AMTECH SYSTEMS INC - Annual Report: 2004 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 0-11412

AMTECH SYSTEMS, INC.

Registrant’s telephone number, including area code:

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

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

      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.     þ Yes          o 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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b)(2).     o Yes          þ No

     As of March 31, 2004, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $12,805,000, based upon the closing sales price reported by the NASDAQ National Market® on that date.

     As of January 12, 2005, the registrant had outstanding 2,705,121 shares of Common Stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Definitive Proxy Statement related to the registrant’s 2005 Annual Meeting of Shareholders, which Proxy Statement will be filed under the Securities Exchange Act of 1934, as amended, within 120 days of the end of the registrant’s fiscal year ended September 30, 2004, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

      Certain information contained or incorporated by reference in this Annual Report on Form 10-K is forward-looking in nature. All statements included or incorporated by reference in this Annual Report on Form 10-K, or made by management of Amtech Systems, Inc. and its subsidiaries (“Amtech”), other than statements of historical fact, are hereby identified as “forward-looking statements” (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). Examples of forward-looking statements include statements regarding Amtech’s future financial results, operating results, business strategies, projected costs, products under development, competitive positions and plans and objectives of the Company and its management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Item 7. Management’s Discussion and Analysis — Trends, Risks and Uncertainties.” These and many other factors could affect Amtech’s future operating results and financial condition, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Amtech or on its behalf. Unless noted otherwise, all references to a year apply to Amtech’s fiscal year, which ends on September 30th.

      All references to “we,” “our,” “us,” or “Amtech” refer to Amtech Systems, Inc. and its subsidiaries.

PART I

      Amtech Systems, Inc. (“Amtech” or the “Company”) was incorporated in Arizona in October 1981, under the name Quartz Engineering & Materials, Inc., and changed to its present name in 1987. Amtech also conducts operations through three wholly-owned subsidiaries, Tempress Systems, Inc., a Texas corporation with all of its operations in the Netherlands (“Tempress Systems” or “Tempress”), P.R. Hoffman Machine Products, Inc., an Arizona corporation based in Carlisle, Pennsylvania (“P.R. Hoffman”) and Bruce Technologies, Inc., a Massachusetts corporation based in Billerica, Massachusetts (“Bruce Technologies”).

      We develop, manufacture, market and service wafer and semiconductor fabrication equipment and related spare parts for the global semiconductor industry. Customers for our products include semiconductor wafer manufacturers and semiconductor integrated circuit (or chip) manufacturers, who either use the chips they manufacture in their own products or sell them to other companies. These chips are key components in most electronic products for telecommunications (especially wireless communications), computers and consumer electronics and are also used to add functionality to, or improve the performance of, a wide range of existing products, such as automobiles. Other customers for our products include manufacturers of optical components and solar cells and research and development facilities.

      Our business is divided into two business segments, semiconductor equipment and polishing supplies. The semiconductor equipment segment manufactures and sells horizontal diffusion furnaces; processing/robotic equipment and host systems for such diffusion furnaces. This includes related spare parts, consumables and services used in certain processes of fabricating integrated circuits, or chips, on silicon wafers. In addition, our semiconductor equipment segment provides manufacturing support services, including wet and dry cleaning of semiconductor machine processing parts, to one of our Texas-based customers. Our polishing supplies segment produces and sells carriers and templates that are consumed in the final steps of manufacturing silicon wafers (the raw material used in the production of semiconductors), double-sided precision lapping and polishing machines and related spare parts. For information regarding revenue, operating profit or loss and identifiable assets attributable to each of these two business segments, see Note 9 of the Notes to Consolidated Financial Statements included herein and Item 7 of this annual report.

      We serve a niche market in an industry that experiences on going technological advances, and which is very cyclical. As a result, our future profitability and growth depends on our ability to develop or acquire and market profitable improved or new products, and on our ability to adapt to cyclical trends.

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GROWTH STRATEGY

      Our strategy for growing revenue and operating profit is to develop improved or new products and services that satisfy our targeted markets, to further penetrate these and new markets with existing and new products and to acquire additional products through strategic acquisitions. We categorize these growth strategies as internal growth and acquisition growth.

      Internal Growth. Our strategy for internal growth, sometimes referred to as organic growth, includes adding new markets, new or improved products and new services. We began providing a new service, contract semiconductor manufacturing support, in the fourth quarter of 1997, and in 2004 expanded the services provided and revenues generated by these services. Service revenues were 5% of sales in 2004. In 2000, we began obtaining orders for semiconductor production equipment from manufacturers of MEMS (microelectromechanical system) using nanotechnology. While MEMS manufacturers are currently experiencing a downturn, this proved to be a significant new market for us in 2000 and 2001 and we expanded our position in this market with the 2004 acquisition of Bruce Technologies from Kokusai Semiconductor Corporation (“Kokusai”). In addition, one of the first new markets added by our semiconductor equipment segment was manufacturers of solar cells.

      Our new products have included the July 2000 introduction of the S-300 and E-300 models of automation, which were a significant source of sales in 2001 and 2002. Other new products, which we began shipping in 2002, include 300mm diffusion furnaces sold to wafer manufacturers and related automation and S-300 models with cassette-to-cassette capability, a SECS II Gem (semiconductor equipment communications standard with level II documentation and incorporating the general equipment model) interface to a customer’s factory automation and an interface to third party SMIF (standard mechanical interface) pod openers. The introduction of new products in 2002 helped our semiconductor equipment segment avoid the severe revenue decline experienced by most of our peers in 2002. We expect these new products to generate increased sales and profits during the next industry upturn.

      During 2003, our polishing supplies segment received a customer order for a double-sided lapping and polishing machine with a larger capacity than our previous machines. This machine is driven by servo motors, rather than the hydraulics used in our then existing largest machine. P.R. Hoffman completed the design and manufacture of this machine, Model 5400 Servo, in 2003, and it was shipped and accepted by the customer in 2004. The Model 5400 is our first lapping and polishing machine capable of processing parts up to 19.5 inches in diameter; has higher capacities for smaller parts; and is equipped with a Windows^TM touch-screen interface to a programmable controller for flexible multi-step control of speeds and pressure, optional thickness control, and crash protection. The Model 5400 offers very high precision for a large double-sided planetary machine and is especially suited to thin and fragile substrates. This design uses servo motors to precisely control the smooth, quiet, three-way planetary motions as well as precise, completely variable control of downward force ranging from as little as 24 pounds to as much as 1 1/2 tons.

      During 2003, after considerable consultation with a customer, our semiconductor equipment segment received an order for a new small batch vertical furnace, which is subject to customer acceptance. The specifications for this furnace include a two-tube vertical furnace for wafer sizes of up to 200mm, with each tube having a small flat zone capable of processing 25-50 wafers per run. This system is expected to have the same process capability of other vertical furnaces in the marketplace, but with less complex automation and a lower cost than that of our competitors. The market for vertical furnaces is much larger than any of the other markets we currently serve. However, we intend to target research and development and other niche applications first, since the competition in vertical furnaces is fierce and our competitors are much larger with substantially greater financial resources, processing knowledge and advanced technology than Amtech. The development of this small batch vertical furnace is presently moving from the sub-assembly stage to the final assembly phase. Delivery is now expected to be in March, 2005. There can be no assurance that when completed the customer will accept this small batch vertical furnace.

      The large installed customer base of Bruce Technologies, Inc., which was acquired in 2004, increases the market to which the Company can sell its new or existing automation products and its proposed small batch vertical furnace.

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      Acquisition Growth. In 1995, we completed a secondary offering of our common stock, yielding proceeds of $3.6 million to be used to fund our acquisition strategy. That year, we acquired certain assets of the former Tempress, B.V. and hired Tempress, B.V.’s former engineers to develop our first models of the Tempress® horizontal diffusion furnaces for production in The Netherlands. On July 1, 1997, we acquired substantially all of the assets of P.R. Hoffman Machine Products Corporation. This acquisition enabled us to offer new products, including lapping and polishing carriers, polishing templates, lapping and polishing machines and related consumable and spare parts to our existing customer base and to target new customers. In September 2000, we raised an additional $4.6 million through a private placement of our common stock to further fund our acquisition strategy. On July 1, 2004, we acquired certain semiconductor horizontal diffusion furnace operations, product line and other assets from Kokusai and its affiliate Kokusai Electric Europe, GmbH, which will be marketed under the name, Bruce Technologies. Bruce Technologies has a large installed base, including several large semiconductor fabricators. While we have had some difficulty identifying fairly-valued suitable acquisition candidates, we continue to pursue acquisition candidates that will either increase our existing market share or expand the number of front-end semiconductor processes addressed by our products.

INDUSTRY

      The semiconductor industry experienced significant growth since the early 1990s. This growth is primarily attributable to increased demand for personal computers and the growth of the Internet, the expansion of the telecommunications industry (especially wireless communications) and the emergence of new applications in consumer electronics. Further fueling this growth is the rapidly expanding end-user demand for smaller, less-expensive and better-performing electronic products and traditional products with more “intelligence,” which has led to an increased number of semiconductor devices in electronic and other consumer products.

      Although the semiconductor market has experienced significant growth over the past decade, it remains cyclical by nature, characterized by periods of either under or over supply for most semiconductors, including microprocessors, memory, power management chips, discrete chips and other logic devices. When demand decreases, semiconductor manufacturers typically slow their purchasing of capital equipment. Conversely, when demand increases, so does capital spending. After historical peaks in 2000, the semiconductor industry experienced one of its most severe down turns in 2001, 2002 and the first half of 2003 which resulted in a decline in revenue for both chip fabricators and most semiconductor equipment manufacturers. The industry began to rebound from this downturn during the later part of 2003. As this industry rebound developed in 2004, it became clear that most of the increased spending was by new semiconductors fabs utilizing 300mm technologies, a market not served by the Company. Our 300mm products, including a diffusion furnace, automation, and insert carriers, are only used by wafer manufacturers. As a result, we have not benefited from the 2004 rebound, i.e. our 2004 orders were slightly lower than in 2003.

      Semiconductors control and amplify electrical signals and are used in a broad range of electronic products, including consumer electronic products, computers, wireless telecommunication devices, communications equipment, automotive electronic products, major home appliances, industrial automation and control systems, robotics, aircraft, space vehicles, automatic controls and high-speed switches for broadband fiber optic telecommunication networks. Semiconductors, or semiconductor “chips,” and optical components are fabricated on a silicon wafer substrate and are part of the circuitry or electronic components of many of the aforementioned products.

      Most semiconductor chips are built on a base of silicon, called a wafer, and include multiple layers of wiring that connect a variety of circuit components, such as transistors and other structures. To build a chip, the transistors, capacitors and other circuit components are first created on the surface of the wafer by performing a series of processes to deposit and remove selected film layers, including insulators. Similar processes are then used to build the layers of wiring structures on the wafer. These are all referred to as “front-end” processes. A simplified sequence of front-end processes for fabricating typical chips involves: (1) pulling molten silicon to form an ingot; (2) slicing the silicon ingot into wafers of uniform thickness with a wire saw; (3) lapping and polishing the silicon wafer to a mirror-like finish; (4) cleaning the wafer; (5) forming a thin film layer of silicon dioxide on the wafer in a diffusion furnace where oxygen, hydrogen or a combination of the two is introduced to cause a chemical reaction (oxidation) with the silicon wafer’s surface; (6) insulating or conducting layers are deposited on the wafer surface, which sometimes is accomplished in a diffusion furnace

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      The silicon wafer may be cycled ten to twenty times through these wafer-processing steps, starting each time at step (5) or (6) to form a number of chips on the wafer. The front-end process steps are followed by a number of back-end steps in which the wafers are sliced into individual chips that are then packaged to add connectors that are compatible with the end product in which the chip will be used. Depending on the device, our polishing supplies segment’s products may be used in step (3) and our semiconductor equipment segment’s products may be used in steps (5), (6) and (12). A part of the Company’s growth strategy is to increase the number of process steps it can serve by acquiring additional product lines.

SEMICONDUCTOR EQUIPMENT SEGMENT PRODUCTS

      The semiconductor manufacturing equipment products, used in the oxidation, CVD, POLC₃ doping and annealing steps of fabricating integrated circuits on silicon wafers, are manufactured by our Arizona, Massachusetts and Netherlands operations. The following paragraphs describe the products that comprise our semiconductor equipment segment:

      Through our subsidiaries, Tempress Systems and Bruce Technologies, we produce and sell horizontal diffusion and conveyor furnace systems, which generally include a load station. Our diffusion furnaces currently address several deposition steps in the semiconductor manufacturing process, including oxidation/diffusion and low-pressure chemical vapor deposition (“LPCVD”), POLC₃ doping and annealing. The LPCVD step consists of performing CVD under high temperature, low-pressure conditions to deposit insulating or conductive layers, primarily on wafers up to 200mm in size. Diffusion furnaces also are used in certain high and ultra-high temperature processes in the manufacture of optical components of high-speed switches used in broadband fiber optic telecommunications networks.

      Our diffusion furnaces generally consist of three large modules: the load station where the loading of the wafers occurs; the furnace section, which is comprised of one to four reactor chambers; and the gas distribution cabinet where the flow of gases into the reactor chambers is controlled and are often customized to meet the requirements of a customer’s particular processes. The horizontal diffusion furnaces utilize existing industry technology and are sold primarily to customers who do not require the advanced automation of, or cannot justify the significantly higher expense of, vertical diffusion furnaces for some or all of their diffusion processes. In 2002, we began shipping models of the Tempress® diffusion furnace capable of processing 300mm wafers, with the initial customer being a semiconductor wafer manufacturer, and we now have models capable of processing all currently existing wafer sizes.

      Tempress Systems also produces conveyor furnace systems used to produce thick films for the electronics industry. Conveyor furnace systems provide for precision thermal processing of electronic parts for thick film applications, including annealing, sealing, soldering, silvering, curling, brazing, alloying, gloss-metal sealing and component packaging.

      During 2003, after considerable consultation with a customer, our semiconductor equipment segment received an order for a new small batch vertical furnace, which is subject to customer acceptance. The specifications for this furnace include a two-tube vertical furnace for wafer sizes of up to 200mm, with each tube having a small flat zone capable of processing 25-50 wafers per run. This system is expected to have the same process capability of other vertical furnaces in the marketplace, but with less complex automation and a lower cost than that of our competitors. The market for vertical furnaces is much larger than any of the other markets we currently serve. However, we intend to target research and development and other niche

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      Our processing and robotic equipment consist of several products that either automate the loading of horizontal diffusion furnaces or improve the processing characteristics of such furnaces. Wherever possible, our processing and robotic products are sold in various combinations of our Tempress® and Bruce Technologies® diffusion furnaces in order to maximize sales of these products and expand the market for our diffusion furnaces. These products also are sold to customers as retrofits to most all brands of horizontal diffusion furnaces.

      Use of our automation products reduces human handling and, therefore, reduces exposure of wafers to particle sources during the loading and unloading of the process tubes and protects operators from heat and chemical fumes. Since the top reactor chamber of a horizontal furnace is as much as eight feet from the floor on which the operator stands when manually loading wafer boats, and typical boats of 150mm to 300mm wafers weigh three to six pounds, automating the wafer loading and unloading of a diffusion furnace improves employee safety and ergonomics in silicon wafer, semiconductor and solar cell manufacturing facilities. The following paragraphs describe our automation products.

      E-300. Our most cost effective robotic product is the E-300. This product is most suitable for the lowest cost semiconductor devices, such as diodes and power management chips. The E-300 operates like an elevator and generally is used to raise boats loaded with up to 300 wafers to one or both of the upper two reactor chambers of a diffusion furnace. There the operator uses a hand held tool to lift the wafer boat off the E-300 and to either place them directly on a cantilever paddle system, into an Amtech Atmoscan®, or onto an IBAL Trolley, which then places the wafers on the paddle or Atmoscan®. The E-300 can be used in conjunction with all wafer sizes, including 300mm wafers.

      S-300. The patented S-300 model provides a very efficient method of automatically transporting a full batch of up to 300 wafers to the designated tube level and automatically placing them directly onto the cantilever loader of a diffusion furnace at one time. This product is suitable for the production of nearly all semiconductors fabricated in a horizontal furnace, but is not compatible with furnace reactor chambers where the process requires an Atmoscan®. During 2002, we began shipping S-300 models for 300mm wafers and other models with cassette-to-cassette capability, a SECS II Gem interface to the customer’s factory automation and an interface to third party SMIF pod openers. We believe that customers will view the SECS II Gem interface to their factory automation as a means to reduce scrap that is sometimes caused by an operator loading wafers into the wrong process chamber. The S-300 can now be used in conjunction with all wafer sizes, including 300mm wafers.

      IBAL. Our Individual Boats with Automated Loading. (“IBAL”) automation system is a patented integrated automation system composed of four modules comprised of hardware and software. The IBAL Shuttle transfers wafers between wafer transfer machines manufactured by third parties and the IBAL Queue, providing customers with the option of complete cassette-to-cassette wafer handling. The IBAL Queue provides a convenient staging area for the operator or the IBAL Shuttle to place boats on a load station and automates the loading of those boats onto the IBAL Butler. The IBAL Butler automatically transfers wafer carriers onto the IBAL Trolley of the appropriate furnace tube level for loading. The IBAL Trolley automatically places the quartz trays that hold silicon wafers (“boats”) on a cantilever paddle system or into an Amtech Atmoscan® that then are inserted in the diffusion furnace. This sequence is reversed for unloading the furnace after the particular process step has been completed.

      The automation products described above are sometimes sold as a complete system in conjunction with a load station module, which also includes an ultra-clean environment for wafer loading by filtering and controlling the flow of air.

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      Atmoscan® is a patented controlled environment wafer processing system that includes a cantilever tube used to load silicon wafers into a horizontal diffusion furnace and through which a purging inert gas flows during the process of loading and unloading the reactor chamber. Among the major advantages afforded by the Atmoscan® product are increased control of the environment of the wafers during the gaseous and heating process, thereby increasing yields and decreasing manufacturing costs; a decreased need for the cleaning of diffusion furnace tubes, which ordinarily involves substantial expense and equipment down time; and significant economies in the manufacturing process.

      We also designed and sell an open cantilever paddle system, the type of loader which remains the most commonly used in the semiconductor industry for loading wafers into horizontal furnaces. Prior to the introduction of the Atmoscan®, our alternative to the open cantilevered processing system, similar systems were used by the industry.

POLISHING SUPPLIES SEGMENT PRODUCTS

      The products of our polishing supplies segment are used primarily for lapping and polishing raw silicon wafers to a mirror-like finish. Depending on the cycle of the semiconductor industry, between 55% and 65% of this segment’s products are sold to either semiconductor wafer manufacturers or specialty semiconductor fabricators. The products of our polishing supplies segment are also sold to fabricators of optics, quartz, ceramics and metal parts, and to manufacturers of medical equipment components and computer disks. These products are manufactured by our P.R. Hoffman operation in Pennsylvania and are described below.

      Carriers are work holders into which silicon wafers or other materials are inserted for the purpose of holding them securely in place during lapping and polishing processes. We produce carriers for our line of lapping and polishing machines, as well as those machines sold by our competitors. Substantially all of the carriers we produce are customized for specific applications. A very significant category of our steel carriers, referred to as insert carriers, contain plastic inserts molded onto the inside edge of the work-holes of the carrier, which hold the wafers in place during processing. Although standard steel carriers are preferred in many applications because of their durability, rigidity and precise dimensions, they are typically not suited for applications involving softer materials or when metal contamination is an issue. Insert carriers, however, are well suited for such materials, because they provide the advantages of steel carriers while reducing the potential for damage to the edges of sensitive materials such as large semiconductor wafers, which are becoming more standard in the industry. Our insert carriers are used for double-sided lopping or polishing of semiconductor wafers up to 300 mm in diameter.

      Our polishing templates are used to securely hold silicon wafers in place during single-sided polishing processes. Polishing templates are customized for specific applications and are manufactured to exacting tolerances. We manufacture polishing templates for all brands of tools and various processes. In addition to silicon wafers, these products are used in polishing silicon carbide wafers and sapphire crystals used in LED’s.

      Double-sided lapping and polishing machines are designed to process thin and fragile materials, such as semiconductor silicon wafers, precision optics, computer disk media and ceramic components for wireless communication devices, to exact tolerances of thickness, flatness, parallelism and surface finish. On average, our surface processing systems are priced lower than competing systems offered by our competitors and target the semiconductor, optics, quartz, ceramics, medical, computer disk and metal working markets.

      Lapping machines process parts using an abrasive slurry and cast iron plates. The material to be processed is positioned in carriers, which are then driven with a planetary motion between the top and bottom plates. The planetary action of the lapping machines simultaneously removes equal amounts of material from both sides of the material being processed. While polishing machines are similar to the lapping machines,

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      During 2003, our polishing supplies segment received a customer order for a double-sided lapping and polishing machine with a larger capacity, compared to our previous machines, and driven by servo motors, rather than the hydraulics used in our then existing largest machine. P.R. Hoffman completed the design and manufacture of this machine, Model 5400 Servo, in 2003, and it was shipped and accepted by the customer in 2004. The Model 5400 is our first lapping and polishing machine capable of processing parts up to 19.5 inches in diameter, including 300mm wafers; has higher capacities for smaller parts; and is equipped with a Windows^TM Touch-screen interface to a programmable controller for flexible multi-step control of speeds and pressure, optional thickness control, and crash protection. The 5400 model offers very high precision for a large double-sided planetary machine and is especially suited to thin and fragile substrates. This design uses servo motors to precisely control the smooth, quiet, three-way planetary motions as well as precise, completely variable control of downward force ranging from as little as 24 pounds to as much as 1 1/2 tons.

      Since lapping machinery involves abrasive slurries, the plates, gears and carriers are often exposed to a high degree of abrasion and wear. Accordingly, we produce a wide assortment of plates, gears, parts and wear items for our own machines as well as for machines manufactured by our competitors. In addition to producing standard off-the-shelf parts, we have the ability to produce highly customized parts.

MANUFACTURING, RAW MATERIALS AND SUPPLIERS

      Our manufacturing activities consist primarily of assembling various commercial and proprietary components into finished systems in Heerde, The Netherlands (diffusion furnaces), Tempe, Arizona (processing and robotic systems), Billerica, Massachusetts (diffusion furnaces) and Carlisle, Pennsylvania (lapping and polishing machines). Polishing consumables, including carriers, templates, gears, wear items and spare parts, are fabricated from various materials in Carlisle, Pennsylvania, from raw materials manufactured to our specifications by our suppliers. Many items, such as proprietary components for systems and lapping plates, are also purchased from suppliers who manufacture these items to our specifications. In addition, certain parts for our automation products are fabricated in our machine shop. All final assembly and system tests are performed within our manufacturing facilities. Quality control is maintained through inspection of incoming materials and components, in-process inspection during equipment assembly, testing of assemblies and final inspection and, when practical, operation of manufactured equipment prior to shipment. Since the majority of the products in the polishing supplies segment are designed to specific customers’ specifications, this segment’s facility is equipped to perform a significantly higher percentage of the fabrication processes required in the manufacturer of its products and certain of the manufacturing processes are subcontracted out to various third parties. In addition, this segment relies on key suppliers for certain materials, including two steel mills, an injection molder, pad supplier (sole sourced from a Japanese company) and an adhesive manufacturer. During the fourth quarter of 2004, the Company purchased a state of the art laser-cutting tool, to significantly reduce the cost and lead times of producing steel carriers, particularly insert carriers. To minimize the risk of production and service interruptions and/or shortages of key parts, we maintain appropriate inventories of key raw materials and parts. If for any reason we were unable obtain a sufficient quantity of parts in a timely and cost-effective manner to meet our production requirements, our results of operations would be materially and adversely affected.

      Prior to the July 1, 2004 acquisition of the Bruce Technologies product line, the Bruce Technologies horizontal diffusion furnaces were manufactured by an outsource manufacturer. The Company continued to outsource that manufacturing until the assumed outsourcing contract expired November 22, 2004. Since that time, we have been transitioning the order fulfillment and production to facilities in Billerica, MA and Tempe,

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BACKLOG

      Our order backlog decreased to $7.3 million as of September 30, 2004, from $7.6 million at the same date of the previous year. The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. The backlog also includes revenue deferred pursuant to our revenue recognition policy derived from orders that have already been shipped, but which have not met the criteria for recognition. We schedule production of our systems based on order backlog and customer commitments. However, customers may delay delivery of products or cancel orders suddenly and without sufficient notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Delays in delivery schedules and/or a reduction of backlog during any particular reporting period could have a material adverse effect on our business, financial position and results of operations. In addition, our backlog does not provide any assurance that we will realize a profit from those orders or indicate in which period revenue will be recognized. See the disclosure under the caption “Results of Operations — Net Revenues” in Item 7 of this report for a breakdown of the backlog by segment.

RESEARCH, DEVELOPMENT AND ENGINEERING

      The markets we serve are characterized by evolving industry standards and rapid technological change. To compete effectively in our markets, we must continually keep up with the pace of such change by improving our products and our process technologies and developing new technologies and products that compete effectively on the basis of price and performance and that adequately address current and future customer requirements. Historically, our early product development efforts were accomplished primarily through cooperative efforts with two key customers. We continue to obtain as much customer cooperation and input as possible to increase the efficiency and effectiveness of our research and development efforts. While there can be no assurance that such relationships will continue or that others will be developed, such cooperative efforts are expected to continue to be a significant element in our future development projects. Generally, our relationships in such projects are substantially dependent on personal involvement of our President, Mr. Jong S. Whang, and our division general managers.

      During 2003, after considerable consultation with a customer, our semiconductor equipment segment received an order for a new small batch vertical furnace, which is subject to customer acceptance. The specifications for this furnace include a two-tube vertical furnace for wafer sizes of up to 200mm, with each tube having a small flat zone capable of processing 25-50 wafers per run. This system is expected to have the same process capability of other vertical furnaces in the marketplace, but with less complex automation and a lower cost than that of our competitors. The development of this small batch vertical furnace is presently moving from the sub-assembly stage to the final assembly phase. Delivery is expected in March, 2005. There can be no assurance that when completed the customer will accept this small batch vertical furnace.

      As previously reported, the results of the feasibility work on a new technology Asher pursuant to a joint product development agreement with PSK Tech, Inc. were encouraging. However, continued improvements in existing technologies have delayed our customers’ potential requirements for this product and thus further development has been suspended.

      During 2003, our polishing supplies segment received a customer order for a double-sided lapping and polishing machine with a larger capacity, compared to our previous machines, and driven by servo motors, rather than the hydraulics used in our then existing largest machine. P.R. Hoffman completed the design and manufacture of this machine, Model 5400 Servo, in 2003, and it was shipped and accepted by the customer in 2004. The Model 5400 is our first lapping and polishing machine capable of processing parts up to 19.5 inches in diameter; has higher capacities for smaller parts; and is equipped with a Windows^TM Touch-screen interface to a programmable controller for flexible multi-step control of speeds and pressure, optional thickness control, and crash protection. The 5400 model offers very high precision for a large double-sided planetary machine

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      From time to time we add functionality to our products or develop new products during engineering and manufacturing to fulfill specifications in a customer’s order, in which case the cost of development, along with other costs of the order, are charged to cost of sales. We periodically receive small research grants for research and development of products in The Netherlands, which are netted against research and development costs. Our approach to such expenditures has allowed us to produce a number of new products while spending amounts that are generally modest in relation to most semiconductor equipment manufacturers. Our expenditures that have been accounted for as research and development were $0.5 million (2.6% of revenues) in 2004, $0.7 million (3.6% of revenues) in 2003 and $0.5 million (2.4% of revenues) in 2002. These amounts exclude those expenses incurred in connection with customer orders or supported by government grants.

PATENTS

      The following table shows the patents granted or licensed and the expiration date thereof, and the material patents pending, for our products in each of the countries listed below:

  (*) Patent is licensed from the patent holder or co-owner on a non-exclusive basis.

(**) Patent is licensed from the patent holder on an exclusive basis for horizontal furnaces.

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

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

SALES AND MARKETING

      Because of the highly technical nature of our products, we market our products primarily by direct customer contact through our sales personnel and through a network of domestic and international independent sales representatives and distributors that specialize in semiconductor equipment and supplies. Our promotional activities include direct sales contacts, an internet website, advertising in trade magazines and the distribution of product brochures. We also participate in trade shows, including Semicon West, Semicon Europa, Semicon Japan, Diskcon and one large optics show each year. Our selling activities in Asia, a fast growing market, are enhanced by the active involvement of our President, Jong S. Whang, with the accounts of certain key customers.

      In 2004, net revenues were to customers in the following geographic regions: North America 36%, Asia 33% and Europe 31%. One customer represented 10% of net revenues during 2004. Two customers represented 15% and 12% of net revenues, respectively, during 2003. No customer accounted for 10% or more of net revenues during 2002. For a more complete analysis of significant customers and sales to customers by geographic region, see Note 8 of the Notes to Consolidated Financial Statements included herein and Item 7 of this annual report. For information regarding revenue, operating profit or loss and identifiable assets attributable to each of our industry segments and financial information about foreign and domestic operations, see Note 9 of the Notes to Consolidated Financial Statements included herein and Item 7 of this annual report.

      Our business is not seasonal in nature, but is cyclical based on the capital equipment investment patterns of semiconductor manufacturers. These expenditure patterns are based on many factors, including anticipated demand for integrated circuits, the development of new technologies and global and regional economic conditions.

COMPETITION

      We compete in several distinct markets, including the semiconductor devices equipment market, the semiconductor wafer market, the solar cell and optical component equipment markets and the market for general industrial lapping and polishing machines and supplies. Each of these markets is highly competitive. Our ability to compete depends on our ability to continually improve our products, processes and services, as well as our ability to develop new products that meet constantly evolving customer requirements. Significant competitive factors for succeeding in the semiconductor manufacturing equipment market include the equipment’s technical capability, productivity and cost-effectiveness, overall reliability, ease of use and maintenance, contamination and defect control and the level of technical service and support provided by the vendor. The importance of each of these factors varies depending on the specific customer’s needs and criteria, including considerations such as the customer’s process application, product requirements, timing of the purchase and particular circumstances of the purchasing decision.

      The Company’s installed base provides some competitive advantage, as customers with a number of our systems can minimize training, spares inventory and other costs by acquiring similar equipment from us and the Company is more likely to receive greater attention from existing customer contacts when it offers new products. VSLI Research Data indicate that the Bruce Technologies product line, acquired by Amtech in 2004, enjoyed a 42% share of the horizontal diffusion furnace installed base.

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      Our diffusion furnaces, robotic/processing equipment and double-sided lapping and polishing machines primarily compete with those produced by other domestic and foreign original equipment manufacturers, some of which are well-established firms that are larger and have substantially greater financial resources than Amtech. Our diffusion furnaces compete against vertical furnaces on the high-end of the price spectrum. Such competition could intensify in the future, if the industry trend to produce smaller chips on larger wafers accelerates, or the newer technology represented by vertical furnaces results in a material shift in the purchasing habits of our targeted customers. Our furnaces and lapping and polishing machines also face, to a limited, but increasing extent, competition from used equipment on the low-end of the price spectrum. We intend to maintain or improve our competitive position for orders for our diffusion furnaces and automation products by focusing our sales and marketing efforts on the large and stable middle market, designing products to meet the customer’s specific process requirements and providing competitive prices and product support service levels. With the addition of the Bruce Technologies product line we expect to gain marketing synergies and to be more competitive at the upper end of our targeted market. By purchasing our own brands of used diffusion furnaces at opportunistic prices, refurbishing them, and then reselling them with the original manufacturer’s warranty, we expect to be able to better defend the lower end of our targeted market. We have also entered into a memorandum of understanding with a Chinese manufacturer of low cost horizontal furnaces in order to determine whether they can become a supplier and thereby help us to become even more competitive in the market. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Risks and Uncertainties” for a discussion regarding the impact on our diffusion furnace sales of the industry trend of producing smaller chips on larger wafers.

      We believe our automation products are generally superior to those of our primary competitors. We believe that patents on the key features of our automation products provide a competitive advantage. We expect our automation product competitors to seek to continually improve the design and performance of their products. There can be no assurance that our automation competitors will not develop enhancements or acquire new technologies that will offer price or performance features superior to those that we offer. We believe that our  S-300 and E-300 automation products require less of the expensive clean room floor space and are generally less expensive and easier to operate than those of our competitors. The target market for our automation products is customers who want to improve employee safety and reduce scrap. The acquisition of the Bruce Technologies product line has already provided increased sales opportunities and a new customer for our automation products through introductions to their installed based, which tend to be semiconductor fabricators with a large number of horizontal furnaces. We are not aware of any products comparable to our IBAL automation products that are capable of loading Atmoscan® systems, thus providing us with a competitive advantage.

      We are not aware of any significant product that directly competes with the Atmoscan® however, there are several processing systems and various configurations of existing manufacturing products that provide advantages similar to those that we believe the Atmoscan® provides to semiconductor manufacturers. Notwithstanding this competition, we believe that Atmoscan® provides better results in terms of more uniform wafer temperature and dispersion of heated gases in the semiconductor manufacturing process, less exposure of semiconductor wafers to contaminants and other technical advantages that afford to its users a higher yield.

      We believe that we are much larger and financially stronger than most of the other domestic manufacturers of lapping and polishing carriers, which tend to be family-owned businesses. However, we are currently also experiencing price competition from carriers produced by foreign manufacturers, for which there is very little publicly available information. As a result, we are intensifying our efforts to reduce the cost of our carriers and will continue to compete with other manufacturers of carriers by continually updating our product line to keep pace with the rapid changes in our customers’ requirements and by providing a higher level of customer service. During September 2004, we completed the installation and began producing steel carriers, including insert carriers, on a newly acquired state of the art laser cutting tool, which is expected to significantly reduce costs and lead times of these products. We have been able to capture a small yet meaningful share of the semiconductor polishing template market, which Rodel, a division of Rohm and Haas, dominates with an estimated 90% market share. Our strategy for competing for template orders is to seek out niche markets and to provide the highest level of customer support and reduced total cost of ownership.

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EMPLOYEES

      At September 30, 2004, we employed 132 people. Of these employees, 15 were based at our corporate offices and manufacturing facility in Tempe, Arizona; 25 were employed at our manufacturing plant in Carlisle, Pennsylvania; 17 at our manufacturing plant in Billerica, Massachusetts; 54 at our facilities in and near Heerde, The Netherlands; and 21 in our contract semiconductor manufacturing support services business located in Austin, Texas. Of the 25 people employed at our Carlisle, Pennsylvania facility, 14 were represented by the United Auto Workers Union — Local 1443. We have never experienced a work stoppage or strike. We consider our employee relations to be good.

      Our semiconductor processing/robotic equipment business and corporate offices are located in 15,700 square feet of office and manufacturing space in Tempe, Arizona. These facilities are leased at a current rate of $8,096 per month, on a triple net basis, for a term to expire on November 30, 2007. Manufacturing support services are performed in customer facilities.

      Our diffusion furnace business is conducted primarily in a 9,900 square foot building that we own, which is located in Heerde, The Netherlands and 12,500 square feet of leased office and warehouse space located in Billerica, MA, with rental payments of $7,812 per month through the end of the March 31, 2005 expiration date. In November 2004, the Billerica, MA lease was renewed for an additional five years on comparable terms. We also lease an additional 10,000 square feet of manufacturing space in locations near our Heerde plant. These additional facilities are leased at a current rate of $4,700 per month, for varying terms, the last of which expires on July 31, 2008.

      Our polishing supplies business is located in a 21,740 square foot building located in Carlisle, Pennsylvania. These facilities are leased at a current rate of $10,860 per month, on a triple net basis, for a term that expires on June 30, 2005. We have the option to renew the lease for five successive terms of one year each.

      We consider the above facilities suitable and adequate to meet our current requirements.

      In August 2000, a “P.R. Hoffman Machine Products” was one of 11 companies named in a legal action being brought by North Middleton Township in Carlisle, Pennsylvania, in the Court of Common Pleas, Cumberland County, Pennsylvania, the owner of a landfill allegedly found to be contaminated. We acquired the assets of P.R. Hoffman Machine Products Corporation in an asset transaction consummated on July 1, 1997. The landfill was closed and has not been used by P.R. Hoffman since sometime prior to completion of our acquisition transaction. Therefore, we believe that the named company was the prior owner of the acquired assets. On January 7, 2004, this legal action was dismissed due to the Township’s failure to pursue the action within the statutory time limits.

      None.

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PART II

MARKET INFORMATION

      Our common stock, par value $.01 per share (“Common Stock”), began trading on the NASDAQ National Market®, under the symbol “ASYS,” on April  18, 2001. Prior to that time, our Common Stock was traded on the NASDAQ SmallCap Market. The following table sets forth the high and low bid price at which the shares of our Common Stock traded for each quarter of 2004 and 2003, as reported by the NASDAQ National Market®.

HOLDERS

      As of January 11, 2005, there were 989 stockholders of record of our Common Stock. Based upon a recent survey of brokers, we estimate there were approximately an additional 2,382 beneficial stockholders who held shares in brokerage or other investment accounts as of that date.

DIVIDENDS

      We have never paid dividends. Our present policy is to apply cash to investment in product development, acquisition or expansion; consequently, we do not expect to pay dividends in the foreseeable future.

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      This selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements (including the related notes thereto) contained elsewhere in this report. Effective October 1, 2000, we changed our revenue recognition policy. Since revenue is not reported on a consistent basis between years, certain data contained in this report may not be comparable between years.

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EXECUTIVE SUMMARY

Introduction.

      Management’s Discussion and Analysis (MD&A) is intended to facilitate an understanding of Amtech’s business and results of operations. This MD&A should be read in conjunction with Amtech’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:

Overview

      We develop, manufacture, market and service wafer and semiconductor fabrication equipment and related parts, supplies and services on a worldwide basis. Customers for our products include semiconductor wafer manufacturers and semiconductor integrated circuit (or chip) manufacturers, who either use the chips they manufacture in their own products or sell them to other companies. Other customers for our products include manufacturers of optical components and solar cells and research and development facilities.

      The products offered are grouped into two business segments: the semiconductor equipment segment, which offers horizontal diffusion furnaces, processing/robotic equipment for diffusion furnaces, related spare parts and manufacturing support services to semiconductor fabricators and silicon wafer manufacturers; and the polishing supplies segment, which offers supplies, including carriers and templates, and equipment for lapping and polishing primarily to silicon wafer manufacturers.

      Since Amtech is a supplier to the (i) semiconductor industry and (ii) manufacturers of silicon wafers, which are a key raw material in the fabrication of integrated circuits, Amtech’s results are driven by worldwide demand for integrated circuits, which in turn depends on end-user demand for consumer electronics. Demand for our products can change significantly from period to period as a result of numerous factors, including, but not limited to, changes in: 1) global and regional economic conditions; 2) supply and demand for semiconductors and the related changes in capacity utilization and production volume of manufacturers of semiconductors, silicon wafers, solar cells and optical components; 3) the profitability of semiconductor manufacturers and their silicon wafer suppliers; and 4) the addition of new product lines, such as the July 1, 2004, acquisition of the Bruce Technologies diffusion furnace. Since over 50% of our consolidated revenues are derived from our operations in The Netherlands, which has the Euro as its functional currency, changes in the value of the currencies in which we do business affect our competitiveness.

      The global semiconductor industry is volatile. Demand for semiconductor and silicon wafer manufacturing equipment and related consumable products has been volatile as a result of sudden changes in semiconductor supply and demand and the resulting changes in capacity utilization at our customers. As a result, our business has historically been subject to those cyclical industry conditions, and 2004, 2003 and 2002 were no exception. Customers’ delivery and installation schedules on large system orders often add to this volatility. Some of the factors that are not within our control, but can effect the timing of delivery and

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      Within the global semiconductor equipment market, which is served by both of our business segments, each geographic region exhibits unique characteristics that can cause, and in the past have caused, capital equipment investment patterns to vary significantly from period to period. In 2004, 2003 and 2002, 33%, 44% and 20%, respectively, of our total revenue was attributable to sales in Asia, principally China, Korea and Taiwan. While revenue from Asia declined in 2004, compared to 2003, due to the competitive disadvantage experienced by our Netherlands operation from the strong Euro, revenue from that region were second only to the record level achieved in 2003 and represent the second highest proportion of net revenues from that region since 1996. The higher sales from Asia during 2004 and 2003 are partially due to the fact that China’s economy has been very strong. Another factor is that significant portions of the semiconductor industry’s operations have moved to Asia in order to better serve that rapidly growing semiconductor market in China and to reduce the costs of operations. This is a trend of increasing importance to us and to other suppliers to the industry. One example of this trend is that many semiconductor fabricators have gone fabless, out-sourcing the manufacturing operations to foundries in Taiwan or elsewhere in Asia. As a result, silicon wafer manufacturing in Asia has also increased. For a more complete analysis of sales to customers by geographic region, see Note 8 of the accompanying consolidated financial statements.

      We serve niche markets in an industry that experiences on going technological advances. As a result, our future profitability and growth depends on our ability to develop or acquire and market profitable improved or new products and our ability to adapt to industry volatility and fluctuations in the value of the currencies in which we transact business. For these and other reasons, our results of operations for 2004, 2003 and 2002 may not necessarily be indicative of future operating results. We are focusing our major efforts on the following areas:

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      The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes appearing elsewhere in this report.

RESULTS OF OPERATIONS

      Net Revenues. Our net revenues for 2004 were $19.3 million, compared to $19.4 million in 2003 and $20.5 million in 2002, representing decreases of 1% in 2004 and 5% in 2003. Our Netherlands operation accounted for approximately 51% of consolidated net revenues and 73% of the net revenues of the semiconductor equipment segment. Our Netherlands operation records all transactions in Euros, its functional currency, which in turn are translated into United States (“U.S.”) dollars, our reporting currency. The Euro increased in value relative to the U.S. dollar in both 2004 and 2003. As a result of the decline in the value of the U.S. dollar, consolidated net revenues, and those of the semiconductor equipment segment, were approximately $2.4 million and $1.7 million higher in 2004 and 2003, respectively; than they would have been had the exchange rates remained the same as the weighted average exchange rates for 2002. However, the increasing value of the Euro made it more difficult to compete and win orders in Asia, leading to an 11% decline in that region’s percentage contribution to consolidated net revenue, offsetting approximately $2.2 million of the 2004 increase in net revenue just described.

      The following table reflects new orders (net of cancellations), shipments and net revenues for each quarter and year during the three years in the period ended September 30, 2004, and the backlog as of the end those periods, on a consolidated basis, as well as for each of our two business segments:

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      Shipments increased by $1.2 million in 2004, compared to 2003, as a result of approximately $1.2 million of additional sales from the acquired Bruce Technologies product line acquired in the fourth quarter. Despite this increase in shipments during 2004, net revenues declined by $0.1 million or 1% to $19.3 million in 2004 from $19.4 million in 2003, primarily due to customer caused delays in completing installations and obtaining acceptances on a few large systems that shipped in 2002, on which the revenue was recognized in 2003, and on four systems shipped during 2004 that will not be recognized until 2005. Net revenues of the polishing supplies segment increased by $0.8 million, primarily in consumables. While the acquisition of Bruce Technology increased the semiconductor equipment net revenues by $1.2 million, the remaining semiconductor equipment net revenues decreased by $1.4 million.

      Semiconductor Equipment Revenue. Our semiconductor equipment segment accounted for 68%, 73% and 75% of net revenues in 2004, 2003 and 2002, respectively. This segment also accounted for 108% and 79% of the operating loss in 2004 and 2003 and 255% of operating income in 2002. The semiconductor and optical component industries’ cycles peaked during 2000 and reached bottom in 2002. The semiconductor industry again began to improve during 2003, with new orders (net of cancellations) from this segment reaching $13.5 million, the second highest in the history of our semiconductor segment. However, this segment’s business began to soften again in 2004, when new orders, excluding those acquired with the Bruce Technologies product line, declined by $.03 million, or .1%. Again, the strong Euro relative to the U.S. dollar caused the cost of our products manufactured in Europe to be higher than those of competitors with production in the United States and Asia. Over 50% of our products have been produced in Europe over the past three years. However, with the acquisition of the Bruce Technologies product line, we expect that our domestic operations will account for the majority of production starting in 2005.

      The semiconductor equipment segment’s net revenues were $13.2 million, $14.1 million and $15.4 million in 2004, 2003 and 2002, respectively, representing revenue declines of 6% and 8% in 2004 and 2003, respectively. Although shipments increased by $0.4 million in 2004 to $13.7 million, from $13.3 million in 2003, revenue declined in 2004 by $0.9 million primarily due the $0.8 million increase in the amount of revenue deferred as a result of additional customer caused delays in completing installations and obtaining acceptances. Certain post-shipment factors that affect the timing of the recognition of revenue are discussed above. Also, see “Revenue Recognition” in Note 1 of the accompanying consolidated financial statements for a summary of our revenue recognition policy and the components of deferred profit. The inclusion of Bruce Technologies for four quarters in 2005, compared to one quarter in 2004, is expected to allow us to report higher revenue in 2005.

      Polishing Supplies Revenue. Revenues of the polishing supplies segment reached a record $8.2 million in 2000, as the semiconductor industry reached the peak of its business cycle. This segment reached the bottom of the ensuing cyclical downturn during 2002, with revenue decreasing dramatically to $5.1 million, before increasing slightly to $5.3 million in 2003 and by another 15% to reach $6.1 million in 2004. Increased revenues in 2004 and 2003 result mainly from increased sales of insert carriers. The increase in insert carrier revenue accounted for 92% and 252% of the increase in polishing supplies revenue in 2004 and 2003, respectively.

      The following table sets forth certain operational data as a percentage of net revenues for each of the three years in the period ended September 30, 2004:

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      Gross Margin. Consolidated gross margin for 2004 was $3.9 million, compared to $4.8 million in 2003 and $5.0 million in 2002, representing a decrease of $0.9 million, or 18%, in 2004, and a decrease of $0.2 million, or 3%, in 2003. In 2004, the gross margin of the semiconductor equipment segment decreased by $1.2 million, or 33%, primarily due to non-cash charges represented by a $0.6 million write down of inventories and $0.5 million increase in the deferral of profit resulting from unexpected delays by one customer in completing the facilities for four systems shipped during the second and third quarters of fiscal 2004. Also contributing to the decline in 2004 gross margin was the $0.3 million of estimated future losses on the sale of a small batch vertical furnace being designed and manufactured under a contract in cooperation with a significant customer in the electronics industry. The gross margin of the polishing supplies segment increased by $0.3 million, or 32%, in 2004 due to the increased revenue and the improvement in that segment’s gross margin percentage, discussed below.

      In 2003, the gross margin of the semiconductor equipment segment decreased by $0.2 million, or 6%, primarily due to the decline in revenues, described above. On a consolidated basis, this was only partially offset by the $0.1 million, or 7%, increase in the 2003 gross margin of the polishing supplies segment resulting from higher revenues, compared to 2002.

      As a percentage of net revenues, the consolidated gross margin was 20.5% in 2004 and 24.9% in 2003, compared to 24.3% in 2002. The $0.5 million of gross margins that were deferred in 2004 on a nearly equal amount of deferred revenue, compared to the recognition of $0.1 million of deferred net revenue in 2003 accounts for approximately 1.7% of the 4.4% decline in gross margins as a percent of revenue. Pursuant to its inventory valuation accounting policy, Amtech valued Bruce Technologies’ inventories acquired from Kokusai Semiconductor Corporation at $0.3 million less than the value at which the seller carried those inventories and charged that amount to cost of sales. As a result, write-downs of excess or obsolete inventory were $0.3 million higher in 2004, compared to 2003, and accounted for 1.5% of the decline in gross margin as a percentage of revenues in 2004 compared to 2003. In 2004 and 2003, development of a small batch vertical furnace pursuant to a customer purchase order became the most significant project. However, because this system is being built to a customer specification and order, the only significant incremental costs related to this project results from the $0.3 million of projected costs in excess of the selling price, which has been accounted for as additional cost of sales, representing another 1.5% of the decline in our gross margin percentage. These factors were only partially offset by the improved margins of the polishing supplies segment, which resulted from spreading fixed costs over that segments higher revenue. Inventory write-downs were $0.3 million, or 1.5% of revenue, and $0.5 million, or 2.4% of revenue, in 2003 and 2002, respectively, with the reduction as a percentage of revenue more than accounting for the 0.6% improvement in our gross margin percentage in 2003 compared to 2002. Our gross margin has significantly fluctuated in the past and will continue to fluctuate in the future based on several factors including, but not limited to, the severity and duration of industry cycles, the timing of revenue recognition under evolving accounting principles, product mix and overhead absorption levels.

      Selling, General and Administrative Expenses. Consolidated selling, general and administrative expenses were $5.5 million in 2004, compared to $4.4 million in 2003 and 2002. The semiconductor equipment segment accounted for $1.0 million of the increase in selling, general and administrative expenses, which is attributable to the addition of Bruce Technology in the fourth quarter of fiscal 2004 ($0.4 million), and increases in selling personnel and related costs ($0.2 million), administrative personnel costs ($0.1 million), other selling costs, such as advertising and trade shows, ($0.1 million). In addition, the higher selling, general and administrative expenses in 2004 were caused by $0.3 million of increases in other general and administrative expenses, including foreign currency transaction losses ($0.1 million) and due to the rise in the dollar value of Euro denominated expenses incurred in The Netherlands ($0.3 million), resulting from the change in the rate used to translate those costs and to a lesser extent travel and other costs associated with the due diligence on and integration of the recent acquisition of Bruce Technologies ($0.1 million), which were partially offset by a $0.2 million decline in commissions as a result of a decline in sales through sales representatives, particularly in China. The remaining increase in selling, general and administrative costs in 2004 is attributable to the polishing supplies segment, primarily resulting from commissions and royalties on higher sales of insert carriers.

      In 2003, general and administrative costs declined by $0.4 million primarily due to a reduction in provisions for doubtful accounts, but that reduction was offset by increased selling costs, including commissions ($0.2 million), personnel costs ($0.1 million) and other costs, such as tradeshows and advertising

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      Selling, general and administrative expenses as a percentage of net revenues increased dramatically in 2004 to 28.6% from 22.8% in 2003 and 21.5% in 2002, partially because Bruce Technologies selling, general and administrative expenses were approximately 36% of its revenue as a result of certain transition costs that have since been eliminated through the centralization of back office functions and because the increases in expenditures for the other operations described above did not result in proportionately greater revenue.

      Research and Development Expenses. During 2004, 2003 and 2002, expenditures accounted for as research and development were $0.5 million, $0.7 million and $0.5 million, respectively. The primarily reason for the decline in research and development from 2003 to 2004 is that the 2003 costs include certain preliminary conceptual development costs on the small batch vertical furnace, discussed above, prior to receipt of the customer order and thus were expensed. During 2002 and 2001, the most significant projects included in research and development expenses was the development of a new technology, Asher, pursuant to a joint product development agreement with PSK Tech Inc. and development of a new model for our horizontal diffusion furnace product line. As previously reported, the results of the feasibility work on this new technology were encouraging. However, continued improvements in existing technologies have delayed our customers’ potential requirements for this product and thus further development has been suspended.

      Operating Income (Loss). Reduced revenues and gross margins and increased selling, general and administrative costs in 2004 resulted in an operating loss of $2.1 million, compared to an operating loss of $0.2 million, or 1% of revenue, in 2003, and an operating income of $0.1 million, or less than 1% of revenue, in 2002. The 2004 operating loss is primarily comprised of increases in selling, general and administrative expenses, described above, $0.5 million of operating profit deferred on the four systems that were delivered to a customer during the second and, third quarters, but on which installation could not be completed due to customer delays, $0.6 million of inventory write-downs primarily related to inventory acquired along with the Bruce Technologies product line, and $0.3 million of anticipated losses recorded on a customer contract, representing our investment in the development of a small batch vertical diffusion furnace that has the potential to generate significant revenues in the future

      Interest Income, net. Net interest income was less than $0.1 million in 2004, 2003 and 2002. The decrease in net interest income in 2004 and 2003 is primarily the result of a decline in interest rates since 2001 and, to a lesser degree, fluctuations in excess cash available for investment.

      Income Tax Provision. During 2004 we recorded an income tax provision of $1.1 million. The provision includes a charge for $1.8 million resulting from a valuation allowance for the total deferred tax assets at September 30, 2004. In 2003, we recorded an income tax benefit of $0.1 million, respectively, compared to the income tax provision recorded in 2002 of $0.1 million. Excluding the 2004 charge of $1.8 million for the valuation allowance, the effective tax rate as a percentage of income (loss) before income taxes was 34%, 52% and 30% in 2004, 2003 and 2002, respectively. The lower rate in 2004 compared to 2003 is because permanent differences as a percent of pre-tax loss is lower in 2004 than 2003. The significantly higher effective tax rate in 2003 than 2002 is due to the impact of permanent differences between financial reporting and taxable income, primarily the extraterritorial income exclusion of 17%. The significantly lower effective tax rate in 2002 is a result of the fact that more than all of the consolidated operating profit was earned in The Netherlands where there are no state income taxes. In addition, a state income tax benefit arose from operating losses in the U.S. during 2002.

      Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carry back and carryforward periods. SFAS 109 further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. As a result of the review undertaken at September 30, 2004, we concluded that it was appropriate to establish a full valuation allowance for net deferred tax assets.

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      The valuation allowance will be reversed in future accounting periods if the Company sustains a sufficient level of taxable income to be able to utilize the benefits of the net deferred tax assets.

      Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of pre-tax income, non-tax deductible expenses and the effectiveness of our tax planning strategies.

      Net Income (Loss). As a result of the operating results described above, 2004 resulted in a net loss of $3.2 million, compared to the net loss of $0.1 million for 2003 and net income reported for 2002 of $0.1 million. Net income (loss) per diluted share was $(1.17), $(.04) and $.04 in 2004, 2003 and 2002, respectively. Net income (loss) per diluted share was $(1.17), $(.04) and $.04 in 2004, 2003 and 2002, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

      As of September 30, 2004 and 2003, cash and cash equivalents were $1.7 million and $7.5 million, respectively. The $3.6 million cost of the acquisition of the Bruce Technologies product line and $0.9 million of cash used to finance receivables directly related to that operation, but not acquired in that transaction, account for $4.5 million of the $5.8 million of cash used during 2004. Our ratio of current assets to current liabilities was 2.7:1 and 4.9:1 at September 30, 2004 and 2003, respectively.

      In 2004, net cash used in operating activities was $1.2 million, compared to cash used by operations of $0.8 million in 2003 and cash provided by operations of $2.4 million in 2002. The 2004 net loss ($3.2 million) was offset by $1.1 million of non-cash adjustments for depreciation ($0.5 million) and the write-down of inventory ($0.6 million) coupled with an increase in accounts payable ($0.2 million), decrease in deferred taxes ($1.1 million), and the addition to deferred profit ($0.5 million). However, the increase in inventories ($0.3 million), accounts receivable ($0.5 million) and prepaid expenses ($0.2 million) contributed to the use of operating cash in 2004.

      The 2003 net loss ($0.1 million) was more than offset by $0.8 million of non-cash adjustments for depreciation ($0.5 million) and the write-down of inventory ($0.3 million). However, the increase in inventories ($0.9 million), accounts receivable ($0.1 million) and income taxes receivable ($0.5 million) resulted in operating activities using $0.8 million of cash in 2003.

      Investing activities consisted of software, computer and equipment purchases and building improvements, which totaled $1.1 million, $0.2 million and $0.5 million in 2004, 2003 and 2002, respectively. In addition, $3.6 million was invested in the fourth quarter 2004 acquisition of the Bruce Technologies product line, which consisted primarily of $2.3 million of inventory, $1.5 million of intangible assets, including non-compete agreements, trademarks and trade names, customer relationships, technology, backlog and goodwill, and $0.1 million of office equipment. This was offset by the assumption of $0.3 million of liabilities. Because no trade receivables were acquired in the transaction approximately $0.9 million and $0.2 million was used to finance receivables generated during the last quarter of 2004 and the first quarter of 2005, respectively.

      Financing activities used $-0- million in 2004 and provided $0.3 million and $-0- million in 2003 and 2002, respectively. In 2003, financing activities consisted mainly of the proceeds from an increase in the mortgage on the building in the Netherlands.

      At September 30, 2004, our principal sources of liquidity consisted of $1.7 million of cash and cash equivalents and approximately $0.3 million available in a Euro line of credit. Since the only lien on our assets is a $0.5 million mortgage loan and a security interest in trade receivables of the operation in The Netherlands, we believe that significant amounts of additional liquidity are available from various financing sources. We believe that we have sufficient liquidity for our current operations. One element of our growth strategy is the acquisition of product lines or businesses that complement our existing product lines and business. Another element of that strategy is the development of new products, such as the small batch vertical furnace. Our currently available cash and cash equivalents are expected to be sufficient for existing operations, and planned research and development. However, significant unplanned development of new products or the completion of additional acquisitions may require additional capital resources that are expected to be obtained from one or more sources of financing, such as a private placement, a public offering, working capital loans or term loans from banks or other financial institutions, equipment leasing, mortgage financing and internally generated cash

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CONTRACTUAL OBLIGATIONS

      Key suppliers include two steel mills, one domestic and one German, capable of meeting the material specifications we require. As of September 30, 2004, we had unconditional commitments to purchase $0.5 million of steel, with delivery dates to be determined in the future. Due to minimum order quantities for this steel and long lead time, we have made purchase commitments that may be in excess of future production requirements, and it could take several years to use all of the steel commitments in production of our products. These purchase commitments are not expected to result in any significant losses.

      We lease buildings, vehicles and equipment under operating leases. As of September 30, 2004, future minimum rental commitments under non-cancelable operating leases with initial or remaining terms of one year or more totaled $519,000.

      The following table shows minimum lease payments due:

CRITICAL ACCOUNTING POLICIES

      “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

      On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, accounts receivable collectibility, warranty and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. The results of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      A critical accounting policy is one that is both important to the portrayal of our financial position and results of operations, and also requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in the section below entitled “Trends, Risks and Uncertainties.” We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

      Revenue Recognition. We review product and service sales contracts with multiple deliverables to determine if separate units of accounting are present in the arrangements. Where separate units of accounting exist, revenue is allocated to delivered items equal to the total sales price less the greater of (1) the relative fair value of the undelivered items, and (2) all contingent portions of the sales arrangement.

      We recognize revenue when persuasive evidence of an arrangement exists; the product has been delivered and title has transferred, or services have been rendered; the seller’s price to the buyer is fixed or determinable

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      Deferred Tax Asset Valuation Allowance. We currently have significant net deferred tax assets resulting from expenses not currently deductible for tax purposes, revenues previously recognized for tax purposes and net operating loss carryforwards which will reduce taxable income in future periods. We established a full valuation allowance for net deferred tax assets and recognized a $1.8 million charge during 2004.

      SFAS No. 109 requires a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carryback and carryforward periods. It also states that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, the cumulative losses weigh heavily in the overall assessment.

      Inventory Valuation. We value our inventory at the lower of cost (first-in, first-out method) or net realizable value. We regularly review inventory quantities and record a write-down for excess and obsolete inventory. The write-down is primarily based on historical inventory usage adjusted for expected changes in product demand and production requirements. However, our industry is characterized by customers in highly cyclical industries, rapid technological changes, frequent new product developments and rapid product obsolescence. During 2001 and 2002 there was a significant decrease in worldwide demand for semiconductor capital equipment. Demand for our products has fluctuated significantly in the past, and may do so in the future, which could result in an increase in the cost of inventory or an increase in excess inventory quantities. While inventory turnover in 2004 remains at a level that is within historic norms on a consolidated basis, certain portions of the inventory are at higher levels than what are needed for current operating activities, a condition that may not change until there is further improvement in capital spending by our customers. While the inventories acquired in the Bruce Technologies transaction will require several years to consume in production and through spare parts sales, management believes the write-downs taken are sufficient to protect against future losses, as this product line is receiving greater attention under its current ownership. However, there can be no assurance that future developments will not necessitate further write-downs.

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      Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is based on historical experience, credit evaluations and specific customer collection issues we have identified. Since a significant portion of our revenues are derived from the sale of high-value systems, our accounts receivable are often concentrated in a relatively few number of customers. A significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

      Warranty. We provide a limited warranty, generally for 12 to 24 months, to all purchasers of our new products and systems. A provision for the estimated cost of providing warranty coverage is recorded upon shipment of all systems. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that the systems are ultimately accepted or to maintain customer goodwill. While our warranty costs have historically been within our expectations and we believe that the amounts accrued for warranty expenditures are sufficient for all systems sold through September 30, 2004, we cannot guarantee that we will continue to experience a similar level of predictability with regard to warranty costs. In addition, technological changes or previously unknown defects in raw materials or components may result in more extensive and frequent warranty service than anticipated, which could have a material adverse impact on our operating results for the periods in which such additional costs materialize.

      Impairment of Long-lived Assets. We evaluate whether events and circumstances have occurred that indicate the estimated useful lives of long-lived assets or intangible assets may warrant revision or that the remaining balance may not be recoverable. Goodwill is also tested for impairment at least annually. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted net cash flows generated by the asset over the remaining estimated life of the asset in measuring whether the asset is recoverable. We make judgments and estimates used in establishing the carrying value of long-lived or intangible assets. Those judgments and estimates could be modified if adverse changes occurred in the future resulting in an inability to recover the carrying value of these assets. We have not experienced any impairment to long-lived assets during 2004 or 2003. Future adverse changes could be caused by, among other factors, a downturn in the semiconductor industry, a general economic slowdown, reduced demand for our products in the marketplace, poor operating results, the inability to protect intellectual property or changing technologies and product obsolescence.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” This Interpretation addresses the consolidation by business enterprises of variable interest entities when the equity investors do not have the characteristics of a controlling financial interest (as defined in the Interpretation). In December, 2003, the FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” The FASB deferred the effective date for implementation of this Interpretation until fiscal years ending after March 15, 2004. We believe that we currently have no contractual or other business relationship with a variable interest entity, and therefore, the adoption of this Interpretation did not have a material effect on our financial position or results of operations.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The company is currently evaluating the provisions of SFAS No. 151 and will adopt it on November 1, 2005, as required. We believe the adoption of this Statement will not have a material effect on our financial position or results of operations.

      In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments”, which amends SFAS No. 123, “Accounting for Stock-based Compensation”. This statement requires companies to expense the fair value of employee stock options and similar awards, and is effective for periods beginning after

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TRENDS, RISKS AND UNCERTAINTIES

      The revenues of our semiconductor equipment segment, which accounts for approximately three quarters of our consolidated revenues, is comprised of sales of horizontal diffusion furnaces and our processing/robotic product line. Our processing/robotic product line is useable only with horizontal diffusion furnaces. There is a trend in the semiconductor industry, related to the trend to produce smaller chips on larger wafers, towards the use in semiconductor manufacturing facilities of newer technology, such as vertical diffusion furnaces. Vertical diffusion furnaces are more efficient to use than the horizontal diffusion furnaces in certain manufacturing processes of smaller chips on larger wafers. Because of this trend, we had expected that demand for our horizontal diffusion furnaces would decline. We believe this trend has yet not adversely affected us to the extent originally expected primarily because:

      However, to the extent that the trend to use vertical diffusion furnaces over horizontal diffusion furnaces continues, our revenues may decline and our corresponding ability to generate income may be adversely affected.

      The semiconductor equipment industry is highly cyclical. The purchasing decisions of our customers are highly dependent on the economies of both their domestic markets and the worldwide semiconductor industry. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. The cyclical nature of our marketplace affects our ability to accurately budget our expense levels, which are based in part on our projections of future revenues.

      When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be able to make timely adjustments to our cost and expense structure to correspond to the prevailing market conditions. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to changes within the industry cycles. If we fail to respond to these cyclical changes, our business could be seriously harmed.

      During the most recent down cycle, beginning in the first half of 2001, the semiconductor industry experienced excess production capacity that caused semiconductor manufacturers to decrease capital

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      We are the beneficiary of a life insurance policy on the life of our President and Chief Executive Officer, Mr. J.S. Whang, in the amount of $1,000,000, but there is no assurance that such amount will be sufficient to cover the cost of finding and hiring a suitable replacement for Mr. Whang. It may not be feasible for any successor to maintain the same business relationships that Mr. Whang has established. If we were to lose the services of Mr. Whang for any reason, it could have a material adverse affect on our business.

      In addition, historically, our product development has been accomplished through cooperative efforts with two key customers. Our relationship with one of these customers, as well as with our joint development partner for the new technology Asher, is substantially dependent on personal relations established by Mr. Whang. While there can be no assurance that such relationships will continue, such cooperation is expected to continue to be a significant element in our future development efforts.

      We also depend on the management efforts of our officers and other key personnel and on our ability to attract and retain key personnel. Most of our products, other than the Atmoscan® and products acquired in the P.R. Hoffman and Bruce Technologies’ acquisitions were developed by our own personnel. We presently employ two engineers at our Tempe, Arizona plant, including one with a Ph.D. One engineer is employed at our Billerica, Massachusetts plant. We employ ten engineers, including two with Ph.D.’s, at our Netherlands operation. These employees design and support the horizontal diffusion furnace and conveyor furnace product lines manufactured in the Netherlands and the related Process/ Robotic products manufactured in Tempe. Two engineers are employed at our Carlisle, Pennsylvania operation. They design wafer lapping machines and carriers to meet customers’ processing requirements. During times of strong economic growth, competition is intense for highly skilled employees. There can be no assurance that we will be successful in attracting and retaining such personnel or that we can avoid increased costs in order to do so. There can be no assurance that employees will not leave Amtech or compete against us. Our failure to attract additional qualified employees, or to retain the services of key personnel, could negatively impact our financial position and results of operations.

      Success in the semiconductor equipment industry depends, in part, on continual improvement of existing technologies and rapid innovation of new solutions. For example, the semiconductor industry continues to shrink the size of semiconductor devices. These and other evolving customer needs require us to respond with continued development programs.

      Technical innovations are inherently complex and require long development cycles and appropriate professional staffing. Our future business success depends on our ability to develop and introduce new products, or new uses for existing products, that successfully address changing customer needs, win market acceptance of these new products or uses and manufacture any new products in a timely and cost-effective manner. If we do not develop and introduce new products, technologies or uses for existing products in a timely manner and continually find ways of reducing the cost to produce them in response to changing market conditions or customer requirements, our business could be seriously harmed.

      The rapid change in technology in our industry requires that we continue to make investments in research and development in order to enhance the performance and functionality of our products, to keep pace with competitive products and to satisfy customer demands for improved performance, features and functionality.

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      We are authorized to issue up to 100,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. As of December 12, 2004, there were 2,705,121 shares of common stock outstanding. Authorized but unissued common stock may be issued for such consideration as the board of directors determines to be adequate. The board of directors may issue preferred stock with such rights, preferences, privileges and restrictions as they determine, without shareholder vote. Although we do not currently intend to issue any shares of our preferred stock, there can be no assurance that we will not do so in the future. Shareholders may or may not be given the opportunity to vote thereon, depending upon the nature of any such transactions, applicable law, the rules and policies of the national securities exchange on which the common stock or preferred stock, as the case may be, is then trading, if any, and the judgment of the board of directors. Shareholders have no preemptive rights to subscribe for newly issued shares of our capital stock.

      On May 17, 1999, we declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock. The dividend was payable on June 9, 1999 to stockholders of record as of the close of business on that date. Each right entitles the registered holder to purchase one one-hundredth of a share of Series A Participating Preferred Stock, subject to adjustment, at a price of $8.50 per one one-hundredth of a share of Preferred Stock, subject to adjustment. The rights issuance was adopted as protection against a takeover by a third party.

      Mr. Whang and certain other key employees have severance arrangements that require us to make significant lump sum payments in the event of a change of control in ownership.

      Having the outstanding rights, and a substantial number of authorized and unreserved shares of common stock, preferred stock and severance arrangements with key employees could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Management could use the additional shares to resist a takeover effort even if the terms of the takeover offer are favored by a majority of the independent shareholders. This could delay, defer or prevent a change in control.

      Our success is dependent in part on our technology and other proprietary rights. We own various United States and international patents; have additional pending patent applications relating to some of our products and technologies; and license the right to manufacture certain products under patents owned by third parties, some of which are on a non-exclusive basis. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents, or that, issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. Other companies and individuals, including our larger competitors, may develop technologies that are similar or superior to our technology or design around the patents we own or license. The owner of the patent from whom we license the right to manufacture insert carriers may grant licenses to our competitors, diminishing or eliminating any competitive advantage we may have. We also maintain trademarks on certain of our products and claim copyright protection for certain proprietary software and documentation. However, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties.

      While patent, copyright and trademark protection for our intellectual property is important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative

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      From time to time, we have received communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies or information. In such cases, we evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms or defending our position. Based on industry practice and prior experience, we believe that licenses or other rights, if necessary, will be available on commercially reasonable terms for existing or future claims. Nevertheless, we cannot ensure that licenses can be obtained, or if obtained will be on acceptable terms, or that litigation or other administrative proceedings will not occur. Defending our intellectual property rights through litigation could be very costly. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial position and results of operations could be materially and adversely affected.

      As of September 30, 2004, receivables from one customer comprised 15% of our accounts receivable. A concentration of our receivables from a small number of customers places us at risk. If any one or more of our major customers is unable to pay us it could adversely affect our financial position and results of operations. We attempt to manage this credit risk by performing credit checks, by requiring significant partial payments prior to shipment where appropriate and by actively monitoring collections.

      Our backlog includes orders for large systems, such as our diffusion furnaces, with system prices of up to $1.0 million depending on the system configuration, options included and any special requirements of the customer. In light of the significant dollars associated with larger system sales, should any of these orders be cancelled prior to shipment, or not be accepted by the customer, our financial position and results of operations could be materially adversely affected.

      During 2004, 64% of our sales were made to customers outside of North America as follows:

      Because of our significant dependence on international revenues, our operating results could be negatively affected by a decline in the economies of any of the countries or regions in which we do business. Each region in the global semiconductor equipment market exhibits unique characteristics that can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues, political instability and fluctuations in interest and currency exchange rates could negatively affect our business and results of operations.

      We recorded a loss of $0.1 million during 2004 and gains of $0.1 million and $0.2 million during 2003 and 2002, respectively, as a result of foreign currency transactions. While our business has not been materially affected in the past by currency fluctuations, there is a risk that it may be materially adversely affected in the future. Such risk includes possible losses due to currency exchange rate fluctuations, possible future

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      Our industry includes large manufacturers with substantial resources to support customers worldwide. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies having substantially greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products and services that we offer. These competitors may bundle their products in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging semiconductor equipment companies whose strategy is to provide a portion of the products and services that we offer at often a lower price than ours, using innovative technology to sell products into specialized markets. Loss of competitive position could impair our prices, customer orders, revenues, gross margin and market share, any of which would negatively affect our financial position and results of operations. Our failure to compete successfully with these other companies would seriously harm our business. There is risk that larger, better-financed competitors will develop and market more advanced products than those that we currently offer, or that competitors with greater financial resources may decrease prices thereby putting us under financial pressure. The occurrence of any of these events could have a negative impact on our revenues.

      We continually evaluate potential acquisitions. We make acquisitions of, or significant investments in, other businesses with synergistic products, services and technologies. Acquisitions involve numerous risks, including, but not limited to:

      We use a wide range of materials and services in the production of our products including custom electronic and mechanical components, and we use numerous suppliers to supply materials. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customer orders, we try to avoid maintaining an extensive inventory of materials for manufacturing. Key

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      Although we make reasonable efforts to ensure that parts are available from multiple suppliers, this is not always practical or even possible; accordingly, some key parts are being procured from a single supplier or a limited group of suppliers. During the semiconductor industry peak years, increases in demand for capital equipment has resulted in longer lead-times for many important system components, which could cause delays in meeting shipments to our customers. Because the selling price of some systems exceeds $1 million, the delay in the shipment of even a single system could cause significant variations in quarterly revenues, operating results and the market value of our common stock. We have sought, and will continue to seek, to minimize the risk of production and service interruptions and shortages of key parts by:

      There can be no assurance that our financial position and results of operations will not be materially and adversely affected if, in the future, we do not receive in a timely and cost-effective manner a sufficient quantity and quality of parts to meet our production requirements.

      On September 13, 2000, we issued 383,000 shares of common stock, and warrants to purchase an aggregate of up to 59,300 shares of common stock, in a private placement pursuant to a Stock and Warrant Purchase Agreement. We received net proceeds of $4.6 million, after deducting placement agents’, legal, accounting and registration fees. Those proceeds have been used to fund our growth initiatives. While we believe that current cash balances, the small line of credit and cash flows generated from our operations provide adequate working capital for the foreseeable future, additional financing is expected to be required for further implementation of our growth plans. There is no assurance that any additional financing will be available if and when required, or, even if available, that it would not materially dilute the ownership percentage of the then existing shareholders.

      While our common stock is now included on the NASDAQ National Market®, continued listing on NASDAQ will depend on our ability to meet certain eligibility requirements established from time to time by the NASDAQ National Market® or the NASDAQ SmallCap Market. Loss of NASDAQ eligibility could result from material operating losses, or if the market price of our common stock falls below $1.00 per share. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. The rule may adversely affect the ability of broker-dealers to sell our securities, and consequently may limit the public market for, and the trading price of, our common stock.

      Section 404 of the Sarbanes Oxley Act requires management to certify that it has tested and found the Company’s internal controls to be effective. It is also required that the Company’s independent auditors attest that such management representations are reasonably founded. The adequacy of internal controls generally

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

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

      We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Our operations in the United States are conducted in U.S. dollars. Our operation in The Netherlands, a component of the semiconductor equipment segment, conducts business primarily in the Euro and the U.S. dollar. The functional currency of our Netherlands operation is the Euro. The functional currency for all other operating units is the U.S. dollar.

      During 2004, approximately $3.4 million, or 18% of our net revenues, were transacted in a currency other than the functional currency of the operating unit generating that revenue. That exposure to the risk of changing foreign currency exchange rates was partially offset by transacting purchases during the year equal to approximately $1.2 million, or 8% of our cost of sales, in a currency other than the functional currency of the operating unit making the purchase. As of September 30, 2004, we did not hold any stand-alone or separate derivative instruments. We recorded a loss of $0.1 million during 2004 and gains of $0.1 million and $0.2 million during 2003 and 2002, respectively, as a result of foreign currency transactions. Our investment in and advances to our Netherlands operation totals $2.6 million. A 10% change in the value of the Euro relative to the U.S. dollar would cause a $0.3 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity.

      When the value of the Euro increases relative to the value of the U.S. dollar, our operation in The Netherlands becomes less competitive outside the European market, as it must raise prices to those customers that normally make purchases in U.S. dollars in order to maintain the same profit margins. This was the situation in 2004, which contributed to the $2.2 million decrease in revenues from Asia to $6.4 million in 2004

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(a) The following documents are filed as part of this Annual Report on Form 10-K:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Amtech Systems, Inc. and subsidiaries (the Company) as of September 30, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended September 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amtech Systems, Inc. and subsidiaries as of September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.

Phoenix, Arizona

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AMTECH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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AMTECH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

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AMTECH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY