Speedfam Ipec 10-Q 2003 Q1 Quarterly report

UNITED STATES 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, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 incorporation or organization)	(I.R.S. Employer Identification Number)
305 North 54th Street, Chandler, Arizona	85226
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (480) 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    ü    No      

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (September 30, 2002).

Common Stock, no par value: 31,103,409 shares

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
	ITEM 4. Controls and Procedures.
PART II — OTHER INFORMATION
Signature
EXHIBIT INDEX
EX-99.1

SPEEDFAM-IPEC, INC.

INDEX

			Page
PART I	FINANCIAL INFORMATION
		Condensed Consolidated Balance Sheets August 31, 2002 and June 1, 2002	2
		Condensed Consolidated Statements of Operations First Quarter Ended August 31, 2002 and September 1, 2001	3
		Condensed Consolidated Statements of Cash Flows First Quarter Ended August 31, 2002 and September 1, 2001	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	23
PART II	OTHER INFORMATION		23
SIGNATURES			25
EXHIBIT INDEX

1

PART I – FINANCIAL INFORMATION

SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

					AUGUST 31,			JUNE 1,
					2002			2002
				ASSETS
Current assets:
	Cash and cash equivalents				$	60,391		$	33,358
	Trade accounts receivable, net					21,995			22,162
	Inventories					42,500			44,545
	Shipped systems pending acceptance					6,379			9,175
	Prepaid expenses and other current assets					3,000			3,896
		Total current assets				134,265			113,136
Property, plant and equipment, net						31,413			58,007
Other assets						5,883			5,684
		Total assets			$	171,561		$	176,827
			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt				$	48		$	65
	Accounts payable					13,513			11,061
	Deferred systems revenue					14,752			18,238
	Accrued liabilities					14,934			13,904
		Total current liabilities				43,247			43,268
Long-term liabilities:
	Long-term debt					115,057			115,054
	Other liabilities					4,711			4,620
		Total long-term liabilities				119,768			119,674
Stockholders’ equity:
	Common stock, no par value, 60,000 shares authorized, 31,099 and 30,672 shares issued and outstanding at August 31, 2002 and June 1, 2002, respectively					1			1
	Additional paid-in capital					436,897			435,663
	Retained deficit					(429,538	)		(423,049	)
	Accumulated comprehensive income					1,186			1,270
		Total stockholders’ equity				8,546			13,885
				Total liabilities and stockholders’ equity	$	171,561		$	176,827

See Accompanying Notes to Condensed Consolidated Financial Statements.

2

SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER ENDED AUGUST 31, 2002 AND SEPTEMBER 1, 2001
(in thousands, except per share data)

				First Quarter Ended
				August 31,			September 1,
				2002			2001
Net sales				$	33,789		$	41,082
Cost of sales					25,536			31,695
			Gross margin		8,253			9,387
Operating expenses:
		Research, development and engineering			7,781			12,388
		Selling, general and administrative			5,696			8,120
		Litigation settlement costs			—			1,800
		Total operating expenses			13,477			22,308
Operating loss					(5,224	)		(12,921	)
		Other expense, net			(1,266	)		(1,502	)
Loss before income taxes and cumulative effect of accounting change					(6,490	)		(14,423	)
		Income taxes			—			—
Loss before cumulative effect of accounting change					(6,490	)		(14,423	)
Cumulative effect of accounting change					—			(2,582	)
Net loss				$	(6,490	)	$	(17,005	)
Net loss per common share:
	Basic and diluted:
		Before cumulative effect of accounting change		$	(0.21	)	$	(0.48	)
		From cumulative effect of accounting change			—			(0.08	)
		Net loss		$	(0.21	)	$	(0.56	)
	Weighted average number of shares:
		Basic and diluted			30,871			30,223

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED AUGUST 31, 2002 AND SEPTEMBER 1, 2001
(in thousands)

				First Quarter Ended
				August 31,			September 1,
				2002			2001
Cash flows from operating activities
	Net loss			$	(6,490	)	$	(17,005	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			2,561			4,557
		Loss on disposal of assets			85			—
		Cumulative effect of change in accounting principle			—			2,582
		Contribution of stock to employee benefit plan			160			—
		Changes in assets and liabilities:
			Decrease in trade accounts receivable		403			14,156
			(Increase) decrease in inventories		2,318			(5,806	)
			Decrease in shipped systems pending acceptance		2,796			5,218
			Decrease in other current assets		914			1,030
			Increase (decrease) in accounts payable		1,583			(5,275	)
			Decrease in deferred systems revenue		(3,486	)		(11,838	)
			Increase in accrued liabilities		1,088			2,856
	Net cash provided by (used in) operating activities				1,932			(9,525	)
Cash flows from investing activities
	Proceeds from sale of assets				25,000			—
	Maturities of short-term investments				—			7,115
	Capital expenditures				(570	)		(1,169	)
	Other investing activities				(634	)		(548	)
	Net cash provided by investing activities				23,796			5,398
Cash flows from financing activities
	Proceeds from exercise of stock options and employee stock purchases				1,074			544
	Principal payments on long-term debt				(68	)		(19	)
	Net cash provided by financing activities				1,006			525
	Effects of foreign currency rate changes on cash				299			71
	Net increase (decrease) in cash and cash equivalents				27,033			(3,531	)
	Cash and cash equivalents at beginning of year				33,358			47,344
	Cash and cash equivalents at end of quarter			$	60,391		$	43,813

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

SPEEDFAM-IPEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(1) BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for comprehensive financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Actual results may differ from these estimates. Operating results for the quarter ended August 31, 2002 are not necessarily indicative of the results that may be expected for the year ending May 31, 2003. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 1, 2002.

         The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, the 2003 fiscal year ends on May 31, 2003 and contains 52 weeks whereas the 2002 fiscal year ended on June 1, 2002 and also contained 52 weeks. All references to quarters and years relate to fiscal quarters and fiscal years unless otherwise noted.

(2) INVENTORIES

         The components of inventory were:

	August 31,		June 1,
	2002		2002
Raw materials	$	21,956	$	19,164
Work-in-process		10,522		11,490
Finished goods		10,022		13,891
	$	42,500	$	44,545

5

(3) ACCRUED LIABILITIES

         Accrued liabilities are as follows:

	August 31,		June 1,
	2002		2002
Accrued warranty	$	833	$	804
Accrued payroll and benefits		2,736		2,310
Accrued merger, integration, and restructuring costs		1,156		1,288
Other accrued liabilities		10,209		9,502
	$	14,934	$	13,904

(4) COMPREHENSIVE LOSS

         The Company’s comprehensive loss was as follows:

		First Quarter Ended
		August 31,			September 1,
		2002			2001
Net loss		$	(6,490	)	$	(17,005	)
Other comprehensive income (loss):
	Unrealized loss on securities		—			(12	)
	Foreign currency translation adjustment		(84	)		112
Comprehensive loss		$	(6,574	)	$	(16,905	)

         Accumulated other comprehensive income (loss) was as follows:

								Accumulated
		Foreign			Unrealized			Other
		Currency			Gain (Loss)			Comprehensive
		Translation			on Securities			Income (Loss)
Balance at June 1, 2002		$	1,270		$	—		$	1,270
	One quarter change		(84	)		—			(84	)
Balance at August 31, 2002		$	1,186		$	—		$	1,186
Balance at June 2, 2001		$	803		$	24		$	827
	One quarter change		112			(12	)		100
Balance at September 1, 2001		$	915		$	12		$	927

6

(5) BASIC EARNINGS (LOSS) PER COMMON SHARE

         Basic earnings (loss) per common share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per common share assumes the exercise of all options and warrants which are dilutive, whether exercisable or not.

         In calculating diluted net loss per common share, the dilutive effect of 28,895 and 591,772 common stock equivalent shares (determined under the treasury stock method) have been excluded for the first quarter ended August 31, 2002 and September 1, 2001, respectively, because their inclusion would have been anti-dilutive due to the net losses recorded for the periods.

(6) 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 (STG), which is comprised of the distribution of high-throughput precision surface processing equipment used in the silicon wafer industry; and (iii) the Industrial Applications Group (IAG), 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 during the first quarter ended August 31, 2002 and September 1, 2001 is as follows (in thousands):

		First Quarter Ended
		August 31,			September 1,
		2002			2001
Net sales:
	CMP Group	$	28,103		$	32,619
	Surface Technology Group		3,442			5,015
	Industrial Applications Group		2,244			3,448
Total net sales to unaffiliated customers			33,789			41,082
Segment operating profit (loss):
	CMP Group		(2,683	)		(8,393	)
	Surface Technology Group		(328	)		100
	Industrial Applications Group		(154	)		599
Total segment operating loss			(3,165	)		(7,694	)
General corporate expense, net			(1,551	)		(5,227	)
Interest expense, net			(1,774	)		(1,502	)
Loss before income taxes and cumulative effect of accounting changes		$	(6,490	)	$	(14,423	)

(7) CHANGES IN ACCOUNTING PRINCIPLES

         In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 supersedes prior guidance and requires that goodwill no longer be amortized to earnings, but instead be annually reviewed for impairment. In addition, goodwill should be tested for impairment upon adoption of the statement. The Company early adopted

7

SFAS No. 142 in the first quarter of 2002 and recorded a cumulative effect of a change in accounting principle for the write-off of goodwill of ($2.6) million, or ($0.08) per share, as of the beginning of 2002 (June 3, 2001). The circumstances leading to the impairment of goodwill primarily relate to operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, which correspond to the Company’s business segments, were estimated using quoted market prices.

         In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”. SFAS No. 141 supersedes prior guidance and requires that all business combinations in the scope of this statement be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, as well as all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company adopted this statement as required on July 1, 2001 and it did not affect the financial statements.

         In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transactions reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not yet determined the effects SFAS No. 144 will have on its financial position, results of operations or cash flows but does not anticipate that the impact will be significant.

         In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No. 145 on June 2, 2002 and it did not have a material impact on the financial position or results of operations of the Company.

(8) SUBSEQUENT EVENTS

         On August 11, 2002, the Company entered into an Agreement and Plan of Reorganization with Novellus Systems, Inc. (Novellus), a California corporation and a leader in thin film deposition technology for the semiconductor industry. Novellus will acquire all outstanding shares of SpeedFam-IPEC in a stock-for-stock merger transaction. If the merger is completed, the Company would become a wholly-owned subsidiary of Novellus. Each share of SpeedFam-IPEC common stock outstanding as of the closing date will be converted into 0.1818 shares of Novellus common stock on a fixed exchange ratio basis. The merger is intended to qualify as a tax-free reorganization under IRS regulations. The transaction has been approved by the board of directors of both companies and is expected to formally close in the fourth calendar quarter of 2002.

(9) RELATED PARTY TRANSACTIONS

         On June 21, 2002, the Company completed a sale-leaseback transaction of its corporate headquarters and research and development facilities in Chandler, Arizona. The purchaser/lessor is Phoenix Industrial Investment Partners, L.P. (the “Buyer”), a firm controlled by Kenneth Levy, a director of the Company. The sales price was $25.0 million.

         In connection with the sale of the buildings, the Company has simultaneously entered into a 15-year lease for the buildings. The lease, which has been accounted for as an operating lease, contains provisions for three, five-year extensions and requires minimum annual rental payments of $3.0 million. Annual operating expenses will

8

increase by approximately $2.4 million, reflecting the new rental payments, offset by interest income on the net proceeds and reduced depreciation expense.

         As a result of the transaction, the Company received cash proceeds of $25.0 million. The book value of buildings and improvements removed from the balance sheet in the first quarter of 2003 is $25.1 million. The loss on the sale of the buildings was immaterial.

9

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Overview

         SpeedFam-IPEC, Inc. (the Company) designs, develops, manufactures and markets chemical mechanical planarization (CMP) systems for use in the fabrication of semiconductor chips. The Company also supplies parts and provides ongoing support for these systems.

         Semiconductor chips are built on a base of silicon, called a wafer, and include multiple layers of wiring, which connect a variety of circuit components, such as transistors and other structures. The construction of semiconductor chips is accomplished through the deposition onto a wafer of layers of metal for wire connections and silicon dioxide for insulation. Copper is fast becoming the metal of choice among chip manufacturers due to its superior conductivity capability. Insulators, or dielectrics, of which silicon dioxide is the conventional material, are used to prevent interference between closely spaced metal interconnects.

         Deposition is done with varying degrees of thickness and uniformity, leaving behind bumpy or uneven layers of metal or insulating material. CMP is used to planarize—or smooth—the surface of the wafer to prepare it for the next layer of processing. This smoothing is accomplished through a polishing process using high-performance equipment, consumables — such as slurries, and related technologies. A slurry is a suspension of abrasives in reactive chemicals. In some instances, slurry may contain no abrasives, but may consist only of reactive chemicals. Different metals or oxides require different slurries.

         CMP has become an increasingly critical processing step as semiconductor manufacturers are continually designing chips with smaller feature sizes that utilize thinner and more numerous layers of interconnect on increasingly larger wafers. This facilitates the production of smaller, faster and more complex chips at a lower cost.

         In addition to CMP systems, the Company markets high-throughput precision surface processing equipment for the wafer market, and consumables used in surface processing. The Company also manufactures and markets polishing systems for general industrial applications.

         The Company’s total revenue consists of net sales of the products described above and service revenues, as well as revenue derived from the distribution by the Company in the U.S. and Europe of products manufactured by the former SpeedFam-IPEC, Co., Ltd. (the Far East Joint Venture). The Company distributes such products throughout the U.S. and Europe acting as sales agent, under a five-year agreement. Related costs to import this equipment are recorded as cost of goods sold. The Company’s CMP segment has provided the substantial majority of our revenues during the last several years. In fiscal years 2002, 2001 and 2000, the CMP Group accounted for 75%, 81% and 84% of revenues, respectively. For the quarter ended August 31, 2002, the CMP Group accounted for 83% of revenues.

         The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest May 31. Accordingly, the 2003 fiscal year ends on May 31, 2003 and the 2002 fiscal year ended on June 1, 2002. All references to quarters and years relate to fiscal quarters and fiscal years unless otherwise noted.

         Beginning in 2001 and continuing into 2003, there has been a significant decrease in the worldwide demand for semiconductor capital equipment. As a result of a rapid decline in the demand for semiconductor devices, inventory buildups in telecommunications products, slower than expected personal computer sales and overall slower global economic growth, many semiconductor manufacturers reevaluated their capital spending plans. Accordingly, several of the Company’s customers rescheduled delivery or canceled existing orders. Furthermore, the Company has experienced a substantial decline in new orders. In response to industry conditions, the Company has recorded significant inventory write-downs, charges related to asset impairments and severance costs in connection with across-the-board headcount reductions. Furthermore, the Company implemented measures to reduce discretionary spending.

10

Recent Events

         On August 11, 2002, the Company entered into an Agreement and Plan of Reorganization with Novellus Systems, Inc., a California corporation and a leader in thin film deposition technology for the semiconductor industry. Novellus will acquire all outstanding shares of SpeedFam-IPEC in a stock-for-stock merger transaction. If the merger is completed, the Company would become a wholly-owned subsidiary of Novellus. Each share of SpeedFam-IPEC common stock outstanding as of the closing date will be converted into 0.1818 shares of Novellus common stock on a fixed exchange ratio basis. The merger is intended to qualify as a tax-free reorganization under IRS regulations. The transaction has been approved by the board of directors of both companies and is expected to formally close in the fourth calendar quarter of 2002.

Results of Operations

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

		First Quarter Ended
		August 31,			September 1,
		2002			2001
Net sales			100.0	%		100.0	%
Cost of sales			75.6			77.2
	Gross margin		24.4			22.8
Research, development and engineering			23.0			30.2
Selling, general and administrative			16.9			19.8
Litigation settlement costs			—			4.3
Operating loss			(15.5	)		(31.5	)
Other expense, net			(3.7	)		(3.7	)
Loss before cumulative effect of Accounting change			(19.2	)		(35.1	)
Cumulative effect of accounting change			—			(6.3	)
Net loss			(19.2	)%		(41.4	)%

         Net Sales.Net sales for the first quarter of 2003 were $33.8 million, down 18% from net sales of $41.1 million in the first quarter of 2002. Net sales of CMP products for the first quarter of 2003 totaled $28.1 million, or 83% of net sales, compared to $32.6 million, or 79% of net sales, in the first quarter of 2002. Sales of CMP systems products decreased in 2003 due to the continued slowing of worldwide demand for semiconductor manufacturing equipment caused by a rapid decline in demand for semiconductor devices. Inventory buildups in telecommunication products, slower than expected personal computer sales and slower global economic growth have caused semiconductor companies to reevaluate their capital spending plans. A number of the Company’s customers revised the timing of their capital spending, resulting in the postponement of equipment delivery and a decline in new orders and net sales.

         Upon implementation of SAB 101 in fiscal 2001, the Company recorded a non-cash charge of $36.5 million for the three quarters ended March 3, 2001 to reflect the cumulative effect of the accounting change as of the beginning of fiscal 2001, June 4, 2000. The deferred systems revenue balance at June 4, 2000, was $60.8 million. This amount is comprised of equipment that was shipped and previously recorded as revenue but had not been accepted or did not qualify for mulitple-element accounting as of June 3, 2000. In addition to deferred systems

11

revenue, the Company recorded deferred amounts related to cost of sales totaling $21.3 million as of June 4, 2000. This amount represents costs related to shipped systems that were pending acceptance as of June 3, 2002. As of June 4, 2000, the Company also reversed accruals associated with its warranty and installation costs of $3.0 million related to shipped systems pending customer acceptance. Of the $60.8 million in deferred systems revenue, $1.3 million and $10.5 million were recognized as revenue, respectively for the quarter ended August 31, 2002 and September 1, 2001. Of the $21.3 million in deferred cost of sales $6.5 million was recognized as cost of sales for the quarter ended September 1, 2001. For the quarter ended August 31, 2002, there were no deferred costs recognized as cost of sales which were reflected in the cumulative effect of the accounting change.

         Net sales of the Surface Technology Group (STG) in the first quarter of 2003 accounted for $3.4 million, or 10% of net sales, compared to $5.0 million, or 12% of net sales, in the first quarter of 2002. During 2003, the silicon wafer market has experienced continued softness in demand due to ongoing manufacturing over-capacity caused by various factors including available capacity and increased production efficiencies due to the fact that more chips can be produced on a given wafer.

         Net sales of the Industrial Applications Group (IAG) in the first quarter of 2003 totaled $2.2 million, or 7% of net sales, compared to $3.5 million or 8% of net sales, in the first quarter of 2002.

         Gross Margin.In the first quarter of 2003, gross margin was $8.3 million, or 24% of net sales, compared to $9.4 million, or 23% of net sales, in the first quarter of 2002. The increase in gross margin as a percentage of net sales was primarily due to the product mix of systems shipped. The Company’s gross margins are below historical levels due primarily to decreased production volume resulting in lower overhead absorption on a reduced revenue base. During the industry downturn, the Company expects this trend of reduced gross margins to continue. The Company’s gross margin has significantly fluctuated in the past and will continue to fluctuate based on several factors including the severity and duration of the current industry downturn, product mix, overhead absorption levels and costs associated with the introduction of new products.

         Research, Development and Engineering.In the first quarter of 2003, research, development and engineering expenses decreased to $7.8 million, or 23% of net sales, compared to $12.4 million, or 30% of net sales, in the first quarter of 2002. Research, development and engineering expense decreased by $4.6 million or 37% as a result of certain cost cutting measures, including a reduction in headcount and discretionary spending, which were implemented by the Company in response to the industry wide downturn. The Company expects to continue investing substantial resources in research, development and engineering programs.

         Selling, General and Administrative.In the first quarter of 2003, selling, general and administrative expenses decreased to $5.7 million, or 17% of net sales, compared $8.1 million, or 20% of net sales, in the first quarter of 2002. Selling, general and administrative expense decreased by $2.4 million or 30% as a result of certain cost cutting measures, including a reduction in headcount and discretionary spending, which were implemented by the Company in response to the industry downturn.

         Litigation settlement costs.On October 5, 2001, the Company settled its outstanding litigation with MEMC. In connection with this settlement the Company agreed to pay MEMC $1.8 million.

         Other Expense, net.Other expense, net decreased to ($1.3) million during the first quarter of 2003 from ($1.5) million during the same period a year ago. This decrease primarily resulted from higher average balances in cash and cash equivalents as a result of the $25.0 million of proceeds received in connection with the Company’s sale-leaseback transaction.

         Provision for Income Taxes.At the end of the first quarter of 2003 and 2002, the Company established a valuation allowance for deferred tax assets generated by its operating losses and is in a net operating loss carry-forward position. As a result, the effective tax rate for the first quarter of 2003 and 2002 was zero. While the Company will reassess its tax situation each quarter, the Company expects that its effective tax rate will approximate zero throughout 2003.

12

Liquidity and Capital Resources

         As of August 31, 2002, the Company had $60.4 million in cash and cash equivalents, compared to $33.4 million at June 1, 2002. During the first quarter of 2003, the Company had $1.9 million of cash provided by operating activities compared to cash used of $9.5 million in operating activities during the same period in 2002. The difference is primarily related to a reduction in the net loss in the first quarter of 2003 as compared to the first quarter of 2001. Approximately $5.6 million of cash was provided in the first quarter of 2003 due to a decrease in working capital. The net loss of $6.5 million included non-cash items totaling $2.8 million: depreciation and amortization expense of $2.6 million; contribution of stock to employee benefit plan of $0.1 million and loss on disposal of assets of $0.1 million.

         Net cash provided by investing activities totaled $23.8 million during the first quarter of 2003 compared with net cash provided of $5.4 million during the same period in 2002. Net cash proceeds received from the sale of the Company’s corporate headquarters and research and development facilities (discussed below) provided $25.0 million and was offset by cash used for capital expenditures of $0.6 million during the first quarter of 2003. Cash provided by investing activities in the first quarter of 2002 primarily related to maturities- of short-term investments.

         Financing activities provided cash of $1.0 million during the first quarter of 2003 compared with approximately $0.5 million during the same period of 2002. The sale of stock to employees and the exercise of stock options generated proceeds of $1.1 million during the quarter ended August 31, 2002.

         On June 21, 2002, the Company completed a sale-leaseback transaction of its corporate headquarters and research and development facilities in Chandler, Arizona. As a result of the sale transaction, the Company received cash proceeds of $25.0 million. The book value of buildings and improvements removed from the balance sheet in the first quarter of 2003 was $25.1 million. The loss on the sale of the buildings was $0.1 million. The Company simultaneously entered into a 15-year lease for the buildings which contains provisions for three five-year extensions, requires minimum annual rental payments of $3.0 million and required a $0.7 million deposit which was paid at the time of closing. In addition, the Company recorded expenses related to the lease of $0.6 million at the time the transaction closed. Annual operating expenses will increase by approximately $2.4 million, reflecting the new rental payments, offset by interest income on the net proceeds and reduced depreciation expense.

         Beginning in 2001 and continuing into 2003, there was a significant decrease in the worldwide demand for semiconductor capital equipment. As a result of a rapid decline in the demand for semiconductor devices, inventory buildups in telecommunications products, slower than expected personal computer sales and overall slower global economic growth, many semiconductor manufacturers reevaluated their capital spending plans. Accordingly, several of the Company’s customers rescheduled delivery or canceled existing orders. Furthermore, the Company experienced a substantial decline in new orders. In response to industry conditions and the introduction of new products that are technologically advanced, the Company recorded significant inventory write-downs, charges related to asset impairments and severance costs related to across-the-board headcount reductions. In addition, the Company implemented measures to reduce discretionary spending.

         Due to the continuation and severity of the industry-wide downturn, the Company implemented additional cost-cutting measures during 2002, which included further decreases in discretionary spending and reductions in worldwide headcount. Despite the expected continuation of the industry-wide downturn and uncertainty associated with the introduction of new products, and taking into account the Company’s actions to restructure and downsize the Company, management believes that the Company’s current cash and investment balances will be sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures at least through May 31, 2003. However, due to significant uncertainties related to the duration and severity of the semiconductor industry downturn and overall economic conditions, the Company may require additional sources of funds in order to strengthen its working capital position. Based on discussions with various lenders, the Company believes that the sources of funds available include a line of credit facility and term debt. If the Company were to raise additional funds through the issuance of equity securities, the percentage ownership of the Company’s stockholders would be reduced. In addition, these equity securities may have rights, preferences or privileges senior to the Company’s common stock. Furthermore, the Company may need to raise additional funds in future periods through a public or private financing, or other sources, to fund working capital requirements driven by the expansion of the business during the industry’s upturn. There are no assurances that the Company will be able to consummate any of these

13

transactions. For more detailed information, see “Certain Factors Affecting the Company’s Business,” set forth below.

         The terms of the Agreement and Plan of Reorganization with Novellus substantially limits our ability to incur indebtedness without the consent of Novellus. In addition, the merger agreement with Novellus precludes the issuance of debt or equity securities except under certain limited circumstances and only with the prior consent of Novellus. Further, we made certain covenants in the merger agreement that prevent us from entering into certain agreements and prevent us from taking certain actions without the consent of Novellus except agreements and actions that arise in the ordinary course of business and which are consistent with past practices.

Related Party Transactions

         On June 21, 2002, the Company completed a sale-leaseback transaction of its corporate headquarters and research and development facilities in Chandler, Arizona. The Company was assisted by a national real estate consulting firm, which obtained 12 qualified offers from across the United States on behalf of the Company. The winning offer was made by Phoenix Industrial Investment Partners, L.P. (the “Buyer”), a firm controlled by Kenneth Levy, a director of the Company, in a competitive arms’ length bidding process. The offer was approved by the independent directors of the Company, based in large part on the opinion of the Company’s outside real estate consulting firm that it was superior to all other offers. In this regard, the Buyer’s $25.0 million cash purchase price offered the highest net proceeds and the most favorable net present value. Moreover, the offer did not require a financing contingency.

         In connection with the sale of the buildings, the Company has simultaneously entered into a 15-year lease for the buildings. The lease, which has been accounted for as an operating lease in accordance with SFAS No. 13, “Accounting for Leases”, contains provisions for three five-year extensions and requires minimum annual rental payments of $3.0 million.

     ��   As a result of the transaction, the Company received cash proceeds of $25.0 million. The book value of buildings and improvements removed from the balance sheet in the first quarter of 2003 is $25.1 million. The loss on the sale of the buildings and improvements was $0.1 million.

Changes in Accounting Principles

         In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 supercedes prior guidance and requires that goodwill no longer be amortized to earnings, but instead be annually reviewed for impairment. In addition, goodwill should be tested for impairment upon adoption. The Company early adopted SFAS No. 142 in the first quarter of 2002 and recorded a cumulative effect of change in accounting principle for the write-off of goodwill of ($2.6) million, or ($0.08) per share, as of the beginning of 2002 (June 3, 2001). The circumstances leading to the impairment of goodwill primarily relate to current operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. The fair value of the reporting units, which correspond to the Company’s business segments, were estimated using quoted market prices.

         In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”. SFAS No. 141 supercedes prior guidance and requires that all business combinations in the scope of this statement be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, as well as all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company adopted this statement as required on July 1, 2001 and it did not affect the financial statements.

         In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens disposal transactions reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued

14

for fiscal years beginning after December 15, 2001. The Company has not yet determined the effects SFAS No. 144 will have on its financial position, results of operations or cash flows but does not anticipate that the impact will be significant.

         In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No. 145 on June 2, 2002 and it did not have a material impact on the financial position or results of operations of the Company.

Contractual Obligations and Commercial Commitments

         The Company has Convertible Subordinated Notes of $115.0 million due in September 2004. The Company also leases certain facilities and equipment under capital leases and non-cancelable operating leases, which expire at various dates through 2011. Other cash obligations consist of non-cancelable commercial commitments, which the Company anticipates paying through March 2003.

         Contractual cash obligations and commitments relating to debt, lease payments and commercial commitments are as follows (in thousands):

			Operating		Commercial
	Debt		Leases(1)		Commitments
Through August 2003	$	48	$	4,504	$	6,845
September 2003 to August 2006		115,057		10,787		—
September 2006 to August 2008		—		6,669		—
Thereafter		—		32,337		—
Total	$	115,105	$	54,297	$	6,845

(1) Reported amounts for operating leases have been reduced for income from subleases. Sublease income is as follows: $2,326 through August 2003, $7,584 September 2003 to August 2006; $5,097 September 2006 to August 2008; $8,822 thereafter.

Impact of Recently Issued Accounting Standards

         In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities and applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not yet determined the effects SFAS No. 143 will have on its financial position, results of operations or cash flows.

         In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit

15

or disposal activity be recognized when the liability is incurred. Prior guidance required that a liability for an exit cost be recognized at the date of an entity’s commitment to an exit plan. This Statement also establishes that fair value techniques should be used to measure the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

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. SpeedFam-IPEC claims the protection of the safe-harbor for forward-looking statements contained in those Sections. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in this report relate to, but are not limited to: (i) SpeedFam-IPEC’s expectation that the merger with Novellus will close; (ii) the continuation of the trend in reduced or fluctuating gross margins; (iii) the continuation of investment in research, development, and engineering programs; (iv) SpeedFam-IPEC’s expectation that its effective tax rate will approximate zero throughout 2003; (v) SpeedFam-IPEC’s expectation that the industry-wide downturn in the semiconductor industry will continue; and (vi) management’s belief that current cash and investment balances along with cash generated through operations will be sufficient to meet the Company’s cash needs or that sources of additional financings may be available. Forward-looking statements involve risks, uncertainties and other factors that may cause actual results, performance or achievements of SpeedFam-IPEC to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect SpeedFam-IPEC’s results and cause them to materially differ from those contained in the forward-looking statements include those listed below under the heading “Certain Factors Affecting the Company’s Business.” Forward-looking statements speak only as of the date the statement was made. SpeedFam-IPEC does not undertake and specifically declines any obligation to update any forward-looking statements.

CERTAIN FACTORS AFFECTING THE COMPANY’S BUSINESS

         Our business is subject to numerous risks, including those discussed below. If any of the events described in these risks occurs, our business, financial condition and results of operations could be seriously harmed.

         We may not achieve the benefits we expect from the merger with Novellus. We entered into the merger agreement with Novellus with the expectation that the merger will result in significant benefits to both parties. Achieving the benefits of the merger depends on the timely, efficient and successful execution of a number of post-merger events, including integrating the operations, products, personnel and technologies of the two companies. In addition, the attention and effort devoted to the integration of the two companies could significantly divert management’s attention from other important issues, and could seriously harm the combined company.

         There may be fluctuations in the price of the common stock of Novellus, which, based on the fixed exchange ratio set forth in our merger agreement with Novellus and investors’ belief that the merger will be consummated at such stock price, may affect the market price of our common stock which could result in substantial losses for investors.

         Failure to complete the merger could negatively impact our stock price and future business and operations.If the merger is not completed for any reason, we may be subject to a number of material risks, including the following:

• we may be required under certain circumstances to pay Novellus a termination fee in cash equal to $5.0 million and reimburse Novellus for its expenses;

• the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed; and

• costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed.

16

         Additionally, our customers and suppliers, in response to the announcement of the merger, may delay or defer decisions concerning us or decide to terminate their relationship with us. Any delay or deferral in those decisions or any decision to terminate such relationships by our customers or suppliers could have a material adverse effect on our business, regardless of whether the merger is ultimately completed. Similarly, this may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel to the extent we need to keep such personnel.

         Further, if the merger is terminated and our board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to pay an equivalent or more attractive price than the price to be paid in the proposed merger. In addition, during the period in which the merger agreement is in effect and subject to very narrowly defined exceptions, we are prohibited from soliciting, initiating or encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination, with any party other than Novellus.

         We are using substantial cash reserves to fund operations during the industry downturn, and there can be no assurance we will be able to achieve positive cash flow in the foreseeable future. Although during the first quarter of 2003, we generated $1.9 million in cash from operating activities, we remained cash flow negative. We are currently exploring options to generate positive cash flow, including continued reduction in operating expenses. However, we continue to experience depressed revenues and orders and we are unable to determine when increasing demand for our products will resume, if ever. Accordingly, we can provide no assurances that we will achieve a positive cash flow position in the future or obtain or generate sufficient cash proceeds from financings to sustain our operations.

         Our common stock may be delisted by Nasdaq if we do not comply with its listing maintenance requirements.Our common stock is listed on the Nasdaq National Market. We are currently in compliance with Nasdaq’s continued listing requirements. However, if the price of our common stock falls below $3.00 for 30 consecutive days and if our stockholder’s equity falls below $10.0 million, or if we are not otherwise able to demonstrate to Nasdaq our ability to comply with its other listing standards, our shares of common stock might be delisted. A delisting is likely to make the price of our common stock fall steeply. This lack of liquidity also could make it more difficult for us to raise capital in the future. As of August 31, 2002 our stockholders equity was $8.5 million and our stock price as quoted on Nasdaq was $3.71 per share as of September 30, 2002.

         Our current business model is predicated on the successful launch and market acceptance of our Momentum and Momentum300 products. Our failure to win qualification contests and obtain volume orders for our 200 and 300 millimeter would materially adversely affect our cash flow and operations.A significant portion of our projected revenue depends on sales of our Momentum product. Any positive response to Momentum through evaluation testing may not translate into sales of Momentum on the scale or in the time frame we anticipate. If we are unable to close anticipated orders, sell products at profitable levels, or fulfill orders for the Momentum product, our revenues, cash flow and profitability will be adversely affected.

         In particular, we must succeed in selling CMP equipment for leading-edge technologies such as 300 millimeter wafer processing, 0.13 micron and below processing, and copper applications in order to increase our cash flows and maintain market share. To compete for market share in these leading-edge technologies, we must enter into qualification contests that will result in manufacturers choosing a line of equipment and purchasing such equipment in volume. To date, we have not won any qualification contests for our 300 millimeter tool. If we fail to win qualification contests for 300 millimeter, 0.13 micron and below processing, and copper applications, we may experience difficulty achieving volume sales of Momentum and Momentum300 equipment to semiconductor manufacturers, which would adversely affect revenues and cash flows.

         The rollout of Momentum and Momentum300 may be slowed due to:

• continuation of the semiconductor industry downturn;

• manufacturing problems;

17

• unforeseen technical problems with the Momentum or Momentum300 product itself;

• changes in the CMP marketplace that differ from our expectations; or

• competitive factors.

         The sales and implementation cycles for our products are long, and we may incur substantial, non-recoverable expenses or devote significant resources to sales that may not occur when anticipated, if at all.A customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. Our sales cycle for new customers is lengthy, typically from six to eighteen months. After a customer decides to purchase our products, the timing of their deployment and implementation depends on a variety of factors specific to each customer. Further, prospective customers may delay purchasing our products in order to evaluate new technologies. Throughout the sales cycle, we spend considerable resources educating and providing information to prospective customers regarding the use and benefits of our products.

         Our dependence on selling a small number of high-priced machines to a small number of major customers may lead to reduced revenues and profits should our customers delay or cancel delivery orders.We derive a significant portion of our revenue from the sale of a relatively small number of high-priced CMP systems to a select group of CMP customers. The following customers each represented more than 10% of SpeedFam-IPEC’s revenues for the fiscal years indicated: Intel Corporation and United Microelectronics for the fiscal year ended June 1, 2002; Intel Corporation, United Microelectronics and Silterra Malaysia Sdn. Bhd for the fiscal year ended June 2, 2001; and Intel Corporation and United Microelectronics for the fiscal year ended June 3, 2000. The loss of a significant customer or a substantial reduction in orders by any significant customer, including reductions due to customer departures from previous buying patterns, would damage our business and results of operations. Moreover, we are subject to the credit risk of our customers. Consequently, if any one of our significant customers delays payment or is unable to pay, our financial condition and business would be affected.

         We are transitioning our manufacturing process to more of an outsourced model, which will increase our dependence on a few key suppliers.For our Momentum products, we are moving toward an outsourced production model, in which a limited number of key vendors will supply a limited number of modules designed to our specifications that we will assemble into our products. Historically, we have manufactured our own products from parts, components and subassemblies provided by more than one hundred suppliers. Although we anticipate that our new processes will streamline production, reduce our inventories, and increase our margins, our operating results and relationships with our customers may suffer in the event of:

• insufficient quantity or quality of parts from suppliers;

• our failure to receive shipments from suppliers in a cost-effective and timely manner;

• our suppliers’ failure to obtain necessary raw materials or other parts; or

• our suppliers’ inability to obtain credit or maintain sufficient cash flows.

         Orders in backlog may not result in future revenue if customers cancel or reschedule orders.We include in backlog only those customer orders for which we have accepted purchase orders. Expected revenue may be lower if customers cancel or reschedule orders, which they can generally do without penalty. For instance, during fiscal 2002, we decreased our backlog by approximately $19 million for orders that were canceled or had shipment dates that were rescheduled beyond the next twelve months.

         The downturn in the semiconductor industry has led and may continue to lead to decreased revenues.Beginning in 2001 and continuing into 2003, slowing worldwide demand for semiconductors resulted in significant inventory buildups for semiconductor companies and a rapid decline in demand for semiconductor manufacturing equipment. Presently, we have little visibility regarding how long the semiconductor industry downturn will last or how severe the downturn will be. During fiscal 2002, we experienced cancellations and suspensions of orders for

18

our products and a significant decrease in orders. If the downturn continues or worsens, we may experience additional cancellations and/or suspensions of orders for our products and a continuing slowdown in orders.

         Our quarterly results of operations could fluctuate due to factors outside of our control, which may cause fluctuations and a corresponding decrease to the price of our securities.Our quarterly operating results may fluctuate for reasons that are not within our control, including:

• industry demand for our products, which depends on economic conditions in the semiconductor and silicon wafer markets;

• timing of new product introductions and market acceptance of new or enhanced versions of our or our customers’ products;

• ability to develop and implement new technologies in a timely fashion to meet market demand;

• the health of other industries on which we are directly or indirectly dependant, such as the personal computer, telecommunications and electronics industries;

• consolidation in the chip manufacturing industry;

• the actions of our competitors;

• timing, cancellation or delay of customer orders, shipments and acceptance;

• unexpected costs associated with sales and service of the CMP tools and processes; and

• foreign currency exchange rates.

         The fluctuation of our quarterly operating results, as well as other factors, could cause the market price of our securities to fluctuate and decrease. Some of these factors include:

• enhanced credit risk associated with our debt;

• the announcement of new customers or the loss of significant customers;

• delays in orders;

• announcements by our competitors;

• sales or purchases of Company securities by officers, directors and insiders;

• government regulation;

• changes in earnings estimates or recommendations by securities analysts, or our failure to achieve analysts’ earnings estimates;

• announcements regarding restructuring, technological innovations, departures of key officers, directors or employees, or the introduction of new products; and

• general market conditions and other factors, including factors unrelated to our operating performance or that of our competitors.

         In addition, the stock prices of many companies in the semiconductor industry have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors and price fluctuations may materially and adversely affect the market price of our securities. Investors in our securities should be willing to incur the risk of such price fluctuations.

19

         We face intense competition, including from companies with greater resources. This competitive pressure could lead to continued decreases in our revenues, which would adversely affect our operating results.Several companies currently market CMP systems that directly compete with our products, including Applied Materials, Inc. and Ebara Corporation. For several reasons, we may not compete effectively with existing and potential competitors. These reasons may include:

• Some competitors have greater financial resources and are in better financial condition than us.

• Some competitors have more extensive engineering, manufacturing, marketing and customer service and support capabilities.

• Some competitors may supply a broader range of semiconductor capital equipment, enabling them to serve more or all of their customers’ needs. This could limit sales for us and strengthen existing relationships that competitors have with semiconductor manufacturers, including our current and potential customers.

• Some competitors may be able to better adapt to changing market conditions and customer demand.

• Competitors are expected to continue to improve their existing technology and introduce new products. These products may be better than ours, cheaper than ours or more efficient than ours.

• 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 our products.

         Increased competitive pressure could lead to lower prices and reduced margins for our products. If we experience continued reductions in our revenue for any reason, our margins will continue to be reduced, which would adversely affect our results of operations. We cannot assure you that we will be able to compete successfully in the future.

         We may not develop products in time to meet changing technologies, which could lead to reduced revenue and market share.Semiconductor manufacturing equipment and processes are subject to rapid technological changes and product obsolescence. Our success in developing, introducing and selling new and enhanced products and technologies depends upon a variety of factors including:

• anticipation of market trends;

• product selection;

• timely and efficient completion of product design and development;

• timely and efficient implementation of manufacturing and assembly processes;

• adjustment of production and pricing to meet customer demand;

• product performance in the field; and

• effective sales and marketing.

         If we are unable to timely develop new products and technologies, we will likely experience reduced revenue and market share.

         Product or process development problems could harm our results of operations.Our products are complex, and from time to time have defects or bugs that are difficult and costly to fix. This can harm our results of operations in the following ways:

20

• We incur substantial costs to ensure the functionality and reliability of products early in their life cycle.

• Repeated defects or bugs can reduce orders, increase manufacturing costs, adversely impact working capital and increase service and warranty expenses.

• We require significant lead-times between product introduction and commercial shipment.

         As a result, we may have to write off inventory and other assets related to products and could lose customers and revenue. There is no assurance that we will be successful in preventing product and process development problems that could potentially harm our results of operations.

         Our dependence on international sales, particularly in Asia and Europe, subjects us to a risk of decreased revenues.International sales are subject to additional risks and uncertainties, including:

• foreign exchange issues, including risks associated with our forward exchange contracts to buy and sell foreign currency;

• language and other cultural differences that may inhibit our sales and marketing efforts and create internal communication problems among our US and foreign counterparts;

• political, economic and regulatory environment of the countries where customers are located;

• tariffs, quotas, and other trade barriers or restrictions;

• collection of accounts receivable;

• inadequate intellectual property protection;

• potentially adverse tax consequences; and

• intense price competition.

         International sales accounted for 63% of our total revenue in the first quarter of 2003, 64% for 2002 and 61% for 2001. We expect that international sales will continue to account for a significant portion of total revenue in future periods. If international sales are adversely effected as a result of any of the foregoing risks or uncertainties, our cash flows and financial condition would be similarly effected.

         If we are unable to protect our intellectual property, our business could suffer.Our intellectual property is very important to our success. We may not be able to protect our technology for several reasons:

• 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 our intellectual property;

• third parties may prevent us from selling products by alleging infringement, obtaining intellectual property rights that limit our ability to do business or require us to license technology; and

• we may not have adequate financial resources to address a dispute.

21

         The occurrence of any of the foregoing risks or uncertainties concerning our intellectual property could make us less competitive and adversely affect our revenues, cash flows and financial condition.

         Third parties hold many patents relating to CMP machines and processes, which expose us to the possibility that we may be forced to cease production of our products.If we lose any of our intellectual property rights or need to obtain licenses to third party intellectual property, we cannot assure you that we will be able to obtain such licenses on reasonable terms, if at all. If we are unable to secure the necessary licenses, we may be forced to cease a substantial portion of our operations.

         We are subject to environmental regulations and our inability or failure to comply with these regulations could adversely affect our business.We are subject to environmental regulations in connection with our business operations, including but not limited to regulations related to the development, manufacturing and use of our products. From time to time, we receive notices alleging violations of these regulations. It is our policy to respond promptly to these notices and to take necessary corrective action. Failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development, manufacturing or use of certain of our products, each of which could damage our financial condition and results of operations.

         Terrorist attacks and threats or actual war may negatively impact all aspects of our operations, revenues, costs and stock price.Recent terrorist attacks in the United States, as well as future events occurring in response or connection to them, including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of parts, components and subassemblies, may impact our operations, including, among other things, causing delays or losses in the delivery of supplies to us and decreased sales of our products. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenues and costs.

22

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 June 1, 2002.

ITEM 4. Controls and Procedures.

         Based on the evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report, each of the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time period specified by the Securities and Exchange Commission’s rules and forms.

         There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K.

(a)	Exhibits.
	See Exhibit Index
(b)	Reports on Form 8-K.

         A report on Form 8-K, Item 2 was filed on June 27, 2002 concerning the completion of the Company’s sale/leaseback transaction.

         A report on Form 8-K, Item 5 was filed on August 13, 2002 concerning the execution of an Agreement

23

and Plan of Reorganization pursuant to which SpeedFam-IPEC will become a wholly-owned subsidiary of Novellus Systems, Inc. through the merger of a wholly-owned subsidiary of Novellus with and into SpeedFam-IPEC. The consummation of the merger is contingent upon receiving requisite approval of SpeedFam-IPEC shareholders.

24

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.

	/s/ J. Michael Dodson
Date: October 15, 2002	By J. Michael Dodson Secretary and Chief Financial Officer (Principal Financial Officer)
	/s/ G. Michael Latta
Date: October 15, 2002	By G. Michael Latta Corporate Controller (Principal Accounting Officer)

25

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Richard J. Faubert, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the reigstrant);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors:
	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
6.	The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 15, 2002

/s/ Richard J. Faubert

Richard J. Faubert
Chief Executive Officer

26

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, J. Michael Dodson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of SpeedFam-IPEC, Inc. (the registant);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors:
	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
6.	The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 15, 2002

/s/ J. Michael Dodson

J. Michael Dodson
Chief Financial Officer

27

EXHIBIT INDEX

Exhibit
Number	Description
*3.1	Articles of Incorporation of SpeedFam-IPEC, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 2, 2002 (File No. 0-26784))
*3.2	By-laws of SpeedFam-IPEC, Inc. (incorporated by Reference to Exhibit 3.2 to the Registrant’s Form 10-Q for the quarter ended March 2, 2002 (File No. 0-26784))
99.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed.

28