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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 29, 1998
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
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: (612) 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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 October 16, 1998, as reported on the
Nasdaq National Market, was approximately $85,249,000. 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 October 16, 1998, the registrant had issued and outstanding 23,054,176
shares of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended August
29, 1998 (the "Annual Report") are incorporated by reference into Parts I, II
and IV of this Form 10-K Report.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on January 26, 1999, (the "Proxy Statement") and to
be filed within 120 days after the Registrant's fiscal year ended August 29,
1998, are incorporated by reference into Part III of this Form 10-K 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 the Private Litigation Securities
Reform Act of 1995. Such forward looking statements are based upon current
expectations and beliefs and involve numerous risks and uncertainties 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 this Report and in the Section of the 1998
Annual Report to Shareholders entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference into
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" or the
"Company"), designs, develops, manufactures, markets and supports
microlithography, surface conditioning and chemical management equipment used in
the fabrication of microelectronics, such as advanced semiconductor devices,
thin film heads and multichip modules.
The Company has four segments, Surface Conditioning Division (SCD), Chemical
Management Division (CMD), Microlithography Division (MLD) and Shared Services
(SS).
Due to the similarity of production processes, distribution methods, customer
base and products/services, the reporting of segment information will be
aggregated for Surface Conditioning and Microlithography. (See Note 17 of the
Company's notes to the consolidated financial statements incorporated by
reference and referred to in Item 8 on page 21 of this Report.)
The Surface Conditioning segment sells products, processes and services using
wet, vapor and cryogenic techniques to prepare the surfaces of silicon wafers
for subsequent processing and the Microlithography segment supplies photoresist
processing equipment and services for the semiconductor, thin film head and
multichip module markets.
The Chemical Management segment supplies a wide range of chemical management
systems for microelectronics manufacturers. These systems generate, blend and
deliver chemicals to all points of use in a manufacturing facility.
The Shared Services segment consists of legal, marketing, finance, information
services, human resources and other administrative activities. None of the
Shared Service costs are allocated to the other segments.
In the fall of 1997, FSI established a company in South Korea to provide
chemical management systems' support and turnkey installation services to the
microelectronics manufacturing industry in South Korea. The new company, FSI
Chemical Management Company-Korea, Ltd. ("CMK"), is owned 65% by FSI with the
remaining 35% owned by FSI's affiliated distributor Metron Technology B.V.
("Metron").
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On April 4, 1996, the Company, through a merger involving a newly-formed and
wholly-owned subsidiary of the Company, acquired all of the outstanding capital
stock of Semiconductor Systems, Inc. ("SSI") a supplier of photoresist
processing equipment and support, and SSI became a wholly-owned subsidiary of
the Company. Principal SSI products include the ORBITRAK(R) and the SCORPIO(TM)
microlithography clusters. SSI's operations are headquartered in Fremont,
California.
During fiscal 1995, the Company completed two transactions which expanded its
chemical management capabilities. In January 1995, FSI and Metron each acquired
a 50% interest in FSI Chemical Management Europe, Limited ("CME") located in
Newhaven, England. On March 8, 1995 the Company, through a merger involving a
newly-formed and wholly-owned subsidiary, acquired all of the outstanding
capital stock of Applied Chemical Solutions ("ACS") and ACS became a
wholly-owned subsidiary of the Company. ACS's operations are headquartered in
Hollister, California.
The Company markets its products directly in North America and primarily through
a network of affiliated distributors in Europe, Asia Pacific and Japan. Through
these affiliated international distributors the Company can provide timely and
efficient worldwide customer service and support.
INDUSTRY BACKGROUND
The fabrication of semiconductor devices is a complex process involving several
distinct phases repeated numerous times during the fabrication process. Each
production phase requires different processing technology and equipment, and no
one semiconductor equipment supplier currently produces an entire
state-of-the-art fabrication system. Rather, semiconductor device manufacturers
typically equip fabrication facilities by combining manufacturing equipment
produced by several different suppliers, each of which performs specific
functions in the manufacturing process. The multichip module, and thin film head
fabrication processes utilize many of the same basic technological building
blocks as that of the semiconductor manufacturing industry.
Demand for new microelectronics manufacturing equipment is driven principally by
the need for new processes and systems capable of manufacturing increasingly
complex devices. Industries that utilize microelectronics are demanding higher
performance devices from manufacturers. Over the last decade, technological
advances have allowed device manufacturers to reduce the size and substantially
increase the functionality of each device.
The Company's business depends upon the capital equipment expenditures of
microelectronics manufacturers, which in turn depend on the current and
anticipated market demand for semiconductor devices and products utilizing
semiconductor devices. The microelectronics industry has been cyclical in nature
and has experienced periodic downturns. The industry is currently experiencing a
downturn and it is unclear at this point in time as to how long this downturn
may last.
The Company continues to believe that microelectronics manufacturers are asking
equipment suppliers to take an increasingly active role in meeting the
manufacturer's technology requirements and cost constraints by developing and
supporting the products and processes required to fabricate advanced
microelectronics products.
Concurrent with rapid technological advances in microelectronics, competitive
pressures are forcing manufacturers to reduce production costs. Because of the
significant capital cost of a typical new fabrication facility, manufacturers
have increased their focus on the various cost components of these facilities.
This focus has led manufacturers to increasingly analyze the costs associated
with owning and
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operating each piece of required operating equipment, often referred to as the
equipment's "cost of ownership." Cost of ownership measurement has become an
increasingly competitive issue among equipment suppliers. In addition, the
Company believes that in an effort to reduce total manufacturing costs and to
reduce potential contaminant exposure as the substrate is transferred from one
process step to another, manufacturers are increasingly seeking process
equipment capable of being integrated with the process equipment of other
suppliers to create a highly automated and integrated processing system.
PRODUCTS
The mix of products sold by the Company may vary significantly from year to
year. The following table sets forth, for the periods indicated, the amount of
sales and approximate percentages of the Company's total sales contributed by
the Company's principal products:
FISCAL YEAR ENDED
------------------------------------------------------------------------------
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31,1996
-------------------------- ------------------------ -------------------------
(DOLLARS IN THOUSANDS)
Microlithography
products $ 74,540 34.2% $ 80,994 32.1% $137,975 45.4%
Surface conditioning
products 60,197 27.6% 54,578 21.6% 66,082 21.7%
Chemical management
systems 49,864 22.9% 84,724 33.6% 66,642 21.9%
Spare parts and
service 33,293 15.3% 32,145 12.7% 33,342 11.0%
----------- ---------- ----------- -------- ----------- --------
$217,894 100.0% $252,441 100.0% $304,041 100.0%
=========== ========== =========== ======== =========== ========
MICROLITHOGRAPHY PRODUCTS. The Company's microlithography products consist of
several versions of the POLARIS(R) cluster and of several other products
manufactured by the Company's subsidiary, SSI.
The Company's POLARIS microlithography clusters perform all of the
photolithography processing steps except exposure. The POLARIS cluster consists
of one or two clean-room qualified robots surrounded by various process modules.
Each module is totally independent and requires no mechanical interface. The
cluster is enclosed by process modules and safety walls, creating a
self-contained process environment and is configured to match the throughput
capabilities of the integrated exposure equipment (stepper). The enclosure can
be used to provide a Class 1 clean room environment with independent control of
temperature, humidity and airborne chemical contaminants from the rest of the
fabrication area. During operation, cassettes of wafers are loaded into the
cluster's input/output module from which the robot or robots transport(s) wafers
through the various process modules in a sequence programmed by the operator.
The POLARIS clusters represent a processing alternative to conventional
photoresist track or linear systems which permit processing of the wafer only
according to a pre-established arrangement of the equipment. Wafer routing and
throughput in a POLARIS cluster are not dependent upon module configuration. The
programmable capability allows random wafer routing and continuous processing of
wafers eliminating the need for production pauses between wafer lots for
resetting the wafer sequence
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sometimes required by traditional track systems. In addition, by controlling
system variables within narrow tolerance levels, the POLARIS cluster is able to
better ensure the repeatability of the various process steps. As a result, the
POLARIS cluster provides system flexibility and performance advantages over
competing track systems. It also provides significant reliability and
serviceability advantages. The highly integrated and automated cluster approach
of the POLARIS cluster eliminates the need for a number of complex mechanisms
which can impact system reliability, such as exposure system interface modules
and wafer transport mechanisms generally associated with track systems. Recent
models include a dual robot system to provide for higher throughput and to
address more complex process flows. POLARIS process modules can be serviced from
outside the cluster without disrupting other cluster process operations. In
addition, should technology change in any particular process module, that
individual module can be replaced or modified with an upgrade without rendering
the entire system obsolete.
Purchasers of multiple POLARIS clusters include Applied Magnetics; ASM
Lithography; International Business Machines Corporation ("IBM"); ITT
Corporation; National Semiconductor, Corp., ("NSC"); SMST Submicron; Texas
Instruments, Incorporated ("TI") and Tower Semiconductor Ltd. ("TSL"). The price
of the POLARIS cluster ranges from approximately $800,000 to $2,500,000,
depending on wafer size, number of modules, and number of robots required. The
POLARIS cluster technology is licensed by the Company from TI. See "Patents,
Trademarks and Intellectual Property" below.
In April 1996, the Company expanded its resist processing product line, through
the acquisition of SSI, to include the ORBITRAK(R) and SCORPIO(TM)
microlithography clusters. Introduced by SSI in 1993, the ORBITRAK
microlithography cluster is designed for use in submicron fabs. The ORBITRAK
cluster features proprietary process modules -- arranged in an "orbit" around
production proven, three axis robots -- that allow wafers to be processed in
virtually any desired sequence. Multiple process chambers, thermal process
modules, and fixed central robots with dual end effectors all contribute to
superior throughput in a very small footprint, thereby reducing its cost of
ownership.
Introduced by SSI in 1993, the SCORPIO cluster is a flexible and cost-effective
platform for the photolithography steps involved in the manufacturing of thin
film heads and semiconductor devices. The benefits of "cluster" processing are
also evident in this system. The SCORPIO cluster provides thin-film head
manufacturers who produce less complex circuits with some of the same advantages
provided by the ORBITRAK and POLARIS clusters. The SCORPIO cluster is also
designed for use in manufacturing multichip modules ("MCMs"). MCMs are multiple
integrated circuits (memory, logic, microcomponent, etc.) designed onto a single
packaging substrate to provide increased functionality with a smaller component
size.
Purchasers of SSI's products include Candescent Technologies Corporation, Dallas
Semiconductors, Inc., Flip Chip Technologies, Hewlett-Packard, International
Rectifier Corp., Motorola, Inc. ("Motorola"), Microchip Technology, Read-Rite
Corporation and Seagate Technology.
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SURFACE CONDITIONING PRODUCTS. The Company's surface conditioning products
perform cleaning, etching and stripping functions necessary for the fabrication
of semiconductor devices.
Spray Processing Systems. The Company's spray processing systems, which include
the MERCURY(R) and ZETA(TM) spray processors, are sophisticated spray chemistry
systems used to clean, etch and strip wafers at various stages in the
semiconductor device fabrication process. These systems use centrifugal spray
technology to process wafers by exposing them 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 and the
processing chemicals, de-ionized water and nitrogen are sequentially dispensed
into the chamber through one or more spray posts mounted in the chamber. As the
turntable rotates, nozzles apply a chemical spray to the wafers' surface. After
chemical application, de-ionized water is sprayed on the wafer surface and all
surfaces of the process chamber to remove chemical residues. The wafers and
chamber are then dried by centrifugal spinning combined with a flow of nitrogen
into the chamber. FSI's spray processing systems include a microprocessor-based
controller to program, control, and monitor the operating functions of the
system in order to ensure precise control and repeatability of the process.
The Company's spray processing systems provide an alternative to traditional
immersion technology, principally wet-bench processing of wafers. A chemical
wet-bench consists of an exhaust hood with open chemical batches arranged in a
line in which the wafers are either manually or automatically transferred from
one chemical bath to another. The Company believes that its spray processing
systems provide cost of ownership and many other benefits over wet-bench
chemical processing including protection of the process equipment operator from
hazardous chemicals or fumes, improved cleaning capability, reduced chemical
usage, lower space utilization in the clean room, and greater process
flexibility, including the capability to easily change chemical sequences.
In October 1997, the Company introduced the ZETA(TM) system, a batch spray
processor designed to meet all factory automation requirements for both 200- and
300-mm wafer technology. The ZETA(TM) system includes an eight-chemical flow
system for improved process which allows for a wider range of chemical blend
ratios and also lowers chemical and DI water consumption. The ZETA(TM) system
provides a reliable, automated environment to move wafers to and from the
process chamber. A central robot moves cassettes from station to station and
into the ZETA(TM) system process chamber. After wafers are processed, it unloads
the cassettes from the process chamber, transfers wafers back into the transport
cassettes and returns the cassettes to the input/output ("I/O") ports to be
removed from the system workcell. The automated and enclosed ZETA(TM) system
helps ensure maximum process tool use, increases throughput, reduces
contamination and minimizes human error.
In 1998, the Company introduced the ANTARES(TM) single wafer platform. The
ANTARES(TM) single wafer platform is capable of integrating such products as the
EXCALIBUR(R) and ARIES(R) systems. The advantages of a single platform for the
Company's customers include common spares, less service training and support and
less engineering support. The ANTARES(TM) single wafer platform has the ability
to mix and match multiple process technologies.
Spray processing system customers include Advanced Micro Devices ("AMD"); Atmel
Corporation; Fujitsu Microelectronics, Inc. ("Fujitsu"); IBM; "IRC"; Lucent
Technology; Macronix International Co., Ltd.; Matsushita Corp.; Motorola; SGS
Thompson Microelectronics, Inc. ("SGS Thompson"); Philips Semiconductors B.V.;
Siliconix, Inc. and TI. The spray processing systems offered by the Company
range in price from $650,000 to $2.0
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million. The Company also markets certain equipment complementary to its spray
processors, including water heaters, chemical heaters, and booster pumps.
Vapor Processing Systems. The Company's EXCALIBUR(R) vapor processing systems
use anhydrous hydrogen fluoride ("HF") gas in conjunction with water vapor to
perform cleaning steps normally done with liquid chemicals. The EXCALIBUR(R)
systems are highly automated, with a microprocessor-based controller and
user-friendly software for sequencing and control of the reactants. Wafers are
processed on an individual basis and loaded from the wafer carrier into the
process chamber by a handler that minimizes particle contamination. Up to two
process chambers can be operated with a single electronic controller through the
utilization of multi-tasking software. The advantages of vapor HF processing
over wet processing include 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, increased processing capabilities leading to
technology enablement. An integrated system of this type provides the necessary
environmental and surface control of the wafer between cleaning and various
other process steps, resulting in reduced contamination and improved yield.
The Company's EXCALIBUR(R) system customers include AMD; ANAM Industrial Co.
Ltd. ("ANAM"); Fujitsu; Hyundai Electronics Industries Co., Ltd.;
IBM; Matsushita; Motorola; Taiwan Semiconductor Manufacturing Corp.;
and TI. Systems vary in price from approximately $400,000 to $650,000 depending
on the model, wafer size, number of process chambers, and related electronic
control requirements.
Through a License Agreement with IBM, FSI manufactures, markets, and services a
product using IBM's cryogenic aerosol cleaning technology. In July, 1996, the
Company introduced this cryogenic aerosol cleaning technology as the ARIES(R)
cryokinetic cleaning system. In the system, ultrapure argon/nitrogen crystals
are formed by rapidly cooling the gaseous mixture. When the frozen gas crystals
collide with particles or residues on the wafer surface, they impart sufficient
cryokinetic force to dislodge contaminants. Contaminants become entrained in the
gas flow and are carried away from the wafer and removed from the process
chamber. This removal process is facilitated by a unique chamber design that
prevents contaminants from redepositing on the wafer surface once removed. The
process is effective on many types of particle or residue contamination. The
advantage of using an ARIES system over conventional aqueous processes includes
the ability of the cryogenic aerosol to remove particles or particulate without
undercutting and weakening device structures. An ARIES system varies in price
from $1,200,000 to $1,500,000 depending on the number of process chambers and
related requirements. To date, the Company's only ARIES system customer has been
IBM.
CHEMICAL MANAGEMENT SYSTEMS. The Company's chemical management systems enable
semiconductor manufacturers to blend acids and slurries to desired
concentrations, store the acids and solvents in bulk tanks outside the device
fabrication clean room and to deliver programmed amounts of chemicals to various
types of equipment in the clean room.
Chemical Delivery Systems. The Company offers chemical delivery and slurry
systems utilizing pump, pump and pressure, and vacuum pressure designs. The
Company's chemical delivery systems provide manufacturers with enhanced chemical
purity, inventory control, safety, dispensing accuracy and bulk purchasing
opportunities.
Typically, a chemical delivery system installation involves the delivery, flow
and purity control of ten to twenty distinct chemicals and two to four types of
slurry. Each chemical requires its own station operated by a dedicated
programmable logic controller. These dedicated controllers are in turn
integrated
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by a host industrial computer to monitor and control the entire system.
Normally, one chemical delivery module is required for each chemical; however,
one module can be used to supply that chemical to multiple use points within the
clean room. Each system installation requires a degree of customization based on
the delivery requirements and physical layout of the customer's facility. FSI's
project management expertise allows it to perform multiple installations
simultaneously, which is a significant advantage during periods of growth in the
number of fabrication facilities being constructed, upgraded, or expanded. In
addition, upon the request of a customer, FSI will oversee and coordinate not
only the installation of a chemical delivery system but also the entire chemical
distribution system of the fabrication facility, including point of use
interfaces and primary and secondary containment piping.
The Company offers several models of chemical delivery systems, including the
CHEMFILL(R) 500 module, which provides all the features of a centralized
delivery system in a compact, economical unit. This model can be used as a
cost-effective solution for small volume chemical users or as a local source of
chemicals in large fabrication facilities. The CHEMFILL 1000 PLC module (for
"programmable logic control") offers increased automation to its users,
providing enhanced control, flexibility, and functionality. The CHEMFILL 1500
series of delivery modules incorporates vacuum pressure or pump pulsation
dampened technology with full redundancy. The 1500 series utilizes stabilized
distribution, stabilized drum transfer compartmentalization for on-line
maintenance, semiautomatic component purge with DI water and nitrogen and a
standard metal and particle sampling compartment. The CHEMFILL 5000, designed
for facilities requiring high chemical flow features redundant pump/pressure
systems that help increase uptime.
In fiscal 1998, the Company introduced the CHEMFILL 1200 series which
incorporates stabilized distribution in a vacuum pressure or pump pulsation
dampened configuration to provide for all the solvent and aqueous chemistries
required by a fabrication facility. The CHEMFILL 1200 series provides vacuum
pressure technology at a lower cost to the customer and higher purity capability
to support sub 0.18 micron semiconductor manufacturing.
Chemical Blending and Mixing Systems. The Company's chemical blending and mixing
systems allow semiconductor device manufacturers to reduce chemical costs by
enabling them to blend a process chemical from concentrate on site to create the
various chemical concentrations required at different points of use in the clean
room. The CHEMLITHO(TM) line of blending systems provides accurate photoresist
developer blending for the microlithography area. The CHEMPREP(TM) line of
blending systems accurately blends HF or Ammonium hydroxide for specialty
cleaning applications.
Chemical Generation Systems. The CHEMGEN(R) chemical generation systems allow
semiconductor device manufacturers to reduce chemical costs by generating bulk
quantities of specific chemicals by mixing gases with deionized water located at
the facility. These chemicals are then delivered to the various use points in
the fabrication facility.
Slurry Mixing and Delivery Systems. The Company's proprietary vacuum pressure
slurry mixing and delivery systems mix and deliver slurries which are used in
conjunction with CMP technology. The Company's P2200, P4400 and P6000 systems
mix and deliver slurries for both oxide and metal polishing applications.
Chemical management system customers include ANAM; AMD; Chartered Semiconductor;
Cypress; Hitachi; IBM; Lucent; Matsushita Semiconductor Corporation of America;
Motorola; NSC and Siemens. The Company has installed chemical management systems
in over 150 fabrication plants worldwide. Typical installations vary in price
from $250,000 to $3,500,000. However, a project
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involving turn-key installation with multiple chemicals and points of use can
cost in excess of $15,000,000.
SPARE PARTS AND SERVICE.
The Company sells spare part kits for a number of its products and individual
spare part components for its equipment. The Company often packages product
improvements to enable customers to update previously purchased equipment.
The Company employs customer service and process engineers to assist and train
the Company's customers in performing preventive maintenance and service on FSI
equipment and developing process applications for the equipment through service
and application engineers worldwide. The Company offers a variety of process,
service, and maintenance programs that may be purchased for a fee. A number of
customers have purchased maintenance contracts whereby the Company's service
employees work at the customer's facility, and provide process service and
maintenance support for FSI equipment.
BACKLOG AND SEASONALITY
The Company's backlog at the end of fiscal 1998 and 1997, was approximately $54
million and $112 million, respectively. Approximately 55% and 32% respectively
of FSI's backlog at fiscal 1998 and 1997 year-end was comprised of orders from
three customers. Backlog consists of orders for which a customer's purchase
order has been received or a customer purchase order number has been
communicated to the Company and where the equipment is scheduled to be shipped
within twelve months of the order. All orders are subject to cancellation by the
customer and in some cases a limited penalty provision may apply. During fiscal
1997, the semiconductor market experienced volatility in terms of product demand
and product pricing and deteriorating industry conditions. These conditions
continued into fiscal 1998 and have caused certain semiconductor manufacturers
to exercise caution in making their capital equipment purchase decisions and in
certain cases to reschedule or cancel capital equipment purchases. In fiscal
1998 and 1997, purchase orders aggregating approximately $14,498,000 and
$18,861,000, constituting 6.7% and 7.5% of sales, respectively, were canceled
and not rescheduled. Because of the timing and relative size of certain orders
received by the Company and possible changes in delivery schedules and
cancellations of orders, the Company's backlog can vary from time to time and at
any particular date is not necessarily indicative of actual sales for any
succeeding period. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The business of the Company is
not seasonal to any significant extent.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on its
ability to enhance, in collaboration with its customers, its existing product
lines to meet the changing needs of microelectronics manufacturers.* The Company
believes that the trends in the industry, such as utilization of smaller circuit
geometries, increased use of larger substrates and manufacturers' increased
desire for integral processing equipment will make highly automated and integral
systems, including single substrate processing systems, more important in the
manufacturing of devices.* To assist the Company in its development efforts, the
Company maintains relationships with a number of industry professionals,
including its customers, who help identify and review industry trends in
advanced technology and FSI's development activities toward meeting the
industry's technology needs.
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The Company's 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,
robotics automation in the clean room and integration of the Company's product
offerings with the processing equipment of other suppliers. Each of these
programs involves customer collaboration to ensure proper machine configuration
and process development to meet industry requirements.
The Company maintains state-of-the-art demonstration and process development
laboratories, one at its manufacturing facility in Chaska, Minnesota, occupying
over 2,000 square feet, and another in Allen, Texas, occupying 2,200 square
feet. In fiscal 1998, the Company opened a new research and development
laboratory in one of its Chaska, Minnesota facilities which focuses on high
purity chemical delivery and blending equipment. This laboratory occupies
approximately 2,100 square feet. In fiscal 1997, the Company added a slurry
blending and dispense technology laboratory in Hollister, California, which
occupies 1,250 square feet. The Company's laboratory personnel work directly
with customers in solving process problems, developing new processes, evaluating
new pieces of equipment and designing new equipment.
Expenditures for research and development, which are expensed as incurred,
during fiscal 1998, 1997 and 1996 were approximately $42,975,000, $39,713,000,
and $40,998,000, respectively, and represented 19.7%, 15.7% and 13.5% of sales,
respectively.
The Company expects to continue to make substantial investments in research and
development.* The Company also must manage product transitions successfully, as
introduction of new products could adversely affect sales of existing products.*
MARKETING, SALES AND SUPPORT
The Company markets its products throughout the world. The Company's marketing
and sales efforts are focused on building long-term relationships with its
customers. These efforts are supported by a team of product marketing managers,
sales personnel, and equipment, process and software engineers that work closely
with individual customers to find solutions to their process needs.
In North America, the Company markets its products through direct sales
personnel located at its operating facilities or at regional sales offices
together with product and technical specialists devoted to each of the Company's
product lines. These individuals and the Company's process engineers work with
customers to understand the customer's precise processing requirements and to
configure the appropriate FSI equipment to meet such requirements. In addition,
as of the end of fiscal 1998, the sales effort was supported by approximately
170 employees and contractors engaged in customer service and support.
International sales, primarily in Europe and Asia accounted for approximately
41%, 36% and 35% of total sales for fiscal years 1998, 1997 and 1996
respectively. The Company owns a 31.8% equity interest in Metron Technology B.V.
("Metron"), a distributor of the Company's products which has an extensive
distribution organization located in Europe, Israel, India, and in the Asia
Pacific Region. Fluoroware, Inc., a manufacturer of plastic injection moldings
for the microelectronics industry, also owns a 31.8% equity interest in Metron.
In addition to the Company's products, Metron also sells products and equipment
on behalf of several other semiconductor equipment and consumables
manufacturers, including Fluoroware, Inc.
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The Company owns a 49% equity interest in m-FSI, Ltd. ("m-FSI"), a Japanese
joint venture company formed in August 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, the Company and Mitsui granted m-FSI certain product and technology
licenses and product distribution rights.
The significant majority of the Company's international sales are made to its
affiliated distributors for resale to end users of the Company's products.
However, in some cases, the Company may also sell directly to an international
customer, in which case the Company may pay a commission to one of its
affiliated distributors in connection with the sale. When commissions are taken
into account, the international sales to the Company's affiliates are on terms
generally no less favorable to the Company than international sales by the
Company directly to non-affiliates.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
The Company maintains multiple manufacturing facilities including Chaska,
Minnesota; Allen, Texas and Fremont, California. CME also manufactures, under a
license from the Company, certain CMD products. In addition, CME also provides
program management, including the capability to manage the installation of large
chemical generation, blending and dispense systems.
The Company typically assembles its 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 the Company's specifications. Typically,
final assembly and systems tests are performed by the Company's 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. FSI has a
company-wide quality program in place and received ISO 9001 certification in
October 1994. Such certification, however, does not cover the operations of ACS,
CME, CMK or SSI.
Certain of the components and subassemblies included in the Company's products
are obtained from a single supplier or a limited group of suppliers in order to
ensure overall quality and timeliness of delivery. Although the Company seeks to
reduce dependence on sole and limited source suppliers, disruption or
termination of certain of these sources could have a temporary adverse effect on
the Company's operations. The Company believes that alternative sources could be
obtained and qualified to supply these products, if necessary.* Nevertheless, a
prolonged inability to obtain certain components could have an adverse effect on
the Company's operating results, disrupt scheduled deliveries and result in
damage to customer relationships.*
COMPETITION
The global semiconductor industry in which FSI competes is highly competitive.
In each of the markets it serves, the Company faces 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 the Company. In order to
remain competitive, the Company will be required to maintain a high level of
investment in research and development, marketing, and customer service and
support as well as control its operating expenses.* There can be no assurance
that the Company will have sufficient resources to continue to make such
investments or that the Company's products will continue to be viewed as
competitive as a result of technological advances
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by competitors or changes in semiconductor processing technology. The Company's
competitors also may increase their efforts to gain and retain market share
through competitive pricing or strategic alliances.* Such competitive pressures
may necessitate significant price reductions by the Company or result in lost
orders which could adversely affect the Company's results of operations.* If the
Company's competitors enter into strategic alliances with leading semiconductor
manufacturers in the areas of surface conditioning, chemical management, or
microlithography, this could impair the ability of the Company to sell its
products to manufacturers and adversely affect the Company's operating results.*
The Japanese market segment is important as it represents a substantial
percentage of the world-wide semiconductor device market. To date, the Company
has not yet established itself as a significant participant in the Japanese
market segment with respect to its microlithography product line. As part of the
strategy to establish its Japanese presence, the Company formed a joint venture,
m-FSI in August 1991 with Mitsui and granted m-FSI certain product and
technology licenses and product distribution rights in Japan.
The Company believes that the Japanese equipment companies with which it
competes have a competitive advantage because of their dominance of the Japanese
market segment. Furthermore, 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,
the Company 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. Certain Japanese equipment
manufacturers have begun to establish manufacturing operations in the United
States, which will enable them to compete more effectively in the United States
market.
A portion of the Company's international sales have been to semiconductor device
manufacturers located in Korea. The Korean market is extremely competitive and
the semiconductor device manufacturers located there have been very aggressive
in seeking price concessions from suppliers. The Company recently established a
company in South Korea, CMK, to provide sales support and service to chemical
management systems or projects in Korea. FSI does not believe that there are any
existing government trade restrictions that would materially limit FSI's ability
to compete in the Japanese or Korean markets.
Taiwan, Singapore and more recently, Thailand and Malaysia, have increased their
microelectronics fabrication facility activity. The Company understands that
many of these companies 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.
Significant competitive factors in the equipment market include quality, process
repeatability, capability and flexibility, ability to integrate with other
products, and overall cost of ownership, including reliability, automation,
throughput, customer support, and system price. The Company has experienced
significant price competition from certain of its competitors, primarily those
in the microlithography and chemical management systems' markets. Although the
Company believes that it has certain technological and other advantages over its
competitors, realizing and maintaining such advantages will require a continued
high level of investment by the Company in research and development, and
marketing and customer service and support as well as controlling operating
expenses.* There can be no assurance that the Company will continue to compete
successfully in the future.*
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The Company's competitors differ across its three product lines. The Company's
microlithography clusters compete with products offered by, among others,
Dainippon Screen Manufacturing Co. Ltd. ("DNS"), Fairchild/Convac, Silicon
Valley Group, Inc., and Tokyo Electron Ltd. ("TEL"). The Company competes with,
among others, DNS, Kaijo Denki, Steag, Sugai/Sankyo Engineering, Semitool, Inc.,
SubMicron Systems, Inc. ("SubMicron"), SCP Global Technologies, and TEL in the
area of surface conditioning products. The Company's Chemical Management
Division competes with products, among others, from Systems Chemistry, Inc., a
subsidiary of British Oxygen Company ("BOC"), MEGA Systems, Inc., a subsidiary
of U.S. Filter Corporation and a number of gas and/or chemical supply companies
that also offer competitive products or services.
CUSTOMERS
The Company sells products from one or more of its product lines to most major
microelectronics manufacturers and has an extensive history with several of the
largest integrated circuit manufacturers in the world. It has over 100 active
customers worldwide.
IBM accounted for approximately 11%, 17% and 11% of the Company's sales in
fiscal 1998, 1997 and 1996, respectively.
The Company has experienced and expects to continue to experience fluctuations
in its customer mix.* The timing of an order for the Company's 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 the Company's affiliated international distributors in fiscal 1998,
1997 and 1996, which may include sales of products subsequently resold to the
Company's direct customers, accounted for approximately 37%, 29% and 25%
respectively, of the Company's total sales. In addition, the earnings received
from the Company's equity ownership interest in such affiliated distributors was
approximately $674,000, $3,712,000 and $5,108,000, in fiscal 1998, 1997 and 1996
respectively. The earnings or losses of the Company's affiliated distributors
can affect significantly the financial results of the Company. There can be no
assurance that the affiliated distributors will continue to distribute the
Company's products or do so successfully, and in such event the Company's
results of operations and earnings could be adversely affected.*
Effective March 31, 1998 the Company and Metron entered into a new distribution
agreement. The agreement appoints Metron as the Company's distributor in a
number of European and Asian countries for FSI's CMD, MLD, and SCD products. The
agreement continues until terminated. Either party may terminate the agreement
on or after January 31, 2000 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 the
Company's products.
The Company entered into licensing and distribuiton agreements with m-FSI when
it was formed in 1991. In general, m-FSI has exclusive distribution rights with
respect to certain of FSI's products in Japan. The licensing agreement allows
m-FSI to manufacture certain of FSI's 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 FSI's products.
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PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The Company's success is dependent upon a variety of factors including
proprietary technology. Protection of the Company's technology by obtaining and
enforcing patents is becoming increasingly important. Consequently, the Company
has an active program to file patent applications in the United States and other
countries on inventions it may consider significant. In addition to patent
protection, the Company attempts to protect its proprietary information through
non-disclosure agreements with its employees and with third-parties. The Company
has a number of patents in the United States and other countries and additional
applications are pending for new developments on its equipment and related
processes. In addition to patents, the Company also possesses 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 any rights granted thereunder will provide
competitive advantages to the Company. In addition, there can be no assurances
that patents will issue for pending applications or that the claims allowed in
any future patents will be sufficiently broad to protect the Company's
technology. In addition, the laws of some foreign countries may not permit the
protection of the Company's proprietary rights to the same extent as under the
laws of the United States. Although the Company believes that protection
afforded by its patents, patent applications, and other intellectual property
rights has value, rapidly changing technology makes its future success primarily
dependent on the engineering, marketing, service, and manufacturing skills of
its employees.*
In the normal course of business, the company from time to time receives and
makes inquiries with regard to possible patent infringement. In dealing with
such inquiries, it may become necessary or useful for the Company to obtain or
grant licenses or other rights. However, there can be no assurance that such
license rights will be available to the Company 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 the Company.
The POLARIS cluster is offered by the Company under a non-exclusive license from
TI. The Company has converted the license to a fully paid-up, world-wide license
to sell and manufacture the POLARIS cluster. FSI also has the non-exclusive
right to manufacture and sell related TI modules. The license agreement
continues until terminated. It may be terminated by either party upon a breach
by the other party, and the failure to cure, of certain terms of the agreement.
The ARIES(R) cryokinetic cleaning tool 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
which excludes amounts for freight, taxes, customers duties, insurance,
discounts, and certain equipment not manufactured by FSI.
EMPLOYEES
As of August 29, 1998, FSI and its wholly-owned subsidiaries ACS and SSI, and
its joint ventures, CME and CMK, had, in the aggregate, approximately 1,140
employees. As of October 31st that number was approximately 990 and the decrease
is primarily related to a reduction in force in October of 1998. In the high
technology industry, competition for highly skilled employees is intense. The
Company believes that a great part of its future success depends upon its
continued ability to retain and attract qualified employees.* The Company is not
subject to any collective bargaining agreement, has never been subject to a work
stoppage and believes its relations with its employees is good.
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ENVIRONMENTAL MATTERS
The Company is 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. The Company believes that it is in compliance with
these regulations and that it has obtained all necessary environmental permits
to conduct its business. These permits generally relate to the disposal of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production or cessation of operations.* Such regulations could require the
Company to acquire significant equipment or take other actions to comply with
environmental regulations at a potentially significant cost to the Company.* Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of hazardous substances could subject the Company to
future liabilities.* See also "Item 3 - Legal Proceedings."
The Company believes that compliance with federal, state and local provisions
which 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 the capital expenditures, earnings and competitive
position of the Company.*
INTERNATIONAL SALES
The Company's international sales for each of the last three fiscal years is
disclosed in the financial statements incorporated by reference and referred to
in Item 8 on page 21 of this report.
OTHER RISK FACTORS
A discussion of certain risk factors is presented in the "Risk Factors Section"
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing on pages 15 to 18 of the Company's Annual Report to
Shareholders for the year ended August 29, 1998, which risk factors discussion
is hereby incorporated by reference.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Chaska, a suburb of Minneapolis,
Minnesota. In fiscal 1998, the Company leased approximately 288,000 square feet,
in four buildings. The annual rental cost for these facilities in fiscal 1998
was approximately $1,238,000.
In November 1995, the Company opened a new 100,000 square foot manufacturing
facility which cost approximately $12.5 million to construct and equip. The
facility contains 40,000 square feet of Class 1,000 and 10,000 clean room space,
which can be upgraded to class 100 as required. The new facility also contains
manufacturing support operations and a customer training center. In May, 1997,
the Company completed construction of an 88,000 square foot addition to this
facility. The cost of constructing and equipping this addition was $21.5
million. This addition contains the headquarters for the Company's Surface
Conditioning Division and includes research, laboratory and engineering
facilities.
In March, 1997 the Company completed construction of a 159,000 square foot
facility in Allen, Texas at a cost of $18.6 million to construct and equip. This
facility comprises the Microlithography Division's headquarters and includes
manufacturing, engineering, and a research and development laboratory.
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The Company also leases facilities in England and in various other locations
within the United States including:
* a 27,390 square foot engineering and administrative facility for the Chemical
Management Division located in Hollister, California (ACS Headquarters).
* 23,500 square feet of office, engineering, manufacturing, and administrative
facilities for the Chemical Management Division located in England (CME
Headquarters).
* a 62,040 square foot research and development laboratory, engineering,
manufacturing, and administrative facility in Fremont, California (SSI
Headquarters).
* a 4,270 square foot sales support and project management facility in Bundang,
Korea (CMK headquarters).
The Company also leases office space for service or sales and services offices
in the United States. Management believes its existing facilities are well
maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
The Company generates minor amounts of liquid and solid hazardous waste and uses
licensed haulers and disposal facilities to ship and dispose of such waste. The
Company has received notice from state or federal enforcement agencies that it
is 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, the Company believes that it is at most a "de minimis" PRP. The
Company has elected to participate in settlement offers made to all de minimis
parties with respect to several of 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 that are able could be held financially responsible for the
shortfall. While the ultimate outcome of those matters not yet settled cannot
presently be determined, the Company does not believe that any of these
investigations, either individually or in the aggregate, will have a material
adverse effect on its business, operating results, or financial condition.
There has been substantial litigation regarding patent and other intellectual
property rights in the microelectronics industry recently and further
commercialization of the Company's products could provoke claims of infringement
by third-parties. In the future, litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the Company
or to defend the Company against claimed infringement of the rights of others
and to determine the scope and validity of the Company's proprietary rights. Any
such litigation could result in substantial costs and diversion of effort by the
Company, which by itself could have a material adverse impact on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third-parties or prevent the Company from
manufacturing or selling one or more products, any of which could have a
material adverse effect on the Company's financial condition and results of
operations.
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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
Semiconductors Systems, Inc. ("Semiconductor Systems"), a wholly-owned
subsidiary of the Company that was acquired in April 1996, and the former
shareholders of Semiconductor Systems. In the fall of 1995, pursuant to the
Employee Stock Purchase and Shareholder Agreement dated November 30, 1990
between Mr. Hsu and Semiconductor Systems (the "Shareholder Agreement") and in
connection with Mr. Hsu's termination of his employment with Semiconductor
Systems in August 1995, the former shareholders of Semiconductor Systems
purchased the shares of Semiconductor Systems common stock then held by Mr. Hsu.
The plaintiffs are claiming, 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. The plaintiffs are seeking, among other things, damages in an amount to
be proven at trial, punitive damages, attorneys' fees and a constructive trust
over the shares held in the escrow mentioned below. Semiconductor Systems
intends to vigorously defend the lawsuit and the Company currently believes the
trial will commence shortly.
The Company, on behalf of Semiconductor Systems, has made a claim with respect
to the lawsuit under the escrow created at the time of the Company's acquisition
of Semiconductor Systems. The escrow was established to secure certain
indemnification obligations of the former shareholders of Semiconductor Systems.
The former shareholders have agreed to hold the Company and Semiconductor
Systems harmless from any claim arising out of any securities transactions
between the shareholders or former shareholders of Semiconductor Systems and
Semiconductor Systems. The escrow consists of an aggregate of 250,000 shares of
Company Common Stock paid to the former shareholders of Semiconductor Systems as
consideration in the acquisition.
Other than the litigation described above or routine litigation incidental to
the Company's business, there is no material litigation to which the Company is
a party or of which any of its 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 29, 1998.
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 the Company.
NAME AGE POSITION
- ---- --- --------
Mark A. Ahmann (1) 42 Vice President, Human Resources
Dale A. Courtney (2) 61 Senior Vice President; President,
Surface Conditioning Division
Joel A. Elftmann (3) 58 Chairman and
Chief Executive Officer
Patricia M. Hollister (4) 38 Chief Financial Officer and
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Corporate Controller
Luke R. Komarek (5) 45 Vice President; General Counsel and
Assistant Secretary
Dale M. Pescatrice (6) 51 Vice President; President, Chemical
Management Division
Benno G. Sand (7) 44 Executive Vice President, Chief
Administrative Officer and Secretary
Benjamin J. Sloan (8) 58 Executive Vice President, Chief
Operating Officer and President,
Microlithography Division
Charles R. Wofford (9) 65 Vice Chairman
(1)Mr. Ahmann has been Vice President of Human Resources since January 1998 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
with the company 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)Mr. Courtney has served as Senior Vice President; President, Surface
Conditioning Division of the Company since January 1, 1998 and as Executive Vice
President; President, Surface Conditioning Division from January 1996 to
December 1997. From March 1994 until January 1, 1996 he was Senior Vice
President, Surface Conditioning Division. He served as Vice President, Surface
Conditioning Division of the Company from November 1992 to March 1994. Mr.
Courtney served as Vice President, Engineering of the Company from August 1991
to November 1992. Mr. Courtney served as Director of Engineering of the Company
from September 1990 to August 1991 and as manager of Engineering Software
Development and Automation of the Company from September 1987 to September 1990.
Prior to joining the Company, Mr. Courtney was President of D A Courtney &
Associates, Dallas, Texas, specializing in the development of software for
automation and real time process control systems. Mr. Courtney is a director of
m-FSI, Ltd.
(3)Mr. 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 the present, Mr. Elftmann
has served as Chief Executive Officer of the Company. From 1977 to August 1983,
and from May 1991 until January 1998, Mr. Elftmann served as President of the
Company. Mr. Elftmann is a member of the Supervisory Board of Directors of
Metron Technology B.V., a director of m-FSI, Ltd. and has been a director of
Veeco Instruments, Inc. since May 1994.
(4)Ms. Hollister has served as Chief Financial Officer and Corporate Controller
since January 1998. She was Corporate Controller of the Company from March 1995
until January 1998. Prior thereto, Ms. Hollister was employed by KPMG Peat
Marwick LLP in Minneapolis, Minnesota where she served over 12 years on various
audit and consulting engagements, most recently as a Senior Manager.
(5)Mr. 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 has served as
Assistant Secretary since 1996. Prior to joining FSI he
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was at Faegre and Benson, the company's outside law firm for several years and
prior to Faegre he held legal management positions with Northgate Computer
Company and Diversified Energies, Inc. Mr. Komarek is also a director of CMK.
(6)Mr. Pescatrice joined FSI as Vice President; President, Chemical Management
Division in March 1998. In 1997, Mr. Pescatrice was associated with
Co-Development International as a senior consultant where he contributed his
supply chain experience to the Tennessee Valley Authority (TVA), the largest
generator of electric power in the United States. Mr. Pescatrice worked at Texas
Instruments from 1969-1996. From 1994 to 1996, he served as Vice President,
World-Wide Supply Process and was accountable for the global strategy and
execution of procurement and logistics performance to enhance semiconductor
group objectives. From 1985 to 1993, he served as Vice President, Materials
Division within the semiconductor group. Mr. Pescatrice is also a director of
both CMK and CME.
(7)Mr. Sand has served as Executive Vice President and Chief Administrative
Officer since January 1, 1998. 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 Secretary in November 1990. Mr.
Sand is a director of ACS and SSI.
(8)Dr. Sloan has served as Executive Vice President; Chief Operating Officer and
President, Microlithography Division of the Company since January 1, 1998. From
January 1996 to January 1998 he served as Executive Vice President and
President, Microlithography Division. From January 1992 to January 1996, he
served as Executive Vice President, Microlithography Division. Prior thereto,
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.
(9)Mr. Wofford has served as a Director of the Company since November 1992. On
February 5, 1996 he joined the Company as Vice Chairman. 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. Prior thereto, Mr. Wofford held a variety of
positions with respect to TI'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
The Company's Common Stock, no par value, is traded on the Nasdaq Stock Market
under the symbol "FSII." The information concerning the quarterly stock prices
and dividends for the fiscal years ended August 29, 1998 and the number of
shareholders of record is contained in the Company's 1998 Annual Report to
Shareholders ("Annual Report"), at page 32 under the captions "Quarterly Data"
and "Common Stock Prices", which information is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The summary of selected financial data for each of the last five fiscal years
set forth in the Annual Report in the table on page 11 under the caption
"Five-Year Selected Financial Data" is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in the
Company's Annual Report on pages 12 to 18 is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant at August 29, 1998 and
August 30, 1997 and for each of the three years in the period ended August 29,
1998 and the Report thereon of the Independent Auditors' on pages 19 to 32 of
the Annual Report are incorporated herein by reference.
The Quarterly Data on page 32 of the Annual Report is also incorporated herein
by reference.
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 the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on January 26, 1999 (the "Proxy Statement") and which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after August 29, 1998.
Except for those portions specifically incorporated in this Report by reference
to the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on January 26, 1999, 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.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company'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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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) The following financial statements and documents and the report of the
independent auditors are included in the Annual Report (an Exhibit to this
Report) and are incorporated by reference in Item 8 of this Report:
PAGE NUMBER IN THE
ANNUAL REPORT
-------------------------
Selected Financial Data for the five years ended August 29, 1998 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-18
Consolidated Statements of Operations - Fiscal Years ended
August 29, 1998, August 30, 1997 and August 31, 1996 20
Consolidated Balance Sheets - August 29, 1998 and August 30, 1997 21
Consolidated Statements of Stockholders' Equity - Fiscal Years ended August
29, 1998, August 30, 1997 and August 31, 1996 22
Consolidated Statements of Cash Flows - Fiscal Years ended
August 29, 1998, August 30, 1997 and August 31, 1996 23
Notes to Consolidated Financial Statements 24-32
Independent Auditors' Report 19
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PAGE NUMBER
IN THIS REPORT
---------------------
(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 28
Schedule II - Valuation and Qualifying Accounts 29
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
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(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive compensation plan or arrangement
2.1 Agreement and Plan of Reorganization by and Among FSI International, Inc., Spectre Acquisition Corp.,
and Semiconductor Systems, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Restated By-Laws. (3)
3.3 Amendment to Restated By-Laws. (4)
4.1 Note Purchase Agreement between FSI International, Inc. and
Metropolitan Life Insurance Company and other certain
purchasers. (Schedule A omitted) (5)
4.2 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)
4.3 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)
*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 and Benjamin J. Sloan,
have been omitted, but will be filed if requested in writing by the Commission):(6)
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 1989 Stock Option Plan. (4)
*10.7 Amended and Restated Employees Stock Purchase Plan.(filed herewith)
10.8 Shareholders Agreement among FSI International, Inc. and Mitsui & Co., Ltd. and
Chlorine Engineers Corp. Ltd. dated as of August 14, 1991. (8)
10.9 FSI Exclusive Distributorship Agreement dated as of August 14, 1991 between
FSI International, Inc. and m-FSI, Ltd. (8)
10.10 FSI Licensing Agreement dated as of August 14, 1991, between FSI International, Inc.
and m-FSI, Ltd. (8)
10.11 License Agreement, dated October 15, 1991, between the Company and Texas Instruments
Incorporated. (9)
10.12 Amendment No. 1, dated April 10, 1992, to the License Agreement, dated October 15, 1991,
between the Company and Texas Instruments Incorporated. (9)
10.13 Amendment effective October 1, 1993 to the License Agreement,
dated October 15, 1991 between the Company and Texas
Instruments Incorporated (10)
*10.14 Amended and Restated Directors' Nonstatutory Stock Option Plan. (11)
*10.15 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.)
*10.16 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.17 FSI International, Inc. 1998 Incentive Plan. (filed herewith)
10.18 First Amendment to Lease made and entered into October 31, 1995 by and between Lake Hazeltine Properties and FSI
International, Inc. (13)
10.19 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) (filed herewith)
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10.20 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI International, Inc. (13)
10.21 Lease Rider dated August 9, 1995 between Skyline Builders, Inc. and FSI International, Inc. (13)
10.29 Lease Amendment dated November, 1995 between Roland A. Stinski and FSI International,
Inc. (Exhibits to Amendment omitted) (13)
13.0 Registrant's 1998 Annual Report to Shareholders (Only those
portions of this document specifically incorporated herein by
reference are deemed to be included in this Exhibit and part
of this Report) (filed herewith)
21.0 Subsidiaries of the Company (filed herewith)
23.0 Consent of KPMG Peat Marwick (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.
(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.
---------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
August 29, 1998.
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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/Joel A. Elftmann
Joel A. Elftmann, Chairman,
and Chief Executive Officer
(Principal Executive Officer)
Dated: November 23, 1998
By: /s/Patricia M. Hollister
Patricia M. Hollister, Chief Financial Officer
and Corporate Controller
(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 )
Neil R. Bonke, Director )
Terrence W. Glarner, Director )
Joanna T. Lau, Director )
Thomas D. George, Director )
Charles R. Wofford, Director )
By: /s/ Patricia M. Hollister
Patricia M. Hollister, Chief Financial Officer
and Corporate Controller
(Principal Financial and Accounting Officer)
Dated: November 23, 1998
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INDEPENDENT AUDITORS' REPORT ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of FSI International, Inc.:
Under the date of October 9, 1998, we reported on the consolidated balance
sheets of FSI International, Inc. and subsidiaries as of August 29, 1998 and
August 30, 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended August 29, 1998, as contained in the 1998 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1998.
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 Peat Marwick LLP
Minneapolis, Minnesota
October 9, 1998
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED AUGUST 29, 1998,
AUGUST 30, 1997 AND AUGUST 31, 1996
Balance at
Beginning Balance at
of Year Additions Deletions End of Year
------------- ------------ ----------- ---------------
Fiscal Year Ended August 29, 1998
Allowance for doubtful accounts
(Deducted from accounts receivable) $2,127,000 $986,000 $ $3,113,000
-
Fiscal Year Ended August 30, 1997
Allowance for doubtful accounts
(Deducted from accounts receivable) $1,843,000 $284,000 $ $2,127,000
-
Fiscal Year Ended August 31, 1996
Allowance for doubtful accounts
(Deducted from accounts receivable) $1,234,000 $609,000 $ $1,843,000
-
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