UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
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OR
[ ] 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: 0-11412
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AMTECH SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Arizona 86-0411215
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 South Clark Drive, Tempe, Arizona 85281
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 602-967-5146
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of Class)
Redeemable Public Warrant
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(Title of Class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Yes
State the aggregate market value of voting stock held by nonaffiliates
of the registrant: $9,849,950 as of December 26, 1997
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE (5) YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date: 4,185,106 shares of
Common Stock, $.01 par value, outstanding as of December 26, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
PART III (Items 10-13) is incorporated by reference to the registrant's
proxy statement for the Registrant's Annual Meeting of Shareholders to be held
on or about February 27, 1998.
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TABLE OF CONTENTS
Page
----
ITEM 1. BUSINESS...................................................... 5
Background.................................................... 5
Operating Strategy and Industry Overview...................... 6
Products...................................................... 8
Proposed New Products......................................... 12
Manufacturing and Suppliers................................... 13
Order Backlog................................................. 14
Research, Development and Engineering......................... 14
Patents....................................................... 15
Sales and Marketing........................................... 15
Competition................................................... 17
Employees..................................................... 18
FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES........................ 19
ITEM 2. PROPERTIES.................................................... 19
ITEM 3. LEGAL PROCEEDINGS............................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..................................................... 20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS' MATTERS............................... 21
Market Information............................................ 21
Holders....................................................... 21
Dividends..................................................... 21
ITEM 6. SELECTED FINANCIAL DATA....................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 23
PLANS FOR EXPANSION AND CAPITAL RESOURCES..................... 23
RESULTS OF OPERATIONS......................................... 25
3
Fiscal 1997 Compared to Fiscal 1996........................ 25
Continuing Operations............................. 25
Total Company..................................... 27
Fiscal 1996 Compared to Fiscal 1995........................ 28
Continuing Operations............................. 28
Discontinued Operations........................... 29
Total Company..................................... 30
LIQUIDITY AND FINANCIAL CONDITION............................. 30
FORWARD-LOOKING STATEMENTS.................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.................................................. 34
ITEM 11. EXECUTIVE COMPENSATION........................................ 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................. 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K......................................... 35
SIGNATURES .............................................................. 38
POWER OF ATTORNEY............................................................ 38
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PART I
ITEM 1. BUSINESS
Background
Amtech Systems, Inc. (the "Company") was incorporated in Arizona in
October, 1981, under the name Quartz Engineering & Materials, Inc., and changed
to its present name during 1987. The Company also conducts operations through
two (2) wholly owned subsidiaries, Tempress Systems, Inc. ("Tempress Systems")
and P.R. Hoffman Machine Products, Inc. ("P.R. Hoffman").
The Company's initial business was the manufacture of low technology
quartzware implements for sale to and use by manufacturers of semiconductor
chips. The Company is currently, and has been since 1987, engaged in the
manufacture and marketing of several items of capital equipment used by
customers in the manufacture of semiconductors, one of which is patented. The
Company's Processing/Loading product line (Atmoscan(R), IBAL and load stations)
is designed to permit its customers to increase the degree of control over their
semiconductor chip manufacturing environment and to reduce exposure to
contaminants by limiting human contact during the process. In fiscal 1995, the
Company began the complementary business of producing and selling horizontal
diffusion furnaces for use in semiconductor fabrication, through its wholly
owned subsidiary, Tempress Systems.
On July 1, 1997, the Company, through its wholly owned subsidiary, P.R.
Hoffman, purchased substantially all of the assets of P.R. Hoffman Machine
Products Corporation, based in Carlisle, Pennsylvania. P.R. Hoffman develops,
manufactures, markets and sells double sided precision lapping and polishing
machines and related products including carriers, semiconductor polishing
templates and replacement parts. These products are high throughput precision
surface processing systems used in the manufacture of semiconductor wafers and
other thin wafer materials, such as computer disk media and ceramic components
for wireless communication devices.
In addition, the Company has proposed the development of a new photo
chemical vapor deposition ("CVD") product for use in semiconductor manufacturing
facilities, which product would be based upon the Company's existing U.S. patent
on such technology. In 1994, the Company engaged the University of California,
Santa Cruz to conduct a study to determine the feasibility of developing a CVD
product. While this study has already proven that the Company's patented method
prevents the clouding of the window that separates the light source from the
photo CVD reactor chamber, further work is required to determine whether it is
feasible to develop a commercially viable reactor incorporating this design. In
this regard, the second phase of the study involves testing higher intensity
light sources. Although the first of such lamps failed to meet expectations, the
Company expects to receive a newly designed version of the lamp in the second
quarter of fiscal 1998. That lamp will be used to determine the commercial
feasibility of such a product. If the results of the study are sufficiently
favorable, the Company intends to commence to design, manufacture and market a
photo CVD product. See "--Operating Strategy and Industry Overview."
5
Unless the context otherwise requires, the "Company" refers to Amtech
Systems, Inc., an Arizona corporation, and its wholly owned subsidiaries. The
Company's principal executive offices are located at 131 South Clark Drive,
Tempe, Arizona 85281 and its telephone number is (602) 967-5146.
Operating Strategy and Industry Overview
The Company is engaged primarily in the manufacture and marketing of
several items of capital equipment and related consumables and spare parts used
by customers in the manufacture and fabrication of semiconductors.
Semiconductors, or semiconductor "chips," are made of silicon and are part of
the circuitry of electronic computers. The manufacture of semiconductors
involves many complex operations during which silicon wafers (the substrates
from which chips are made) are inserted in a diffusion furnace and subjected to
the precise flow of gases under very intense heat. The Company's
Processing/Loading product line is intended to permit customers using horizontal
diffusion furnaces to increase the degree of control over the manufacturing
environment and to reduce exposure to contaminants by reducing the amount of
human contact during the process. Following an industry trend, the size of
individual chips has tended to decrease and the size of the wafers from which
chips are made has tended to increase. As a result, the value of each wafer has
increased because each is the source of an increased number of chips. As the
value of wafers increase, so too does the importance of control over the
manufacturing environment. In addition to the Company's Processing/Loading
product line, the Company manufactures and sells horizontal diffusion furnaces
through its wholly owned subsidiary, Tempress Systems.
There also is a trend in the industry, related to the trend to smaller
chips, toward the use in new semiconductor manufacturing facilities of newer
technology, vertical diffusion furnaces, which are more efficient to use than
the horizontal diffusion furnaces in certain manufacturing processes of smaller
chips on larger wafers. Vertical diffusion furnaces are, however, significantly
more expensive to purchase than horizontal diffusion furnaces. The Company's
Processing/Loading product line is useable with horizontal diffusion furnaces
only.
The July 1997 addition of P.R. Hoffman's product line of double sided
precision lapping and polishing machines and related products enables the
Company to offer its existing and prospective customers an expanded product line
and a variety of manufacturing solutions for their businesses. Accordingly, the
P.R. Hoffman acquisition has broadened and expanded the markets served by the
Company, which now include fabricators of semiconductor devices to the producers
of the silicon wafers used by those fabricators. The Company intends to expand
the markets for the P.R. Hoffman product line to the Company's existing and
prospective customers with the aid of the Company's larger and more established
international distribution channel. In addition, through this acquisition the
Company has obtained access for its existing products to markets currently
served by P.R. Hoffman.
The Company's target market for its Processing/Loading product line
consists of customers who wish to increase the efficiency of their existing
semiconductor manufacturing facilities equipped with horizontal diffusion
systems. Through its Tempress System operations, the Company also provides its
customers with efficient integrated horizontal diffusion furnace systems. The
Company's target market also includes customers who build new facilities but
whose operations do not require or otherwise want the higher priced vertical
diffusion furnace systems. Based on
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market information obtained through customer and market contacts, the Company
believes that a majority of worldwide semiconductor manufacturing facilities are
equipped with horizontal diffusion furnaces, as compared with vertical diffusion
furnaces. While the Company estimates that in the next several years the
percentage of facilities in the world equipped with each type of system will
become equal, it believes that a significant demand for its present product line
will continue to exist, although there can be no assurance in that regard. The
Company plans to increase its share of the diffusion furnace market by expanding
its manufacture and sales of horizontal diffusion furnaces. In 1996, Tempress
Systems acquired a modern, high-tech manufacturing facility in Heerde, The
Netherlands, for its European operations, and moved its operations into the new
facility in November 1996.
The Company's target market for its lapping and polishing machines and
related consumables and spare parts are original equipment manufacturers
("OEMs") and end users who produce silicon wafers for semiconductor chip
manufacturers, as well as, thin wafers of other materials, such as quartz,
ceramics and metals used in the manufacture of computer storage disks, optics
and ceramic components for wireless communication products. Demand for silicon
wafer lapping and polishing machines and related products has been fueled by the
inherent need of semiconductor device manufacturers to continually meet the
growing demand for such semiconductors caused by the virtual explosion of new
uses for such devices. In order to produce today's higher density chips,
semiconductor manufacturers must maintain tighter tolerances with respect to the
surface finish, flatness, and planerization of the bare silicon wafer, which in
turn is requiring more polishing steps and thus more surface processing
equipment. A similar trend is occurring in the computer disk industry as
manufacturers strive to produce higher density drives in order to satisfy end
user demand for greater storage capacity and reduced size. Based upon available
industry statistics and analyst data, the following market information reflects
future prospects for growth for P.R. Hoffman's product line: (i) the markets for
grinding and polishing equipment for blank silicon wafers and disk media are
projected to increase at a compound annual growth rate in excess of 20%; (ii)
the semiconductor and memory disk industries have experienced rapid growth as a
result of continued expansion of the personal computer, workstation, network,
and telecommunications markets coupled with increased utilization of
semiconductors in products such as automobiles and consumer electronics and
appliances; and (iii) United States demand for silicon wafers is projected to
increase at a 12% compound annual rate, reaching $3.8 billion by the year 2000.
Industry Slowdown. Semiconductor manufacturers currently are
experiencing a significant decrease in the prices of semiconductors, squeezing
manufacturers' margins. These factors may affect semiconductor manufacturers'
decisions to purchase capital equipment such as the Company's products. Further
price declines due to increased supply of semiconductors may have a material
adverse effect on the Company's business and results of operations.
Increased Backlog. During recent periods, the Company has experienced a
significantly greater order backlog than prior periods. This increase in backlog
is due primarily to the continuing expansion of Tempress Systems, a large
multi-year order and the July 1, 1997 acquisition of the P.R. Hoffman
operations. Further, the Company expects that the recent turmoil in the Asian
financial markets will likely reduce equipment sales into that region. The
Company expects to mitigate or offset any such decline by re-focusing sales and
marketing efforts on other regions of the world and adjusting operating costs,
if required. Notwithstanding the foregoing, the recent
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acquisition of P.R. Hoffman, which will be included in the results of operations
for all four (4) quarters in fiscal 1998 and subsequent years, is expected to
allow the Company to continue its growth in sales and operating profits, at
least through the end of fiscal 1998. The Company continues to seek expansion of
its revenue and operating profit through the development and acquisition of new
products that complement its own. See "--Order Backlog."
Products
Processing/Loading Equipment
Atmoscan(R)
The Company's "Atmoscan(R)" is a patented controlled environment wafer
processing system for use with horizontal diffusion furnaces. When in use, it is
loaded with wafers and inserted into the diffusion furnace under a nitrogen
controlled environment. The technology protected by the Company's Atmoscan(R)
patents is a processing method that includes a cantilever tube used to load
silicon wafers into a diffusion furnace and through which a purging inert gas
flows during the loading and unloading processes.
The Company believes that among the major advantages afforded by the
Atmoscan(R) product are increased control of the environment of the wafers
during the gaseous and heating process, thereby increasing yields and decreasing
manufacturing costs, and a decreased need for the cleaning of diffusion furnace
tubes, which ordinarily involves substantial expense and equipment down time.
Additional significant economies in the manufacturing process are also believed
to result.
The Company has manufactured and sold Atmoscan(R) units to major
semiconductor manufacturers in the United States, the Pacific Rim and Europe,
including at various times to International Business Machines, Intel
Corporation, Samsung, Digital Equipment Corp., Motorola, SGS-Thompson,
SVG-Thermco and others. Sales of Atmoscan(R) have declined from their peak in
1989, due to an industry trend toward use of vertical diffusion furnaces.
The Company has designed and sells an open cantilever paddle system,
which remains the most commonly used wafer loading system in the industry. This
product was introduced to the market prior to Atmoscan(R), the Company's
alternative to the cantilevered processing system.
IBAL Automation
"IBAL" is an acronym for "Individual Boats with Automated Loading." The
Company's IBAL automation is an integrated automation system composed of several
modules, with the base module being called simply IBAL. Boats are quartz trays
that hold silicon wafers while they are being processed in diffusion furnaces.
IBAL, with a patent pending, is a device, including software, which
automatically places boats into Atmoscan(R) tubes or onto a cantilever paddle
system before they are inserted in the diffusion furnace and automatically
removes the trays after completion of the process.
8
IBAL Butler is a robotics device which further automates the loading of wafers
into the diffusion furnace by automatically transferring wafer carriers onto the
IBAL for loading into the Atmoscan(R) or on the cantilever paddle system for the
appropriate furnace tube. IBAL Queue provides a convenient staging area for the
operator to place boats on a load station and automates the loading of those
boats onto the IBAL Butler. The first IBAL Queue unit was shipped during the
second quarter of fiscal 1994. Use of the IBAL products reduces human handling
and, therefore, reduces exposure of wafers to contaminants during the loading
and unloading of the process tubes. All of the IBAL modules have been designed
by the Company.
Load Stations
The IBAL automation products described above are offered and sometimes
sold as a complete system, mounted on a device called a "load station," which
also includes an ultra-clean environment for wafer loading by filtering and
controlling the flow of air. The Company began shipping such high-end load
stations, which are assembled and tested in its Tempe, Arizona facility, in
fiscal 1992. Further, almost all diffusion furnaces, described below, are sold
with either a Tempress(R) load station, manufactured in The Netherlands, or a
high-end load station described in the preceding sentence.
Diffusion Furnaces
Through its wholly owned subsidiary, Tempress Systems, the Company
produces and sells horizontal diffusion furnace systems, which generally include
a Tempress(R) load station, with the Tempress(R) trademark under the
Amtech/Tempress name. These furnaces utilize existing industry technology for
sale to customers who do not require the advanced automation of, or want to
incur the major expense of, acquiring vertical diffusion furnaces. While the
major advantage of vertical diffusion furnaces is their susceptibility to
increased automation, which decreases the degree of human intervention in the
manufacturing process, the use of horizontal diffusion furnaces, with less
automation, is more economical for larger size chips and multi-model
semiconductor manufacturing. While industry forecasts indicate that overall
market demand for horizontal diffusion furnaces will decline, the Company
believes that a significant niche market will persist.
The Company started the horizontal diffusion furnace business utilizing
certain acquired assets previously owned by a bankrupt company, Tempress B.V.,
located in The Netherlands, including the right to use the trade name
"Tempress(R)" in connection with such furnaces. Tempress B.V. was involved in
the development, manufacture and sale of a number of different products,
including a horizontal diffusion furnace. The right to use the trade name
"Tempress" is also held by three subsidiaries of the former Tempress B.V. in
connection with the sale of other Tempress products and services unrelated to
the horizontal diffusion furnace. The Company believes, and sales volume would
appear to support, that the diffusion furnace products it designs and sells
under the "Tempress" name are gaining acceptance by the Company's targeted
market.
9
Double Sided Planetary Lapping and Polishing Machines
Through its wholly owned subsidiary, P.R. Hoffman, the Company
develops, manufactures, markets and sells double sided precision lapping and
polishing machines and complementary products including carriers, semiconductor
polishing templates and parts. Double sided lapping and polishing machines are
designed to process wafer type products such as semiconductor silicon wafers,
computer disk media and ceramic components for wireless communication devices
to exact tolerances of thickness, flatness, parallelism and surface finish. The
polishing process is used to change the characteristics of the surface of a
semiconductor wafer or thin film memory disk. Polishing is a complex science,
often involving multiple steps, each at a specified set of process parameters
such as polishing speed, pressure, time and temperature. Polishing improves the
flatness (planarity), smoothness and optical properties of a surface.
Processes similar to polishing includes lapping (a process where no
polishing pad is used and the workpiece is pressed into a polishing liquid
(slurry) which is applied to a cast-iron lapping wheel). Lapping results in
higher removal rates than polishing but produces rougher surface finishes.
Dimensional tolerance, surface finish, quantity of material to be removed along
with production rates required and cost of operation are the primary variables
considered in the determination of the best process for a specific application.
Polishing and other surface treatment processes are typically followed by a
cleaning process.
The following table summarizes the various models of surface processing
machines and the markets for each of these products:
DOUBLE SIDED LAPPING AND POLISHING MACHINES
Model Year Introduced Markets
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PR-1 1938 Quartz
PR-2 1940 Quartz
1500 1990 Quartz, ceramics, medical
1900 1992 Ceramics, optics, computer
disks
3100 1995/96 Computer disks, optics,
metal working, ceramics
4800 1981 Silicon semiconductor,
optics, metal working,
ceramics
On average, the Company's surface processing systems are priced lower than
competing systems offered by SpeedFam, Peter Wolters of America, and Lapmaster.
The systems offered by the
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Company's competitors tend to feature more sophisticated controls and user
interfaces, and thus in some applications can be operated by less skilled
employees. The Company intends to evaluate proposed plans to incorporate more
sophisticated controls into its next line of lapping and polishing machines.
Carriers
Carriers are workholders where wafers are nested during the lapping and
polishing processes. Carriers are produced for the Company's line of lapping and
polishing machines as well as for competitors' systems. Substantially all of the
carriers are customized for specific applications. The Company produces custom
carriers in a variety of sizes, configurations and materials. An expanding
category of the Company's steel carriers contain plastic inserts molded into the
work-holes of the carrier and are referred to as insert carriers. Although
standard steel carriers are preferred in many applications because of their
durability, rigidity and precise dimensions, they are typically not suited for
applications involving softer materials or when metal contamination is an issue.
Steel carriers can cause damage (edge chipping) to delicate parts (i.e. 8" and
larger semiconductor wafers). Insert carriers provide the advantages of steel
carriers while reducing the potential of damage to the edges of sensitive
materials.
The Company licenses the design for its steel carrier with plastic
inserts from Wacker GmbH in Germany ("Wacker"). Under a license agreement with
Wacker, the Company pays Wacker a 5% royalty for carriers sold by the Company
based on this design. The Company believes that the licensor, despite patenting
the design, is currently unable to consistently manufacture carriers which
properly hold the wafer in place and the Company believes that its proprietary
manufacturing process provides a competitive barrier to entry. The royalty fee
does not apply to sales to the licensor.
Semiconductor Polishing Templates
The Company's single sided polishing templates are used to polish
silicon wafers. Since the Company does not manufacture surface processing
systems for single sided applications, templates are designed to work with
machines manufactured by leading suppliers in this market segment such as Cybeq,
SpeedFam and Westech. Polishing templates are customized for specific
applications and are manufactured to such exacting tolerances that even a change
in humidity of 10% can result in unacceptable mechanical defects, performance
and durability.
Plates, Gears, Wear Items and Other Parts
The Company produces a wide assortment of plates, gears, parts and
wear items for both its own as well as for competitors' machines. The Company
manufactures approximately eighty percent (80%) of the parts that are used in
its machines. In addition to producing standard off-the-shelf parts, the Company
has the ability to produce highly customized parts.
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Proposed New Products
CVD Technology
The Company has patented an invention which it believes may be of
significant importance to the semiconductor manufacturing industry. It is now
having a research study conducted to determine the feasibility of developing
semiconductor manufacturing equipment using this patented invention. The
invention relates to an improvement to the CVD process used in the manufacture
of certain semiconductors. The improvement uses ultraviolet light to activate
the deposition reactions rather than thermal heat or plasma, which are presently
the common means in commercial CVD processing. This photo-assisted CVD process
is separate and distinct from the diffusion process in which the Company's
existing products are used and its use is not limited to facilities with
horizontal diffusion furnaces, as are the Company's existing products.
Accordingly, if a commercially viable photo-assisted CVD machine is developed,
it could be used in facilities that only use vertical furnaces.
A photo-assisted CVD process is potentially attractive for the
manufacture of semiconductors because it allows a less severe processing
environment. First, the photo-assisted CVD processes occur at lower temperatures
and the lower temperature reduces the risk of temperature related defects in the
deposited materials. In this process, ultraviolet or UV light is used as the
energy source to effect the deposition of chemicals on the wafers. The
photo-assisted CVD processes also avoid radiation damage which can occur with
currently prevalent processes. Furthermore, photo-assisted CVD processes based
on the Company's patented method are more readily adaptable to the use of larger
wafers (the silicon substrates from which semiconductor chips are made) than
other CVD processes now in use. The trend in the industry is toward the use of
larger size wafers and smaller size chips.
The Company has not determined whether a commercially feasible product
can be developed from this technology. The Company has entered into a Research
Agreement with the Regents of the University of California ("University")
whereunder a feasibility study is being undertaken by the University under the
direction of Roger W. Anderson, Ph.D. It is anticipated that, if the results of
the University study are favorable, the Company will design and develop
specifications for an initial photo-assisted CVD device. The initial device is
expected to have one "chamber," containing a number of light pipes which are
patented and a pedestal (called a susceptor) to hold wafers and would be sold to
academic and industry research facilities. See "Patents." If use by such
facilities results in acceptance of the technology by the industry, the Company
will attempt to develop a fully automatic multi-chamber, multi-wafer product for
mass production of semiconductors. The automation (or robotic) components of the
product are expected to be procured from other manufacturers.
The Company's current plans for developing a saleable model of the
proposed new photo CVD product are conceptual only. Detailed planning is
expected to be done if, as and when the University study demonstrates the
product's commercial feasibility. The development of first a research laboratory
product and then an industrial product is expected to take a period of
approximately two to three years.
12
The total cost of the photo-assisted CVD product development effort is
expected to be approximately $3,200,000, expended in stages over a two to three
year period. All of the Company's plans and estimates are subject to significant
uncertainties.
Wafer Reclaiming Venture
In November 1995, the Company entered into a joint venture agreement
pursuant to which it acquired a 45% ownership interest and a 50% voting interest
in Seil Semicon, Inc. ("Seil Semicon"). Seil Semicon intends to develop and
operate a silicon test wafer reclaiming business. The Company had invested
$425,000 in the venture. In September 1996, the Company reached an agreement to
dispose of its interest in the joint venture. In accordance with the termination
agreement, the Company received $478,143 as a return of its initial investment
and reimbursement of certain direct and indirect expenses related to
establishing and monitoring the joint venture. The Company estimated that
additional costs during the start-up phase of Seil Semicon, as well as
additional equipment required for operations, increased the total projected
capital requirements by approximately $2.5 million over previously anticipated
amounts. Under the then existing ownership structure, the Company was the joint
venture's primary source for these additional funds. The Company concluded that
it did not want to increase its investment in the joint venture to $2-3 million
without obtaining majority control.
Manufacturing and Suppliers
The Company assembles its equipment and systems from components and
fabricated parts manufactured and supplied by others, including quartz and metal
components. Certain parts are machined in the Company's own machine shops.
Certain of the items manufactured by others are made to the Company's
specifications. All final assembly and system tests are performed within the
Company's manufacturing/assembly facilities. Quality control is maintained
through incoming inspection of components, in-process inspection during
equipment assembly and final inspection and operation of manufactured equipment
prior to shipment. The Company's Processing/Loading product line is manufactured
at its Tempe, Arizona plant. The Company conducts similar engineering,
purchasing and assembly operations in the manufacture of its diffusion furnace
line in a building owned and located in Heerde, Netherlands. The Company's
lapping and polishing machines and related parts are manufactured at the
Company's facilities in Carlisle, Pennsylvania.
If the proposed photo-assisted CVD product is developed, the Company
plans to continue to do the engineering and purchasing and rely on suppliers for
most parts and to assemble and do a small amount of machining work internally.
The Company's operations in Carlisle, Pennsylvania also are equipped to
perform a high percentage of the manufacturing process. The manufacturing at
this facility includes the following: metal stamping, milling, painting,
assembling, welding, punching, cutting, heat treating, machining and laminating.
Manufacturing processes which are typically subcontracted out include plastic
injection, laser cutting and wire EDM machining, and complex electrical wiring.
Key suppliers include two (2) steel mills capable of holding the type and
tolerances the Company requires, an injection molder that provides plastic
insets for steel carriers, a pad supplier that produces a unique material used
to attach semiconductor wafers to the polishing template
13
(sole sourced from a Japanese company), and adhesive manufacturing that supplies
the critical glue used in the production of the semiconductor polishing
templates.
Order Backlog
As of November 30, 1997, the Company's order backlog for semiconductor
equipment was approximately $5,860,000 (including $1,480,000 attributable to the
Company's P.R. Hoffman operations) compared to approximately $3,875,000 at the
same date in the previous year. The Company includes in its backlog all credit
approved customer purchase orders. The Company anticipates that approximately
$800,000 of its current backlog will be shipped in fiscal 1999. Orders in the
backlog may be canceled by the customer upon payment of mutually acceptable
cancellation charges. While the current backlog includes the orders of one
customer expected to be shipped over two fiscal years (fiscal 1998 and 1999),
orders generally are shipped within three to six months of receipt. Accordingly,
the backlog may not be a valid measure of revenue for a future period. In
addition, a backlog does not provide any assurance that the Company will realize
a profit from the order.
Research, Development and Engineering
The markets in which the Company competes are characterized by evolving
industry standards and frequent improvements in products and service. To compete
effectively in its markets, the Company must continually improve its products
and its process technologies and develop new technologies and products that
compete effectively on the basis of price and performance and that adequately
address current and future customer requirements. The Company's research,
development and engineering expenditures during fiscal 1995, 1996 and 1997, were
approximately $232,000, $325,000 and $280,000, respectively.
The Atmoscan(R), was acquired in 1983 through a licensing arrangement
with its inventor, who was not employed by the Company. The other products
(excluding the Company's products acquired in the P.R. Hoffman acquisition) were
developed by Company personnel. The patented photo-assisted CVD technology was
invented and patent rights assigned to the Company by an employee. The Company
presently employs at its Tempe, Arizona plant, four engineers, including one
with a Ph.D. and one in the sales department and the Corporate General Manager,
and six technicians. The Company presently employs two engineers, one with a
Ph.D., and nine technicians in its Netherlands operation. These employees design
and support the horizontal diffusion furnace product line manufactured in The
Netherlands. One engineer and one technician are employed in the Company's
Carlisle, Pennsylvania operation. They design wafer lapping machines and
carriers to meet the customers' processing requirements.
Historically, the Company's product development has been accomplished
through cooperative efforts with two key customers. While there can be no
assurance that such relationships will continue, such cooperation is expected to
continue to be a significant element in the Company's future development
efforts. The Company's relationship with one of these customers is substantially
dependent on the personal relations established by the Company's President, Mr.
Jong S. Whang. It is anticipated that approximately five additional engineers
and technicians will be required for the proposed new photo-assisted CVD product
development effort.
14
Patents
Generally, the effect of a patent is that the courts will grant to the
patent holder the right to prevent others from making, using and selling the
combination of elements or combination of steps covered by the patent. The
Company has several United States patents on the Atmoscan(R) system, each
reflecting an improvement to or modification of the previous patent. The two
Japanese patents on the Atmoscan(R) cover the first two U.S. patents listed in
the table, below.
The Company has two United States patents on its photo-assisted CVD
method, the second being an improvement on the first, and the Japanese patent is
pending on the photo-assisted CVD method. Other than certain patents on the IBAL
automation, neither the IBAL, cantilever, load stations nor the diffusion
furnace products are protected by patents.
The following table shows the patents granted and the expiration date
thereof and the patents pending for the Company's products in each of the
countries listed below:
Expiration Date or
Product Country Pending Approval
- ------- ------- ------------------
Atmoscan(R) United States July 10, 2001
Atmoscan(R) United States July 2, 2002
Atmoscan(R) United States August 30, 2005
Atmoscan(R) Korea May 30, 1999
Atmoscan(R) Japan June 1, 2004
Atmoscan(R) Japan July 18, 2005
Atmoscan(R) European Patent Community
- France July 18, 2004
- Germany July 18, 2004
- United Kingdom July 18, 2004
- Italy July 18, 2004
- Netherlands July 18, 2004
IBAL Cantilever Trolley United States Pending Approval
Photo CVD United States June 1, 2010
Photo CVD United States November 15, 2011
Photo CVD Japan Pending Approval
The Company's ability to compete may be enhanced by its ability to
protect its proprietary information, including the issuance of patents and
trademarks. While no intellectual property right of the Company has been
invalidated or declared unenforceable, there can be no assurance that such
rights will be upheld in the future. There can be no assurance that in the
future products, processes or technologies owned by others, necessary to the
conduct of the Company's business, can be licensed on commercially reasonable
terms.
Sales and Marketing
There are two components of the market for the Company's
Processing/Loading and diffusion furnace product line, which consists of
semiconductor manufacturers in the United
15
States, Korea, Western Europe, Taiwan, Japan and recently the People's Republic
of China and India. One component consists of customers who are installing new
semiconductor manufacturing facilities. The other component consists of
customers who wish to install new equipment systems in existing facilities. The
Company's products have been sold in both components. The Company has increased
and intends to continue to increase its share of that market by expanding sales
of horizontal diffusion furnaces manufactured by the Company in its Netherlands
facility and increasing its sales, marketing and manufacturing capabilities in
Europe. This plan has and is expected to increase revenue not only through added
sales of horizontal furnaces, but by making the other products more competitive
by offering them as a part of a broader complement of product line with greater
capabilities. For example, the Company expects to generate increased sales of
diffusion furnaces because it will offer them together with Atmoscan(R) and IBAL
products. The Company also expects to obtain orders for its new horizontal
diffusion furnace from former Tempress customers as well as customers in the
United States, a large market that had not been effectively penetrated by
Tempress in recent years.
The Company has historically marketed its polishing machines and
related parts and expendables to OEMs fabricating silicon wafers for the
semiconductor industry, disk media for the computer industry, equipment with
optical components, and ceramic components for wireless communication products.
The Company also sells diffusion furnace and process/loading products to some of
these customers, as it did prior to the P.R. Hoffman acquisition. Further, the
Company believes the process of sales lead generation will be enhanced by the
sharing of leads among its increased number of product lines, including those
acquired in the P.R. Hoffman acquisition transaction.
The Company's installed base of customers (facilities at which the
Company's products are installed and operating) includes IBM Corporation,
Motorola, Digital Equipment, Texas Instruments, Intel Corporation, National
Semiconductor, Phillips, SGS-Thomson, Matsushita, Oki, Samsung, Sumimoto Sitix,
Mitsubishi, Hyundai, ITT Night Vision, Lucent, UMC and Wuxi China. Of these
corporations, IBM Corporation, Motorola, Digital Equipment, Intel Corporation,
SGS-Thomson, and Samsung have been customers of the Company for approximately 11
years.
The Company markets its products by direct customer contact by the
Company's sales personnel, which personnel consists of twelve (12) persons based
in the United States, including the President, the Corporate General Manager,
the President of P.R. Hoffman, two other outside salesmen and an inside sales
and marketing staff of seven (7) persons. The Company employs five sales and
marketing personnel in The Netherlands. The Company also markets its products
through a network of domestic and international independent sales
representatives and distributors. The Company's promotional activities have
consisted of advertising in trade magazines and the distribution of product
brochures. The Company also participates in trade shows, including Semicon West,
Semicon Europa and Diskcon and at least one large optical show per year. The
Company is dependent on its President, Jong S. Whang, for continuing
relationships with key customers.
During fiscal 1997, two customers accounted for 16% and 16%,
respectively, of sales from continuing operations. No other customers accounted
for 10% or more of sales. For a
16
more complete analysis of significant equipment customers, see Note 6 of the
Notes to Consolidated Financial Statements included herein (the "Financial
Statements").
There are presently ten independent sales representatives and five
international distributors, each covering a specified geographical area on an
exclusive basis. The areas now covered by representatives are the New England
area, the United Kingdom, Central Europe (including Germany), France, India,
Italy, Korea, Singapore, Malaysia, Taiwan, Thailand and the People's Republic of
China. Representatives are paid a commission as specified from time to time in
the Company's commission schedule, which at present is generally higher for
complete systems and lower for spare parts and accessories. Further, a discount
has been granted to a customer who is a manufacturer of diffusion furnaces.
Upon the development of the proposed photo-assisted CVD product, the
Company will seek initially to make sales to customers who have assisted and
will continue to assist in further development. Such customers will probably be
granted a discount from published prices. Although marketing the new product, if
it is successfully developed, will probably result in an increase in the number
of marketing employees and in advertising and other marketing expense, the
amount cannot now be predicted with any degree of accuracy.
Semiconductor equipment sales generally fluctuate with the level of
capital spending in the semiconductor industry. The semiconductor business is
cyclical.
Competition
The Company is not aware of any significant product which directly
competes with the Atmoscan(R), however, there are several processing systems and
various configurations of existing manufacturing products which provide
advantages similar to those that the Company believes the Atmoscan(R) provides
to semiconductor manufacturers. Notwithstanding this competition the Atmoscan(R)
provides better results in terms of more uniform wafer temperature and
dispersion of heated gases in the semiconductor manufacturing process, less
exposure of semiconductor wafers to contaminants, and other technical advantages
which afford to its users a higher yield and, therefore, a lower per item cost
in the manufacture of semiconductors. While the industry trend is toward the use
of vertical diffusion furnaces (with which Atmoscan(R) is not useable), the
Company believes that a number of customers are and will continue to be willing
to buy Atmoscan(R) units and horizontal diffusion furnaces because for all but
very large production runs of smaller geometry chips there is a higher
productivity with horizontal furnaces and because many applications do not
involve the processing of smaller devices on larger silicon wafers and thus do
not require the much more expensive vertical furnaces.
The Company believes that there are several products in the market
which perform the same functions as the IBAL automation products, IBAL
Atmoscan(R), IBAL Butler and IBAL Queue, but they require more expensive
cleanroom floor space and are more expensive. The IBAL products are intended for
customers who do have or want to dedicate the additional cleanroom space
required for competing, more complex systems. Load stations are sold to
customers that are upgrading their existing facilities with other products of
the Company or as part of a larger equipment package to customers starting-up
new facilities. These load stations provide a cleaner environment than those
they replace and the higer-end models can reduce the
17
down-time for the upgrade or installation as these load stations were
specifically designed to accept the Company's Processing/Loading products
without further modification. Products competitive with the Company's load
station are sold by several well-established firms, larger than the Company. The
Company believes, however, that there is a niche market for its load stations
because they can be packaged with Atmoscan(R), IBAL products and/or sold in
conjunction with Tempress(R) diffusion furnaces. The cantilever paddle system is
designed for easy assembly and disassembly to minimize down-time during
maintenance. The Company expects to sell its horizontal diffusion furnaces to
customers who purchase them in small quantities and that it will maintain a
competitive position through its policy of providing competitive prices and
product support services designed for the customer's specific requirements.
There are a number of competitors for the wafer lapping and polishing
machines and related consumables. However, the Company believes that it is able
to compete effectively based upon the reputation of its double sided planetary
lapping and polishing machines, which are highly regarded for applications for
applications involving delicate and thin (approximately 100 microns) wafers. The
Company believes these products compare favorably to the competition with
respect to the following factors: durability, maintaining close thickness
tolerances of wafers and other parts, quality, reliability, performance and
price.
Competition to be expected for the proposed photo-assisted CVD product
cannot now be determined. It should be assumed, however, that others in the
industry are in the process of developing new products and improving existing
ones.
Employees
At December 22, 1997 the Company employed 121 people (including
corporate officers and 7 contract employees); 67 in manufacturing, 21 in
engineering, 16 in administration, and 17 in sales. Of these, 32 are based at
the Company's offices and plant in Tempe, Arizona, 39 are employed at its
facility in Carlisle, Pennsylvania, 31 at its facility in Heerde, Netherlands,
and 19 for the Company's contract preventative maintenance business located in
Austin, Texas. Of the 39 people employed at the Company's Carlisle, Pennsylvania
facility, 22 are represented by the United Auto Workers Union - Local 1443. The
Company has never experienced a work stoppage or strike. The Company considers
its employee relations to be good.
18
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
The following table shows the amounts of revenue attributable to the
Company's foreign sales for the past three fiscal years (the sales to customers
in the United States are included in the table for comparison purposes). All
foreign sales were associated with nonaffiliates.
1997 1996 1995
---------------- ----------------- -----------------
United States (1) $ 4,227,000 38% $ 3,314,000 39% $ 2,463,000 36%
Far East (2) 3,044,000 27% 3,014,000 36% 3,483,000 51%
Europe (3) 3,840,000 35% 1,768,000 21% 494,000 7%
India -- -- 318,000 4% 424,000 6%
----------- --- ----------- ---- ----------- ----
Total $11,111,000 100% $ 8,414,000 100% $ 6,864,000 100%
=========== ==== =========== ==== =========== ====
- ----------------------
(1) Includes sales in Costa Rica in 1997 and Canada in 1996 and 1995.
(2) Includes Korea, Singapore, Taiwan, Japan, the People's Republic of China
and Malaysia.
(3) Includes sales in Israel, which are not material.
For a further description of foreign sales, see Note 6 of the Notes to
the Financial Statements included herein.
ITEM 2. PROPERTIES
The Company's semiconductor equipment business and corporate offices
are located in 9,000 square feet of office and manufacturing space at its
principal address. These facilities are leased at a current rate of $3,515 per
month, on a triple net basis, for a term to expire on January 31, 1998. On
December 24, 1997, the term of the lease was extended to May 31, 1998, at a rate
of $4,950 per month on a triple net basis.
The Company also owns a 9,900 square foot building located in Heerde,
The Netherlands. This facility is expected to provide adequate space for the
Company's assembly operations for its furnace line for the foreseeable future.
The Company subleases a 21,740 square foot building located in
Carlisle, Pennsylvania from John R. Krieger, the president of P.R. Hoffman and
the former owner of that business. These facilities are leased at a current rate
of $3,515 per month, on a triple net basis, for a term to expire on August 31,
1999. The Company has the option to renew the lease for two successive terms of
one year each.
If the results of the University study (described above) are favorable
and the Company commences a photo-assisted CVD product development effort, an
additional 2,000 square feet will be required for a laboratory. The Company
believes that this laboratory, together with the Company's existing plant
facility, will be adequate through the first year of the development effort. If
and when commercial production begins, an additional 10,000 square feet of space
may be
19
required. No difficulty is expected in obtaining any additional space at then
prevailing rents. However, at some point it may become more efficient to have
all U.S. operations in one facility.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
Market Information
The Company's Common Stock is traded in the over-the-counter market and
is quoted under the symbol "ASYS" in the automated quotation system of the
National Association of Securities Dealers SmallCap Market ("NASDAQ").
The following table sets forth the range of the high and low bid price
for the shares of the Company's common stock for each quarter of fiscal years
1997 and 1996 as reported by the NASDAQ SmallCap Market.
Quarter Ended High Low
------------- -------- -------
Fiscal 1997:
December 31, 1996 $ 4.75 $ 2.38
March 31, 1997 4.00 2.00
June 30, 1997 3.63 2.00
September 30, 1997 3.50 2.50
Fiscal 1996:
December 31, 1995 4.56 3.88
March 31, 1996 4.31 3.50
June 30, 1996 5.63 4.13
September 30, 1996 5.13 3.50
Holders
As of December 23, 1997, there were approximately 1,477 shareholders of
record of the Company's Common Stock.
Dividends
The Company has never paid dividends. Its present policy is to apply
cash to investment in product development, acquisition or expansion;
consequently, it does not expect to pay dividends within the foreseeable future.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth with respect to the Company's
operations for each of the years in the three year period ended September 30,
1997 and with respect to the balance sheets at September 30, 1997 and 1996 are
derived from audited financial statements that have been audited by Arthur
Andersen LLP, independent public accountants, which are included elsewhere in
this Report and are qualified by reference to such financial statements. Data
from the statements of operations for the fiscal years ended September 30, 1994
and 1993 and the balance sheet data at September 30, 1995, 1994 and 1993 are
derived from financial statements not included in this Report. The selected
financial data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the Company's Financial Statements (including the related notes thereto)
contained elsewhere in this Report.
Fiscal Years Ended September 30,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Operating Data
From Continuing Operations:
Revenues $ 11,111,142 $ 8,414,005 $ 6,864,068 $ 4,331,079 $ 4,087,886
Operating Profit (loss)(1) 215,420 120,813 39,582 (172,648) 426,890
Income (Loss) from
Continuing Operations(1)(6) 237,709 197,591 171,053 (89,469) 302,390
Net Income(1)(5)(6) $ 237,709 $ 508,683 $ 226,568 $ 94,004 $ 508,670
Primary Earnings Per Share:(1)(2)(3)
Continuing Operations (loss)(1)(6) $ .06 $ .05 $ .04 $ (.05) $ .15
Net Income(1)(5)(6) $ .06 $ .10 $ .06 $ .05 $ .26
Balance Sheet Data:
Cash and Short-Term Investments $ 1,975,040 $ 4,458,337 $ 4,505,389 $ 1,080,976 $ 1,895,042
Working Capital 5,271,320 5,480,452 6,163,304 2,244,628 2,722,362
Total Assets 9,355,092 8,458,614 8,365,519 3,974,922 4,119,928
Total Current Liabilities 2,108,165 1,568,994 1,363,291 852,103 1,091,113
Long-Term Obligations 318,721 265,355 -- -- --
Accumulated Deficit (174,378) (412,087) (920,770) (1,147,338) (1,241,342)
Shareholders' Equity(2)(4) 6,928,206 6,624,265 7,002,228 3,122,819 3,028,815
- -----------------------------------------------
(1) The results for the fiscal years 1997, 1996 and 1994 include $84,883,
$132,243 and $355,405, respectively, of expense for the University study
described elsewhere herein.
(2) The results shown have been restated to reflect the two-for-one combination
or "reverse split" of Common Stock which took place on June 4, 1993 and the
two-for-one forward split which was effective March 29, 1996. Earnings per
share for 1997, 1996 and 1995 reflect the sale of 2,415,000 shares in a
public offering completed December 22, 1994.
(3) The results shown would be the same if they were prepared on a
fully-diluted basis, except that the net income per common share for the
fiscal year ended September 30, 1993 would have been $.25.
22
(4) The decline in Shareholders' Equity in 1996 resulted from the Company's
receipt of 196,034 shares of its Common Stock upon disposition of the stock
of Echelon Services Company, as further detailed in the Consolidated
Statements of Stockholders' Equity, included in the audit financial
statements.
(5) The results for fiscal 1996 include a $284,335 gain on the disposal of
discontinued operations.
(6) Income from continuing operations for fiscal 1997 include a $115,487 gain
from the disposition of the Company's interest in the Seil Semicon joint
venture.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto set forth elsewhere herein and the
"Forward-Looking Statements" explanation included herein.
PLANS FOR EXPANSION AND CAPITAL RESOURCES
The Company is engaged primarily in the manufacture and marketing of
several items of capital equipment and related consumables and spare parts used
by customers in the manufacture and fabrication of semiconductors. Some of these
products, amounting to an estimated 6% of consolidated sales in fiscal 1997 and
up to 15% in fiscal 1998, are also sold for use in the production of wireless
communications, optics, memory disk media, ceramics and other products. The
Company also provides contract preventative maintenance services to the
semiconductor industry, accounting for an estimated 1% of consolidated sales in
fiscal 1997 and expected to grow to approximately 5% of consolidated sales in
fiscal 1998. The Company intends to focus on expanding its revenue and operating
profits derived from sale of such equipment and related consumable products sold
to semiconductor fabricators and manufacturers of silicon wafers used in the
fabrication of such semiconductors. The Company is seeking to expand its revenue
and operating profits through the development and acquisition of new products
that serve these markets and to further penetrate these markets with existing
and new products.
Acquisitions. As a part of the above strategy, the Company acquired
substantially all of the assets and assumed certain of the related liabilities
of P.R. Hoffman Machine Products Corporation on July 1, 1997. The total cost of
the acquisition, including the liabilities assumed and related transaction
costs, was approximately $3,210,000. See Note 3 to the Consolidated Financial
Statements, included herein, for further details of the acquisition and pro
forma revenues and earnings for fiscal 1996 and 1997, reflecting the assumption
that the acquisition had occurred at the beginning of each such fiscal year.
During the 1996 calendar year, the operations acquired produced $6.6 million of
revenue and $609,023 of operating profit.
During the fourth quarter of fiscal 1997, the Company began providing
preventative maintenance service to the semiconductor industry. Although this
operation currently serves only one customer and existed only for the months of
August and September of fiscal 1997, it is already contributing to operating
profit.
23
During fiscal 1996, the Company entered into a joint venture agreement
pursuant to which it acquired a 45% ownership interest and a 50% voting interest
in Seil Semicon, Inc. (the "Korean Joint Venture") in return for a commitment to
invest $500,000 in cash. The purpose of the joint venture was to develop and
operate a silicon test wafer reclaiming business. After the end of fiscal 1996,
the joint venture was dissolved because management determined that increasing
the Company's investment commitment to $3 million, without obtaining majority
control, was more risk than was appropriate for the Company. The Company
received $478,000 during December 1996, pursuant to the termination agreement,
which compensated the Company for its actual investment and expenses. As a
result, the Company recorded a gain in fiscal 1997 of $115,487, largely
representing recovery of related costs and expenses recorded in the previous
year.
Although the Company discontinued its participation in the Korean Joint
Venture and has since completed one other larger acquisition, the Company
intends to continue to evaluate other potential product or business acquisitions
that may complement the Company's business. Based upon current acquisition
criteria, such an acquisition could require $4 million or more of capital
resources. The determination of the appropriateness of a potential acquisition
is expected to take into consideration many factors including, without
limitation, the prospects and timing of the planned photo-assisted CVD product
line, described below, and the capital that would be required and available for
that product line, the economic terms of the acquisition under review, and the
potential synergy of the acquired business with the Company's existing business.
Research and Development; Photo-assisted CVD Project. Relative to many
technology businesses, the Company made relatively small investments in product
development prior to fiscal 1994. The Company increased research and product
development expenditures in fiscal 1994 by $257,000, primarily through the
expenditure of $355,000 for photo-assisted CVD research. During fiscal 1995,
research and development costs consisted entirely of developing the new Tempress
line of furnaces, an automated robot to load cantilever paddle systems and
product improvements. The Company entered into two amendments of its research
and development contract with the University during fiscal 1996, which expanded
the Company's financial commitment by a total of $244,000, all but $30,000 of
which has been expended. The Company intends to enter into a third amendment
expanding its commitment by an additional $251,000 and extending the contract
until the date on which certain agreed upon work is completed, which is expected
to occur in the first or second quarter of fiscal 1999. If the results of the
photo-assisted CVD feasibility study are sufficiently encouraging, the next
phase would be to develop a prototype model for use by research facilities to
develop advanced processes for the manufacture of semiconductor devices.
Depending on the actual timing and results of the final stage of the feasibility
study being conducted by the University, the Company intends to expend an
estimated $3,200,000 on research and development over approximately a three year
period, possibly beginning in fiscal 1999, in order to develop a commercial
product based upon the Company's patented photo-assisted CVD technology. This
expenditure is expected to be made in two stages: approximately $1,700,000 for
the development of an initial product suitable for use in research facilities
and approximately $1,500,000 for the development of a product for use in
industrial production facilities. These estimates will need to be updated, if
the development project reaches the development stage, do not include any amount
for the expansion of facilities for the manufacture of a new photo-assisted CVD
product designed for industrial production facilities or for a marketing
campaign, and are subject to various assumptions and significant uncertainties.
The increased research and development expenses anticipated for this project may
thus adversely and significantly affect the Company's future operating results.
24
In addition to photo-assisted CVD research, the Company expended
$196,000 in fiscal 1997 on research and development for product improvement and
development of diffusion products. Management may consider other development
projects in the future, but has not approved any significant projects, pending
review of the cost and benefits and their relationship to expected earnings.
These other research and development expenses will affect the Company's future
operating results.
The funds from the cash and short-term investments on hand should be
sufficient for the $281,000 of commitments made and planned to complete the
research phase of the photo-assisted CVD project. The currently available cash
and short-term investments are sufficient to service the inter-period liquidity
requirement of already expanded and growing operations of the Company.
Therefore, any funds required for future acquisitions or for the development of
a commercial model of the photo-assisted CVD reactor and the related expansion
and marketing campaign are expected to be obtained from one or more sources of
financing, such as the possible exercise of the outstanding redeemable common
stock warrants, working capital loans from banks, a public offering of debt or
equity securities, equipment leasing, mortgage financing and internally
generated cash flow from operations. There is no assurance of the availability
or sufficiency of these or any other source of funding.
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Continuing Operations
The consolidated revenues of the semiconductor equipment business
increased $2,697,000, or thirty-two percent (32%), to $11,111,000 in fiscal 1997
from $8,414,000 in fiscal 1996. During the same period, operating income
increased seventy-eight percent (78%), or $94,000, from $121,000 in fiscal 1996
to $215,000 in fiscal 1997. The acquisition and start-up businesses discussed in
the previous section accounted for sixty-six percent (66%) of the increase in
revenue and more than all of the increase in operating profit, despite their
inclusion for only the fourth quarter of fiscal 1997.
Revenue from the sale of existing diffusion products increased
$923,000, or eleven percent (11%), to $9,337,000, and accounted for thirty-four
percent (34%) of the increase in consolidated revenue. Growth in diffusion
product revenue resulted primarily from continued expansion of The Netherlands
operation, where the Tempress(R) diffusion furnaces are manufactured. The growth
in gross margins resulting from the increase in diffusion product sales was not
yet sufficient to offset the $435,000 increase in the related selling, general
and administrative expenses. Further, expanded furnace sales, which typically
produce a lower gross margin, were partially offset by a decline in the
typically more profitable automation products, thereby producing an unfavorable
mix. The gain on the disposal of the Korean Joint Venture described above,
partially compensated for the decrease in consolidated operating profit for the
diffusion product line.
25
Income (loss) from continuing operations before income taxes includes
operating income, discussed above, and net interest income. Net interest income
was $64,000 lower in fiscal 1997, as compared to fiscal 1996, due to cash used
in the acquisition of P.R. Hoffman and for increased inventories and receivables
associated with the expansion of the diffusion product line. As a result of
these items, the income from continuing operations before income taxes improved
by $30,000, or 9%, to $378,000 in fiscal 1997.
The income tax provision is $140,000 in fiscal 1997 and $150,000 in
fiscal 1996. The effective tax rate for fiscal 1996 is higher than the statutory
rate and the effective rate of fiscal 1997, because the equity in the losses of
the Korean Joint Venture were not deductible for U.S. income tax purposes in
fiscal 1996, when incurred, but were deductible upon disposition of that
investment. See Note 4 to the consolidated financial statements for further
details including an analysis of the differences between the statutory rate and
the effective rate for fiscal 1997 and 1996. After taking into consideration the
provision for income taxes, income from continuing operations is $238,000, $.06
per share, for fiscal 1997, a 20% improvement over the income of $198,000, or
$.05 per share, in fiscal 1996.
26
Total Company
For fiscal 1997, net income is equal to income from continuing
operations, $238,000, or $.06 per share. The non-recurring $284,000 gain in
fiscal 1996 from the disposal of discontinued operations and $27,000 of income
before disposition of that operation, brought net income for fiscal 1996 to
$509,000, or $.10 per share.
Trends. The historical and expected profitability of the Company's new
subsidiary, P.R. Hoffman, and its inclusion in the consolidated operations for
four (4) quarters in fiscal 1998, as compared to only one (1) in fiscal 1997,
will likely lead to substantially higher consolidated revenue and operating
income in fiscal 1998 and later years, compared to fiscal 1997. Management
believes that the diffusion operation in The Netherlands has not yet reached its
full potential. The resources deployed to acquire P.R. Hoffman detracted
significantly from the sale of the higher margin automation products. While the
Company intends to pursue other acquisitions in the future, which may cause
management resources to be less focused on existing operations, the Company has
sought to alleviate this concern by hiring a high level sales and marketing
person with significant experience in diffusion products, including the
Company's automation product line. In light of these trends, both existing and
expected, the Company believes that it can achieve significantly higher sales
and operating profit. However, no assurance can be given that such increased
sales or profitability will occur or that the Company's measures will be
effective.
The Company's diffusion product line has been and will continue to be
affected by industry trends. The use and market share of vertical furnaces is
increasing throughout the industry on a worldwide basis, particularly for the
fabrication of leading edge semiconductor devices, and is expected to increase
in usage to an estimated 50% over the next several years. However, the Company
believes that there will continue to be demand for horizontal diffusion
furnaces, notwithstanding other advantages of vertical systems (e.g. reduced
contamination and the capability to produce more sophisticated semiconductors
more efficiently), because for all but mass production runs of small chips on
larger wafers there is a higher productivity in horizontal furnaces as compared
to vertical furnaces. Also, the Company's products may be used to upgrade,
retro-fit or replace existing horizontal furnaces in order to extend their
useful lives or otherwise avoid the necessity for the customer to acquire more
expensive vertical furnaces. Horizontal furnaces are also sold for use in new
facilities that do not require vertical furnaces for the particular process.
Another important factor is the growth of semiconductor manufacturing using the
less capital intensive horizontal diffusion furnaces in the Peoples Republic of
China, and other less developed areas, which could further prolong the
commercial life of the Company's diffusion products. The Company also has and
expects to continue to benefit from a growth trend within the solar cell
industry, which uses the Company's diffusion products.
The market for the Company's products remains a small niche market.
Thus future revenues are and will continue to be dependent upon continued
introduction or acquisition of new products. For example, the IBAL automation
products introduced from fiscal 1991 to fiscal 1993, or improved versions of
products that exist in the market, such as the Tempress(R) horizontal diffusion
furnaces and "clean room" load stations. The Company intends to pursue both
types of product introductions in the future. Product or business acquisitions
is also a part of the Company's strategy for growth, as evidenced by the
acquisition of P.R. Hoffman's product line
27
of double sided precision lapping and polishing machines and related consumable
products in the fourth quarter of fiscal 1997. The Company intends to pursue
acquisitions of other businesses or products that complement its existing
product lines. Furthermore, the Company's long range plans include developing,
if feasible, a new product based on its patented photo-assisted CVD technology.
As of the date of this filing, memory device manufacturers are
continuing to experience falling prices resulting from the excess capacity
discussed above, yet their order backlogs and shipments have increased
significantly. Turmoil in the Asian financial markets is expected to eliminate
most, if not all, capital equipment sales into that region. Sales into the Asian
market accounted for 35% of the Company's total sales in fiscal 1997. These
negative factors are expected to have a greater impact on the high margin
domestic diffusion product line, as the ATMOSCAN(R) and IBAL automation products
are believed to improve the customers yields and efficiencies, but are not an
absolute necessity, and therefore are the first types of equipment to be cut
from a customer's capital budget. The sale of spares, replacement parts and the
consumable products associated with the lapping and polishing product line are
expected to continue to be sold even in Asia, with little or no decline.
Further, prospective customers outside of Asia are expected to continue to
require the horizontal diffusion furnace products manufactured in The
Netherlands. In addition, the Company's products are sold on a world-wide basis
and therefore, the Company will attempt to offset the sales declines caused by
the above factors by focusing more attention on other regions. Again, because of
the acquisition of P.R. Hoffman, the Company expects that the net result of all
of these variables will be a substantial increase in revenue in fiscal 1998.
In addition to photo-assisted CVD research, the Company expended
$196,000 in fiscal 1997 on research and development for product improvement and
development of diffusion products. Management may consider other development
projects in the future, but has not approved any significant projects, pending
review of the cost and benefits and their relationship to expected earnings.
These other research and development expenses may significantly offset the
Company's future operating results.
Fiscal 1996 Compared to Fiscal 1995
Continuing Operations
The revenues of the semiconductor equipment business increased
$1,550,000, or 23%, to $8,414,000 in fiscal 1996 from $6,864,000 in fiscal 1995.
The increase in revenues is due primarily to the 85% increase in the sales of
Tempress horizontal diffusion furnaces and related after market parts resulting
from continued growth of the manufacturing operations in The Netherlands. The
net sales of the domestic operations' ATMOSCAN(R) and IBAL automation products
were essentially unchanged in fiscal 1996 from the level achieved in fiscal
1995. Significant synergies have been achieved with the addition of the Tempress
product line, as both the domestic and foreign operations have secured orders by
having a broader line of products to offer, orders that might not otherwise have
been obtainable.
28
Gross profit was $2,897,000 for fiscal 1996 versus $2,305,000 for
fiscal 1995, representing a 26% increase. The $592,000 increase in gross margin
primarily results from the expansion of The Netherlands operations. Gross margin
as a percentage of revenue was 34.4% in fiscal 1996 versus 33.6% in fiscal 1995,
with the improvement being attributed to increased sales from The Netherlands'
operations.
The selling, general and administrative costs were $352,000 (17%)
higher in fiscal 1996 than in fiscal 1995. Costs associated directly with the
relatively new operations in The Netherlands grew approximately 29%, thus
accounting for 56% of the total increase. Corporate efforts to further penetrate
the market with the entire product line on a world-wide basis, the development
of new business opportunities and the write-off of certain doubtful accounts
receivable accounted for most of the remaining increase in selling, general and
administrative expenses. However, these costs declined from approximately 30% of
revenues during fiscal 1995 to 28% in fiscal 1996.
Operating profits were $121,000 in fiscal 1996, or 200% more than the
$40,000 reported in fiscal 1995. The improvement in operating profit in fiscal
1996 reflects the expansion of The Netherlands' operations, which reached its
break-even point in fiscal 1996.
Income (loss) from continuing operations before income taxes includes
operating income, discussed above, and net interest income, which was $5,000
higher in fiscal 1996, as compared to fiscal 1995. As a result of these items,
the income from continuing operations before income taxes improved by $87,000,
or 33%, to $348,000 in fiscal 1996.
The income from continuing operations is $198,000, $.05 per share, for
fiscal 1996, a 16% improvement over the income of $171,000, or $.04 per share,
in fiscal 1995, after taking into consideration the income tax provision of
$150,000 in fiscal 1996 and $90,000 in fiscal 1995. The effective tax rate for
fiscal 1996 is higher than the statutory rate and the effective rate of the
preceding year because the equity in the losses of the Korean Joint Venture are
not deductible for U.S. income tax purposes. The income tax provision for fiscal
1995 approximates the statutory rate. See Note 4 to the consolidated financial
statements for further details including an analysis of the differences between
the statutory rate and the effective rate for fiscal 1996 and 1995.
Discontinued Operations
In October 1995, the Company's Board of Directors decided to
concentrate on the Company's core semiconductor equipment operations and
discontinue the technical contract personnel business. That discontinued
operation produced income before income taxes of $52,000 and $86,000 for fiscal
1996 and fiscal 1995, respectively. Income taxes for fiscal 1996 and fiscal 1995
were $25,000 and $30,000, respectively, resulting in income from discontinued
operations of $27,000 in fiscal 1996 and $56,000 in fiscal 1995. The decline in
income is due to the fact that the Company owned this operation for one quarter
of fiscal 1996, compared to a full year in fiscal 1995. The effective tax rate
in fiscal 1996 is higher than the statutory rate because of state income taxes,
including the settlement of disputed taxes related to prior years.
29
Effective December 29, 1995, the Company exchanged all of its ownership
interest in the common stock of Echelon Service Company ("Echelon"), the only
remaining operation in the technical contract personnel line of business, for
196,034 shares of the Company's outstanding Common Stock previously owned by
Eugene R. Hartman, then an officer and director of the Company. The transaction
was preceded by a dividend from Echelon to the Company in order to equalize the
values. The transaction was structured to be a tax-free reorganization and, as
such, no provision was made for income taxes. As a result of the transaction,
the Company recognized a gain of $284,000.
Total Company
As a result of the gain on the disposal of discontinued operations, net
income increased $282,000 to $509,000, or $.10 per share, in fiscal 1996 from
$227,000, or $.06 per share, in fiscal 1995.
LIQUIDITY AND FINANCIAL CONDITION
As of September 30, 1997 and 1996, cash, cash equivalents and
short-term investments amounted to $1,975,000 and $4,458,000, respectively. The
fiscal 1997 decrease in cash and cash equivalents of $2,483,000, resulted from
the $2,564,000 cash expended on the acquisition of P.R. Hoffman, including
transaction costs. While the Company expects to make up to $340,000 of capital
expenditures during fiscal 1998, and up to $610,000 for research and
development, actual expenditures will be made in light of the existing operating
climate. Furthermore, substantial cash flows are expected to be generated by
P.R. Hoffman, while cash required for working capital will be controlled by
maintaining the level of receivable and inventory turns. As a result of the
above, the Company believes there is sufficient liquidity for current
operations. However, see "Plans for Expansion and Capital Resources," above, for
an explanation of factors that would give rise to requirements for additional
sources of liquidity and capital resources, and possible sources of such to meet
those needs.
Working capital decreased by $209,000 to $5,271,000 from $5,480,000, a
decrease of 4%, primarily as a result of the $577,000 investment in the goodwill
of P.R. Hoffman. See the Consolidated Financial Statements and related notes
included herein. For the same reasons, the ratio of current assets to current
liabilities decreased to 3.5:1 from 4.5:1. Cash and short-term investments
comprise 21% of total assets and stockholders' equity accounts for 74% of total
assets. These are measures of financial condition. The Company believes that it
continues to be financially strong.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements. The forward-looking statements contained herein are based on current
expectations that involve a number of risks and uncertainties. Among others,
these forward-looking statements are based on assumptions that (a) the Company
will not lose a significant customer or customers, (b) the Company will not
experience significant further reductions in demand or rescheduling of
30
customer purchase orders that have occurred recently due to equipment buyers'
caution resulting from declining prices for semiconductor chips, (c) that the
Company's products will remain accepted within their respective markets and will
not be significantly further replaced by newer technology equipment, (d) that
competitive conditions within the Company's markets will not change materially
or adversely, (e) that the Company efforts to integrate its P.R. Hoffman
subsidiary will continue to progress, (f) that the Company's efforts to improve
its products and maintain its competitiveness in the markets it competes will
continue to progress and that the savings associated with these expenditures
and/or the increased product demand resulting therefrom justifies these
development costs. (g) that the Company will retain and when needed add to its
ranks key technical and management personnel, (h) that business or product
acquisitions, if any, will be successfully integrated and the results of
operations therefrom will support the acquisition price, (i) that the Company's
forecasts will accurately anticipate market demand, (j) that there will be no
material adverse changes in the Company's existing operations or business, (k)
that the cost and time necessary to complete its photo-assisted CVD feasibility
study will not again significantly exceed the Company's projections, and that
should the Company proceed to the product development stage, the cost of
development will not significantly exceed the Company's projections, (l) the
Company will be able to obtain sufficient funding to increase its capital
resources by the amount used in business or product acquisitions, if any, and
(m) the post-development start-up losses of a photo-assisted CVD product line,
if any, will be manageable, and there will be sufficient demand for the
photo-assisted CVD products to recover the related development and start-up
costs, and to (n) expand its manufacturing facilities and production capacity in
order to produce and ship photo-assisted CVD products, the turmoil in the Asian
markets will not spread to other geographic regions. Assumptions related to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are beyond the control of the Company. Although the Company believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in forward-looking statements will be
realized. In addition, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives or plans for the Company will be achieved.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
----
Report of Independent Public Accountants.....................................F-1
Financial Statements -
Consolidated Balance Sheets
September 30, 1997 and 1996...............................................F-2
Consolidated Statements of Operations for
the years ended September 30, 1997, 1996 and 1995.........................F-3
Consolidated Statements of Stockholders'
Equity for the years ended September 30,
1997, 1996 and 1995.......................................................F-4
Consolidated Statements of Cash Flows for
the years ended September 30, 1997, 1996 and 1995.........................F-5
Notes to Consolidated Financial Statements
- September 30, 1997, 1996 and 1995.......................................F-7
Financial Statement Schedule for the years ended
September 30, 1997, 1996 and 1995:
Schedule II - Valuation and Qualifying Accounts...........................S-1
All Schedules, other than the Schedule listed above, are omitted as the
information is not required, is not material or is otherwise furnished.
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AMTECH SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of AMTECH SYSTEMS,
INC. (an Arizona corporation) and subsidiaries as of September 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMTECH SYSTEMS, INC. and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purposes of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
December 12, 1997.
F-1
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
1997 1996
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and equivalents (Note 2) $ 1,395,849 $ 1,994,217
Short-term investments (Note 2) 579,191 2,464,120
Accounts receivable, less allowance
for doubtful accounts of $130,000 in
1997 and $90,000 in 1996 2,983,573 1,581,973
Inventories (Note 2) 2,062,052 739,201
Deferred income taxes (Notes 2 and 4) 273,000 223,000
Prepaid expenses 85,820 46,935
----------- -----------
Total current assets 7,379,485 7,049,446
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Land, building and leasehold
improvements (Note 5) 629,604 535,104
Equipment and machinery 785,142 432,435
Furniture and fixtures 726,365 608,972
----------- -----------
2,141,111 1,576,511
Less accumulated depreciation and
amortization 781,078 600,180
----------- -----------
1,360,033 976,331
----------- -----------
PURCHASE PRICE IN EXCESS OF NET ASSETS
ACQUIRED, at amortized cost
(Notes 2 and 3) 561,238 --
OTHER ASSETS (Note 11) 54,336 432,837
----------- -----------
$ 9,355,092 $ 8,458,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 935,338 $ 652,771
Accrued liabilities:
Compensation and related taxes 471,604 442,785
Warranty and installation expenses 369,868 185,450
Other accrued liabilities 208,355 143,988
Income taxes payable (Notes 2 and 4) 123,000 144,000
----------- -----------
Total current liabilities 2,108,165 1,568,994
----------- -----------
LONG-TERM OBLIGATIONS (Note 5) 318,721 265,355
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 7, 8, and 10)
STOCKHOLDERS' EQUITY (Notes 2, 9 and 12):
Preferred stock; no specified terms;
100,000,000 shares authorized; none issued -- --
Common stock; $.01 par value; 100,000,000
shares authorized; 4,185,106 (4,109,668
in 1996) shares issued and outstanding 41,850 41,097
Additional paid-in capital 7,345,187 7,043,803
Cumulative foreign currency translation
adjustment (284,453) (48,548)
Accumulated deficit (174,378) (412,087)
----------- -----------
Total stockholders' equity 6,928,206 6,624,265
----------- -----------
$ 9,355,092 $ 8,458,614
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Net product sales (Note 6) $ 11,111,142 $ 8,414,005 $ 6,864,068
Cost of product sales 7,591,347 5,516,936 4,558,675
------------ ------------ ------------
Gross margin 3,519,795 2,897,069 2,305,393
Selling and general 3,139,366 2,386,466 2,034,027
Equity in (income) losses
of Korean joint venture
(Note 11) (115,487) 65,063 --
Photo-CVD project
(Notes 2 and 10) 84,883 132,243 --
Other research and development
(Note 2) 195,613 192,484 231,784
------------ ------------ ------------
Operating profit 215,420 120,813 39,582
Interest income-net 162,289 226,778 221,471
------------ ------------ ------------
Income from continuing
operations before
income taxes 377,709 347,591 261,053
Income tax provision
(Notes 2 and 4) 140,000 150,000 90,000
------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS 237,709 197,591 171,053
------------ ------------ ------------
DISCONTINUED OPERATIONS:
- ------------------------
Income From Discontinued
Operations (Note 12) -- 26,757 55,515
Gain on Disposal of Echelon
(Notes 4 and 12) -- 284,335 --
------------ ------------ ------------
-- 311,092 55,515
------------ ------------ ------------
NET INCOME $ 237,709 $ 508,683 $ 226,568
============ ============ ============
PRIMARY EARNING PER SHARE
(Notes 2 and 9):
Income From Continuing
Operations $ 0.06 $ 0.05 $ 0.04
Net Income $ 0.06 $ 0.10 $ 0.06
FULLY DILUTED EARNING PER SHARE
(Notes 2 and 9):
Income From Continuing
Operations $ 0.06 $ 0.05 $ 0.04
Net Income $ 0.06 $ 0.10 $ 0.06
The accompanying notes are an integral part of these
consolidated statements.
F-3
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended September 30, 1997, 1996 and 1995
Cumulative
Common Stock Foreign
-------------------------- Additional Currency Total
Number of Paid-In Translation Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1994 1,890,702 $ 18,907 $ 4,251,250 $ -- $(1,147,338) $ 3,122,819
Net Income -- -- -- -- 226,568 226,568
Secondary Public
Offering (Note 9) 2,415,000 24,150 3,599,232 -- -- 3,623,382
Translation adjustment -- -- -- 29,459 -- 29,459
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1995 4,305,702 43,057 7,850,482 29,459 (920,770) 7,002,228
Net Income -- -- -- -- 508,683 508,683
Shares returned upon
disposition of Echelon (196,034) (1,960) (806,679) -- -- (808,639)
Translation adjustment -- -- -- (78,007) -- (78,007)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1996 4,109,668 41,097 7,043,803 (48,548) (412,087) 6,624,265
Net Income -- -- -- -- 237,709 237,709
Employee stock bonus 16,050 160 34,577 -- -- 34,737
Stock options exercised 27,000 270 34,930 -- -- 35,200
Shares and warrants issued
in connection with the
acquisition of P.R. Hoffman
assets (Note 3) 32,388 323 231,877 -- -- 232,200
Translation adjustment -- -- -- (235,905) -- (235,905)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1997 4,185,106 $ 41,850 $ 7,345,187 $ (284,453) $ (174,378) $ 6,928,206
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
F-4
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30. 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income $ 237,709 $ 508,683 $ 226,568
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization 233,938 179,289 144,085
Inventory and accounts
receivable write-offs 76,123 91,085 80,428
Gain on disposal of
discontinued operations -- (284,335) --
Loss (gain) on sale or
retirement of assets 592 (1,950) 31,398
Equity in (income) losses of
Korean joint venture (115,487) 65,063 --
Deferred tax benefit (50,000) (70,000) (36,000)
Decreases (increases) in
operating assets:
Accounts receivable (401,561) 212,067 (762,669)
Inventories, prepaids and
other assets (421,270) (284,872) (73,893)
Increases (decreases) in
operating liabilities:
Accounts payable 191,544 160,152 223,091
Accrued liabilities 222,828 254,814 123,063
Income taxes payable (21,000) (81,000) 150,000
----------- ----------- -----------
Net cash Provided by (Used In)
Operating Activities (46,584) 748,996 106,071
----------- ----------- -----------
INVESTING ACTIVITIES:
Maturities (purchases) of
short-term investments - net 1,884,929 1,207,449 (3,327,577)
Proceeds from disposition of
(Investment in) unconsolidated
Korean joint venture 475,047 (425,000) --
Proceeds from sale of assets 200 28,983 19,591
Purchases of property, plant
and equipment (236,852) (541,919) (328,257)
Cash paid for net assets of
P. R. Hoffman Machine Products
Corporation (2,569,580) -- --
Cash distributed in disposal of
Echelon -- (109,698) --
----------- ----------- -----------
Net Cash Provided by (Used in)
Investing Activities (446,256) 159,815 (3,636,243)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from public offering
(Note 9) -- -- 3,623,382
Proceeds from stock options
exercised (Note 9) 35,200 -- --
Proceeds from (Payments on)
mortgage loan (19,635) 288,297 --
----------- ----------- -----------
Net Cash Provided By Financing
Activities 15,565 288,297 3,623,382
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES (121,093) (36,711) 3,626
----------- ----------- -----------
CASH AND EQUIVALENTS (Note 2):
Net increase (decrease) (598,368) 1,160,397 96,836
Beginning of year 1,994,217 833,820 736,984
----------- ----------- -----------
END OF YEAR CASH AND EQUIVALENTS $ 1,395,849 $ 1,994,217 $ 833,820
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
F-5
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
1997 1996 1995
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 19,855 $ 5,376 $ --
Income taxes, net of refunds 216,000 327,000 6,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Value received in the form of the
Company's $.01 par value Common
Stock in exchange for the net assets
of Echelon Service Company (Note 12) -- 808,639 --
The accompanying notes are an integral part of these
consolidated statements.
F-6
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended September 30, 1997, 1996, and 1995
(1) NATURE OF OPERATIONS:
Amtech Systems, Inc., based in the United States, Tempress Systems,
Inc., a wholly-owned subsidiary formed in September 1994, and based in The
Netherlands, and P. R. Hoffman Machine Products, Inc., a wholly-owned subsidiary
formed in July 1997, and based in the United States, comprise the "Company". The
Company designs, assembles, sells and installs capital equipment and related
consumables used in the manufacture of wafers of various materials , primarily
silicon wafers for the semiconductor industry, and in certain processes of
semiconductor fabrication. These products are sold to manufacturers of silicon
wafers and semiconductors world-wide, particularly in the United States, Korea,
and Northern Europe. During fiscal 1997, the Company began providing
preventative maintenance services to the semiconductor industry in the United
States. See Note 12 regarding discontinued operations.
The Company serves a niche market in an industry which experiences
rapid technological advances and which in the past has been very cyclical.
Therefore, the Company's future profitability and growth depend on its ability
to develop or acquire and market profitable new products and its success in
adapting to future cyclical trends.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - The accompanying consolidated financial
statements include the accounts of Amtech Systems, Inc. and its wholly owned
subsidiaries, including Echelon Service Company (Note 12) through the date of
its disposition, and P. R. Hoffman Machine Products, Inc. (Note 3) since its
acquisition date. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition - Revenue is recognized on the accrual basis when
the product is shipped and title passes to the customer.
Cash Equivalents and Short-term Investments - Cash equivalents and
short-term investments consist of time certificates of deposit and U.S. treasury
bills. The Company considers certificates of deposit and treasury bills to be
cash equivalents if their maturity is 90 days or less from purchase. Investments
maturing in over 90 days are considered to be "available-for-sale" (as defined
by the Statement of Financial Accounting Standards (SFAS) No. 115) and are
recorded at fair value, which approximates cost.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market. The components of inventory as of September 30,
1997 and 1996 are as follows:
1997 1996
---------- ----------
Purchased parts $ 995,850 $ 527,321
Work-in-progress 618,295 211,880
Finished Goods 447,907 --
---------- ----------
$2,062,052 $ 739,201
========== ==========
F-7
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Property, Plant and Equipment - Maintenance and repairs are charged to
expense as incurred. The costs of additions and improvements are capitalized.
The cost of property retired or sold and the related accumulated depreciation
are removed from the applicable accounts and any gain or loss is recognized.
Depreciation is computed using the straight-line method. Useful lives
for equipment, machinery, and leasehold improvements are from three to five
years; for furniture and fixtures from five to ten years; and for buildings
twenty years.
In fiscal 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This standard requires that long-lived assets be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of the asset
may not be recoverable. If the sum of the expected cash flows from an asset to
be held and used in operations is less than the carrying value of the asset, an
impairment loss is recognized. Adoption of this Standard did not have a material
effect on the Company's financial position or results of operations.
Purchase Price in Excess of Net Assets Acquired - The purchase price in
excess of net assets acquired, commonly referred to as goodwill, is being
amortized over fifteen years using the straight-line method.
Research and Development Expenses - The Company expenses product
development costs as they are incurred. The Company incurred approximately
$280,000 in 1997, $325,000 in 1996, and $232,000 in 1995, of expenses related to
research of photo-assisted CVD (chemical vapor deposition) equipment and
process, the development of diffusion furnaces, and the improvement of Atmoscan
(Note 8) and other products.
Foreign Currency Transactions and Translation - Income from continuing
operations includes gains from foreign currency transactions of $34,000 in 1997,
$56,000 in 1996 and $11,000 in 1995. There were no material foreign currency
transactions prior to 1995. The functional currency of Tempress Systems, Inc. is
The Netherlands guilder.
Income Taxes - The Company files consolidated federal income tax
returns and computes deferred income tax assets and liabilities based upon
cumulative temporary differences between financial reporting and taxable income,
carryforwards available and enacted tax law. See Notes 4 and 12.
F-8
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Income Per Common Share - Primary and fully diluted earnings per share
are computed using the modified treasury stock method, because the number of
warrants and options exceed 20% of the common shares outstanding as of year-end.
The weighted average shares outstanding for the purposes of calculating primary
earnings per share were 4,168,111, 6,341,027, and 3,802,853 for 1997, 1996 and
1995, respectively. The average outstanding shares for the calculation of fully
diluted earnings per share were not materially different. The weighted average
shares outstanding for 1996 include 2,165,299, shares issuable upon exercise of
the warrants and stock options because they are dilutive. Shares issuable upon
the excise of warrants and stock options were not included in the weighted
average shares outstanding used in the calculation of earnings per share for
fiscal 1997, because they were anti-dilutive under the modified treasury stock
method.
The Financial Accounting Standards Board ("FASB") issued a Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" during
fiscal 1997. SFAS No. 128 supersedes Accounting Principles Board (APB) Opinion
No. 15, the existing authoritative guidance effective with financial statements
for both interim and annual periods ending after December 15, 1997. After SFAS
No. 128 becomes effective for a company, all prior period earnings per share
(EPS) data presented must be restated. The new statement modifies the
calculation of primary and fully diluted EPS and replaces them with basic and
diluted EPS. Assuming SFAS No. 128 had become effective on or before September
30, 1997, 1996 and 1995, the pro forma basic and diluted EPS would have been the
same as the primary and fully diluted EPS, respectively, reported on the
consolidated Statement of Operations, except that in fiscal 1997 the diluted EPS
would have been $.05 per share, and in 1996 diluted EPS from continuing
operations would have been $.04 per share.
Accounting for Stock-Based Compensation - During 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation", which defines a fair
value based method of accounting for employee stock options or similar equity
instruments and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost related to stock options issued
to employees under these plans using the method of accounting
F-9
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Entities electing to continue using the accounting in APB Opinion No. 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation
plans under APB Opinion No. 25; therefore, no compensation cost is recognized in
the accompanying financial statements for employee stock options granted in
fiscal 1997. Employee stock options granted in fiscal 1996 were not material.
During fiscal 1997, the Company issued stock options exercisable for
the purchase of approximately 264,000 shares of its $.01 par value common stock
(Note 9). These options have been valued at $440,000, using the Black-Scholes
valuation method. Had the effects of stock-based compensation been accounted for
in the financial statements, net income and earnings per share would have been
reduced by $51,000 and $.02, respectively. The primary assumptions used in the
valuation were a weighted average risk free rate of 6.23%, an expected dividend
yield of 0%, holding periods of four to eight years and 69% volatility. No
adjustment has been made for the non-transferability of the options or for the
risk of forfeiture.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires 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 and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The carrying values of the
Company's current assets and current liabilities approximate fair value due to
the short term in which these instruments mature. The carrying value of the
Company's long-term debt approximates fair value because the interest rate of
the mortgage note payable (Note 5) approximates prevailing interest rates for
similar debt instruments.
Accounting Pronouncements Not Yet Adopted - In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of all changes in equity that result from transactions and other
economic events of the period other than transactions with owners
("comprehensive income"), and requires companies to retroactively display the
cumulative total of comprehensive income other than net income for the period as
a separate component of equity in both interim and annual financial statements.
SFAS No. 131
F-10
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
establishes a new model for interim and annual segment reporting which is based
on the way management organizes segments for making operating decisions and
assessing segment performance. The Company is required to adopt these standards
in fiscal 1999. Management has not assessed the effect of these standards on
future disclosures.
(3) PURCHASE OF P. R. HOFFMAN MACHINE PRODUCTS:
Effective July 1, 1997, the Company acquired substantially all of the
assets and related operating liabilities of P. R. Hoffman Machine Products
Corporation. P. R. Hoffman specializes in the development, manufacture and
marketing of double sided lapping and polishing machines a related consumables
used in the manufacture of semiconductor silicon wafers. The purchase method of
accounting is being used for this acquisition, and therefore, the accompanying
statements include the results of the operations of P. R. Hoffman for the three
month period beginning July 1, 1997.
The cost of the acquisition is summarized as follows:
Cash $2,307,757
Liabilities assumed 382,276
Acquisition transaction costs 261,823
Issuance of 32,388 shares of common stock 65,000
Issuance of 150,000 warrants 167,200
----------
Total cost of acquisition $3,184,056
==========
The cost of the acquisition was allocated as follows:
Accounts Receivable $1,122,518
Inventory 1,060,191
Property 420,923
Other Assets & Liabilities 9,702
Purchase price in excess of net assets acquired 570,722
----------
Total $3,184,056
==========
F-11
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) PURCHASE OF P. R. HOFFMAN MACHINE PRODUCTS: - (continued)
Valuation of the common stock issued in connection with these
transactions was determined based on the fair market value of the common stock
on the date of issuance, taking into account the illiquidity arising from
restrictions on the sale of the stock.
The purchase price in excess of net assets acquired commonly referred
to as "goodwill" is being amortized on a straight-line basis over a period of 15
years.
In addition to the above purchase price, the former owner of P. R.
Hoffman Machine Products Corporation is entitled to additional payments equal to
50% of pretax income in excess of $800,000 per year for a period of 5 years,
limited to a maximum aggregate of $2 million of such payments. The additional
contingent purchase price of up to $2 million is payable in a combination of
cash and unregistered and registered common stock of Amtech as defined in the
Asset Purchase Agreement. This additional consideration will be treated as part
of the purchase price to the extent earned and will be amortized over the
remaining fifteen year period that began on the July 1, 1997 acquisition date.
The following consolidated pro forma financial information was prepared
assuming that the acquisition had occurred at the beginning of each fiscal year.
This pro forma information does not necessarily reflect the results of
operations that would have occurred had the acquisition taken place at the
beginning of each fiscal year and is not necessarily indicative of results that
may be obtained in the future (unaudited):
1997 1996
----------- -----------
Revenues $16,121,577 $15,028,672
Income from continuing operations 575,069 355,643
Net Income 575,069 666,735
Earnings per share:
Income from continuing operations $ .11 $ .08
Net Income $ .11 $ .13
For purposes of the above pro forma presentation, the historical
revenues and earnings of P. R. Hoffman for the twelve month period ended
September 30, 1997 and the year ended December 31, 1996 have been combined with
the revenues and earnings of Amtech for the years ended September 30, 1997 and
1996, respectively. Therefore, both columns include the operating results of P.
R. Hoffman for the three months ended December 31, 1996, including $ 1,332,814
of revenues and $227,591 of operating losses.
F-12
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) INCOME TAXES:
The provision for (benefit from) income taxes on continuing operations
consists of:
1997 1996 1995
--------- --------- ---------
Current-
Federal $ 170,000 $ 212,000 $ 130,000
State 20,000 8,000 2,000
--------- --------- ---------
190,000 220,000 132,000
--------- --------- ---------
Deferred-
Federal (48,000) (70,000) (42,000)
State (2,000) -- --
--------- --------- ---------
(50,000) (70,000) (42,000)
--------- --------- ---------
$ 140,000 $ 150,000 $ 90,000
========= ========= =========
The provision for income taxes on continuing operations is different
than the amount which would be computed by applying the United States corporate
income tax rate to the income before income taxes. The differences are
summarized as follows:
1997 1996 1995
--------- --------- ---------
Tax provision at the
statutory rate $ 128,000 $ 118,000 $ 89,000
Effect of amortization
of goodwill and other expenses
not deductible for tax 19,000 3,000 13,000
State tax provision 23,000 28,000 54,000
Effect of losses of Korean
joint venture (22,000) 22,000 --
Change in valuation allowance 3,000 (20,000) (52,000)
Other items (11,000) (1,000) (14,000)
--------- --------- ---------
Actual tax provision $ 140,000 $ 150,000 $ 90,000
========= ========= =========
The components of deferred taxes as of September 30, 1997 and 1996 are
as follows:
1997 1996
--------- ---------
Allowance for doubtful accounts $ 40,000 $ 38,000
Uniform capitalization of inventory
costs 48,000 43,000
Inventory write-downs not currently
deductible 23,000 45,000
Book vs. tax depreciation (19,000) (24,000)
Unrealized currency gains (24,000) --
State net operating loss carryforwards 63,000 2,000
Liabilities not currently deductible 203,000 177,000
Valuation allowance (61,000) (58,000)
--------- ---------
$ 273,000 $ 223,000
========= =========
F-13
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) INCOME TAXES - (continued)
In evaluating the probability of realizing its deferred tax assets, the
Company has limited its recognition of deferred tax assets to an amount equal to
the expected federal income tax rate of 34% applied to the cumulative temporary
differences existing at year end. Deferred tax assets attributable to state net
operating losses and the state tax effect of the temporary differences are
offset by the valuation allowance.
See Note 12 regarding the income tax treatment of the gain on the
disposal of discontinued operations.
(5) LONG-TERM OBLIGATIONS
Long-term debt included in long term obligations consists of a twenty
(20) year mortgage secured by the Company's land and building located in The
Netherlands. The principal balance of this long-term debt was $ 216,300 and $
265,355 as of September 30, 1997 and 1996, respectively. The collateral has a
carrying value of $395,000. Principal is payable in The Netherlands guilder in
240 equal monthly payments. Principal payments are $13,000 for each of the next
five years, with the payments for 1998 being included with accounts payable as
of September 30, 1997. Interest is fixed at 6.95% through June 2001, after which
the rate will be adjusted to the prevailing market rate. During the five year
fixed interest period there is a penalty for prepayment of the loan.
(6) MAJOR CUSTOMERS AND FOREIGN SALES:
The Company had major customers which account for more than 10% of
sales as follows:
1997 1996 1995
------ ------ ------
Customer 1 -- 17% 28%
Customer 2 -- 10% 11%
Customer 3 -- 10% --
Customer 4 -- 10% --
Customer 5 16% -- --
Customer 6 16% -- --
------ ------ ------
32% 47% 39%
====== ====== ======
As of September 30, 1997 and 1996, receivables from three customers
comprise 55% and 50% of accounts receivable, respectively, representing a
concentration of credit risk as defined by SFAS No. 105.
F-14
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(6) MAJOR CUSTOMERS AND FOREIGN SALES - (continued)
The Company's sales were to the following geographic regions:
1997 1996 1995
------ ------ ------
United States (including 1% or less to
Costa Rica) 38% 39% 36%
Far East (Korea, People's Republic of China,
Taiwan, Japan, Singapore, and India) 27% 40% 57%
Europe (including 1% or less to Africa) 35% 21% 7%
------ ------ ------
100% 100% 100%
====== ====== ======
(7) LEASES:
The Company leases buildings, vehicles and equipment. As of September
30, 1997 minimum rental commitments under noncancellable operating leases, all
of which expire in the next two years, total $274,000, of which $169,000 and
$105,000 are payable in fiscal 1998 and 1999, respectively.
Rental expense related to continuing operations, net of sublease
income, for 1997, 1996 and 1995 was approximately $98,000, $108,000 and $76,000,
respectively.
(8) PROPRIETARY PRODUCT RIGHTS:
The Company acquired the proprietary product rights to Atmoscan in
1983, which provides an improved method for the automatic loading of silicon
wafers into diffusion furnaces. The Company has agreed to pay the inventor
royalties for 17 years until November 22, 2000. From the first quarter of fiscal
1994 through the year 2000, royalties are 4% on sales of complete Atmoscan
systems and 2% on any related spare parts.
Through the acquisition of the net assets of P. R. Hoffman Machine
Products Corporation (see Note 3), the company acquired the license for the
design of its steel carriers with plastic inserts for abrasive machining of
silicon wafers. In 1995, P. R. Hoffman licensed the patent rights from Wacker
Siltronincs. Royalties are 5% on net sales of insert carriers to third parties .
Royalty expense included in cost of product sales totaled approximately
$44,000, $47,000 and $49,000 in 1997, 1996 and 1995, respectively.
F-15
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) STOCKHOLDERS' EQUITY AND STOCK OPTIONS:
Effective with the close of business on March 29, 1996, each share of
the $.01 par value common stock of the Company was split into two shares. All
shares and per share amounts have been restated to give effect for this two for
one forward stock split.
The Company issued 2,415,000 shares of its $.01 par value common stock
and redeemable warrants in connection with a secondary public offering completed
December 22, 1994. Gross proceeds from the offering were $4,528,125. Each
redeemable warrant issued in the offering entitles the holder to acquire two
shares of the Company's $.01 par value common stock at an exercise price of
$2.75 per share at any time prior to the December 15, 1999 expiration date. The
redeemable warrants are subject to the Company's right of redemption, under
certain circumstances, at $.05 each during the period in which they are
exercisable. In connection with the public offering, the Company also sold the
underwriting group a warrant ("underwriter's warrant") entitling the group to
purchase 35,000 units at a per unit price of $13.50 until their expiration on
December 15,1999. In summary, the total number of shares of $.01 par value
common stock issuable under the underwriter's warrant and the redeemable
warrants are 210,000 at a per share price of $2.25 and 2,625,000 at a per share
price of $2.75, respectively.
The Board has reserved 70,000 shares of common stock for use by the
1983 Incentive Stock Option Plan, which is now expired, 40,000 shares under
Director Stock Purchase Agreements, 200,000 shares for the Non-Employee
Directors Stock Option Plan and 320,000 shares to be used jointly by the Amended
and Restated 1995 Stock Option Plan and the 1995 Stock Bonus Plan, for a total
of 630,000 shares so reserved. Incentive stock options issued under the terms of
the plans have or will have an exercise price equal to or greater than the fair
market value of the common stock at the date the option was granted. Incentive
stock option grants expire no later than 10 years from the date of grant, with
the most recent grant expiring February 28, 2007. Under the terms of the 1995
Stock Option Plan, nonqualified options may also be issued. Options in fiscal
1997 and 1996 vest at the rate of 20% - 25% per year, for each of the next four
to five years. The stock option transactions and the options outstanding for the
three years ended September 30, 1997, are summarized as follows:
Number of Weighted-Average
Options Exercise Price
--------- ----------------
Outstanding at September 30,1994 127,000 $1.27
Granted 20,000 2.24
------- -----
Outstanding at September 30,1995 147,000 1.40
Expired (14,000) 1.08
------- -----
Outstanding at September 30,1996 133,000 1.32
F-16
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) STOCKHOLDERS' EQUITY AND STOCK OPTIONS -(continued)
Outstanding at September 30,1996 133,000 $1.32
Granted 282,084 2.50
Exercised (27,000) 1.07
Expired (6,000) 1.63
-------- -----
Outstanding at September 30,1997 382,084 $2.17
======== =====
Outstanding options exercisable as of:
September 30, 1995 93,000 $1.67
September 30, 1996 81,000 $1.52
September 30, 1997 50,000 $1.45
In addition to the above stock options, in connection with the
acquisition of the net assets of P.R. Hoffman during fiscal 1997, the Company
issued 150,000 warrants for purchase of one share each of the Company's $.01 par
value common stock at $3.00 per share. These warrants have been valued at
$167,200 using the Black-Scholes valuation method discussed in Note 2. The
primary assumptions used in the valuation of these warrants were a risk free
rate of 6.29%, expected dividend yield of 0%, average holding period of 2.5
years, and 69% volatility. The value of these warrants has been included in the
goodwill associated with the purchase of the P. R. Hoffman net assets.
(10) COMMITMENTS AND CONTINGENCIES:
During March 1994, the Company entered into a research and development
contract with and paid $355,405 to the University of California at Santa Cruz
(the "University"). That amount was expensed in fiscal 1994. The Company's
purpose for entering into the contract is to attempt to prove the feasibility
and demonstrate the practical application of the Company's patented
photo-assisted chemical vapor deposition ("CVD") process. The University has
developed designs and specifications for a prototype model of a product
embodying the Company's technology and used it to conduct the initial study. The
study has proven that the Company's patented method minimizes the clouding of
the window that separates the light source from the reactor chamber. However,
further study is needed to determine whether it can develop a photo-assisted
machine that produces a commercially viable rate of deposition. Subsequent to
September 30, 1997, the company opened negotiations to amend its contract to
extend its term to the later of December 31, 1998 or the date on which the work
is completed, and to increase its financial commitment. Once the amendment is
accepted by both parties, the remaining commitment on the contract will be
$250,000. The purpose of the
F-17
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) COMMITMENTS AND CONTINGENCIES - (continued)
contract amendment is to determine whether deposition rates that are
satisfactory for commercial applications can be achieved with the Company's
patented method.
Assuming the feasibility of the proposed photo CVD product, the Company
expects to expend approximately $3,200,000 for its development. The expenditure
is expected to be made in two stages: approximately $1,700,000 for the
development of an initial product suitable for use in research facilities and
approximately $1,500,000 for the development of a product for use in industrial
production facilities. These estimates do not include any amount for the
expansion of facilities for the manufacture of a new photo CVD product designed
for industrial production facilities and it is reasonably possible that these
estimates will be revised based upon an analysis of the final study results.
Funds for that expansion, if any, are expected to be obtained from one or more
sources of financing, such as the possible exercise of the outstanding
redeemable common stock warrants, working capital loans from banks, a secondary
public offering, lease financing and internally generated cash from operations.
There is no assurance of the availability or sufficiency of these or any other
source of financing.
(11) KOREAN JOINT VENTURE:
In the first quarter of fiscal 1996, the Company entered into a joint
venture agreement pursuant to which the Company received a 45% ownership
interest and a 50% voting interest in Seil Semicon, Inc. (the "JVC") in return
for a commitment to invest $500,000 in cash. The joint venturers planned to
operate a silicon test wafer reclaiming business in Korea through Seil Semicon,
Inc., which remains in the start-up phase. Pursuant to that agreement, the
Company invested $425,000 and expensed $65,000 of that amount as its share of
the start-up losses. The joint venture succeeded in acquiring real property for
construction of the reclamation facility and in securing $3 million in third
party financing. However, a review during the fourth quarter of fiscal 1996
revealed that the increases in the JVC's anticipated costs during the start-up
phase and the cost of additional equipment required for the operation had
expanded the total projected capital requirements by $2,500,000. During the
first quarter of fiscal 1997, the Company's financial relationship with the
joint venture was terminated because management determined that raising the
Company's investment commitment to $3 million, without obtaining majority
control, was more risk than was appropriate for the Company. The Company
received $478,000 during December 1996, pursuant to the termination agreement,
which reimbursed the Company's actual investment and expenses. As of September
30, 1996, the $360,000 carrying value of the investment in the JVC was included
in other assets.
F-18
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) DISCONTINUED TECHNICAL CONTRACT PERSONNEL SEGMENT:
The Company entered the technical contract personnel segment in 1988. On
September 30, 1992, the Company sold substantially all of the operations of the
technical contract personnel segment, with only Echelon Service Company
("Echelon") being retained. Echelon was acquired in 1989, using stock and cash
at closing as consideration, as well as an incentive arrangement payable in cash
and stock. Since October 1995, when the board of directors approved a plan to
discontinue the technical contract personnel business, those operations have
been designated as discontinued in financial reports of the Company. Effective
December 29, 1995, the Company exchanged all of its ownership interest in the
stock of Echelon for 196,034 shares of the Company's outstanding $.01 par value
Common Stock previously owned by Eugene R. Hartman, then an officer and director
of the Company. The transaction was preceded by a dividend from Echelon to the
Company in order to equalize values. The transaction was structured to be a
tax-free reorganization and, as such, no provision for income taxes has been
made relative to this transaction.
The results of the discontinued operations reflected in the consolidated
statements of operations are those of Echelon through the date of the disposal.
Revenue of the discontinued operations were $1,235,000 for the three months
ended December 1995 and $4,549,000 for the year ended September 30, 1995. Income
from discontinued operations for fiscal 1996 and 1995 are net of applicable
income taxes of $25,000 and $30,000, respectively.
F-19
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
-----------------------------------------------------
For the Year Balance at Charged
Ended Beginning (credited) Balance at
September 30, of Year to Expense Write-offs End of Year
------------- ---------- ---------- ---------- -----------
1. Allowance for Doubtful Accounts
-------------------------------
1997 $ 90,000 $ 42,960 $ 2,960 $130,000
1996 80,000 66,249 56,249 90,000
1995 45,000 35,704 704 80,000
2. Deferred Tax Asset Valuation Allow ance
---------------------------------------
1997 $ 58,000 $ 3,000 $ -- $ 61,000
1996 78,000 (20,000) -- 58,000
1995 150,000 (72,000) -- 78,000
S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Company's Notice of Meeting and Proxy Statement to be filed in connection
with the Company's Annual Meeting of Shareholders anticipated to be held on or
about February 27, 1998 (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's 1998 Proxy Statement.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements.
The following is a list of all financial statements filed as a part of
this Report:
1. Consolidated Balance Sheets - September 30, 1997 and 1996
2. Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995
3. Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1997, 1996 and 1995
4. Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995
5. Notes to Consolidated Financial Statements - September 30,
1997, 1996 and 1995
(b) Financial Statement Schedules
The following is a list of a financial statement schedule required to
be filed as a part of this Report:
1. Schedule II - Valuation and Qualifying Accounts
All schedules other than the Schedule listed above, are omitted as the
information is not required, is not material or is otherwise furnished.
35
(c) Exhibits.
Method
Exhibit No. Description of Filing
- ---------- ----------- ---------
3.1 Articles of Incorporation A
3.2 Articles of Amendment to Articles of Incorporation, A
dated April 27, 1983
3.3 Articles of Amendment to Articles of Incorporation, B
dated May 19, 1987
3.4 Articles of Amendment to Articles of Incorporation, C
dated May 2, 1988
3.5 Articles of Amendment to Articles of Incorporation, G
dated May 28, 1993
3.6 Amended and Restated Bylaws D
10.1 Amended and Restated 1995 Stock Option Plan J
10.2 1995 Stock Bonus Plan J
10.3 Non-Employee Director Stock Option Plan K
10.4 Employment Agreement with Robert T. Hass, dated May F
19, 1992
10.5 Registration Rights Agreement with J.S. Whang, dated G
January 24, 1994
10.6 Employment Agreement with J.S. Whang, dated February M
28, 1997
10.7 Contract of Sale (Real Property) dated June 21, 1996 I
between Tempress Systems, Inc. and Orgelmakerij Gedr.
Rell B.V.
10.8 Research Agreement with The Regents of the University H
of California dated March 1, 1994, together with
amendments thereto dated March 1, 1994, March 30,
1994, March 7, 1995, June 26, 1995, October 16, 1995,
November 29, 1995, and December 4, 1995
10.9 Amendment to Research Agreement with the Regents of I
the University of California dated July 8, 1996
10.10 Employment Agreement, dated July 1, 1997, between the L
Registrant and John R. Krieger
36
Method
Exhibit No. Description of Filing
- ---------- ----------- ---------
10.11 Registration Rights Agreement, dated July 1, 1997, L
between the Registrant and John R. Krieger
10.12 Sublease Agreement, dated July 1, 1997, between the L
Registrant and John R. Krieger
10.13 Asset Purchase Agreement, dated July 1, 1997, among L
the Registrant, P.R. Hoffman Machines Corporation and
John R. Krieger
11 Schedule of Computation of Net Income per Share *
21 Subsidiaries of the Registrant *
23 Consent of Independent Public Accountant *
24 Powers of Attorney See Signature
Page
27 Financial Data Schedule *
- -------------------------
* Filed herewith.
A Incorporated by reference to the Company's Form S-18 Registration Statement
No. 2-83934-LA
B Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1987
C Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1988
D Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991
E Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992
F Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993
G Incorporated by reference to the Company's Form S-1 Registration Statement
No. 33-77368
H Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995
I Incorporated by reference to the Company's Form S-3 Registration Statement
No. 333-09917
J Incorporated by reference to Company's Form S-8 Registration Statement
relating to the Amended and Restated 1995 Stock Option Plan and the 1995
Stock Bonus Plan filed with the Securities and Exchange Commission on
September 9, 1997.
K Incorporated by reference to Company's Form S-8 Registration Statement
relating to the Non-Employee Directors Stock Option Plan filed with the
Securities and Exchange Commission on August 8, 1996
L Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 1, 1997.
M Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
37
(d) Reports on Form 8-K
On July 9, 1997, the Company filed a Current Report on Form 8-K, dated
July 1, 1997, reporting the Company's acquisition of substantially all of the
assets of P.R. Hoffman Machine Products Corporation ("P.R. Hoffman"). On
September 9, 1997, the Company filed a Form 8-K/A, which report amended the
prior Form 8-K to include required financial information relating to P.R.
Hoffman.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMTECH SYSTEMS, INC.
December 29, 1997 By /s/ Jong S. Whang
-------------------
Jong S. Whang, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints JONG S. WHANG and ROBERT T. HASS, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Jong S. Whang Chairman of the Board, December 29, 1997
- -------------------------- President
Jong S. Whang (Chief Executive Officer)
/s/ Robert T. Hass Vice President-Finance December 29, 1997
- -------------------------- (Chief Financial
Robert T. Hass & Accounting Officer)
/s/ Donald F. Johnston Director December 29, 1997
- --------------------------
Donald F. Johnston
/s/ Alvin Katz Director December 29, 1997
- --------------------------
Alvin Katz
/s/ Bruce R. Thaw Director December 29, 1997
- --------------------------
Bruce R. Thaw
39