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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-25424
SEMITOOL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Montana 81-0384392
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Semitool, Inc.
655 West Reserve Drive, Kalispell, Montana 59901
(406) 752-2107
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant on December 14, 1998 (based on the last
reported sale price on the Nasdaq National Market as of such date) was
$40,558,452.
The number of shares of the registrant's Common Stock, no par value, outstanding
as of December 14, 1998 was 13,792,023.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K the information contained in the registrant's definitive proxy statement
for its annual meeting of shareholders to be held February 9, 1999.
PART I
Item 1. Business
INTRODUCTION
Statements contained in this Report on Form 10-K which are not historical facts
are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation,
statements regarding trends in the semiconductor industry, future product
development, strategic business development, pursuit of new and growing markets,
competition, patent filings, results from operations, and the adequacy of
manufacturing facilities, and are subject to the safe harbor provisions created
by that statute. A forward-looking statement may contain words such as "will
continue to be," "will be," "continue to," "expect to," "anticipates that," "to
be" or "can impact." Management cautions that forward-looking statements are
subject to risks and uncertainties that could cause the Company's actual results
to differ materially from those projected in such forward-looking statements.
These risks and uncertainties include, but are not limited to, the cyclical
nature of the semiconductor industry in general, lack of market acceptance for
new products, decreasing demand for the Company's existing products, impact of
competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraint difficulties and
other risks detailed under the heading "Risk Factors" and elsewhere herein. The
Company's future results will depend on its ability to continue to enhance its
existing products and to develop and manufacture new products and to finance
such activities. There can be no assurance that the Company will be successful
in the introduction, marketing and cost-effective manufacture of any new
products or that the Company will be able to develop and introduce in a timely
manner new products or enhancements to its existing products and processes which
satisfy customer needs or achieve widespread market acceptance.
The Company undertakes no obligation to release revisions to forward-looking
statements to reflect subsequent events, changed circumstances, or the
occurrence of unanticipated events.
THE COMPANY
Semitool, Inc. ("Semitool" or the "Company"), a Montana corporation organized in
1979, designs, manufactures, markets and services equipment and factory
monitoring and control automation systems used in the fabrication of
semiconductors. In February 1996, the Company acquired Semy Engineering, Inc., a
manufacturer of factory automation monitoring and control systems (fab
supervisory systems) for semiconductor fabrication facilities (fab). The
Company's products include batch and single substrate surface preparation and
cleaning equipment, electrochemical deposition (ECD) equipment, thermal
processing equipment, and fab supervisory software systems. The process steps
performed by the Company's products occur repeatedly throughout the
semiconductor fabrication cycle, and constitute an integral part of the
manufacturing process for virtually every semiconductor produced today. The
Company's products are also used to manufacture materials and devices fabricated
with similar processes, including thin film heads used for disk drives, flat
panel displays, multichip modules, ink jet print heads, compact disc masters,
solder bumping for advanced device packaging, high speed gallium arsenide
communication devices, micro electromechanical systems (MEMS), and hard disk
media. The Company's products are designed to provide improved yields through
higher process uniformity and reduced contamination, increased throughput
through advanced processes which reduce cycle times, and lower direct costs
through reduced consumables usage and smaller footprints, thereby providing
lower overall cost of ownership. The Company markets and sells its products to
customers worldwide through its own sales force and manufacturer's
representatives.
INDUSTRY BACKGROUND
The fabrication of semiconductor devices is a complex process involving several
distinct phases repeated numerous times during the fabrication process. Each
production phase requires different processing technology and equipment, and the
Company believes no one semiconductor equipment supplier currently produces an
entire state-of-the-art fabrication system. Rather, semiconductor device
manufacturers typically construct fabrication facilities by combining
manufacturing equipment produced by several different suppliers, each of which
performs specific functions in the manufacturing process.
Industries that use semiconductors are demanding increasingly complex, higher
performance devices. Fabrication of these devices requires increasing the number
of process steps and reducing feature sizes, necessitating narrower process
tolerances. These factors, together with the industry's history of migration to
larger wafer sizes and a greater number of semiconductor devices on some wafers
have led to a substantial increase in the manufacturers' per wafer investment.
The semiconductor industry is characterized by continuing change and evolving
technologies. Traditionally, semiconductor devices have used aluminum alloys to
connect the millions of transistors on a micro chip. As line geometries become
increasingly smaller to accommodate the ever shrinking chip, aluminum becomes
less efficient. Copper has long been known to have superior electrical
properties when compared to aluminum, but due to its high mobility, copper will
migrate through the device and ruin the transistors. This drawback has been
overcome and the industry is moving forward with copper interconnect adoption.
This major interconnect technology development will require specialized
production equipment. The existing equipment used for aluminum cannot be
retrofitted to deposit copper interconnect layers.
Because of the increasing cost of equipping fabrication facilities and the
greater number of devices manufactured on each wafer, the Company believes
semiconductor manufacturers are placing greater importance on the overall cost
of ownership of each piece of process equipment. The principal elements of cost
of ownership are yield, throughput, and direct costs. Yield, or the percentage
of good devices per wafer, is primarily determined by operating contamination
levels and process uniformity. Achieving high yields becomes more critical to
manufacturers as their per wafer investment increases. Throughput, or the number
of wafers processed by a particular tool in a given period, is primarily a
function of the time required to complete a process cycle and the handling time
between process steps. Major components of direct operating cost include the
amount of consumables used in the manufacturing process, the cost of the clean
room space occupied by the equipment (i.e., the "footprint"), the purchase price
of the equipment, and other operating costs such as repairs and maintenance.
The Company believes that semiconductor device manufacturers are asking
equipment suppliers to take an increasingly active role in meeting the
manufacturers' technology requirements and cost constraints by researching,
developing, and supporting the products and processes required to fabricate
advanced products. Certain manufacturers are seeking strategic relationships
with equipment suppliers for specific process steps on existing and new
products. As a result, equipment companies are being asked to provide advanced
process expertise, superior product performance, reduced overall cost of
ownership, and worldwide customer support to meet the needs of device
manufacturers.
In addition to the semiconductor industry, certain semiconductor manufacturing
equipment has application in the manufacturing processes of other industries.
For example, manufacturers of thin film heads for disk drives, flat panel
displays, multichip modules, ink jet print heads, compact disc masters, solder
bumping for advanced device packaging, high speed gallium arsenide,
communication devices, micro electromechanical systems and hard disk media
utilize many of the same basic technological building blocks as does the
semiconductor manufacturing industry, in that certain production equipment
provides the same basic function or applications for a substrate as
semiconductor manufacturing equipment does for a silicon wafer.
THE SEMITOOL STRATEGY
The key elements of the Company's business strategy are as follows:
Develop Innovative Solutions. The Company is committed to developing
new products and processes, new applications for existing products, and
enhancing existing products to address evolving process requirements.
Accordingly, the Company devotes substantial resources to product innovation and
collaborative development efforts.
Offer a Broad Range of Products to Customers in Diverse Markets. The
Company focuses on offering a broad range of products including surface
preparation and cleaning tools, electrochemical deposition equipment, thermal
processing equipment, and fab supervisory systems to semiconductor manufacturers
for use in diverse process applications. The Company leverages its technology
and expertise to provide solutions to manufacturers of other products that are
fabricated using similar processes, such as thin film heads used for disk
drives, flat panel displays, multichip modules, ink jet print heads used in disk
drives, compact disc masters, solder bump bonding, and hard disk media. Some of
these other applications involve substrates with surfaces larger than the
current typical semiconductor substrates.
Capitalize on Manufacturing Expertise. The Company's manufacturing
strategy is to identify and perform internally those manufacturing functions
which add value to the Company's products. The Company believes it achieves a
number of competitive advantages from its selective vertical manufacturing
integration, including the ability to achieve cost and quality benefits, and to
bring quickly new products and product enhancements to market.
Focus on Low Overall Cost of Equipment Ownership. The Company designs
and manufactures process equipment and develops processes with a focus on
providing its customers with a low overall cost of ownership. Additionally, the
Company sells fab supervisory systems that have the ability to monitor and
control multiple tools, not only those manufactured by the Company but those
manufactured by others, on a fab-wide basis which can provide better process
control and improve yields.
Address Worldwide Markets. The Company markets and sells its products
worldwide with emphasis on Europe and Asia as its principal international
markets. The Company believes the strength of its international sales and
service organizations is important to its continued success in these markets. To
facilitate its worldwide marketing strategy, the Company has dedicated
international sales and support organizations in England, France, Germany,
Italy, Japan, Korea, Singapore, and Taiwan.
SEMITOOL'S PRODUCTS AND SOLUTIONS
The Company designs, manufactures, markets and services batch and single
substrate surface preparation and cleaning equipment, electrochemical deposition
systems, thermal processing equipment, and fab supervisory systems for
computer-integrated manufacturing.
The Company conducts research and development in a number of process areas. In
July 1998, the Company introduced a new surface preparation and cleaning process
called HydrOzone. HydrOzone uses environmental friendly ozone to provide better
cleans than was previously achieved with highly-toxic chemicals. This new
process can be used for a variety of cleaning and photo-resist removal
applications while reducing contaminants and water consumption. Compared to
traditional technology, the HydrOzone process has a shorter cycle time resulting
in higher throughput, and is cleaner because the chemistry contains no
background particle levels. Also, the process is more cost effective because
there is less chemical usage, the chemicals are less expensive to purchase, and
chemical disposal costs are greatly reduced. The HydrOzone process is available
on the Company's Magnum and Spectrum products.
In July 1998, the Company announced the Millennium, a single wafer processor
that complements the Company's Equinox product. The Millennium is a
revolutionary approach to single wafer surface preparation through a unique
Capsule process chamber providing process control to specific areas on both
surfaces of the wafer for critical clean applications. Wafer backside cleaning
for copper interconnect is an anticipated application. The system is based on
the Company's proven linear platform which is designed for high throughput
manufacturing. The Capsule takes advantage of a spin-assisted surface tension
effect to tightly control surface processing and provide clean, dry wafers for
further fabrication steps. The Company expects to begin selling the Millennium
in fiscal 1999.
Copper interconnect was the focus of the Company's electrochemical deposition
research and development and centered on increasing film uniformity, and
developing methods to prevent "back-side" contamination. The LT-210C, introduced
in fiscal 1998, uses a small footprint linear configuration designed for high
throughput and high productivity manufacturing. The LT-210C employs two track
robots to feed process chambers and has optional automatic on-line electrolyte
control systems to ensure constant solution concentration for repeatability of
deposition, and various proprietary systems to ensure uniformity of plating
across the wafer. The LT-210C consistently deposits films with superior step
coverage, lower electrical resistance, at a lower cost and at a rate faster than
is possible with conventional vacuum deposition systems.
The Company has developed a broad range of products that enables its customers
to perform advanced fabrication processes. The Company's products are designed
to provide improved yields through higher process uniformity and reduced
contamination, increased throughput through advanced processes which reduce
cycle times, and lower direct costs through reduced usage of consumables and
smaller footprints, thereby providing lower overall cost of ownership. The
process steps performed by the Company's products occur repeatedly throughout
the fabrication cycle and constitute an integral part of the manufacturing
process for virtually every semiconductor produced today.
Surface Preparation and Cleaning
The fabrication of semiconductors involves numerous distinct processes which
can, depending on the complexity of the device, exceed 250 steps. The surface
preparation processing steps involved in semiconductor manufacturing can include
cleaning, developing, stripping, etching, and micro-machining. Such processes
have traditionally been performed using wet-benches which consist of open
chemical and rinse tanks, in which cassettes of wafers are immersed, either
manually or automatically. Multiple process steps are performed by transferring
wafers from one chemical bath to another. There are significant disadvantages
relating to process uniformity and contamination control inherent in wet-bench
processing, which are becoming increasingly problematic as process tolerances
narrow. Wet-benches also lack the flexibility to readily change processes, and
are relatively costly to operate because they consume large amounts of deionized
water and process chemicals and have large footprints that use valuable clean
room space. The Semitool solution utilizes spray processing as a replacement for
wet-bench processing. The Company believes it is the market leader in this
technology.
The Company's surface preparation and cleaning equipment uses centrifugal spray
technology to process wafers and substrates by exposing them to a
user-programmable, sequenced spray of chemicals inside an enclosed chamber.
Spray technology avoids non-uniformity of process by applying the process
chemicals via spray. This technique enhances chemical reaction on the substrate
surface, which increases process reliability and shortens process cycle times.
The enclosed process chamber technology also allows for more efficient use and
disposal of process chemicals through recirculation, reclamation, and filtration
as well as increased operator safety. The Company sells both manual and fully
automated batch (multiple wafer processing) platforms that cluster multiple
chemical processing modules for silicon wafers and other substrates, thereby
increasing yield and throughput, and providing a complete process solution in a
single unit.
Batch tools process multiple wafers in a carrier which is loaded into a rotating
fixture mounted in a process chamber. The process chamber is then sealed and
chemicals are sequentially dispensed into the chamber via spray manifolds in a
closed-loop system. As the rotating fixture turns the carrier, a chemical spray
is applied to the wafer surfaces. This technique enhances chemical reaction on
the substrate surface, which increases process reliability and shortens process
cycle times. After application of the process chemicals, deionized ("DI") water
can be sprayed into the chamber to stop the chemical reaction and to remove
chemical residues. The wafers, carrier, and chamber are then dried by
centrifugal spinning coupled with a flow of warm nitrogen, either in the same
process chamber or in an adjacent rinser/dryer module. The Company believes its
batch spray chemical processing and cleaning tools offer significant advantages
over conventional wet-benches. Other advantages include higher yields by
providing better process uniformity and lower particulate contamination,
increased throughput by providing shorter process cycle times, and reduced
direct costs by providing more effective use of chemicals and smaller
footprints, thereby lowering overall cost of ownership. All of the Company's
batch chemical processing and cleaning tools are 300mm ready.
Batch Processing Tools
The Magnum, Magnum 3000, and Spectrum are Semitool's automated batch
multi-module surface processing products. These tools cluster the Company's
solvent, acid and spin rinser/dryer capabilities into a single automated unit.
These tools offer standard mechanical interface ("SMIF") loading capabilities
and a touch screen computer interface customized for ease of operation.
Introduced during fiscal year 1998, Spectrum represents a more compact version,
of Semitool's automated spray technology which through advanced design has
retained high productivity and performance standards and is easier to retrofit
into existing semiconductor fabs. All of these multi-module batch tools provide
customers with the flexibility to mix and match process modules, including
immersion modules as appropriate, thereby providing them with a complete surface
processing solution to meet their particular process requirements. The Magnum
and Spectrum possess significant competitive advantages over both stand-alone
tools and other automated products, including the ability to replace two or more
wet-benches with a single, smaller footprint tool which provides increased
yields and increased throughput per square foot of clean room space. The
purchase price of the Magnum and Magnum 3000 ranges from $800,000 to over $3.1
million, depending on configuration. Spectrum selling price ranges from $900,000
to $2.0 million.
The Company's manually loaded batch spray chemical processing and cleaning
products include the Spray Acid Tool and the Spray Solvent Tool. The Spray Acid
Tool is used in applications using acids and all of its areas exposed to acids
are made entirely of teflon and other acid-resistant materials. This tool
addresses applications such as resist-stripping, pre-diffusion cleaning, oxide
etching, polymer removal and chemical milling. The Company's Spray Solvent Tool
is primarily constructed of stainless steel and addresses processes which use
solvents to dissolve and strip the lithographic media from substrate surfaces,
remove polymer residues, and develop lithographic images on substrate surfaces.
In addition to customary semiconductor applications, the Spray Acid Tool and
Spray Solvent Tool are being used in the manufacturing process for a variety of
other products including flat panel displays and thin film heads, and are used
with substrates as large as 500 square millimeters. The purchase price of the
Company's manual batch chemical processing tools range from $120,000 to
$750,000, depending on configuration.
The Company's manually loaded Spin Rinser/Dryer is a batch tool used primarily
for removing chemical residue from substrate surface with "DI" water, and
utilizes the same enclosed chamber, spray processing and centrifugal drying
technologies employed in the Company's Spray Acid Tools and Spray Solvent Tools.
The Spin Rinser/Dryer incorporates a "DI" water resistivity monitor to ensure
the required level of cleanliness. Additionally this rinsing and drying
technology can be used to clean and dry the carriers and boxes used to transport
wafers throughout the fab. Since these carriers are made of plastic, high
temperatures cannot be used for drying as deformation will occur. If the
carriers and boxes are not rinsed and dried properly, they can be a significant
source of contamination that will decrease device yields. The Company introduced
the Spin Rinser/Dryer in 1979 and, as of September 30, 1998, had delivered over
22,000 units to customers. The purchase price of the Spin Rinser/Dryer ranges
from $10,000 to $100,000, depending on configuration. The Spin Rinser/Dryer has
been redesigned to handle 300mm substrates.
Single Substrate Processing Tools
The Company's single substrate processing equipment employs chemical spray and
allows multiple chemistries to be used within a self-cleaning, enclosed process
chamber. These tools enable customers to conduct sequential surface processing
steps, and then within the same chamber, rinse and centrifugally dry substrates,
thereby reducing contamination during and between process steps.
The Company's Equinox tool addresses the needs of customers employing single
substrate processing for specialized applications. The Equinox utilizes a
variety of processes, including immersion, spray, vapor and infrared heating, to
address cleaning, stripping, etching, developing, micro-machining and plating.
All of these processes are performed with the substrate suspended device side
down in an enclosed process chamber. This face down positioning allows for
enhanced liquid, vapor, or gas delivery of the process to the substrate,
resulting in greater process uniformity and reduced contamination. The Equinox
is a flexible platform which may contain multiple process chambers, allowing
customers to cluster multiple process technologies into a single tool to perform
sequential processes. The Equinox has been used to process ceramic substrates,
thin film heads and photo masks in addition to its customary silicon and gallium
arsenide wafer applications. The price of the Equinox ranges from $300,000 to
$1.1 million, depending on configuration.
The Company introduced the Millennium single wafer processor to complement its
Equinox product. The Millennium provides a revolutionary approach to single
wafer surface preparation through a unique Capsule process chamber to provide
process control to specific areas on both surfaces of the wafer for critical
clean applications. Wafer backside cleaning for copper interconnects is an
anticipated application. The system is based on the Company's proven linear
platform which is designed for high throughput manufacturing. The Capsule takes
advantage of a spin-assisted surface tension effect to tightly control surface
processing and provide clean, dry wafers for further fabrication steps. The
Company expects to begin selling the Millennium in fiscal 1999.
Wafer Carrier Cleaning System
The Company's Storm wafer carrier cleaning system cleans and dries the wafer
carriers in a unique rinsing/drying process that occurs inside an enclosed
chamber. Solution is sprayed inside the chamber, cleaning both the boxes and
cassettes and the inside of the chamber, followed by a "DI" water rinse. The
boxes and cassettes are then dried using centrifugal force and warm filtered
ambient air. The Storm monitors the humidity inside the enclosed process chamber
to ensure consistent drying results. The Company believes the Storm removes
particles more effectively than conventional technology and has a low cost of
ownership. The Storm also has a patented loading feature that allows
through-the-wall installation whereby unwashed boxes and cassettes can be loaded
into the Storm from outside the clean room and then unloaded directly into the
clean room after the cleaning cycle has been completed. This feature enables
customers to avoid bringing contaminated boxes and cassettes into the clean
room. The price of a Storm ranges from $150,000 to $400,000, depending on
configuration.
Electrochemical Deposition
Semitool introduced its first electrochemical deposition (ECD) tool in 1993. The
Company's ECD tools have been used for gold, platinum, solder, and copper
deposition production and research and development applications. Semitool
developed the first high throughput copper plating tool, the Equinox LT-210, for
the semiconductor industry.
Copper has several advantages over the aluminum alloys that have traditionally
been used for device interconnects. Copper will significantly minimize the
number of metal layers required, reduce heat dissipation, reduce manufacturing
cost, and increase chip speed. Copper has lower electrical resistance than
aluminum so much smaller lines of copper have the same current-carrying
capability as today's aluminum interconnects. A limited number of semiconductor
device manufacturers have begun delivering devices with copper interconnects.
The Company believes the emerging copper interconnect market will be a
high-growth market when the semiconductor industry begins widespread production
of semiconductor copper interconnect based devices and the semiconductor
industry begins its economic recovery.
Other applications for electrochemical deposition are also emerging such as the
deposition of gold interconnects on gallium arsenide in the manufacture of high
speed communication devices and solder bump application to semiconductors for
flip chip attachment. Flip chip attachment makes the die attach operation much
more efficient than conventional wire bonding processes, becomes increasingly
necessary as the number of inputs and outputs per chip increase, and provides a
higher level of performance than is otherwise available. ECD provides technical
capability while maintaining low cost solder application. MEMS and sensors are
used in a number of new products and are instrumental in the functioning of the
automobile air bag. The manufacture of thin-film heads and ink-jet print heads
also utilizes electrochemical deposition.
Semitool offers two models of fully automated single wafer processing tools that
are designed for electrochemical deposition. Its radial tool, the Equinox, is
designed for flexibility to handle process development or production
applications. It's versatility in configuration allows multiple chemistries and
processes to be performed in the same tool. The LT-210C, introduced in fiscal
1998, uses a small footprint, linear configuration designed for high throughput
and high productivity manufacturing. The LT-210C employs two track robots to
feed process chambers and has optional automatic on-line electrolyte control
systems to ensure constant solution concentration for repeatability of
deposition, and various proprietary systems to ensure uniformity of plating
across the wafer. The LT-210C consistently deposits films with superior step
coverage, lower electrical resistance, at a lower cost and at a rate faster than
is possible with conventional vacuum deposition systems. Both models plate
copper or gold for device interconnects, gold or solder for bonding bumps,
copper and gold for ink jet devices and copper for magnetoresistive heads used
in hard drives. The Company's ECD tools range upward in price from $575,000 to
$2.2 million
Thermal
Thermal processing generally addresses the oxidation/diffusion and low pressure
chemical vapor deposition (LPCVD) steps of the semiconductor fabrication
process. The Company's VTP 1500 and EXPRESS vertical furnaces address this
market. They employ a patented design which provides a continuously controlled
process environment that allows for oxidation/diffusion and LPCVD processing
steps to be performed sequentially in the same processing chamber. The Company's
furnaces feature a stationary base plate and quartz process tower with a double
lift system which allows the process chamber and heating element to each be
raised and lowered independently over the process tower. The double lift design
also permits the heating element to be lifted away from the sealed process
chamber, allowing wafers to cool more rapidly in a controlled environment,
thereby improving overall thermal processing cycle time. The Company believes
its furnaces produce higher quality film with fewer impurities and increased
electrical properties, and have been designed to meet manufacturers'
requirements for the production of semiconductor devices with line geometries as
small as .18 micron. The EXPRESS is designed with model-based temperature
control technology which provides a shortened period to reach desired processing
temperature thereby providing increased throughput. The prices of the VTP 1500
and EXPRESS range from $600,000 to $1.5 million, depending on configuration. The
EXPRESS has been redesigned to handle 300mm wafers.
Spare Parts and Service
The Company sells spare part kits and spare part components for its equipment.
The Company employs customer service and process engineers to assist and train
the Company's customers in performing preventive maintenance and service on
Semitool equipment and developing process applications for the equipment. The
Company currently provides one, two or three year warranty on new equipment and
a 90-day warranty on parts. The Company offers a variety of process, service,
and maintenance programs that may be purchased for a fee. A number of customers
have purchased maintenance contracts whereby the Company's service employees
work full-time at the customer's facility, and provide service and maintenance
support for Semitool equipment.
Fab Supervisory Systems
A state-of-the-art semiconductor fab contains many pieces of complex equipment
and each one performs a complicated process. Monitoring and controlling the
processes on each piece of equipment are critical to achieving high yields, high
quality devices, and meeting production targets. Typically, this is done by
highly trained operators. However, a monitoring and control system can
significantly enhance a fabs' ability to achieve yield, quality and production
goals.
In February 1996, the Company acquired Semy Engineering, Inc., a manufacturer of
monitoring and control systems. The core of these systems is a highly
sophisticated communication software applied through a specially equipped
computer workstation. These workstations are networked with the process tools to
provide monitoring and control. The Company's Unix based systems have a number
of features including process recipe management, statistical process control,
data logging and data warehouse management, preventive maintenance tracking, and
process analysis.
Another Semy product is the MYPRO Model Based Temperature Control (MBTC) System.
The MYPRO MBTC system provides state-of-the-art temperature control capability
for both new and retrofit diffusion furnace applications and offers increased
temperature control. In October 1998, Semiconductor International selected Semy
Engineering, Inc's MYPRO MBTC system as an Editor's Choice Best Product.
During fiscal 1998, the Company invested $2.2 million in software development to
enhance its Unix based fab supervisory system product line and extended its
control capability to virtually every major machine in the front-end
manufacturing process of a semiconductor manufacturer. This new family of
software and hardware offerings has enabled the Company to be the first to
successfully implement a fab-wide data collection, analysis and control system
which interfaces directly with the semiconductor manufacturer's computer
integrated manufacturing system and individual process tools.
CUSTOMERS, SALES AND MARKETING
The Company's customers include leading worldwide semiconductor manufacturers as
well as major manufacturers of thin film heads, flat panel displays, multichip
modules, ink jet print heads, compact disc masters, and hard disk media. The
following is a representative list of the Company's largest United States and
international customers, which had purchases of approximately $2.0 million or
more in fiscal 1998:
Advanced Micro Devices Lucent Technologies Philips Semiconductor
Chartered Semiconductor Matsushita Semi. STMicrelectronics
Fujitsu Micro Chip Corporation Siemens
Hewlett-Packard Motorola Sony
IBM National Semiconductor Taiwan Semiconductor
Intel NEC United Micro Electronics
LSI Logic Oliver Design Whiteoak Semiconductor
The Company believes that its Company-staffed worldwide sales, service and
customer support organizations are important to the long-term success of its
customer relationships.
International sales, primarily in Europe and Asia accounted for approximately
38%, 36% and 44% of total sales for fiscal years 1998, 1997 and 1996,
respectively. The Company markets and sells its products in North America
through its sales organization which includes direct sales personnel and
independent sales representatives. The Company currently has sales and service
offices located throughout the United States. In Europe, the Company has direct
sales personnel. In Asia, the Company sells through direct sales personnel and
independent sales representatives as well as through Tokyo Electron, Limited
("TEL") pursuant to a non-exclusive distribution agreement. The TEL distribution
agreement is in phased termination which is expected to be final in March 1999.
TEL sells the Company's stand-alone batch processing products (except
electrochemical deposition products) in Japan. The Company has a direct sales
and customer support organization located in Japan, Singapore and Korea that
sells Semitool products.
To enhance its sales capabilities, the Company maintains a demonstration and
process development laboratory and a clean room at its Kalispell, Montana
facility and is installing a demonstration laboratory in Japan.
The Company currently provides one, two or three year warranties on new
equipment and a 90-day warranty on parts. The Company has field service
personnel and application engineers servicing customers in the United States,
Europe and Asia, who directly provide warranty service, post-warranty service,
and equipment installations. Field service engineers are located in nine sites
throughout the United States, including dedicated site-specific engineers at
certain customer locations pursuant to customer agreements. To further ensure
customer satisfaction, the Company also provides service and maintenance
training as well as process application training for its customers' personnel on
a fee basis. The Company maintains an extensive inventory of spare parts which
allows the Company to provide overnight delivery in most instances. The
Company's vertically integrated manufacturing allows the Company to quickly
manufacture parts to address customers' service needs.
BACKLOG
Orders Backlog decreased nearly 52% to approximately $30.8 million at September
30, 1998, from approximately $63.8 million at September 30, 1997. The Company
includes in its backlog those customer orders for which it has received purchase
orders or purchase order numbers and for which shipment is scheduled within the
next twelve months. Orders are generally subject to cancellation or rescheduling
by customers with limited or no penalty. As the result of systems ordered and
shipped in the same quarter, possible changes in customer delivery schedules,
cancellations of orders and delays in product shipments, the Company's backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period.
MANUFACTURING
Most of the Company's manufacturing is conducted at its facilities located in
Kalispell, Montana. The Company's vertically integrated manufacturing operations
include metals and plastics fabrication and finishing capabilities; component
part and final product assembly; and extensive product testing capabilities. The
Company's manufacturing personnel work closely with product development
engineers to ensure that products are engineered for manufacturability,
affording a smooth transition from prototype to full scale production. Component
and product prototyping is performed internally, and design engineers often
receive prototypes of newly designed parts from manufacturing within 24 hours.
The Company believes it achieves a number of competitive advantages from its
vertically integrated manufacturing operations, including the ability to achieve
cost and quality advantages, and to bring quickly new products and product
enhancements to market.
RESEARCH AND DEVELOPMENT
The market for semiconductor equipment is characterized by rapid technological
change and product innovation. The Company believes that continued timely
development of products for both existing and new markets is necessary to remain
competitive. The Company devotes significant resources to programs directed at
developing new and enhanced products, as well as new applications for existing
products. The Company maintains an extensive demonstration and process
development laboratory at its facilities in Montana, including a clean room for
testing and developing its products. Company research and development (R&D)
personnel work directly with customers to provide process solutions, develop new
processes and to design and evaluate new pieces of equipment.
The Company developed new models for its single substrate processing and
automated batch chemical processing product line during fiscal 1998. The major
equipment R&D projects during fiscal 1998 were the LT-210C, a linear copper
plating tool, the high throughput fully automated Spectrum, and Millennium which
utilizes a unique "Capsule" processing chamber. The Company also developed a new
family of software for its factory automation business the costs of which were
capitalized once technological feasibility was reached.
Expenditures for R&D, which are expensed as incurred, during fiscal 1998, 1997
and 1996 were approximately $24.5 million, $21.2 million and $19.5 million and
represented 13.6%, 10.9% and 11.2% of net sales, respectively.
COMPETITION
The markets in which the Company competes are highly competitive. The Company
faces substantial competition from established competitors, certain of which
have greater financial, marketing, technical and other resources, broader
product lines, more extensive customer support capabilities, and larger and more
established sales organizations and customer bases than the Company. The Company
may also face competition from new domestic and overseas market entrants.
Significant competitive factors in the semiconductor equipment market and other
markets in which the Company competes include system performance and
flexibility, cost of ownership, the size of each manufacturer's installed
customer base, customer service and support, and breadth of product line. The
Company believes that it competes favorably on the basis of these factors. The
primary competition to the Company's batch chemical spray products is currently
from wet-bench chemical processing equipment. The Company is also aware of at
least two other competing manufacturers of spray chemical processors. As the
demand for more precise and reliable chemical processing increases, the Company
anticipates greater competition in the centrifugal spray technology area. The
Company is aware of vertical furnaces produced by at least four other
manufacturers which compete with the Company's thermal processing equipment. The
single substrate processing market in which the Company's Equinox competes and
the wafer carrier cleaning market in which the Company's Storm competes are
highly fragmented markets. The Company is aware of at least two major companies,
both larger than the Company, and several smaller companies competing in the
electrochemical deposition market.
The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features, or
that new processes, or technologies will not emerge that render the Company's
products less competitive or obsolete. As a result of the substantial investment
required to integrate capital equipment into a production line, the Company
believes that once a manufacturer has selected certain capital equipment from a
particular vendor, the manufacturer generally relies upon that vendor to provide
equipment for the specific production line application and may seek to rely upon
that vendor to meet other capital equipment requirements. Accordingly, the
Company may be at a competitive disadvantage with respect to a particular
customer if that customer utilizes a competitor's manufacturing equipment.
Increased competitive pressure could lead to lower prices for the Company's
products, thereby adversely affecting the Company's business and results of
operations. There can be no assurance that the Company will be able to compete
successfully in the future.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company's success depends in significant part on the technically innovative
features of its products. The Company currently holds numerous United States
patents, some with pending foreign counterparts, has several United States
patent applications pending and intends to file additional patent applications
as appropriate. There can be no assurance that patents will issue from any of
the Company's pending applications or that existing or future patents will be
sufficiently broad to protect the Company's technology. The Company believes
that patents and trademarks are of less significance in its industry than such
factors as product innovation, technical expertise and its ability to quickly
adapt its products to evolving processing requirements and technologies. While
the Company attempts to protect its intellectual property rights through
patents, copyrights and non-disclosure agreements, there can be no assurance
that the Company will be able to protect its technology, or that competitors
will not be able to develop similar technology independently. In addition, the
laws of certain foreign countries may not protect the Company's intellectual
property to the same extent as the laws of the United States. Moreover, there
can be no assurance that the Company's existing or future patents will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide meaningful competitive advantages to the Company. In any of such
events, the Company's business, operating results and cash flows could be
adversely affected.
There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any infringement by its products of any patents or proprietary rights
of others, further commercialization of the Company's products could provoke
claims of infringement from third parties. In August, 1998, the Company filed
suit against Novellus Systems, Inc. in the United States District Court for the
Northern District of California (Case No. C-98-3089DLJ), alleging infringement
of two of the Company's patents relating to single substrate processing tools
used in electrochemical deposition of copper onto semiconductor wafers. The
Company seeks damages for past infringement, a permanent injunction, treble
damages for willful infringement, pre-judgment interest and attorneys fees.
Novellus answered the complaint by denying all allegations, counterclaiming for
declaratory judgment of invalidity and non-infringement. Discovery is commencing
and no trial has been set. In the future, litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any such litigation could result in substantial cost and diversion of
effort by the Company, which by itself could have a material adverse effect on
the Company's financial condition and operating results. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its products, any of which could have a
material adverse effect on the Company's business and results of operations.
EMPLOYEES
At September 30, 1998, the Company had 1,045 full time employees and 24
temporary contract employees worldwide. This includes 471 in manufacturing, 363
in marketing, sales and field service, 134 in research and development, and 101
in general administration. The Company's worlwide employment has declined 31%
since the end of the last fiscal year. None of the Company's employees are
represented by a labor union and the Company has never experienced a work
stoppage or strike. The Company considers its employee relations to be good.
RISK FACTORS
Introduction
The risks detailed in this section as well as risks and uncertainties discussed
elsewhere in this annual report on Form 10-K and in the Company's other SEC
filings constitute some of the risks common in the semiconductor equipment
industry or risks specific to Semitool. Shareholders or potential shareholders
should read these risks carefully to better understand the potential volatility
of the Company's results and volatility in the Company's share price. The fact
that some of the risk factors may be the same or similar to the Company's past
filings means only that the risks are present in multiple periods. The Company
believes that many of the risks detailed are part of doing business in the
semiconductor equipment industry and will likely be present in all periods
reported. The fact that certain risks are endemic to the industry does not
lessen the significance of the risk.
Cyclical Nature of the Semiconductor Industry
The Company's business depends primarily on the capital expenditures of
semiconductor manufacturers, who correspondingly depend on the demand for final
products or systems that use such devices. The semiconductor industry is
cyclical and has historically experienced periodic downturns characterized by
oversupply and weak demand, which often have had a material adverse effect on
capital expenditures by semiconductor manufacturers. These downturns generally
have adversely affected the business and operating results of semiconductor
equipment suppliers, including the Company. The semiconductor device industry is
presently experiencing a slowdown in terms of product demand and volatility in
terms of product pricing. In 1998, the average selling price of memory chips and
certain other semiconductor devices significantly decreased. This slowdown in
conjunction with manufacturers ability to produce more devices per wafer has
resulted in excess production capacity and many semiconductor device
manufacturers are delaying expansion plans. This slowdown and volatility has
caused the semiconductor industry to reduce its demand for semiconductor
processing equipment and, in some instances, to delay capital equipment
decisions. In some cases this has resulted in order cancellations or delays of
orders and delays of delivery dates for the Company's products. The current
downturn has negatively impacted the Company resulting in reduced new order
rates and order backlog and declining sales and profitability. The Company
expects the downturn to continue into fiscal 1999 and will result in further
sales and profitability declines. Currently, analysts are not expecting a
recovery in the semiconductor equipment industry until late calendar year 1999
or early 2000. In addition, the need for continued investment in research and
development, marketing and customer support may limit the Company's ability to
reduce expenses in response to this and future downturns in the semiconductor
industry.
Fluctuations in Future Operating Results
The Company's business and results of operations have fluctuated significantly
in the past and the Company expects them to fluctuate significantly on a
quarterly or annual basis in the future. During a particular quarter, a
significant portion of the Company's revenues is often derived from the sale of
a relatively small number of high selling price systems. The number of such
systems sold in, and the results for a particular quarter or year can vary
significantly due to a variety of factors, including the timing of significant
orders, the timing of new product announcements by the Company or its
competitors, patterns of capital spending by customers, market acceptance of new
and enhanced versions of the Company's products, changes in pricing by the
Company, its competitors or suppliers, the mix of products sold and cyclicality
in the semiconductor industry and other industries served by the Company. In
addition, the cancellation or rescheduling of customer orders or any production
difficulty could adversely impact shipments which would negatively impact the
Company's business and results of operations for the period or periods in which
such cancellation or rescheduling occurs. In light of these factors, the
cyclical nature of the semiconductor industry and the current industry downturn,
the Company expects to continue to experience significant fluctuations in
quarterly and annual operating results. Moreover, many of the Company's expenses
are fixed in the short-term which, combined with the need for continued
investment in research and development, marketing and customer support, limits
the Company's ability to reduce expenses quickly. As a result, declines in net
revenues could have a material adverse effect on the Company's business, results
of operations and cash flows.
Dependence on Product Development
Semiconductor equipment is subject to rapid technological change as well as
evolving industry standards. The Company believes that its future success will
depend in part upon its ability to continue to enhance its existing products and
their process capabilities, to continue to decrease the overall cost of
ownership of such products, and to continue to develop and manufacture new
products with improved process capabilities which conform to evolving industry
standards. As a result, the Company expects to continue to make significant
investments in research and development. Although historically the Company has
had adequate funds from its operations to devote to research and development,
there can be no assurance that such funds will be available in the future or, if
available, that they will be adequate. The Company also must manage product
transitions successfully, since announcements or introductions of new products
by the Company or its competitors could adversely affect sales of existing
Company products. There can be no assurance that the Company will be able to
develop and introduce new products or enhancements to its existing products on a
timely basis or in a manner which satisfies customer needs or achieves
widespread market acceptance. The failure to do so could adversely affect the
Company's business, results of operations and cash flows.
Market Acceptance of New Products
The Company believes that its growth prospects depend in large part upon its
ability to gain customer acceptance of its products and technology. Market
acceptance of new products depends upon numerous factors, including
compatibility with existing manufacturing processes and products, perceived
advantages over competing products and the level of customer service available
to support such products. Moreover, manufacturers often rely on a limited number
of equipment vendors to meet their manufacturing equipment needs. As a result,
market acceptance of the Company's new products may be adversely affected to the
extent potential customers utilize a competitor's manufacturing equipment. There
can be no assurance that growth in sales of new products will continue or that
the Company will be successful in obtaining broad market acceptance of its
systems and technology.
Competition
The markets in which the Company competes are highly competitive. The Company
faces substantial competition from established competitors, certain of which
have greater financial, marketing, technical and other resources, broader
product lines, more extensive customer support capabilities, and larger and more
established sales organizations and customer bases than the Company. The Company
may also face competition from new domestic and overseas market entrants.
Significant competitive factors in the semiconductor equipment market and other
markets in which the Company competes include system performance and
flexibility, cost of ownership, the size of each manufacturer's installed
customer base, customer service and support, and breadth of product line. The
Company believes that it competes favorably on the basis of these factors. In
order to remain competitive, the Company must maintain a high level of
investment in research and development, marketing, and customer service while
controlling operating expenses. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company's products will continue to be viewed as competitive as a result of
technological advances by competitors or changes in semiconductor processing
technology. The Company's competitors may also increase their efforts to gain
and retain market share through competitive pricing. Such competitive pressures
may necessitate significant price reductions by the Company or result in lost
orders which could adversely affect the Company's business, results of
operations, and cash flows.
The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features, or
that new processes or technologies will not emerge that render the Company's
products less competitive or obsolete. As a result of the substantial investment
required to integrate capital equipment into a production line, the Company
believes that once a manufacturer has selected certain capital equipment from a
particular vendor, the manufacturer generally relies upon that vendor to provide
equipment for the specific production line application and may seek to rely upon
that vendor to meet other capital equipment requirements. Accordingly, the
Company may be at a competitive disadvantage with respect to a particular
customer if that customer utilizes a competitor's manufacturing equipment. There
can be no assurance that the Company will be able to compete successfully in the
future.
Environmental Regulations
The Company is subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
on the Company's premises. The Company believes that it is in material
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business. Nevertheless, current or future
regulations could require the Company to purchase expensive equipment or to
incur other substantial expenses to comply with environmental regulations. Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of, hazardous substances could subject the Company to
future liabilities, result in fines being imposed on the Company, or result in
the suspension of production or cessation of the Company's manufacturing
operations.
International Business
Approximately 38%, 36% and 44% of the Company's sales for fiscal 1998, 1997 and
1996, respectively, were attributable to customers outside the United States.
The Company expects sales outside the United States to continue to represent a
significant portion of its future sales. Sales to customers outside the United
States are subject to various risks, including exposure to currency
fluctuations, the imposition of governmental controls, the need to comply with a
wide variety of foreign and United States export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes, and longer
payment cycles typically associated with international sales. The Company's
international sales activities are also subject to the difficulties of managing
overseas distributors or representatives, and difficulties of staffing and
managing foreign subsidiary operations. In addition, because a majority of the
Company's international sales are denominated in United States dollars, the
Company's ability to compete overseas could be adversely affected by a
strengthening United States dollar. Moreover, although the Company endeavors to
meet technical standards established by foreign standards setting organizations,
there can be no assurance that the Company will be able to comply with changes
in foreign standards in the future. The inability of the Company to design
products to comply with foreign standards or any significant or prolonged
decline in the Company's international sales could have a material adverse
effect on the Company's business, results of operations, and cash flows.
Patents and Other Intellectual Property
The Company's success depends in significant part on the technically innovative
features of its products. The Company currently holds numerous United States
patents, some with pending foreign counterparts, has several United States
patent applications pending and intends to file additional patent applications
as appropriate. There can be no assurance that patents will issue from any of
the Company's pending applications or that existing or future patents will be
sufficiently broad to protect the Company's technology. The Company believes
that patents and trademarks are of less significance in its industry than such
factors as product innovation, technical expertise and its ability to quickly
adapt its products to evolving processing requirements and technologies. While
the Company attempts to protect its intellectual property rights through
patents, copyrights and non-disclosure agreements, there can be no assurance
that the Company will be able to protect its technology, or that competitors
will not be able to develop similar technology independently. In addition, the
laws of certain foreign countries may not protect the Company's intellectual
property to the same extent as the laws of the United States. Moreover, there
can be no assurance that the Company's existing or future patents will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide meaningful competitive advantages to the Company. In any of such
events, the Company's business, operating results and cash flows could be
adversely affected.
There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any infringement by its products of any patents or proprietary rights
of others, further commercialization of the Company's products could provoke
claims of infringement from third parties. In the future, litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could result in
substantial cost and diversion of effort by the Company, which by itself could
have a material adverse effect on the Company's financial condition and
operating results. Further, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any of which could have a material adverse effect on the Company's
business and results of operations.
Dependence on Key Personnel
The Company's success depends to a significant extent upon the efforts of
certain senior management and technical personnel, particularly Raymon F.
Thompson, the Company's Chairman. The Company's future success will depend in
large part upon its ability to attract and retain highly skilled technical,
managerial, and marketing personnel. Competition for such personnel is high and,
while to date the Company does not believe that its geographic location has
hindered it in recruiting qualified personnel, no assurance can be given that
the Company's location will not adversely affect future recruiting of key
personnel. The loss of the services of Mr. Thompson or of one or more other key
management or technical personnel, or the inability to attract and retain
additional qualified personnel, could adversely affect the Company's business,
results of operations and cash flows. The Company does not carry key man life
insurance on Mr. Thompson.
Dependence on Key Customers
The Company's ten largest customers accounted for 55%, 52% and 42% of the
Company's net sales in fiscal 1998, 1997 and 1996, respectively. Although the
composition of Semitool's largest customers has changed from year to year, the
loss of, or a significant curtailment of purchases by one or more of the
Company's key customers could adversely affect the Company's business, results
of operations and cash flows.
Dependence on Key Suppliers
Certain components and subassemblies included in the Company's products are
obtained from a single source or a limited group of suppliers. Although the
Company has vertically integrated much of its manufacturing operations, the loss
of, or disruption in shipments from, certain sole or limited source suppliers
could in the short-term adversely affect the Company's business and results of
operations. The Company believes that it could either manufacture components or
secure an alternate supplier with no long-term material adverse effect on the
Company's business or operations. Further, a significant increase in the price
of one or more of these components could adversely affect the Company's
business, results of operations and cash flows.
Effect of Certain Anti-Takeover Provisions
The Company's Articles of Incorporation authorize the Company's Board of
Directors to issue Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of Preferred Stock and to fix the number of shares constituting
any series and the designations of such series, without further vote or action
by the shareholders. Although the Company has no present plans to issue any
Preferred Stock, and views the authorized Preferred Stock as a potential
financing vehicle for the Company, the Board of Directors may issue Preferred
Stock with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. Any issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company.
Volatility of Stock Price
The Company's Common Stock has experienced in the past, and could experience in
the future, substantial price volatility as a result of a number of factors,
including quarter to quarter variations in the actual or anticipated financial
results, announcements by the Company, its competitors or its customers,
government regulations, developments in the industry and general market
conditions. In addition, the stock market has experienced extreme price and
volume fluctuations which have affected the market price of many technology
companies in particular and which have at times been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations, as well as economic conditions generally and in the semiconductor
industry specifically, may adversely affect the market price of the Company's
Common Stock.
YEAR 2000
The Company's Year 2000 (Y2K) readiness project is well underway. The project
consists of six major phases:
1. Planning (completed July 1998)
2. Assessment (completed October 1998)
3. Testing (in progress, scheduled to be completed March 1999)
4. Repairs/Reinstallations (in progress, scheduled to be completed
March 1999)
5. Retesting (in progress, scheduled to be completed June 1999)
6. Contingency plans (June 1999 - October 1999).
The planning phase has been completed and consisted of assigning resources and
timelines to tasks with the projects scheduled to be complete by June 1999. The
plan is updated as new information is collected. The assessment phase has also
been completed and consisted of taking an inventory of products, Information
Technology (IT) systems, non-IT systems, and customers/suppliers that need to be
tested and certified as to Y2K readiness.
Products. Other than some spare parts, many of the Company's products
include software both internally developed and purchased from vendors.
Some equipment also includes numerous sub-systems with embedded software.
Much of this software is customized to meet customers' specific needs.
IT System. These systems include the Company's business and manufacturing
systems, computer-aided design, e-mail and others. The majority of these
systems were developed by software vendors, are not highly customized, and
are either under a software maintenance agreement which requires the
vendor to make the systems Y2K ready or have been updated to Y2K compliant
revisions. Many of the systems have been certified by the manufacturer to
be Y2K ready.
Non-IT Systems. These systems include but are not limited to controllers
on machinery used in production, the heating and air conditioning systems,
communication systems, and electronic security devices. We are working
closely with suppliers of such systems to ensure their products work
properly.
Customers/Suppliers. The Company is working with its customers and
suppliers to determine Y2K readiness to insure that goods and services
will be delivered timely and that transaction processing is proper. The
Company does have electronic data interface (EDI) transactions with some
customers, however, these EDI transactions are provided by third parties
who have certified their Y2K readiness. The Company is working with key
vendors who supply Y2K sensitive products.
The assessment phase consisted of identifying which systems have potential Y2K
problems and the possible affects of those problems. The problems were then
prioritized and those with the largest potential impact on operations were
scheduled for early testing.
The Company is currently in the testing phase with its IT systems, non-IT
systems, and its customers and suppliers. The Company is using test procedures
developed by Sematech, a consortium of semiconductor and semiconductor
manufactures for its IT systems. This work is performed by the Company's IT
personnel. The non-IT systems and customers and suppliers testing is either done
jointly or completely by the supplier. As testing is completed,
repairs/reinstallations, and retesting will occur.
Some of the Company's equipment and the fab supervisory systems that it sells
contain hardware and software components that are subject to the Y2K problems.
The Company is currently in the testing, repairs/reinstallation and retesting
phases with its products. All products shipped since April 11, 1998 are Y2K
ready and most of the products shipped prior to that date have upgrades
available or installed. The installed upgrades have been retested.
The Company will formulate contingency plans for those systems not Y2K ready by
June of 1999. It is not anticipated the contingency plans will be needed for the
mission critical IT and non-IT systems, nor does the Company expect that
contingency plans will be needed for its internally developed software products.
It is not known at this point if contingency plans will be needed for
customers/suppliers and for outsourced components.
The cost incurred thus far with regard to Y2K consists mainly of IT personnel
payroll expenses for IT, non-IT and customers/suppliers issues. Software
engineering payroll cost has been the primary expense related to Y2K products
related issues. The Company does not track Y2K costs as a separate cost. Total
estimated costs are not anticipated to exceed $250,000.
Due to the inherent uncertainty surrounding the Y2K issue, the Company cannot
anticipate all of the possible problems that may occur. Adverse consequences
from Y2K issues may materially effect the Company's warranty liability, the
value of its capitalized software and the carrying value of its inventory as
well as the Company's financial condition, results of operations and cash flows.
The Y2K problems could also subject the Company to litigation which may include
consequential damages.
Item 2. Properties
The Company owns a number of facilities around the world. The Company has two
facilities located on sites in Kalispell, Montana. The building and land for the
Company's European sales and customer service headquarters is located in
Cambridge, England and is owned by the Company. The land holdings in Cambridge
were increased during fiscal 1998 with the purchase of adjacent property.
Building and land were purchased in Coopersburg, Pennsylvania as a manufacturing
facility for the Rhetech, Inc., subsidiary. Also, during the year the Company
purchased land in Scottsdale, Arizona with the intent to build a facility to
house its Semy Engineering subsidiary. That project was canceled during the year
and the Company intends to sell the land. In early fiscal 1999, the Company
purchased a building and land in Phoenix, Arizona to house Semy. The Company
believes that its existing manufacturing facilities, will be adequate to meet
its requirements for the foreseeable future and that suitable additional or
substitute space will be available as needed. The Company also leases various
other smaller facilities worldwide which are used as sales and customer service
centers.
The Company is subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used
on the Company's premises. The Company believes that it is in material
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business. Nevertheless, current or future
regulations could require the Company to purchase expensive equipment or to
incur other substantial expenses to comply with environmental regulations. Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of, hazardous substances could subject the Company to
future liabilities, result in fines being imposed on the Company, or result in
the suspension of production or cessation of the Company's manufacturing
operations.
Item 3. Legal Proceedings
On July 17, 1998 an agreement to settle was reached in a Montana securities
class action (Case No. DV-96-124A) filed in the Montana Eleventh Judicial
District Court. Flathead County, Kalispell, Montana. A Stipulation of Settlement
was presented to the District Court for its preliminary approval on August 25,
1998. In connection with the settlement, the plaintiff class has also agreed to
dismiss with prejudice their alleged claims against the Company and its
Chairman, Raymon F. Thompson. Insurance policies will fully fund the class
action settlement. The settlement was conditioned upon the District Court's
approval and a judgment settling all claims became final on October 27, 1998.
In August, 1998, the Company filed suit against Novellus Systems, Inc. in the
United States District Court for the Northern District of California (Case No.
C-98-3089DLJ), alleging infringement of two of the Company's patents relating to
single substrate processing tools used in electrochemical deposition of copper
onto semiconductor wafers. The Company seeks damages for past infringement, a
permanent injunction, treble damages for willful infringement, pre-judgment
interest and attorneys fees. Novellus answered the complaint by denying all
allegations, counterclaiming for declaratory judgment of invalidity and
non-infringement. Discovery is commencing and no trial has been set.
A lawsuit brought by Mitsubishi Silicon America Corporation, successor to Siltec
Corporation (Case No. CV-98-826AA) was filed on July 7, 1998 in the United
States Federal District Court for the District of Oregon against the Company.
The lawsuit alleges breach of warranties and seeks damages and attorney's fees
in excess of $5 million. The Company believes the lawsuit to be without merit
and intends to contest the action vigorously. However, given the inherent
uncertainty of litigation and the early stages of discovery, there can be no
assurance that the ultimate outcome will be in the Company's favor. Further,
regardless of the ultimate outcome, there can be no assurance that the diversion
of management's attention, and any costs associated with the lawsuit, will not
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is the opinion of the Company's management, based upon the
information available at this time, that the currently expected outcome of these
matters, individually or in the aggregate, will not have a material adverse
effect on the results of operations, financial condition or cash flows of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the shareholders for a vote during the fourth
quarter of the fiscal year.
Part II
Item 5. Market for Semitool's Common Stock and Related Shareholder Matters
The Company's Common Stock is traded under the symbol "SMTL" principally on the
Nasdaq National Market. The approximate number of shareholders of record at
December 14, 1998 was 219 and the reported last sale price of the Company's
common stock on the Nasdaq National Market was $5.50. The high and low sales
prices for the Company's common stock reported by the Nasdaq National Market are
shown below.
Common Stock Price Range
Fiscal Year
Ended September 30,
1998 1997
High Low High Low
First Quarter $26.25 $12.00 $11.63 $8.38
Second Quarter $14.75 $11.63 $14.88 $9.50
Third Quarter $14.50 $7.88 $13.50 $9.50
Fourth Quarter $9.63 $5.13 $26.88 $12.88
Since the Company's initial public offering of Common Stock in February of 1995,
it has never declared or paid any cash dividend nor has any intent to do so in
the near future.
Item 6. Selected Financial Data
This summary should be read in conjunction with the consolidated financial
statements and related notes included elsewhere herein.
Summary Consolidated Financial Information
(in thousands, except per share data)
Year Ended September 30,
1998 1997 1996 1995 1994
Statement of Operations Data:
Net sales $180,501 $193,952 $174,204 $128,326 $62,597
Gross profit 90,979 91,090 84,631 65,858 31,957
Income from operations 8,087 20,432 24,182 20,927 3,020
Net income 4,805 12,523 15,136 14,885 2,170
Pro forma Statement of Operations Data:
Income from operations (1) 8,087 20,432 24,182 22,599 6,509
Net income (2) 4,805 12,523 15,136 14,403 3,723
Basic earnings per share 0.35 0.92 1.11 1.19 0.40
Diluted earnings per share 0.35 0.91 1.09 1.15 0.37
Average number of basic common shares 13,783 13,676 13,651 12,080 9,349
Average number of diluted common shares 13,904 13,833 13,858 12,563 9,946
Balance Sheet Data:
Working capital 52,408 50,047 43,797 37,209 6,109
Total assets 127,990 131,725 114,954 88,067 39,807
Short-term debt 3,596 4,393 4,374 924 7,409
Long-term debt 3,836 3,364 3,637 4,011 6,089
Shareholders' equity (3) 86,694 81,580 68,003 52,813 12,487
(1) Pro forma income from operations has been determined by eliminating for 1995
and 1994 payments for technology rights that ceased in February 1995, upon
closing of the initial public offering of the Company's common stock.
(2) Between October 1, 1986 and February 1, 1995, the Company elected to be
taxed under the provisions of Subchapter S of the Code. Under those provisions,
the Company had not been subject to federal corporate income taxation. In
connection with the closing of the Company's initial public offering, the
Company terminated its S corporation status. Pro forma net income has been
determined by assuming that the Company had been taxed as a C corporation for
federal income tax purposes for 1995 and 1994. The pro forma provision for
income taxes has been calculated by using statutory rates for federal and state
taxes applied to pro forma income before income taxes, net of actual research
and development credits generated in each year. The pro forma effective tax
rates in fiscal 1995 and 1994 were 37.1% and 36.4%, respectively.
(3) Prior to the termination of S corporation status, dividends were paid by the
Company only in amounts sufficient to cover shareholders' tax liabilities other
than the final distribution of prior accumulated S Corporation earnings. The per
share dividend information has therefore not been presented.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTION
Statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report on Form
10-K which are not historical facts are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including without limitation, statements regarding use of sales, service and
support organizations, gross margins, research and development, costs of
manufacturing, future balances, and effects of new accounting standards, and are
subject to the safe harbor provisions created by that statute. A forward-looking
statement may contain words such as "will continue to be," "will be," "continue
to," "expect to," "anticipates that," "to be" or "can impact." Management
cautions that forward-looking statements are subject to risks and uncertainties
that could cause the Company's actual results to differ materially from those
projected in such forward-looking statements. These risks and uncertainties
include, but are not limited to, the cyclical nature of the semiconductor
industry in general, lack of market acceptance for new products, decreasing
demand for the Company's existing products, impact of competitive products and
pricing, product development, commercialization and technological difficulties,
capacity and supply constraint difficulties and other risks detailed herein. The
Company's future results will depend on its ability to continue to enhance its
existing products and to develop and manufacture new products and to finance
such activities. There can be no assurance that the Company will be successful
in the introduction, marketing and cost-effective manufacture of any new
products or that the Company will be able to develop and introduce in a timely
manner new products or enhancements to its existing products and processes which
satisfy customer needs or achieve widespread market acceptance.
The Company undertakes no obligation to release revisions to forward-looking
statements to reflect subsequent events, changed circumstances, or the
occurrence of unanticipated events.
OVERVIEW
The Company was incorporated in 1979 to develop, manufacture and market
innovative manufacturing equipment for the semiconductor industry, and shipped
its first product, a spin rinser/dryer, that year. During the 1980s, the Company
introduced several generations of its acid and solvent spray surface preparation
and cleaning tools and vertical furnaces, and began to market its products to
manufacturers outside the semiconductor industry. Since 1990, the Company has
developed its single substrate surface preparation and cleaning system, its
Storm wafer carrier cleaning system, and its automated multi-module surface
preparation processing system. The Company also developed the high throughput
production-ready copper plating tool, the LT-210C.
The unit selling prices for the Company's products range from $15,000 to
$150,000 for a spin rinser/dryer, to $900,000 to over $2.0 million for the
Magnum and ECD tools. Due to these relatively high unit selling prices, a
significant portion of the Company's revenue in any given period is often
derived from the sale of a relatively small number of units. From time to time,
the Company has experienced, and expects to continue to experience, significant
fluctuations in its results of operations, particularly on a quarterly basis.
The Company's expense levels are based in part on expectations of future sales.
If sales levels in a particular period do not meet expectations, operating
results will be adversely affected. A variety of factors have an influence on
the Company's operating results in a particular period. These factors include
specific economic conditions in the semiconductor industry, the timing of the
receipt of orders from major customers, customer cancellations or delays of
shipments, specific feature requests by customers, production delays or
manufacturing inefficiencies, management decisions to commence or discontinue
product lines, the Company's ability to design, introduce and manufacture new
products on a cost-effective and timely basis, the introduction of new products
by the Company or its competition, the selection of the Company's or its
competitors' products by semiconductor manufacturers for new generations of
fabrication facilities, the timing of research and development expenditures,
exchange rate fluctuations, and expenses attendant to acquisitions, strategic
alliances and the further development of marketing and service capabilities.
The Company markets and sells its products worldwide with an emphasis on Europe
and Asia as its principal international markets. During fiscal 1998,
approximately 38.3% of the Company's revenues were derived from sales to
customers outside the United States. The Company anticipates that international
sales will continue to account for a significant portion of net sales, although
the percentage of international sales may fluctuate from period to period. The
Company believes its sales, service and support organizations are important to
the long-term success of its customer relationships. The Company provides sales,
service and support worldwide, primarily through direct employees in the United
States, Europe, Japan, Korea, Singapore, Taiwan, and through distributors
elsewhere in the world.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the
periods indicated expressed as a percentage of net sales:
Year Ended September 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Statement of Operations Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 49.6 53.0 51.4
------------- ------------- -------------
Gross profit 50.4 47.0 48.6
------------- ------------- -------------
Operating expenses:
Selling, general and administrative 32.3 25.5 23.5
Research and development 13.6 10.9 11.2
------------- ------------- -------------
Total operating expenses 45.9 36.4 34.7
------------- ------------- -------------
Income from operations 4.5 10.6 13.9
Other income (expense), net (0.5) (0.1) (0.1)
------------- ------------- -------------
Income before income taxes 4.0 10.5 13.8
Provision for income taxes 1.4 4.0 5.1
------------- ------------- -------------
Net income 2.6% 6.5% 8.7%
============= ============= =============
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. Net sales consists of revenues from sales of equipment, spare parts
and service, and fab supervisory systems. Net sales decreased $13.5 million or
7.0% to $180.5 million in fiscal 1998 from $194.0 million in fiscal 1997. The
decrease in sales in Surface Preparation and Cleaning, and Thermal products was
partially offset by increased sales in Electrochemical Deposition products,
Spare Parts and Service, and Fab Supervisory Control systems. Electrochemical
Deposition sales for fiscal 1998, were $24.6 million, up from $6.4 million in
the prior fiscal year. Essentially all of the sales increase in Electrochemical
Deposition products was provided by sales of tools for copper plating
applications. The overall sales decrease is primarily attributable to the
reduction of capital equipment spending by the Company's customers in response
to the semiconductor industry downturn driven by excess capacity and the Asian
economic decline.
International sales, predominantly to customers based in Europe and Asia,
accounted for 38.3% of net sales in fiscal 1998 compared to 35.9% in the prior
year. The Company anticipates that international sales will continue to account
for a significant portion of net sales, although the percentage may fluctuate
from period to period.
Orders backlog decreased nearly 52% to $30.8 million at September 30, 1998, from
approximately $63.8 million at September 30, 1997. The Company includes in its
backlog those customer orders for which it has received purchase orders or
purchase order numbers and for which shipment is scheduled within the next
twelve months. Orders are generally subject to cancellation or rescheduling by
customers with limited or no penalty. As the result of systems ordered and
shipped in the same quarter, possible changes in customer delivery schedules,
cancellations of orders and delays in product shipments, the Company's backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period.
The continuing market weakness and the low orders backlog level at the beginning
of fiscal 1999, limits the Company's visibility into fiscal 1999, however, the
Company will likely have substantially lower sales and possibly a net loss for
the year.
Gross Profit. Gross margin, gross profit as a percentage of sales, increased to
50.4% in fiscal 1998 from 47.0% in the prior year. The increase in gross margin
is attributable to a number of factors including improved efficiencies earlier
in the year which were partially offset later in the year by excess capacity
costs, lower material costs and sales mix. The Company's gross margin has been,
and will continue to be, affected by a variety of factors, including the cost to
manufacture, service, and support new and enhanced products, as well as the mix
and average selling prices of products sold. The Company anticipates that the
cost to manufacture and support newer tool models will improve over time, but
that it will continue to design and sell additional models of its existing tools
and additional tool types, which may offset in part the anticipated improvement.
Gross profit margins declined in the fourth quarter of fiscal 1998 and are
expected to be under downward pressure in fiscal 1999 as a result of excess
capacity.
Selling, General and Administrative. Selling, general and administrative (SG&A)
expenses were $58.4 million or 32.3% of net sales in fiscal 1998 compared to
$49.5 million or 25.5% of net sales in the prior year. The $8.9 million increase
in fiscal 1998 as compared to fiscal 1997 reflects the full-year effect of the
Company's 1997 decision to transition to a company-staffed sales and customer
support organization in the Asian marketplace, the larger domestic and european
customer service organization, and a fourth quarter $1.3 million bad debt
provision for an international receivable. A substantial portion of the
Company's SG&A expense is fixed in the short-term; however, the Company expects
it's SG&A expenses to decrease in fiscal 1999.
Research and Development. Research and development (R&D) expenses consist of
salaries, project materials, laboratory costs, consulting fees and other costs
associated with the Company's research and development efforts. R&D expenses
were $24.5 million or 13.6% of net sales in fiscal 1998 compared to $21.2
million or 10.9% of net sales in the prior year. Spending on R&D increased 15.9%
or $3.4 million in absolute dollars over the prior year due to the number and
complexity of projects undertaken. Major projects during the year include
development of the LT-210C linear copper plating tool, the development of the
high throughput fully automated Spectrum, and the Millennium platform with its
unique Capsule chamber. The HydrOzone cleaning process was also developed during
fiscal 1998.
The Company is committed to technology leadership in the semiconductor equipment
industry and expects to continue to fund research and development expenditures
with a multiyear perspective. Such funding has resulted in fluctuations in R&D
expenses from period to period in the past. The Company expects such
fluctuations to continue in the future, both in absolute dollars and as a
percentage of net sales, primarily due to the timing of expenditures and changes
in the level of net sales.
Other Income (Expense). Interest income on short-term investments declined from
$97,000 in fiscal 1997 to $64,000 in 1998. Interest expense increased to
$559,000 in fiscal 1998 compared with $499,000 in fiscal 1997 due to additional
debt related to the building purchased for Rhetech. Other expense in fiscal 1998
also includes a $483,000 write-off of capitalized costs associated with a
canceled building project.
Provision for Income Taxes. The provisions for income taxes for 1998 and 1997
were $2.5 million and $7.7 million, respectively. The effective tax rates for
1998 and 1997 were 34% and 38%, respectively.
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales. Net sales consist of revenues from sales of equipment, spare parts
and service contracts. Net sales increased $19.7 million (11.3%) to $194.0
million in fiscal 1997 from $174.2 million in fiscal 1996. Net sales of the
Company's automated batch chemical processing tools accounted for the majority
of the increase.
The Company shipped a number of new tool models during 1997. The first 50 wafer
batch size Magnum with a newly designed work-in-process (WIP) station was
delivered during the fiscal year. New versions of Magnum also include vision
systems to guide the robotics and an ozone injection system designed to decrease
operating expenses and enhance performance. In addition to our own proprietary,
newly designed model-based temperature controller which decreases cycle time,
the Express furnace received new robotics and a fully standard mechanical
interface (SMIF) compatible WIP station. The adoption of any of these tools for
future widespread production use is dependent on a number of factors including,
but not limited to, performance and pricing competition from other equipment
manufacturers.
International sales, predominantly to customers based in Europe and Asia,
accounted for 35.9% of net sales in fiscal 1997 compared to 43.9% in the prior
year. The Company anticipates that international sales will continue to account
for a significant portion of net sales, although the percentage may fluctuate
from period to period.
Gross Profit. Gross margin decreased to 47.0% in fiscal 1997 from 48.6% in the
prior year. The Company's gross margin has been, and will continue to be,
affected by a variety of factors, including the costs to manufacture, service
and support new and enhanced products, as well as the mix and average selling
prices of products sold. The Company believes that the largest single factor in
the 1997 gross margin decline is costs and inefficiencies related to recently
developed products. The Company anticipates that the cost to manufacture and
support the newer tool models will improve over time, but that it will continue
to design and sell additional models of its existing tools and additional tool
types, which may somewhat offset the anticipated improvement in gross margins.
Selling, General and Administrative. Selling, general and administrative (SG&A)
expenses were $49.5 million or 25.5% of net sales in fiscal 1997 compared to
$40.9 million or 23.5% of net sales in the prior year. The $8.6 million increase
in SG&A expense in 1997 as compared to 1996 reflects higher costs associated
with increased sales volumes, a broader range of equipment to market and
service, and costs associated with additional sales and service personnel
supporting the domestic and Asian marketplaces. A substantial portion of the
Company's SG&A expense is fixed in the short-term. While it is the Company's
goal to reduce SG&A expense as a percentage of net sales during periods of
rising sales, a decline in net sales would cause the Company's selling, general
and administrative expense to increase as a percentage of net sales and could
have an adverse effect on the Company's business and results of operations.
Research and Development. Research and development (R&D) expenses consist of
salaries, project materials, laboratory costs, consulting fees and other costs
associated with the Company's research and development efforts. R&D expenses
were $21.2 million or 10.9% of net sales in fiscal 1997 compared to $19.5
million or 11.2% of net sales in the prior year. Major projects during the year
include development of the Equinox LT-210 linear copper plating tool and the
completion of development of the 300mm Magnum 3000 and 300mm Express products.
Spending on R&D increased 8.6% or $1.7 million in absolute dollars over the
prior year due to the number and complexity of projects undertaken. The Company
is committed to technology leadership in the semiconductor equipment industry
and expects to continue to fund research and development expenditures with a
multiyear perspective. Such funding has resulted in fluctuations in R&D expenses
from period to period in the past. The Company expects such fluctuations to
continue in the future, both in absolute dollars and as a percentage of net
sales, primarily due to the timing of expenditures and changes in the level of
net sales.
Other Income (Expense). Interest income on short-term investments declined from
$173,000 in fiscal 1996 to $97,000 in 1997.
Provision for Income Taxes. The provisions for income taxes for 1997 and 1996
were $7.7 million and $8.9 million, respectively. The effective tax rates for
1997 and 1996 were 38% and 37%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth since its February 1995 initial public
offering primarily through amounts raised in conjunction with that offering,
operations and borrowings on its revolving line of credit. Cash generated by
operating activities in fiscal 1998 was $15.0 million as compared to $8.5
million generated by operations in fiscal 1997. Substantial reductions in
accounts receivable and inventory, and increases in non-cash expenses in 1998
offset the decline in accounts payable and net income. As of September 30, 1998,
the Company had $34.9 million of accounts receivable and $36.4 million of
inventory, compared to $40.9 million of accounts receivable and $41.1 million of
inventory at September 30, 1997. As is customary in the semiconductor
manufacturing equipment industry, products are generally built to fill specific
customer orders, with typical order fulfillment times ranging from four to six
weeks for certain products to six months or more for more complex products.
Accordingly, while the Company's finished goods inventory accounts for slightly
over 15% of total inventory, overall inventory levels tend to fluctuate with the
level and type of orders received. Currently, the tools with the longest average
cycle times are the automated batch chemical tools and the single substrate
processor. The Company expects future receivable and inventory balances to
fluctuate with net sales.
Cash used in investing activities in fiscal 1998 was $12.5 million as compared
to $7.3 million in fiscal 1997. Investing activities consisted primarily of
acquisitions of property and equipment and intangible assets in fiscal 1998.
Property and equipment purchases used cash of $9.8 million in fiscal 1998 and
$6.2 million in fiscal 1997. Major purchases of plant, property and equipment
during the year include the purchase of a building site for Semy Engineering,
the purchase of an airplane, purchase of land adjacent to the Company's
Cambridge, England site, the purchase of land and building for Rhetech, and
increases in lab equipment which includes the purchase of a fixed-ion beam
microscope. Investments in intangible assets used cash of $2.8 million in fiscal
1998 and consisted of $2.2 million for fab supervisory systems software
development costs which were capitalized once technological feasibility was
reached and $600,000 for patents and trademarks
Financing activities consisted primarily of $1.1 million in new financing
related to the purchase of the land and building to house Rhetech, and $668,000
in new debt related to the land purchased in Cambridge, England.
As of September 30, 1998, the Company's principal sources of liquidity consisted
of approximately $7.3 million of cash and cash equivalents, $22.0 million
available under the Company's $25 million revolving line of credit, which was
renewed during the fourth quarter of fiscal 1998. The credit facility is with
Seafirst Bank and bears interest at the bank's prime lending rate. The revolving
line of credit expires on April 1, 2001 and all principal amounts owing are due
by April 1, 2004. The revolving line of credit agreement has various restrictive
covenants, including a prohibition against pledging or in any way encumbering
current or operating assets during the term of the agreement and the maintenance
of various financial ratios.
The Company believes that cash and cash equivalents, funds generated from
operations, and funds available under its bank lines will be sufficient to meet
the Company's planned capital requirements during the next twelve months
including the spending of approximately $5.0 million to purchase property, plant
and equipment. The Company believes that success in its industry requires
substantial capital in order to maintain the flexibility to take advantage of
opportunities as they arise. The Company may, from time to time, as market and
business conditions warrant, invest in or acquire complementary businesses,
products or technologies. The Company may effect additional equity or debt
financings to fund such activities or to fund greater than anticipated growth.
The sale of additional equity securities or the issuance of equity securities in
a business combination could result in dilution to the Company's shareholders.
LITIGATION
On July 17, 1998 an agreement to settle was reached in a Montana securities
class action (Case No. DV-96-124A) filed in the Montana Eleventh Judicial
District Court. Flathead County, Kalispell, Montana. A Stipulation of Settlement
was presented to the District Court for its preliminary approval on August 25,
1998. In connection with the settlement, the plaintiff class has also agreed to
dismiss with prejudice their alleged claims against the Company and its
Chairman, Raymon F. Thompson. Insurance policies will fully fund the class
action settlement. The settlement was conditioned upon the District Court's
approval and a judgment settling all claims became final on October 27, 1998.
In August, 1998, the Company filed suit against Novellus Systems, Inc. in the
United States District Court for the Northern District of California (Case No.
C-98-3089DLJ), alleging infringement of two of the Company's patents relating to
single substrate processing tools used in electrochemical deposition of copper
onto semiconductor wafers. The Company seeks damages for past infringement, a
permanent injunction, treble damages for willful infringement, pre-judgment
interest and attorneys fees. Novellus answered the complaint by denying all
allegations, counterclaiming for declaratory judgment of invalidity and
non-infringement. Discovery is commencing and no trial has been set.
A lawsuit brought by Mitsubishi Silicon America Corporation, successor to Siltec
Corporation (Case No. CV-98-826AA) was filed on July 7, 1998 in the United
States Federal District Court for the District of Oregon against the Company.
The lawsuit alleges breach of warranties and seeks damages and attorney's fees
in excess of $5 million. The Company believes the lawsuit to be without merit
and intends to contest the action vigorously. However, given the inherent
uncertainty of litigation and the early stages of discovery, there can be no
assurance that the ultimate outcome will be in the Company's favor. Further,
regardless of the outcome, there can be no assurance that the diversion of
management's attention, and any costs associated with the lawsuit, will not have
a material adverse effect of the Company's financial condition, results of
operations or cash flows.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is the opinion of the Company's management, based upon the
information available at this time, that the currently expected outcome of these
matters, individually or in the aggregate, will not have a material adverse
effect on the results of operations, financial condition or cash flows of the
Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Comprehensive Income," was issued. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997, and requires restatement of earlier periods
presented. The Company does not believe the application of this standard will
have a material effect on the presentation of its financial statements.
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information," was
issued. SFAS 131 establishes standards for the way that a public enterprise
reports information about operating segments in its financial statements. SFAS
131 is effective for fiscal years beginning after December 15, 1997, and
requires restatement of earlier periods presented. The Company has not yet
determined the effect this standard will have on the form of presentation of its
financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, however, earlier application of all of the
provisions of this Statement is encouraged as of the beginning of any fiscal
quarter. The Company has not yet determined the effect the adoption of this
standard will have on the financial condition, results of operations, and cash
flows of the Company.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires companies to capitalize certain costs of
computer software developed or obtained for internal use. The Company does not
believe the application of this standard will have a material effect on the
results of operations, financial condition or cash flows of the Company.
YEAR 2000
The Company's Year 2000 (Y2K) readiness project is well underway. The project
consists of six major phases:
1. Planning (completed July 1998)
2. Assessment (completed October 1998)
3. Testing (in progress, scheduled to be completed March 1999)
4. Repairs/Reinstallations (in progress, scheduled to be completed
March 1999)
5. Retesting (in progress, scheduled to be completed June 1999)
6. Contingency plans (June 1999 - October 1999).
The planning phase has been completed and consisted of assigning resources and
timelines to tasks with the projects scheduled to be complete by June 1999. The
plan is updated as new information is collected. The assessment phase has also
been completed and consisted of taking an inventory of products, Information
Technology (IT) systems, non-IT systems, and customers/suppliers that need to be
tested and certified as to Y2K readiness.
Products. Other than some spare parts, many of the Company's products
include software both internally developed and purchased from vendors.
Some equipment also includes numerous sub-systems with embedded software.
Much of this software is customized to meet customers' specific needs.
IT System. These systems include the Company's business and manufacturing
systems, computer-aided design, e-mail and others. The majority of these
systems were developed by software vendors, are not highly customized, and
are either under a software maintenance agreement which requires the
vendor to make the systems Y2K ready or have been updated to Y2K compliant
revisions. Many of the systems have been certified by the manufacturer to
be Y2K ready.
Non-IT Systems. These systems include but are not limited to controllers
on machinery used in production, the heating and air conditioning systems,
communication systems, and electronic security devices. We are working
closely with suppliers of such systems to ensure their products work
properly.
Customers/Suppliers. The Company is working with its customers and
suppliers to determine Y2K readiness to insure that goods and services
will be delivered timely and that transaction processing is proper. The
Company does have electronic data interface (EDI) transactions with some
customers; however, these EDI transactions are provided by third parties
who have certified their Y2K readiness. The Company is working with key
vendors who supply Y2K sensitive products.
The assessment phase consisted of identifying which systems have potential Y2K
problems and the possible affects of those problems. The problems were then
prioritized and those with the largest potential impact on operations were
scheduled for early testing.
The Company is currently in the testing phase with its IT systems, non-IT
systems, and its customers and suppliers. The Company is using test procedures
developed by Sematech, a consortium of semiconductor and semiconductor
manufactures for its IT systems. This work is performed by the Company's IT
personnel. The non-IT systems and customers and suppliers testing is either done
jointly or completely by the supplier. As testing is completed,
repairs/reinstallations, and retesting will occur.
Some of the Company's equipment and the fab supervisory systems that it sells
contain hardware and software components that are subject to the Y2K problems.
The Company is currently in the testing, repairs/reinstallation and retesting
phases with its products. All products shipped since April 11, 1998 are Y2K
ready and most of the products shipped prior to that date have upgrades
available or installed. The installed upgrades have been retested.
The Company will formulate contingency plans for those systems not Y2K ready by
June of 1999. It is not anticipated the contingency plans will be needed for the
mission critical IT and non-IT systems, nor does the Company expect that
contingency plans will be needed for its internally developed software products.
It is not known at this point if contingency plans will be needed for
customers/suppliers and for outsourced components.
The cost incurred thus far with regard to Y2K consists mainly of IT personnel
payroll expenses for IT, non-IT and customers/suppliers issues. Software
engineering payroll cost has been the primary expense related to Y2K products
related issues. The Company does not track Y2K costs as a separate cost. Total
estimated costs are not anticipated to exceed $250,000.
Due to the inherent uncertainty surrounding the Y2K issue, the Company cannot
anticipate all of the possible problems that may occur. Adverse consequences
from Y2K issues may materially affect the Company's warranty liability, the
value of its capitalized software and the carrying value of its inventory as
well as the Company's financial condition, results of operations and cash flows.
The Y2K problems could also subject the Company to litigation which may include
consequential damages.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates.
Interest Rate Sensitivity
The Company as of September 30, 1998 has approximately $4.4 million in long term
debt and approximately $3.0 million in short-term debt. The Company's long-term
debt bears interest at a fixed rate. As a result, changes in the fixed rate
interest market would change the estimated fair value of its fixed rate
long-term debt. The Company believes that a 10% change in the long term interest
rate would not have a material effect on the Company's financial condition or
result of operations. The Company's short-term debt bears interest at a variable
rate. Based on the $3.0 million of short-term debt outstanding as of September
30, 1998, a 10% change in interest rates would affect on the Company's results
of operations.
Foreign Currency Exchange Rate Sensitivity
The Company conducts its Japanese business in Japanese yen. The Company enters
into forward foreign exchange contracts primarily as an economic hedge against
the short-term impact of foreign currency fluctuations of its Japanese
subsidiary. These contracts are denominated in the Japanese yen. The maturities
of the forward foreign exchange contracts are generally short-term in nature.
The Company's forward exchange contracts are marked to market as are the
underlying transactions being hedged. The impact of movements in currency
exchange rates on forward foreign exchange contracts generally offsets the
related impact on anticipated transactions denominated in yen. The effect of a
ten percent change in foreign exchange rates on the Japanese Yen forward
exchange contracts and the underlying transactions would not be material to the
Company's financial condition, results of operations or the cash flows. In
general, net foreign currency gains and losses have not been material.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in Item 14(a)(1) and
14(a)(2) of this Form 10-K are incorporated into this Item 8 of Part II of this
Form 10-K.
Unaudited Quarterly Consolidated Financial Data
Amounts In Thousands, Except Per Share Data
Quarter
First Second Third Fourth
1998
Net sales $ 47,002 $ 45,241 $ 46,572 $ 41,686
Gross profit 23,904 23,842 24,109 19,124
Net income (loss) 2,604 1,415 1,489 (703)
Basic and diluted earnings (loss) per share 0.19 0.10 0.11 (0.05)
1997
Net sales $ 42,508 $ 45,227 $ 49,480 $ 56,737
Gross profit 19,083 20,907 23,161 27,939
Net income 2,206 2,626 3,270 4,421
Basic and diluted earnings per share 0.16 0.19 0.24 0.32
The fourth quarter fiscal year 1998 results were significantly impacted by
pretax charges totaling $2.8 million, or $0.13 per diluted share relating to a
provision for the loss on an international customer receivable, a customer
return, costs associated with a canceled building project, and severance costs.
The negative effect of these charges was partially offset by a reduction of the
Company's effective income tax rate that increased net income by $263,000, or
$0.02 per diluted share.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Executive Officers and Directors
The following table sets forth certain information with respect to the executive
officers and directors of the Company:
Name Age Position
Raymon F. Thompson 57 Chairman of the Board
Fabio Gualandris 39 President and Chief Executive Officer
Timothy C. Dodkin 49 Senior Vice President
Managing Director, Semitool Europe, Ltd.
William A. Freeman 55 Senior Vice President, Finance and
Chief Financial Officer
Thomas Sulzbacher 30 Vice President, Sales
Gregory L. Perkins 55 Vice President, Operations
Larry A. Viano 44 Treasurer, Principal Accounting Officer
and Controller
Howard E. Bateman (1) 64 Director
Richard A. Dasen (2) 56 Director
Daniel J. Eigeman (2) 64 Director
John F. Osborne (1) 54 Director
Calvin S. Robinson (1)(2) 78 Director and Secretary
- -----------
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Audit Committee.
The following sets forth the background of each of the Company's executive
officers and directors, including the principal occupation of those individuals
for the past five years:
Raymon F. Thompson founded the Company in 1979 and has served as Chairman since
the Company's inception. Mr. Thompson previously served as Chief Executive
Officer and President. In 1979, Mr. Thompson designed, patented and introduced
the first on-axis rinser/dryer for the semiconductor industry.
Fabio Gualandris has served as the Company's President and Chief Executive
Officer since joining the Company in 1998. Since 1984, Mr. Gualandris has served
in various positions with SGS Thompson and STMicroelectronics, the world's
leading supplier of analog integrated circuits and one of the top ten worldwide
semiconductor suppliers. Most recently, from 1996 to 1998, he was Director of
the Automotive Business Unit of the Dedicated Products Group. From 1991 to 1996,
he served as Director of Operations for a submicron semiconductor fabrication
facility. Mr. Gualandris has a doctorate in physics from Milan University,
Milan, Italy, and has authored several papers on semiconductor technology and
research and development and production management. He also holds four patents.
Timothy C. Dodkin joined the Company in 1985 and served as the Company's
European Sales Manager from 1985 to 1986. Since 1986, Mr. Dodkin has served as
Managing Director of Semitool Europe, Ltd. Prior to joining the Company, Mr.
Dodkin worked at Cambridge Instruments, a semiconductor equipment manufacturer,
for ten years in national and international sales.
William A. Freeman joined the Company in 1998, and is Senior Vice President,
Finance and Chief Financial Officer. Prior to joining the Company and since
1995, Mr. Freeman was an independent management consultant. Prior to 1995, he
worked for 22 years at Zurn Industries, Inc., a diversified manufacturing,
engineering, and construction company. At Zurn, Mr. Freeman served in division
management positions before being appointed Senior Vice President - Chief
Financial Officer in 1986, and President in 1991. Mr. Freeman also serves on the
Board of Directors of NPC International, Inc., a Nasdaq-listed company.
Thomas Sulzbacher has served as the Company's Vice President of Sales since
February 1997. Mr. Sulzbacher has been with Semitool for nine years. Mr.
Sulzbacher's experience in the semiconductor industry was developed through
Service and Sales positions in Semitool's Bad Reichenhall, Germany office. Upon
relocating to the United States in 1994, Mr. Sulzbacher managed the Magnum sales
force prior to his current position. Mr. Sulzbacher is Raymon F. Thompson's
son-in-law.
Gregory L. Perkins joined the Company in 1990 as Vice President, Manufacturing
and, since 1994, has served as the Company's Vice President, Operations. Prior
to joining the Company, Mr. Perkins served as General Manager for Modulair,
Inc., a manufacturer of clean rooms, from 1987 to 1990.
Larry A. Viano joined the Company in 1985 and serves as the Company's treasurer,
principal accounting officer and controller. Mr. Viano serves on the Board of
Directors of Semitool Europe, Ltd. Mr. Viano, a Certified Public Accountant,
also serves on the Accounting Advisory Board of the University of Montana.
Howard E. Bateman has served on the Company's Board of Directors since 1990. Mr.
Bateman formerly owned and operated Entech, a Pennsylvania company that was an
independent sales representative for the Company's products from 1979 to 1996.
Richard A. Dasen has served on the Company's Board of Directors since 1984. From
1974 to 1992, Mr. Dasen owned and managed Evergreen Bancorporation, a multi-bank
holding company. Since 1992, Mr. Dasen has been an independent businessman.
Daniel J. Eigeman has served on the Company's Board of Directors since 1985.
From 1971 to 1993, Mr. Eigeman was President of Eigeman, Hanson & Co., P.C., an
accounting firm, and since 1993 has been a shareholder of Junkermier, Clark,
Campanella, Stevens, P.C., CPAs. Mr. Eigeman served as President of the Montana
Society of Certified Public Accountants in 1993 and currently serves as director
of CPA Mutual Insurance of America, Inc.
John F. Osborne has served on the Company's Board of Directors since July 1997
and has thirty years of experience in the semiconductor industry, including 20
years in microchip manufacturing and ten years in the capital equipment
industry. During the past ten years, Mr. Osborne held senior management
positions at Lam Research in Fremont, CA. These positions included Vice
President of Lam's Worldwide Customer Support. Mr. Osborne holds seven patents,
has numerous technical and business publications, and has served on the Board of
Directors of four companies.
Calvin S. Robinson has served as a director of the Company since 1982 and since
February of 1996 has served as the Company's Secretary. Mr. Robinson has been of
counsel to Crowley, Haughey, Hanson, Toole & Dietrich, P.L.L.P. since 1989. This
firm has provided legal services to the Company since 1979. Mr. Robinson is also
a director of Winter Sports, Inc.
The executive officers are elected each year by the Board of Directors to serve
for a one-year term of office.
The information concerning compliance with Section 16(a) of the Securities and
Exchange Act of 1934, as amended, required under this item is contained in the
Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting
of Shareholders under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by reference.
Item 11. Executive Compensation
The information concerning compensation of executive officers and directors
required under this item is contained in the Company's Proxy Statement to be
filed in connection with its 1999 Annual Meeting of Shareholders under the
caption "Executive Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning certain principal holders of securities and security
ownership of executive officers and directors required under this item is
contained in the Company's Proxy Statement to be filed in connection with its
1999 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information concerning certain relationships and related transactions
required under this item is contained in the Company's Proxy Statement to be
filed in connection with its 1999 Annual Meeting of Shareholders under the
caption "Certain Transactions," and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1998 and
September 30, 1997
Consolidated Statements of Income for the Years Ended
September 30, 1998, September 30, 1997, and
September 30, 1996
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 1998, September 30, 1997 and
September 30, 1996
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, September 30, 1997 and September 30, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
(a) The exhibits listed below are filed as part of this Annual Report on Form
10-K or are incorporated herein by reference:
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Company (1)
3.2 By-laws of the Company dated August 1, 1979 and related amendments to
these By-laws (1)
3.3 Amended Bylaws of Semitool, Inc. (4)
3.4 Amended Bylaws of Semitool, Inc. (5)
3.5 Amended Bylaws of Semitool, Inc. (6)
3.6 Amended Bylaws of Semitool, Inc. (7)
10.3 Form of Semitool, Inc. 1994 Stock Option Plan (1)
10.5 Aircraft Lease Agreement, dated September 9, 1994, between the Company
and Mr. Thompson (1)
10.6 Aircraft Lease Agreement, dated November 1, 1994, between the Company
and Mr. Thompson (1)
10.12 Agreement between the Company and the Semitool European Companies (1)
10.13 Aircraft Lease Agreement, dated April 1, 1996, between the Company and
Mr. Thompson (2)
10.16 Business Loan Agreement, dated September 30, 1997, between the
Company and the Bank of America NT & SA doing business as Seafirst
Bank (5)
10.17 Promissory Note, dated September 29, 1997, between the Company and the
Bank of America National Trust and Savings Association doing business
as Seafirst Bank (5)
10.18 Loan Modification Agreement, dated September 29, 1997 between the
Company and The Bank of America National Trust And Savings Association
doing business as Seafirst Bank (5)
10.19 Loan Modification Agreement, dated October 2, 1997 between the Company
and the Bank of America National Trust And Savings Association doing
business as Seafirst Bank (5)
10.20 Loan Modification Agreement, dated October 2, 1997 between the Company
and the Bank of America National Trust And Savings Association doing
business as Seafirst Bank (5)
10.21 Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
CoreStates Bank, N.A. (6)
10.22 Mortgage, Assignment of Leases and Security Agreement, dated March 26,
1998 between Rhetech, Inc. and CoreStates Bank, N.A. (6)
10.23 Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
CoreStates Bank, N.A. (6)
10.24 Mortgage, Assignment of Leases and Security Agreement, dated March 26,
1998 between Rhetech, Inc. and CoreStates Bank, N.A. (6)
10.25 Employment Agreement between William A. Freeman and Semitool, Inc. dated
February 20, 1998. (6)
10.26 Employment Agreement between Fabio Gualandris and Semitool, Inc. dated
April 21, 1998. (8)
10.27 Business Loan Agreement, dated September 30, 1998, between the
Company and the Bank of America NT & SA doing business as Seafirst
Bank (8)
10.28 Promissory Note, dated September 30, 1998, between the Company and the
Bank of America National Trust and Savings Association doing business
as Seafirst Bank (8)
21.1 Subsidiaries of Registrant (8)
27 Financial data schedule (8)
99.1 Amended and Restated Semitool, Inc. 1994 Stock Option Plan (3)
99.2 Amended and Restated Semitool, Inc. 1994 Stock Option Plan (6)
(1) Incorporated herein by reference to the identically numbered exhibits to the
Company's Registration Statement on Form S-1 (File No. 33-87548), which became
effective on February 2, 1995.
(2) Incorporated herein by reference to the identically numbered exhibits to the
Company's Annual Report on Form 10-K, date of report September 30, 1996.
(3) Incorporated herein by reference to the identically numbered exhibit to the
Company's Quarterly Report on Form 10-Q, date of report March 31, 1997.
(4) Incorporated herein by reference to the identically numbered exhibit to the
Company's Quarterly Report on form 10-Q, date of report June 30, 1997.
(5) Incorporated herein by reference to the identically numbered exhibits to the
Company's Annual Report on Form 10-K, date of report September 30, 1997.
(6) Incorporated herein by reference to the identically numbered exhibit to the
Company's Quarterly Report on form 10-Q, date of report March 31, 1998.
(7) Incorporated herein by reference to the identically numbered exhibit to the
Company's Quarterly Report on form 10-Q, date of report June 30, 1998.
(8) Filed herewith.
(b) Reports on Form 8-K. During the fourth quarter of fiscal 1998, there were
no Form 8-K's filed by the Company.
(c) Exhibits. The Exhibits listed in Item 14(a)(3)(a) hereof are filed as part
of this Annual Report on Form 10-K or incorporated herein by reference.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 17, 1998 SEMITOOL, INC.
By: /s/Fabio Gualandris
---------------------------------
Fabio Gualandris
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
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/Fabio Gualandris
- ------------------------
Fabio Gualandris President and Chief Executive December 17, 1998
Officer
(Principal Executive Officer)
/s/William A. Freeman
- ------------------------
William A. Freeman Senior Vice President - Finance, December 17, 1998
and Chief Financial Officer
/s/Larry A. Viano
- ------------------------
Larry A. Viano Controller, Treasurer and December 17, 1998
Chief Accounting Officer
/s/Raymon F. Thompson
- ------------------------
Raymon F. Thompson Chairman of the Board December 17, 1998
/s/Howard E. Bateman
- ------------------------
Howard E. Bateman Director December 17, 1998
/s/Richard A. Dasen
- ------------------------
Richard A. Dasen Director December 17, 1998
/s/Timothy C. Dodkin
- ------------------------
Timothy C. Dodkin Director and December 17, 1998
Senior Vice President
/s/Daniel J. Eigman
- ------------------------
Daniel J. Eigeman Director December 17, 1998
/s/John F. Osborne
- ------------------------
John F. Osborne Director December 17, 1998
/s/Calvin S. Robinson
- ------------------------
Calvin S. Robinson Director and Secretary December 17, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Semitool, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Semitool, Inc. and subsidiaries at September 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boise, Idaho
October 29, 1998
SEMITOOL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
(Amounts in Thousands)
ASSETS
1998 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 7,287 $ 5,060
Trade receivables, less allowance for doubtful accounts
of $1,542 and $224 34,855 40,896
Inventories 36,435 41,124
Prepaid expenses and other current assets 2,052 1,771
Deferred income taxes 6,379 5,902
----------- -----------
Total current assets 87,008 94,753
Property, plant and equipment, net 36,302 33,685
Intangibles, less accumulated amortization of $2,399 and $1,460 3,965 2,142
Other assets, net 715 1,145
----------- -----------
Total assets $ 127,990 $ 131,725
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 3,000 $ 4,000
Accounts payable 8,987 16,735
Accrued commissions 935 1,850
Accrued warranty and installation 11,970 9,820
Accrued payroll and related benefits 4,240 6,164
Other accrued liabilities 2,414 1,029
Customer advances 2,380 1,722
Income taxes payable -- 2,986
Long-term debt, current 596 393
Payable to shareholders 78 7
----------- -----------
Total current liabilities 34,600 44,706
Long-term debt, noncurrent 3,836 3,364
Deferred income taxes 2,860 2,075
----------- -----------
Total liabilities 41,296 50,145
----------- -----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, no
shares issued and outstanding -- --
Common stock, no par value, 30,000 shares authorized,
13,792 and 13,756 shares issued and outstanding
in 1998 and 1997 41,248 40,590
Retained earnings 45,754 40,949
Foreign currency translation adjustment (308) 41
----------- -----------
Total shareholders' equity 86,694 81,580
----------- -----------
Total liabilities and shareholders' equity $ 127,990 $ 131,725
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 30, 1998, 1997 and 1996
(Amounts in Thousands, Except for Per Share Amounts)
1998 1997 1996
---------- ---------- ----------
Net sales $ 180,501 $ 193,952 $ 174,204
Cost of sales 89,522 102,862 89,573
---------- ---------- ----------
Gross profit 90,979 91,090 84,631
---------- ---------- ----------
Operating expenses:
Selling, general and administrative 58,356 49,479 40,946
Research and development 24,536 21,179 19,503
---------- ---------- ----------
Total operating expenses 82,892 70,658 60,449
---------- ---------- ----------
Income from operations 8,087 20,432 24,182
---------- ---------- ----------
Other income (expense):
Interest income 64 97 173
Interest expense (559) (499) (540)
Other, net (312) 168 211
---------- ---------- ----------
(807) (234) (156)
---------- ---------- ----------
Income before income taxes 7,280 20,198 24,026
Provision for income taxes 2,475 7,675 8,890
---------- ---------- ----------
Net income $ 4,805 $ 12,523 $ 15,136
========== ========== ==========
Earnings per share:
Basic $ 0.35 $ 0.92 $ 1.11
Diluted $ 0.35 $ 0.91 $ 1.09
Average common shares:
Basic 13,783 13,676 13,651
Diluted 13,904 13,833 13,858
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY For the years ended September 30, 1998, 1997 and 1996
(Amounts in Thousands)
Common Stock
---------------------
Number Foreign
of Retained Currency
Shares Amount Earnings Translation Total
--------------------------------------------------------------
Balance October 1, 1995 13,650 $ 39,523 $ 13,290 -- $ 52,813
Net income -- -- 15,136 -- 15,136
Exercise of stock options 6 54 -- -- 54
-------- --------- --------- --------- ----------
Balance September 30, 1996 13,656 39,577 28,426 -- 68,003
Net income -- -- 12,523 -- 12,523
Exercise of stock options 100 1,013 -- -- 1,013
Translation adjustment -- -- -- 41 41
-------- --------- --------- --------- ----------
Balance September 30, 1997 13,756 40,590 40,949 41 81,580
Net income -- -- 4,805 -- 4,805
Exercise of stock options 36 342 -- -- 342
Income tax effect of nonqualified stock
options -- 316 -- -- 316
Translation adjustment -- -- -- (349) (349)
-------- --------- --------- --------- ----------
Balance September 30, 1998 13,792 $ 41,248 $ 45,754 (308) $ 86,694
======== ========= ========= ========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
--------- --------- ---------
Operating activities:
Net income $ 4,805 $ 12,523 $ 15,136
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on disposition of assets 623 6 59
Depreciation and amortization 10,423 6,077 4,002
Provisions for losses on accounts receivable 1,318 (9) 20
Deferred income tax provision (benefit) 308 (719) (1,093)
Change in:
Trade receivables, net 3,993 (1,653) (10,720)
Inventories 2,593 (10,649) (18,837)
Prepaid expenses and other current assets (282) 552 (989)
Shareholders receivable/payable 71 (26) (44)
Other assets, net 113 (262) 134
Accounts payable (7,234) (442) 11,115
Accrued commissions (915) 99 (341)
Accrued warranty and installation 2,150 1,823 3,746
Accrued payroll and related benefits (1,924) 1,132 (4,149)
Other accrued liabilities 972 435 (1,427)
Customer advances 660 (2,035) 808
Income taxes payable (2,670) 1,652 (1,648)
--------- --------- ---------
Net cash provided by (used in) operating
activities 15,004 8,504 (4,228)
--------- --------- ---------
Investing activities:
Proceeds from the sale of marketable securities -- -- 4,010
Purchases of property, plant and equipment (9,759) (6,174) (10,194)
Increase in intangible assets (2,826) (1,122) (796)
Increase in covenant not to compete -- -- (1,200)
Proceeds from sale of equipment 63 42 397
--------- --------- ---------
Net cash used in investing activities (12,522) (7,254) (7,783)
--------- --------- ---------
Financing activities:
Proceeds from exercise of stock options 342 1,013 54
Borrowings under line of credit 75,440 61,835 49,170
Repayments under line of credit (76,440) (61,835) (45,170)
Proceeds from long-term debt 1,100 131 --
Repayments of long-term debt (410) (385) (924)
Repayments of short-term debt (255) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities (223) 759 3,130
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (32) (7) --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,227 2,002 (8,881)
Cash and cash equivalents at beginning of year 5,060 3,058 11,939
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,287 $ 5,060 $ 3,058
========= ========= =========
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the years ended September 30, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
--------- --------- --------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 569 $ 497 $ 582
Income taxes 5,263 6,748 10,699
Supplemental disclosures of non-cash financing and
investing activity:
Inventory transferred to equipment $ 2,033 $ 6,434 $ 1,191
Assets acquired by incurring debt 668 -- --
Income tax effect of nonqualified stock options 316 -- --
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Organization and Summary of Significant Accounting Policies:
Semitool, Inc. (Semitool) and subsidiaries (the Company) designs,
manufactures, markets and services equipment used in the manufacture of
semiconductors as well as other products requiring similar processes
including thin film heads, compact disc masters, flat panel displays and
hard disk media. Semitool has various subsidiaries which operate as sales
and service offices in their respective geographic areas.
Significant accounting policies followed by the Company are:
Principles of Consolidation
The consolidated financial statements include the accounts of Semitool
and its wholly-owned subsidiaries: Semitool Europe Ltd., (United
Kingdom); Semitool Halbleitertechnik Vertriebs GmbH, (Germany);
Semitool France SARL; Semitool Italia SRL; Semitool Japan KK; Semitool
Korea, Inc.; Semitool (Asia) Pte Ltd., (Singapore); Semitool FSC, Inc.;
Semy Engineering, Inc. (Semy) and Rhetech, Inc.
(Rhetech).
All significant intercompany accounts and transactions are eliminated
in consolidation.
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
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results inevitably
will differ from those estimates, and such differences may be material
to the consolidated financial statements.
Cash Equivalents
The Company considers cash equivalents to consist of short-term, highly
liquid investments with remaining maturities at time of purchase of
three months or less. Substantially all of its cash and cash
equivalents are held by major financial institutions. At times such
balances may be in excess of the federal insurance limit.
Inventories
Inventories are carried at the lower of first-in, first-out (FIFO) cost
or market. The Company periodically reviews its inventories to identify
slow moving and obsolete inventories to record such inventories at net
realizable values. It is reasonably possible that the Company's
estimates of net realizable values could change in the near term due to
technological and other changes.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method with estimated
useful lives as follows:
Buildings and improvements 10-40 years
Machinery and equipment 2-5 years
Furniture, fixtures and leasehold improvements 3-7 years
Vehicles and aircraft 5-10 years
Major additions and betterments are capitalized. Costs of maintenance
and repairs which do not improve or extend the lives of the respective
assets are expensed currently. When items are disposed of, the related
costs and accumulated depreciation are removed from the accounts and
any gain or loss is recognized in operations.
Intangible Assets
Intangible assets include, among other things, the cost of internally
developed software and legal costs associated with obtaining patents.
Costs incurred for internally developed software products and
enhancements after technological feasibility and marketability have
been established for the related product are capitalized and are stated
at the lower of cost or net realizable value. Amortization is provided
based on the greater of the amount computed using (a) the ratio that
current gross revenues for a product bears to the total of current and
anticipated future gross revenues for that product, or (b) the
straight-line method over the remaining economic life of the product,
estimated at three years. Net capitalized software costs were
$2,409,000 and $1,019,000 as of September 30, 1998 and 1997 and
amortization of such costs was $877,000, $491,000 and $365,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
The cost of patents is amortized on a straight-line basis over the
lesser of 17 years or the estimated product life.
It is reasonably possible that estimates of future gross revenues for
software products, the estimated remaining product life, or both could
change in the near term due to technological and other changes which
would result in a reduction in the carrying value of capitalized
software development costs and patents.
Revenue Recognition
Revenue from sales of products is generally recognized at the time the
product is shipped. Service revenue is generally recognized ratably
over the period of the related contract.
Accrued Warranty and Installation
The Company's remaining obligations at time of shipment for
installation and warranty are accrued concurrently with the revenue
recognized. The Company has made a provision for its warranty and
installation obligations based upon historical costs incurred for such
obligations adjusted, as necessary, for current conditions and factors.
Due to the significant uncertainties and judgments involved in
estimating the Company's warranty and installation obligations,
including changing product designs and specifications, the ultimate
amount incurred for warranty and installation costs could change in the
near term from the Company's current estimate.
Foreign Currency
Except for Semitool Japan KK, where the functional currency was changed
to the yen during the fourth quarter of 1997, the functional currency
for the Company's foreign operations is the U.S. dollar, in which most
of the sales and purchases are denominated. For these foreign
operations, realized gains and losses from foreign currency
transactions and unrealized gains and losses from re-measurement of the
financial statements of the foreign operations into the functional
currency are included in the consolidated statements of income.
In July 1997, Semitool Japan KK, commenced invoicing its customers in
yen, and therefore, the Company changed the functional currency from
the U.S. dollar to the yen. The change in the functional currency has
been accounted for prospectively commencing in the fourth quarter of
1997. Realized gains and losses are included in the consolidated
statements of income and unrealized gains and losses from
re-measurement of the financial statements are reflected as a component
of shareholders' equity.
Foreign Currency Exchange Contracts
The Company uses foreign currency exchange contracts, which typically
mature within one year, as part of an overall risk-management strategy.
These instruments are used as an economic hedge of receivables
denominated in yen. Transaction gains and losses on these contracts and
the related receivables are recognized in the consolidated statements
of income. In entering into these contracts, the Company has assumed
the risk that might arise from the possible inability of counterparties
to meet the terms of their contracts. The Company does not expect any
losses as a result of counterparty defaults. Because the impact of
movements in currency exchange rates on forward foreign exchange
contracts generally offsets the related impact on the underlying items
being hedged, net foreign currency gains and losses on these
transactions have not been material. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes.
As of September 30, 1998 and 1997, the Company had foreign currency
exchange contracts maturing at various dates in 1998 and 1999 to sell
570,520,250 and 304,300,265 yen at contracted forward rates. The
Company had no outstanding foreign currency exchange contracts at
September 30, 1996.
Research and Development Costs
Costs of research and development are expensed as incurred.
Earnings Per Share
The Company adopted Statements of Financial Accounting Standard No. 128
(SFAS 128), "Earnings per Share" in fiscal 1998. Basic earnings per
share is computed using the weighted average number of common shares
outstanding. Diluted earnings per share is computed using the weighted
average number of common shares outstanding and common share
equivalents. Common equivalent shares result from the assumed exercise
of outstanding stock options. Diluted earnings per share excludes the
effects of antidilutive stock options. Historical per share amounts
have been restated in accordance with SFAS No. 128.
The following table sets forth the computation of basic and diluted
earnings per common share for the years ended September 30, 1998, 1997
and 1996 (in thousands):
1998 1997 1996
Numerator:
Net income used for basic and diluted earnings per share $ 4,805 $ 12,523 $ 15,136
========= ========= =========
Denominator:
Average common shares used for basic earnings per share 13,783 13,676 13,651
Effects of dilutive stock options 121 157 207
--------- --------- ---------
Denominator for diluted earnings per share 13,904 13,833 13,858
========= ========= =========
New Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS
130), "Comprehensive Income," was issued. SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997,
and requires restatement of earlier periods presented. The Company does
not believe the application of this standard will have a material
effect on the presentation of its financial statements.
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related
Information," was issued. SFAS 131 establishes standards for the way
that a public enterprise reports information about operating segments
in its financial statements. SFAS 131 is effective for fiscal years
beginning after December 15, 1997, and requires restatement of earlier
periods presented. The Company has not yet determined the effect this
standard will have on the form of presentation of its financial
statements.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities"
was issued. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, however, earlier application of all of the
provisions of this Statement is encouraged as of the beginning of any
fiscal quarter. The Company has not yet determined the effect the
adoption of this standard will have on the financial condition, results
of operations, and cash flows of the Company.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". SOP 98-1 requires companies to capitalize certain
costs of computer software developed or obtained for internal use. The
Company does not believe the application of this standard will have a
material effect on the results of operations, financial condition or
cash flows of the Company.
2. Inventories:
Inventories at September 30, 1998 and 1997 are summarized as follows (in
thousands):
1998 1997
Parts and raw materials $ 22,334 $ 22,028
Work-in-process 8,344 14,869
Finished goods 5,757 4,227
---------- ----------
$ 36,435 $ 41,124
========== ==========
3. Property, Plant and Equipment:
Property, plant and equipment at September 30, 1998 and 1997 is summarized
as follows (in thousands):
1998 1997
Buildings and improvements $ 15,337 $ 13,892
Machinery and equipment 20,955 16,638
Furniture, fixtures and leasehold improvements 11,534 10,206
Vehicles and aircraft 6,702 5,577
--------- ----------
54,528 46,313
Less accumulated depreciation and amortization (24,240) (15,460)
------- ----------
30,288 30,853
Land and land improvements 6,014 2,832
--------- ----------
$ 36,302 $ 33,685
========= ==========
4. Note Payable to Bank:
The Company has an uncollateralized line of credit totaling $25 million
under an agreement with Seafirst Bank (Seafirst). Borrowings under the
line of credit bear interest at the bank's prime lending rate (8.25% at
September 30, 1998) with the line of credit expiring on April 1, 2001. The
line of credit requires monthly interest payments only, until April 1,
2001 with the then outstanding balance repayable in monthly principal and
interest payments over a three-year period ending April 1, 2004. At
September 30, 1998, there were $3 million of advances outstanding on the
line of credit. The line of credit agreement provides for a quarterly
commitment fee on any unused portion. Additionally, the agreement has
various restrictive covenants, including a prohibition against pledging or
in any way encumbering current or operating assets during the term of the
agreement and the maintenance of various financial ratios.
5. Long-Term Debt:
Long-term debt at September 30, 1998 is summarized as follows (in
thousands):
Mortgage term note payable in monthly installments of
$23 including interest at a blended rate of 5.5%, maturing on
September 1, 2014 (A) $ 2,880
Mortgage term note payable in monthly installments of
$25 including interest at a blended rate of 4.7%, maturing on
December 1, 1999 (A) 364
Japanese yen term note payable in a single payment of
14,471 Japanese yen due on April 5, 1999. Interest accrues
at a fixed rate of 2.9% per annum and is payable in arrears, on
various dates, until repaid in full 106
Mortgage term note payable to CoreStates Bank, N.A. in monthly
installments of $6, including interest at 7.5% until
March 30, 2005 and thereafter at the Bank's national commercial
rate plus 1.0% per annum, maturing on March 30, 2008. (B) 522
Mortgage term note payable to CoreStates Bank, N.A. in a single
payment of $560 on November 30, 1998. Interest at the Bank's
national commercial rate (8.5% at September 30, 1998)
plus 0.5% per annum is payable monthly. (B) 560
----------
4,432
Less current portion 596
----------
$ 3,836
==========
(A) The mortgage term notes payable are collateralized by a first lien
deed of trust on the Kalispell office and manufacturing facility and
by all fixtures and personal property of the Company necessary
for the operation of the facility. The Montana State Board of
Investments provided 80% of the financing with Seafirst providing
the remaining 20%. The notes are personally guaranteed by Raymon F.
Thompson, the Company's chairman, and are subject to the restrictive
covenants described in Note 4.
(B) The mortgage term notes payable to CoreStates Bank N.A. are
collateralized by a first lien deed of trust on the Coopersburg,
Pennsylvania office and manufacturing facility and by all fixtures
and personal property of Rhetech, Inc. necessary for the operation
of the facility. The Company has received final approval from the
Pennsylvania Industrial Development Authority (PIDA) for a $560,000
ten-year term loan bearing interest at 4.25% per annum, which will
pay in full the $560,000 term note payable on or before November 30,
1998. Accordingly, the $560,000 term note payable has been
classified as long-term as of September 30, 1998.
Principal maturities for long-term debt outstanding at September 30, 1998,
are summarized as follows (in thousands):
Year Ending
September 30,
1999 $ 596
2000 282
2001 224
2002 239
2003 255
Thereafter 2,836
--------
$ 4,432
========
6. Employee Benefit and Stock Option Plans:
Semitool maintains a profit-sharing plan and trust under Section 401(k) of
the Internal Revenue Code. Under the terms of the plan, U.S. employees may
make voluntary contributions to the plan. Semitool contributes a matching
amount equal to 50% of the employee's voluntary contribution up to 5% of
the employee's compensation. Semitool may also make non-matching
contributions to the plan, which are determined annually by the Board of
Directors. Total profit sharing contribution cost for this plan was
approximately $1,080,000, $1,115,000 and $639,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
Semitool Europe Ltd. maintains a defined contribution pension agreement.
This pension agreement is open to all employees with more than three
months of service. The employer and employee contributions are invested in
each individual member's personal pension plan with a United Kingdom
insurance company. The employer has an obligation to make contributions at
one-half of the contribution rate paid by the employee, subject to a rate
between 2.5% and 5.0% of the employee's salary. The total pension cost for
this plan for the years ended September 30, 1998, 1997 and 1996
approximated $59,000, $37,000 and $23,000, respectively.
The Company's other foreign subsidiaries do not operate their own pension
plans, but retirement benefits are generally provided to employees through
government plans operated in their respective countries.
In December 1994, the Board of Directors adopted and the shareholders
approved the Semitool, Inc. 1994 Stock Option Plan (the Option Plan). A
total of 900,000 shares of common stock were reserved for issuance under
the Option Plan. In February 1997 and again in 1998, the Option Plan was
amended to increase the number of shares of common stock available for
issuance thereunder by 200,000 shares per amendment for a total increase
of 400,000. The total shares reserved for the Option Plan is 1,300,000 at
September 30, 1998. Options granted under the Option Plan generally become
exercisable at a rate of 5% per quarter commencing three months after the
grant date. Semitool may grant options that qualify as incentive stock
options to employees and nonqualified stock options to employees,
officers, directors, independent contractors and consultants. The Option
Plan also provides for automatic grants of nonqualified stock options to
independent directors. The Option Plan will terminate in December 2004
unless terminated earlier at the discretion of the Board of Directors. At
September 30, 1998, 233,490 shares were available for future issuance
under the Option Plan. No compensation expense has been recognized in
1998, 1997 or 1996 under the Option Plan.
The following summary shows stock option activity for the three years
ended September 30, 1998:
Weighted-
Average
Number of Exercise Price
Stock Option Activity Shares per Share
---------------------- ------------------- -----------------
October 1, 1995 512,485 $8.73
Granted 179,000 $14.26
Exercised (5,675) $8.93
Forfeited (50,000) $10.90
------------------- -----------------
September 30, 1996 635,810 $10.12
Granted 163,000 $10.54
Exercised (99,937) $10.14
Forfeited (100,550) $10.66
------------------- -----------------
September 30, 1997 598,323 $10.14
Granted 429,500 $11.28
Exercised (36,509) $9.36
Forfeited (125,640) $11.73
------------------- -----------------
September 30, 1998 865,674 $10.51
=================== =================
The following tables summarize information about stock options outstanding
at September 30, 1998:
Options Outstanding
--------------------------------------------------------
Weighted-
Average Weighted-
Remaining Average
Number Contractual Exercise
Range of Outstanding at Life Price
Exercise Prices September 30, 1998 (in years) per Share
- --------------------- ----------------------- --------------- ------------
$6.38 - $9.25 388,074 7.1 $8.63
$9.75 - $14.63 452,200 8.9 $11.85
$15.00 - $16.25 25,400 8.1 $15.23
----------------------- --------------- ------------
865,674 8.1 $10.51
======================= =============== ============
Options Exercisable
--------------------------------------------------------
Weighted-
Average
Number Exercise
Range of Exercisable at Price
Exercise Prices September 30, 1998 per Share
- ------------------ ----------------------- -------------
$6.38 - $9.25 192,542 $8.67
$9.75 - $14.63 91,675 $12.16
$15.00 - $16.25 15,250 $15.27
----------------------- -------------
299,467 $10.07
======================= =============
The number and weighted-average exercise prices of options exercisable at
September 30, 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
Number exercisable 299,467 196,637 161,898
Weighted-average exercise price per share $10.07 $9.72 $9.53
The exercise and sale of certain qualified options resulted in the
treatment of those options as nonqualified options for tax purposes. As a
result, the Company received a tax benefit associated with those options
of $316,000 in 1998 which has been recorded as additional capital.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123) "Accounting for
Stock-Based Compensation." Had compensation cost for the Option Plan been
determined based on the fair value of awards in fiscal 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
shown below (in thousands, except for per share amounts):
1998 1997 1996
Net income:
As reported $ 4,805 $ 12,523 $ 15,136
Pro forma $ 4,526 $ 12,275 $ 15,021
Diluted earnings per share:
As reported $ 0.35 $ 0.91 $ 1.09
Pro forma $ 0.33 $ 0.89 $ 1.08
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: dividend yield of 0% for all years; expected volatility of
66.0%, 67.8% and 67.8%; risk-free interest rates of 5.49%, 6.31% and
6.07%; and expected lives of 4.9, 4.6 and 4.5 years. The weighted-average
fair value of stock options granted during the years ended September 30,
1998, 1997 and 1996, was $6.69, $6.31 and $8.46, respectively.
7. Income Taxes:
The provision for income taxes for the years ended September 30, 1998,
1997 and 1996 consists of the following (in thousands):
1998 1997 1996
Federal:
Current $ 1,487 $ 7,643 $ 7,882
Deferred 231 (643) (551)
State:
Current 489 899 1,776
Deferred 77 (76) (67)
Foreign:
Current 191 (148) 325
Deferred -- -- (475)
--------- ---------- ---------
$ 2,475 $ 7,675 $ 8,890
========= ========== =========
Domestic and foreign components of income (loss) before income taxes for
the years ended September 30, 1998, 1997 and 1996 are as follows (in
thousands):
1998 1997 1996
Domestic $ 6,897 $ 22,245 $ 24,277
Foreign 383 (2,047) (251)
--------- ---------- ---------
$ 7,280 $ 20,198 $ 24,026
========= ========== =========
The components of the deferred tax assets and liabilities as of September
30, 1998 and 1997 are as follows (in thousands):
1998 1997
Deferred tax assets:
Accrued warranty and installation $ 3,900 $ 3,204
Other accrued liabilities 700 1,127
Inventory 939 816
Foreign net operating loss carryovers 708 475
Covenant not to compete 216 132
Other 149 148
---------------------------
Total deferred tax assets 6,612 5,902
Less valuation allowance (233) --
---------------------------
Net deferred tax assets 6,379 5,902
---------------------------
Deferred tax liabilities:
Depreciation and amortization (2,820) (2,075)
Other (40) --
---------------------------
Total deferred tax liabilities (2,860) (2,075)
---------------------------
Net deferred tax asset $ 3,519 $ 3,827
===========================
The Company has established a valuation allowance of $233,000 at September
30, 1998 to reduce the deferred tax asset related to the net operating
loss carryforwards in its Korean and Singapore subsidiaries. The Company
does not believe a valuation allowance is necessary at September 30, 1997
to reduce the deferred tax asset as this asset will more likely than not
be realized through the ability to recover prior income taxes paid or the
generation of future taxable income.
The differences between the consolidated provision for income taxes and
income taxes computed using income before income taxes and the U.S.
federal income tax rate for the years ended September 30, 1998, 1997 and
1996 are as follows (in thousands):
1998 1997 1996
Amount computed using the statutory rate $ 2,475 $ 7,069 $ 8,409
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit 374 959 1,155
Effect of foreign taxes 73 569 (62)
Research and experimentation credit (790) (863) (355)
Foreign sales corporation benefit (272) (822) (695)
Valuation allowance 233 -- --
Other, net 382 763 438
-------- -------- --------
$ 2,475 $ 7,675 $ 8,890
======== ======== ========
8. Related Party Transactions:
Semitool has agreements with Mr. Raymon F. Thompson, the Company's
chairman and a shareholder, to lease aircraft. Under these agreements,
rent expense was approximately $1,273,200, $1,276,600 and $1,158,000 for
the years ended September 30, 1998, 1997 and 1996, respectively. The
rental rate for fiscal 1999 will be $22,000 per month.
Periodically, Semitool advances funds to Mr. Thompson and pays certain
expenses for the benefit of Mr. Thompson. These advances are offset by
amounts payable to Mr. Thompson under the agreements described in the
preceding paragraph. Net advances to (from) Mr. Thompson are charged
interest at the federal funds short-term rate. Associated with these
advances, Mr. Thompson paid the Company interest of $3,932 in 1998 and
received approximately $2,000 of interest income in 1996.
Semitool purchased raw materials approximating $441,000, $720,000,
and $651,000 for the years ended September 30, 1998, 1997 and 1996,
respectively, from a company previously owned by Mr. Thompson. Mr.
Thompson sold his holdings of this company in January of 1998.
9. Commitments and Contingencies:
The Company has various operating lease agreements for equipment and
office space that expire through the year 2003. Total rent expense for the
years ended September 30, 1998, 1997 and 1996, exclusive of amounts paid
to a related party as described in Note 8, was approximately $1,085,000,
$1,305,000, and $950,000, respectively. At September 30, 1998, future
rental payments under these agreements and the aircraft leases described
in Note 8 are as follows (in thousands):
Year Ending
September 30, Total
1999 $ 1,152
2000 794
2001 436
2002 308
2003 139
Thereafter 19
--------
$ 2,848
========
On July 17, 1998 an agreement to settle was reached in a Montana
securities class action (Case No. DV-96-124A) filed in the Montana
Eleventh Judicial District Court. Flathead County, Kalispell, Montana. A
Stipulation of Settlement was presented to the District Court for its
preliminary approval on August 25, 1998. In connection with the
settlement, the plaintiff class has also agreed to dismiss with prejudice
their alleged claims against the Company and its Chairman, Raymon F.
Thompson. Insurance policies will fully fund the class action settlement.
The settlement was conditioned upon the District Court's approval and a
judgment settling all claims became final on October 27, 1998.
A lawsuit brought by Mitsubishi Silicon America Corporation, successor to
Siltec Corporation (Case No. CV-98-826AA) was filed on July 7, 1998 in the
United States Federal District Court for the District of Oregon against
the Company. The lawsuit alleges breach of warranties and seeks damages
and attorney's fees in excess of $5 million. The Company believes the
lawsuit to be without merit and intends to contest the action vigorously.
However, given the inherent uncertainty of litigation and the early stages
of discovery, there can be no assurance that the ultimate outcome will be
in the Company's favor, or that if the ultimate outcome is not in the
Company's favor, that such an outcome, the diversion of management's
attention, and any costs associated with the lawsuit, will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate
disposition of these matters, it is the opinion of the Company's
management, based upon the information available at this time, that the
currently expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of
operations, financial condition or cash flows of the Company.
10. Concentration of Credit Risk and Foreign Operations:
At September 30, 1998 and 1997, trade receivables of the Company were
primarily from companies in the semiconductor industry, and included
approximately $15.9 million and $11.7 million, respectively, of foreign
receivables. Accordingly, the Company is exposed to concentrations of
credit risk. The Company routinely assesses the financial strength of its
customers.
Consolidated sales to one major customer, represented 10.9% of total
consolidated sales for the year ended September 30, 1997. No other
customer represented more than 10% of total consolidated sales for any
period presented.
Summarized data for the Company's foreign operations for the years ended
September 30, 1998, 1997 and 1996 are as follows (in thousands):
Income (loss)
from Total
Net Sales operations assets
--------------------------------------------
1998:
United States $ 117,962 $ 7,297 $ 101,485
Europe 46,765 327 17,267
Other foreign operations 15,774 (167) 9,238
--------------------------------------------
$ 180,501 $ 8,087 $ 127,990
============================================
1997:
United States $ 152,940 $ 22,478 $ 110,581
Europe 38,021 (1,146) 18,711
Other foreign operations 2,991 (900) 2,433
--------------------------------------------
$ 193,952 $ 20,432 $ 131,725
============================================
1996:
United States $ 124,918 $ 24,898 $ 90,168
Europe 49,197 332 23,472
Other foreign operations 89 (1,048) 1,314
--------------------------------------------
$ 174,204 $ 24,182 $ 114,954
============================================
Export sales to unaffiliated customers from the Company's United States
operations were approximately $6.7 million, $27.9 million and $27.2
million for the years ended September 30, 1998, 1997 and 1996,
respectively.
11. Preferred Stock:
The Board of Directors has the authority to issue preferred stock of
Semitool in one or more series and to fix the rights, privileges,
preferences and restrictions granted to or imposed upon any unissued
shares of preferred stock, without further vote or action by the common
shareholders.
12. Financial Instruments and Fair Values:
The Company has estimated the fair value of its financial instruments
including cash and cash equivalents, payable to shareholder, note payable
to bank and long-term debt. The fair value estimates are made at a
discrete point in time based on relevant market information and
information about the financial instruments. Fair value estimates are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates are not necessarily indicative of
what the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at September 30, 1998 and 1997 for
which it is practicable to estimate that value:
Cash and Cash Equivalents - The carrying value of cash and cash
equivalents approximates fair value due to the nature of the cash
investments.
Payable to Shareholder - The carrying value of the shareholder payable
approximates fair value due to the fact that the note carries a
variable interest rate.
Note Payable to Bank - The carrying value of the note payable to bank
approximates fair value due to the fact that the note bears a
negotiated variable interest rate.
Long-Term Debt - The fair value of notes payable is based on the
discounted value of contractual cash flows using an estimated discount
rate of 8.25% which the Company could currently obtain for debt with
similar remaining maturities.
The estimated fair value of financial instruments at September 30, 1998
and 1997, consisted of the following (in thousands):
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------- ----------------------
Cash and cash equivalents $ 7,287 $ 7,287 $ 5,060 $ 5,060
Payable to shareholder 78 78 7 7
Note payable to bank 3,000 3,000 4,000 4,000
Long-term debt 4,432 3,927 3,757 3,182
Exhibit Index
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Company (1)
3.2 By-laws of the Company dated August 1, 1979 and related amendments to
these By-laws (1)
3.3 Amended Bylaws of Semitool, Inc. (4)
3.4 Amended Bylaws of Semitool, Inc. (5)
3.5 Amended Bylaws of Semitool, Inc. (6)
3.6 Amended Bylaws of Semitool, Inc. (7)
10.3 Form of Semitool, Inc. 1994 Stock Option Plan (1)
10.5 Aircraft Lease Agreement, dated September 9, 1994, between the Company
and Mr. Thompson (1)
10.6 Aircraft Lease Agreement, dated November 1, 1994, between the Company
and Mr. Thompson (1)
10.12 Agreement between the Company and the Semitool European Companies (1)
10.13 Aircraft Lease Agreement, dated April, 1996, between the Company and
Mr. Thompson (2)
10.16 Business Loan Agreement, dated September 30, 1997, between the Company
and the Bank of America NT & SA doing business as Seafirst Bank (5)
10.17 Promissory Note, dated September 29, 1997, between the Company and the
Bank of America National Trust and Savings Association doing business as
Seafirst Bank (5)
10.18 Loan Modification Agreement, dated September 29, 1997 between the
Company and the Bank of America National Trust And Savings Association
doing business as Seafirst Bank (5)
10.19 Loan Modification Agreement, dated October 2, 1997 between the Company
and the Bank of America National Trust And Savings Association doing
business as Seafirst Bank (5)
10.20 Loan Modification Agreement, dated October 2, 1997 between the Company
and the Bank of America National Trust And Savings Association doing
business as Seafirst Bank (5)
10.21 Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
CoreStates Bank, N.A. (6)
10.22 Mortgage Assignment of Leases and Security Agreement, dated March 26,
1998 between Rhetech, Inc. and CoreStates Bank, N.A(6)
10.23 Promissory Note, dated March 26, 1998 between Rhetech, Inc. and
CoreStates Bank, N.A. (6)
10.24 Mortgage Assignment of Leases and Securities Agreement, dated March 26,
1998 between Rhetech, Inc. and CoreStates Bank, N.A.(6)
10.25 Employment Agreement between William A. Freeman and Semitool, Inc. dated
February 20, 1998. (6)
10.26 Employment Agreement between Fabio Gualandris and Semitool, Inc. dated
April 21, 1998. (8)
10.27 Business Loan Agreement, dated September 30, 1998, between the
Company and the Bank of America NT & SA doing business as
Seafirst Bank (8)
10.28 Promissory Note, dated September 30, 1998, between the Company and the
Bank of America National Trust and Savings Association doing business as
Seafirst Bank (8)
21.1 Subsidiaries of Registrant (8)
27 Financial data schedule (8)
99.1 Amended and Restated Semitool, Inc. 1994 Stock Option Plan (3)
99.2 Amended and Restated Semitool, Inc. 1994 Stock Option Plan (6)
(1) Incorporated herein by reference to the identically
numbered exhibits to the Company's Registration Statement on
Form S-1 (File No. 33-87548), which became effective on
February 2, 1995.
(2) Incorporated herein by reference to the identically
numbered exhibits to the Company's Annual Report on Form 10-K,
date of report September 30, 1996.
(3) Incorporated herein by reference to the identically
numbered exhibit to the Company's Quarterly Report on Form
10-Q, date of report March 31, 1997.
(4) Incorporated herein by reference to the identically
numbered exhibit to the Company's Quarterly Report on Form
10-Q, date of report June 30, 1997.
(5) Incorporated herein by reference to the identically
numbered exhibits to the Company's Annual Report on Form 10-K,
date of report September 30, 1997.
(6) Incorporated herein by reference to the identically
numbered exhibit to the Company's Quarterly Report on Form
10-Q, dated of report March 31, 1998.
(7) Incorporated herein by reference to the identically
numbered exhibit to the Company's Quarterly Report on form
10-Q, date of report June 30, 1998.
(8) Filed herewith.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Semitool, Inc.
Our audits of the consolidated financial statements referred to in our report
dated October 29, 1998 of Semitool, Inc. and subsidiaries (which report and
consolidated financial statements are included elsewhere in this Annual Report
on Form 10-K) also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Boise, Idaho
October 29, 1998