Basis of Presentation

Nature of Operations and Basis of Presentation – Amtech Systems, Inc. (the “Company”) designs, assembles, sells and installs capital equipment and related consumables used in the manufacture of solar cells, semiconductors and wafers of various materials, primarily for the solar and semiconductor industries. The Company sells these products worldwide, primarily in Asia, the United States and Europe. The Company serves markets in industries that are experiencing rapid technological advances, and which historically have been cyclical. Therefore, future profitability and growth depend on the Company’s ability to develop or acquire and market profitable new products, and on its ability to adapt to cyclical trends.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and consequently do not include all disclosures normally required by U.S. generally accepted accounting principles. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal and recurring nature, to present fairly our financial position, results of operations and cash flows. Certain information and note disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

The consolidated results of operations for the three and nine month periods ended June 30, 2011, are not necessarily indicative of the results to be expected for the full fiscal year.

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition – Revenue is recognized upon shipment of the Company’s proven technology equal to the sales price less the greater of (i) the fair value of undelivered services or (ii) the contingent portion of the sales price, which is generally 10-20% of the total contract price. The entire cost of the equipment relating to proven technology is recorded upon shipment. The remaining contractual revenue, deferred costs and installation costs are recorded upon the completion of installation at the customers’ premises and acceptance of the product by the customer.

For purposes of revenue recognition, proven technology means the Company has a history of at least two successful installations. New technology systems are those systems with respect to which the Company cannot demonstrate that it can meet the provisions of customer acceptance at the time of shipment. The full amount of revenue and costs of new technology shipments is recognized upon the completion of installation at the customers’ premises and acceptance of the product by the customer.

Revenue from services is recognized as the services are performed. Revenue from prepaid service contracts is recognized ratably over the life of the contract. Revenue from spare parts is recorded upon shipment.

Deferred Profit – Revenue deferred pursuant to the Company’s revenue recognition policy, net of the related deferred costs, if any, is recorded as deferred profit in current liabilities. The components of deferred profit are as follows:



	June 30, 2011			September 30, 2010
	(dollars in thousands)
Deferred revenues	$	28,291	12,577	$	12,577
Deferred costs	2,067		1,138	1,138
Deferred profit	$	26,224		$	11,439

Concentrations of Credit Risk – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable and cash. The Company’s customers, located throughout the world, consist of manufacturers of solar cells, semiconductors, semiconductor wafers, LEDs and MEMS. Credit risk is managed by performing ongoing credit evaluations of the customers’ financial condition, by requiring significant deposits where appropriate, and by actively monitoring collections. Letters of credit are required of certain customers depending on the size of the order, type of customer or its creditworthiness, and its country of domicile. Reserves for potentially uncollectible receivables are maintained based on an assessment of collectability.

The Company maintains its cash, cash equivalents and restricted cash in multiple financial institutions. Balances in the United States (approximately 30% of total cash balances) are primarily invested in US Treasuries or are in financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). The remainder of the Company’s cash is maintained in banks in The Netherlands, France and China that are uninsured.

As of June 30, 2011, three customers accounted for 19%, 15% and 10% of accounts receivable, individually.

Restricted Cash – Restricted cash of $13.0 million and $6.2 million as of June 30, 2011 and September 30, 2010, respectively, includes collateral for bank guarantees required by certain customers from whom deposits have been received in advance of shipment. Restricted cash as of June 30, 2011, also includes $5.9 million in an escrow account related to the acquisition of Kingstone Technology Hong Kong Limited (Kingstone). See Note 7, “Acquisition,” for additional information regarding the Kingstone acquisition.

Accounts Receivable - Unbilled and Other – Unbilled and other accounts receivable consist mainly of the contingent portion of the sales price that is not collectible until successful installation of the product. These amounts are generally billed upon final customer acceptance. The majority of these amounts are offset by balances included in deferred profit. As of June 30, 2011, the unbilled and other includes $4.3 million of Value Added Tax (VAT) receivables at our Netherlands operations. These are taxes that we have paid to our vendors that will be refunded to the Company by the government.

Inventories – Inventories are stated at the lower of cost or net realizable value. Approximately 90% of inventory are valued on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. The components of inventories are as follows:



	June 30, 2011			September 30, 2010
	(dollars in thousands)
Purchased parts and raw materials	$	20,127	12,894	$	12,894
Work-in-process	17,356		9,497	9,497
Finished goods	8,828		1,926	1,926
	$	46,311		$	24,317

Property, Plant and Equipment – Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. The cost of property retired or sold and the related accumulated depreciation are removed from the applicable accounts when disposition occurs and any gain or loss is recognized. Depreciation is computed using the straight-line method. Useful lives for equipment, machinery and leasehold improvements range from three to seven years; for furniture and fixtures from five to ten years; and for buildings twenty years.

The following is a summary of property, plant and equipment:



	June 30, 2011			September 30, 2010
	(dollars in thousands)
Land, building and leasehold improvements	$	11,091		$	8,099
Equipment and machinery	5,788			4,918
Furniture and fixtures	5,673			3,991
	22,552			17,008
Accumulated depreciation and amortization	(9,110		)	(7,431		)
	$	13,442		$	9,577

Goodwill - Goodwill is not subject to amortization and is reviewed for impairment on an annual basis, typically at the end of the fiscal year, or more frequently if circumstances dictate.

The following is a summary of activity in goodwill:



	Nine Months Ended
	June 30, 2011
	(dollars in thousands)
Beginning balance	$	4,839
Goodwill recognized due to acquisition	8,356
Net exchange differences	236
Ending balance	$	13,431

Intangibles – Intangible assets are capitalized and amortized over their useful life if the life is determinable. If the life in not determinable, amortization is not recorded.

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

In the second quarter of fiscal 2011, the Company acquired a 55% ownership of Kingstone, a Hong Kong-based holding company that owns 100% of Kingstone Semiconductor Company Ltd, a Shanghai-based technology company specializing in ion implant solutions for the solar and semiconductor industries. The intangible assets of Kingstone consist of in-process research and development, non-compete agreements, technology and the trade name totaling $3.2 million. The fair value of the intangible assets was determined by a valuation approach that estimates the future economic benefit stream of the asset determined with the assistance of an independent third-party consultant. The benefit stream was then discounted to present value with an appropriate risk-adjusted discount rate. See Note 7, “Acquisition,” for detail of the intangible assets acquired.

The following is a summary of intangibles:



	Useful Life	June 30, 2011			September 30, 2010
		(dollars in thousands)
Non-compete agreements	4-8 years	$	1,075		$	166
Customer lists	10 years	927			876
Technology	5-10 years	2,537			1,737
Licenses	10 years	500			890
In-process research and development	(1)	1,600			—
Other	2-10 years	102			90
		6,741			3,759
Accumulated amortization		(1,405		)	(1,188		)
		$	5,336		$	2,571


(1)	The in-process research and development will be amortized over its useful life when it has reached technological feasibility.

Warranty – A limited warranty is provided free of charge, generally for periods of 12 to 24 months, for all purchases of the Company’s new products and systems. Accruals are recorded for estimated warranty costs at the time the system is accepted by the customer.

The following is a summary of activity in accrued warranty expense:



	Nine Months Ended June 30,
	2011			2010
	(dollars in thousands)
Beginning balance	$	1,843		$	1,429
Warranty expenditures	(847		)	(386		)
Warranty expense	2,061			448
Ending balance	$	3,057		$	1,491

Stock-Based Compensation - The Company measures compensation costs relating to share-based payment transactions based upon the grant-date fair value of the award. Those costs are recognized as expense over the requisite service period, which is generally the vesting period. The benefits of tax deductions in excess of recognized compensation cost are credited to additional paid-in capital and reported as cash flow from financing activities rather than as cash flow from operating activities. Our stock-based compensation plans are summarized in the table below:



Name of Plan	Shares Authorized	Shares Available	Options Outstanding	Plan Expiration
2007 Employee Stock Incentive Plan	1,400,000	671,987	428,509	Apr. 2017
1998 Employee Stock Option Plan	500,000	—	80,272	Jan. 2008
Non-Employee Directors Stock Option Plan	350,000	120,600	92,853	Jul. 2015
		792,587	601,634

Share-based compensation expense reduced the Company’s results of operations by the following amounts:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
	(dollars in thousands, except per share amounts)						(dollars in thousands, except per share amounts)
Effect on income before income taxes (1)	$	(356	)	$	(187	)	$	(1,099	)	$	(757	)
Effect on income taxes	105			44			383			215
Effect on net income	$	(251	)	$	(143	)	$	(716	)	$	(542	)


(1)	Stock-based compensation expense is included in selling, general and administrative expenses.

Stock options issued under the terms of the plans have, or will have, an exercise price equal to or greater than the fair market value of the common stock at the date of the option grant and expire no later than 10 years from the date of grant, with the most recent grant expiring in 2021. Options issued by the Company vest over 2 to 5 years.

Stock option transactions and the options outstanding are summarized as follows:



	Nine Months Ended June 30,
	2011					2010
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of period	636,283			$	7.59	691,403			$	7.03
Granted	145,233			17.33		102,000			6.44
Exercised	(178,882		)	7.35		(25,608		)	6.04
Forfeited	(1,000		)	6.93		(6,525		)	5.55
Outstanding at end of period	601,634			$	10.01	761,270			$	6.99

Exercisable at end of period	210,543			$	8.07	448,081			$	7.23
Weighted average fair value of options granted during the period	$	10.85				$	3.97

The fair value of options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions:



	Nine Months Ended June 30,
	2011	2010
Risk free interest rate	1.69%	2.57%
Expected life	6 years	6 years
Dividend rate	0%	0%
Volatility	70%	68%
Forfeiture rate	4%	6%

To estimate expected lives for this valuation, it was assumed that options will be exercised at varying schedules after becoming fully vested. Forfeitures have been estimated at the time of grant based upon historical experience and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Fair value computations are highly sensitive to the volatility factor assumed in that the greater the volatility, the higher the computed fair value of the options granted.

Total fair value of options granted was approximately $1.6 million and $0.4 million for the nine months ended June 30, 2011 and 2010, respectively.

The Company awards restricted shares under the existing share-based compensation plans. Our restricted share-awards vest in equal annual installments over a two to four-year period. The total value of these awards is expensed on a ratable basis over the service period of the employees receiving the grants. The “service period” is the time during which the employees receiving grants must remain employees for the shares granted to fully vest.

Restricted stock transactions and awards outstanding are summarized as follows:



	Nine Months Ended June 30,
	2011				2010
	Awards		Weighted Average Grant Date Fair Value		Awards		Weighted Average Grant Date Fair Value
Beginning Outstanding	127,751		$	6.36	122,875		$	5.85
Awarded	35,517		17.28		24,000		6.15
Released	(37,376	)	6.27		(33,625	)	6.46
Forfeited	—		—		(1,250	)	8.20
Ending Outstanding	125,892		$	9.47	112,000		$	5.70

The fair value of restricted shares awarded was equal to the closing price of the Company's common stock on the day before the grant date and totaled approximately $0.6 million and $0.1 million for the nine months ended June 30, 2011 and 2010, respectively.

Fair Value of Financial Instruments – Cash, Cash Equivalents and Restricted Cash - The carrying amount of these assets on the Company’s Consolidated Balance Sheets approximates their fair value because of the short maturities of these instruments.

Receivables, Payables and Accruals—The recorded amounts of financial instruments, including accounts receivable, accounts payable, and accrued liabilities, approximate their fair value because of the short maturities of these instruments.

Pensions—The Company has retirement plans covering substantially all employees. The principal plans are defined contribution plans, except for the plans of the Company’s operations in the Netherlands and France and the plan for hourly union employees in Pennsylvania. The Company’s employees in the Netherlands, France and hourly union employees in Pennsylvania participate in multi-employer plans. Payments to the plans are recognized as an expense in the Consolidated Statement of Operations as they become due.

Shipping expense – Shipping expenses of $1.8 million and $0.9 million for the three months ended June 30, 2011 and 2010, respectively, are included in selling, general and administrative expenses. Shipping expenses of $4.5 million and $1.4 million for the nine months ended June 30, 2011 and 2010, respectively, are included in selling, general and administrative expenses.

Research and development expense – Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes; materials and supplies used in those activities; and product prototyping. The Company receives reimbursements through governmental research and development grants which are netted against these expenses. The table below shows gross research and development expenses and grants earned:



	Three Months Ended						Nine Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(dollars in thousands)						(dollars in thousands)
Research and development	$	2,187		$	814		$	4,330		$	2,018
Grants earned	(252		)	(276		)	(613		)	(758		)
Net research and development	$	1,935		$	538		$	3,717		$	1,260

Impact of Recently Issued Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income (June 2011). ”The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendment is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company will adopt the two-statement approach.

In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IRFSs (May 2011). "The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendment is effective during interim and annual periods beginning after December 15, 2011. The Company is evaluating the impact of this amendment.

In December 2010, the FASB issued ASU No. 2010-29, “Business Combinations: Disclosure for Supplementary Pro Forma Information for Business Combinations.” If a public entity presents financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. It requires expanded supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The Update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company will evaluate the impact of this update on future acquisitions as they occur