended period of time.

Increased competitive pressure could lead to lower prices for the Company’s products, thereby materially adversely affecting the Company’s business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully in the future.

      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. The success of the Company in developing, introducing and selling new and enhanced systems depends upon a variety of factors including:

	•	product selection
	•	timely and efficient completion of product design and development
	•	timely and efficient implementation of manufacturing and assembly processes
	•	product performance in the field
	•	effective sales and marketing

      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 have had 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.

There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or in enhancing its existing products. As is typical in the semiconductor capital equipment market, the Company has experienced delays from time to time in the introduction of, and certain technical and manufacturing difficulties with, certain of its systems and enhancements and may experience

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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 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:

	•	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.
	•	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.

There can be no assurance that the Company will be successful in preventing product and process development problems that could potentially harm the Company’s results of operations.

      The Company’s quarterly operating results and stock price may fluctuate for reasons not within its control. The Company’s quarterly operating results may fluctuate due to a variety of factors, including:

	•	industry demand for capital equipment, which depends on economic conditions in the semiconductor, memory disk and silicon wafer markets
	•	timing of new product introductions
	•	ability to develop and implement new technologies
	•	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
	•	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 fluctuate widely in a short period of time due to factors specific to the Company such as:

	•	variation in quarterly results
	•	changes in analysts’ earnings estimates
	•	announcements regarding restructurings, technological innovations, departures of key officers or employees, or the introduction of new products

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All of the above factors could decrease the trading price of the Company’s common stock. The Company’s stock price may also fluctuate due to factors specific to the semiconductor industry, which has experienced significant price fluctuations in recent years. Investors in the Company’s stock should be willing to incur the risk of such price fluctuations.

If the market price of the Company’s stock is adversely affected, the Company may experience difficulty in raising capital or making acquisitions, which could have a material adverse effect on the Company’s business, financial condition and stock price. In addition, if the market price of the Company’s common stock is adversely affected, the Company may become the object of securities class action litigation. If the Company is sued in a securities class action, the Company may incur substantial costs and management’s attention and resources may be diverted, which could have a material adverse effect on the business, financial condition and stock price.

In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market price of securities issued by many high technology companies, in many cases for reasons unrelated to the operating performance of the specific companies, and the Company’s Common Stock has experienced volatility not necessarily related to announcements of Company performance. Broad market fluctuations may adversely affect the market price of the Company’s Common Stock.

      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 2000, two customers accounted for 11.8% and 11.1%, respectively, of its total revenue. In 1999, two customers accounted for 11.4% and 10.5%, respectively, of its total revenue. The Company’s ten largest customers accounted for 64.9%, 60.8% and 53.4% of the Company’s total revenue in 2000, 1999 and 1998, respectively. The loss of a significant customer or a substantial reduction in orders by any significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry, could adversely effect the Company’s business, financial condition and results of operations.

      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.

      The Company’s success depends on international sales, particularly in Asia and Europe. International sales accounted for 69.6% of the Company’s total revenue for 2000, 37.4% for 1999 and 34.3% for 1998. 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
	•	intense price competition

The Company derives a substantial portion of its revenues from customers in Asian countries particularly Japan and Korea. Economic developments in late 1997 and early 1998 resulted in decreased capital investments by Asian customers. Recent economic developments indicate that the economies of Japan, Korea and other Asian countries have recovered somewhat from 1997 and 1998 levels. Any negative economic developments or delays in the economic recovery of Asian countries could result in the cancellation or delay of orders for the Company’s products from Asian customers, thus materially adversely affecting the Company’s business, financial condition or results of operations.

      The Company may not realize the potential benefits of the reorganization of the Far East Joint Venture. One of the purposes of the reorganization of the Far East Joint Venture is to focus the Company more on the

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	•	The continued and increased acceptance of CMP among semiconductor manufacturers is still a primary risk factor in the Company’s growth. The reorganization of the Far East Joint Venture makes the Company more dependent on the CMP business. If this market fails to continue to develop, the Company will suffer.
	•	The Company believes that it will incur a one-time non-cash charge to operations in the range of $10 million to $20 million in the first half of 2001 as a result of the reorganization. This could cause the stock price to decline.

The success of the Company’s CMP operations in Asia after the reorganization depends upon its ability to retain key employees. None of the key employees in Asia have long-term employment contracts. The Company does not have any direct experience managing operations in Asia. Some employees may decide to leave after the reorganization for this and other reasons. This may negatively affect the Company’s operations in Asia, which represent a large portion of the Company’s total revenue.

      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

      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 3 years. Continued and increased acceptance of CMP systems depends on many factors considered by potential customers, including:

	•	cost of ownership
	•	throughput
	•	process flexibility
	•	performance
	•	reliability
	•	customer support

Failure to adequately meet potential customers’ needs with respect to one or more of these factors may result in decreased acceptance of CMP and, therefore, the Company’s CMP systems, which may in turn negatively impact the Company’s profitability.

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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. In the event the Company loses any of its intellectual property rights or otherwise determines that it needs to obtain licenses to third party intellectual property, there is no assurance that the Company will be able to obtain such licenses on reasonable terms, if at all. The Company currently licenses the right to manufacture CMP machines employing an orbital motion in its Avant Gaard 676, 776, 876 and Momentum^TM 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 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
	•	limits on the Company’s ability to successfully incorporate acquired technology and rights into its service offerings
	•	maintenance of uniform standards, controls, procedures and policies

      The Company is dependent on key management and technical personnel. The Company’s performance and ability to execute is substantially dependent on the performance of the Company’s executive officers and key technical and engineering employees. The loss of the services of any of these executive officers or key employees could have a material adverse effect on the Company’s business, operating results, financial condition, cash flows, market perceptions or the price of the Company’s stock.

The Company’s future success also depends on its ability to identify, hire, train and retain other highly qualified managerial and technical personnel. Competition for such personnel is intense. If the Company is not successful in identifying, hiring, training and retaining such personnel, it could have a material adverse effect on the Company’s business, operating results, financial condition, cash flows, market perceptions or the price of the Company’s stock.

      The Company uses financial instruments that potentially subject it to concentrations of credit risk. The Company enters into foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies, principally Japanese Yen. The Company also invests its cash in deposits in banks, money market funds, government and corporate debt securities. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and by policy, limits the amount of credit exposure to any one issuer. The Company mitigates default risk by investing in only the safest and highest credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. To date, the Company has not experienced material losses on these investments. However, there can be no assurance that the Company will not in the future experience losses that could materially adversely affect the Company’s business, financial condition and results of operations.

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Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

      Interest Rate Risk. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and long-term debt obligations. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer.

      The Company mitigates default risk by investing in only the safest and highest credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

      The Company has no cash flow exposure due to rate changes for cash equivalents and short-term investments, as all of these investments are at fixed interest rates. Long-term debt is at a fixed interest rate. The long-term debt was primarily incurred in connection with the Company’s issuance of convertible debenture bonds.

      The table below presents principal amounts and related weighted average interest rates by year of maturity for the Company’s investment portfolio and debt obligations (in thousands).

      Foreign Currency Risk. The Company transacts business in various foreign countries. Its primary foreign currency cash flows are in countries in Asia and Europe. During 2000 and 1999, the Company employed a foreign currency hedging program utilizing foreign currency forward exchange contracts. Under this program, increases or decreases in currency commitments, as translated into U.S. dollars, are primarily offset by realized gains and losses on the hedging instruments. The goal of the hedging program is to economically guarantee or lock in exchange rates on the Company’s foreign currency cash outflows and to minimize the impact to the Company of foreign currency fluctuations. The Company does not use foreign currency forward exchange contracts for speculative or trading purposes.

      The following table provides information as of June 3, 2000 about the Company’s derivative financial instruments, which are comprised of foreign currency forward exchange contracts. The information is provided in U.S. dollar equivalent amounts, as presented in the Company’s financial statements. The table presents the notional amounts (at the contract exchange rates), the weighted average contractual foreign currency exchange rates, and the estimated fair value of those contracts.

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Item 8.  Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The above consolidated financial statements of SpeedFam-IPEC Co., Ltd. and consolidated subsidiaries are included herein pursuant to Rule 3-09 of Regulation S-X.

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Independent Auditors’ Report

The Board of Directors

      We have audited the accompanying consolidated balance sheets of SpeedFam-IPEC, Inc. and consolidated subsidiaries as of June 3, 2000 and May 31, 1999, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three fiscal years in the period from June 1, 1997 through June 3, 2000. These consolidated financial statements are the responsibility of the management of SpeedFam-IPEC, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpeedFam-IPEC, Inc. and consolidated subsidiaries as of June 3, 2000 and May 31, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period from June 1, 1997 through June 3, 2000 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois

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SPEEDFAM-IPEC, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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SPEEDFAM-IPEC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND