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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 26, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-17276
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FSI INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its charter)
MINNESOTA 41-1223238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
(Address of principal executive offices and Zip Code)
Registrant's telephone number including area code: (952) 448-5440
Securities registered pursuant to Section 12(b) of the Securities Exchange Act:
Title of each class and name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:
Common Stock, no par value Preferred Share Purchase Rights
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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price on November 3, 2000, as reported on
the NASDAQ National Market, was approximately $144,673,000. Shares of common
stock held by each officer and director and by each person who owns 10% or more
of the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for any other purpose.
As of November 3, 2000, the registrant had issued and outstanding
25,418,092 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on January 24, 2001, (the "Proxy Statement")
and to be filed within 120 days after the Registrant's fiscal year ended August
26, 2000, are incorporated by reference into Part III of this Form 10-K Report.
(The Audit Committee Report, the Compensation Committee Report and the stock
performance graph of the Registrant's Proxy Statement are expressly not
incorporated by reference herein.)
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PART I
ITEM 1. BUSINESS
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created by
that statute. Such forward-looking statements are based upon current
expectations and beliefs and involve numerous risks and uncertainties, both
known and unknown, that could cause actual events or results to differ
materially from these forward-looking statements. For a discussion of factors
that could cause actual results to differ materially from those described in
this Form 10-K, see the discussion of risk factors set forth below in Item 7 of
this Report. Forward-looking statements in this report are indicated by an
asterisk.*
THE COMPANY
FSI International, Inc., a Minnesota corporation organized in 1973 ("FSI"),
designs, develops, manufactures, markets and supports microlithography, spin-on
dielectric and surface conditioning equipment used in the fabrication of
microelectronics, such as advanced semiconductor devices and thin film heads. We
have two divisions, the Surface Conditioning Division ("SCD") and the
Microlithography Division ("MLD").
The Surface Conditioning Division sells and services equipment that uses
wet, vapor, cryogenic and other chemistry techniques to clean, strip or etch the
surfaces of silicon wafers for subsequent processing. The Microlithography
Division supplies photoresist processing equipment and services for the
semiconductor and thin film head markets, and deposition equipment and services
for spin-on dielectric material applications in the semiconductor market.
These divisions are supported by a shared services group that provides
finance, human resources, information services, marketing services, legal, and
other administrative support.
We market our products directly in North America and market in Europe, Asia
Pacific and Japan primarily through two affiliated distributors, Metron
Technology B.V. and m-FSI, Ltd. Through these affiliated international
distributors we can provide timely and efficient worldwide support.
Company Strategies
We have identified five strategic objectives that we began focusing on in
fiscal 2001. These objectives represent our one- to five-year plans, and our
tactics for fiscal 2001 support one or more of these strategic objectives. The
key elements of each are as follows:
- CUSTOMER SATISFACTION -- This objective includes strategies related to
understanding and exceeding customers' expectations. These strategies are
designed to create and deploy "information" products, improve customer
service support and enhance existing product features. Another aspect of
this strategy is to expand our surface conditioning business and product
offerings by acquiring or licensing technology from other cleaning
companies.
- GLOBAL INFRASTRUCTURE -- Our objective is to strengthen our sales and
service infrastructure in Asia and Europe. This includes increasing our
direct presence in foreign markets and highlighting and marketing our
environmental, health and safety capabilities.
- OPERATIONAL EXCELLENCE -- We are focusing on ensuring efficient, lean
processes throughout our organization. This entails improving asset
utilization, eliminating waste, improving supply chain management and
reducing product cost.
- SUPERIOR WORKFORCE -- This objective focuses on building employee
capability and commitment to our organization through improved
communications, supervisor development training, succession planning, and
better aligning our profit sharing programs with our tactics and
strategies.
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- SHAREHOLDER VALUE -- We intend to deliver both a superior and more
predictable financial performance. This includes improving our operating
return on sales, gross profit margins and shareholder return; maintaining
a strong balance sheet; and reducing research and development and sales
and general administration expenses as a percent of total sales.
Acquisition of YieldUP International, Inc.
On October 20, 1999, we completed the acquisition of YieldUP International
Corporation, a publicly held company that designed, developed, manufactured and
marketed immersion cleaning, rinsing and drying equipment used in the
fabrication of advanced semiconductor devices. Under the terms of the
acquisition, YieldUP shareholders received $0.7313 and 0.1567 of a share of our
common stock for each share of YieldUP stock. YieldUP option holders received
substitute options entitling them to purchase FSI common stock. The acquisition
of immersion technology provided us with additional process solutions for the
critical cleaning market, the largest market segment in semiconductor cleaning.
YieldUP is now operating under the name SCD Mountain View, Inc. ("SCD Mountain
View") as part of the Surface Conditioning Division.
Chemical Management Division Divestiture
On July 31, 1999, we sold our Chemical Management Division to the BOC
Group, Inc., a Delaware corporation ("BOC"), for approximately $38.2 million in
cash. We reported a pre-tax gain of approximately $24.8 million and an after-tax
gain of $15.9 million. The Chemical Management Division designed and
manufactured chemical management systems that generate, blend and dispense high
purity chemicals, and blend and deliver slurries to points of use in a
manufacturing facility, as well as related controls and support products.
Under the asset purchase agreement with BOC, we agreed to either retain or
indemnify BOC with respect to certain specified obligations and liabilities of
the Chemical Management Division.
Acquisition of Semiconductor Systems, Inc.
On April 4, 1996, we acquired all of the outstanding capital stock of
Semiconductor Systems, Inc. ("SSI"), a supplier of photoresist processing
equipment and support, and SSI became our wholly-owned subsidiary. SSI products
include the recently introduced CALYPSO(TM) spin-on dielectric system. SSI's
operations are part of the Microlithography Division.
INDUSTRY BACKGROUND
The complex process of fabricating semiconductor devices involves several
distinct phases that are repeated numerous times. Because each production phase
typically requires different processing technologies and equipment, no one
semiconductor equipment supplier currently produces all of the types of tools to
equip an entire state-of-the-art fabrication facility. Instead, semiconductor
device manufacturers typically equip their facilities by combining manufacturing
equipment produced by a number of suppliers. Each piece of equipment performs
specific functions in the manufacturing process. A thin film head fabrication
process will use many of the same types of manufacturing equipment as the
semiconductor manufacturing industry.
Generally, the need for new processes, larger substrates, and systems
capable of manufacturing increasingly complex devices drives demand for new
microelectronics manufacturing equipment and processes. Industries that use
microelectronics increasingly demand higher performance devices from
manufacturers. Over the last decade, device manufacturers have reduced the size
and substantially increased the functionality of each device because of
technological advances.
Our business depends upon the microelectronics manufacturers' capital
equipment expenditures. Manufacturers' expenditures in turn depend on the
current and anticipated market demand for microelectronic devices and products
that use microelectronic devices. The microelectronics industry has been
cyclical in nature and has experienced periodic downturns. We continue to
believe that microelectronics manufacturers are asking equipment suppliers to
take an increasingly active role in
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meeting the manufacturers' technology requirements and cost constraints.
Equipment suppliers do this by developing and supporting the products and
processes required to fabricate products or devices.
In addition to rapid technological advances in microelectronics,
competitive pressures are also forcing manufacturers to reduce production costs.
A typical new fabrication facility is very expensive to build and equip, so
manufacturers carefully evaluate individual cost components. Manufacturers
increasingly analyze the costs associated with owning and operating each piece
of required operating equipment resulting in a figure referred to as the
equipment's "cost of ownership." Equipment suppliers now often use this
measurement as a means of differentiating themselves from their competition.
Another factor enters into this formula as well. To reduce total manufacturing
costs and to reduce potential contaminant exposure from one process step to
another, manufacturers seek process equipment that can be integrated with other
suppliers' equipment. When this strategy is successful, equipment suppliers can
offer microelectronics manufacturers a highly automated and integrated
processing system.
PRODUCTS
The mix of products we sell may vary significantly from year to year. The
following table sets forth, for the periods indicated, the amount of sales and
approximate percentages of our total sales by our principal product lines:
FISCAL YEAR ENDED
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AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
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(DOLLARS IN THOUSANDS)
Microlithography products........... $ 66,956 30.4% $ 51,651 45.5% $ 74,540 46.1%
Surface conditioning products....... 109,603 49.9% 37,416 33.0% 60,197 37.2%
Spare parts and service............. 43,228 19.7% 24,445 21.5% 26,958 16.7%
-------- ----- -------- ----- -------- -----
$219,787 100.0% $113,512 100.0% $161,695 100.0%
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MICROLITHOGRAPHY PRODUCTS
Our microlithography products consist of several versions of the POLARIS(R)
Cluster and the CALYPSO(TM) Low-K System with Instacure(TM) Module.
POLARIS Microlithography Clusters These systems perform all
photolithography processing steps except exposure. In the cluster, various
process modules surround one or two cleanroom-qualified robots in a
self-contained process environment. The cluster is configured to match or exceed
the throughput capabilities of the integrated exposure tool (stepper). To
operate, the robot(s) transport(s) wafers loaded into the cluster's input/output
module through the various process modules in a sequence programmed by the
operator.
The POLARIS Cluster offers an alternative to photoresist track or cluster
type systems that process wafers according to a pre-established arrangement of
the equipment. The cluster provides system flexibility and certain performance
advantages over competing systems. It also provides certain reliability and
serviceability advantages. The system's highly integrated and automated cluster
approach can eliminate the need for a number of complex mechanisms that can
impact system reliability.
POLARIS System process modules can be serviced from outside the tool
without disrupting other cluster process operations. When technological advances
make it necessary to replace equipment, individual modules can be replaced or
modified with an upgraded module without rendering the entire system obsolete.
In 1999, we introduced the POLARIS 3500 Microlithography Cluster. The 3500
system extends the productivity benefits of the POLARIS 2500 Cluster platform to
300 mm wafer processing. The tool is targeted at 0.15-micron design
applications. Each model uses the same kind of wafer handling system,
environmental control system and software. Certain process modules were designed
for both 200 mm and 300 mm wafers to allow customers to bridge from 200 mm to
300 mm device manufacturing without the need to purchase another complete
system.
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The price of the POLARIS Cluster ranges from approximately $1,000,000 to
$3,500,000, depending on wafer size, number of modules, and number of robots
required. We licensed the original POLARIS cluster technology from Texas
Instruments in 1990. Since then, we have made many improvements to the product.
See "Patents, Trademarks and Intellectual Property," below.
CALYPSO(TM) Low-K System with Instacure(TM) Module Based on our POLARIS
Cluster platform, the system deposits organic and inorganic low-k dielectric
films on semiconductor substrates. Because of its modular architecture, users
can extend or adapt to ultra low-k nonporous films for future technology nodes.
At the heart of the CALYPSO System is the Instacure Module, a proprietary
(patent pending) high-temperature anaerobic bake module that optimizes wafer
temperature and oxygen content within the chamber throughout the in-line single
wafer curing process. Because the Instacure process eliminates the need for a
traditional curing furnace, it reduces cleanroom space requirements, capital and
operating costs, power consumption and the risk of damage to wafers. The CALYPSO
System can be modified to accommodate both 200 mm and 300 mm wafer processing.
The SOD equipment market is still in its infancy stage. Sales of CALYPSO Systems
depend on the successful adoption of SOD materials over more common CVD low-k
materials. To date, there have been no sales of the CALYPSO System. We expect
that we may begin realizing sales during fiscal 2001.* The price of the CALYPSO
system ranges from approximately $1,500,000 to $3,500,000 depending on the
configuration.
OrbiTrak(R) and SCORPIO(TM) Microlithography Clusters We have discontinued
manufacturing these products acquired in the SSI acquisition, as functions
performed by them are being fulfilled by the POLARIS Cluster. We continue to
support OrbiTrak and SCORPIO Clusters in the field.
SURFACE CONDITIONING PRODUCTS
Our surface conditioning products perform cleaning, etching and stripping
functions necessary to fabricate microelectronic devices.
Spray Processing Systems Our spray processing systems, which include the
MERCURY(R) and ZETA(R) Surface Conditioning Systems, are sophisticated spray
chemistry systems that clean, etch and strip wafers at various stages in the
device fabrication process. In the systems, centrifugal spray technology exposes
wafers to a programmed, sequenced spray of fresh chemicals inside a closed,
nitrogen-filled chamber. Cassettes filled with wafers are loaded into a
turntable in the process chamber. Processing chemicals, deionized (DI) water and
nitrogen are sequentially dispensed into the chamber through one or more
sprayposts mounted in the chamber. As the turntable rotates, nozzles apply a
chemical spray to the wafers' surfaces. After chemical application, DI water is
sprayed on the wafer surfaces and all process chamber surfaces to remove
chemical residues. Centrifugal spinning, combined with a flow of nitrogen into
the chamber, then dries the wafers and the chamber. Our spray processing systems
include a microprocessor-based controller to program, control and monitor the
system's operating functions to ensure precise control and process
repeatability.
In October 1997, we introduced the fully-automated ZETA Surface
Conditioning System, a batch spray processor that provides a reliable, automated
environment to move wafers to and from the process chamber. This tool's
eight-chemical flow system allows for a wide range of chemical blend ratios. Our
spray processing systems range in price from $600,000 to $2,500,000.
To respond to customers who require ozone technology in their device
manufacturing processes, we sell an ozone resist stripping and cleaning module
for use in our ZETA and MERCURY Systems. Our ozone-based resist stripping and
cleaning technologies are based on our patented and patent pending high-
concentration ozonated water generation process and dynamic chemical processing.
Ozone use in semiconductor processing is attractive because it uses only oxygen
and water instead of abrasive and dangerous chemicals, and produces a carbon
dioxide by-product. Semiconductor fabs can thus eliminate sulfuric acid in
front-end-of-line (FEOL) processing. This lower chemical and water usage adds up
to potential process line savings.
Vapor Processing Systems Our EXCALIBUR(R) 2000 Vapor HF Etching Systems use
anhydrous hydrogen fluoride (HF) gas in conjunction with water vapor to perform
cleaning steps. The system processes wafers individually, loading them from the
wafer carrier into the process chamber by a handler to minimize particle
contamination. Vapor HF processing offers these advantages over processing
systems
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using liquid chemicals: increased chemical purity (due in part to its ability to
mix chemical gases with water vapor at the point of use); reduced chemical and
waste disposal costs; and increased processing capabilities that are
technologically possible only with the EXCALIBUR System. This integrated system
provides environmental and surface control of the wafer between cleaning and
various other process steps that results in reduced contamination and improved
yield.
The EXCALIBUR System ranges in price from $400,000 to $800,000, depending
on the model, wafer size, number of process chambers and related electronic
control requirements.
CryoKinetic Processing Systems Through a license agreement with IBM, we
manufacture, market, and service products using IBM's cryogenic aerosol cleaning
technology. We introduced this technology as the ARIES(R) CryoKinetic Cleaning
System in 1996. The system rapidly cools the mixture of inert gases to cryogenic
temperatures, forming ultrapure argon/nitrogen crystals. When the frozen gas
crystals collide with particles or residues on the wafer surface, they impart
sufficient kinetic energy to dislodge contaminants. The gas flow carries
contaminants away from the wafer and removes them from the process chamber. This
removal process is facilitated by a unique chamber design that prevents
contaminants from redepositing on the wafer surface once they are removed. The
ARIES System's advantage over conventional aqueous processes is that cryogenic
aerosol can remove particles or particulate without undercutting and weakening
device structures. ARIES Systems range in price from $1,200,000 to $2,200,000
depending on the number of process chambers and related requirements.
In 1998, we introduced the ANTARES(TM) Advanced Cleaning System for either
200 mm or 300 mm processing. The system's single-wafer platform can integrate
products such as the EXCALIBUR and ARIES Systems. It can mix and match multiple
process technologies, and is the platform for future SCD single-wafer
technologies. Customers can realize advantages of common spares, improved
platform robustness, and higher throughput. ANTARES Systems range in price from
$1,400,000 to $2,200,000.
Immersion Processing Systems With our acquisition of YieldUP International
in October 1999, we expanded into immersion processing, allowing us now to offer
process solutions for the critical cleaning segment of the surface conditioning
market. YieldUP systems incorporate our patented Surface Tension Gradient
(STG(TM))drying technology and patented CleanPoint(R) water filtration system.
YieldUP's operations were transferred to Chaska, Minnesota in September 2000.
Our immersion products include:
YieldUP(R) 1000 STGTM Rinse Dry Module
The YieldUP 1000 Module is a small-footprint, stand-alone rinsing and
drying system, designed to replace conventional spin rinse dryer technology in
semiconductor manufacturing facilities This process can reduce contamination and
water spots that can be left by conventional rinsing and drying equipment.
YieldUP(R) 2000 STGTM Rinse Dry Module
The YieldUP 2000 Module is an integrated cleaning, rinsing and drying
system that uses the same rinse and dry technology as in the YieldUP 1000
system, coupling it with additional cleaning options and system control
capabilities. The module is available as a stand-alone system or as an upgrade
to an existing wet bench system.
YieldUP(R) 4000 Immersion Etch System
The YieldUP 4000 System is a two-chamber etching, rinsing and drying system
that provides integrated hydrofluoric acid etching. The YieldUP 4000 System is
configured with robotics for wafer cassette handling.
YieldUP(R) 6200 Immersion Clean System
The YieldUP 6200 System provides a replacement Standard Clean 1 (SC1),
which is a common particle removal chemistry, based on advanced technology that
uses only ultra-dilute ammonia gas and DI water. Megasonic energy in the
cleaning chamber further improves cleaning performance. The YieldUP 6200 System
is used for critical cleaning, especially pre-diffusion, on a variety of
substrates. The system is also configured with robotics for wafer cassette
handling.
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Immersion system products range in price from $125,000 to $700,000.
SPARE PARTS AND SERVICE
We sell spare part kits for a number of our products and individual spare
part components for our equipment. We also offer product improvements to enable
customers to update previously purchased equipment.
We have customer service and process engineers worldwide, who assist and
train customers to perform preventive maintenance on and to service our
equipment. They also develop process applications for the equipment. We sell a
variety of process, service and maintenance programs. A number of customers have
purchased maintenance contracts in which our service employees work at the
customer's facility to provide process service and maintenance support for our
equipment.
BACKLOG AND SEASONALITY
Our year-end backlog at fiscal 2000 was $184 million; in fiscal 1999 it was
$45 million. Approximately 51% and 42%, respectively, of our backlog at fiscal
2000 and 1999 year-end was comprised of orders from three customers for each
year. Texas Instruments, First Silicon and Philips Semiconductor were the top
three customers in fiscal 2000 year-end backlog. Texas Instruments, IBM and
STMicroelectronics were the top three customers in backlog at the end of 1999.
The loss of any of these customers could have a material adverse effect on our
operations. Backlog consists of orders with delivery dates within the next 12
months for which a customer's purchase order has been received or a customer
purchase order number has been communicated in writing to us. All orders are
subject to cancellation by the customer and in some cases a penalty provision
may apply to a cancellation.
In fiscal 2000 and 1999, purchase orders aggregating approximately
$5,252,000 and $16,216,000, constituting 2.4% and 14.3% of sales, respectively,
were canceled and not rescheduled. Because of the timing and relative size of
certain orders received by us and possible changes in delivery schedules and
order cancellations, our backlog can vary from time to time so that backlog as
of any particular date is not necessarily indicative of actual sales for any
subsequent period. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our business is not seasonal to
any significant extent.
RESEARCH AND DEVELOPMENT
We believe that our future success depends in large part on our ability to
enhance, in collaboration with our customers and other equipment and materials
manufacturers, our existing product lines to meet the changing needs of
microelectronics manufacturers. We believe that industry trends, such as the use
of smaller circuit geometries, increased use of larger substrates and
manufacturers' increased desire for integrated processing equipment, will make
highly automated and integrated systems, including single substrate processing
systems, more important to customers. For assistance in our development efforts,
we maintain relationships with a number of industry professionals, including our
customers, who help identify and review industry trends and our development
activities to meet the industry's advanced technology needs.
Our current research and development programs are focused on the need for
cleaner substrate surfaces due to smaller geometries, increased process control
and flexibility through monitoring and software management systems and process
automation, robotics automation in the cleanroom, and integration of FSI's
product offerings with other suppliers' processing. Each of these programs
involves customer collaboration to ensure proper machine configuration and
process development to meet industry requirements.
We maintain an 8,000-square-foot, state-of-the-art demonstration and
process development laboratory at our SCD Division manufacturing facility in
Chaska, Minnesota, and a corresponding 2,200-square-foot lab at our MLD Division
in Allen, Texas.
Expenditures for research and development, which are expensed as incurred,
during fiscal 2000, 1999 and 1998 were approximately $37,300,000 (exclusive of
$6,370,000 of in-process research and development
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write-off), $31,592,000 and $36,103,000, respectively, and represented 17.0%,
27.8% and 22.3% of sales, respectively.
We expect to continue to make substantial investments in research and
development.* We also recognize the importance of managing product transitions
successfully, as the introduction of new products could adversely affect sales
of existing products.
MARKETING, SALES AND SUPPORT
We market our products throughout the world. Our marketing and sales
efforts are focused on building long-term relationships with our customers.
These efforts are supported by marketing and sales personnel, and process and
software engineers that work closely with individual customers to find solutions
to their process needs.
In North America, we market our products through direct sales personnel,
located at our Chaska or Allen offices or at regional sales offices, together
with product and technical specialists devoted to each of our product lines.
These individuals and our engineers work with customers to understand their
processing requirements and to configure our equipment to meet those
requirements. In addition, as of the end of fiscal 2000, the sales effort was
supported by approximately 135 employees and contractors engaged in customer
service and support.
International sales, primarily in Europe and Asia, accounted for
approximately 53%, 29% and 39% of total sales for fiscal years 2000, 1999 and
1998, respectively. We own a 20% equity interest in Metron Technology B.V.
("Metron"), a distributor of our products and which has an extensive
distribution organization located in Europe, Israel, India, and in the Asia
Pacific Region. Entegris, Inc., a manufacturer of plastic injection moldings for
the microelectronics industry and a supplier to FSI, also owns a 20% equity
interest in Metron. In addition to FSI's products, Metron also sells materials
and equipment on behalf of several other semiconductor equipment and consumables
manufacturers, including Entegris, Inc.
We own a 49% equity interest in m-FSI, Ltd. ("m-FSI"), a Japanese joint
venture company formed in 1991 with Mitsui & Co., Ltd. and its wholly-owned
subsidiary, Chlorine Engineers Corp., Ltd. (collectively, "Mitsui"). Mitsui owns
a 51% equity interest in m-FSI. In connection with its formation, we and Mitsui
granted m-FSI certain product and technology licenses and product distribution
rights.
The significant majority of our international sales are made to Metron or
m-FSI for resale to end users of our products. However, in some cases, we may
also sell directly to an international customer, in which case we may pay a
commission to our affiliated distributor in connection with the sale. When
commissions are taken into account, the international sales to our affiliates
are on terms generally no less favorable to us than international sales by us
directly to non-affiliates.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
We maintain manufacturing facilities in Chaska, Minnesota and Allen, Texas.
We typically assemble our products and systems from components and prefabricated
parts manufactured and supplied by others, such as process controllers, robots,
integrated circuits, power supplies, stainless steel pressure vessels, chamber
bowls, valves and relays. Certain of the items manufactured by others are made
to our specifications. Typically, final assembly and systems tests are performed
by our manufacturing personnel. Quality control is maintained through incoming
inspection of components, in-process inspection during equipment assembly, and
final inspection and operation of manufactured equipment prior to shipment. We
have a company-wide quality program in place and received ISO 9001 certification
in 1994.
Certain of the components and subassemblies included in our products are
obtained from a single supplier or a limited group of suppliers to ensure
overall quality and delivery timeliness. Although we seek to reduce dependence
on sole and limited-source suppliers, disruption or termination of certain of
these sources could have a temporary adverse effect on our operations. We
believe that alternative sources could be obtained and qualified to supply these
products, if necessary, but that production delays would likely occur in some
cases.* Further, a prolonged inability to obtain certain components could have
an adverse effect on our operating results, delay scheduled deliveries and
result in damage to customer relationships.*
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COMPETITION
The global semiconductor industry in which we compete is highly
competitive. In each of our markets we face intense competition from established
competitors, some of which have substantially greater financial, engineering,
research, development, manufacturing, marketing, service and support resources,
and greater name recognition than us. To remain competitive, we must maintain a
high level of investment in research and development, marketing, and customer
service and support, and must also control our operating expenses.* There can be
no assurance that we will have sufficient resources to continue to make such
investments or that our products will continue to be viewed as competitive as a
result of technological advances by competitors or changes in semiconductor
processing technology. Our competitors also may increase their efforts to gain
and retain market share through competitive pricing, strategic alliances or
mergers and acquisitions.* Such competitive pressures may require us to reduce
prices or may result in lost orders that could adversely affect our financial
results. If our competitors enter into strategic alliances with leading
semiconductor manufacturers in the areas of surface conditioning,
microlithography or spin-on dielectrics, this could impair our ability to sell
our products and adversely affect our operating results.
As the foundry market has expanded, the construction of new fabrication
facilities has increased considerably in the Pacific Rim, especially Taiwan.
These Pacific Rim markets are extremely competitive and the semiconductor device
manufacturers located there have been very aggressive in seeking price
concessions from suppliers. We understand that many companies in this area have
technology alliances with established Japanese, U.S. or European semiconductor
device manufacturing companies and that a substantial portion of their equipment
purchase decisions will be based upon the recommendations of their alliance
partners. However, we do not believe any existing government trade restrictions
materially limit our ability to compete in the Pacific Rim market.
We believe that the Japanese equipment companies that we compete with have
a competitive advantage because of the dominance of their Japanese customer
base. Japanese microelectronics manufacturers have extended their influence
outside Japan by licensing products and process technologies to non-Japanese
manufacturers. Such licenses can result in a recommendation to use equipment
manufactured by Japanese companies. Therefore, we may be at a competitive
disadvantage with respect to the Japanese equipment suppliers, who have been
engaged for some time in collaborative efforts with Japanese microelectronics
manufacturers. Some Japanese equipment manufacturers have established
manufacturing operations in the United States, which will enable them to compete
more effectively in the United States market. As part of our strategy to
strengthen our Japanese presence, we granted m-FSI, a joint venture with Mitsui
established in 1991, certain product and technology licenses and product
distribution rights in Japan.
Significant competitive factors in the equipment market include system
price, quality, process repeatability, capability and flexibility, ability to
integrate with other products, and overall cost of ownership, including
reliability, automation, throughput, system price and customer support. We have
experienced significant price competition from certain competitors, primarily
those in the microlithography market. Although we believe that we have certain
technological and other advantages over our competitors, realizing and
maintaining such advantages will require a continued high level of investment by
us in research and development, marketing, and customer service and support as
well as controlling operating expenses. There can be no assurance that we will
continue to compete successfully in the future.
Our competitors differ across our product lines. Our microlithography
products compete with products offered by, among others, Dainippon Screen
Manufacturing Co. Ltd. (DNS), Silicon Valley Group, Inc., and Tokyo Electron
Ltd. (TEL). Our surface conditioning products compete with, among others, DNS,
Kaijo Denki, Steag, Sugai/Sankyo Engineering, Semitool, Inc., SCP Global
Technologies, and TEL.
CUSTOMERS
We sell products from one or more of our product lines to most major
microelectronics manufacturers. We have an extensive history of sales to several
of the largest integrated circuit manufacturers. We have over 100 active
customers worldwide.
STMicroelectronics accounted for approximately 11% of our sales in fiscal
2000 and less than 10% in fiscal 1999 and 1998. Texas Instruments accounted for
15% and 13% of our sales in fiscal 2000 and 1999,
9
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respectively, and less than 10% in fiscal 1998. IBM accounted for approximately
24% and 14% of our sales in fiscal 1999 and 1998, respectively, and less than
10% in fiscal 2000. National Semiconductor Corporation accounted for less than
10% of FSI's sales in fiscal 2000 and 1999, and accounted for 12% of our sales
in fiscal 1998.
We have experienced, and expect to continue to experience, fluctuations in
our customer mix.* The timing of an order for our equipment is primarily
dependent upon the customer's expansion program, replacement needs, or
requirements to improve productivity and yields. Consequently, a customer who
places significant orders in one year will not necessarily place significant
orders in subsequent years.
Sales to Metron and m-FSI, our international distributors in fiscal 2000,
1999 and 1998, accounted for approximately 46%, 27% and 37%, respectively, of
our total sales. Usually these systems are purchased for resale to device
manufacturers. In addition, the earnings (losses) received from our equity
ownership interest in Metron and m-FSI were approximately $2,047,000 of income
in 2000, $1,166,000 of losses in 1999 and $674,000 of income in 1998. The
earnings or losses of Metron or m-FSI can significantly affect our financial
results. There can be no assurance that we will continue to distribute our
products or do so successfully, and in such event our results of operations and
earnings could be adversely affected.*
Under our distribution agreements with Metron, we appointed Metron as
distributor for our products in a number of European and Asian countries. The
agreements continue until terminated. Either party may terminate the agreements
on or after November 19, 2001 by giving one year prior written notice and upon
the occurrence of certain events at an earlier date upon one year notice. There
is no requirement that Metron purchase a specified amount or percentage of our
products under the agreements.
Under the m-FSI distribution agreement, m-FSI has exclusive distribution
rights with respect to certain of our products in Japan. A licensing agreement
allows m-FSI to manufacture certain of our products. The agreements may be
terminated only upon the occurrence of certain events or conditions. There is no
obligation under the distribution agreement for m-FSI to purchase a specified
amount or percentage of our products.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
Our success depends upon a variety of factors, including proprietary
technology. It is becoming increasingly important to protect our technology by
obtaining and enforcing patents. Consequently, we have an active program to file
patent applications in the United States and other countries on inventions we
consider significant. We also attempt to protect our proprietary information
through non-disclosure agreements with our employees and with third parties. We
have a number of patents in the United States and other countries, and
additional applications are pending. We also possess other proprietary
intellectual property, including trademarks, know-how, trade secrets and
copyrights.
There can be no assurance that any of these patents will not be challenged,
invalidated or circumvented, or that rights granted by the patents will provide
competitive advantages to us. There are no assurances that pending applications
will result in patents or that the claims allowed in future patents will be
sufficiently broad to protect our technology. The laws of some foreign countries
may not permit the protection of our proprietary rights to the same extent as
under the laws of the United States. Although we believe that protection
afforded by our patents, patent applications, and other intellectual property
rights has value, because of rapidly changing technology, our future success is
primarily dependent on our employees' engineering, marketing, service, and
manufacturing skills.
In the normal course of business, we from time to time receive and make
inquiries about possible patent infringement. In dealing with such inquiries, it
may be necessary or useful for us to obtain or grant licenses or other rights.
However, there can be no assurance that such license rights will be available to
us on commercially reasonable terms, or at all. The inability to obtain certain
license or other rights, or to obtain such licenses or rights on favorable
terms, or the need to engage in litigation could have a material adverse effect
on us. (See also Item 3, "Legal Proceedings.")
The POLARIS Cluster is offered by us under a non-exclusive license from TI.
We have converted the license to a fully paid-up, worldwide license to sell and
manufacture the POLARIS Cluster. We also have the non-exclusive right to
manufacture and sell related TI modules. The license agreement continues
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until terminated. It may be terminated by either party upon a breach by the
other party, and the failure to cure certain terms of the agreement.
The ARIES(R) CryoKinetic Cleaning System is offered under license
agreements from IBM. The licenses require certain minimum royalties and
system-based royalties. Royalties are based on the "royalty portion revenues" of
licensed equipment that excludes amounts for freight, taxes, customers' duties,
insurance, discounts, and certain equipment not manufactured by us.
FSI and its wholly owned subsidiaries have approximately 71 patents.
Expiration dates range from 2004 to 2018.
EMPLOYEES
As of August 26, 2000, we had approximately 900 employees. Competition for
highly skilled employees is intense. We believe that a great part of our future
success depends upon our continued ability to retain and attract qualified
employees.* We are not subject to any collective bargaining agreement and have
never been subject to a work stoppage. We believe we have good relations with
our employees.
ENVIRONMENTAL MATTERS
We are subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. We believe we are in compliance with these
regulations and that we have obtained all necessary environmental permits to
conduct our business. These permits generally relate to the disposal of
hazardous wastes. If we failed to comply with present or future regulations,
fines could be imposed, production could be suspended, or operations could
cease. Such regulations could require us to acquire significant equipment or
take other actions to comply with environmental regulations at a potentially
significant cost to us. If we failed to control the use of, or adequately
restrict the discharge or disposal of hazardous substances we could incur future
liabilities. (See also Item 3 -- "Legal Proceedings.")
We believe that compliance with federal, state and local provisions that
have been enacted or adopted regulating discharges of materials into the
environment, or otherwise relating to the protection of the environment, will
not have a material effect upon our capital expenditures, earnings and
competitive position.*
INTERNATIONAL SALES
Our sales for each of the last three fiscal years is disclosed in the
financial statements included elsewhere in this Report in Item 8 on page 50.
OTHER RISK FACTORS
We discuss certain risk factors in the "Risk Factors Section" in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this report on pages 25 to 30.
ITEM 2. PROPERTIES
Our corporate offices are located in Chaska, a suburb of Minneapolis,
Minnesota. As of August 26, 2000, we leased approximately 90,000 square feet, in
three buildings. The annual net rental cost for these facilities in fiscal 2000
was approximately $448,000. In connection with the sale of the Chemical
Management Division to the BOC Group, Inc. ("BOC"), we have extended the current
lease for our corporate headquarters by one year. We sub-leased approximately
79,000 square feet of one of our Chaska facilities to BOC for approximately
$396,000 in annual rental costs.
In November 1995, we opened a new 100,000-square-foot manufacturing
facility in Chaska, Minnesota, which cost approximately $12.5 million to
construct and equip plus an 88,000 square foot, $21.5 million addition in 1997.
The facility contains the headquarters for our Surface Conditioning Division and
includes research, laboratory and engineering facilities, 40,000 square feet of
Class 1,000 and 10,000 cleanroom space; manufacturing support operations and a
customer training center.
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In March 1997 a 159,000-square-foot facility in Allen, Texas was completed
at a cost of $18.6 million to construct and equip, and contains the
Microlithography Division's headquarters and includes manufacturing,
engineering, and a research and development laboratory.
Other U.S. leased locations include a 62,040-square-foot facility in
Fremont, California ("SSI") and a 14,370-square-foot facility in Mountain View,
California ("SCD Mountain View"). We are consolidating these two facilities and
are in the process of vacating the premises and seeking the early termination of
these leases.
We also lease office space for several service or sales and service offices
in the United States. Management believes its existing facilities are well
maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
We generate minor amounts of liquid and solid hazardous waste and use
licensed haulers and disposal facilities to ship and dispose of such waste. In
the past, we have received notice from state or federal enforcement agencies
that we are a potentially responsible party ("PRP") in connection with the
investigation of several hazardous waste disposal sites owned and operated by
third parties. In each matter, we have elected to participate in settlement
offers made to all de minimis parties with respect to such sites. The risk of
being named a PRP is that if any of the other PRP's are unable to contribute
their proportionate share of the liability, if any, associated with the site,
those PRP's that are able could be held financially responsible for the
shortfall.
There has recently been substantial litigation regarding patent and other
intellectual property rights in the microelectronics industry. Commercialization
of new products or further commercialization of our current products could
provoke claims of infringement by third parties. In the future, litigation may
be necessary to enforce patents issued to us, to protect trade secrets or
know-how owned by us or to defend us against claimed infringement of the rights
of others and to determine the scope and validity of our proprietary rights. Any
such litigation could result in substantial costs and diversion of effort by us,
which by itself could have a material adverse impact on our financial condition
and operating results. Further, adverse determinations in such litigation could
result in our loss of proprietary rights, subject us to significant liabilities
to third parties, require us to seek licenses from third parties or prevent us
from manufacturing or selling one or more products, any of which could have a
material adverse effect on our financial condition and results of operations.
Certain of our product lines are intended for use with hazardous chemicals.
As a result, we are notified by our customers from time to time of incidents
involving our equipment that have resulted in a spill or release of a hazardous
chemical. In some cases it may be alleged that we or our equipment are at fault.
There can be no assurance that any future litigation resulting from such claims
would not have a material adverse effect on our business or financial results.
In October 1996, Eric C. and Angie L. Hsu (the "plaintiffs") filed a
lawsuit in the Superior Court of California, County of Alameda, Southern
Division, against Semiconductor Systems, Inc. ("SSI"), a wholly-owned subsidiary
of FSI that was acquired in April 1996, and the former shareholders of SSI. In
the fall of 1995, pursuant to the Employee Stock Purchase and Shareholder
Agreement dated November 30, 1990 between Mr. Hsu and SSI (the "Shareholder
Agreement") and in connection with Mr. Hsu's termination of his employment with
SSI in August 1995, the former shareholders of SSI purchased the shares of SSI
common stock then held by Mr. Hsu. The plaintiffs claimed, among other things,
that such purchase breached the Shareholder Agreement and violated the
California Corporations Code, breached the fiduciary duty owed plaintiffs by the
individual defendants and constituted fraud.
In September and October of this year, certain of Mr. Hsu's claims were
tried to a jury in Alameda County Superior Court in Oakland, California. At the
conclusion of the trial, the jury made the following findings. The jury found
that SSI breached the Shareholder Agreement between it and Eric Hsu either by
allowing the other shareholders to purchase Mr. Hsu's shares or by allowing an
untimely purchase of Mr. Hsu's shares and that the damages that resulted were
$2.4 million. This finding may allow Mr. Hsu to seek recovery of certain of his
attorney's fees. In addition, each of the individual defendant shareholders was
found liable for conversion and damages of $4.2 million were awarded. Certain
individual defendants were also found to have intentionally interfered with Mr.
Hsu's prospective economic advantage and
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damages of $3.2 million were awarded. Finally, several individual defendants and
SSI were found to have violated certain provisions of the California
Corporations Code and damages of $2.4 million were awarded. The judge has not
yet heard arguments regarding the jury verdict but SSI believes the damages
awards will be found to be duplicative and not cumulative and that certain of
these damages awards may be subject to reduction, including for among other
things, on account of the amount paid to Mr. Hsu in connection with the purchase
of his shares.
Certain equitable claims of Mr. Hsu still must be tried to and decided by
the court. For this reason, damages have not yet been allocated among the
respective defendants and final judgment has not yet been entered. Once judgment
is entered, the matter is appealable and SSI and the individual defendants are
likely to appeal the verdict on a variety of grounds. Thus, there is
considerable uncertainty as to the ultimate resolution of this matter and the
respective liability, if any, of the individual defendants or SSI.
We, on behalf of SSI, have made a claim with respect to the lawsuit under
the escrow created at the time of our acquisition of SSI. The escrow was
established to secure certain indemnification obligations of the former
shareholders of SSI. The escrow consists of an aggregate of 250,000 shares of
our Common Stock paid to the former shareholders of SSI as consideration in the
acquisition. There is no cash in the escrow. The former shareholders have agreed
to hold FSI and SSI harmless from any claim arising out of any securities
transactions between SSI and the shareholders or former shareholders of SSI. The
indemnification obligations of the individual SSI shareholders are capped at
approximately $4.2 million in the aggregate. Any shares in the escrow returned
to FSI to satisfy any indemnification obligations will be valued at $12.125 per
share, the per-share price of FSI Common Stock at the time of the SSI
acquisition. Depending on the ultimate resolution of the case, it is possible
that the escrow and indemnity obligations of the individual shareholders may not
be sufficient to fully protect SSI against any judgment that may be entered in
the matter.
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against YieldUP in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain YieldUP products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in
YieldUP's favor. In a written opinion granting summary judgment for YieldUP, the
United States District Court held that CFM had failed to produce evidence on
three separate elements of the patent claim. To establish infringement, evidence
of all three elements was required. On June 30, 1998, the United States District
Court of Delaware granted CFM's petition for re-argument of the summary judgment
motion, and the re-argument briefs have been filed by both parties. The judge
has not yet ruled as to whether to sustain his earlier ruling. If the original
order is overturned, the litigation may proceed to trial, and the litigation and
the associated costs may, and an unfavorable adjudication could, have a material
adverse impact on FSI.* CFM is asking for monetary damages and an injunction
against YieldUP's use of the products at issue. A loss, if any, resulting from
an unfavorable adjudication, cannot presently be estimated.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of YieldUP's products
infringes two patents held by CFM: U.S. Patent Nos. 4,917,123 and 4,778,532.
YieldUP plans to vigorously defend its intellectual property rights against any
and all claims. FSI believes that the additional CFM patent infringement lawsuit
is without merit and that none of YieldUP's technology and products infringes
any of the CFM patents asserted in that litigation. FSI believes YieldUP's
technology is substantially different from CFM's patented technology. YieldUP
has filed an answer to the complaint and a counter claim for non-infringement
and invalidity of CFM's patents. CFM is asking for monetary damages and an
injunction against YieldUP's use of those products at issue. A loss, if any,
resulting from an unfavorable adjudication, cannot presently be estimated. The
associated costs may, and an unfavorable adjudication could, have a material
adverse impact on FSI.
On April 4, 2000 the United States District Court for the District of
Delaware granted YieldUP's motion for summary judgment that the '123 and '532
patents are invalid. CFM's motion for rehearing has been denied. On July 29, the
issue of whether CFM and its inventors had engaged in inequitable conduct in
prosecuting the '123 and '532 patents was tried before the court. In early
September the parties filed their briefs on the matter of inequitable conduct.
The judge has yet to rule on the issue. If the judge finds CFM engaged in
inequitable conduct, YieldUP will request the court to order CFM to pay
YieldUP's
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attorneys fees in defending this suit. Once judgment is entered based upon the
District Court's granting YieldUP's summary judgment motion, the District
Court's order may be appealed by CFM.
Other than the litigation described above or routine litigation incidental
to our business, there is no material litigation to which we are a party or of
which any of our property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended August 26, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers are elected by the board of directors, generally for
a term of one year, and serve until their successor is elected and qualified.
The following table and discussion contains information regarding the current
executive officers of FSI.
NAME AGE POSITION
- ---- --- --------
Mark A. Ahmann(1)......................... 44 Vice President Administration
Arnie M. DeWitt(2)........................ 46 Vice President Information Systems
Dean Duffy(3)............................. 47 Vice President Sales
Joel A. Elftmann(4)....................... 60 Chairman
John C. Ely(5)............................ 41 President, Surface Conditioning Division
Patricia M. Hollister(6).................. 40 Chief Financial Officer, Assistant
Secretary
Luke R. Komarek(7)........................ 47 Vice President, General Counsel and
Secretary
Donald S. Mitchell(8)..................... 45 President and Chief Executive Officer
Benno G. Sand(9).......................... 46 Executive Vice President, Business
Development
Benjamin J. Sloan(10)..................... 60 Executive Vice President; President,
Microlithography Division
Charles R. Wofford(11).................... 67 Vice Chairman
- ---------------
(1) Mark Ahmann has been Vice President of Administration since September 2000.
He was Vice President, Human Resources from January 1998 until September
2000 and joined the Company in May 1997 as Staff Vice President, Human
Resources. From 1988 to 1997 he worked for Aetna, Inc. in a variety of
human resources positions in corporate and divisional operations, most
recently as Vice President, Human Resources in a project management
capacity. Prior to Aetna he worked for Honeywell, Inc. and Northern States
Power Company.
(2) Arnie DeWitt has served as Vice President of Information Systems since
January 2000. He joined FSI International in 1996 as the Manager of
Information Services. Prior to joining FSI, Arnie worked for 16 years at
Cray Research, Inc. in Chippewa Falls, Wisconsin, most recently as Director
of Information Systems and Technology.
(3) Dean Duffy was hired as Vice President of Sales in August 2000. Prior to
joining FSI, Duffy was president of TRiMEGA Electronics, L.L.C. in Santa
Clara, California, a joint venture of Air Products and Chemicals, Inc. and
the Kinetics Group, which provides turnkey capital equipment for gas,
chemical and water systems, and consumables to the semiconductor industry.
From 1979 to 1999 he was with Air Products, serving five years as director
of Air Products Electronics Asia. He also headed an Air Products joint
venture to establish cleanroom facilities and helped develop the company's
MEGASYS on-site management concept for turnkey systems and operations
supply to device manufacturers.
(4) Joel Elftmann is a co-founder of the Company and has served as a director
of the Company since 1973 and as Chairman of the Board since August 1983.
From August 1983 to August 1989, and from May 1991 until December 1999, Mr.
Elftmann served as Chief Executive Officer of the Company. From 1977 to
August 1983, and from May 1991 until December 1999, Mr. Elftmann served as
President of the Company. Prior to 1977, Mr. Elftmann was Vice President
and General Manager of the Company. Mr. Elftmann is also Chairman of the
Supervisory Board of Metron Technology B.V. He also has been a director of
Veeco Instruments, Inc. since May 1994.
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(5) John C. Ely was named President of FSI's Surface Conditioning Division in
August 2000. Employed at FSI since 1985, John was the Division's
Sales/Marketing/Applications Manager since 1997; General Manager, from 1995
to 1997; Product Specialist/Product Manager, from 1989 to 1995; and in
direct sales, from 1985 to 1989. Mr. Ely is a director of m#FSI and SCD
Mountain View, Inc.
(6) Patricia Hollister has served as Chief Financial Officer since November
1999 and Chief Financial Officer and Corporate Controller from January 1998
until November 1999. She is also Assistant Secretary. She was Corporate
Controller of the Company from March 1995 until January 1998. Prior to
this, Ms. Hollister was employed by KPMG LLP in Minneapolis, Minnesota
where she served over 12 years on various audit and consulting engagements,
most recently as a Senior Manager.
(7) Luke Komarek joined FSI in June 1995 as Corporate Counsel. He was named
General Counsel in October 1996 and made a Staff Vice President in May
1997. In January 1998 he was elected Vice President and General Counsel. He
was named Corporate Secretary in January 2000 after being an Assistant
Secretary since 1996. Prior to joining FSI, he was at Faegre and Benson for
several years, and prior to Faegre, he held legal management positions with
Northgate Computer Company and Diversified Energies, Inc.
(8) Donald S. Mitchell was named Chief Executive Officer and President of FSI
in December 1999. From its formation in 1998 until December 1999, he was
President of Air Products Electronic Chemicals, Inc., located in Carlsbad,
California, a division of Pennsylvania-based Air Products and Chemicals,
Inc. From 1991 to 1998 he served as President of Schumacher, a leading
global chemical equipment and services supplier to the semiconductor
industry. Throughout his career with Schumacher, he held various executive
positions, including Vice President of Operations and Vice President of
Sales and Marketing. Mr. Mitchell is a director of FSI and m-FSI.
(9) Benno Sand has served as Executive Vice President, Business Development
since January 2000. From January 1998 to December 1999 he was Executive
Vice President and Chief Administrative Officer. He served as Executive
Vice President and Chief Financial Officer of the Company from January 1992
to January 1998. Mr. Sand served as Vice President, Finance and Chief
Financial Officer of the Company from October 1990 until January 1992. He
served as Vice President, Finance of the Company from October 1987 until
October 1990. Mr. Sand was elected Assistant Secretary of the Company in
November 1989 and served as Secretary from November 1990 to December 1999.
Mr. Sand is a director of SSI and SCD Mountain View, Inc.
(10) Ben Sloan has served as Executive Vice President and President,
Microlithography Division since January 1996. He was also Chief Operating
Officer from January 1, 1998 to December 1999. From January 1992 to January
1996, he served as Executive Vice President, Microlithography Division.
Prior to that, Dr. Sloan was employed by Texas Instruments in Dallas, Texas
where he served over 24 years in various research and development
capacities, most recently as Vice President of a semiconductor group of TI
and Manager of the Wafer Fabrication Systems Division of TI's Process
Automation Center. Dr. Sloan also serves as a director of SSI.
(11) Mr. Wofford has served as a director of the Company since November 1992. He
has also been Vice Chairman since February 1996. Since 1998, Mr. Wofford
has been on the board of directors of ST Assembly Test Services in
Singapore. Since April 1994, Mr. Wofford has been a business and management
consultant. From April 1992 to April 1994, he was Chairman of the Board,
Chief Executive Officer, and President of the FARR Company, a manufacturer
of clean room filtration systems and equipment. Mr. Wofford was President
and Chief Executive Officer of the FARR Company from September 1991 to
March 1992, and from July 1991 to August 1991 he was President and Chief
Operating Officer. From 1958 to 1991, Mr. Wofford held a variety of
positions with respect to Texas Instrument's semiconductor operations in
the United States, Europe, Asia, and Latin America, including Senior Vice
President, Semiconductor Group.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FSI's common stock is traded on the NASDAQ National Market System (NMS)
under the symbol "FSII". The following table sets forth the highest and lowest
sale prices at the close of each day, as reported by the NASDAQ-NMS, for the
fiscal periods indicated:
2000 1999
---------------- ---------------
HIGH LOW HIGH LOW
------- ------ ------ ------
Fiscal Quarter
First.............................................. $11.063 $6.188 $9.750 $3.500
Second............................................. 20.000 9.063 14.313 7.000
Third.............................................. 23.625 11.688 11.375 5.063
Fourth............................................. 24.000 12.938 10.063 6.125
There were approximately 750 shareholder accounts of record on October 20,
2000, and an estimated 8,700 shareholders who held the Company common stock in
street name.
FSI has never declared or paid cash dividends on its common stock. FSI
currently intends to retain all earnings for use in its business, and does not
anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial data in conjunction with our Consolidated Financial
Statements and the related Notes and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K report. The Consolidated Statement of Operations data for the years
ended August 26, 2000, August 28, 1999 and August 29, 1998, and the Consolidated
Balance Sheet data as of August 26, 2000 and August 28, 1999, are derived from
and are qualified in their entirety by our Consolidated Financial Statements
that have been audited by KPMG LLP, independent auditors, and are included
elsewhere in this Form 10-K report. The Consolidated Statement of Operations
data for the years ended August 30, 1997 and August 31, 1996, and the
Consolidated Balance Sheet data as of August 29, 1998, August 30, 1997 and
August 31, 1996 are derived from our audited consolidated financial statements
which do not appear in this report. On October 20, 1999 the Company acquired
YieldUP International Corporation (YieldUP). The acquisition has been accounted
for as a purchase. Accordingly, the Consolidated Statement of Operations Data
includes the results of operations for YieldUP from the acquisition date. The
historical results presented below are not necessarily indicative of the results
to be expected for any future fiscal year or fiscal period.
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SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FISCAL YEAR ENDED(1)
----------------------------------------------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29, AUGUST 30, AUGUST 31,
2000 1999 1998 1997 1996
--------------- --------------- --------------- --------------- ----------
Statement of Operations Data:
Sales....................... $219,787 $113,512 $161,695 $162,888 $233,239
Gross profit................ 80,363 34,812 51,707 62,152 102,604
Selling, general, and
administrative
expenses................. 50,400 37,264 52,103 45,403 49,410
Research and development
expenses(2).............. 43,700 31,592 36,102 31,756 33,940
Operating income (loss)..... (13,737) (34,044) (36,498) (15,007) 19,254
Equity in earnings (loss) of
affiliates............... 2,047 (1,166) 674 3,711 5,108
Net income (loss) from
continuing operations.... $ (4,143) $(40,119) $(21,322) $ (3,289) $ 21,473
Net income (loss) from
continuing operations per
share -- Basic........... $ (0.17) $ (1.73) $ (0.94) $ (0.14) $ 0.97
Net income (loss) from
continuing operations per
share -- Diluted......... $ (0.17) $ (1.73) $ (0.94) $ (0.14) $ 0.93
Weighted average common
shares................... 24,810 23,205 22,801 22,466 22,177
Weighted average common
shares and potential
common shares............ 24,810 23,205 22,801 22,466 23,207
Balance Sheet Data:
Total assets................ $255,937 $242,703 $293,747 $317,738 $283,964
Total long-term debt........ 60 30,063 42,130 42,250 459
Stockholders' equity........ 201,789 176,312 204,376 224,340 218,127
Dividends................... -- -- -- -- --
- -------------------------
(1) All amounts have been adjusted to reflect the divestiture, effective July
31, 1999, of the Company's Chemical Management Division. See Note 5 of Notes
to the Consolidated Financial Statements.
(2) During the first quarter of fiscal 2000, FSI recorded an in-process research
and development write-off of $6.4 million related to the YieldUP
acquisition. See Note 4 of Notes to Consolidated Financial Statements.
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The quarterly data for the last two fiscal years is as follows:
QUARTERLY DATA (UNAUDITED)
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(A) QUARTER QUARTER(C) QUARTER(B)
---------- ------- ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
2000
Sales....................................... $ 30,907 $45,798 $ 67,747 $75,335
Gross profit................................ 10,109 17,146 26,053 27,055
Operating income (loss)..................... (15,707) (3,202) 3,381 1,791
Net income (loss)(d)........................ (10,624) (3,088) 3,695 5,474
Diluted net income (loss) per common
share.................................... $ (0.44) $ (0.12) $ 0.14 $ 0.21
1999
Sales....................................... $ 24,016 $19,147 $ 37,674 $32,675
Gross profit................................ 7,853 5,453 10,566 10,940
Operating loss.............................. (9,273) (9,757) (5,326) (9,688)
Net income (loss)(d)........................ (7,078) (7,574) (20,387) 4,405
Diluted net income (loss) per common
share.................................... $ (0.30) $ (0.33) $ (0.88) $ 0.19
- -------------------------
(a) During the first quarter of fiscal 2000, FSI recorded an in-process research
and development write-off of $6.4 million related to the YieldUP acquisition
(see Note 4 to Notes to Consolidated Financial Statements). FSI also
recorded a gain of $5.4 million related to the sale of 612,000 of their
Metron Shares (see Note 11 to Notes to Consolidated Financial Statements).
(b) During the fourth quarter of fiscal 2000, FSI recorded realignment charges
of $4.1 million (see Note 2 to Notes to Consolidated Financial Statements).
(c) During the third quarter of fiscal 1999, FSI recorded a valuation reserve of
$16.6 million against deferred taxes (see Note 14 to Notes to Consolidated
Financial Statements).
(d) All quarters in fiscal 1999 and the first quarter of fiscal 2000 include net
income (loss) from discontinued operations.
FSI's fiscal quarters are generally 13 weeks, all ending on a Saturday. The
fiscal year ends on the last Saturday in August and comprises 52 or 53 weeks.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, except for the historical information
contained herein, contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that statute. Such statements are subject to
various risks and uncertainties, both known and unknown. Factors that could
cause actual results to differ include overall general economic conditions;
changes in customer capacity requirements and the demand for semiconductors;
global trade policies, worldwide political stability, particularly in Asia; the
demand and price for semiconductors; the Company's successful execution of
internal performance plans; cost reduction efforts; the cyclical nature of the
Company's business; volatility of the market for certain products; the timing
and success of current and future product and process development programs;
performance issues with key suppliers and subcontractors; the transition to 300
mm products; the success of the Company's affiliated distributors; the level of
new orders and order delays or cancellations; legal proceedings and the timing
and extent of any industry upturn or downturn. In addition, readers are also
directed to the Risk Factors discussion found below under "Risk Factors."
Readers also are cautioned not to place undue reliance on these forward-looking
statements as actual results could differ materially. FSI assumes no obligation
to publicly release any revisions or updates to these forward-looking statements
to reflect future events or unanticipated occurrences. Such forward-looking
statements are marked with an asterisk (*).
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto appearing elsewhere in
this report.
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INDUSTRY TRENDS
The industry appears to be well into its growth cycle. Industry analyst are
forecasting 37 percent growth in calendar 2000 followed by 22 percent expected
growth in 2001 for global semiconductor sales.* Over the past year, a number of
semiconductor manufacturers have increased their equipment spending to add
capacity, thus supporting a significant part of the growth in the industry.
According to Dataquest, an industry market research firm, (July 2000) equipment
spending is forecast to increase 68% in calendar 2000, followed by expected 2001
growth of 30 percent.*
The Asia Pacific region has experienced the most growth, as foundries are
adding capacity very quickly to meet demand. This capacity shortfall exists
because semiconductor manufacturers made very little equipment investments
during the most recent downturn. Dataquest's July 2000 forecast estimates that,
in calendar 2000, of total industry equipment sales, Asia Pacific will spend
36.3% while the US will spend 30.3%.
In August 2000, the North American Semiconductor equipment companies
recorded for the first time in industry history, order levels of approximately
$3 billion. This order level is up 92% from August 1999. Also, by August, the
North American equipment industry had experienced 18 consecutive months of year-
over-year booking growth. By comparison, the last major build cycle of 1992 to
1995 experienced 54 consecutive months of year-over-year order growth. With a
strong integrated circuit forecast predicted into 2003 and continued health in
end-user markets, industry booking rates should continue to be strong.*
Of the market segments that FSI participates in, Dataquest's July 2000
forecast estimates 2000 market growth as follows:
- Photoresist processing -- 40%
- Surface conditioning -- 33%
- Spin-on low-K dielectric -- 135%
This forecast is based on factors such as shrinks, capacity additions and
new fabs, acceptance of new materials such as copper and low-k dielectrics, and
funding of 300 mm programs.
Another factor receiving attention within the industry is the issue of
reducing chemical consumption to lessen environmental impact. Both industry
trade groups and equipment manufactures are seeking the best way to address
these environmental concerns.
FSI anticipates many challenges as industry conditions continue to change
with 300 mm wafer fabs coming to fruition, growth concentrating in Asia, and the
demand for integrated processes from its customers continuing to increase.
RESULTS OF OPERATIONS
In fiscal 2000, FSI's revenue nearly doubled with revenue increasing 94%
over fiscal 1999. The significant increase in revenues is a result of capacity
expansions by our customers due largely to increased device demand.
During the fourth quarter of fiscal 2000, FSI announced the infrastructure
realignment program closing its Mountain View and Fremont, California facilities
and the discontinuance of production of the nickel iron-plating product. FSI
recorded realignment charges of approximately $4.1 million consisting of
approximately $2.1 million of cost of goods sold, $1.3 million of selling,
general and administrative expenses and $0.7 million of research and development
expenses.
In addition, in the first quarter of fiscal 2000, FSI recorded a $6.4
million in-process research and development write-off related to the acquisition
of YieldUP and a gain of $5.4 million related to the sale of 612,000 shares of
its Metron shares.
Fiscal 1999 was a difficult year as FSI saw its revenue decrease 30% from
fiscal 1998. In anticipation of lower revenue, FSI implemented cost reduction
measures in October 1998, including an involuntary reduction in force, scheduled
plant shutdowns and the delay or cancellation of certain programs. In addition,
during the third quarter of 1999, FSI recorded a valuation allowance of $16.6
million against its deferred tax assets.
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During the fourth quarter of fiscal 1998, FSI incurred $11.2 million of
charges relating to the realignment of its business due to industry conditions
and the length of the industry-downturn. These charges were the result of the
reduction in force and related severance costs, additional inventory reserves
due to the discontinuation or phasing out of certain product lines, increased
allowance for doubtful accounts for customers who previously purchased products
which may be impacted by the realignment and charges related to the
consolidation of facilities. (See Note 2 of Notes to the Consolidated Financial
Statements)
The following table sets forth, for the fiscal years indicated, certain
income and expense items as a percent of total sales:
PERCENT OF SALES
---------------------------
FISCAL YEARS ENDED 2000 1999 1998
- ------------------ ----- ----- -----
Sales....................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 63.4 69.3 68.0
Gross profit................................................ 36.6 30.7 32.0
Selling, general and administrative......................... 22.9 32.9 32.3
In-process research and development write-off............... 2.9 -- --
Research and development.................................... 17.0 27.8 22.3
Operating loss.............................................. (6.2) (30.0) (22.6)
Other income, net........................................... 3.4 0.8 0.7
Loss before income taxes.................................... (2.8) (29.2) (21.9)
Income tax (benefit) expense................................ -- 5.1 (8.3)
Equity in earnings (losses) of affiliates................... 0.9 (1.0) 0.4
Net loss from continuing operations......................... (1.9) (35.3) (13.2)
Discontinued Operations:
Net loss from discontinued operations..................... -- (5.7) (0.4)
Loss (gain) on sale of net assets of discontinued
operations............................................. (0.2) 14.0 --
----- ----- -----
Net loss.................................................... (2.1)% (27.0)% (13.6)%
===== ===== =====
SALES
Sales increased 94% to $219.8 million for the fiscal year ended August 26,
2000 as compared to $113.5 million for the fiscal year ended August 28, 1999.
Both the Microlithography and Surface Conditioning Divisions experienced sales
increases, with the Surface Conditioning Division having the most significant
increase. The overall sales increase is primarily due to the semiconductor
manufacturers' increased capital spending as they add capacity to meet customer
demand, as well as a broadening customer base and market penetration in Asia.
Sales decreased 30% to $113.5 million for the fiscal year ended August 28,
1999 as compared to $161.7 million for the fiscal year ended August 29, 1998.
The decrease in sales occurred in both the Microlithography and Surface
Conditioning product lines. The overall decrease in sales is the result of
limited capital expenditures by FSI's customers due to fewer new fabs being
constructed and equipped, and a limited number of fab expansions.
International sales were $116.1 million, $32.8 million and $63.1 million
during fiscal 2000, 1999 and 1998, respectively, and represented approximately
53%, 29% and 39% of sales during these periods. International sales are
primarily through FSI's affiliates, Metron and m-FSI, and represented
approximately 87%, 92% and 95% of international sales during fiscal 2000, 1999
and 1998, respectively. The increase in international sales in fiscal 2000
occurred in all international markets, particularly Europe and Asia. Both
divisions experienced an increase in international sales in fiscal 2000 as
compared to fiscal 1999. Due to its broader customer base, the Surface
Conditioning Division has a higher percentage of international sales than the
Microlithography Division. (See Note 18 of the Notes to Consolidated Financial
Statements for additional information regarding the Company's international
sales.)
FSI ended the fiscal year with a record backlog of approximately $184
million as compared to $45 million at the end of fiscal 1999. Backlog consists
of orders with delivery dates within the next 12 months for which a customer
purchase order has been received or a customer purchase order number
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has been communicated in writing to FSI. Because of the timing and relative size
of orders and the possibility of cancellations or customer delays, backlog is
not necessarily indicative of sales for future periods. Our book to bill ratio
for fiscal 2000 was 1.6, which was above the industry average for the same
period.
Orders for the last two quarters of fiscal 2000 exceeded $100 million per
quarter. FSI expects orders for the first quarter of fiscal 2001 to be below
this level*. Based upon current backlog, anticipated orders, and delivery
schedules, FSI expects fiscal 2001 sales to be considerably above the fiscal
2000 level .* However, due to customer delivery schedules, first quarter of
fiscal 2001 is expected to be relatively flat as compared to the fourth quarter
of fiscal 2000, but significantly higher than the first quarter of fiscal 2000.*
Fiscal 2001 annual sales are expected to exceed $300 million.*
GROSS PROFIT
Gross profit, as a percentage of sales for fiscal 2000, was 36.6% as
compared to 30.7% for fiscal 1999. The improvement in gross margins for fiscal
2000 as compared to fiscal 1999 is due to higher manufacturing capacity
utilization, a stronger mix of higher margin products increased service revenue
and cost reduction efforts. The improvement in margin was offset by the higher
level of foreign sales, which sales generally have lower margins and also due to
increased OEM content in our products. Fiscal 2000 margin was impacted by
approximately $2.1 million of reduction in margin related to sales of YieldUP
finished goods inventory which was marked up to fair market value at the time of
the closing of the YieldUP acquisition. We began recognizing full margins on
YieldUP product sales during the fourth quarter of fiscal 2000. Fiscal 2000
gross margin was also impacted by inventory reserves, severance and outplacement
costs of approximately $2.1 million related to the infrastructure realignment
recorded in the fourth quarter.
Gross profit, as a percentage of sales for fiscal 1999, was 30.7% as
compared to approximately 32.0% for fiscal 1998. The decrease in gross margins
for fiscal 1999 as compared to fiscal 1998 was primarily due to fixed excess
manufacturing capacity related costs spread over a lower sales level. Gross
profit margin for the fourth quarter of fiscal 1998 was significantly reduced
due to approximately $8.0 million of additional inventory reserves and severance
and outplacement costs associated with a reduction in force. Due to the industry
conditions and FSI's realignment, both divisions reviewed their phase-out plans
and discontinued products. As a result, the divisions increased their inventory
reserves.
The increase in inventory reserves, net for 1999 and 1998 were $631,000 and
$2.6 million, respectively. The larger amount in 1998 was due to the continued
downturn in the industry. As the industry conditions started to improve in late
fiscal 1999 and during fiscal 2000, the Company has not significantly increased
inventory reserves. During fiscal 2000, the Company disposed of $5.0 million of
inventory and increased inventory reserves by $1.0 million.
FSI's gross profit margin may fluctuate as a result of a number of factors,
including the mix of products sold as some products have higher margins than
others, the proportion of international sales as international sales generally
have lower margins, competitive pricing pressures and utilization of
manufacturing capacity. Based on the expected increase in sales volume and if
FSI is successful with its product cost reduction programs, it is anticipated
that gross margins will approach 42% by the fourth quarter of fiscal 2001.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses in fiscal 2000 were
$50.4 million or 22.9% of sales, as compared to $37.3 million or 32.9% of sales
in fiscal 1999 and $52.1 million or 32.3% of sales in fiscal 1998. The decrease
in SG&A as a percent of sales is due to higher revenue levels and the Company's
emphasis on cost controls. The dollar amount increase is due to realignment
costs of $1.3 million, increased depreciation related to the new business system
and the amortization of the intangible assets from the YieldUP acquisition. The
realignment costs of $1.3 million included $0.2 million write off of the YieldUP
assembled workforce intangible, $0.1 million of severance accruals and $1.0
million of fixed asset and lease write-offs. The dollar increase in SG&A for
fiscal 2000 as compared
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to 1999 is also due to increased commissions, incentive compensation and
customer service costs as a result of higher sales levels.
The decrease in SG&A expenses in fiscal 1999, as compared to fiscal 1998,
is due to the overall reduction in force and also due to approximately $4.9
million of realignment charges and other one time charges in 1998. The $4.9
million of charges consists of $2.0 million of costs associated with
organizational changes announced in December 1997 and the settlement of a patent
infringement lawsuit, $1.6 million of costs associated with facilities
consolidation, $800,000 of costs associated with increased allowance for
doubtful accounts and $500,000 of severance costs and outplacement fees related
to the reduction in force.
FSI expects the amount of SG&A expenses as a percent of sales to decrease
in fiscal 2001 to a range of 17.5% to 18.5% due to anticipated higher levels of
revenues and various cost containment programs.* Also, FSI will continue
investments to expand worldwide sales and support capabilities.* FSI expects the
dollar amount of SG&A expenses to slightly increase in the first quarter of
fiscal 2001 as compared to the fourth quarter of fiscal 2000 excluding the
realignment charges recorded in the fourth quarter of 2000.* The dollar amount
of SG&A expenses for fiscal 2001 are expected to increase as compared to fiscal
2000 primarily due to anticipated increases in incentive programs and in
customer service costs related to higher sales.*
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses for fiscal 2000 were $37.3 million,
or 17.0% of sales, as compared to $31.6 million, or 27.8% of sales, for fiscal
1999 and $36.1 million, or 22.3% of sales, for fiscal 1998. The dollar amount
increase for R&D in fiscal 2000 as compared to fiscal 1999 is primarily due to
product development on the 300 mm products, the CALYPSO(TM) spin-on dielectric
product and other new applications. Fiscal 2000 R&D also included $0.7 million
of realignment charges related to the $0.1 million write off of the YieldUP
assembled workforce intangible, $0.4 million of severance costs and $0.2 million
of fixed asset write-offs.
FSI incurred an in-process R&D write-off of approximately $6.4 million in
the first quarter of fiscal 2000 related to the YieldUP acquisition. As part of
the acquisition, the Company acquired projects under development, including the
YieldUP 8000 program. The 8000 program is based on core technology that
integrates multiple gas-based cleaning capabilities, while also providing for
the use of existing liquid based chemical sequencing. In addition, the 8000
program is being designed from the ground up as a modular, multi-tank-cleaning
solution designed to replace conventional wet benches for 300 mm applications.
YieldUP initiated development of the 8000 program in the fourth quarter of
1997. YieldUP had spent approximately 3.3 person-years of effort to date in the
development of the 8000 program. At the time of the acquisition YieldUP
estimated that it would require an additional 1.8 person-years of effort to get
the 8000 program to technological feasibility. At the time of acquisition, the
8000 program was expected to reach a beta version at the beginning of the first
quarter of fiscal 2001. However, due to increased demand of the Company's other
products, the project was delayed. The 8000 program is expected to reach a beta
version by the fourth quarter of 2001. The Company expects to spend another $2.9
million by the end of fourth quarter 2001 to complete the technology.
In-process research and development was valued by discounting forecasted
cash flow directly related to the products expected to result from the subject
research and development. In each instance where a developed, core technology is
expected to be leveraged, a charge for core technology was deducted from the
forecast to provide a fair return on the leveraged technology. The assumed
charge for core technology is 2% of revenues on an after-tax basis.
To estimate the fair value of the in-process research and development
assets, a discount rate of 26.5% was employed, developed by analyzing the
project and market risks associated with the research and development effort,
both in terms of costs invested as of the valuation date relative to completion
costs and technical achievements. This discount rate represents a significant
premium above the discount rate utilized in the valuation of existing product
technology to account for the additional risks associated with in-process
product technologies.
FSI developed a calculation of the value of in-process research and
development assets that excludes cash flows attributable to remaining
development efforts required to develop the acquired incomplete
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technology into commercially viable products. The calculation of excluded cash
flow was determined by evaluating the costs, development time, and technological
complexity required to develop the in-process technology into commercially
viable products. At the time of the acquisition, FSI management's estimate was
that in-process technology was 65% complete, and the value of the in-process
research and development assets as of the valuation date was estimated at $6.4
million.
The 8000 program represents a high-risk in-process technology asset since
the 8000 program is based on an entirely new platform from FSI's current
products. Certain technology developed by YieldUP for the 8000 program is
revolutionary as the 8000 program represents FSI's first attempt to integrate
both multiple gas-based cleaning technologies and gas-based drying technology
within a modular 300 mm configuration design with a low cost of ownership. Some
of this technical risk is moderated by the project's later stage of development.
Market research indicates that there could be significant demand for a
fully integrated wafer cleaning solution, such as the 8000 program.* However,
FSI is a new entrant in the wet bench market and may face significant
competition from more established players.
Therefore, an unusual charge of approximately $6.4 million is reflected in
the income statement of FSI in the first quarter of 2000 due to the immediate
write-off of in-process research and development. At the effective date, the
technological feasibility of the acquired technology had not been established
and the technology had no alternative uses.
FSI's average investment on new product and process development programs as
a percent of total revenues has been 22.4% for the past three years. FSI expects
R&D expense as a percentage of sales to decrease in fiscal 2001 to a range of 13
to 14% as compared to 2000.* However, the dollar amount in fiscal 2001 is
expected to increase from the fiscal 2000 level.* FSI will continue to remain
focused on critical technologies and strategically invest its R&D dollars,
specifically in the immersion technology for Surface Conditioning products, the
CALYPSO(TM) the spin-on dielectric product, and 300-mm products for both resist
processing and surface conditioning.* FSI expects R&D expenses to increase in
the first quarter of fiscal 2001 as compared to the fourth quarter of 2000.*
During fiscal years 2000, 1999 and 1998, FSI recognized approximately
$42,000, $8,000 and $1,919,000, respectively, of third party funding as
reductions in research and development expenses.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was approximately $7.5 million of income, or
3.4% of sales, for fiscal 2000 as compared to $936,000 of income, or 0.8% of
sales, for fiscal 1999 and $1.2 million of income, or 0.7% of sales for fiscal
1998.
The increase in amounts for fiscal 2000 as compared to fiscal 1999 is due
to the $5.4 million gain recognized on the sale of approximately 612,000 shares
of Metron Technology's (our affiliate) stock in its initial public offering
during the first quarter. Additionally, the increase in fiscal 2000 is due to
reduced interest expense as a result of the debt repayment offset by reduced
interest income due to lower cash and cash equivalents and marketable securities
amounts.
The overall change for fiscal 1999 as compared to 1998 is due to an
additional expense of approximately $690,000 associated with the make-whole
penalties related to the repayment of certain senior unsecured notes that were
scheduled to mature through 2004.
Interest expense is expected to be minimal for FSI in fiscal year 2001.*
Interest income is expected to be $500,000 to $700,000 during the first quarter
of fiscal 2001, depending upon the level of investments and the interest rates.*
It is anticipated that quarterly interest income will increase during fiscal
2001 if the Company generates cash flow from operations as expected.*
INCOME TAX (BENEFIT) EXPENSE
The Company had no tax benefit or expense during fiscal year 2000 as a
result of its recent losses.
The tax expense related to continuing operations for fiscal 1999 was $5.8
million of expense as compared to a $13.3 million of tax benefit for the
comparable 1998 period. During the third quarter of
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1999, FSI recorded a valuation allowance of $16.6 million against its deferred
tax assets. This valuation allowance was recorded in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, primarily due to FSI's
continued losses.
FSI does not expect to record any tax benefit or expense in the future
until the Company is consistently profitable on a quarterly basis.* FSI's
deferred tax assets on the balance sheet as of August 26, 2000 have been fully
reserved with a valuation allowance.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES
Equity in earnings (losses) of affiliates was approximately $2.0 million of
income for fiscal 2000, $1.2 million of losses for fiscal 1999 and $674,000 of
income for fiscal 1998. The income in fiscal 2000 is due to improved operations
at both affiliates. The loss in fiscal 1999 as compared to the income in 1998 is
due to losses or lower earnings at both affiliates, Metron Technology N.V. and
m-FSI, Ltd.
FSI is expecting continued improvement in financial performance for both
affiliates in fiscal 2001 with equity in earnings of affiliates to range from
$500,000 to $1.0 million each quarter.*
LIQUIDITY AND CAPITAL RESOURCES
FSI's cash, cash equivalents and marketable securities were approximately
$42.2 million as of August 26, 2000, a decrease of $47.8 million from the end of
fiscal 1999. The decrease in cash, cash equivalents and marketable securities is
due to approximately $15.8 million in cash flow used to fund operations and
approximately $30 million used to repay long-term debt. In addition, during the
first quarter of fiscal 2000, the Company made $6.1 million in payments to
YieldUP shareholders as part of the acquisition consideration and received cash
proceeds of $7.4 million from the sale of Metron Technology stock.
Accounts receivable increased $25.2 million from the end of fiscal 1999
including an increase in accounts receivable from affiliates of $17.8 million.
The increase in accounts receivable was due to the increase in sales in fiscal
2000 as compared to fiscal 1999 and the higher mix of foreign sales as the
collection period is generally longer for foreign accounts receivable.
Inventory increased approximately $17.9 million to $50.8 million at the end
of fiscal 2000, as compared to $32.9 million at the end of fiscal 1999. The
increase in inventory was primarily in work-in-process and raw materials as we
purchased materials to support the higher order activity. As of August 26, 2000,
FSI's current ratio was 2.8 to 1.0 and working capital was $99.1 million.
Acquisitions of property, plant and equipment were $7.1 million, $11.8
million and $7.0 million in fiscal 2000, 1999 and 1998, respectively. FSI
expects capital expenditures to be between $11 and $13 million in fiscal 2001.*
Depreciation and amortization for fiscal 2001 is expected to be approximately
$18 million.*
On September 3, 1999, FSI completed the repayment of its senior unsecured
notes. The notes consisted of $30 million of 7.15% senior unsecured notes due to
mature in 2004 which were paid off in September and $12 million of 7.27% senior
unsecured notes due to mature in 2006 which were paid off prior to fiscal 1999
year-end. At the time of the prepayment, certain lenders had claimed that FSI
was in default under certain covenants contained in the note agreements. These
claims were waived in connection with the repayment. FSI's long-term debt,
including current maturities, remaining after the pay-off of its unsecured notes
is approximately $60,000 related to capital leases.
FSI believes that with existing cash, cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet FSI's currently projected working capital and other cash requirements
through at least mid fiscal 2002*.
FSI believes that success in its industry requires substantial capital to
maintain the flexibility to take advantage of opportunities as they arise. One
of FSI's strategic objectives is, as market and business conditions warrant,
consider divestitures, investments or acquisitions of businesses, products or
technologies particularly those that are complementary to our surface
conditioning business.* FSI may affect additional equity or debt financing to
fund such activities.* The sale of additional equity or debt securities could
result in additional dilution to FSI's shareholders.*
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which
establishes appropriate accounting for derivative instruments and hedging
activities. SFAS No. 133 must be adopted for financial statements issued for
fiscal years beginning after June 15, 2000. FSI will adopt SFAS No. 133 in
fiscal 2001. The impact of the adoption of SFAS No. 133 is not expected to have
a material impact on FSI's financial statements although, equity in earnings of
affiliates may be more volatile due to their international operations.*
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. The Company is
evaluating various practical implementation considerations. Changes in our
revenue recognition policy resulting from the interpretation of SAB 101, to the
extent applicable, would be effective in the fourth quarter of fiscal 2001.
Management believes that SAB 101, to the extent applicable to us, will not
affect the underlying strength or weakness of our business operations as
measured by the dollar value of our product shipments and cash flows.*
RISK FACTORS
Due to the nature of business and the industry in which we operate the
following risk factors should be considered in addition to others described
above. Our business faces significant risks. These risks include those described
below and may include additional risks and uncertainties not presently known to
us or that we currently believe are immaterial. If any of the events or
circumstances described in the following risks occurs, our business, operating
results or financial condition could be materially adversely affected. These
risks should be read in conjunction with the other information set forth in this
report.
BECAUSE OUR BUSINESS DEPENDS ON THE AMOUNT THAT MANUFACTURERS OF
MICROELECTRONICS SPEND ON CAPITAL EQUIPMENT, DOWNTURNS IN THE MICROELECTRONICS
INDUSTRY MAY ADVERSELY AFFECT OUR RESULTS.
The microelectronics industry experiences periodic slowdowns, which may
have a negative effect on our sales and operating results. Our business depends
on the amount that manufacturers of microelectronics spend on capital equipment.
The amount they spend on capital equipment depends on the existing and expected
demand for semiconductor devices and products that use semiconductor devices.
The microelectronics industry has experienced alternating upturns and downturns
in business activity. When this occurs, some semiconductor manufacturers
experience lower demand and increased pricing pressure for their products. As a
result, they are likely to purchase less semiconductor processing equipment and
have sometimes delayed making decisions to purchase capital equipment. In some
cases, semiconductor manufacturers have cancelled or delayed orders for our
products.
IF WE DO NOT CONTINUE TO DEVELOP NEW PRODUCTS, WE WILL NOT BE ABLE TO
COMPETE EFFECTIVELY.
Our business and results of operations could decline if we do not develop
and successfully introduce new or improved products that the market accepts. The
technology used in microelectronics manufacturing equipment and processes
changes rapidly. Industry standards change constantly and equipment
manufacturers frequently introduce new products. We believe that
microelectronics manufacturers increasingly rely on equipment manufacturers like
us to:
- Design and develop more efficient manufacturing equipment
- Design and implement improved processes for microelectronics
manufacturers to use
- Make their equipment compatible with equipment made by other equipment
manufacturers
To compete, we must continue to develop, manufacture, and market new or
improved products that meet changing industry standards. To do this
successfully, we must:
- Select appropriate products
- Design and develop our products efficiently and quickly
- Implement our manufacturing and assembly processes efficiently and on
time
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- Make products that perform well for our customers
- Market and sell our products effectively; and
- Introduce our new products in a way that does not reduce sales of our
existing products
FUTURE ACQUISITIONS MAY DILUTE OUR STOCKHOLDERS' OWNERSHIP INTERESTS AND
HAVE OTHER ADVERSE CONSEQUENCES.
Because of consolidations in the semiconductor equipment industry served by
us and other competitive factors, our management will seek to acquire additional
product lines, technologies, and businesses if suitable opportunities develop.
Acquisitions may result in the issuance of our stock, which may dilute our
stockholders' ownership interests and reduce earnings per share. Acquisitions
may also increase debt levels and the amortization of goodwill and other
intangible assets, which could have a significant negative effect on our
financial condition and operating results. In addition, acquisitions involve
numerous risks, including:
- Difficulties in absorbing the new business, product line, or technology
- Diversion of management's attention from other business concerns
- Entering new markets in which we have little or no experience
- Possible loss of key employees of the acquired business
BECAUSE OF THE VOLATILITY OF OUR STOCK PRICE, THE ABILITY TO TRADE FSI
SHARES MAY BE ADVERSELY AFFECTED AND OUR ABILITY TO RAISE CAPITAL THROUGH FUTURE
EQUITY FINANCING MAY BE REDUCED.
The price of our stock has been volatile in the past and may continue to be
so in the future. In the 2000 fiscal year, for example, our stock price ranged
from $6.19 to $24.00 per share.
The trading price of our common shares is subject to wide fluctuations in
response to various factors, some of which are beyond our control, including
factors discussed elsewhere in this report and the following:
- Failure to meet the published expectations of securities analysts for a
given quarterly period
- Changes in financial estimates by securities analysts
- Press releases or announcements by or changes in market values of
comparable companies
- Stock market price and volume fluctuations, which is particularly common
among securities of high technology companies
- Stock market price and volume fluctuations attributable to inconsistent
trading volume levels
- Additions or departures of key personnel; and
- Involvement in litigation
The prices of technology stocks, including ours, have been particularly
affected by extreme fluctuations in price and volume in the stock market
generally. These fluctuations have often been unrelated to the operating
performance of the companies whose stock is traded. These broad stock market
fluctuations may have a negative effect on our future stock price.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. To date we have not been subject to such claims, however we may in
the future be the target of this type of litigation. Securities litigation may
result in substantial costs and divert management's attention and resources,
which can seriously harm our business.
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BECAUSE OUR QUARTERLY OPERATING RESULTS ARE VOLATILE, OUR STOCK PRICE COULD
DECREASE.
In the past, our operating results have fluctuated from quarter to quarter
and are likely to do so in the future. These fluctuations may have a significant
impact on our stock price. The reasons for the fluctuations in our operating
results, such as sales, gross profits, and net income, include:
- The Timing of Significant Customer Orders and Customer Spending
Patterns. During industry downturns, our customers may ask us to delay or
even cancel the shipment of previously firm orders. Delays and
cancellations may adversely affect our operating results in any
particular quarter if we are unable to recognize revenue for particular
sales in the quarter in which those sales were expected.
- The Timing of New Product and Service Announcements By Us or Our
Competitors. New product announcements by us and our competitors could
cause our customers to delay a purchase or to decide to purchase products
of one of our competitors which would adversely affect our revenue and,
therefore, our results of operations. New product announcements by others
may make it necessary for us to reduce prices on our products or offer
more service options, which could adversely impact operating margins and
net income.
- The Mix of Products Sold and the Market Acceptance of Our New Product
Lines. The mix of products we sell varies from period to period, and
because margins vary among or within different product lines, this can
adversely affect our results of operations. If we fail to sell our
products which generate higher margins, our average gross margins may be
lower than expected. If we fail to sell our new product lines, our
revenue may be lower than expected.
- General Global Economic Conditions or Economic Conditions in a Particular
Region. When economic conditions in a region or worldwide worsen,
customers may delay or cancel their orders. There may also be an increase
in the time it takes to collect from our customers or even outright
defaults in payments. This can negatively affect our cash flow and our
results.
As a result of the factors listed above, our future operating results are
difficult to predict. Further, we base our current and future expense plans in
significant part on our expectations of our longer-term future revenue. As a
result, we expect our expense levels to be relatively fixed in the short-run. An
unanticipated decline in revenue for a particular quarter may disproportionately
affect our net income in that quarter. If our revenue is below our projections,
then our operating results will also be below expectations and, as we have in
the past, we may even have losses in the short-run. Any one of the factors
listed above, or a combination thereof, could adversely affect our quarterly
results of operations, and consequently may cause a decline in our share price.
BECAUSE INTERNATIONAL SALES ARE IMPORTANT TO US, AND BECAUSE MOST OF OUR
INTERNATIONAL SALES ARE THROUGH OUR AFFILIATED DISTRIBUTORS, REDUCTIONS IN THE
SALES EFFORTS OF THESE AFFILIATES COULD ADVERSELY AFFECT OUR RESULTS.
The profits or losses of our affiliated distributors, Metron Technology
B.V. and m-FSI Ltd., can also significantly affect our financial results. We
make most of our international sales through these affiliated distributors. As
of August 26, 2000 we have a 20.4% ownership interest in Metron and a 49%
interest in m-FSI. Fiscal 2000 sales through m-FSI were $11.1 million or 5.1% of
our total sales. Fiscal 2000 sales through Metron were $89.7 million or 40.8% of
our total sales. In addition, these affiliates also provide service and support
to many of our international customers. Metron and m-FSI also distribute or sell
products for companies other than us. It could have a negative effect on our
operating results if either of these affiliates reduced its sales efforts, lost
the business of a significant company for which it distributes or sells
products, lost a significant customer, or otherwise became less financially
viable.
We cannot guarantee that Metron or m-FSI will continue to successfully
distribute our products or the products of other companies. The failure of
Metron or m-FSI to do so could have a significant negative effect on our results
of operations.
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CHANGES IN DEMAND CAUSED BY FLUCTUATIONS IN INTEREST AND CURRENCY EXCHANGE
RATES MAY REDUCE OUR INTERNATIONAL SALES.
Almost all of our direct international sales are denominated in U.S.
dollars. Nonetheless, changes in demand caused by fluctuations in interest and
currency exchange rates may affect our international sales. Most of our
international sales, however, are through our affiliated distributors. Metron's
sales of our products and other companies' products are primarily denominated in
U.S. dollars, but its expenses are generally denominated in foreign currencies.
Accordingly, fluctuations in interest and currency exchange rates may affect
Metron's financial results. Sales for m-FSI are denominated in yen. As a result,
U.S. dollar/yen exchange rates may affect our equity interest in m-FSI's
earnings.
Metron and m-FSI sometimes engage in so-called "hedging" or risk-reducing
transactions to try to limit the negative effects that the devaluation of
foreign currencies relative to the U.S. dollar could have on operating results.
They will do so if a sale denominated in a foreign currency is sufficiently
large to justify the costs of hedging. To hedge a sale, Metron or m-FSI will
typically commit to buy U.S. dollars and sell the foreign currency at a given
price at a future date. If the customer cancels the sale, Metron or m-FSI may be
forced to buy U.S. dollars and sell the foreign currency at market rates to meet
its hedging obligations and may incur a loss in doing so. To date, the hedging
activities of Metron and m-FSI have not had any significant negative effect on
us. The adoption of SFAS 133 by Metron and m-FSI may cause more volatility in
our equity in earnings of affiliates.*
BECAUSE OF THE NEED TO MEET AND COMPLY WITH NUMEROUS FOREIGN REGULATIONS
AND POLICIES, THE CHANGEABILITY OF THE POLITICAL AND ECONOMIC ENVIRONMENTS IN
FOREIGN JURISDICTIONS AND THE DIFFICULTY OF MANAGING BUSINESS OVERSEAS, WE MAY
NOT BE ABLE TO SUSTAIN OUR HISTORICAL LEVEL OF INTERNATIONAL SALES.
We and our affiliates operate in a global market. In fiscal 2000,
approximately 53% of our sales revenue derived from sales outside the United
States. In fiscal 1999, this figure was 29%, and in fiscal 1998 it was 39%.
These figures include sales through Metron and m-FSI, which accounted for 87% of
international sales in 2000, 92% in 1999 and 95% in 1998. We expect that
international sales will continue to represent a significant portion of total
sales. Sales to customers outside the United States involve a number of risks,
including the following:
- Imposition of government controls
- Compliance with U.S. export laws and foreign laws
- Political and economic instability
- Trade restrictions
- Changes in taxes and tariffs
- Longer payment cycles
- Difficulty of administering business overseas; and
- General economic conditions
In particular, the Japanese and Asia Pacific markets are extremely
competitive. The semiconductor device manufacturers located there are very
aggressive in seeking price concessions from suppliers, including equipment
manufacturers like us. In fiscal 2000, approximately 25% of our international
sales were attributable to these markets.
We seek to meet technical standards imposed by foreign regulatory bodies.
However, we cannot guarantee that we will be able to comply with those standards
in the future. Any failure by us to design products to comply with foreign
standards could have a significant negative impact on us.
BECAUSE OF THE SIGNIFICANT FINANCIAL RESOURCES NEEDED TO OFFER A BROAD
RANGE OF PRODUCTS, TO MAINTAIN CUSTOMER SERVICE AND SUPPORT AND TO INVEST IN
RESEARCH AND DEVELOPMENT, WE MAY BE UNABLE TO COMPETE WITH LARGER, BETTER
ESTABLISHED COMPETITORS.
The microelectronics equipment industry is highly competitive. We face
substantial competition throughout the world. We believe that to remain
competitive, we will need significant financial resources to offer a broad range
of products, to maintain customer service and support, and to invest in research
and
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development. We believe that the microelectronics industry is becoming
increasingly dominated by large manufacturers who have the resources to support
customers on a worldwide basis. Some of our competitors have substantially
greater financial, marketing, and customer-support capabilities than us. Large
equipment manufacturers may enter the market areas in which we compete. In
addition, smaller, emerging microelectronics equipment companies provide
innovative technology. We expect that our competitors will continue to improve
the design and performance of their existing products and processes. We also
expect them to introduce new products and processes with better performance and
pricing. We cannot guarantee that we will continue to compete effectively in the
United States or elsewhere.
BECAUSE WE DO NOT HAVE LONG-TERM SALES COMMITMENTS WITH OUR CUSTOMERS, IF
THESE CUSTOMERS DECIDE TO REDUCE, DELAY OR CANCEL ORDERS OR CHOOSE TO DEAL WITH
OUR COMPETITORS, THEN OUR RESULTS WILL BE ADVERSELY AFFECTED.
If our significant customers, including IBM, Texas Instruments,
STMicroelectronics, 1st Silicon or Seagate Technology, reduce, delay, or cancel
orders, then our operating results could suffer. Our largest customers have
changed from year to year. Sales to FSI's top five customers accounted for
approximately 45%, 49% and 41% of total sales in fiscal 2000, 1999 and 1998,
respectively. STMicroelectronics represented 11% of revenues in fiscal 2000.
Texas Instruments accounted for 15% of revenues in fiscal 2000 and 13% of
revenues during fiscal 1999. IBM accounted for 24% of revenues during fiscal
1999 and 14% of revenues during fiscal 1998. National Semiconductor accounted
for 12% of revenues in fiscal 1998. We currently have no long-term sales
commitments with any of our customers. Instead, we generally make sales under
purchase orders. Our backlog at August 26, 2000 was $184 million of which 51%
was comprised of orders from three customers. As of August 26, 2000 we had
received approximately $48 million in orders from two customers that are
scheduled to ship in fiscal 2002 and 2003. All orders are subject to
cancellation or delay by the customer.
BECAUSE WE RETAINED CERTAIN LIABILITIES FROM THE DIVESTITURE OF THE
CHEMICAL MANAGEMENT DIVISION OR AGREED TO INDEMNIFY BOC WITH RESPECT TO
SPECIFIED OBLIGATIONS AND LIABILITIES, WE MAY EXPERIENCE CHARGES IN EXCESS OF
THE RESERVES ESTABLISHED AT THE TIME OF THE DIVESTITURE WHICH COULD NEGATIVELY
IMPACT RESULTS FROM OPERATIONS.
In connection with the divestiture of the Chemical Management Division, we
retained certain liabilities and agreed to indemnify BOC with respect to certain
specified obligations and liabilities. During the first quarter of 2000, FSI
continued to negotiate the final closing balance sheet for the CMD divestiture
to BOC. Upon the completion of those negotiations, FSI established an additional
$400,000 accrual for expected costs associated with completing two projects that
were in process when BOC purchased the division. During the second quarter, the
parties settled on a final closing balance sheet and no additional reserves were
recorded. If we experience liabilities or charges in excess of established
reserves and it is ultimately determined that an adjustment in favor of BOC is
warranted, our results of operations could be adversely impacted due to
additional costs associated with those reserves or the request to return to BOC
a portion of the purchase price because of such adjustments.
IT MAY BE DIFFICULT FOR US TO COMPETE WITH STRONGER COMPETITORS RESULTING
FROM INDUSTRY CONSOLIDATION.
In the past several years, we have seen a trend toward consolidation in the
microelectronics equipment industry We expect the trend toward consolidation to
continue as companies seek to strengthen or maintain their market positions in a
rapidly changing industry. We believe that industry consolidations may result in
competitors that are better able to compete. This could have a significant
negative impact on our business, operating results, and financial condition
BECAUSE WE DEPEND UPON OUR MANAGEMENT AND TECHNICAL PERSONNEL FOR OUR
SUCCESS, THE LOSS OF KEY PERSONNEL COULD PLACE US AT A COMPETITIVE DISADVANTAGE.
Our success depends to a significant extent upon our management and
technical personnel. The loss of a number of these key persons could have a
negative effect on our operations. Competition is high for such personnel in our
industry in all locations. We periodically review our compensation and benefit
packages to ensure that they are competitive in the marketplace and make
adjustments or implement new programs for that purpose, as appropriate. We
cannot guarantee that we will continue to attract and retain the personnel we
require to continue to grow and operate profitably.
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30
OUR EMPLOYMENT COSTS IN THE SHORT-TERM ARE TO A LARGE EXTENT FIXED, AND
THEREFORE ANY UNEXPECTED REVENUE SHORTFALL COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our operating expense levels are based in significant part on our head
count, which is generally driven by longer-term revenue goals. For a variety of
reasons, particularly the high cost and disruption of lay-offs and the costs of
recruiting and training, our head count in the short-term is, to a large extent,
fixed. Accordingly, we may be unable to reduce employment costs in a timely
manner to compensate for any unexpected revenue or gross margin shortfall, which
could have a material adverse effect on our operating results.
BECAUSE OUR INTELLECTUAL PROPERTY IS IMPORTANT TO OUR SUCCESS, THE LOSS OR
DIMINUTION OF OUR INTELLECTUAL PROPERTY RIGHTS THROUGH LEGAL CHALLENGE BY OTHERS
OR FROM INDEPENDENT DEVELOPMENT BY OTHERS, COULD ADVERSELY AFFECT OUR BUSINESS.
We attempt to protect our intellectual property rights through patents,
copyrights, trade secrets, and other measures. However, we believe that our
financial performance will depend more upon the innovation, technological
expertise, and marketing abilities of our employees than on such protection. In
connection with our intellectual property rights, we face the following risks:
- Our pending patent applications may not be issued or may be issued with
more narrow claims
- Patents issued to us may be challenged, invalidated, or circumvented
- Rights granted under issued patents may not provide competitive
advantages to us
- Foreign laws may not protect our intellectual property rights
- Others may independently develop similar products, duplicate our
products, or design around our patents
As is typical in the semiconductor industry, we occasionally receive
notices from others alleging infringement claims. We have been involved in
patent infringement litigation in the past and SCD Mountain View is currently
involved in such litigation. We could become involved in similar lawsuits or
other patent infringement claims in the future. We cannot guarantee the outcome
of such lawsuits or claims, which may have a significant negative effect on our
business or operating results.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, WHICH COULD REQUIRE US TO INCUR
HIGH SALES AND MARKETING EXPENSES WITH NO ASSURANCE THAT A SALE WILL RESULT.
Sales cycles for some of our products can run as long as 12 to 18 months.
As a result, we may not recognize revenue from efforts to sell particular
products for extended periods of time. We believe that the length of the sales
cycle may increase as some current and potential customers centralize purchasing
decisions into one decision-making entity. We expect this may intensify the
evaluation process and require us to make additional sales and marketing
expenditures with no assurance that a sale will result.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
ADOPTION OF THE COMMON EUROPEAN CURRENCY MAY ADVERSELY AFFECT US AND OUR
AFFILIATED DISTRIBUTORS BY REQUIRING SYSTEMS MODIFICATIONS AND POSSIBLY
INCREASING THEIR CURRENCY EXCHANGE RISKS.
We are in the process of analyzing the issues raised by the introduction of
the common European currency unit, the "Euro." The use of the Euro began on
January 1, 1999 and will be phased-in through January 1, 2002. We do not expect
the cost of any necessary systems modification to be material and do not
anticipate that the introduction and use of the Euro will materially affect our
results or those of our affiliated distributors' international business
operations.* Nor do we expect the Euro to have a material effect on the currency
exchange risks of our or our affiliated distributors' businesses.* Our
management will continue to monitor the effect of the implementation of the
Euro.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements under the captions "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this report are "forward-looking statements." These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our, or our industry's, actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. These factors are listed under "Risk Factors" and
elsewhere in this report.
In some cases, you can identify forward-looking statements by terminology
such as "expects," "anticipates," "intends," "may," "should," "plans,"
"believes," "seeks," "estimates," "could," would" or the negative of such terms
or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this report to conform these statements to actual results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and earnings are subject to fluctuations in foreign exchange
rates due to investments in foreign-based affiliates. As of August 26, 2000 our
investments in affiliates include a 20.4% interest in Metron Technology (Metron)
and a 49% interest in m-FSI Ltd. Metron operates mainly in Europe, Asia Pacific
and the United States. m-FSI Ltd. operates in Japan. Approximately 89% of fiscal
2000 sales to affiliates were to Metron. We denominate all U.S. export sales in
U.S. dollars.
Metron attempts to limit its exposure to changing foreign currency exchange
rates through operational and financial market actions. Products are sold in a
number of countries throughout the world resulting in a diverse portfolio of
transactions denominated in foreign currencies. Certain short-term foreign
currency exposures are managed by the purchase of forward contracts to offset
the earnings and cash flow impact of non-functional currency denominated
receivables and payables.
We do not have significant exposure to changing interest rates as all
material outstanding debt was repaid on September 3, 1999 and all marketable
securities consist of debt instruments, 100% of which mature within one year. As
of year-end, amortized cost approximates market value for all outstanding
marketable securities. We do not undertake any specific actions to cover our
exposure to interest rate risk and we are not party to any interest rate risk
management transactions. The impact of a 1% change in short-term interest rates
would be approximately $400,000 based on cash, cash equivalents and marketable
security balances as of August 26, 2000.
Our investment in our affiliate, Metron, is accounted for by the equity
method of accounting and has a carrying value on the balance sheet of
approximately $14.8 million. The fair value of Metron is subject to stock market
fluctuations. Based on the closing stock price of Metron of $12.31 per share on
August 25, 2000, the fair value of our investment in Metron, was approximately
$33.1 million. The stock price of Metron ranged from $6.63 to $36.00 per share
during fiscal 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
2000 1999 1998
------------ ------------ ------------
Sales (including sales to affiliates of $100,855,000,
$30,192,000 and $60,050,000, respectively)......... $219,786,607 $113,512,360 $161,695,114
Cost of goods sold................................... 139,423,904 78,700,362 109,987,687
------------ ------------ ------------
Gross profit............................... 80,362,703 34,811,998 51,707,427
Selling, general and administrative expenses......... 50,400,255 37,263,717 52,102,864
In-process research and development write-off........ 6,370,000 -- --
Research and development expenses.................... 37,329,873 31,592,243 36,102,507
------------ ------------ ------------
Operating loss............................. (13,737,425) (34,043,962) (36,497,944)
Gain on sale of investment in affiliates............. 5,409,744 -- --
Interest expense..................................... (378,504) (3,766,883) (3,189,390)
Interest income...................................... 2,445,693 4,630,156 4,774,458
Other income (expense), net.......................... 69,883 72,895 (412,439)
------------ ------------ ------------
Loss before income taxes................... (6,190,609) (33,107,794) (35,325,315)
Income tax expense (benefit)......................... -- 5,844,990 (13,328,959)
------------ ------------ ------------
Loss before equity in earnings (losses) of
affiliates......................................... (6,190,609) (38,952,784) (21,996,356)
Equity in earnings (losses) of affiliates............ 2,047,499 (1,165,931) 674,274
------------ ------------ ------------
Net loss from continuing operations........ (4,143,110) (40,118,715) (21,322,082)
Discontinued operations:
Net loss from discontinued operations.............. -- (6,422,864) (630,009)
Gain (loss) on sale of net assets of discontinued
operations, net of $8,886,000 of taxes in
1999............................................ (400,000) 15,907,271 --
------------ ------------ ------------
Net loss................................... $ (4,543,110) $(30,634,308) $(21,952,091)
============ ============ ============
Net (loss) income per common share -- Basic
Continuing operations........................... $ (0.17) $ (1.73) $ (0.94)
Discontinued operations......................... $ (0.01) $ 0.41 $ (0.02)
------------ ------------ ------------
Net (loss) income.......................... $ (0.18) $ (1.32) $ (0.96)
============ ============ ============
Net (loss) income per common share -- Diluted
Continuing operations........................... $ (0.17) $ (1.73) $ (0.94)
Discontinued operations......................... $ (0.01) $ 0.41 $ (0.02)
------------ ------------ ------------
Net (loss) income.......................... $ (0.18) $ (1.32) $ (0.96)
============ ============ ============
Weighted average common shares....................... 24,810,200 23,204,706 22,801,415
Weighted average common and potential common
shares............................................. 24,810,200 23,204,706 22,801,415
The accompanying notes are an integral part of the consolidated financial
statements.
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FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 26, AUGUST 28,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 34,637,974 $ 62,326,355
Marketable securities..................................... 7,565,222 27,671,653
Trade accounts receivable, less allowance for doubtful
accounts of $3,229,000 and $2,578,000, respectively.... 25,054,782 17,662,389
Trade accounts receivable from affiliates................. 30,421,899 12,659,778
Inventories............................................... 50,809,885 32,911,669
Refundable income taxes................................... -- 160,915
Prepaid expenses and other current assets................. 4,703,050 5,568,093
------------ ------------
Total current assets.............................. 153,192,812 158,960,852
Property, plant and equipment, net.......................... 59,489,427 64,091,223
Investment in affiliates.................................... 19,628,072 14,177,866
Intangible assets........................................... 19,604,070 2,000,000
Deposits and other assets................................... 4,023,087 3,473,280
------------ ------------
$255,937,468 $242,703,221
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 18,997 $ 30,059,696
Trade accounts payable.................................... 18,974,502 14,956,324
Accrued expenses.......................................... 24,902,722 15,380,136
Customer deposits......................................... -- 453,198
Deferred revenue.......................................... 10,211,208 5,538,705
------------ ------------
Total current liabilities......................... 54,107,429 66,388,059
Long-term debt, less current maturities..................... 41,344 2,998
Stockholders' equity:
Preferred stock, no par value; 9,700,000 shares
authorized; none issued and outstanding................ -- --
Series A Junior Participating Preferred stock, no par
value; 300,000 shares authorized; none issued and
outstanding............................................ -- --
Common stock, no par value; 50,000,000 shares authorized;
issued and outstanding, 25,375,332 and 23,391,953
shares, respectively................................... 190,253,307 165,625,250
Retained earnings......................................... 12,194,209 11,915,059
Accumulated other comprehensive loss...................... (658,821) (1,228,145)
------------ ------------
Total stockholders' equity........................ 201,788,695 176,312,164
------------ ------------
Commitments (Notes 5, 7, 13, 21 and 23)..................... $255,937,468 $242,703,221
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
COMMON STOCK ACCUMULATED
------------------------- OTHER
NUMBER OF RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
---------- ------------ ------------ ------------- ------------
Balance, August 30, 1997..... 22,583,174 $159,706,639 $ 64,985,283 $ (352,293) $224,339,629
Stock issuance............... 451,388 3,365,772 -- -- 3,365,772
Tax benefit from stock
options exercised.......... -- 234,696 -- -- 234,696
Comprehensive (loss) income:
Cumulative translation
adjustment............ -- -- -- (1,611,739) (1,611,739)
Net loss................ -- (21,952,091) -- (21,952,091)
------------
Total comprehensive loss..... -- -- -- -- (23,563,830)
---------- ------------ ------------ ----------- ------------
Balance, August 29, 1998..... 23,034,562 163,307,107 43,033,192 (1,964,032) 204,376,267
Stock issuance............... 357,391 2,274,674 -- -- 2,274,674
Tax benefit from stock
options exercised.......... -- 43,469 -- -- 43,469
Dilution in investment
in affiliates.............. -- -- (483,825) -- (483,825)
Comprehensive (loss) income:
Cumulative translation
adjustment............ -- -- -- 735,887 735,887
Net loss................ -- -- (30,634,308) -- (30,634,308)
------------
Total comprehensive loss..... -- -- -- -- (29,898,421)
---------- ------------ ------------ ----------- ------------
Balance, August 28, 1999..... 23,391,953 165,625,250 11,915,059 (1,228,145) 176,312,164
Stock issuance............... 679,993 5,361,057 -- -- 5,361,057
Stock issuance related to
acquisition of YieldUP..... 1,303,386 19,267,000 -- -- 19,267,000
Accretion in investment in
affiliates................. -- -- 4,822,260 -- 4,822,260
Comprehensive (loss) income:
Cumulative translation
adjustment............ -- -- -- 569,324 569,324
Net loss................ -- -- (4,543,110) -- (4,543,110)
------------
Total comprehensive loss..... (3,973,786)
---------- ------------ ------------ ----------- ------------
Balance, August 26, 2000..... 25,375,332 $190,253,307 $ 12,194,209 $ (658,821) $201,788,695
========== ============ ============ =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
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FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
2000 1999 1998
------------ ------------- ------------
OPERATING ACTIVITIES
Net loss............................................ $ (4,543,110) $ (30,634,308) $(21,952,091)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Gain on sale of investment in affiliates.......... (5,409,744) -- --
Loss from discontinued operations................. 400,000 6,422,864 630,009
Gain on sale of discontinued operations........... -- (15,907,271) --
Write-off of in-process research and
development.................................... 6,370,000 -- --
Depreciation...................................... 11,729,787 12,822,641 14,210,294
Amortization...................................... 4,986,449 849,919 1,041,231
Provision for allowance for doubtful accounts..... 887,059 352,861 940,234
Write-off of accounts receivable.................. (236,521) (164,121) --
Provision for inventory reserves.................. 1,016,255 6,354,000 12,068,215
Disposal of inventory............................. (4,971,181) (5,723,261) (9,511,300)
Provision for deferred income taxes............... (4,520,624) (3,308,595) (4,953,900)
Valuation reserve on deferred tax assets.......... 4,520,624 20,523,170 --
Equity in (earnings) losses of affiliates......... (2,047,499) 1,165,931 (674,274)
Loss on disposal of equipment..................... -- 528,843 470,679
Changes in operating assets and liabilities:
Trade accounts receivable...................... (25,036,301) 1,799,434 13,090,737
Inventories.................................... (10,027,167) 6,345,798 8,667,438
Prepaid expenses and other current assets...... (9,180,056) 273,616 (2,067,594)
Trade accounts payable......................... 2,644,990 (410,265) (5,845,086)
Refundable income taxes........................ 160,915 9,624,146 (9,785,061)
Accrued expenses............................... 12,647,541 (4,842,815) (1,206,894)
Customer deposits.............................. (453,198) 453,198 (854,125)
Deferred revenue............................... 4,672,503 (6,068,696) 4,202,943
Other.......................................... 542,000 316,665 (370,031)
------------ ------------- ------------
Net cash (used in) provided by operating
activities........................................ $(15,847,278) $ 773,754 $ (1,898,576)
INVESTING ACTIVITIES
Proceeds from the sale of investment in
affiliates........................................ $ 7,398,621 $ -- $ --
Acquisition of property, plant and equipment........ (7,064,121) (11,790,546) (7,004,174)
Purchase of marketable securities................... (5,960,584) (58,410,721) (13,306,196)
Investment in YieldUP, net of cash.................. (6,522,515) -- --
Sale of marketable securities....................... -- 6,971,481 --
Maturities of marketable securities................. 26,077,015 37,262,998 9,833,381
Increase in deposits and other assets............... (1,397,638) (2,883,154) (1,029,815)
Proceeds from sale of equipment..................... 622,438 486,575 --
------------ ------------- ------------
Net cash provided by (used in) investing
activities........................................ 13,153,216 (28,363,367) (11,506,804)
FINANCING ACTIVITIES
Principal payments on long-term debt................ (30,355,376) (12,067,220) (119,786)
Net proceeds from issuance of common stock.......... 5,361,057 2,274,674 3,365,772
------------ ------------- ------------
Net cash (used in) provided by financing
activities........................................ (24,994,319) (9,792,546) 3,245,986
------------ ------------- ------------
Cash provided by discontinued operations............ -- 26,918,703 7,506,422
------------ ------------- ------------
Decrease in cash and cash equivalents............... (27,688,381) (10,463,456) (2,652,972)
Cash and cash equivalents at beginning of year...... 62,326,355 72,789,811 75,442,783
------------ ------------- ------------
Cash and cash equivalents at end of year............ $ 34,637,974 $ 62,326,355 $ 72,789,811
============ ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
35
36
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Description of Business
FSI International, Inc. is a global supplier of processing equipment used
at key production steps to manufacture microelectronics, including semiconductor
devices and thin film heads. The Company develops, manufactures, markets and
supports products used in the technology areas of microlithography and surface
conditioning. FSI International's customers include microelectronics
manufacturers located throughout North America, Europe, Japan and the Asia
Pacific region.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
FSI International, Inc. and its wholly owned subsidiaries, FSI International,
Ltd., a foreign sales corporation (FSC), SCD Mountain View and Semiconductor
Systems, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company's fiscal year ends on the last Saturday in August and is
comprised of 52 or 53 weeks. Fiscal 2000 and 1998 consist of 52-week periods and
fiscal 1999 consists of a 53-week period.
Revenue Recognition
Revenue related to the Company's products is recognized upon shipment,
except for newly introduced products, which is recognized upon the successful
completion of an evaluation period. Once the Company has a base of five
installations of a new product accepted by customers, the Company then
recognizes all of the new product revenue upon shipment. Revenue related to
services is recognized at the time the services are performed.
The Company defers 49.0% and 20.4% of sales to the Company's affiliates,
m-FSI and Metron, respectively, until the sales are recognized by the
affiliates.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. The Company is
evaluating various practical implementation considerations. Changes in the
Company's revenue recognition policy resulting from the interpretation of SAB
101, to the extent applicable, would be effective in the fourth quarter of
fiscal 2001.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to revenues, expenses, gains,
and losses that are not included in net income, but rather are recorded directly
in stockholders' equity. For fiscal 2000, 1999, and 1998, the only item of other
comprehensive income (loss) is related to foreign currency translation
adjustment.
Cash and Cash Equivalents
All highly liquid investments purchased with an original effective maturity
of three months or less are considered to be cash equivalents.
Marketable Securities
The Company classifies its marketable debt securities as available-for-sale
and carries these securities at approximately fair market value. Unrealized
holding gains and losses are excluded from earnings and reported as a net amount
in a separate component of stockholders' equity until realized (See Note 3).
36
37
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are valued at the lower of cost, determined by the first in,
first out method, or net realizable value.
Property, Plant and Equipment
Building and related costs are carried at cost and depreciated on a
straight-line basis over a 30 year period. Leasehold improvements are carried at
cost and amortized over a 3 to 5 year period or the term of the underlying
lease, whichever is shorter. Equipment is carried at cost and depreciated on a
straight-line method over its estimated economic life. Principal economic lives
for equipment are 1 to 7 years. Software developed for internal use is amortized
over 3 to 5 years beginning when the system is placed in service. When assets
are retired or disposed of, the cost and accumulated depreciation thereon is
removed from the accounts and gains or losses are included in other income
(expense). Maintenance and repairs are expensed as incurred; significant
renewals and improvements are capitalized.
Intangible Assets
Goodwill, patents, license fees and other intangible assets are capitalized
based on their estimated fair value and amortized over their estimated economic
or legal lives, whichever is shorter, ranging from 3 to 9 years. The
recoverability of goodwill is determined based on analysis of the net present
value of projected related revenue.
Investment in Affiliates
The Company's investment in affiliated companies consists of a 20.4%
interest in Metron Technology and a 49.0% interest in m-FSI Ltd. Each investment
is accounted for by the equity method utilizing a three-month and a two-month
lag due to the affiliates' respective May and June year ends. Summary financial
information for these affiliates is included in Note 11.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting. The Company accounts
for tax credits as reductions of income tax expense in the year in which such
credits are allowable for tax purposes.
Product Warranty
The Company, in general, warrants new equipment manufactured by the Company
to the original purchaser to be free from defects in material and workmanship
for one to two years, depending upon the product or customer agreement.
Provision is made for the estimated cost of maintaining product warranties at
the time the product is sold.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at current exchange rates. Operating results for investees are
translated into U.S. dollars using the average rates of exchange prevailing
during the year. Unrealized gains or losses resulting from translating investees
are included in the cumulative translation adjustment account in stockholders'
equity.
Net Income (Loss) Per Common Share
Basic earnings per share are computed by dividing net income or loss by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share is computed using the treasury stock method to
compute the weighted average common stock outstanding assuming the
37
38
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conversion of potential dilutive common shares. Net loss per share does not
include the effect of stock options as their inclusion would be antidilutive.
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 could affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Employee Stock Plans
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company elected to continue to apply the
provisions of Accounting Principles Board's Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock option and stock purchase plans and therefore
is not required to recognize compensation expense in connection with these plans
as long as the quoted market price of the Company's stock at the date of grant
equals the amount the employee must pay to acquire the stock. Companies that
continue to use APB No. 25 are required to present in the notes to the
consolidated financial statements the pro forma effects on reported net income
and earnings per share as if compensation expense had been recognized based on
the fair value of options granted (see Note 16).
Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform to the
current year presentation.
(2) REALIGNMENT COSTS
During the fourth quarter of fiscal 2000, the Company announced an
infrastructure realignment program closing its Mountain View and Fremont,
California facilities and the discontinuance of production of the nickel
iron-plating product. The Company recorded realignment charges of approximately
$4,100,000 consisting of approximately $1,000,000 in reduction in its workforce
which included $500,000 related to the assembled workforce intangible asset
established at the time of the YieldUP acquisition. Additionally the realignment
charges also included approximately $1,400,000 for consolidation of facilities,
approximately $1,300,000 for liabilities associated with the discontinuance of a
product and approximately $400,000 for additional inventory reserves. The
reduction in work force resulted in approximately 50 positions being eliminated
in the fourth quarter of 2000 and the first quarter of fiscal 2001.
The realignment charge for the consolidation of facilities was for
noncancellable lease payments on the closed facilities and the write off of
leasehold improvements and other fixed assets.
These charges were reflected in the Statement of Operations consisting of
$2,100,000 of cost of goods sold expenses, $1,300,000 of selling, general and
administrative expenses and $700,000 of research and development expenses.
38
39
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fiscal 2000 realignment charge is summarized as follows:
AMOUNT PAID
OR UTILIZED
AMOUNT THROUGH ACCRUAL AT
CHARGED AUGUST 26, AUGUST 26,
2000 2000 2000
---------- ----------- ----------
Severance costs................................... $1,000,000 $100,000 $ 900,000
Facility costs.................................... 1,400,000 -- 1,400,000
Product discontinuance............................ 1,300,000 -- 1,300,000
Inventory reserves................................ 400,000 -- 400,000
---------- -------- ----------
$4,100,000 $100,000 $4,000,000
========== ======== ==========
The accruals of $4,000,000 remaining at August 26, 2000 are expected to be
paid or utilized during fiscal 2001.
During the fourth quarter of fiscal 1998, the Company announced the
realignment of its business due to current industry conditions. The Company
recorded realignment charges of approximately $11,200,000 consisting of
approximately $1,000,000 for a reduction in its workforce, approximately
$1,600,000 for consolidation of facilities, approximately $7,800,000 for
additional inventory reserves and approximately $800,000 for allowance for
doubtful accounts. The reduction in workforce resulted in approximately 170
positions being eliminated throughout FSI. These positions were eliminated in
July and August 1998.
The inventory reserved for related to the realignment of FSI due to the
continued downturn of the industry. Reserves were necessary for products that
were or would be phased out or discontinued. The realignment charge for the
consolidation of facilities was for noncancellable lease payments on a closed
facility.
These charges were reflected in the statement of operations consisting of
$8,000,000 of cost of goods sold expenses, $2,900,000 of selling, general and
administrative expenses and $300,000 of research and development expenses.
The fiscal 1998 realignment charge is summarized as follows:
AMOUNT PAID
OR UTILIZED
AMOUNT THROUGH ACCRUAL AT
CHARGED AUGUST 26, AUGUST 26,
2000 2000 2000
----------- ----------- ----------
Severance........................................ $ 1,000,000 $ 1,000,000 $ --
Facility costs................................... 1,600,000 1,400,000 200,000
Inventory reserves............................... 7,800,000 7,800,000 --
Allowance for doubtful accounts.................. 800,000 200,000 600,000
----------- ----------- --------
$11,200,000 $10,400,000 $800,000
=========== =========== ========
The accrual of $800,000 remaining at August 26, 2000 is expected to be paid
or utilized during fiscal 2001.
On October 8, 1998, FSI implemented additional cost control measures
including an additional reduction of force of approximately 135 employees and
contractors and FSI announced four weeks of scheduled plant shutdowns during the
first half of fiscal 1999. FSI had a charge of approximately $770,000 for
severance and outplacement costs accrued and paid in the first quarter of fiscal
1999.
(3) CONCENTRATION OF RISK AND FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
marketable securities and trade accounts receivable.
39
40
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's customers consist of microelectronics manufacturers located
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally requires no collateral from them.
The Company maintains an allowance for doubtful accounts receivable based upon
expected collectibility of all accounts receivable.
The Company invests in a variety of financial instruments such as municipal
bonds, commercial paper and money market fund shares. The Company, by policy,
limits the amount of credit exposure with any one financial or commercial
issuer.
The Company's financial instruments reflected on the balance sheet,
including cash, cash equivalents, marketable securities, accounts receivable,
notes payable, accounts payable and accrued expenses, approximate fair value at
August 26, 2000, due to their short maturities.
As of August 26, 2000 and August 28, 1999, all marketable securities are
classified as available-for-sale. At August 26, 2000, marketable securities
consist of $7,565,222 of commercial paper and corporate bonds that contractually
mature within 12 months.
At August 26, 2000, $33,481,222 of investments in debt securities purchased
with an original effective maturity date of less than three months are included
in cash and cash equivalents on the balance sheet.
The Company has an investment in Metron of $14,793,906 on the balance sheet
as of August 26, 2000 accounted for by the equity method. Based on the closing
stock price of Metron on August 25, 2000, the fair value of the Company's
investment was approximately $33,129,084.
Gross unrealized holding gains and losses and gross realized gains and
losses on sales of marketable securities were not significant as of and for the
years ended August 26, 2000, August 28, 1999 and August 29, 1998. The Company
manages its cash equivalents and short-term investments as a single portfolio of
highly marketable securities, all of which are intended to be available to meet
the Company's current cash requirements.
(4) ACQUISITION OF YIELDUP
On October 20, 1999 the Company acquired YieldUP International Corporation
(now known as SCD Mountain View, Inc.) by paying approximately $6,083,000 in
cash and issuing 1,303,000 shares of common stock to YieldUP shareholders.
SCD Mountain View Inc. (SCD Mountain View) develops, manufactures and
markets innovative cleaning, rinsing and drying equipment designed to enable new
processes and improve manufacturing yields of semiconductor device
manufacturers.
Under the definitive agreement, the YieldUP shareholders received $0.7313
and 0.1567 of a share of FSI common stock for each share of YieldUP stock. The
Company also issued options covering 209,278 shares of Company common stock in
substitution for previously outstanding options to acquire shares of YieldUP's
common stock.
The acquisition was accounted for under the purchase method of accounting
and the consolidated financials of the Company include the results of SCD
Mountain View since October 20, 1999. The purchase price was allocated to the
fair value of the assets and liabilities as follows:
Net tangible assets......................................... $ (3,405,000)
Identified intangibles and goodwill......................... 23,024,000
In-process research and development......................... 6,370,000
Value of FSI stock issued and converted options and
warrants.................................................. (19,267,000)
Acquisition costs........................................... (639,000)
------------
Cash paid................................................... $ 6,083,000
============
40
41
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has allocated $6,370,000 of the YieldUP purchase price to
acquired in-process research and development related to acquired projects, which
was estimated to be 65% complete. In-process research and development was valued
by discounting forecasted cash flow directly related to the products expected to
result from the subject research and development. The Company presently expects
that a beta version will be available by the fourth quarter of 2001.
Prior to the acquisition, two patent infringement lawsuits were filed
against YieldUP, which if resolved unfavorably could have a material adverse
impact on the Company. (See Note 23)
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of YieldUP as though the transaction had occurred on
August 30, 1998.
FISCAL YEAR ENDED
---------------------------
AUGUST 26, AUGUST 28,
2000 1999
------------ ------------
Net sales................................................ $220,719,995 $119,011,823
Net loss................................................. (8,330,105) (38,575,629)
Net loss per common share - Basic........................ (0.32) (1.57)
Net loss per common share - Diluted...................... (0.32) (1.57)
Weighted average common shares........................... 26,113,586 24,508,092
Weighted average common and potential common shares...... 26,113,586 24,508,092
(5) DIVESTITURE OF THE CHEMICAL MANAGEMENT DIVISION
On July 31, 1999, FSI sold its Chemical Management Division to the BOC
Group, Inc., a Delaware corporation ("BOC"), for approximately $38.2 million in
cash. FSI reported a pre-tax gain of approximately $24.8 million and an after
tax gain of $15.9 million. The Chemical Management Division designed and
manufactured chemical management systems that generated, blended and dispensed
high purity chemicals, and blended and delivered slurries, to points of use in a
manufacturing facility, as well as related controls and support products.
During the first quarter of 2000, FSI continued to negotiate the final
closing balance sheet for the CMD divestiture to BOC. Upon the completion of
those negotiations, FSI established an additional $400,000 accrual for expected
costs associated with completing two projects that were in process when BOC
purchased the division.
Financial information with respect to the Chemical Management Division,
excluding the gain (loss) on sale of net assets of discontinued operations, is
as follows:
FISCAL YEAR ENDED
--------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
---------- ----------- -----------
Sales............................................ $ -- $42,920,378 $56,199,292
Income (loss) from discontinued operations....... -- $(6,422,864) $ (630,009)
Income (loss) per share from discontinued
operations:
Basic.......................................... -- $ (0.28) $ (0.02)
Diluted........................................ -- $ (0.28) $ (0.02)
(6) EARNINGS PER SHARE
Basic and diluted earnings per share are the same for the fiscal years
ended August 26, 2000, August 28, 1999 and August 29, 1998 as the effect of
stock options was not included in the calculation of diluted earnings per share
because their inclusion would have been anti-dilutive due to net losses each
year.
41
42
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) RELATED PARTY TRANSACTIONS AND OTHER LEASE COMMITMENTS
The Company has operating lease agreements for equipment and manufacturing
and office facilities. Certain of the lease agreements are with partnerships of
which a partner is an officer, director and shareholder of the Company.
The lease for the Company's headquarters is a lease with such a partnership
(Lake Hazeltine Properties). The agreement provides for a base monthly rental of
$58,333, plus payment of executory costs such as property taxes, maintenance and
insurance. The Company leased approximately 72,000 square feet of its
headquarters to BOC, the company that acquired its Chemical Management Division,
for approximately $29,790 per month plus payment of executory costs such as
property taxes, maintenance and insurance.
Including the impact of the sublease, the future net minimum lease payments
for all leases with noncancellable lease terms in excess of one year at August
26, 2000 are as follows:
RELATED OTHER
PARTY LEASES LEASES TOTAL
------------ ---------- ----------
Fiscal Year Ending August:
2001.............................................. $448,400 $1,516,900 $1,965,300
2002.............................................. 162,900 477,000 639,900
2003.............................................. -- 190,400 190,400
2004.............................................. -- 54,400 54,400
2005.............................................. -- 13,100 13,100
Thereafter........................................ -- -- --
-------- ---------- ----------
Total minimum lease payments........................ $611,300 $2,251,800 $2,863,100
======== ========== ==========
Rental expense for all operating leases consisted of the following:
FISCAL YEAR ENDED
------------------------------------
AUGUST 26, AUGUST 29, AUGUST 28,
2000 1999 1998
---------- ---------- ----------
Rent expense for related party leases.............. $ 439,700 $ 767,400 $ 797,200
Rent expense for other operating leases............ 1,809,900 1,504,200 1,503,500
---------- ---------- ----------
$2,249,600 $2,271,600 $2,300,700
========== ========== ==========
(8) INVENTORIES
Inventories are summarized as follows:
AUGUST 26, AUGUST 28,
2000 1999
----------- -----------
Finished products........................................... $ 6,702,005 $ 6,759,290
Work in process............................................. 17,896,233 6,667,750
Subassemblies............................................... 3,880,125 8,967,812
Raw materials and purchased parts........................... 22,331,522 10,516,817
----------- -----------
$50,809,885 $32,911,669
=========== ===========
42
43
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
AUGUST 26, AUGUST 28,
2000 1999
------------ ------------
Land...................................................... $ 1,992,029 $ 1,992,029
Building and leasehold improvements....................... 52,310,722 51,154,371
Office furniture and equipment............................ 7,248,521 7,126,507
Computer hardware and software............................ 34,875,513 25,183,980
Manufacturing equipment................................... 6,138,739 5,559,954
Lab equipment............................................. 18,203,023 14,137,296
Tooling................................................... 651,977 580,260
Vehicles.................................................. 46,746 46,746
Capital programs in progress.............................. 2,042,105 8,559,366
------------ ------------
123,509,375 114,340,509
Less accumulated depreciation and amortization............ (64,019,948) (50,249,286)
------------ ------------
$ 59,489,427 $ 64,091,223
============ ============
Interest is capitalized in connection with the construction of major
projects. The capitalized interest is recorded as part of the asset to which it
relates and is amortized over the asset's estimated useful life. In fiscal 1999
approximately $338,000 of interest was capitalized. No interest was capitalized
in fiscal 1998 or 2000.
(10) INTANGIBLE ASSETS
The components of intangible assets are as follows:
AUGUST 26, AUGUST 28,
2000 1999
----------- ----------
Goodwill.................................................... $ 8,774,254 $ --
Developed technology........................................ 9,150,000 --
Patents..................................................... 4,284,533 --
License fees................................................ 500,000 2,000,000
Other....................................................... 419,853 --
----------- ----------
23,128,640 2,000,000
Less accumulated amortization............................. (3,524,570) --
----------- ----------
$19,604,070 $2,000,000
=========== ==========
As a result of the acquisition of YieldUP during the first quarter of
fiscal 2000, the Company recorded $23,257,000 of intangibles which included
$233,000 of patents acquired from YieldUP. The Company recorded $3,456,000 of
amortization related to these intangibles and $167,000 of amortization related
to a technology license agreement. The license fees intangible as of August 28,
1999 included a $1,500,000 license with YieldUP which subsequent to the
acquisition was eliminated upon consolidation. The Company capitalized $11,000
in patents during fiscal 2000. As a result of the closing of the Mountain View
facility in the fourth quarter of fiscal 2000, $542,000 of the assembled
workforce intangible asset was written off.
(11) INVESTMENTS IN AFFILIATES
Metron Technology N.V. successfully completed the initial public offering
of 3,750,000 shares of its Common Stock at an offering price of $13.00 per share
on November 19, 1999. The Company sold approximately 612,000 shares of its
Metron shares and recorded a gain of approximately $5,400,000. The
43
44
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
initial public offering resulted in the accretion of the Company's investment in
Metron of approximately $4,606,108 and as a result the Company recorded a charge
to retained earnings to reflect this accretion. The Company's ownership in
Metron as of August 26, 2000 is 20.4%. The Company's ownership in Metron could
be diluted by the exercise of stock options or if Metron issues stock in
secondary offerings.
On July 13, 1998, Metron Technology acquired substantially all the
outstanding shares of Kyser. Under the terms of the Merger Agreement, each
outstanding share of Kyser's common stock acquired was converted into 16.5
shares of the Metron Technology's common shares. Accordingly, Metron Technology
issued 1,582,683 new common shares to the shareholders of Kyser. Kyser is a
stocking distributor of materials and components which markets both high-purity
and industrial-use products in Texas and five other states. The acquisition
resulted in a dilution to percentage ownership and as a result the Company
recorded a charge to retained earnings of $483,825 to reflect this dilution.
A summary of assets, liabilities and results of operations for Metron
Technology and m-FSI Ltd. accounted for by the equity method is as follows
(dollars in thousands):
Metron Technology:
MAY 31,
-------------------
2000 1999
-------- --------
Current assets........................................ $159,761 $86,956
Noncurrent assets..................................... 21,608 12,669
Current liabilities................................... 105,374 64,326
Noncurrent liabilities................................ 3,480 3,371
Total stockholders' equity............................ 72,515 31,928
FISCAL YEAR ENDED MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
Sales................................................. $337,551 $228,618 $275,024
Net income (loss)..................................... 7,752 (4,534) 1,102
m-FSI Ltd:
JUNE 30,
-------------------
2000 1999
-------- --------
Current assets........................................ $28,093 $11,775
Noncurrent assets..................................... 18,769 12,172
Current liabilities................................... 22,395 14,083
Noncurrent liabilities................................ 14,728 1,857
Total stockholders' equity............................ 9,739 8,007
FISCAL YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Sales................................................. $22,539 $17,893 $24,078
Net income............................................ 151 27 523
Metron Technology operates mainly in Europe, Asia Pacific and the United
States. m-FSI Ltd. operates in Japan.
The Company sold approximately $100,855,000, $30,192,000 and $60,050,000 of
its products in the aggregate to Metron Technology and m-FSI Ltd. in fiscal
2000, 1999 and 1998, respectively. In addition, the Company paid Metron
Technology a commission for direct sales to Asia-Pacific customers of $663,000,
$175,000 and $476,000 for fiscal years 2000, 1999 and 1998, respectively. At
August 26, 2000 and August 28, 1999, trade accounts receivable from affiliates
was $30,422,000 and $12,660,000, respectively and deferred revenue from
affiliates was $4,704,000 and $2,139,000, respectively.
44
45
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
AUGUST 26, AUGUST 28,
2000 1999
----------- -----------
Commissions................................................ $ 2,284,605 $ 408,220
Commissions due affiliates................................. 36,557 --
Salaries and bonuses....................................... 3,831,955 2,252,783
Pension and profit sharing................................. 1,815,059 1,074,255
Product warranty........................................... 8,790,990 6,242,040
Other...................................................... 8,143,556 5,402,838
----------- -----------
$24,902,722 $15,380,136
=========== ===========
(13) DEBT
Long-term debt is summarized as follows:
AUGUST 26, AUGUST 28,
2000 1999
---------- -----------
Unsecured Senior Notes; bearing an interest rate of 7.15% to
7.27% redeemed in September 1999.......................... $ -- $30,000,000
Capital leases on equipment; interest rates ranging from
8.83% to 10.37% through April 2003, secured by underlying
equipment................................................. 60,341 62,694
-------- -----------
60,341 30,062,694
Less current maturities..................................... (18,997) (30,059,696)
-------- -----------
$ 41,344 $ 2,998
======== ===========
Future payments of long-term debt are as follows:
Fiscal Year Ending
2001..................................................... $18,997
2002..................................................... 20,820
2003..................................................... 20,524
The Company redeemed $12,000,000 in senior unsecured notes in August 1999
and the remaining thirty million dollars ($30,000,000) of the senior unsecured
notes in September 1999. In addition to the payment of the principal and accrued
interest on the notes, FSI paid the noteholders approximately $690,000 in
make-whole penalties that were expensed in fiscal 1999.
As of August 26, 2000 the Company had one standby letter of credit
outstanding with a foreign vendor. The standby letter of credit is in the amount
of $2,000,000 and expires December 31, 2000.
45
46
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) INCOME TAXES
The provision for income tax (benefit) expense is summarized as follows:
FISCAL YEAR ENDED
--------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
---------- ---------- ------------
Current:
Federal....................................... $ -- $ -- $ (8,819,000)
Foreign....................................... -- 191,000 (260,000)
State......................................... -- -- 52,000
---------- ---------- ------------
$ -- $ 191,000 $ (9,027,000)
---------- ---------- ------------
Deferred:
Federal....................................... $ -- $5,204,000 $ (2,827,000)
Foreign....................................... -- -- --
State......................................... -- 450,000 (1,475,000)
---------- ---------- ------------
$ -- $5,654,000 $ (4,302,000)
---------- ---------- ------------
$ -- $5,845,000 $(13,329,000)
========== ========== ============
In fiscal 2000, 1999 and 1998, there was a tax benefit of $0, $43,469 and
$234,696, respectively, credited to stockholders' equity associated with the
exercise of stock options.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 26,
2000 and August 28, 1999 are as follows:
AUGUST 26, AUGUST 28,
2000 1999
----------- -----------
Deferred tax assets:
Inventory differences..................................... $ 5,381,000 $ 5,215,000
Deferred revenue.......................................... 492,000 211,000
Accounts receivable....................................... 1,250,000 980,000
R&D credit carryforwards.................................. 1,200,000 341,000
Alternative minimum tax carryforwards..................... 585,000 810,000
Net operating loss carryforwards.......................... 11,164,000 9,466,000
Accruals.................................................. 4,197,000 3,134,000
Other, net................................................ 2,540,000 1,030,000
----------- -----------
Total gross deferred tax assets................... $26,809,000 $21,187,000
Deferred tax liabilities:
Fixed asset differences................................... $ 665,000 $ 664,000
Intangibles............................................... 1,100,000 --
----------- -----------
Total gross deferred tax liabilities.............. $ 1,765,000 $ 664,000
Less valuation allowance.................................. (25,044,000) (20,523,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
46
47
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax (benefit) expense from continuing operations
differs from the expected statutory federal income tax as follows:
FISCAL YEAR ENDED
-------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
------------ ------------- ------------
Expected federal income tax benefit....... $ (2,367,000) $ (11,587,000) $(12,364,000)
State income benefit, net of federal
benefit................................. (166,000) (993,000) (925,000)
Research activities credit................ (390,000) (341,000) (412,000)
Effect of foreign investments............. 517,000 -- --
Non deductible write-off of acquired
in-process research and development..... 2,230,000 -- --
Non deductible goodwill................... 1,188,000 -- --
Valuation allowance....................... (1,021,000) 18,562,000 --
Other items, net.......................... 9,000 204,000 372,000
------------ ------------- ------------
$ -- $ 5,845,000 $(13,329,000)
============ ============= ============
The Company has net operating loss carryforwards for federal purposes of
approximately $28,600,000, which will begin to expire in fiscal year 2011 if not
utilized. Of this amount, approximately $17,500,000 is subject to Internal
Revenue Code Section 382 limitations on utilization. This limitation is
approximately $1,200,000 per year. The Company has net operating loss
carryforwards for state purposes of approximately $37,000,000, which will expire
at various times, beginning in fiscal year 2004, if not utilized.
The Company maintains a valuation allowance to fully reserve against its
deferred tax asset due to uncertainty over the ability to realize these assets.
As of August 26, 2000, the valuation allowance is $25,044,000. Of this amount,
$5,542,000 is attributable to a net operating loss carryover the Company
obtained through its acquisition of YieldUP; if it is determined in the future
that this portion of the allowance is no longer required, the offset will be
recorded as a reduction in goodwill. Additionally, $1,028,000 of the valuation
allowance will be recorded as a credit to paid-in-capital if it is determined in
the future that this portion of the valuation allowance is no longer required.
At August 26, 2000, there was approximately $9,406,000 of accumulated
undistributed earnings of subsidiaries outside the United States that are
considered to be reinvested indefinitely, subject to cash flow requirements. It
is not practicable to estimate the deferred tax liability related to such
undistributed earnings. If such earnings were remitted to the Company,
applicable U.S. federal income and foreign withholding taxes would be
substantially offset by available foreign tax credits.
(15) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution pension plan covering substantially
all employees. Total pension cost for fiscal 2000, 1999 and 1998 was $1,328,123,
$1,497,639 and $1,966,310, respectively.
The Company also has Employee 401(k) Retirement Plans, which allow for
discretionary profit sharing contributions, covering eligible employees.
Contributions under the plans are determined by means of a formula or at the
discretion of the Board of Directors. There were no contributions in fiscal
2000, 1999 and 1998.
(16) STOCK OPTIONS AND WARRANTS
In addition to other stock based plans, the Company has a 1997 Omnibus
Stock Plan (the Plan). The Plan, which was approved by the Company's
stockholders, authorizes stock based awards ("Awards") to purchase up to
2,500,000 shares of the Company's common stock. Under the Plan, the Plan
Committee has the power to make Awards, to determine when and to whom Awards
will be granted, the form of each Award, the amount of each Award, and any other
terms or conditions of each Award consistent with the Plan.
47
48
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity under stock option plans of the Company is as follows:
NUMBER OF SHARES
------------------------ WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ----------- ----------------
ACTIVITY DESCRIPTION
August 30, 1997......................................... 436,000 2,098,792 9.01
Additional shares authorized for 1997 Omnibus Stock
Option Plan........................................ 750,000 -- --
Granted............................................... (822,499) 822,499 9.70
Exercised............................................. -- (181,959) 4.80
Canceled.............................................. 66,500 (159,467) 12.63
---------- --------- -----
August 29, 1998......................................... 430,001 2,579,865 9.33
Additional shares authorized for 1997 Omnibus Stock
Option Plan........................................ 350,000 -- --
Granted............................................... (336,000) 336,000 7.87
Exercised............................................. -- (154,034) 4.94
Canceled.............................................. 145,250 (310,159) 10.95
---------- --------- -----
August 28, 1999......................................... 589,251 2,451,672 9.21
Additional shares authorized for 1997 Omnibus Stock
Option Plan........................................ 400,000 -- --
Converted YieldUP Plan................................ -- 208,389 5.84
Granted............................................... (1,025,750) 1,025,750 11.47
Exercised............................................. -- (462,996) 8.29
Canceled.............................................. 310,765 (452,646) 11.23
---------- --------- -----
August 26, 2000......................................... 274,266 2,770,169 9.59
========== ========= =====
The following table summarizes information with respect to options
outstanding and exercisable at August 26, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE AVERAGE
EXERCISE OF OPTIONS CONTRACTUAL EXERCISE EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$ 0.94 - $ 5.00 320,693 2.8 $ 2.48 288,832 $ 2.43
$ 5.01 - $ 9.00 846,213 7.3 7.50 441,272 7.47
$ 9.01 - $13.00 983,872 7.3 11.07 410,855 11.68
$13.01 - $17.00 597,725 8.5 13.64 129,308 14.64
$17.01 - $20.88 21,666 2.9 17.50 21,332 17.45
--------- ---------
$ 0.94 - $20.88 2,770,169 7.0 $ 9.59 1,291,599 $ 8.56
========= =========
At August 28, 1999, then currently exercisable options aggregated 1,424,815
shares of common stock at a weighted-average exercise price of $9.00.
In fiscal 1993, the Company issued a warrant to purchase 100,000 shares of
common stock at an exercise price of $3.75 per share that expires in February
2003. The warrant to purchase 40,000 shares of common stock was exercised during
fiscal 2000 and the balance of 60,000 had expired.
On May 22, 1997, the Company adopted a Shareholder Rights Plan (the Rights
Plan). Pursuant to the Rights Plan, Rights were distributed as a dividend at the
rate of one preferred share purchase right (a Right) for each outstanding share
of common stock of the Company. The Rights expire on June 10, 2007, unless
extended or earlier redeemed or exchanged by the Company.
48
49
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Rights Plan, each Right entitles the registered holder to
purchase one-hundredth of a Series A Junior Participating Preferred Share, no
par value (Preferred Shares), of the Company at a price of $90. In general, the
Rights will become exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's common stock or commences a tender
offer or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's common stock.
The Company has adopted the disclosure-only provisions of SFAS No. 123 but
applies APB No. 25 and related interpretations in accounting for its plans.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company
recognized no compensation expense in 2000, 1999 or 1998 under APB No. 25.
If the Company had elected to recognize compensation cost for the stock
option plan and employee stock purchase plan based on the fair value at the
grant dates for awards under those plans, consistent with the method prescribed
by SFAS No. 123, net loss and net loss per common share would have been changed
to the pro forma amounts indicated below:
2000 1999 1998
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss
As reported..................................... $(4,543) $(30,634) $(21,952)
Pro forma....................................... $(9,473) $(34,485) $(25,942)
Diluted net loss per common share
As reported..................................... $ (0.18) $ (1.32) $ (0.96)
Pro forma....................................... $ (0.38) $ (1.49) $ (1.14)
The fair value of stock options used to compute pro forma net loss and net
loss per common share disclosures is the estimated present value at the grant
date using the Black-Scholes option-pricing model with the following weighted
average assumptions:
OPTIONS ESPP
------------------------ ------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Annualized dividend yield.................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility.............. 69.8% 64.3% 59.0% 69.8% 64.3% 45.0%
Risk free interest rate...................... 6.0% 5.1% 5.1% 6.3% 5.2% 5.1%
Expected life (years)........................ 5.7 5.5 5.5 0.5 0.5 0.5
(17) EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (the Plan) that enables
employees to contribute up to 10% of their wages toward the purchase of the
Company's common stock at 85% of the lower of market value at the beginning or
the end of the purchase period. Effective January 1, 1998, the Plan was amended
from an annual to a semiannual basis plan. In January 1999, the stockholders
authorized 250,000 additional shares for the Plan. In January 1998, the
shareholders authorized 350,000 additional shares for the Plan.
49
50
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares were issued on the following dates for the following prices:
PRICE PER
DATE SHARES SHARE
- ---- ------- ---------
December 31, 1997........................................... 150,067 $10.09
June 30, 1998............................................... 123,993 8.26
December 31, 1998........................................... 104,900 8.19
June 30, 1999............................................... 100,944 6.64
December 31, 1999........................................... 100,875 6.74
June 30, 2000............................................... 84,394 9.67
At August 26, 2000, there were 265,413 shares reserved for future employee
purchases of stock under the Plan.
(18) ADDITIONAL SALES INFORMATION
International sales for the fiscal years 2000, 1999 and 1998 were
approximately 53%, 29% and 39%, respectively, of total sales. The basis for
determining sales by geographic region is the location that the product is
shipped to. Included in these percentages and the table below are sales to
affiliates (see Note 11.) International sales by geographic area, consisting
principally of export sales, are summarized as follows:
FISCAL YEAR ENDED
----------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
------------ ----------- -----------
Asia................................................... $ 53,889,000 $ 9,445,000 $23,526,000
Europe................................................. 61,930,000 22,741,000 36,439,000
Other.................................................. 328,000 645,000 3,111,000
------------ ----------- -----------
$116,147,000 $32,831,000 $63,076,000
============ =========== ===========
There was no individual foreign country that represented more than 10% of
sales in fiscal years 2000, 1999 and 1998.
The following summarizes significant customers comprising 10% or more of
the Company's customer sales, which includes sales through affiliates to
end-users:
FISCAL YEAR ENDED
---------------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
--------------- --------------- ---------------
Customer A.................................. * 24% 14%
Customer B.................................. 15% 13% *
Customer C.................................. * * 12%
Customer D.................................. 11% * *
- -------------------------
* Sales to respective customer was less than 10% during the fiscal year.
(19) SEGMENT INFORMATION
The Company has two divisions, Surface Conditioning Division (SCD), and
Microlithography Division (MLD). Due to the similarity of production processes,
distribution methods, customer base and products/services, the reporting of
segment information is aggregated for Surface Conditioning and Microlithography.
Both divisions provide process solutions to microelectronics manufacturers
worldwide.
The Surface Conditioning Division sells products and processes using
immersion, spray, vapor and cryogenic techniques to prepare the surfaces of
silicon wafers for subsequent processing and the Microlithography Division
supplies photoresist and spin-on dielectric processing equipment and services
for the semiconductor market and photoresist processing and services for the
thin film head market.
50
51
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has received research and development funding commitments from
third party organizations. Such funds are not anticipated to cover all costs of
the research and development projects involved. The funds received are recorded
as reductions of research and development expenses. The Company recognized
approximately $42,200, $7,700 and $1,918,900 of third party funding in fiscal
years 2000, 1999 and 1998, respectively.
(21) LICENSE AGREEMENTS
The Company, in the ordinary course of business, enters into various
licensing agreements related to technologies. These agreements generally provide
for technology transfers between the Company and the licensors in exchange for
minimum royalty payments and/or a fixed royalty to the licensors. These
agreements can generally be terminated by the Company with appropriate notice to
the licensors.
The Company also has joint development agreements that generally provide
for technology transfers between the Company and the other company involved.
(22) SUPPLEMENTARY CASH FLOW INFORMATION
The following summarizes supplementary cash flow items:
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
---------- ------------ ----------
Interest paid, net of amounts capitalized......... $783,671 $ 2,999,953 $3,148,587
Income taxes (received) paid, net................. $(48,317) $(12,039,578) $2,252,523
(23) LITIGATION
During fiscal 1998, the Company settled a patent infringement lawsuit
relating to its EXCALIBUR(R) systems, which had been brought by Purusar
Corporation in October 1995. In exchange for a one-time lump sum payment,
Purusar dismissed the lawsuit and released the Company and its customers from
any past or future claims of infringement relating to the patent at issue. The
Company did not and will not pay any royalties to Purusar as a result of the
settlement.
In October 1996, Eric C. and Angie L. Hsu (the "plaintiffs") filed a
lawsuit in the Superior Court of California, County of Alameda, Southern
Division, against Semiconductor Systems, Inc. ("SSI"), a wholly-owned subsidiary
of the Company that was acquired in April 1996, and the former shareholders of
SSI. In the fall of 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Mr. Hsu and SSI (the
"Shareholder Agreement") and in connection with Mr. Hsu's termination of his
employment with SSI in August 1995, the former shareholders of SSI purchased the
shares of SSI common stock then held by Mr. Hsu. The plaintiffs claimed, among
other things, that such purchase breached the Shareholder Agreement and violated
the California Corporations Code, breached the fiduciary duty owed plaintiffs by
the individual defendants and constituted fraud.
In September and October of this year, certain of Mr. Hsu's claims were
tried to a jury in Alameda County Superior Court in Oakland, California. At the
conclusion of the trial, the jury made the following findings. The jury found
that SSI breached the Shareholder Agreement between it and Eric Hsu either by
allowing the other shareholders to purchase Mr. Hsu's shares or by allowing an
untimely purchase of Mr. Hsu's shares and that the damages that resulted were
$2.4 million. This finding may allow Mr. Hsu to seek recovery of certain of his
attorney's fees. In addition, each of the individual defendant shareholders was
found liable for conversion and damages of $4.2 million were awarded. Certain
individual defendants were also found to have intentionally interfered with Mr.
Hsu's prospective economic advantage and damages of $3.2 million were awarded.
Finally, several individual defendants and SSI were found to have violated
certain provisions of the California Corporations Code and damages of $2.4
million were awarded. The judge has not yet heard arguments regarding the jury
verdict but SSI believes the damages awards
51
52
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will be found to be duplicative and not cumulative and that certain of these
damages awards may be subject to reduction, including for among other things, on
account of the amount paid to Mr. Hsu in connection with the purchase of his
shares.
Certain equitable claims of Mr. Hsu still must be tried to and decided by
the court. For this reason, damages have not yet been allocated among the
respective defendants and final judgment has not yet been entered. Once judgment
is entered, the matter is appealable and SSI and the individual defendants are
likely to appeal the verdict on a variety of grounds. Thus, there is
considerable uncertainty as to the ultimate resolution of this matter and the
respective liability, if any, of the individual defendants or SSI.
The Company, on behalf of SSI, have made a claim with respect to the
lawsuit under the escrow created at the time of our acquisition of SSI. The
escrow was established to secure certain indemnification obligations of the
former shareholders of SSI. The escrow consists of an aggregate of 250,000
shares of our Common Stock paid to the former shareholders of SSI as
consideration in the acquisition. There is no cash in the escrow. The former
shareholders have agreed to hold the Company and SSI harmless from any claim
arising out of any securities transactions between SSI and the shareholders or
former shareholders of SSI. The indemnification obligations of the individual
SSI shareholders are capped at approximately $4.2 million in the aggregate. Any
shares in the escrow returned to the Company to satisfy any indemnification
obligations will be valued at $12.125 per share, the per-share price of the
Company's Common Stock at the time of the SSI acquisition. Depending on the
ultimate resolution of the case, it is possible that the escrow and indemnity
obligations of the individual shareholders may not be sufficient to fully
protect SSI against any judgment that may be entered in the matter.
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against YieldUP in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain YieldUP products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in
YieldUP's favor. In a written opinion granting summary judgment for YieldUP, the
United States District Court held that CFM had failed to produce evidence on
three separate elements of the patent claim. To establish infringement, evidence
of all three elements was required. On June 30, 1998, the United States District
Court of Delaware granted CFM's petition for re-argument of the summary judgment
motion, and the re-argument briefs have been filed by both parties. The judge
has not yet ruled as to whether to sustain his earlier ruling. If the original
order is overturned, the litigation may proceed to trial, and the litigation and
the associated costs may, and an unfavorable adjudication could, have a material
adverse impact on FSI.* CFM is asking for monetary damages and an injunction
against YieldUP's use of the products at issue. A loss, if any, resulting from
an unfavorable adjudication, cannot presently be estimated.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of YieldUP's products
infringes two patents held by CFM: U.S. Patent Nos. 4,917,123 and 4,778,532.
YieldUP plans to vigorously defend its intellectual property rights against
any and all claims. FSI believes that the additional CFM patent infringement
lawsuit is without merit and that none of YieldUP's technology and products
infringes any of the CFM patents asserted in that litigation. FSI believes
YieldUP's technology is substantially different from CFM's patented technology.
YieldUP has filed an answer to the complaint and a counter claim for
non-infringement and invalidity of CFM's patents. CFM is asking for monetary
damages and an injunction against YieldUP's use of those products at issue. A
loss, if any, resulting from an unfavorable adjudication, cannot presently be
estimated. The associated costs may, and an unfavorable adjudication could, have
a material adverse impact on FSI.
On April 4, 2000 the United States District Court for the District of
Delaware granted YieldUP's motion for summary judgment that the '123 and '532
patents are invalid. CFM's motion for rehearing has been denied. On July 29, the
issue of whether CFM and its inventors had engaged in inequitable conduct in
prosecuting the '123 and '532 patents was tried before the court. In early
September the parties filed their briefs on the matter of inequitable conduct.
The judge has yet to rule on the issue. If the judge finds
52
53
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CFM engaged in inequitable conduct, YieldUP will request the court to order CFM
to pay YieldUP's attorneys fees in defending this suit. Once judgment is entered
based upon the District Court's granting YieldUP's summary judgment motion, the
District Court's order may be appealed by CFM.
Other than the litigation described above or routine litigation incidental
to the Company's business, there is no material litigation to which it is a
party or of which any of its property is subject.
53
54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited the accompanying consolidated balance sheets of FSI
International, Inc. and subsidiaries as of August 26, 2000 and August 28, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended August
26, 2000. 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 auditing standards generally
accepted in the United States of America. 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 FSI
International, Inc. and subsidiaries as of August 26, 2000 and August 28, 1999,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended August 26, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
October 9, 2000
54
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is incorporated by reference to
FSI's Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on January 24, 2001 (the "Proxy Statement") and which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after August 26, 2000.
Except for those portions specifically incorporated in this Report by
reference to FSI's Proxy Statement for the Annual Meeting of Shareholders to be
held on January 24, 2001, no other portions of the Proxy Statement are deemed to
be filed as part of this Report on Form 10-K. The Proxy Statement is furnished
solely for the information of the Securities and Exchange Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning FSI's directors required by this Item is
included in the Proxy Statement and is incorporated by reference. For
information concerning executive officers, see Item 4A of this Form 10-K Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
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56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
PAGE NUMBER
IN THIS REPORT
--------------
(a)(1) Index to Financial Statements
Consolidated Statements of Operations -- Years ended August
26, 2000, August 28, 1999 and August 29, 1998............. 32
Consolidated Balance Sheets -- August 26, 2000 and August
28, 1999.................................................. 33
Consolidated Statements of Stockholders' Equity -- Years
ended August 26, 2000, August 28, 1999 and August 29,
1998...................................................... 34
Consolidated Statements of Cash Flows -- Years ended August
26, 2000, August 28, 1999 and August 29, 1998............. 35
Notes to Consolidated Financial Statements.................. 36 to 53
Independent Auditors' Report................................ 54
(a)(2) Financial Statement Schedules
The following Report and financial statement schedule are included
in this Part IV and are found in this Report at the pages
indicated.
Independent Auditors' Report on Schedule............................ 61
Schedule II -- Valuation and Qualifying Accounts.................... 62
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
56
57
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement
2.0 Agreement and Plan of Reorganization, dated as of January
21, 1999 among FSI International, Inc., BMI International,
Inc. and YieldUP International, Corporation(16)
2.1 License Agreement for Microelectronic Technology between
YieldUP International, Corporation and FSI International,
Inc. dated January 21, 1999.(16)
2.2 Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc.(1)
2.3 Asset Purchase Agreement dated as of June 9, 1999 between
FSI International, Inc. and The BOC Group, Inc.(15)
3.1 Restated Articles of Incorporation of the Company.(2)
3.2 Restated and amended By-Laws.(20)
3.5 Articles of Amendment of Restated Articles of
Incorporation(17)
4.1 Form of Rights Agreement dated as of May 22, 1997 between
FSI International, Inc. and Harris Trust and Savings Bank,
National Association, as Rights Agent(6)
4.2 Amendment dated March 26, 1998 to Rights Agreement dated May
22, 1997 by and between FSI International, Inc. and Harris
Trust and Saving Bank,, National Association as Rights
Agent(7)
4.3 Amendment dated March 9, 2000 to Rights Agreement dated May
22, 1997, as amended March 26, 1998 by and between FSI
International, Inc. and Harris Trust and Savings Bank as
Rights Agent.(20)
*10.1 FSI International, Inc. 1997 Omnibus Stock Plan(5)
*10.2 Split Dollar Insurance Agreement and Collateral Assignment
Agreement dated December 28, 1989, between the Company and
Joel A. Elftmann. (Similar agreements between the Company
and each of Dale A. Courtney, Patricia M. Hollister, Luke R.
Komarek, Benno G. Sand, Benjamin J. Sloan, Arnie Dewitt,
Mark Ahmann and John Ely, have been omitted, but will be
filed if requested in writing by the Commission).(8)
10.3 Lease dated June 27, 1985, between the Company and Lake
Hazeltine Properties.(3)
10.4 Lease dated September 1, 1985, between the Company and
Elftmann, Wyers, Blackwood Partnership.(3)
10.5 Lease dated September 1, 1985, between the Company and
Elftmann, Wyers Partnership.(3)
10.6 Amendment No. 1 dated February 11, 1991 to lease between the
Company and Elftmann, Wyers, Blackwood Partnership(17)
10.7 Amendment No. 2 dated July 31, 1999 to lease between the
Company and Elftmann, Wyers, Blackwood Partnership(17)
*10.8 1989 Stock Option Plan.(4)
*10.9 Amended and Restated Employees Stock Purchase Plan.(14)
10.10 Shareholders Agreement among FSI International, Inc. and
Mitsui & Co., Ltd. and Chlorine Engineers Corp. Ltd. dated
as of August 14, 1991.(8)
10.11 FSI Exclusive Distributorship Agreement dated as of August
14, 1991 between FSI International, Inc. and m-FSI, Ltd.(8)
10.12 FSI Licensing Agreement dated as of August 14, 1991, between
FSI International, Inc. and m-FSI, Ltd.(8)
10.13 Amendment to FSI/Metron Distribution Agreement dated July
31, 1999(18)
10.15 License Agreement, dated October 15, 1991, between the
Company and Texas Instruments Incorporated.(9)
10.16 Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated.(9)
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58
10.17 Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between the Company and
Texas Instruments Incorporated(10)
*10.18 Amended and Restated Directors' Nonstatutory Stock Option
Plan.(11)
*10.19 Management Agreement between FSI International, Inc. and
Joel A. Elftmann, effective as of June 5, 1998 (filed
herewith) (Similar agreements between the Company and its
executive officers have been omitted but will be filed if
requested in writing by the commission.)(14)
*10.20 FSI International, Inc. 1994 Omnibus Stock Plan.(12)
10.22 First Amendment to Lease made and entered into October 31,
1995 by and between Lake Hazeltine Properties and FSI
International, Inc.(13)
10.23 Distribution Agreement made and entered into as of March 31,
1998 by and between FSI International, Inc. and Metron
Technology B.V. (Exhibits to Agreement omitted)(14)
10.24 Lease dated August 9, 1995 between Skyline Builders, Inc.
and FSI International, Inc.(13)
10.25 Lease Rider dated August 9, 1995 between Skyline Builders,
Inc. and FSI International, Inc.(13)
*10.26 Summary of Employment Arrangement between the Company and
Don Mitchell dated December 12, 1999. (filed herewith)
10.27 Distribution Agreement between FSI International, Inc's.
Surface Conditioning Division and Metron Technology B.V.
effective July 10, 2000. (filed herewith)
10.29 Lease Amendment dated November, 1995 between Roland A.
Stinski and FSI International, Inc. (Exhibits to Amendment
omitted)(13)
*10.30 Employment Agreement entered into as of December 12, 1999 by
and between FSI International, Inc. and Donald S.
Mitchell.(19)
21.0 Subsidiaries of the Company (filed herewith)
23.0 Consent of KPMG LLP (filed herewith)
24.0 Powers of Attorney from the Directors of FSI International,
Inc. (filed herewith)
27.0 Financial Data Schedule (filed herewith)
- -------------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-4(as
amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated by
reference.
(2) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
ended February 24, 1990, SEC File No. 0-17276, and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(4) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
reference.
(5) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended March 1, 1997, SEC File No. 0-17276, and incorporated by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on June 5, 1997, SEC File No. 0-17276, and incorporated by
reference.
(7) Filed as an Exhibit to the Company's Report on Form 8-A/A-1, filed by the
Company on April 16, 1998, Sec File No. 0-17276 and incorporated by
reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1991, as amended by Form 8 dated January 7, 1992, SEC
File No. 0-17276, and incorporated by reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 29, 1992, File No. 0-17276, and incorporated by
reference.
(10) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 1993, SEC File No. 0-17276, and incorporated by
reference.
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59
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
reference.
(12) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1995, SEC File No. 0-17276 and incorporated by
reference.
(14) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 29, 1998, SEC File No. 0-17276, and incorporated by
reference.
(15) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on June 23, 1999, SEC File No. 0-17276 and incorporated by
reference.
(16) Filed as an Exhibit to the Company's Report on Form S-4, filed by the
Company on September 13, 1999, SEC File No. 333-87003 and incorporated by
reference.
(17) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 1999, SEC File No. 0-17276, and incorporated by
reference.
(18) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended November 27, 1999, SEC File No. 0-17276 and incorporated by
reference.
(19) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended February 26, 2000, SEC File No. 0-17276 and incorporated by
reference.
(20) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 27, 2000, SEC File No. 0-17276 and incorporated by
reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended August
26, 2000.
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60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FSI INTERNATIONAL, INC.
By: /s/ DONALD S. MITCHELL
----------------------------------
Donald S. Mitchell, President
and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 21, 2000
By: /s/ PATRICIA M. HOLLISTER
----------------------------------
Patricia M. Hollister, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, constituting a majority
of the Board of Directors, on behalf of the Registrant and in the capacities and
on the dates indicated.
Joel A. Elftmann, Director
James A. Bernards, Director
Terrence W. Glarner, Director
Thomas D. George, Director
Donald S. Mitchell, Director
Charles R. Wofford, Director
By: /s/ PATRICIA M. HOLLISTER
----------------------------------
Patricia M. Hollister, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Dated: November 21, 2000
60
61
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders of FSI International, Inc.:
Under the date of October 9, 2000, we reported on the consolidated balance
sheets of FSI International, Inc. and subsidiaries as of August 26, 2000 and
August 28, 1999 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the fiscal years in the
three-year period ended August 26, 2000, as contained herein. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in the accompanying
index. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
October 9, 2000
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED
AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
BALANCE AT BALANCE
BEGINNING AT END
OF YEAR ADDITIONS DELETIONS OF YEAR
----------- ----------- ---------- -----------
Fiscal year ended August 26, 2000
Allowance for doubtful accounts (Deducted
from accounts receivable).............. $ 2,578,351 $ 887,059 $ 236,521 $ 3,228,889
Fiscal year ended August 28, 1999
Allowance for doubtful accounts (Deducted
from accounts receivable).............. $ 2,389,611 $ 352,861 $ 164,121 $ 2,578,351
Fiscal year ended August 29, 1998
Allowance for doubtful accounts (Deducted
from accounts receivable).............. $ 1,449,377 $ 940,234 $ -- $ 2,389,611
Fiscal year ended August 26, 2000
Inventory reserves (Deducted
from inventory)........................ $10,723,934 $ 3,851,107(1) $4,971,181 $ 9,603,860
Fiscal year ended August 28, 1999
Inventory reserves (Deducted
from inventory)........................ $10,093,195 $ 6,354,000 $5,723,261 $10,723,934
Fiscal year ended August 29, 1998
Inventory reserves (Deducted
from inventory)........................ $ 7,536,280 $12,068,215 $9,511,300 $10,093,195
- -------------------------
(1) Includes reserves acquired from YieldUP International Inc. at the time of
acquisition.
62