1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-26784
SPEEDFAM-IPEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Illinois 36-2421613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
305 North 54th Street, Chandler, Arizona 85226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (January 7, 2000).
Common Stock, no par value: 29,448,841 shares
2
SPEEDFAM-IPEC, INC.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
November 30, 1999 and May 31, 1999............................................... 2
Condensed Consolidated Statements of Operations
Three and Six Months Ended November 30, 1999 and 1998............................ 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1999 and 1998...................................... 4
Notes to Condensed Consolidated Financial Statements............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 19
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................. 20
Item 6. Exhibits and Reports on Form 8-K.................................................... 20
SIGNATURE............................................................................................... 21
EXHIBIT INDEX
Exhibit-27 Financial Data Schedule
3
PART I - FINANCIAL INFORMATION
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
November 30, May 31,
1999 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 62,788 $ 97,003
Short-term investments 72,932 50,020
Trade accounts receivable, net 80,068 76,808
Inventories 78,285 80,744
Other current assets 9,409 9,790
------------ -----------
Total current assets 303,482 314,365
Investments in affiliates 21,707 25,360
Property, plant and equipment, net 85,458 88,997
Other assets 13,710 15,056
------------ -----------
Total assets $ 424,357 $ 443,778
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,377 $ 1,275
Accounts payable and due to affiliates 28,427 25,101
Customer deposits 3,654 1,490
Accrued expenses 32,904 42,764
------------ -----------
Total current liabilities 66,362 70,630
------------ -----------
Long-term liabilities:
Long-term debt 115,559 116,129
Other liabilities 8,033 10,269
------------ -----------
Total long-term liabilities 123,592 126,398
------------ -----------
Stockholders' equity:
Common stock, no par value, 96,000 shares authorized, 29,442 and
29,392 shares issued and outstanding at November 30, 1999
and May 31, 1999, respectively 1 1
Additional paid-in capital 427,537 427,290
Accumulated deficit (195,764) (180,311)
Accumulated comprehensive income (loss) 2,629 (230)
------------ -----------
Total stockholders' equity 234,403 246,750
------------ -----------
Total liabilities and stockholders' equity $ 424,357 $ 443,778
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
4
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended November 30, 1999 and 1998
(dollars and shares in thousands, except per share data)
Three Months Ended Six Months Ended
November 30, November 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue:
Net sales $ 55,354 $ 48,113 $ 105,681 $ 113,097
Commissions from affiliate 423 152 423 737
--------- --------- --------- ---------
Total revenue 55,777 48,265 106,104 113,834
Cost of sales 37,737 39,261 72,897 85,660
--------- --------- --------- ---------
Gross margin 18,040 9,004 33,207 28,174
Research and development 13,298 16,115 26,189 31,626
Selling, general and administrative 12,663 15,948 24,923 31,226
--------- --------- --------- ---------
Operating loss (7,921) (23,059) (17,905) (34,678)
Other income, net 5,415 828 5,328 3,334
--------- --------- --------- ---------
Loss from consolidated companies before income taxes (2,506) (22,231) (12,577) (31,344)
Income tax benefit -- (4,581) -- (5,677)
--------- --------- --------- ---------
Loss from consolidated companies (2,506) (17,650) (12,577) (25,667)
Equity in net earnings (loss) of affiliates (1,984) 701 (2,876) 1,429
--------- --------- --------- ---------
Net loss $ (4,490) $ (16,949) $ (15,453) $ (24,238)
Cumulative dividend on preferred stock -- (51) -- (72)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (4,490) $ (17,000) $ (15,453) $ (24,310)
========= ========= ========= =========
Net loss per share:
Basic and diluted $ (0.15) $ (0.59) $ (0.53) $ (0.85)
========= ========= ========= =========
Weighted average number of shares:
Basic and diluted 29,435 28,807 29,419 28,742
========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
5
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, 1999 and 1998
(dollars in thousands)
Six Months Ended
November 30,
-------------------------------------
1999 1998
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (15,453) $ (24,238)
Adjustments to reconcile net loss to net cash used in
operating activities:
June 1998 IPEC net income -- (2,232)
Equity in net earnings (loss) of affiliates 2,876 (1,429)
Depreciation and amortization 8,821 9,557
Dividend from affiliate -- 521
Gain on the sale of Fujimi Corporation (5,603) --
Other (178) 339
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (3,354) 24,005
Decrease in inventories 3,878 3,528
(Increase) decrease in other current assets 378 (3,261)
Increase (decrease) in accounts payable and due to affiliates 3,604 (19,186)
Decrease in customer deposits and accrued expenses (11,642) (5,273)
--------- ---------
Net cash used in operating activities (16,673) (17,669)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (48,888) (39,141)
Maturities of short-term investments 25,976 31,066
Proceeds from the sale of short-term investments -- 35,849
Proceeds from the sale of Fujimi Corporation 10,000 --
Proceeds from licensing technology and transfer of associated assets 2,335 --
Proceeds form sales of assets -- 600
Redemption of cash surrender value of life insurance 1,024 --
Capital expenditures (7,032) (18,628)
Other investing activities (692) (612)
--------- ---------
Net cash provided by (used in) investing activities (17,277) 9,134
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee stock plan purchases 247 1,522
Principal payments on long-term debt (467) (779)
--------- ---------
Net cash provided by (used in) financing activities (220) 743
--------- ---------
Effects of foreign currency rate changes on cash (45) (8)
--------- ---------
Net decrease in cash and cash equivalents (34,215) (7,800)
Cash and cash equivalents at beginning of year 97,003 104,482
--------- ---------
Cash and cash equivalents at November 30, 1999 and 1998 $ 62,788 $ 96,682
========= =========
Cash paid for:
Interest $ 3,665 $ 3,674
========= =========
Income taxes $ 0 $ 253
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
6
SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share amounts)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by management without audit. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted, although management believes that the disclosures
made are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company
for the year ended May 31, 1999, as filed with the Securities and
Exchange Commission on August 30, 1999 as part of its Annual Report on
Form 10-K. In the opinion of management the information furnished herein
reflects all adjustments (consisting of normal recurring adjustments)
necessary for a fair statement of results for the interim periods
presented. Results of operations for the three and six months ended
November 30, 1999 are not necessarily indicative of results to be
expected for the full fiscal year.
(2) LOSS PER SHARE
Basic loss per common share is based upon the weighted average
number of common shares outstanding. Diluted loss per common share
assumes the exercise of all options which are dilutive, whether
exercisable or not. The dilutive effect of stock options is measured
under the treasury stock method. Employee stock options outstanding
during the six months ended November 30, 1999 and 1998 were not included
in the computation of diluted loss per share because the effect would be
antidilutive.
(3) INVENTORIES
The components of inventory were:
November 30, May 31,
1999 1999
------------ ----------
Raw materials $ 51,018 $ 48,082
Work-in-process 19,301 23,428
Finished goods 7,966 9,234
---------- ----------
$ 78,285 $ 80,744
========== ==========
(4) SHORT-TERM INVESTMENTS
In August, 1998 the Company recorded a realized gain of $46 from
the sale of tax exempt short-term investments, classified as
held-to-maturity securities, with a carrying value of $35,803. The
proceeds of $35,849 were re-invested. The Company sold investments
originally intended to be held-to-maturity to take advantage of more
favorable rates of return available on taxable securities. The Company's
short-term investments are now classified as available-for-sale. The
short-term investments are recorded at fair market value and an
unrealized loss of $444 and $252 is included as part of accumulated
other comprehensive income (loss) within stockholders' equity at
November 30 and May 31, 1999, respectively.
5
7
(5) INVESTMENTS IN AFFILIATES
The Company owns a 50% interest in SpeedFam-IPEC Co., Ltd. The
Company's equity interest in SpeedFam-IPEC Co., Ltd. was $21,707 and
$21,764 at November 30, 1999 and at May 31, 1999, respectively, based on
the balance sheet of SpeedFam-IPEC Co., Ltd. at October 31, 1999 and
April 30, 1999, respectively. Condensed consolidated financial
statements of SpeedFam-IPEC Co., Ltd., which are consolidated on a
fiscal year that ends April 30, are as follows:
BALANCE SHEETS
OCTOBER 31, APRIL 30,
1999 1999
----------------- -----------------
Assets
Total current assets $ 83,914 $ 81,760
Property, plant and equipment, net 39,004 36,003
Other assets 15,678 10,759
----------- -----------
Total assets $ 138,596 $ 128,522
=========== ===========
Liabilities and Stockholders' Equity
Total current liabilities $ 60,573 $ 57,789
Long-term debt 25,809 19,607
Other long-term liabilities 8,800 7,599
Stockholders' equity 43,414 43,527
----------- -----------
Total liabilities and stockholders' equity $ 138,596 $ 128,522
=========== ===========
6
8
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended Six Months Ended
October 31, October 31,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 24,785 $ 33,415 $ 44,719 $ 73,038
Costs and operating expenses 32,108 31,641 55,418 69,406
-------- -------- -------- --------
Earnings (loss) before income taxes (7,323) 1,774 (10,699) 3,632
Income taxes (3,112) 918 (4,174) 2,100
-------- -------- -------- --------
Net earnings (loss) before minority interest (4,211) 856 (6,525) 1,532
Minority interest 41 (113) (172) (345)
-------- -------- -------- --------
Net earnings (loss) (4,252) 969 (6,353) 1,877
Beginning retained earnings 38,225 41,028 40,326 41,162
Transfers to capital -- (4) -- (4)
Dividends -- -- -- (1,042)
======== ======== ======== ========
Ending retained earnings $ 33,973 $ 41,993 $ 33,973 $ 41,993
======== ======== ======== ========
The Company pays a commission to SpeedFam-IPEC Co., Ltd. on sales
of equipment produced by the Company in the U. S. and exported to
Pacific Rim customers through SpeedFam-IPEC Co., Ltd. As of November 30,
1999 the Company had accrued $2,200 of commission expense to
SpeedFam-IPEC Co., Ltd.
In the second quarter of fiscal year 2000, the Company sold its
50% interest in a joint venture, Fujimi Corporation, to its 50% partner,
Fujimi Incorporated. Total proceeds from the sale were $10,000. The gain
on the sale of $5.6 million is classified as other income, net in the
accompanying condensed consolidated statements of income for the three
and six months ended November 30, 1999.
(6) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to offset
exposure to market risks arising from changes in foreign exchange rates.
Derivative financial instruments currently utilized by the Company
include foreign currency forward contracts. The Company evaluates and
monitors consolidated net exposures by currency and maturity, and
external derivative financial instruments correlate with those net
exposures in all material respects. Gains and losses on hedges of
existing assets and liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income when
those carrying amounts are converted. Gains or losses related to hedges
of firm commitments are deferred and included in the bases of the
transactions when they are completed. Gains or losses on unhedged foreign
currency transactions, if any, are included in income as part of cost of
sales. Gains and losses on derivative financial instruments which protect
the Company from exposure in a particular currency, but do not currently
have a designated underlying transaction, are also included in income as
part of cost of sales. If a hedged item matures, or is sold,
extinguished, terminated, or is related to an anticipated transaction
that is no longer likely to take place, the derivative financial
instrument is closed and the related gain or loss is included in income
as part of cost of sales.
7
9
(7) COMPREHENSIVE LOSS
The Company's comprehensive loss was as follows:
COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
November 30, November 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
Net loss $ (4,490) $(17,000) $(15,453) $(24,310)
Other comprehensive income (loss):
Foreign currency translation adjustments 2,118 4,233 3,051 2,420
Unrealized holding losses on securities (192) (11) (192) (7)
======== ======== ======== ========
Comprehensive loss $ (2,564) $(12,778) $(12,594) $(21,897)
======== ======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized Accumulated Other
Foreign Currency Losses on Comprehensive
Translation Securities Income (Loss)
-------------- ------------- -------------
Balance at May 31, 1999 $ 22 $ (252) $ (230)
Six month period change 3,051 (192) 2,859
-------------- ------------- -------------
Balance at November 30, 1999 $ 3,073 $ (444) $ 2,629
============== ============= =============
(8) MERGER, INTEGRATION, AND RESTRUCTURING COSTS
In connection with the merger of SpeedFam International, Inc. and
Integrated Process Equipment Corp. in April 1999, the Company recorded
various merger, integration and restructuring costs. Direct merger costs
primarily consist of professional fees, such as investment banking, legal
and accounting for services rendered through the date of the merger. The
Company recorded integration and restructuring costs for lease
terminations, the write-off of duplicative equipment previously used for
demonstration purposes, the write-down of inventory and equipment related
to product lines that will no longer be supported, and severance costs
resulting from workforce reductions.
The following table summarizes the components of the merger, integration,
and restructuring costs:
Six Month's
Activity
--------
Accrued at Cash Accrued at
May 31, 1999 Expenditures November 30, 1999
------------ ------------ -----------------
Direct merger costs $ 3,600 $3,600 --
Lease termination costs 14,600 4,334 10,266
Discontinued product lines 100 100 --
Severance costs 4,200 2,763 1,437
Other costs 500 218 282
---------------- ------------- -------------------
$23,000 $11,015 $11,985
================ ============= ===================
8
10
(9) BUSINESS SEGMENT INFORMATION
The Company classifies its products into three core business
segments: (i) the CMP Group, which is comprised of the Company's
development and production of chemical mechanical planarization systems;
(ii) the Surface Technology Group, which is comprised of the development
and production of high-throughput precision surface processing equipment
used in thin film memory disk media and silicon wafer industries; and
(iii) the Industrial Applications Group, which is comprised of the
development and production of high-throughput precision surface
processing equipment used in general industrial applications. Information
concerning the Company's business segments in the three and six months
ended November 30, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended
November 30, November 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue:
Sales to unaffiliated customers:
CMP Group $ 45,596 $ 33,763 $ 85,380 $ 84,647
Surface Technology Group 6,307 11,199 14,001 21,770
Industrial Applications Group 3,451 3,151 6,300 6,680
--------- --------- --------- ---------
Total net sales to unaffiliated
customers 55,354 48,113 105,681 113,097
--------- --------- --------- ---------
Commissions from affiliate:
Surface Technology Group 423 192 423 677
Industrial Applications Group -- (40) -- 60
========= ========= ========= =========
Total revenue $ 55,777 $ 48,265 $ 106,104 $ 113,834
========= ========= ========= =========
Segment operating loss:
CMP Group $ (4,429) $ (16,955) $ (9,768) $ (21,965)
Surface Technology Group (209) (3,084) (609) (5,035)
Industrial Applications Group 934 409 1,164 950
--------- --------- --------- ---------
Total segment operating loss (3,704) (19,630) (9,213) (26,050)
General corporate income (expense), net 1,563 (3,391) (2,740) (6,500)
Interest expense, net (365) 790 (624) 1,206
--------- --------- --------- ---------
Loss from consolidated companies before
income taxes $ (2,506) $ (22,231) $ (12,577) $ (31,344)
========= ========= ========= =========
(10) RECLASSIFICATIONS
Certain reclassifications have been made in the financial
statements for the three and six months ended November 30, 1998 to
conform to the fiscal 2000 presentation.
9
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEGMENTS
The Company sells its products and services to three market
segments: (1) semiconductor device manufacturers (CMP Group), (2) thin film
memory disk media and silicon wafer manufacturers (Surface Technology
Group), and (3) manufacturers of general industrial components (Industrial
Applications Group).
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
earnings data for the periods indicated as a percentage of total revenue:
Three Months Ended Six Months Ended
November 30, November 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
Revenue:
Net sales 99.2% 99.7% 99.6% 99.4%
Commissions from affiliate 0.8 0.3 0.4 0.6
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Cost of sales 67.7 81.3 68.7 75.2
------ ------ ------ ------
Gross margin 32.3 18.7 31.3 24.8
Research and development 23.8 33.5 24.7 27.8
Selling, general and administrative 22.7 33.0 23.5 27.5
------ ------ ------ ------
Operating loss (14.2) (47.8) (16.9) (30.5)
Other income, net 9.7 1.7 5.0 3.0
------ ------ ------ ------
Loss from consolidated companies before income
taxes (4.5) (46.1) (11.9) 27.5
Income tax benefit 0.0 (9.5 0.0 (5.0)
------ ------ ------ ------
Loss from consolidated companies (4.5) (36.6) (11.9) (22.5)
Equity in net earnings (loss) of affiliates (3.5) 1.5 (2.7) 1.2
------ ------ ------ ------
Net loss (8.0)% (35.1)% (14.6)% (21.3)%
====== ====== ====== ======
Net Sales. Net sales for the second quarter of fiscal 2000 were
$55.4 million, up 15.0% from net sales of $48.1 million in the second
quarter of fiscal 1999. Net sales for the six months ended November 30,
1999, were $105.7 million, down 6.6% against net sales of $113.1 million in
the first six months of fiscal 1999. Sales of CMP systems totaled $45.6
million, or 82.4% of net sales, up 35.0% from the $33.8 million, or 70.2%
of net sales, in the second quarter of fiscal 1999. Sales of CMP systems
increased in the second quarter of fiscal 2000 from the prior year due to
an increase in demand for semiconductor manufacturing equipment, driven
primarily by manufacturers in the Far East. Sales of CMP systems for the
first six months of fiscal year 2000 were
10
12
$85.4 million, or 80.8% of net sales, compared to $84.6 million, or 74.9%
of net sales, for the first six months of fiscal 1999.
Sales of the Surface Technology Group in the second quarter of fiscal 2000
accounted for $6.3 million, or 11.4% of net sales, as compared to $11.2
million, or 23.3% of net sales in the second quarter of fiscal 1999. Sales
of the Surface Technology Group in the first six months of fiscal 2000 were
$14.0 million, or 13.2% of net sales, compared to $21.8 million, or 19.2%
of net sales, for the first six months of fiscal 1999. During the first
quarter and first six months of fiscal 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 the new equipment the Company supplies from its U.S.
operations. The decline in sales from the Surface Technology Group was also
due to continued slowdown in the silicon wafer market. This slowdown was
due to the ongoing manufacturing over-capacity caused by various factors
including die shrink and increased production efficiencies.
The Company expects the slowdown in these markets to continue
for at least the next 12 months.
Sales in the second quarter of fiscal 2000 of the Industrial Applications
Group were $3.5 million, or 6.2% of net sales, compared to $3.1 million, or
6.5% of net sales in the second quarter of fiscal 1999. Sales of the
Industrial Applications Group in the first six months of fiscal 2000 were
$6.3 million, or 6.0% of net sales, compared to $6.7 million, or 5.9% of
net sales, for the first six months of fiscal 1999.
Commissions from Affiliate. Commissions from affiliate in the
second quarter and first six months of fiscal 2000 were $423,000, compared
to $152,000 and $737,000 recorded in the second quarter and first six
months of fiscal 1999, respectively. The decrease in the first six months
was due to the continued slowdown in the thin film memory disk and
silicon wafer markets. The Company believes that capital equipment spending
will continue to be weak in the thin film memory and silicon wafer
industries through the next 12 months.
Gross Margin. In the second quarter of fiscal 2000, gross margin
was $18.0 million, or 32.3% of total revenue, compared to $9.0 million, or
18.7% of total revenue, in the second quarter of fiscal 1999. Gross margin
dollars and gross margin percentages increased due to an increase in total
revenue in the second quarter of fiscal 2000 compared to the prior year
period, as well as increased production efficiencies as a merged company.
For the first six months of fiscal 2000, gross margin was $33.2 million, or
31.3% of total revenue, compared to $28.2 million, or 24.8% of total
revenue in the first six months of fiscal 1999. The increase in the gross
margin dollars and gross margin percentages reflects the continued
integration of the respective merged company's production lines, the
outsourcing of sub-component manufacturing and the reduction of cycle
times. As a result, the Company believes gross margin percentages will
continue to increase compared to the prior year.
Research and Development. In the second quarter of fiscal 2000,
research and development expense decreased to $13.3 million, or 23.8% of
total revenue, compared to $16.1 million, or 33.5% of total revenue, in the
second quarter of fiscal 1999. In the six months ended November 30, 1999,
research and development expense decreased to $26.2 million, or 24.7% of
total revenue, compared to $31.6 million, or 27.8% of total revenue, in the
same period of fiscal 1999. The decrease in both the three and six month
periods ended November 30, 1999 was due to management's efforts to realign
the Company's research and development efforts around critical and key
programs while eliminating duplicate projects.
11
13
Selling, General and Administrative. In the second quarter of
fiscal 2000, selling, general and administrative expense decreased to $12.7
million, or 22.7% of total revenue, from $15.9 million, or 33.0% of total
revenue, in the second quarter of fiscal 1999. Selling, general and
administrative expense decreased to $24.9 million, or 23.5% of total
revenue, in the first six months of fiscal 2000, from $31.2 million, or
27.5% of total revenue, in the first six months of fiscal 1999. The
decrease in selling, general and administrative expense in the three and
six months ended November 30, 1999, compared to the prior year resulted
primarily from management's efforts to reduce costs and eliminate
functional duplications throughout the merged company.
Other Income, Net. Other income increased to $5.4 million in the
second three months of fiscal 2000 from $828,000 of other income in the
same period of fiscal 1999. This increase resulted from a $5.6 million gain
recorded in the second quarter of fiscal 2000 on the sale of the Company's
50% interest in its joint venture, Fujimi Corporation. In the first six
months of fiscal 2000, other income was $5.3 million, compared to $3.3
million recorded in the same period of fiscal 1999. The increase in other
income in the first six months of fiscal 2000 over the prior year was due
to the gain described above. In the first quarter of fiscal 1999, the
Company recorded a gain arising from the collection of insurance proceeds
for a CMP tool, which was destroyed in transit.
Provision for Income Taxes. At the end of fiscal 1999, as well as
at the end of the second quarter of fiscal 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 the second quarter and first six months of
fiscal 2000 was zero. While the Company will reassess its tax situation
each quarter, the Company expects that its effective tax rate will be zero
at least throughout fiscal 2000.
Equity in Net Earnings (Loss) of Affiliates. For the second
quarter of fiscal 2000, equity in net earnings (loss) of affiliates
decreased to a loss of $2.0 million, compared to $701,000 of net earnings
in the second quarter of fiscal 1999. For the first six months of fiscal
2000, equity in the net earnings (loss) of affiliates decreased to a loss
of $2.9 million, compared to $1.4 million of earnings in the first six
months of fiscal 1999. This decline in both the three and six month periods
compared to the 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 continue to be weak in fiscal
2000. Also during the second quarter of fiscal 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 $1.4 million, net of tax. The Company believes that the
results of the Far East Joint Venture will be adversely affected in fiscal
year 2000 by both a slowdown in demand for equipment sold into the thin
film memory disk and silicon wafer markets.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1999, the Company had $135.7 million in cash,
cash equivalents and short-term investments, compared to $147.0 million at
May 31, 1999. The Company used $16.7 million of cash in operating
activities during the first six months of fiscal 2000. Cash used in
operations included the net loss of $15.5 million adjusted for non-cash
items of $5.9 million. Non-cash positive adjustments included $8.8 million
for depreciation and amortization expense and $2.9 million in equity in the
net loss of the Far East Joint Venture. These adjustments were offset by a
$5.6 million gain on the sale of Fujimi Corporation, and $200,000 of other
items. In addition, $11.6 million in cash was used to pay down accrued
expenses primarily due to the payment of liabilities for merger,
integration and restructuring costs. Changes in other working capital
accounts provided cash of $4.5 million.
12
14
The Company made capital expenditures of $7.0 million in the
first six months of fiscal 2000. The majority of the cash was used to fund
building improvements, software and equipment purchases. Cash of $2.3
million was provided from the licensing of certain technologies and
transferring associated assets. Cash was also used to purchase short-term
investments of $48.9 million, partially offset by proceeds of maturing
investments totaling $26.0 million.
During the quarter ended November 30, 1999, the Company sold its
50% interest in its joint venture, Fujimi Corporation, to its 50% partner,
Fujimi Incorporated. Proceeds from the sale of the investment in Fujimi
Corporation were $10.0 million.
The Company believes that its current cash, cash equivalents and
short-term investments will be sufficient to meet the Company's cash needs
during the next 12 months.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for financial years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company is evaluating the new
Statement's provisions and has not yet determined its impact. The Company
will adopt SFAS No. 133 effective June 1, 2002.
YEAR 2000
In calendar year 1999, the Company completed all of its Year 2000
date 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 passing
into 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.
13
15
CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
The Company's business is subject to numerous risks, including
those discussed below. If any of the events described in these risks
occurs, the Company's business, financial condition and results of
operations could be seriously harmed.
The Company's growth depends on continued and increased acceptance
of CMP among semiconductor manufacturers. Continued and increased
acceptance of CMP systems depends on many factors considered by potential
customers, including the CMP product's
- cost of ownership
- throughput
- process flexibility
- performance, including reliability
- customer support
Failure to adequately meet potential customers' needs with respect
to one or more of these factors will result in decreased acceptance of CMP
and, therefore, the Company's CMP systems, which will in turn negatively
impact the Company's profitability.
The Company's Business is Highly Cyclical. The Company's business
depends substantially on the capital expenditures of semiconductor
manufacturers and, to a lesser extent, thin film memory disk and silicon
wafer manufacturers. These industries are highly cyclical and have
historically experienced periodic downturns, which often have a material
adverse effect on the acquisition of capital equipment and other products
used in the manufacturing process, including products offered by the
Company. These downturns have in the past and are expected in the future to
materially adversely affect the business and operating results of the
Company. The semiconductor device industry has recently experienced a
slowdown and the memory disk and silicon wafer industries are currently
experiencing a slowdown. These events have negatively impacted the
Company's results of operations.
If the Company does not continue to integrate SpeedFam's and
IPEC's technology and operations quickly and effectively, its operations
may be adversely affected. The merger of SpeedFam and IPEC was consummated
April 6, 1999. The company must continue to integrate all components of
IPEC's former operations, including the following:
- Sales and marketing operations, including international
distribution channels. Combining international sales channels
could result in significant expense or customer confusion.
- Product offerings, including marketing of products to the
other's customers.
- Research and development programs.
- Manufacturing operations and philosophies.
- Field service support for CMP equipment.
14
16
The Company cannot be certain that it can achieve integration of
these components without adversely impacting operations. To the extent
management focuses on integration, it may not be able to develop the
business.
The Company, and its predecessors, have had losses recently and
the Company expects losses in the near future. In the six months of fiscal
2000, the Company recorded a net loss of $15.5 million. In fiscal 1999, the
Company had a net loss of $139.9 million. This loss included $53.9 million
of various merger, integration and restructuring costs. Direct merger costs
primarily consist of professional fees, such as investment banking, legal
and accounting for services rendered through the date of the merger. The
Company recorded integration and restructuring costs for lease
terminations, the write-off of duplicative equipment previously used for
demonstration purposes, the writedown of inventory and equipment related to
products lines that will no longer be supported, and severance costs
resulting from workforce reductions.
IPEC had net losses of $42.3 million in fiscal 1998 and $33.7
million in fiscal 1997. In fiscal 1998, IPEC incurred net charges of $25.9
million to increase the valuation allowance for its deferred tax assets and
$10.6 million for an additional writedown of assets in connection with the
closure of IPEC Clean, a subsidiary of IPEC.
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
pricebased competition.
- Other capital equipment manufacturers not currently involved
in the development of CMP systems may enter the market or
develop technology that reduces the need for the Company's
products.
The Company may not develop products in time to meet changing
technologies. Semiconductor manufacturing equipment and processes are
subject to rapid technological changes
15
17
and product obsolescence. Developing new products in the rapidly evolving
industry in which the company operates involves a number of risks:
- products may be introduced behind schedule or after customers
have made buying decisions
- products may not be accepted in the marketplace
Competitive pressures require the Company to continue to enhance
performance for finer geometrics in oxide and tungsten applications, while
developing new process capabilities for emerging STI, copper and 300mm
applications. The Company will also continue to develop with the Far East
Joint Venture products and processes for thin film memory disk
manufacturers and to enhance the plasma-assisted chemical etch processes.
Product or process development problems could harm the Company's
results of operations. The Company's products are complex, and from time to
time have defects or bugs that are difficult and costly to fix. This can
harm results of operations for the Company, in two ways:
(1) The Company incurs substantial costs to ensure the functionality and
reliability of products earlier in their life cycle. This can reduce
orders, increase manufacturing costs, adversely impact working capital
and increase service and warranty expenses.
(2) The Company requires significant lead-times between product
introduction and commercial shipment. As a result, the Company may
have to write off inventory and other assets related to products and
could lose customers and revenue.
The Company's quarterly operating results will fluctuate for
reasons not in its control. The Company's quarterly operating results will
fluctuate due to a variety of factors, including:
- Industry demand for capital equipment, which depends on
economic conditions in the semiconductor, memory disk and silicon
wafer markets.
- Timing, cancellation or delay of customer orders and
shipments. The Company continues to derive a significant portion
of revenue from the sale of a relatively small number of machines
during a given quarter. Order and delivery delays and
cancellations, even of one or two systems, may cause the company
to miss quarterly revenue and profit expectations.
- Unexpected costs associated with sales and service of the CMP
tools and processes.
- The quarterly operating results of the company's joint
ventures, which are accounted for on the equity method.
- Foreign currency exchange rates.
Results of operations in any period are not an indication of
future results. Fluctuations in the Company's operating results may also
result in fluctuations in the Company's common stock price. Operating
results may not meet the expectations of public market analysts or
investors and the trading price of the common stock could decline.
Orders in backlog may not result in future revenue if customers
cancel or reschedule orders. The Company includes in backlog only those
customer orders for which it has accepted purchase
16
18
orders. Expected revenue may be lower if customers cancel or reschedule
orders, which they can generally do without penalty. For example, the
Company removed from its backlog orders of approximately $5.3 million in
the fourth quarter of fiscal 1999, primarily due to reduced capacity
requirements and increased funding constraints of certain customers.
The Company depends on key personnel. The Company's success is
dependent upon its ability to attract and retain qualified management,
technical, sales and support personnel. Competition for qualified personnel
in the industry served by the Company, particularly in the Phoenix
metropolitan area, is intense.
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.
The Company's success depends on international sales, particularly
in Asia and Europe. International sales accounted for 47.3%, 38.1% and
34.3% of SpeedFam-IPEC's total revenue for the first six months ended
November 30, 1999 and fiscal years ended May 31, 1999 and 1998,
respectively. The Company expects that international sales will continue to
account for a significant portion of total revenue in future periods.
International sales are subject to risks, including:
- foreign exchange issues
- political, economic and regulatory environment of the
countries where customers are located
- collectibility of accounts receivable
- inadequate intellectual property protection
Foreign exchange issues also affect the value of the Company's
foreign subsidiaries and equity interest in its Far East joint venture. The
Company does not manage this balance sheet risk through currency
transactions known as hedging, which are designed to minimize this risk.
The Company does try to manage near term currency risks through hedging.
However, efforts may not be enough to decrease the risks involved.
If the Company is unable to protect its intellectual property, its
business could suffer. The company's intellectual property portfolio is
very important to its success. However, the Company may not be able to
protect its technology because:
- pending and new patent applications may not be approved in a
timely manner or approved at all
- third parties may try to challenge or invalidate existing
patents and new patents
- policing unauthorized use of intellectual property is
difficult and expensive
17
19
- the laws of some foreign countries do not protect intellectual
property rights as much as U.S. laws
- competitors may independently develop similar technology or
design around intellectual property owned by the company
Third parties may prevent the Company from selling products that
allegedly infringe on those third parties' intellectual property rights.
The Company cannot be certain that third parties will not in the future
claim that its products infringe their intellectual property rights. Third
parties may
- bring claims of patent, copyright or trademark infringement
- obtain patents or other intellectual property rights that
limit the Company's ability to do business or require the
Company to license or cross-license technology o bring costly,
time consuming lawsuits
Third parties hold many patents relating to CMP machines and
processes. The Company licenses the right to manufacture CMP machines
employing an orbital motion in its Avant Gaard 676, 776 and 876 from a
semiconductor manufacturer.
The Company may be subject to risks associated with acquisitions
and dispositions. The Company continually evaluates strategic acquisitions
of other businesses and dispositions of portions of its business that it
determines are not complementary to it strategy. In November 1999, the
Company sold its 50% interest in its joint venture Fujimi Corporation, to
its 50% partner Fujimi Incorporated. 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; and
- Limits on the Company's ability to successfully incorporate
acquired technology and rights into its service offerings and
maintain uniform standards , controls, procedures and
policies.
18
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For financial market risks related to changes in interest rates and
foreign currency exchange rates, refer to Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual
Report on Form 10-K for the year ended May 31, 1999.
19
21
SPEEDFAM-IPEC, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on October 15,
1999, shareholders elected Messrs. James N. Farley, Sanjeev R.
Chitre, Richard J. Faubert, Makoto Kouzuma, Neil R. Bonke, Richard S.
Hill, Roger D. McDaniel, William Freschi and Kenneth Levy to serve
the Company as directors for a one-year term or until their
respective successors have been elected. The results of the voting
for each director were as follows:
For Withheld
--- --------
Farley 25,375,647 267,292
Chitre 25,434,068 208,871
Faubert 25,373,568 269,371
Kouzuma 25,423,175 219,764
Bonke 25,437,136 205,803
Hill 25,404,211 238,728
McDaniel 25,435,805 207,134
Freschi 25,396,192 246,747
Levy 25,436,527 206,412
Shareholders also approved a proposal to amend the 1995 Stock Plan
for Employees and Directors of SpeedFam-IPEC, Inc. to increase the
initial automatic option grant to eligible directors from an option
to purchase 5,000 shares of SpeedFam-IPEC, Inc. common stock to an
option to purchase 15,000 shares. The results of the voting for the
matter were as follows:
For Against Abstained
--- ------- ---------
19,667,475 5,948,095 27,369
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
November 30, 1999.
20
22
SPEEDFAM-IPEC, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEEDFAM-IPEC, INC.
/s/ J. Michael Dodson
----------------------------------------
Date: January 14, 2000 By J. Michael Dodson
Treasurer and Chief Financial Officer
(As Chief Accounting Officer and Duly
Authorized Officer of SpeedFam-IPEC,
Inc.)
21
23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
22